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areas from where Bar questions may be sourced.

The
primus CUT AND PASTE: questions shown in these Notes may or may not be exactly
The BAR STAR NOTES worded in the actual Bar questions.

The reader is advised to take note of the areas marked


in with stars:

TAXATI0N If pressed for time, the reader should read only the
items marked and . These areas represent 80% to
With selected Supreme Court decisions 90% of the sources of questions that would probably be given
up to May 10, 2009 in the 2009 Bar exams. The reader should merely browse the
areas marked and the unmarked areas because they
VER: 09.05.12 represent only 10% to 20% of the areas from where questions
may probably be sourced this year.
by
WARNING:
ABELARDO T. DOMONDON These materials are copyrighted and/or based on the
writer s books on Taxation and future revisions. It is
How to use the Notes: These Notes in the form of prohibited to reproduce any part of these Notes in any form or
textual materials and representative review questions were any means, electronic or mechanical, including photocopying
specially prepared by Prof. Domondon for the exclusive without the written permission of the author. These materials
use of Bar Candidates who attended his 2009 lectures on are authorized for the use only of Bar reviewees the author
Taxation, and others he has personally authorized. has personally authorized. Unauthorized users shall not be
prosecuted but SHALL BE SUBJECT TO THE LAW OF
The purpose of these Notes is to test the candidate s KARMA SUCH THAT THEY WILL NEVER PASS THE BAR
ability to answer probable questions that may be asked in the OR WOULD BE UNHAPPY IN LIFE for stealing the
September 33, 2009 Bar Examinations in Taxation. The last intellectual property of the author.
version to be released is Ver. 09.08.17 which may
substantially alter the contents of this Ver. 09.05.12 Be sure Only copies with the signature of Prof. Domondon, or his
to secure the last version to replace this version. authorized representative and the corresponding number on
this page are considered authorized copies. Holders of
DO NOT MEMORIZE the suggested answers. Some of authorized copies are requested not to lend their copies for
the answers were purposely made to be lengthy in order to reproduction through Xerox or otherwise.
serve as explanatory devices. This is so because you do not
have time anymore to refer back to your review materials. GENERAL PRINCIPLES OF TAXATION
The materials are arranged in accordance with the bar
TAXATION, IN GENERAL
examination coverage. The actual bar questions may not be
so arranged. Likewise, these Notes are only indicative of the
2
1. Why are tax laws construed strictly against the to be expressed in clear and unambiguous terms. (Quezon City, supra
citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
State and liberally in favor of the State ?
SUGGESTED ANSWER: In case of doubt, tax laws must be
construed strictly against the State and liberally in favor of the taxpayer
5. What is the effect of a BIR reversal of a previous
because taxes, as burdens which must be endured by the taxpayer, ruling interpreting a law as exempting a taxpayer ?
should not be presumed to go beyond what the law expressly and SUGGESTED ANSWER: A reversal of a BIR ruling favorable to
clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., a taxpayer would not necessarily create a perpetual exemption in his
v. Court of Appeals, et al., 293 SCRA 92, 99) favor, for after all the government is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. (Lincoln
2. Why are tax exemptions are strictly construed Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et
al., 293 SCRA 92, 99)
against the taxpayer and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the
continued existence of the State. 6. Why is the right to collect taxes imprescriptible
?
SUGGESTED ANSWER:
3. Strict interpretation of tax exemption laws.
a. As a general rule, revenue laws are not intended to be
Taxes are what civilized people pay for civilized society. They are the
liberally construed, and exemptions are not given retroactive
lifeblood of the nation. Thus, statutes granting tax exemptions are
application, considering that taxes are the lifeblood of the government
construed stricissimi juris against the taxpayer and liberally in favor of
and in Holmes memorable metaphor, the price we pay for civilization,
the taxing authority. A claim of tax exemption must be clearly shown
tax laws must be faithfully and strictly implemented. (Commissioner of
and based on language in law too plain to be mistaken. Otherwise
Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007)
stated, taxation is the rule, exemption is the exception. (Quezon City, However, statutes may provide for prescriptive periods for the
et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
collection of particular kinds of taxes.
2008 citing Mactan Cebu International Airport Authority v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof
b. Tax laws, unlike remedial laws, are not to be applied
rests upon the party claiming the exemption to prove that it is in fact retroactively. Revenue laws are substantive laws and their application
covered by the exemption so claimed. (Quezon City, supra citing must not be equated with remedial laws. (Acosta, supra)
Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)
7. It is said that taxes are the lifeblood of the
4. Rationale for strict interpretation of tax government and any delay in its collection would impair
exemption laws. The basis for the rule on strict construction to the rendition of government services. May the collection of
statutory provisions granting tax exemptions or deductions is to taxes be restrained by a court ?
minimize differential treatment and foster impartiality, fairness and SUGGESTED ANSWER: As a general rule, No court shall
equality of treatment among taxpayers. (Quezon City, et al., v. ABS- have the authority to grant an injunction to restrain the collection of any
CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He national internal revenue tax, fee or charge. (Sec. 218, NIRC)
who claims an exemption from his share of common burden must However, the Court of Tax Appeals is empowered to enjoin the
justify his claim that the legislature intended to exempt him by collection of taxes through administrative remedies when collection
unmistakable terms. For exemptions from taxation are not favored in could jeopardize the interest of the government or taxpayer. (Sec. 11,
law, nor are they presumed. They must be expressed in the clearest Rep. Act No. 1125)
and most unambiguous language and not left to mere implications. It
has been held that exemptions are never presumed the burden is 8. What are the grounds and procedure for
on the claimant to establish clearly his right to exemption and cannot suspension of collection of taxes ?
be made out of inference or implications but must be laid beyond SUGGESTED ANSWER: Where the collection of the amount of
reasonable doubt. In other words, since taxation is the rule and the taxpayer s liability, sought by means of a demand for payment, by
exemption the exception, the intention to make an exemption ought
3
levy, distraint or sale of property of the taxpayer, or by whatever means, a. PURPOSE: A tax is imposed for revenue purposes
as provided under existing laws, may jeopardize the interest of the WHILE a license fee is imposed for regulatory purposes. (Unless it is a
government or the taxpayer, an interested party may file a motion for joint exercise of both the police power and the power of taxation)
the suspension of the collection of the tax liability (Sec. 1, Rule 10, b. BASIS: A tax is imposed under the power of taxation
RRCTA effective December 15, 2005) with the Court of Tax Appeals. WHILE a license fee is imposed under police power.
The motion for suspension of the collection of the tax may be c. AMOUNT: There is no limit as to the amount of a tax
filed together with the petition for review or with the answer, or in a WHILE the amount of license fee that could be collected is limited to
separate motion filed by the interested party at any stage of the the cost of the license and the expenses of police surveillance and
proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005) regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the
9. Explain the sumptuary purpose of taxation. start of a business WHILE a license fee before the commencement of
SUGGESTED ANSWER: The sumptuary purpose of taxation is business.
to promote the general welfare and to protect the health, safety or e. EFFECT OF NON-PAYMENT: Failure to pay a tax does
morals of the inhabitants. It is in the joint exercise of the power of not make the business illegal WHILE failure to pay a license fee
taxation and police power where regulatory taxes are collected. makes the business illegal.
Taxation may be made the implement of the state s police f. SURRENDER: Taxes being the lifeblood of the state,
power. The motivation behind many taxation measures is the cannot be surrendered except for lawful consideration WHILE a license
implementation of police power goals. [Southern Cross Cement fee may be surrendered with or without consideration.
Corporation v. Cement Manufacturers Association of the Philippines, et
al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil. 12. Distinguish taxation from police power.
148, 152 (1955); in turn citing Great Atl. & Pac. Tea Co. v. Grosjean, SUGGESTED ANSSWER: Taxation is distinguishable from
302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v. Maryland, 4 police power as to the means employed to implement these public
Wheaton 316] The reader should note that the August 3, 2005 goals. Those doctrines that are unique to taxation arose from peculiar
Southern Cross case is the decision on the motion for reconsideration considerations such as those especially punitive effects (Southern
of the July 8, 2004 Southern Cross decision. Cross Cement Corporation v. Cement Manufacturers Association of
The so-called sin taxes on alcohol and tobacco the Philippines, et al., G. R. No. 158540, August 3, 2005 citing U. S.
manufacturers help dissuade the consumers from excessive intake of Chief Marshall who once said, the power to tax involves the power to
these potentially harmful products. (Southern Cross Cement destroy, McCulloch v. Maryland, 4 Wheaton 316, cited in Sison v.
Corporation v. Cement Manufacturers Association of the Philippines, et Ancheta, G. R. No. L 59431, July 25, 130 SCRA 654) and the belief
al., G. R. No. 158540, August 3, 2005) that taxes are lifeblood of the state. (Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines, et
10. Explain the compensatory purpose of taxation. al., G. R. No. 158540, August 3, 2005 citing [T]axes being the
SUGGESTED ANSWER: The compensatory purpose of lifeblood of the government, their prompt and certain availability is of
taxation is to implement the social justice provisions of the constitution the essence. Sison v. Ancheta, id., citing Vera v. Fernandez, G. R.
through the progressive system of taxation, which would result to equal No. L-31364, March 30, 1979, 89 SCRA 199]
distribution of wealth, etc. These considerations necessitated the evolution of taxation as a
Progressive income taxes alleviate the margin between rich and distinct legal concept from police power. (Southern Cross Cement
poor. (Southern Cross Cement Corporation v. Cement Manufacturers Corporation, supra)
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) If the question asks for an enumeration of the distinctions
between the power of taxation and police power, the candidate should
11. What are the distinctions between a tax and a reformulate no. 17 above.
license fee ?
SUGGESTED ANSWER: The following are the distinctions 13. What is the purpose of the Sugar
between a tax and a license fee: Adjustment Act ?
4
SUGGESTED ANSWER: The Sugar Adjustment Act which Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647,
increased existing taxes on sugar was enacted to stabilize the sugar April 16, 2005)
industry to prepare it for the loss of its quota in the U.S. market was Establishments granting the 20% senior citizens discount may
levied for a regulatory purpose to protect and promote the sugar claim the discounts granted to senior citizens as tax deduction
industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. based on the net cost of the goods sold or services rendered:
148) Provided, That the cost of the discount shall be allowed as deduction
The Philsugin fund, an imposition on sugar, to raise funds to from gross income for the same taxable year that the discount is
conduct research for the improvement of the sugar industry, is for the granted. Provided, further, That the total amount of the claimed tax
purpose of stabilizing the sugar industry which one of the pillars of the deduction net of value added tax if applicable, shall be included in
Philippine economy which affects the welfare of the State. The levy is their gross sales receipts for tax purposes and shall be subject to
not so much an exercise of the power of taxation, nor the imposition of proper documentation and to the provisions of the National Internal
a special levy, but the exercise of police power which is for the general Revenue Code, as amended. [M.E. Holding Corporation v. Court of
welfare of the entire country, therefore for a public purpose. (Republic Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded
v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966) Senior Citizens Act of 2003, Sec. 4 (a)]

14. Section 40 (g) of the Public Service Act 16. What is purpose for the limitations on the power
authorizes the collection of x x x fees as reimbursement of taxation ?
of its expenses in the authorization, supervision and/or SUGGESTED ANSWER: The inherent and constitutional
regulation of the public services: x x x g) For each permit, limitations to the power of taxation are safeguards which would
authorizing the increase in equipment, the installation of prevent abuse in the exercise of this otherwise unlimited and plenary
power.
new units or authorizing the increase of capacity, or the
The limitations also serve as a standard to measure the validity
extension of means or general extensions in the services, of a tax law or the act of a taxing authority. A violation of the limitations
twenty centavos for each one hundred pesos or fraction of serves to invalidate a tax law or act in the exercise of the power to tax.
the additional capital necessary to carry out the permit.
(paraphrasing supplied) INHERENT LIMITATIONS
Is the imposition a tax measure ? Explain.
SUGGESTED ANSWER: No. It is not a tax measure but a 1. What are the inherent limitations on the
simple regulatory provision for the collection of fees imposed pursuant power of taxation ?
to the exercise of the State s police power. A tax is imposed under SUGGESTED ANSWER: The inherent limitations are
the taxing power of government principally for the purpose of raising a. Public purpose. The revenues collected from taxation
revenues. The law in question, however, merely authorizes and should be devoted to a public purpose.
requires the collection of fees for the reimbursement of the b. No improper delegation of legislative authority to tax.
Commission s expenses in the authorization, supervision and/or Only the legislature can exercise the power of taxes unless the same is
regulation of public services. (Republic, etc., v. International delegated to some other governmental body by the constitution or
Communications Corporation (ICC), G. R. No. 141667, July 17, 2006) through a law which does not violate any provision of the constitution.
c. Territoriality. The taxing power should be exercised only
15. How may the power of taxation also be used to within territorial boundaries of the taxing authority.
implement power of eminent domain ? d. Recognition of government exemptions; and
SUGGESTED ANSWER: Tax measures are but enforced e. Observance of the principle of comity. Comity is the
contributions exacted on pain of penal sanctions and clearly respect accorded by nations to each other because they are equals.
imposed for public purpose. In most recent years, the power to tax On the other hand taxation is an act of sovereign. Thus, the power
has indeed become a most effective tool to realize social justice, public should be imposed upon equals out of respect.
welfare, and the equitable distribution of wealth. (Commissioner of Some authorities include no double taxation.
5
constitutional questions. (Abaya v. Ebdane, G. R. No. 167919,
2. When are taxes considered as being for a February 14, 2007)
public purpose ?
SUGGESTED ANSWER: The tax revenues are for a public 7. When may locus standi be brushed aside ?
purpose if utilized for the benefit of the community in general. An SUGGESTED ANSWER: In cases of paramount importance
alternative meaning is that tax proceeds should be utilized only to where serious constitutional questions are involved, the standing
attain the objectives of government. requirements may be relaxed and a suit may be allowed to prosper
Public use is no longer confined to the traditional notion of use even where there is no direct injury to the party claiming the right of
by the public but held synonymous with public interest, public benefit, judicial review. [Coconut Oil Refiners Association, Inc., etc., et al., vs.
public welfare, and public convenience. (Commissioner of Internal Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Bayan
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April (Bagong Alyansang Makabayan) v. Zamora, G. R. No. 138570,
16, 2005) October 10, 2000, 342 SCRA 449, in turn citing Kilosbayan, Inc. v.
Guingona, Jr., G. R. No. 113375, May 5, 1994, 232 SCRA 110]
3. Define a taxpayer s suit.
SUGGESTED ANSWER: Taxpayers suit is a case where the 8.What are the requirements that must be
act complained of directly involves the illegal disbursement of public met before taxpayers, concerned citizens and legislators
funds derived from taxation. (Justice Melo, dissenting in Kilosbayan, may be accorded standing to sue ?
Inc. v. Guingona, Jr., 232 SCRA 110) SUGGESTED ANSWER:
a. The case should involve constitutional issues;
4. What is locus standi ? b. For taxpayers, there must be a claim of illegal
SUGGESTED ANSWER: Locus standi is a right of disbursement of public funds or that the tax measure is
appearance in a court of justice on a given question. (Abaya v. unconstitutional.
Ebdane, G. R. No. 167919, February 14, 2007) c. For voters, there must be a showing of obvious interest
It is a party s personal and substantial interest in the case, such in the validity of the election law in question.
that the party has sustained or will sustain (Ibid.)direct injury as a result d. For concerned citizens, there must be a showing that
of the government act being challenged. It calls for more than just a the issues raised are of transcendental importance which must be
generalized grievance. settled early.
A party need not be a party to the contract to challenge its e. For legislators, there must be a claim that the official
validity. (Ibid.) action complained of infringes upon their prerogatives as legislators.
(David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R.
5. What is meant by the term material interest ? No. 171396, May 3, 2006)
SUGGESTED ANSWER: The term interest means a
material interest, an interest in issue affected by the decree, as 9. What are the requisites for challenging
distinguished from mere interest in the question involved, or a mere constitutionality of law including a tax law ?
incidental interest. (Abaya v. Ebdane, G. R. No. 167919, February 14, SUGGESTED ANSWER: The party bringing suit must show
2007) not only that the law or act is invalid, but also that he has sustained
or is in immediate, or imminent danger of sustaining some direct
6. What is the rationale for locus standi ? injury as a result of its enforcement and not merely that he suffers
SUGGESTED ANSWER: The rationale for requiring a party thereby in some indefinite way. (Soriano III v. Lista, et al., G. R. No.
who challenges the constitutionality of a statute to allege such a 153881, March 24, 2003)
personal stake in the outcome of the controversy is to ensure that a
concrete adverseness which sharpens the presentation of issues upon 10. Locus standi being merely a matter of
which the court so largely depends for illumination of different
procedure, have been waived in certain instances where a
6
party who is not personally injured may be allowed to bring materials, capital and equipment was merely cited as an example of
suit. Give some examples. incentives that the SSEZ is authorized to grant, in line with its being a
SUGGESTED ANSWER: The following are examples of free port zone. Thus, the legislative intent is that consumer goods
instances where suits have been brought by parties who have not have entering the SSEZ which satisfy the needs of the zone and are
been personally injured by the operation of a law or any other consumed there are not subject to duties and taxes in accordance with
government act but by concerned citizens, taxpayers or voters who Philippine law. (Coconut Oil Refiners Association, Inc., etc., et al., v.
actually sue in the public interest: Torres, etc., et al., G. R. No. 132527, July 29, 2005)
a. Taxpayer s suits to question contracts entered into by ` Would your answer be the same if a Presidential
the national government or government-owned or controlled
Proclamation allowed for the limited withdrawal from the
corporations allegedly in contravention of the law.
b. A taxpayer is allowed to sue where there is a claim that Clark Special Economic Zone or the John Hay Economic
public funds are illegally disbursed, or that public money is being Zone of consumer goods tax and duty-free ?
deflected to any improper purpose, or that there is a wastage of public SUGGESTED ANSWER: The answer would not be the same.
funds through the enforcement of an invalid or unconstitutional law. This time the Presidential Proclamation would be invalid as the
(Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) statutory tax exempt privilege was granted only to the Subic Special
Economic Zone and not to John Hay or Clark. This is so because the
11. The petitioners impugn the validity of the Constitution mandates that no law granting tax exemption shall be
establishment of tax and duty-free shops within the Subic passed without the concurrence of a majority of all the members of
Congress. (Coconut Oil Refiners Association, Inc., etc., et al., v.
Special Economic Zone (SSEZ) and the removal of Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing John Hay
consumer goods and items from the zones without People s Alternative Coalition, et al., v. Lim, etc., et al., G.R. No.
payment of corresponding duties and taxes for the reason 119775, October 24, 2003, 414 SCRA 356)
that this constitute executive legislation in violation of the Furthermore, the law is very clear that the exportation or
rule on separation of powers, that only raw material, removal of goods from the territory of the Subic Special Economic
capital and equipment should be allowed the privilege. Zone to other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and
Rule on the objections and reason out your answer briefly.
other relevant tax laws of the Philippines. (Ibid.)
SUGGESTED ANSWER: The objections should not be given
credence. It is legal to setup duly authorized duty-free shops in the
SSEZ to sell tax and duty-free consumer items in the Secured Area. 11-A. Nature of actual case or controversy. An actual
This is in line with the policy enunciated in the law that the Subic case or controversy involves a conflict of legal rights, an assertion of
Special Economic Zone shall be developed into a self-sustaining, opposite legal claims susceptible of judicial adjudication. (ABAKADA
industrial, commercial, financial and investment center to generate Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715,
employment opportunities in and around the zone and to attract and August 14, 2008 citing Cruz, Isagani, PHILIPPINE
promote productive foreign investments. CONSTITUTIONAL LAW, 1995 edition, p. 23)
While it is true that Section 12 (b) of Rep. Act No. 7227
mentions only raw materials, capital and equipment, this does not 11-B. Criteria of being ripe for judicial determination.
necessarily mean that the tax and duty free buying privilege is limited to A closely related requirement is ripeness, that is, the question must
these types of articles to the exclusion of consumer goods. be ripe for adjudication. And a constitutional question is ripe for
It must be remembered that in construing statutes, the proper adjudication when the governmental act being challenged has a
course is to start out and follow the true intent of the Legislature and to direct adverse effect on the individual challenging it. (ABAKADA Guro
adopt that sense which harmonizes best with the context and promotes Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008
to the fullest manner the policy and objects of the Legislature. citing Bernas, Joaquin, THE 1987 CONSTITUTION OF THE REPUBLIC
OF THE PHILIPPINES: A COMMENTARY, 1996 edition, pp. 848-849)
The concept of inclusio unius est exclusio alterius does not find
Thus, to be ripe for judicial adjudication, the petitioner must show a
application because the phrase tax and duty-free importations of raw
personal stake in the outcome of the case or an injury to himself that
7
can be redressed by a favorable decision of the Court. [ABAKADA SUGGESTED ANSWER: No. There is no undue delegation of
Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary of legislative power but only of the discretion as to the execution of the
Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., law. This is constitutionally permissible.
separate opinion] Congress does not abdicate its functions or unduly delegate
power when it describes what job must be done, who must do it, and
11-C. Personal injury must be shown for judicial what is the scope of his authority. In the above case the Secretary of
controversy to be ripe for judicial determination. In this Finance becomes merely the agent of the legislative department, to
case, aside from the general claim that the dispute has ripened into a determine and declare the even upon which its expressed will takes
judicial controversy by the mere enactment of the law even without place. The President cannot set aside the findings of the Secretary of
any further overt act. (ABAKADA Guro Party List, etc., v. Purisima, etc., et Finance, who is not under the conditions acting as the execute alter
al., G. R. No. 166715, August 14, 2008 citing La Bugal-B Laan Tribal ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et
Association, Inc. v. Ramos, G.R. No. 127882, 01 December 2004, 445 al., G. R. No. 168056, September 1, 2005 and companion cases citing
SCRA 1) various cases]]
Thus, where petitioners fail either to assert any specific and
concrete legal claim or to demonstrate any direct adverse effect of 13. The power to tax should be exercised only within the
the law on them or are unable to show a personal stake in the territorial boundaries of the taxing authority. In theory, it is only
outcome of this case or an injury to themselves their petition is within a state s territorial boundaries that a state could give protection,
procedurally infirm. (ABAKADA Guro Party List, etc., supra) hence it is only within that territory that it could demand support in the
form of taxes.
11-D. Constitutionality of law is exception to the
doctrine of ripe for judicial determination . This 14. Situs of taxation is the place or the authority that has
notwithstanding, public interest requires the resolution of the the power to collect taxes. It is premised upon the symbiotic relation
constitutional issues raised by petitioners. The grave nature of their between the taxpayer and the State.
allegations tends to cast a cloud on the presumption of
constitutionality in favor of the law. And where an action of the 15. The place that gives protection is the place that has
legislative branch is alleged to have infringed the Constitution, it the right to demand that it be supported in the form of taxes so it
becomes not only the right but in fact the duty of the judiciary to settle could continually give protection.
the dispute. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R.
No. 166715, August 14, 2008 citing Taada v. Angara, 338 Phil. 546 (1997)] 16. The situs of real property taxes is the place where the
property is located because it is that place that gives protection.
12. The VAT law provides that, the President, The applicable concept is lex situs or lex rei sitae.
upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value- 17. The situs of taxation of tangible personal property is
added tax to twelve percent (12%) after any of the following the place where the owner is located because it is that place that
conditions have been satisfied. (i) value-added tax gives protection to the owner which protection extends to the tangible
personal property. The applicable concept is mobilia sequuntur
collection as a percentage of Gross Domestic Product
personam.
(GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%) or (ii) national government deficit as a 18. Intangible personal property may have obtained a
percentage of GDP of the previous year exceeds one and business situs in a particular place even if located elsewhere.
one-half percent (1 %). Thus, the dividends earned from domestic corporations are considered
Was there an invalid delegation of legislative power ? as income from within, irrespective where the shares of stock of such
domestic corporation is located.
8
19. The situs of income taxation is determined by the The above Baier-Nickel case discussed the import of the
nationality, residence of the taxpayer and source of income. landmark cases (Howden and BOAC) involving sources of income for
Please refer to general principles of income taxation under income tax purposes both of which may be dangerous for Bar purposes:
taxation.
23. A domestic insurance company decided to
20. The situs of excise taxes is the place where the reinsure with a foreign reinsurer the risks it has undertaken
privilege is exercised because it is that place that gives with its local clients. The foreign reinsurer does not have
protection. an office, neither does it do business in the Philippines.
Are the reinsurance premiums subject to Philippine income
21. The situs of transfer taxes, such as estate and
donor s taxes, is determined by the nationality and residence of taxation ?
the taxpayer and the place where the property is located. Please SUGGESTED ANSWER: Yes because the undertaking of the
refer to estate and donor s taxes. foreign insurance company to indemnify the local insurance company
is the activity that produced the income.
The reinsurance premiums remitted to the foreign reinsurer had
22. Juliane a non-resident alien appointed as for their source the undertaking to indemnify the local insurer against
a commission agent by a domestic corporation with a sales liability. Said undertaking is the activity that produced there insurance
commission of 10% all sales actually concluded and premiums, and the same took place in the Philippines. The reinsured,
collected through her efforts. The local company withheld the liabilities insured and the risk originally undertaken by the local
the amount of P107,000 from her sales commission and insurance company, upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. (Alexander
remitted the same to the BIR.
Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13
She filed a claim for refund alleging that her sales SCRA 601 (1965) cited in Baier-Nickel)
commission is not taxable because the same was a
compensation for her services rendered in Germany and 24. BOAC, a foreign airline company which
therefore considered as income from sources outside the does not maintain any flight to and from the Philippines
Philippines. sold air tickets in the Philippines, through a general sales
Is her contention correct ? agent, relating to the carriage of passengers and cargo
SUGGESTED ANSWER: Yes. The important factor which
between two points, both outside the Philippines.
determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is Is BOAC subject to income taxes on the sale of the
entered into, or the place of payment, but the place where the services tickets ?
were actually performed. SUGGESTED ANSWER: Yes. The source of income which is
Since the activity of securing the sales were in Germany, then taxable is that activity which produced the income. The sale of
the income did not originate from sources from within the Philippines. tickets in the Philippines is the activity that determines whether such
(Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, income is taxable in the Philippines.
August 29, 2006) The tickets exchanged hands here and payments for fares were
NOTE AND COMMENTS: In the above case, the Supreme also made here in Philippine currency. The situs of the source of
Court reiterated the rule that source of income relates to the payments is the Philippines. the flow of wealth proceeded from and
property, activity or service that produced the income. With respect to occurred, within the Philippine territory, enjoying the protection
rendition of labor or personal service, it is the place where the labor or accorded by the Philippine Government. In consideration of such
service was performed that determines the source of the income. protection, the flow of wealth should share the burden of supporting the
government. (Commissioner of Internal Revenue v. British Overseas
Airways Corporation (BOAC), 149 SCRA 395 cited in Bauer-Nickel)
9
NOTES AND COMMENTS: The concept of imposition of the c. The tax authorities gave the term tax credit in
gross Philippine billings that taxes only flights that originate from the Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly
Philippines apply only to resident foreign corporations doing business in disparate from what R.A. No. 7432 provides. Their interpretation
the Philippines [Sec. 28 (A) (3) (a), NIRC of 1997] AND NOT TO muddled up the intent of Congress to grant a mere discount privilege
incomes of non-resident foreign corporations that are taxed on the and not a sales discount. The Court, striking down the revenue
gross income. [Sec. 28 (B) (1)] regulation, held that an administrative agency issuing regulations
may not enlarge, alter or restrict the provisions of the law it
25. No improper delegation of legislative authority administers, and it cannot engraft additional requirements not
to tax. The power to tax is inherent in the State, such power being contemplated by the legislature. (Ibid., Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April
inherently legislative, based on the principle that taxes are a grant of
2005, 456 SCRA 414)
the people who are taxed, and the grant must be made by the
d. Commissioner Jose Ong issued Revenue Memorandum
immediate representatives of the people; and where the people have
Order (RMO) No. 15-91, as well as the clarificatory Revenue
laid the power, there it must remain and be exercised. (Commissioner
of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75,
Memorandum Circular (RMC) 43-91, imposing a 5% lending
rd
July 21, 2008 citing COOLEY TAXATION, 3 Ed., p. 43 cited in investor s tax under the 1977 Tax Code, as amended by Executive
DIMAAMPAO, TAX PRINCIPLE AND REMEDIES, p. 13) Order (E.O.) No. 273, on pawnshops. The Commissioner anchored
the imposition on the definition of lending investors provided in the
26. Instances where the national revenue officers 1977 Tax Code which, according to him, was broad enough to
include pawnshop operators. However, the Court noted that
had ventured in the area of unauthorized administrative
pawnshops and lending investors were subjected to different tax
legislation. treatments under the Tax Code prior to its amendment by the
a. By adding the qualification that the tax due after the executive order; that Congress never intended to treat pawnshops in
12% increase becomes effective shall not be lower than the tax the same way as lending investors; and that the particularly involved
actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 section of the Tax Code explicitly subjected lending investors and
effectively imposes a tax which is the higher amount between the ad dealers in securities only to percentage tax. And so the Court
valorem tax being paid at the end of the three (3)-year transition affirmed the invalidity of the challenged circulars, stressing that
period and the specific tax under paragraph C, sub-paragraph (1)- administrative issuances must not override, supplant or modify the
(4), as increased by 12%a situation not supported by the plain law, but must remain consistent with the law they intend to carry
wording of Section 145 of the Tax Code. (Commissioner of Internal out. (Ibid., citing Commissioner of Internal Revenue v. Michel J. Lhuillier
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in turn citing Commissioner
2008) of Internal Revenue v. Court of Appeals, G.R. No. 108358, 20 January
b. Respondent was not informed in writing of the law and 1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De
the facts on which the assessment of estate taxes was made los Angeles v. Home Development Mutual Fund, G.R. No. 131082, 19 June
pursuant to Section 228 of the 1997 Tax Code, as amended by 2000; 333 SCRA 777, 786)
Republic Act (R.A.) No. 8424. She was merely notified of the findings e. The then acting Commissioner issued RMC 7-85,
by the Commissioner, who had simply relied upon the old provisions changing the prescriptive period of two years to ten years for claims
of the law and Revenue Regulation No. 12-85 which was based on of excess quarterly income tax payments, thereby creating a clear
the old provision of the law. The Court held that in case of inconsistency with the provision of Section 230 of the 1977 Tax
discrepancy between the law as amended and the implementing Code. The Court nullified the circular, ruling that the BIR did not
regulation based on the old law, the former necessarily prevails. The simply interpret the law; rather it legislated guidelines contrary to the
law must still be followed, even though the existing tax regulation at statute passed by Congress. [Ibid., Philippine Bank of Communications v.
that time provided for a different procedure. (Ibid., Commissioner of Commissioner of Internal Revenue, 361 Phil. 916 (1999)]
Internal Revenue v. Reyes, G.R. No. 159694, 27 January 2006, 480 SCRA f. The Supreme Court ruled as invalid RMO 4-87 which
382 in turn citing Philippine Petroleum Corp. v. Municipality of Pililla, Rizal, had construed the amnesty coverage under E.O. No. 41 (1986) to
198 SCRA 82, 88, 3 June 1991, likewise citing Shell Philippines, Inc. v. include only assessments issued by the BIR after the promulgation of
Central Bank of the Philippines, 162 SCRA 628, 634, 27 June 1988) the executive order on 22 August 1986 and not assessments made
10
to that date. The Supreme Court resolved in the negative. [Ibid., 1) Bill should embrace only one subject expressed
Commissioner of Internal Revenue v. CA, et al., 310 Phil. 392 (1995)] in the title thereof;
2) Three (3) readings on three separate days;
27. The rule-making power must be confined to details 3) Printed copies in final form distributed three (3)
for regulating the mode or proceedings in order to carry into days before passage.
effect the law as it has been enacted. h. Presidential power to grant reprieves, commutations and
a. It cannot be extended to amend or expand the statutory pardons and remittal of fines and forfeiture after conviction by final
requirements or to embrace matters not covered by the statute. judgment.
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.
Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court of 3. What are the specific or direct
Appeals, 327 Phil. 1047, 1052 (1996)] An administrative agency issuing
regulations may not enlarge, alter or restrict the provisions of the law constitutional limitation ?
it administers, and it cannot engraft additional requirements not SUGGESTED ANSWER:
contemplated by the legislature. (Ibid., Commissioner of Internal a. No imprisonment for non-payment of a poll tax;
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 b. Taxation shall be uniform and equitable;
April 2005, 456 SCRA 414) c. Congress shall evolve a progressive system of taxation;
The plain meaning rule or verba legis in statutory d. All appropriation, revenue or tariff bills shall originate
construction should be applied such that where the words of a statute exclusively in the House of Representatives, but the Senate may
are clear, plain and free from ambiguity, it must be given its literal propose and concur with amendments;
meaning and applied without attempted interpretation. (Ibid.) e. The President shall have the power to veto any particular
b. Administrative regulations must always be in harmony item or items in an appropriation, revenue, or tariff bill, but the veto
with the provisions of the law because any resulting discrepancy shall not affect the item or items to which he does not object;
between the two will always be resolved in favor of the basic law. f. Delegated power of the President to impose tariff rates,
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. import and export quotas, tonnage and wharfage dues:
Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court of 1) Delegation by Congress
Appeals, 327 Phil. 1047, 1052 (1996)] 2) through a law
3) subject to Congressional limits and restrictions
CONSTITUTIONAL LIMITATIONS 4) within the framework of national development
program.
1. What are the constitutional limitations on the power of g. Tax exemption of charitable institutions, churches,
taxation ? parsonages and convents appurtenant thereto, mosques, and all lands,
SUGGESTED ANSWER: The general or indirect constitutional buildings and improvements of all kinds actually, directly and
limitations as well as the specific or direct constitutional limitations. exclusively used for religious, charitable or educational purposes;
h. No tax exemption without the concurrence of majority
vote of all members of Congress;
2. What are the general or indirect
i. No use of public money or property for religious purposes
constitutional limitations on the power of taxation ? except if priest is assigned to the armed forces, penal institutions,
SUGGESTED ANSWER: The general or indirect constitutional government orphanage or leprosarium;
limitations are the following: j. Money collected on tax levied for a special purpose to be
a. Due process clause; used only for such purpose, balance if any, to general funds;
b. Equal protection clause; k. The Supreme Court's power to review judgments or
c. Freedom of the press; orders of lower courts in all cases involving the legality of any tax,
d. Religious freedom; impose, assessment or toll or the legality of any penalty imposed in
e. No taking of private property without just compensation; relation to the above;
f. Non-impairment clause;
g. Law-making process:
11
l. Authority of local government units to create their own
sources of revenue, to levy taxes, fees and other charges subject to 4-A. The equal protection of the laws clause of the
guidelines and limitations imposed by Congress consistent with the Constitution allows classification. Classification in law, as in
basic policy of local autonomy; the other departments of knowledge or practice, is the grouping of
m. Automatic release of local government's just share in things in speculation or practice because they agree with one another
national taxes; in certain particulars. A law is not invalid because of simple
n. Tax exemption of all revenues and assets of non-stock, inequality. The very idea of classification is that of inequality, so that it
non-profit educational institutions used actually, directly and exclusively goes without saying that the mere fact of inequality in no manner
for educational purposes; determines the matter of constitutionality.
o. Tax exemption of all revenues and assets of proprietary or All that is required of a valid classification is that it be
cooperative educational institutions subject to limitations provided by reasonable, which means that the classification should be based on
law including restrictions on dividends and provisions for reinvestment substantial distinctions which make for real differences, that it must
of profits; be germane to the purpose of the law; that it must not be limited to
p. Tax exemption of grants, endowments, donations or existing conditions only; and that it must apply equally to each
contributions used actually, directly and exclusively for educational member of the class. This Court has held that the standard is
purposes subject to conditions prescribed by law. satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary. [ABAKADA
3-A. No denial of due process when the respondent Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
is given the opportunity to file affidavits and other 2008]
pleadings during the preliminary investigation. A
respondent cannot claim denial of due process when she was given
4-B. State has discretion to make the classification.
the opportunity to file her affidavits and other pleadings and submit In the exercise of its power to make classifications for the purpose of
evidence before the DOJ during the preliminary investigation of her enacting laws over matters within its jurisdiction, the state is
case and before the Information was filed against her. recognized as enjoying a wide range of discretion. It is not necessary
Due process is merely an opportunity to be heard. In addition, that the classification be based on scientific or marked differences of
preliminary investigation conducted by the DOJ is merely inquisitorial. things or in their relation. Neither is it necessary that the classification
It is not a trial of the case on the merits. Its sole purpose is to be made with mathematical nicety. Hence, legislative classification
determine whether a crime has been committed and whether the may in many cases properly rest on narrow distinctions, for the equal
respondent therein is probably guilty of the crime. It is not the protection guaranty does not preclude the legislature from
occasion for the full and exhaustive display of the parties evidence. recognizing degrees of evil or harm, and legislation is addressed to
Hence, if the investigating prosecutor is already satisfied that he can evils as they may appear. [ABAKADA Guro Party List, etc., v. Purisima,
etc., et al., G. R. No. 166715, August 14, 2008]
reasonably determine the existence of probable cause based on the
parties evidence thus presented, he may terminate the proceedings
4-C. Equal protection does not demand absolute
and resolve the case. (Santos v. People, et al, G. R. No. 173176, August
26, 2008 citing De Ocampo v. Secretary of Justice, G.R. No. G.R. No. equality. The equal protection clause exists to prevent undue favor
147932, 25 January 2006, 480 SCRA 71, 81-82) or privilege. It is intended to eliminate discrimination and oppression
based on inequality. Recognizing the existence of real differences
4. Equal protection of the law clause is subject to among men, the equal protection clause does not demand absolute
reasonable classification. If the groupings are characterized by equality. It merely requires that all persons shall be treated alike,
substantial distinctions that make real differences, one class may be under like circumstances and conditions, both as to the privileges
treated and regulated differently from another. The classification must conferred and liabilities enforced. (Santos v. People, et al, G. R. No.
also be germane to the purpose of the law and must apply to all those 173176, August 26, 2008 citing Himagan v. People, G.R. No. 113811, 7
belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., October 1994, 237 SCRA 538, 551.
G.R. No. 127410, January 20, 1999) It is imperative to duly establish that the one invoking equal
protection and the person to which she is being compared were
12
indeed similarly situated, i.e., that they committed identical acts for privileges granted and in obligations required. (Coconut Oil Refiners
which they were charged with the violation of the same provisions of Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527,
the NIRC; and that they presented similar arguments and evidence in July 29, 2005 citing Tiu, et al., v. Court of Appeals, et al., G.R. No.
their defense - yet, they were treated differently. (Santos, supra) 127410, January 20, 1999, 301 SCRA 278)

5. What are the requisites for the validity of a 7. Is the statutory grant of tax and duty-free
classification ? importation into the Subic Special Economic Zone violative
SUGGESTED ANSWER: Classification, to be valid, must the preferential use concept of the Constitution ?
(a) rest on substantial distinctions, SUGGESTED ANSWER: No. The mere fact that the law
(b) be germane to the purpose of the law, authorizes the importation and trade of foreign goods does not suffice
(c) not be limited to existing conditions only, and to declare it unconstitutional on this ground.
(d) apply equally to all members of the same class. (Tiu, et While the Constitution does not encourage the unlimited entry of
al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999) foreign goods, services and investments into the country, it does not
prohibit them either. In fact, it allows an exchange on the basis of
6. The law grant of tax and duty-free status equality and reciprocity, frowning only in foreign competition that is
under Rep. Act No. 7227, to retailers inside the SSEZ unfair. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres,
etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v. Angara, G.
without granting the same to those outside the SSEZ. Is
R. No. 118295, May 2, 1997, 272 SCRA 18)
there a violation of the equal protection clause ?
SUGGESTED ANSWER: There is no violation of equal 8. Equality and uniformity of taxation may mean the
protection because there exists a valid classification as shown below:
same as equal protection. In such a case, the terms would mean
a. Significant distinctions exist between the two groups.
that all subjects and objects of taxation which are similarly situated
Those outside of the SSEZ maintain their business within Philippine
shall be subject to the same burdens and granted the same privileges
customs territory while those within the SSEZ operate within the so-
without any discrimination whatsoever.
called separate customs territory. To grant the same privileges
would clearly defeat the statue s intent to carve a territory out of the
9. Uniformity may have a restrictive meaning different
military reservations in Subic Bay where free flow of goods and capital
from equality and equal protection. It would mean then that the
is maintained.
same rate shall be imposed for the same subjects and objects within
b. The classification is germane to the purpose of Rep. Act
the territorial boundaries of a taxing authority.
No. 7227. As held in Tiu, the real concern of the law is to convert the
lands formerly occupied by the US military bases into economic or
10. It is inherent in the power to tax that the State be free
industrial areas. In furtherance of such objective, Congress deemed it
necessary to extend economic incentives, in terms of a complete to select the subjects of taxation, and it has been repeatedly held
package of tax incentives and other benefits, to the establishments that, "inequalities which result from a singling out of one particular class
within the zone to attract and encourage foreign and local investors. of taxation, or exemption, infringe no constitutional limitation."
c. The classification is not limited to the existing conditions (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA
when the law was promulgated but to future conditions as well, 617)
inasmuch as the law envisioned the former military reservation to
ultimately develop into a self-sustaining investment center. 10-A. The law providing financial rewards to tax
d. The classification applies equally to all retailers found collectors is constitutional. Public service is its own reward.
within the secured area. As ruled in Tiu, the individuals and Nevertheless, public officers may by law be rewarded for exemplary
businesses within the secured area, being in like circumstances or and exceptional performance. A system of incentives for exceeding
contributing directly to the achievement of the end purposes of the law, the set expectations of a public office is not anathema to the concept
are not categorized further. They are all similarly treated, both in of public accountability. In fact, it recognizes and reinforces
13
dedication to duty, industry, efficiency and loyalty to public service of persons similarly situated; it is equality among equals, not similarity of
deserving government personnel. treatment of persons who are classified based on substantial
The U.S. Supreme Court validated a law which awards to differences in relation to the object to be accomplished. When things
officers of the customs as well as other parties an amount not or persons are different in fact or circumstance, they may be treated
exceeding one-half of the net proceeds of forfeitures in violation of in law differently.
the laws against smuggling. [ABAKADA Guro Party List, etc., v. Purisima, The guaranty of equal protection of the laws is not a guaranty
etc., et al., G. R. No. 166715, August 14, 2008 citing United States v. of equality in the application of the laws upon all citizens of the
Matthews, 173 U.S. 381 (1899)] [S]tate. It is not, therefore, a requirement, in order to avoid the
The offer of a portion of such penalties to the collectors is to constitutional prohibition against inequality, that every man, woman
stimulate and reward their zeal and industry in detecting fraudulent and child should be affected alike by a statute. Equality of operation
attempts to evade payment of duties and taxes. [ABAKADA Guro Party of statutes does not mean indiscriminate operation on persons
List, etc., supra citing Dorsheimer v. United States, 74 U.S. 166 (1868)] merely as such, but on persons according to the circumstances
In the same vein, employees of the BIR and the BOC may by surrounding them. It guarantees equality, not identity of rights.
law be entitled to a reward when, as a consequence of their zeal in The Constitution does not require that things which are
the enforcement of tax and customs laws, they exceed their revenue different in fact be treated in law as though they were the same. The
targets. Public service is its own reward. Nevertheless, public officers equal protection clause does not forbid discrimination as to things
may by law be rewarded for exemplary and exceptional performance. that are different. It does not prohibit legislation which is limited either
A system of incentives for exceeding the set expectations of a public in the object to which it is directed or by the territory within which it is
office is not anathema to the concept of public accountability. In fact, to operate. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R.
it recognizes and reinforces dedication to duty, industry, efficiency No. 166715, August 14, 2008]
and loyalty to public service of deserving government personnel. The equal protection clause recognizes a valid classification,
(ABAKADA Guro Party List, etc., supra) that is, a classification that has a reasonable foundation or rational
1[22]
basis and not arbitrary. With respect to RA 9335, its expressed
10-B. Rewards law establishes safeguards to ensure public policy is the optimization of the revenue-generation capability
that the reward system will not create bounty hunters. and collection of the BIR and the BOC. Since the subject of the law is
The Attrition Act of 2005 RA 9335 establishes safeguards to ensure the revenue- generation capability and collection of the BIR and the
that the reward will not be claimed if it will be either the fruit of BOC, the incentives and/or sanctions provided in the law should
bounty hunting or mercenary activity or the product of the irregular logically pertain to the said agencies. Moreover, the law concerns
performance of official duties. One of these precautionary measures only the BIR and the BOC because they have the common distinct
is embodied in Section 8 of the law: primary function of generating revenues for the national government
SEC. 8. Liability of Officials, Examiners and Employees through the collection of taxes, customs duties, fees and charges.
of the BIR and the BOC. The officials, examiners, and Both the BIR and the BOC are bureaus under the DOF. They
employees of the [BIR] and the [BOC] who violate this Act or principally perform the special function of being the instrumentalities
who are guilty of negligence, abuses or acts of malfeasance or through which the State exercises one of its great inherent functions
misfeasance or fail to exercise extraordinary diligence in taxation. Indubitably, such substantial distinction is germane and
the performance of their duties shall be held liable for any intimately related to the purpose of the law. Hence, the classification
loss or injury suffered by any business establishment or and treatment accorded to the BIR and the BOC under RA 9335 fully
taxpayer as a result of such violation, negligence, abuse, satisfy the demands of equal protection. [ABAKADA Guro Party List,
malfeasance, misfeasance or failure to exercise extraordinary etc. supra)]
diligence. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715, August 14, 2008) 10-D. The prosecution of one guilty person while
others equally guilty are not prosecuted, however, is not,
10-C. The rewards law to tax collectors does not by itself, a denial of the equal protection of the laws.
violate equal protection. Equality guaranteed under the equal Where the official action purports to be in conformity to the statutory
protection clause is equality under the same conditions and among classification, an erroneous or mistaken performance of the statutory
14
duty, although a violation of the statute, is not without more a denial law would suffer a complete breakdown. (Santos v. People, et al, G. R.
of the equal protection of the laws. The unlawful administration by No. 173176, August 26, 2008)
officers of a statute fair on its face, resulting in its unequal application
to those who are entitled to be treated alike, is not a denial of equal 11. A fixed annual license fee on those engaged in the
protection unless there is shown to be present in it an element of business of general enterprise was also imposed on the sale of
intentional or purposeful discrimination. This may appear on the face bibles by a religious sect. Is this valid or violative of the
of the action taken with respect to a particular class or person, or it constitutionally guaranteed freedom of religion ?
may only be shown by extrinsic evidence showing a discriminatory SUGGESTED ANSWER: It is not valid because it violates the
design over another not to be inferred from the action itself. constitutionally guaranteed freedom of religion. As a license fee is
But a discriminatory purpose is not presumed, there must be a fixed in amount and unrelated to the receipts of the taxpayer, such a
showing of clear and intentional discrimination. [Santos v. People, et license fee, when applied to a religious sect is actually imposed as a
al, G. R. No. 173176, August 26, 2008 citing People v. Dela Piedra, 403 condition for the free exercise of religion. A license fee restrains in
Phil. 31, 54-56 (2001)] advance those constitutional liberties of press and religion and
inevitably tends to suppress their exercise.
10-E. There is no denial of equal protection where
the prosecution exercises its discretion in determining 12. A lawful tax on a new subject, or an increased tax on
probable cause. The discretion of who to prosecute depends on an old one, does not interfere with a contract or impairs its
the prosecution s sound assessment whether the evidence before it obligation, within the meaning of the constitution. Even though such
can justify a reasonable belief that a person has committed an taxation may affect particular contracts, as it may increase the debt of
offense. The presumption is that the prosecuting officers regularly one person and lessen the security of another, or may impose
performed their duties, and this presumption can be overcome only additional burdens upon one class and release the burdens of another,
by proof to the contrary, not by mere speculation. There must be still the tax must be paid unless prohibited by the constitution, nor can it
evidence to overcome this presumption. The mere allegation a be said that it impairs the obligations of any existing contract in its true
Cebuana, was charged with the commission of a crime, while a and legal sense. (Tolentino v. Secretary of Finance, et al., and
Zamboanguea, was not, is insufficient to support a conclusion that companion cases, 235 SCRA 630)
the prosecution officers acted in denial of the equal protection of the
laws. (Santos v. People, et al, G. R. No. 173176, August 26, 2008) 13. Under the now prevailing Constitution, where there is
neither a grant nor prohibition by statute, the taxing power of
10-F. Equal protection should not be used to protect local governments must be deemed to exist although Congress
commission of crime. While all persons accused of crime are to may provide statutory limitations and guidelines in order to
be treated on a basis of equality before the law, it does not follow that safeguard the viability and self-sufficiency of local government units by
they are to be protected in the commission of crime. It would be directly granting them general and broad tax powers. (City Government
unconscionable, for instance, to excuse a defendant guilty of murder of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March
because others have murdered with impunity. The remedy for 25, 1999)
unequal enforcement of the law in such instances does not lie in the
exoneration of the guilty at the expense of society x x x. Protection of 13-A. Franchise tax is a direct tax. The franchise tax
the law will be extended to all persons equally in the pursuit of their is a percentage tax imposed only on franchise holders. It is
lawful occupations, but no person has the right to demand protection imposed under Section 119 of the Tax Code and is a direct
of the law in the commission of a crime. liability of the franchise grantee. (Quezon City, et al., v. ABS-
Likewise, [i]f the failure of prosecutors to enforce the criminal CBN Broadcasting Corporation, G. R. No. 166408, October 6,
laws as to some persons should be converted into a defense for
2008. The author opines that since practically all franchises
others charged with crime, the result would be that the trial of the
district attorney for nonfeasance would become an issue in the trial of granted to telecommunications companies are similarly
many persons charged with heinous crimes and the enforcement of worded that the above doctrine finds application to the others.)
15

14. The Local Government Code explicitly authorizes 17-A. Taxing power of the local government is
provinces and cities, notwithstanding any exemption granted by limited. The taxing power of local governments is limited in the
any law or other special law to impose a tax on businesses sense that Congress can enact legislation granting tax exemptions.
enjoying a franchise. Indicative of the legislative intent to carry out While the system of local government taxation has changed
the constitutional mandate of vesting broad tax powers to local with the onset of the 1987 Constitution, the power of local
government units, the Local Government Code has withdrawn tax government units to tax is still limited.
exemptions or incentives theretofore enjoyed by certain entities. (City While the power to tax by local governments may be exercised
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. by local legislative bodies, no longer merely be virtue of a valid
127708, March 25, 1999) delegation as before, but pursuant to direct authority conferred by
Section 5, Article X of the Constitution, the basic doctrine on local
15. Philippine Long Distance Telephone Company, Inc., v. taxation remains essentially the same, the power to tax is [still]
City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld primarily vested in the Congress. (Quezon City, et al., v. ABS-CBN
the authority of the City of Davao, a local government unit, to impose Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
and collect a local franchise tax because the Local Government has Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R.
withdrawn all tax exemptions previously enjoyed by all persons and No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu
authorized local government units to impose a tax on business enjoying International Airport Authority, v. Marcos, G.R. No. 120082, September 11,
a franchise tax notwithstanding the grant of tax exemption to them. 1996, 261 SCRA 667, 680)

16. Explain the concept of the paradigm 17-B. Further amplification by Bernas of the local
shift in local government taxation. government s power to tax. What is the effect of Section 5
SUGGESTED ANSWER: Paradigm shift from exclusive on the fiscal position of municipal corporations? Section 5 does not
Congressional power to direct grant of taxing power to local legislative change the doctrine that municipal corporations do not possess
bodies. The power to tax is no longer vested exclusively on Congress; inherent powers of taxation. What it does is to confer municipal
local legislative bodies are now given direct authority to levy taxes, fees corporations a general power to levy taxes and otherwise create
and other charges pursuant to Article X, section 5 of the 1987 sources of revenue. They no longer have to wait for a statutory grant
Constitution. (Batangas Power Corporation v. Batangas City, et al. G. of these powers. The power of the legislative authority relative to the
R. No. 152675, and companion case, April 28, 2004 citing National fiscal powers of local governments has been reduced to the authority
to impose limitations on municipal powers. Moreover, these
Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9,
limitations must be consistent with the basic policy of local
2003)
autonomy. The important legal effect of Section 5 is thus to reverse
the principle that doubts are resolved against municipal corporations.
17. The fundamental law did not intend the direct grant to
Henceforth, in interpreting statutory provisions on municipal fiscal
local government units to be absolute and unconditional, the
powers, doubts will be resolved in favor of municipal corporations. It
constitutional objective obviously is to ensure that, while local
is understood, however, that taxes imposed by local government
government units are being strengthened and made more
must be for a public purpose, uniform within a locality, must not be
autonomous, the legislature must still see to it that:
confiscatory, and must be within the jurisdiction of the local unit to
a. the taxpayer will not be over-burdened or saddled with
pass. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R.
multiple and unreasonable impositions; No. 166408, October 6, 2008 citing City Government of Quezon City, et al.
b. each local government unit will have its fair share of v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484
available resources; SCRA 169)
c. the resources of the national government will be unduly
disturbed; and 17-C. Reconciliation of the local government s
d. local taxation will be fair, uniform and just. (Manila Electric
Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
authority to tax and the Congressional general taxing
16
power. Congress has the inherent power to tax, which includes the power protecting contracts against impairment presupposes the
to grant tax exemptions. On the other hand, the power of local maintenance of a government which retains adequate authority to
governments, such as provinces and cities for example Quezon City, to tax secure the peace and good order of society.
is prescribed by Section 151 in relation to Section 137 of the LGC which In truth, the Contract Clause has never been thought as a
expressly provides that notwithstanding any exemption granted by any law limitation on the exercise of the State s power of taxation save only
or other special law, the City or a province may impose a franchise tax. It where a tax exemption has been granted for a valid consideration.
must be noted that Section 137 of the LGC does not prohibit grant of future
Smart Communications, Inc. v. The City of Davao, etc., et al., G. R.
exemptions.
The Supreme Court in a series of cases has sustained the No. 155491, September 16, 2008 citing Tolentino v. Secretary of
power of Congress to grant tax exemptions over and above the Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685.
power of the local government s delegated power to tax. (Quezon The author opines that since practically all franchises granted to
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, telecommunications companies are similarly worded that the above
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan doctrine finds application to the others)
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units 19. When Congress approved a provision that, Any
under the Constitution and the LGC does not affect the power of advantage, favor, privilege, exemption, or immunity granted under
Congress to grant exemptions to certain persons, pursuant to a existing franchises, or may hereafter be granted, shall ipso facto
declared national policy. The legal effect of the constitutional grant to become part of previously granted telecommunications franchises and
local governments simply means that in interpreting statutory shall be accorded immediately and unconditionally to the grantees of
provisions on municipal taxing powers, doubts must be resolved in such franchises: Provided, however, That the foregoing shall neither
favor of municipal corporations. [Ibid., referring to Philippine Long apply to nor affect provisions of telecommunications franchises
Distance Telephone Company, Inc. (PLDT) vs. City of Davao] concerning territory covered by the franchise, the life span of the
franchise, or the type of service authorized by the franchise.
18. The withdrawal of a tax exemption should not be (Underscoring supplied) there was no intention for it to operate as a
construed as prohibiting future grants of exemption from all blanket tax exemption to all telecommunications entities. Applying
taxes. Indeed, the grant of taxing powers to local government units the rule of strict construction of laws granting tax exemptions and the
under the Local Government Code does not affect the power of rule that doubts should be resolved in favor of municipal corporations in
Congress to grant exemptions to certain persons, pursuant to a interpreting statutory provisions on municipal taxation, it was held that
declared national policy. The legal effect of the constitutional grant to said provisions cannot be considered as extending its application to
local governments simply means that in interpreting statutory franchises such as that of PLDT. (Philippine Long Distance Telephone
provisions on municipal taxing powers, doubts must be resolved in Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August
favor of municipal corporations. (Philippine Long Distance Telephone 22, 2001)
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August
22, 2001) 19-A. In lieu of all taxes in the franchise of ABS-
CBN does not exempt it from local franchise taxes. The
18-A. Tax exemptions in franchises are always in lieu of all taxes provision in the franchise of ABS-CBN does not
subject to withdrawal. Moreover, Smart s franchise was expressly provide what kind of taxes ABS-CBN is exempted from. It
granted with the express condition that it is subject to amendment, is not clear whether the exemption would include both local, whether
alteration, or repeal. (1987 CONSTITUTION, Art. XII, Sec. 11) municipal, city or provincial, and national tax. Whether the in lieu of
It is enough to say that the parties to a contract cannot, all taxes provision would include exemption from local tax is not
through the exercise of prophetic discernment, fetter the exercise of unequivocal.
the taxing power of the State. For not only are existing laws read into The right to exemption from local franchise tax must be clearly
contracts in order to fix obligations as between parties, but the established and cannot be made out of inference or implications but
reservation of essential attributes of sovereign power is also read into must be laid beyond reasonable doubt. Verily, the uncertainty in the
contracts as a basic postulate of the legal order. The policy of in lieu of all taxes provision should be construed against ABS-
17
CBN. ABS-CBN has the burden to prove that it is in fact covered by lieu of all taxes" clause in Smart's franchise refers only to national
the exemption so claimed but has failed to do so. (Quezon City, et al., and not to local taxes. [Smart Communications, Inc. v. The City of
v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Philippine
This is practically the same holding in an earlier case involving another Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571,
telecommunications company. Smart Communications, Inc. v. The City of 594 (2003)]
Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author
opines that since practically all franchises granted to telecommunications 19-C. The in lieu of all taxes clause in the
companies are similarly worded that the above doctrine finds application to
the others.)
franchise of ABS-CBN has become functus officio with
the abolition of the franchise tax on broadcasting
19-B. In lieu of all taxes refers to national internal companies with yearly gross receipts exceeding Ten
revenue taxes and not to local taxes. The in lieu of all Million Pesos. The clause in lieu of all taxes does not pertain
taxes clause applies only to national internal revenue taxes and not to VAT or any other tax. It cannot apply when what is paid is a tax
to local taxes. As appropriately pointed out in the separate opinion of other than a franchise tax. Since the franchise tax on the
Justice Antonio T. Carpio in a similar case involving a demand for broadcasting companies with yearly gross receipts exceeding ten
exemption from local franchise taxes: million pesos has been abolished, the in lieu of all taxes clause
[T]he "in lieu of all taxes" clause in Smart's franchise refers has now become functus officio, rendered inoperative. (Quezon City,
only to taxes, other than income tax, imposed under the National et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
Internal Revenue Code. The "in lieu of all taxes" clause does not 2008. This is practically the same holding in an earlier case involving
another telecommunications company. Smart Communications, Inc. v. The
apply to local taxes. The proviso in the first paragraph of Section 9 of City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The
Smart's franchise states that the grantee shall "continue to be liable author opines that since practically all franchises granted to
for income taxes payable under Title II of the National Internal telecommunications companies are similarly worded that the above doctrine
Revenue Code." Also, the second paragraph of Section 9 speaks of finds application to the others.)
tax returns filed and taxes paid to the "Commissioner of Internal
Revenue or his duly authorized representative in accordance with the 19-D. Historical background on why ABS-CBN is
National Internal Revenue Code." Moreover, the same paragraph subject to VAT and not to the franchise tax. At the time of
declares that the tax returns "shall be subject to audit by the Bureau the enactment of its franchise on May 3, 1995, ABS-CBN was subject
of Internal Revenue." Nothing is mentioned in Section 9 about local to 3% franchise tax under Section 117(b) of the 1977 National
taxes. The clear intent is for the "in lieu of all taxes" clause to apply Internal Revenue Code (NIRC), as amended.
only to taxes under the National Internal Revenue Code and not to On January 1, 1996, R.A. No. 7716, otherwise known as the
local taxes. Even with respect to national internal revenue taxes, the Expanded Value Added Tax Law, took effect and subjected to VAT
"in lieu of all taxes" clause does not apply to income tax. those services rendered by radio and/or broadcasting stations.
If Congress intended the "in lieu of all taxes" clause in Smart's Notably, under the same law, telephone and/or telegraph systems,
franchise to also apply to local taxes, Congress would have expressly broadcasting stations and other franchise grantees were omitted
mentioned the exemption from municipal and provincial taxes. from the list of entities subject to franchise tax. The impression was
Congress could have used the language in Section 9(b) of that these entities were subject to 10% VAT but not to franchise tax.
Clavecilla's old franchise, as follows: Subsequently, R.A. No. 8241 took effect on January 1, 1997
x x x in lieu of any and all taxes of any kind, nature or containing more amendments to the NIRC. Radio and/or television
description levied, established or collected by any authority companies whose annual gross receipts do not exceed
whatsoever, municipal, provincial or national, from which the grantee P10,000,000.00 were granted the option to choose between paying
is hereby expressly exempted, x x x. (Emphasis supplied). 3% national franchise tax or 10% VAT
However, Congress did not expressly exempt Smart from local On the other hand, radio and/or television companies with
taxes. Congress used the "in lieu of all taxes" clause only in yearly gross receipts exceeding P10,000,000.00 were subject to
reference to national internal revenue taxes. The only interpretation, 10% VAT, pursuant to Section 102 of the NIRC.
under the rule on strict construction of tax exemptions, is that the "in
18
nd
On January 1, 1998, R.A. No. 8424 was passed confirming the The presence of the 2 element, taxing all of the subjects and
10% VAT liability of radio and/or television companies with yearly objects for the first time, without taxing all for the second time, results
gross receipts exceeding P10,000,000.00. to discrimination among subjects and objects that are similarly situated,
R.A. No. 9337 was subsequently enacted and became effective on hence violative of the equal protection clause.
July 1, 2005. The said law further amended the NIRC by increasing
the rate of VAT to 12%. The effectivity of the imposition of the 12% 22. Double taxation a valid defense against the legality of a
VAT was later moved from January 1, 2006 to February 1, 2006. tax measure if the double taxation is direct duplicate taxation,
In consonance with the above survey of pertinent laws on the matter, because it would violate the equal protection clause of the constitution.
ABS-CBN is subject to the payment of VAT. It does not have the
option to choose between the payment of franchise tax or VAT since 23. When an item of income is taxed in the Philippines
it is a broadcasting company with yearly gross receipts exceeding and the same income is taxed in another country, this would be
Ten Million Pesos (P10,000,000.00). (Quezon City, et al., v. ABS-CBN known as international juridical double taxation which is the
Broadcasting Corporation, G. R. No. 166408, October 6, 2008. The author imposition of comparable taxes in two or more states on the same
opines that since practically all franchises granted to telecommunications taxpayer in respect of the same subject matter and for identical
companies are similarly worded that the above doctrine finds application to
the others.)
grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc., et al., G.R. No. 127105, June 25, 1999)
20. Double taxation in its generic sense, this means
taxing the same subject or object twice during the same taxable 24. What are the methods for avoiding double
period. taxation (indirect duplicate taxation) ?
In its particular sense, it may mean direct duplicate taxation, SUGGESTED ANSWER: The following are the methods of
which is prohibited under the constitution because it violates the avoiding double taxation:
concept of equal protection, uniformity and equitableness of taxation. a. Tax treaties which exempts foreign nationals from local
Indirect duplicate taxation is not anathematized by the above taxation and local nationals from foreign taxation under the principle of
constitutional limitations. reciprocity.
b. Tax credits where foreign taxes are allowed as
21. What are the elements of direct duplicate deductions from local taxes that are due to be paid.
taxation ? c. Allowing foreign taxes as a deduction from gross income.
SUGGESTED ANSWER:
a. Same 25. Tax credit generally refers to an amount that is
1) Subject or object is taxed twice subtracted directly from one s total tax liability, an allowance against
2) by the same taxing authority the tax itself, or a deduction from what is owned.
3) for the same taxing purpose A tax credit reduces the tax due, including whenever
4) during the same taxable period applicable the income tax that is determined after applying the
b. Taxing all of the subjects or objects for the first time corresponding tax rates to taxable income. (Commissioner of Internal
without taxing all of them for the second time. Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April
If any of the elements are absent then there is indirect 15, 2005)
duplicate taxation which is not prohibited by the constitution.
NOTES AND COMMENTS: 26. A tax deduction is defined as a subtraction fro income
a. Presence of the 2
nd
element violates the equal for tax purposes, or an amount that is allowed by law to reduce income
st
protection clause. If only the 1 element is present, taxing the same prior to the application of the tax rate to compute the amount of tax
subject or object twice, by the same taxing authority, etc., there is no which is due.
violation of the equal protection clause because all subjects and A tax deduction reduces the income that is subject to tax in
objects that are similarly situated are subject to the same burdens and order to arrive at taxable income. (Commissioner of Internal Revenue
granted the same privileges without any discrimination whatsoever, v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)
19
provision. Sales taxes are also regressive. . [Abakada Guro Party List
27. The petitioners allege that the R-VAT law (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and
is constitutional because the Bicameral Conference companion cases citing Tolentino v. Secretary of Finance, et al., G. R.
No. 115455, August 25, 1994, 235 SCRA 630]
Committed has exceeded its authority in including
provisions which were never included in the versions of 29. All revenues and assets of non-stock, non-profit
both the House and Senate such as inserting the stand-by educational institutions that are actually, directly and exclusively
authority to the President to increase the VAT from 10% to used for educational purposes shall be exempt from taxation.
12%; deleting entirely the no pass-on provisions found in
both the House and Senate Bills; inserting the provision 30. Revenues and assets of proprietary educational
imposing a 70% limit on the amount of input tax to be institutions, including those which are cooperatively owned, may
credited against the output tax; and including the be entitled to exemptions subject to limitations provided by law
including restrictions on dividends and provisions for
amendments introduced only by Senate Bill No. 1950
reinvestments. There is no law at the present which grants
regarding other kinds of taxes in addition to the value- exemptions, other the exemptions granted to cooperatives.
added tax. Thus, there was a violation of the constitutional
mandate that revenue bills shall originate exclusively from OTHER CONCEPTS
the House of Representatives.
Are the contentions of such weight as to constitute 1. What is a tax amnesty ?
grave abuse of discretion which may invalidate the law ? SUGGESTED ANSWER: A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties
Explain briefly.
on persons otherwise guilty of evasion or violation of a revenue or a tax
SUGGESTED ANSWER: No. There was no grave abuse of
law.
discretion because all the changes and modifications made by the
It partakes of an absolute waiver by the government of its right
Bicameral Conference Committee were germane to subjects of the
to collect what is due it and to give tax evaders who wish to relent a
provisions referred to it for reconciliation.
chance to start with a clean slate. A tax amnesty, much like a tax
The Bicameral Conference Committee merely exercised the
exemption, is never favored nor presumed in law. The grant of a tax
judicially recognized long-standing legislative practice of giving said
amnesty, similar to a tax exemption, must be construed strictly
conference committee ample latitude for compromising differences
against the taxpayer and liberally in favor of the taxing authority.
between the Senate and the House. [Abakada Guro Party List (etc.) v.
(Philippine Banking Corporation, etc., v. Commissioner of Internal
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and
Revenue, G. R. No. 170574, January 30, 2009 citing Commissioner
companion cases citing Philippine Judges Association v. Pardo, G. R.
of Internal Revenue v. Marubeni Corp., 423 Phil. 862, 874 (2001).
No. 105371, November 11, 1993, 227 SCRA 703; Tolentino v.
Secretary of Finance, et al., G. R. No. 115455, August 25, 1994,
1-A. The purpose of tax amnesty is to
235SCRA 630]
a. give tax evaders who wish to relent a chance to start a
clean slate, and to
28. The VAT is assailed as being regressive and b. give the government a chance to collect uncollected tax
therefore violative of the mandate to evolve a progressive from tax evaders without having to go through the tedious process of
system of taxation. Do you agree ? Explain your answer. a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967,
SUGGESTED ANSWER: No. The VAT does not violate the February 10, 2000)
progressive system of taxation. The mandate to Congress is not to
prescribe but to evolve a progressive system of taxation. Otherwise, 2. Distinguish tax amnesty from tax exemption.
sales taxes which perhaps are the oldest form of indirect taxes, would SUGGESTED ANSWER:
have been prohibited with the proclamation of the constitutional
20
a. Tax amnesty is an immunity from all criminal, civil and enforcing of which the personal consent of the individual taxpayer is not
administrative liabilities arising from nonpayment of taxes (People v. required. (Republic v. Mambulao Lumber Co., 4 SCRA 622)
Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax c. The government and the taxpayer are not mutually
exemption is an immunity from civil liability only. It is an immunity or creditors and debtors of each other and a claim for taxes is no such
privilege, a freedom from a charge or burden to which others are debt, demand, contract or judgment as is allowed to be set-off. (Caltex
subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365) Philippines, Inc. v. Commission on Audit, 208 SCRA 726, 756)
b. Tax amnesty applies only to past tax periods, hence of
retroactive application (Castaneda, supra) WHILE tax exemption has 6. Compensation takes place by operation of law, where
prospective application. the local government and the taxpayer are in their own right reciprocally
debtors and creditors of each other, and that the debts are both due
3. Define tax avoidance and tax evasion. and demandable, in consequence of Articles 1278 and 1279 of the Civil
SUGGESTED ANSWER: Tax avoidance is the use of legally Code. (Domingo v. Garlitos, 8 SCRA 443)
permissible means to reduce the tax while tax evasion is the use of
illegal means to escape the payment of taxes. 7. In case of a tax overpayment, where the BIR s
NOTES AND COMMENTS: obligation to refund or set-off arises from the moment the tax was
a. Tax evasion connotes the integration of three paid under the principle of solutio indebeti. (Commissioner of
factors: Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or the non- 8. But note Nestle Phil. v. Court of Appeals, et al., G.R.
payment of tax when it is shown that a tax is due; No. 134114, July 6, 2001 which held that in order for the rule on solutio
2) an accompanying state of mind which is described indebeti to apply it is an essential condition that the petitioner must first
as being evil on bad faith, willful, or deliberate and show that its payment of the customs duties was in excess of what was
not accidental ; and required by the law at the time the subject 16 importations of milk and
3) a course of action or failure of action which is milk products were made. Unless shown otherwise, the disputable
unlawful. (Commissioner of Internal Revenue v. The Estate of presumption of regularity of performance of duty lies in favor of the
Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, Collector of Customs.
2004)
9. A direct tax is a tax for which a taxpayer is directly
4. Distinguish between the tax avoidance liable on the transaction or business it engages in, without
and tax evasion. transferring the burden to someone else. Examples are individual
SUGGESTED ANSWER: and corporate income taxes, transfer taxes, and residence taxes.
a. Tax avoidance is legal while tax evasion is illegal. (Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,
b. The objective of tax avoidance in most instances is September 1, 2005 and companion cases, citing Maceda v. Macaraig,
merely to reduce the tax that is due while is tax evasion the object is to Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217)
entirely escape the payment of taxes.
c. Tax evasion warrants the imposition of civil, 10. The main difference between direct taxes and indirect
administrative and criminal penalties while tax avoidance does not. taxes is that the burden of direct taxes could not be shifted by the
taxpayer to another while the burden of indirect taxes could be shifted
5. What are the reasons why national taxes cannot be to another person, such the burden value-added taxes being shifted or
the subject of compensation and set-off with debts ? transferred by the taxpayer, the seller, to the buyer.
SUGGESTED ANSWER:
a. The lifeblood theory; 11. Acesite is the owner and operator of restaurant which
b. Taxes are not contractual obligations but arise out of a caters to the patrons of a casino operated by PAGCOR within its
duty to, and are the positive acts of government, to the making and premises. it billed PAGCOR for the cost of the food and
21
beverages consumed by the PAGCOR s patrons as well as the Silkair further anchors its claim on Article 4(2) of the
lease of the premises plus the VAT on these items. PAGCOR paid Air Transport Agreement between the Government of the
Acesite minus the VAT claiming exemption while Acesite, in order Republic of the Philippines and the Government of the
to avoid legal implications, paid the P30 million tax and applied
Republic of Singapore (Air Transport Agreement between
for a refund on the ground of solutio indebeti.
RP and Singapore).
Acesite cites the tax exemption grant in PAGCOR s
franchise as follows: The exemptions herein granted for earnings Silkair likewise argues that it is exempt from indirect
derived from the operations conducted under the franchise specifically taxes because the Air Transport Agreement between RP
from the payment of any tax, income, or otherwise, as well as any form and Singapore grants exemption from the same customs
of charges, fees or levies, shall inure to the benefit of and extend to duties, inspection fees and other duties or taxes imposed
corporation(s), association (s), agency (cies), or individual(s) with in the territory of the first Contracting Party. It invokes
whom the Corporation or operator has any contractual Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197
relationship in connection with the operations of the casino (s)
SCRA 771.which upheld the claim for tax credit or refund
authorized to be conducted under this Franchise and to those
receiving compensation or other remuneration from the Corporation or by the National Power Corporation (NPC) on the ground
operator as a result of essential facilities furnished and/or technical that the NPC is exempt even from the payment of indirect
services rendered to the Corporation or operator. (emphasis taxes.
supplied) Is Silkair entitled to the tax refund or credit it seeks ?
The BIR denied the claim on the ground that PAGCOR is Reason out your answer.
exempt only from direct taxes and not from indirect taxes so SUGGESTED ANSWER: Silkair is not entitled to tax refund or
Acesite may not avail of the exemption. Is this correct ? credit for the following reasons:
SUGGESTED ANSWER: No. As the law is worded the a. The excise tax on aviation fuel is an indirect tax. The
exemption flows to Acesite. The law is clear that the exemption proper party to question, or seek a refund of, an indirect tax is the
extends the exemption to entities or individuals dealing with PAGCOR. statutory taxpayer, the person on whom the tax is imposed by law and
(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel who paid the same even if he shifts the burden thereof to another.
Corporation, G. R. No. 147295, February 16, 2007) (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue,
NOTES AND COMMENTS: G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318) The
a. The above holding should be differentiated from NIRC provides that the excise tax should be paid by the manufacturer
Philippine Acetylene Co. v. Commissioner of Internal Revenue, 20 or producer before removal of domestic products from place of
SCRA 1056, where the tax exemption did not flow to private entities. production. Thus, Petron Corporation, not Silkair, is the statutory
(cited in Abaya v. Ebdane, G. R. No. 167919, February 14, 2007), and taxpayer which is entitled to claim a refund based on Section 135 of
in the following case of Silkair (Singapore) PTE, Ltd., v. Commissioner the NIRC of 1997 and Article 4(2) of the Air Transport Agreement
of Internal Revenue, G.R. No. 173594, February 6, 2008. between RP and Singapore.
b. So also, the tax exemption of PAGCOR has already been Even if Petron Corporation passed on to Silkair the burden of
withdrawn by Rep. Act No. 9337. the tax, the additional amount billed to Silkair for jet fuel is not a tax
but part of the price which Silkair had to pay as a purchaser.
12. Silkair (Singapore) PTE, Ltd., an [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue,
international carrier, purchased aviation gas from Petron 127 Phil. 461, 470 (1967)]
b. Silkair could not seek refuge under Maceda v. Macaraig,
Corporation, which it uses for its operations. It now claims Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the
for refund or tax credit for the excise taxes it paid claiming claim for tax credit or refund by the National Power Corporation (NPC)
that it is exempt from the payment of excise taxes under on the ground that the NPC is exempt even from the payment of
the provisions of Sec. 135 of the NIRC of 1997. indirect taxes.
22
In Commissioner of Internal Revenue v. Philippine Long c. A taxpayer who authorizes the Commissioner to inquire
Distance Telephone Company, G.R. No. 140230, December 15, into his bank deposits.
2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda
v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the 2. Purpose of the NIRC of 1997. Revenue generation
Court held that an exemption from all taxes granted to the has undoubtedly been a major consideration in the passage of
National Power Corporation (NPC) under its charter includes both the Tax Code. (Commissioner of Internal Revenue v. Fortune
direct and indirect taxes. Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
An exemption from all taxes excludes indirect taxes,
unless the exempting statute, like NPC s charter, is so couched as to 3. Purpose of shift from ad valorem system to specific
include indirect tax from the exemption. The amendment under tax system in taxation of cigarettes. The shift from the ad valorem
Republic Act No. 6395 enumerated the details covered by NPC s system to the specific tax system is likewise meant to promote fair
exemption. Subsequently, P.D. 380, made even more specific the competition among the players in the industries concerned, to
details of the exemption of NPC to cover, among others, both direct ensure an equitable distribution of the tax burden and to simplify tax
and indirect taxes on all petroleum products used in its operation. administration by classifying cigarettes, among others, into high,
Presidential Decree No. 938 [NPC s amended charter] amended the medium and low-priced based on their net retail price and
tax exemption by simplifying the same law in general terms. It accordingly graduating tax rates. (Commissioner of Internal Revenue
succinctly exempts NPC from all forms of taxes, duties[,] fees v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21,
The use of the phrase all forms of taxes demonstrates the 2008 citing Record of the Senate, pp. 224-225)
intention of the law to give NPC all the tax exemptions it has been
enjoying before. TAX ON INCOME
The exemption granted under Section 135 (b) of the NIRC of
1997 and Article 4(2) of the Air Transport Agreement between RP and 1. The Tax Code has included under the term
Singapore cannot, without a clear showing of legislative intent, be corporation partnerships, no matter how created or organized,
construed as including indirect taxes. Statutes granting tax joint-stock companies, joint accounts (cuentas en participacion),
exemptions must be construed in strictissimi juris against the taxpayer associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the
and liberally in favor of the taxing authority, and if an exemption is NIRC of 1997]
found to exist, it must not be enlarged by construction. (Silkair
(Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 2. In Evangelista v. Collector, 102 Phil. 140, the Supreme
173594, February 6, 2008) Court held citing Mertens that the term partnership includes a
syndicate, group, pool, joint venture or other unincorporated
NATIONAL INTERNAL REVENUE CODE organization, through or by means of which any business, financial
operation, or venture is carried on.
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE 3. Certain business organizations do not fall under the
category of corporations under the Tax Code, and therefore not
1. Rep. Act No. 1405, the Bank Deposits Secrecy subject to tax as corporations, include:
Law prohibits inquiry into bank deposits. As exceptions to Rep. a. General professional partnerships;
b. Joint venture or consortium formed for the purpose of
Act No. 1405, the Commissioner of Internal Revenue is only
undertaking construction projects engaging in petroleum, coal,
authorized to inquire into the bank deposits of:
geothermal, and other energy operations, pursuant to an operation or
a. a decedent to determine his gross estate; and
consortium agreement under a service contract with the Government.
b. any taxpayer who has filed an application for compromise st
[1 sentence, Sec. 22 (B), BIRC of 1997]
of his tax liability by reason of financial incapacity to pay his tax liability.
[Sec. 5 (F), NIRC of 1997]
23
4. Co-heirs who own inherited properties which 8. The term taxable income means the pertinent items of
produce income should not automatically be considered as gross income specified in the Tax Code, less the deductions and/or
partners of an unregistered corporation subject to income tax for personal and additional exemptions, if any, authorized for such types of
the following reasons: income by the Tax Code or other special laws. (Sec. 31, NIRC of
a. The sharing of gross returns does not of itself establish a 1997)
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are 9. The cancellation and forgiveness of indebtedness
derived. There must be an unmistakable intention to form a may amount to (a) payment of income; (b) gift; or to a (c) capital
partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal transaction depending upon the circumstances.
Revenue, 139 SCRA 436)
b. There is no contribution or investment of additional capital 10. If an individual performs services for a creditor who, in
to increase or expand the inherited properties, merely continuing the consideration thereof, cancels the debt, it is income to the extent of the
dedication of the property to the use to which it had been put by their amount realized by the debtor as compensation for his services.
forebears. (Ibid.)
c. Persons who contribute property or funds to a common 11. An insolvent debtor does not realize taxable income from
enterprise and agree to share the gross returns of that enterprise in the cancellation or forgiveness. (Commissioner v. Simmons Gin Co.,
th
proportion to their contribution, but who severally retain the title to their 43 Fd 327 CCA 10 )
respective contribution, are not thereby rendered partners. They have
no common stock capital, and no community of interest as principal 12. The insolvent debtor realizes income resulting from the
proprietors in the business itself from which the proceeds were derived. cancellation or forgiveness of indebtedness when he becomes solvent.
nd
(Elements of the Law of Partnership by Floyd R. Mechem, 2 Ed., Sec. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)
83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560) 13. If a creditor merely desires to benefit a debtor and without
any consideration therefor cancels the amount of the debt it is a gift
5. The common ownership of property does not itself from the creditor to the debtor and need not be included in the latter s
create a partnership between the owners, though they may use it for income.
purpose of making gains, and they may, without becoming partners,
are among themselves as to the management and use of such 14. If a corporation to which a stockholder is indebted
property and the application of the proceeds therefrom.. (Spurlock v,. forgives the debt, the transaction has the effect of payment of a
Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. dividend. (Sec. 50, Rev. Regs. No. 2)
Commissioner of Internal Revenue, 166 SCRA 560)
15. The Global system of income taxation is a system
6. The income from the rental of the house, bought employed where the tax system views indifferently the tax base and
from the earnings of co-owned properties, shall be treated as the generally treats in common all categories of taxable income of the
income of an unregistered partnership to be taxable as a individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
corporation because of the clear intention of the brothers to join
together in a venture for making money out of rentals. 16. The Schedular system of income taxation is a system
employed where the income tax treatment varies and is made to
7. Income is gain derived and severed from capital, from depend on the kind or category of taxable income of the taxpayer.
labor or from both combined. For example, to tax a stock dividend (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
would be to tax a capital increase rather than the income.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. 17. Under the National Internal Revenue Code the global
No. 108576, January 20, 1999) system is applicable to taxable corporations and the schedular to
individuals.
24
22. What are considered as de minimis
18. What are general principles of benefits not subject to withholding tax on compensation
income taxation in the Philippines OR the situs of income income of both managerial and rank and file employees ?
taxation in the Philippines OR the source rule of income SUGGESTED ANSWER:
taxation as applied in the Philippines ? a. Monetized unused vacation leave credits of employees
SUGGESTED ANSWER: not exceeding ten (10) days during the year;
a. A citizen of the Philippines residing therein is taxable on b. Medical cash allowance to dependents of employees not
all income derived from sources within and without the Philippines. exceeding P750.00 per employee per semester or P125 per month;
b. A nonresident citizen is taxable only on income derived c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice
from sources within the Philippines. per month amounting to not more than P1,000.00;
c. An individual citizen of the Philippines who is working and d. Uniforms and clothing allowance not exceeding P3,000.00
deriving income from abroad as an overseas contract worker is taxable per annum;
only on income from sources within the Philippines: Provided, That a e. Actual yearly medical benefits not exceeding P10,000.00 per
seaman who is a citizen of the Philippines and who receives annum;
compensation for services rendered abroad as a member of the f. Laundry allowance not exceeding P300 per month;
complement of a vessel engaged exclusively in international trade shall g. Employees achievement awards, e.g. for length of service
be treated as an overseas contract worker. or safety achievement, which must be in the form of a tangible persona
d. An alien individual, whether resident or not of the property other than cash or gift certificate, with an annual monetary
Philippines, is taxable only on income derived from sources within the value not exceeding P10,000.00 received by an employee under an
Philippines. established written plan which does not discriminate in favor of highly
e. A domestic corporation is taxable on all income derived paid employees;
from sources within and without the Philippines. h. Gifts given during Christmas and major anniversary
f. A foreign corporation, whether engaged or not in trade or celebrations not exceeding P5,000 per employee per annum;
business in the Philippines, is taxable only on income derived from i. Flowers, fruits, books, or similar items given to employees
sources within the Philippines. (Sec. 23, NIRC of 1997) under special circumstances, e.g. on account of illness, marriage, birth
of a baby, etc.; and
19. Compensation income is considered as having been j. Daily meal allowance for overtime work not exceeding
earned in the place where the service was rendered and not twenty five percent (25%) of the basic minimum wage.
considered as sourced from the place of origin of the money. The amount of de minimis benefits conforming to the ceiling
herein prescribed shall not be considered in determining the P30,000
20. Payment for services, other than compensation ceiling of other benefits provided under Section 32 (B)(7)(e) of the
income, is considered as having been earned at the place where Code. However, if the employer pays more than the ceiling prescribed
the activity or service was performed. by these regulations, the excess shall be taxable to the employee
receiving the benefits only if such excess is beyond the P30,000.00
21. A non-resident alien, who has stayed in the Philippines ceiling, provided, further, that any amount given by the employer as
for an aggregate period of more than 180 days during any calendar benefits to its employees, whether classified as de minimis benefits or
year, shall be considered as a non-resident alien doing business in the fringe benefits, shall constitute as deductible expense upon such
Philippines. Consequently, he shall be subject to income tax on his employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev.
income derived from sources from within the Philippines. [Sec. 25 (A) Regs. No. 8-2000]
(1), NIRC]
He is allowed to avail of the itemized deductions including the 23. Income subject to final tax refers to an income
personal and additional exemptions subject to the rule on reciprocity. collected through the withholding tax system. The payor of the
income withholds the tax and remits it to the government as a final
settlement of the income tax as a final settlement of the income tax due
25
on said income. The recipient is no longer required to include the
income subjected to a final tax as part of his gross income in his 26. What are the conditions for
income tax return. excluding retirement benefits from gross income, hence
tax-exempt ?
24. Distinguish exclusions from deductions. SUGGESTED ANSWER:
SUGGESTED ANSWER: a. Retirement benefits received under Republic Act No.
a. Exclusions from gross income refer to a flow of wealth to 7641 and those received by officials and employees of private firms,
the taxpayer which are not treated as part of gross income for whether individual or corporate, in accordance with the employer s
purposes of computing the taxpayer s taxable income, due to the reasonable private benefit plan approved by the BIR.
following reasons: (1) It is exempted by the fundamental law; (2) It is b. Retiring official or employee
exempted by statute; and (3) It does not come within the definition of 1) In the service of the same employer for at least ten
income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the (10) years;
amounts which the law allows to be subtracted from gross income in 2) Not less than fifty (50) years of age at time of
order to arrive at net income. retirement;
b. Exclusions pertain to the computation of gross income 3) Availed of the benefit of exclusion only once. [Sec.
WHILE deductions pertain to the computation of net income. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee
c. Exclusions are something received or earned by the should not have previously availed of the privilege under the
taxpayer which do not form part of gross income WHILE deductions st
retirement plan of the same or another employer. [1 par., Sec.
are something spent or paid in earning gross income. 2.78 (B) (1), Rev. Regs. No. 2-98]
An example of an exclusion from gross income are life
insurance proceeds, and an example of a deduction are losses.
27. What kind of separation (retirement) pay is
excluded from gross income, hence tax-exempt ?
25. What are excluded from gross income ?
SUGGESTED ANSWER:
SUGGESTED ANSWER:
a. Any amount received by an official, employee or by his
a. Proceeds of life insurance policies paid to the heirs or
heirs,
beneficiaries upon the death of the insured whether in a single sum or
b. From the employer
otherwise.
c. As a consequence of separation of such official or
b. Amounts received by the insured as a return of premiums
employee from the service of the employer because of
paid by him under life insurance, endowment or annuity contracts either
1) Death, sickness or other physical disability; or
during the term, or at maturity of the term mentioned in the contract, or
2) For any cause beyond the control of said official or
upon surrender of the contract.
employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as
c. Value of property acquired by gift, bequest, devise, or st
retrenchment, redundancy and cessation of business. [1
descent.
par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
d. Amounts received, through accident or health insurance or
Workmen s Compensation Acts as compensation for personal injuries
or sickness, plus the amounts of any damages received on whether by 28. What are the Itemized deductions from gross
suit or agreement on account of such injuries or sickness. income and who may avail of them ?
e. Income of any kind to the extent required by any treaty a. Ordinary and necessary trade, business or professional
obligation binding upon the Government of the Philippines. expenses.
f. Retirement benefits received under Republic Act No. b. The amount of interest paid or incurred within a taxable
7641. Retirement received from reasonable private benefit plan after year on indebtedness in connection with the taxpayer s profession,
compliance with certain conditions. Amounts received for beyond trade or business.
control separation. Foreign social security, retirement gratuities, Resident citizens, resident alien individuals and nonresident
pensions, etc. USVA benefits, SSS benefits and GSIS benefits. alien individuals who are engaged in trade and business, on their
26
gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also
these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on
deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.
their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.
in the Philippines are not allowed to deduct this expense. g. Depletion or deduction arising from the exhaustion of a
c. Taxes paid or incurred within the taxable year in connection non-replaceable asset, usually a natural resource.
with the taxpayer s profession. Resident citizens, resident alien individuals and nonresident
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their
alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct
gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also
these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on
deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.
their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.
in the Philippines are not allowed to deduct this expense. h. Charitable and other contributions. Resident
d. Ordinary losses, losses from casualty, theft or citizens, resident alien individuals and nonresident alien individuals who
embezzlement; and net operating losses. are engaged in trade and business, on their gross incomes other from
Resident citizens, resident alien individuals and nonresident compensation income are allowed to deduct these expenses.
alien individuals who are engaged in trade and business, on their Domestic corporations, estates and trusts may also deduct this
gross incomes other from compensation income are allowed to deduct expense. Nonresident citizens and foreign corporations on their gross
these expenses. Domestic corporations, estates and trusts may also incomes from within may also deduct this expense.
deduct this expense. Nonresident citizens and foreign corporations on Nonresident alien individuals not engaged in trade or business
their gross incomes from within may also deduct this expense. in the Philippines are not allowed to deduct this expense.
Nonresident alien individuals not engaged in trade or business i. Research and development expenditures treated as
in the Philippines are not allowed to deduct this expense. deferred expenses paid or incurred by the taxpayer in connection with
e. Bad debts due to the taxpayer, actually his trade, business or profession, not deducted as expenses and
ascertained to be worthless and charged off within the taxable year, chargeable to capital account but not chargeable to property of a
connected with profession, trade or business, not sustained between character which is subject to depreciation or depletion.
related parties. Resident citizens, resident alien individuals and nonresident
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their
alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct
gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also
these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on
deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.
their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.
in the Philippines are not allowed to deduct this expense. j. Contributions to pension trusts. Resident citizens,
f. Depreciation or a reasonable allowance for the resident alien individuals and nonresident alien individuals who are
exhaustion, wear and tear (including reasonable allowance for engaged in trade and business, on their gross incomes other from
obsolescence) of property used in trade or business. compensation income are allowed to deduct these expenses.
Resident citizens, resident alien individuals and nonresident Domestic corporations, estates and trusts may also deduct this
alien individuals who are engaged in trade and business, on their expense. Nonresident citizens and foreign corporations on their gross
gross incomes other from compensation income are allowed to deduct incomes from within may also deduct this expense.
27
Nonresident alien individuals not engaged in trade or business b. Compliance with the substantiation test. Proof by evidence
in the Philippines are not allowed to deduct this expense. or records of the deductions allowed by law including compliance with
k. Insurance premiums for health and hospitalization. the business test.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross 31. What are the requisites for the
incomes other from compensation income are allowed to deduct these deductibility of ordinary and necessary trade, business, or
expenses. Nonresident citizens and nonresident alien individual
engaged in trade or business in the Philippine on their gross incomes
professional expenses, like expenses paid for legal and
from within may also deduct these premiums. auditing services ?
Nonresident alien individuals not engaged in trade or business SUGGESTED ANSWER:
in the Philippines are not allowed to deduct these premiums. a. the expense must be ordinary and necessary;
l. Personal and additional exemptions. Resident citizens, b. it must have been paid or incurred during the taxable year
and resident alien on their gross incomes and from compensation dependent upon the method of accounting upon the basis of which the
income are allowed to deduct these premiums. Nonresident citizens on net income is computed.
their gross incomes from within may also deduct this expense. c. it must be supported by receipts, records or other
Nonresident alien individuals engaged in trade or business in the pertinent papers. (Commissioner of Internal Revenue v, Isabela
Philippines are allowed to deduct these exemptions under reciprocity. cultural Corporation, G. R. No. 172231, February 12, 2007)
Nonresident alien individuals not engaged in trade or business
in the Philippines are not allowed to deduct this expense. 32. TMG Corporation is issuing the
accrual method of accounting. In 2005 XYZ Law Firm and
29. Distinguish ordinary expenses from capital ABC Auditing Firm rendered various services which were
expenditures. billed by these firms only during the following year 2006.
SUGGESTED ANSWER: Ordinary expenses are those which Since the bills for legal and auditing services were received
are common to incur in the trade or business of the taxpayer WHILE only in 2006 and paid in the same year, TMG deducted the
capital expenditures are those incurred to improve assets and benefits
same from its 2006 gross income. The BIR disallowed the
for more than one taxable year. Ordinary expenses are usually
incurred during a taxable year and benefits such taxable year. deduction ?
Necessary expenses are those which are appropriate or helpful to the Who is correct, TMG or BIR ? Explain.
business. SUGGESTED ANSWER: The BIR is correct. TMG should
have deducted the professional and legal fees in the year they were
30. What are the requisites for the incurred in 2005 and not in 2006 because at the time the services were
rendered in 2005, there was already an obligation to pay them.
deductibility of business expenses ? (Commissioner of Internal Revenue v, Isabela Cultural Corporation, G.
SUGGESTED ANSWER: The following are the requisites for R. No. 172231, February 12, 2007)
deductibility of business expenses: NOTES AND COMMENTS:
a. Compliance with the business test: a. Accounting methods for tax purposes comprise a set of
1) Must be ordinary and necessary; rules for determining when and how to report income and deductions.
2) Must be paid or incurred within the taxable (Commissioner of Internal Revenue v, Isabela cultural Corporation, G.
year; R. No. 172231, February 12, 2007)
3) Must be paid or incurred in carrying on a The two (2) principal accounting methods for recognition of
trade or business. income are the (a) accrual method; and the (b) cash method.
4) Must not be bribes, kickbacks or other illegal
b. Recognition of income and expenses under the
expenditures
accrual method of accounting. Amounts of income accrue where
the right to receive them becomes fixed, where there is created an
28
enforceable liability. Liabilities, are incurred when fixed and SUGGESTED ANSWER: For purposes of taxation, fringe
determinable in nature without regard to indeterminacy merely of time benefit means any good, service, or other benefit furnished or granted
of payment.. (Commissioner of Internal Revenue v, Isabela cultural in cash or in kind by an employer to an individual employee (except
Corporation, G. R. No. 172231, February 12, 2007) rank and file employees), such as but not limited to:
The accrual of income and expense is permitted when the all- a. Housing;
events test has been met. (Ibid.) b. Expense account;
c. All-events test. This test requires: c. Vehicle of any kind;
1) fixing of a right to income or liability to pay; and d. Household personnel, such as maid, driver and others;
2) the availability of the reasonable accurate e. Interest on loan at less than market rate to the extent of
determination of such income or liability. the difference between the market rate and actual rate granted;
The test does not demand that the amount of such income or f. Membership fees, dues and other expenses borne by the
liability be known absolutely, only that a taxpayer has at his disposal the employer for the employee in social and athletic clubs or other similar
information necessary to compute the amount with reasonable organizations;
accuracy. g. Expenses for foreign travel;
The all-events test is satisfied where computation remains h. Holiday and vacation expenses;
uncertain; if its basis is unchangeable, the test is satisfied where a i. Educational assistance to the employee or his
computation may be unknown, but is not as much as unknowable, dependents; and
within the taxable year. The amount of liability does not have to be j. Life or health insurance and other non-life insurance
determined exactly,; it must be determined with reasonable premiums or similar amounts in excess of what the law allows. [Sec.
st
accuracy implies something less than an exact or completely 33 (B), NIRC of 1997; 1 par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
accurate amount. 35. Fringe benefits that are not subject to the fringe
The propriety of an accrual must be judged by the fact that a benefits tax:
taxpayer knew, or could reasonably be expected to have known, at the a. When the fringe benefit is required by the nature of, or
closing of its books for the taxable year. Accrual method of accounting necessary to the trade, business or profession of the employer; or
presents largely a question of fact; such that the taxpayer bears the b. When the fringe benefit is for the convenience or
st
burden of proof of establishing the accrual of an item of income or advantage of the employer. [Sec. 32(A), NIRC of 1997; 1 par., Sec.
deduction. (Commissioner of Internal Revenue v, Isabela cultural 2.33 (A), Rev. Regs. No. 3-98]
Corporation, G. R. No. 172231, February 12, 2007) c. Fringe benefits which are authorized and exempted from
d. Under the cash method income is to be construed as income tax under the Tax Code or under any special law;
income for tax purposes only upon actual receipt of the cash payment. d. Contributions of the employer for the benefit of the
It is also referred to as the cash receipts and disbursements employee to retirement, insurance and hospitalization benefit plans;
method because both the receipt and disbursements are considered. e. Benefits given to the rank and file employees, whether
Thus, income is recognized only upon actual receipt of the cash granted under a collective bargaining agreement or not; and
payment but no deductions are allowed from the cash income unless f. De minimis benefits as defined in the rules and
actually disbursed through an actual payment in cash. regulations to be promulgated by the Secretary of Finance upon
st
recommendation of the Commissioner of Internal Revenue. [1 par.,
33. The fringe benefits tax is a final withholding tax Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
imposed on the grossed-up monetary value of fringe benefits
furnished, granted or paid by the employer to the employee, except
st
36. De minimis benefits are facilities and
rank and file employees. [1 par., Sec. 2.33 (A), Rev. Regs. No. 3-98] privileges (such as entertainment, medical services, or so-called
courtesy discounts on purchases), furnished or offered by an
34. What is meant by fringe benefit for employer to his employees. They are not considered as compensation
purposes of taxation ? subject to income tax and consequently to withholding tax, if such
facilities are offered or furnished by the employer merely as a means of
29
promoting the health, goodwill, contentment, or efficiency of his e. The debt must be actually ascertained to be worthless
employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. and uncollectible during the taxable year;
Regs. No. 8-2000] f. The debts are uncollectible despite diligent effort exerted by
the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-
37. Preferred shares are considered capital regardless of 99 reiterated in Rev. Regs. No. 25-2002; Philippine Refining
the conditions under which such shares are issued and dividends Corporation v. Court of Appeals, et al., 256 SCRA 667]
or interests paid thereon are not allowed as deductions from g. Must have been reported as receivables in the income tax
the gross income of corporations. (Revenue Memorandum Circular return of the current or prior years. (Sec. 103, Rev. Regs. No. 2)
No. 17-71) :
41. What is the tax benefit rule ?
38. Bad debts are those which result from the worthlessness or SUGGESTED ANSWER: The tax benefit rule posits that the
uncollectibility, in whole or in part, of amounts due the taxpayer by recovery of bad debts previously allowed as deduction in the preceding
others, arising from money lent or from uncollectible amounts of year or years shall be included as part of the taxpayer s gross income
income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5- in the year of such recovery to the extent of the income tax benefit of
99) said deduction.

39. Who are related parties ? 42. If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due from him on
SUGGESTED ANSWER: The following are related parties:
account of the said deduction, his subsequent recovery thereof from
a. Members of the same family. The family of an individual
his debtor shall be treated as a receipt of realized taxable income.
shall include only his brothers and sisters (whether by the whole or half-
(Sec. 4, Rev. Regs. 5-99)
blood), spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or 43. If the said taxpayer did not benefit from the deduction of
indirectly, by or for such individual; the said bad debt written-off because it did not result to any reduction of
c. Two corporations more than fifty percent (50%) in value his income tax in the year of such deduction (i.e. where the result of his
of the outstanding stock of which is owned, directly or indirectly, by or business operation was a net loss even without deduction of the bad
for the same individual; debts written-off), then his subsequent recovery thereof shall be treated
d. A grantor and a fiduciary of any trust; or as a mere recovery or a return of capital, hence, not treated as receipt
e. The fiduciary of a trust and the fiduciary of another trust if of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
the same person is a grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 44. Depreciation is the gradual diminution in the useful value
(B), NIRC of 1997] of tangible property resulting from ordinary wear and tear and from
normal obsolescence. The term is also applied to amortization of the
value of intangible assets the use of which in the trade or business is
40. What are the requisites for valid deduction definitely limited in duration.
of bad debts from gross income ?
SUGGESTED ANSWER: 45. The methods of depreciation are the following:
a. There must be an existing indebtedness due to the taxpayer a. Straight line method;
which must be valid and legally demandable; b. Declining balance method;
b. The same must be connected with the taxpayer s trade, c. Sum of years digits method; and
business or practice of profession; d. Any other method prescribed by the Secretary of Finance
c. The same must not be sustained in a transaction entered upon the recommendation of the Commissioner of Internal Revenue:
into between related parties; 1) Apportionment to units of production;
d. The same must be actually charged off the books of 2) Hours of productive use;
accounts of the taxpayer as of the end of the taxable year; and
30
3) Revaluation method; and e. Paintings, sculptures, stamp collections, objects of arts which
4) Sinking fund method. are not used in trade or business;
f. Inherited large tracts of agricultural land which were
46. What are personal and additional exemptions ? subdivided pursuant to the government mandate under land reform,
SUGGESTED ANSWER: These are the theoretical persona, then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043,
living and family expenses of an individual allowed to be deducted from April 26, 1968)
the gross or net income of an individual taxpayer. g. Real property used by an exempt corporation in its
These are arbitrary amounts which have been calculated by our exempt operations, such as a corporation included in the enumeration
lawmakers to be roughly equivalent to the minimum of subsistence, of Section 30 of the Code, shall not be considered used for business
taking into account the personal status and additional qualified purposes, and therefore considered as capital asset. (last sentence,
rd
dependents of the taxpayer. They are fixed amounts in the sense that 3 par., Sec. 3.b, Rev. Regs. No. 7-2003)
the amounts have been predetermined by our lawmakers and until our h. Real property, whether single detached, townhouse, or
lawmakers make new adjustments on these personal exemptions, the condominium unit, not used in trade or business as evidenced by a
amounts allowed to be deducted by a taxpayer are fixed as certification from the Barangay Chairman or from the head of
predetermined by Congress. [Pansacola v. Commissioner of Internal administration, in case of condominium unit, townhouse or apartment,
Revenue, G. R. No. 159991, November 16, 2006 citing Madrigal and and as validated from the existing available records of the Bureau of
Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)] Internal Revenue, owned by an individual engaged in business, shall
be treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 7-
47. Capital assets shall refer to all real properties held 2003)
by a taxpayer, whether or not connected with his trade or business, and
which are not included among the real properties considered as 48. Ordinary assets shall refer to all real
ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003) properties specifically excluded from the definition of
The term capital assets means property held by the taxpayer capital assets, namely:
(whether or not connected with his trade or business), BUT DOES a. Stock in trade of a taxpayer or other real property of a kind
NOT INCLUDE: which would properly be included in the inventory of a taxpayer if on
a. Stock in trade of the taxpayer, or hand at the close of the taxable year; or
b. Other property of a kind which would properly be included b. Real property held by the taxpayer primarily for sale to
in the inventory of the taxpayer if on hand at the close of the taxable customers in the ordinary course of his trade or business; or
year, or c. Real property used in trade or business (i.e. buildings and/or
c. Property held by the taxpayer primarily for sale to improvements), of a character which is subject to the allowance for
customers in the ordinary course of his trade or business, or depreciation; or
d. Property used in the trade or business, of a character which is d. Real property used in trade or business of the taxpayer.
subject to the allowance for depreciation; or real property used in the (Sec. 2. b, Rev. Regs. No. 7-2003)
trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997,
capitalized words, numbering and arrangement supplied; Sec. 2.a,
Rev. Regs. No. 7-2003]
49.. Examples of ordinary assets hence not
capital assets:
a. The machinery and equipment of a manufacturing
47-A. Examples of capital assets: concern subject to depreciation;
a. Stock and securities held by taxpayers other than dealers in b. The tractors, trailers and trucks of a hauling company;
securities; c. The condominium building owned by a realty company the
b. Jewelry not used for trade and business; units of which are for rent or for sale;
c. Residential houses and lands owned and used as such; d. The wood, paint, varnish, nails, glue, etc. which are the
d. Automobiles not used in trade and business; raw materials of a furniture factory;
31
e. Inherited parcels of land of substantial areas located in NIRC of 1997] Revenue Regulations No. 7-2003 has defined real
the heart of Metro Manila, which were subdivided into smaller lots then property as having the same meaning attributed to that term under
sold on installment basis after introducing comparatively valuable Article 415 of Republic Act No. 386, otherwise known as the Civil
improvements not for the purpose of simply liquidating the estate but to Code of the Philippines. (Sec. 2.c, Rev. Regs. No. 7-2003)
make them more saleable ; the employment of an attorney-in-fact for
the purpose of developing, managing, administering and selling the 52. Transactions covered by the presumed
lots; sales made with frequency and continuity; annual sales income
capital gains tax on real property:
from the sales was considerable; and the heir was not a stranger to the
a. sale,
real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
b. exchange,
f. Inherited agricultural property improved by introduction of
c. or other disposition, including pacto de retro sales and other
good roads, concrete gutters, drainage and lighting systems converts
forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997,
the property to an ordinary asset. The property forms part of the stock
numbering and arrangement supplied]
in trade of the owner, hence an ordinary asset. This is so, as the
d. Sale, exchange, or other disposition includes taking by the
owner is now engaged in the business of subdividing real estate.
government through condemnation proceedings. (Gutierrez v. Court of
(Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672)
Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et
al., 121 Phil. 861)
50. Tax treatment of real properties that have
been transferred. Real properties classified as capital or ordinary 53. In case the mortgagor exercises his right of redemption
asset in the hands of the seller/transferor may change their character in within one (1) year from the issuance of the certificate of sale, in a
the hands of the buyer/transferee. The classification of such property foreclosure of mortgage sale of real property, no capital gains tax shall
in the hands of the buyer/transferee shall be determined in accordance be imposed because no capital gains has been derived by the
with the following rules: mortgagor and no sale or transfer of real property was realized. [Sec. 3
a. Real property transferred through succession or donation to (1), Rev. Regs. No. 4-99]
the heir or donee who is not engaged in the real estate business with
respect to the real property inherited or donated, and who does not 54. In case of non-redemption of the property sold upon a
subsequently use such property in trade or business, shall be foreclosure of mortgage sale, the presumed capital gains tax shall be
considered as a capital asset in the hands of the heir or donee. imposed, based on the bid price of the highest bidder but only upon the
b. Real property received as dividend by stockholders who are expiration of the one year period of redemption provided for under Sec.
not engaged in the real estate business and who not subsequently use 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid
such real property in trade or business shall be treated as capital within thirty (30) days from the expiration of the said one-year
assets in the hands of the recipient even if the corporation which redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
declared the real property dividend is engaged in real estate business.
c. The real property received in an exchange shall be treated 55. The basis for the final presumed capital
as ordinary asset in the hands of the transferee in the case of a tax-
free exchange by taxpayer not engaged in real estate business to a gains tax of six per cent (6%) is whichever is the higher of the
taxpayer who is engaged in real estate business, or to a taxpayer who, a. gross selling price, or
even if not engaged in real estate business, will use in business the b. the current fair market value as determined below:
property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003) 1) the fair market value or real properties located in
each zone or area as determined by the Commissioner of
Internal Revenue after consultation with competent appraisers
51. The tax is imposed upon capital gains both from the private and public sectors; or
presumed to have been realized from the sale, exchange, 2) the fair market value as shown in the schedule of
or other disposition of real property located in the values of the Provincial and City Assessors. [Sec. 24 (D) (1) in
Philippines, classified as capital assets. [Sec. 24 (D) (1`), relation to Sec. 6 (E), both of the NIRC of 1997]
32
It does not matter whether there was an actual gain or loss c. the BIR Commissioner shall have been duly notified by
because the tax is a presumed capital gains tax. It is the the taxpayer within thirty (30) days from the date of sale or disposition
transaction that is taxed not the gain. through a prescribed return of his intention to avail of the tax
exemption; and
56. Holding period not applied to the taxation of the d. the said tax exemption can only be availed of once every
presumed capital gains derived from the sale of real property ten (10) years. [Sec. 24 (D) (2), NIRC of 1997]
considered as capital assets.
60. A final withholding tax (FWT) of 20% on passive
57. The tax liability, of individual taxpayers (not income is collected from the interest income of banks. It likewise
corporate), if any, on gains from sales or other dispositions has to pay a 5% gross receipts tax (GRT) on gross receipts which
includes their passive income. XYZ Bank now claims that the
of real property, classified as capital assets, to the
GRT should be computed after deducting the 20% passive
government or any of its political subdivisions or agencies or to income tax on the ground that the monies or receipts that do not
government owned or controlled corporations shall be determined, at redound to the benefit of the taxpayer are not part of its gross
the option of the taxpayer, by including the proceeds as part of gross
receipts. To impose the GRT without deducting the 20% would
income to be subjected to the allowable deductions and/or personal
be double taxation. It also contends that since the 20% was
and additional exemptions, then to the schedular tax [Sec. 24 (D) (1), in
withheld at source and is paid directly to the government, then
relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final
presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in the bank has not received the same. Thus, it should not be
relation to Sec. 6 (E), both of the NIRC of 1997] included in the gross receipts subject to tax.
Resolve the issue of whether the 20% FWT on the bank s
58. The seller of the real property, classified as a capital passive income form part of the taxable gross receipts for the
asset, pays the presumed capital gains tax whether: purpose of computing the 5% GRT.
a. an individual [Sec. 24 (D) (1), NIRC of 1997]; SUGGESTED ANSWER: No. The word gross must be used
1) Citizen, whether resident or not [Ibid.]; in its plain and ordinary meaning. It is defined as whole, entire, total,
2) Resident alien [Ibid.]; without deduction. Thus, the 20% should not be deducted for
3) Nonresident alien engaged in trade or business in the purposes of computing the 5% gross receipts tax.
Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both Receipt may either be actual or constructive. There is prior to
of the NIRC of 1997]; the withholding a constructive receipt of the interest, otherwise there
4) Nonresident alien not engaged in trade or business would be no interest from where the 20% tax may be withheld from.
in the Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), There is no double taxation because there are two kinds of
both of the NIRC of 1997]; taxes, the 20% FWT which is an income tax and the 5% GRT which is
b. an estate or trust (Ibid.); a percentage tax. (Commissioner of Internal Revenue v. Citytrust
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997] Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and
companion case)
NOTES AND COMMENTS:
59. Excepted from the payment of the a. Commissioner of Internal Revenue v. Manila Jockey
presumed capital gains tax are those presumed to have Club, 108 Phil. 821 (1960) is different from Commissioner of
been realized from the disposition by natural persons of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No.
their principal place of residence 139786, September 27, 2006 and companion case. Manila Jockey
a. the proceeds of which is fully utilized in acquiring or Club paid amusement taxes on its commission in the total amount of
constructing a new principal residence; bets called wager funds and did not include the 5% of the fund which
b. within eighteen (18) calendar months from the date of went to the Board on Races and to the owners of horses and jockeys.
sale or disposition The Supreme Court rules that the gross receipts of Manila Jockey Club
should not include the 5% because although delivered to the Club,
33
such money has been especially earmarked by law or regulation for As a result of the ruling MBC filed an application for refund
other persons. of the P33 million. Due to the BIR s inaction, MBC filed a petition
Manila Jockey does not apply because what happened there for review with the CTA.
was earmarking and not withholding. Earmarking is not the same as The CTA denied the petition on the ground that MBC is not
withholding. Amounts earmarked do not form part of gross receipts a newly organized corporation. In a volte facie the BIR now
because these are by law or regulation reserved for some person other maintains that MBC should pay the MCIT beginning January 1,
than the taxpayer, although delivered or received. On the contrary, 1998 as it did not close its business operations in 1987 but merely
amounts withheld form part of gross receipts because there are in suspended the same. Even if placed under receivership, the
constructive possession and not subject to any reservation, the corporate existence was never affected. Thus, it falls under the
withholding agent being merely a conduit in the collection process. category of an existing corporation recommencing its banking
(Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc.,
operations.
G. R. No. 139786, September 27, 2006 and companion case)
Should the refund be granted ?
b. There are distinctions between the 20% FWT on
SUGGESTED ANSWER: Yes. The MCIT shall be imposed
interest income and the 5% GRT on banks. Since the two are beginning in the fourth taxable year immediately following the year in
different there is no double taxation. which the corporation commenced its business operations. [Sec. 27
1) FWT is an income tax under Title II of the Code (E) (1), NIRC of 1997]
(Tax on Income) while GRT is a percentage tax under Title V of The date of commencement of operations of a thrift bank is the
the Tax Code. date it was registered with the SEC or the date when the Certificate of
2) Percentage tax is a national tax measured by a Authority to Operate was issued to it by the Monetary Board, whichever
certain percentage of the gross selling price or gross value in comes later. (Sec. 6, Rev. Regs. No. 4-95)
money of goods sold, bartered or imported; or of the gross Clearly then. MBC is entitled to the grace period of four years
receipts or earnings derived by any person engaged in the sale from June 23, 1999 when it was authorized by the BSP to operate as a
of services while an income tax is a national tax imposed on the thrift bank before the MCIT should be applied to it. (Manila Banking
net or gross income realized in a taxable year. Corporation v. Commissioner of Internal Revenue, G. R. No. 168118,
3) Income tax is subject to withholding while August 26, 2006)
percentage is not. (Commissioner of Internal Revenue v. NOTES AND COMMENTS:
Citytrust Investment Phils., Inc., G. R. No. 139786, September a. The MCIT and when should be imposed and the four
27, 2006 and companion case)
(4) year grace period. A minimum corporate income tax of two
percent (2%) of the gross income as of the end of the taxable year, as
61. MBC was incorporated in 1961 and engaged in defined herein, is hereby imposed on a corporation taxable under this
commercial banking operations since 1987. On May 22, 1987, it Title, beginning on the fourth taxable year immediately following the
ceased operations that year by reason of insolvency and its year in which such corporation commenced its business operations,
assets and liabilities were placed under the charge of a when the minimum corporate income tax is greater than the tax
government-appointed receiver. On June 23, 1999, the BSP computed under Subsection (A) of this section for the taxable year.
authorized MBC to operate as a thrift bank. [Sec. 27 (E) (1), NIRC of 1997]
In 2000, It filed its tax return for the year 1999 paying the b. Period when a corporation becomes subject to the
amount of P33 million computed in accordance with the minimum MCIT. (5) Specific rules for determining the period when a
corporate income tax (MCIT). It sought the BIR s ruling on corporation becomes subject to the MCIT (minimum corporate income
whether it is entitled to the four (4) year grace period for paying tax) -
on the basis of MCIT reckoned from 1999. BIR then ruled that For purposes of the MCIT, the taxable year in which business
cessation of business activities as a result of being placed under operations commenced shall be the year in which the domestic
involuntary receivership may be an economic reason for corporation registered with the Bureau of Internal Revenue (BIR).
suspending the imposition of the MCIT.
34
Firms which were registered with BIR in 1994 and earlier years e. Standard deduction of P1 million;
shall be covered by the MCIT beginning January 1, 1998. x x x (Rev. f. Medical expenses not exceeding P500,000.00;
Regs. No. 9-98) g. Amount of exempt retirement received by the heirs under
Manila Banking Corporation v. Commissioner of Internal Rep. Act Mo. 4917;
Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev. Regs. h. Net share of the surviving spouse in the conjugal
No. 9-98 because Rev. Regs. No. 4-95 specifically refers to thrift partnership.
banks.)
c. Purpose of the four (4) year grace period. The intent 4. Not every inter-vivos transfer in anticipation of death is
of Congress relative to the MCIT is to grant a four (43) year considered transfer in contemplation of death for purposes of
suspension of tax payment to newly organized corporations. determining the property to be included in the gross estate of a
Corporations still starting their business operations have to stabilize decedent.
their venture in order to obtain a stronghold in the industry. It does not
come as a surprise then when many companies reported losses in 5. To be considered a transfer in contemplation of
their initial years of operations. death the decedent has at any time made a transfer, by trust or
Thus, in order to allow new corporations to grow and develop at otherwise, in contemplation of or intended to take effect in possession
the initial stages of their operations, the lawmaking body saw the need or enjoyment at or after death [Sec. 85 (B), NIRC of 1997]. It is clear
to provide a grace period of four years from their registration before that the properties are not transferred in contemplation of or intended to
they pay their minimum corporate income tax. (Manila Banking take effect in possession or enjoyment at or after death.
Corporation v. Commissioner of Internal Revenue, G. R. No. 168118,
August 26, 2006) 6. There is no transfer in contemplation of death if there is
no showing the transferor retained for his life or for any period which
ESTATE TAXES does not in fact end before his death: (1) the possession or enjoyment
of, or the right to the income from the property, or (2) the right, either
1. The gross estate for purposes of estate alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom. [Sec. 85
taxation of Filipino citizens, whether residents or (B), NIRC of 1997]
nonresidents and resident alien includes the value at the time of
his death of all his real property, wherever situated, personal property,
whether tangible, intangible or mixed, wherever situated, to the extent
7. The approval of the court sitting in
of the interest existing therein of the decedent at the time of his death. probate, or as a settlement tribunal over the estate of the
deceased is not a mandatory requirement for the collection
2. The gross estate for purposes of estate of the estate. The probate court is determining issues which are not
taxation of non-resident aliens includes the value at the time of against the property of the decedent, or a claim against the estate as
his death of all the real property situated in the Philippines, personal such, but is against the interest or property right which the heir, legatee,
property whether tangible, intangible or mixed, situated in the devisee, etc. has in the property formerly held by the decedent.
Philippines, to the extent of the interest therein of the decedent at the The notices of levy were regularly issued within the prescriptive
time of his death. period.
The tax assessment having become final, executory and
3. Items deductible from the gross estate of a resident enforceable, the same can no longer be contested by means of a
disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA
or nonresident Filipino decedent or resident alien decedent:
47)
a. Expenses, losses, claims, indebtedness and taxes;
b. Property previously taxed;
c. Transfers for public use; DONOR S TAXES
d. The Family Home up to a value not exceeding P1 million;
35
1. What is the donor s tax rate if the donee a. the fair market value as determined by the Commissioner
is a stranger ? of Internal Revenue (zonal valuation) or
b. the fair market value as shown in the schedule of values
SUGGESTED ANSWER: When the donee or beneficiary
fixed by the Provincial and City Assessors. [Sec. 102, in relation to
is a stranger, the tax payable by the donor shall be 30% of the net gifts.
Sec. 88 (B) both of the NIRC of 1997]
2. For purposes of the donor s tax who is a
7. A died leaving as his only heirs, his surviving
stranger ?
spouse B, and three minor children, X, Y and Z. Since B
SUGGESTED ANSWER: A stranger is a is person who is not
a: does not want to participate in the distribution of the
a. Brother, sister (whether by whole or half-blood), spouse, estate, she renounced her hereditary share in the estate.
ancestor and lineal descendant; or a. Is the renunciation subject to donor s tax ?
b. Relative by consanguinity in the collateral line within the Explain.
fourth degree of relationship. [Sec. 99 (B), NIRC of 1997] SUGGESTED ANSWER: No. The general renunciation by an
NOTES AND COMMENTS: All relatives by affinity, irrespective heir, including the surviving spouse, as in the case B, of her share in
of the degree, are considered as strangers. the hereditary estate left by the decedent is not subject to donor s
th
tax. (4 par., Sec. 11, Rev. Regs. No. 2-2003)
3. What is the tax base for donations ? This is so because the general renunciation by B was not
SUGGESTED ANSWER: The net gifts made during the specifically and categorically done in favor of identified heir/s to the
calendar year. [Sec. 99 (A), NIRC of 1997] exclusion or disadvantage of the other co-heirs in the hereditary
estate.
4. For purposes of the donor s tax, what is meant b. Supposing that instead of a general
by net gifts ? renunciation, B renounced her hereditary share in A s
SUGGESTED ANSWER: The net economic benefit from estate to X who is a special child, would your answer be
the transfer that accrues to the donee. Accordingly, if a the same ? Explain.
mortgaged property is transferred as a gift, but imposing upon SUGGESTED ANSWER: My answer would be different. The
the donee the obligation to pay the mortgage liability, then the renunciation in favor of X would be subject to donor s tax.
net gift is measured by deducting from the fair market value of This is so because the renunciation was specifically and
the property the amount of the mortgage assumed. (last par., categorically done in favor of X and identified heir to the exclusion or
Sec. 11, Rev. Regs.No.2-2003) disadvantage of Y and Z, the other co-heirs in the hereditary estate.
th
(4 par., Sec. 11, Rev. Regs. No. 2-2003)
5. How are gifts of personal property to be valued
for donor s tax purposes ? 8. Give some donations that are exempt from
SUGGESTED ANSWER: The market value of the personal donor s tax.
property at the time of the gift shall be considered the amount of the SUGGESTED ANSWER:
gift. (Sec. 102, NIRC of 1997) a. The first P100,000.00 net donation during a calendar year
is exempt from donor s tax [Sec. 99 (A), NIRC of 1997] made by a
6. What is the valuation of donated real property resident or non resident;
b. The donation by a resident or non-resident of a prize to
for donor s tax purposes ?
an athlete in an international sports tournament held abroad and
SUGGESTED ANSWER: The real property shall be appraised
sanctioned by the national sports association is exempt from donor s
at its fair market value as of the time of the gift.
tax (Sec. 1, Rep. Act No. 7549)
However, the appraised value of the real property at the time of
the gift shall be whichever is the higher of:
36
c. Political contributions made by a resident or non-resident 10. A sold to B and P7 million Jaguar for
individual if registered with the COMELEC irrespective of whether only P4 million. The proper VAT on the sale was paid. If
donated to a political party or individual.
However, the Corporation Code prohibits corporations from
you are the BIR examiner assigned to review the sale,
making political contributions. (Corp. Code, Title IV, Sec. 36.9) would you issue a tax assessment on the transaction ?
d. Dowries or gifts made on account of marriage and Explain your answer briefly.
before its celebration or within one year thereafter by residents who SUGGESTED ANSWER: Donor s taxes would be due on the
are parents to each of their legitimate, recognized natural, or adopted insufficiency of consideration.
children to the extent of the first ten thousand pesos (P10,000.00); Where property, other than real property that has been
e. Gifts made by residents or non-residents to or for the subjected to the final capital gains tax, is transferred for less than an
use of the National Government or any entity created by any of its adequate and full consideration in money or money s worth, then
agencies which is not conducted for profit, or to any political the amount by which the fair market value of the property at the time
subdivisions of the said Government; of the execution of the Contract to Sell or execution of the Deed of
f. Gifts made by residents or non residents in favor of an Sale which is not preceded by a Contract to Sell exceeded the value
educational and/or charitable, religious, cultural or social welfare of the agreed or actual consideration or selling price shall be deemed
corporation, institution, foundation, trust or philanthropic organization a gift, and shall be included in computing the amount of gifts made
th
or research institution or organization: Provided, however, That not during the calendar year. (5 par., Sec. 11, Rev. Regs. No. 2-2003)
more than thirty percent (30%) of said gifts shall be used by such
donee for administration purposes. [Sec. 101 (A), NIRC of 1997, VALUE-ADDED TAXES (VAT)
numbering and arrangement supplied]
g. Gifts made by non-resident aliens outside of the 1. Define value-added tax (VAT).
Philippines to Philippine residents are exempt from donor s taxes SUGGESTED ANSWER: A tax which is imposed only on the
because taxation is basically territorial. The transaction, which should increase in the worth, merit or importance of goods, properties or
have been subject to tax was made by non-resident aliens and took services, and not on the total value of the goods or services being
place outside of the Philippines. sold or rendered.

9. What is the concept of donation or gift 2. What is the nature of VAT ?


splitting ? Illustrate. SUGGESTED ANSWSER: VAT is an indirect tax that may be
SUGGESTED ANSWER: Donation or gift splitting is shifted or passed on to the buyer, transferee or lessee of the goods,
spreading the gift over numerous calendar years in order to avail of properties or services. As such, it should be understood not in the
lower donor s taxes. context of the person or entity that is primarily, directly liable for its
In 2008 Leon was thinking of donating a P200,000.00 to payment, but in terms of its nature as a tax on consumption.
Miklos, his first cousin. The P200,000.00 is the totality of the net gifts [Commissioner of Internal Revenue v. Seagate Technology
for 2008. If he donated the P200,000.00 in 2008 the first (Philippines), G. R. No. 153866, February 11, 2005 citing various
P100,000 would be exempt and the remaining P50,000.00 would be authorities}
subject to donor s tax As an indirect tax on services, its main object is the transaction
If Leon spreads the P200,000 donation over two (2) calendar itself or, more concretely, the performance of all kinds of services
years, donating P100,000.00 on December 30, 2008 and the conducted in the course of trade or business in the Philippines.
remaining P100,000.00 on January 1, 2009 the transaction would be These services must be regularly conducted in this country,
exempt from donor s tax. This is so even if the donation is undertaken in pursuit of a commercial or an economic activity, for
separated only by two days because the basis is the calendar year. a valuable consideration, and not exempt under the Tax Code, other
Leon would be enjoying the exemption for the first P100,000.00 net special laws, or any international agreement. (Commissioner, of
gifts for each calendar year. Internal Revenue v. American Express International, Inc. (Philipppine
37
Branch), G. R. No. 152609, June 29, 2005 citing various cases and For example the services rendered by a local firm to its foreign
authorities) client are performed or successfully completed upon its sending to a
VAT is a percentage tax imposed on any person whether or foreign client the drafts and bills it has gathered from service
not a franchise grantee, who in the course of trade or business, sells, establishments here. Its services, having been performed in the
barters, exchanges, leases, goods or properties, renders services. It Philippines, are therefore also consumed in the Philippines. Such
is also levied on every importation of goods whether or not in the facilitation service has no physical existence, yet takes place upon
course of trade or business. The tax base of the VAT is limited only rendition, and therefore upon consumption, in the Philippines.
to the value added to such goods, properties, or services by the [Commissioner of Internal Revenue v. American Express G.R. No.
seller, transferor or lessor. Further, the VAT is an indirect tax and 152609, 29 June 2005, 462 SCRA 197 cited in Commissioner of
can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G.
Broadcasting Corporation, G. R. No. 166408, October 6, 2008) R. No. 164365, June 8, 2007]

3. What is the effect on exemptions of VAT 5. Who are liable for the value-added tax ?
being an indirect tax ? Reason out and illustrate your SUGGESTED ANSWER:
answer. a. Any person who, in the course of his trade or business,
SUGGESTED ANSWER: If a special law merely exempts a 1) Sells, barters, exchanges or leases goods or
party as a seller from its direct liability for payment of the VAT, but properties, or
does not relieve the same party as a purchaser from its indirect 2) renders services, and
burden of the VAT shifted to it by its VAT-registered suppliers, the b. any person who imports goods xxx
purchase transaction is not exempt. However, in the case of importation of taxable goods, the
REASON: The VAT is a tax on consumption, the amount of importer, whether an individual or corporation and whether or not
which may be shifted or passed on by the seller to the purchaser of made in the course of his trade or business, shall be liable to VAT
the goods, properties or services. [Commissioner of Internal xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasing supplied)
Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005) 6. What are the various VAT methods and
Illustration: A VAT exempt seller sells to a non-VAT exempt systems ?
purchaser. The purchaser is subject to VAT because the VAT is SUGGESTED ANSWER:
merely added as part of the purchase price and not as a tax because a. Cost deduction method. This is a single-stage tax
the burden is merely shifted. The seller is still exempt because it which is payable only by the original sellers. [Abakada Guro Party
could pass on the burden of paying the tax to the purchaser. List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005
and companion cases citing Deoferio, Jr. V. A. and Mamalateo, V.C.,
4. The VAT is a tax on consumption. Explain the The Value Added Tax in the Philippines (First Edition 2000)] This
meaning of consumption as used under the VAT system. was subsequently modified and a mixture of cost deduction
method and tax credit method was used to determine the value-
Give an example.
added tax payable. (Ibid.)
SUGGESTED ANSWER: Consumption is "the use of a thing
b. Tax credit method. This method relies on invoices, an
in a way that thereby exhausts it."
entity can credit against or subtract from the VAT charged on its
Applied to services, the term means the performance or
sales or outputs the VAT paid on its purchases, inputs and imports.
"successful completion of a contractual duty, usually resulting in the
[Commissioner of Internal Revenue v. Seagate Technology
performer's release from any past or future liability x x x" Unlike
(Philippines), G. R. No. 153866, February 11, 2005 citing various
goods, services cannot be physically used in or bound for a specific
cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc.,
place when their destination is determined. Instead, there can only be
et al., G. R. No. 168056, September 1, 2005 and companion cases)
a "predetermined end of a course" when determining the service
If at the end of a taxable period, the output taxes charged by a
"location or position x x x for legal purposes."
seller are equal to the input taxes passed on by the suppliers, no
38
payment is required. It is when the output taxes exceed the input sales taxes paid at every level of distribution are not recoverable from
taxes that the excess has to be paid. If however, the input taxes the taxes payable. With the advent of Executive Order No. 273
exceed the output taxes, the excess shall be carried over to the imposing a 10% multi-stage tax on all sales, it was only then that the
succeeding quarter or quarters. Should the input taxes result from crediting of the input tax paid on purchase or importation of goods
zero-rated or effectively zero-rated transactions or from acquisition of and services by VAT-registered persons against the output tax was
capital goods, any excess over the output taxes shall instead be established. This continued with the Expanded VAT Law (R.A. No.
refunded to the taxpayer or credited against other internal revenue 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right
taxes. [Commissioner of Internal Revenue v. Seagate Technology to credit input tax as against the output tax is clearly a privilege
(Philippines), G. R. No. 153866, February 11, 2005 citing various created by law, a privilege that also the law can limit. It should be
cases and authorities] stressed that a person has no vested right in statutory privileges.
(ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207,
7. The VAT being imposed on the increase in October 15, 2005, and companion cases, on the motion for
worth merit or improvement of the goods or services. reconsideration)
How is this done ?
SUGGESTED ANSWER: The VAT utilizes the concept of the 12. What is the concept of transitional input tax
output and input taxes. credits on beginning inventories ?
SUGGESTED ANSWER: Taxpayers who become VAT-
8. Define output tax. registered persons upon exceeding the minimum turnover of
SUGGESTED ANSWER: The value-added tax due on the P1,500,000.00 in any 12-month period, or who voluntarily register
sale or lease or taxable goods, properties or services by any VAT- even if their turnover does not exceed P1,500,000.00 (except
registered person. franchise grantees of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a transitional input
tax on the inventory on hand as of the effectivity of their VAT
9. Define input tax.
registration, on the following:
SUGGESTED ANSWER: The VAT due on or paid by a VAT-
a. goods purchased for resale in their present condition;
registered person on importation of good or local purchases of goods
b. materials purchased for further processing, but which
or services, including lease or use of properties, in the course of his
st have not yet undergone processing;
trade or business. (Rev. Regs. No. 4.110-1, 1 par.)
c. goods which have been manufactured by the taxpayer;
d. goods in process for sale; or
10. What are included in the input tax. e. goods and supplies for use in the course of the
SUGGESTED ANSWER: It shall also include: taxpayer s trade or business as a VAT-registered person. [Rev.
st
a. the transitional input tax and Regs. No. 16-2005, Sec.4.111-1, (a), 1 par., arrangement and
b. the presumptive input tax xxx. numbering supplied]
It includes
c. input taxes which can be directly attributed to 14. What is the concept of presumptive input tax
transactions subject to the VAT plus a ratable portion of any input tax credits ?
which cannot be directly attributed to either the taxable or exempt SUGGESTED ANSWER: Persons or firms engaged in the
st nd nd
activity. (Rev. Regs. No. 4.110-1, 1 par., 2 sentence,. And 2 processing of sardines, mackerel, and milk, and in manufacturing
par., paraphrasing, arrangement and numbering supplied ) refined sugar, cooking oil and packed noodle-based instant meals,
shall be allowed a presumptive input tax, creditable against the
11. May the right to credit the input tax be limited output tax, equivalent to four percent (4%) of the gross value in
by legislation ? money of their purchases of primary agricultural products which are
SUGGESTED ANSWER: Yes because it is a mere creation used as inputs to their production.
of law. Prior to the enactment of multi-stage sales taxation, the
39
As used in this paragraph, the term processing shall mean purpose of selling real property, decided to sell to private
pasteurization, canning and activities which through physical or enterprise all of its shares in its wholly-owned subsidiary
chemical process alter the exterior texture or form or inner substance
the National Marine Corporation (NMC). The NDC decided
of a product in such a manner as to prepare it for special use to
which it could not have been put in its original form or condition. to sell in one lot its NMC shares and five (5) of its ships,
[Rev. Regs. No. 16-2005, Sec.4.111-1, (b)] which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels. The vessels were constructed for the NDC
15. Does the VAT registration fee violate religious between 1981 and 1984, then initially leased to Luzon
freedom ? Stevedoring Company, also its wholly-owned subsidiary.
SUGGESTED ANSWSER: The VAT registration fee imposed Subsequently, the vessels were transferred and leased,
on non-VAT enterprises which includes among others, religious sects on a bareboat basis, to the NMC. The NMC shares
which sells and distributes religious literature is not violative of and the vessels were offered for public bidding. Among
religious freedom, although a fixed amount is not imposed for the the stipulated terms and conditions for the public auction
exercise of a privilege but only for the purpose of defraying part of the
cost of registration. was that the winning bidder was to pay "a value added
The registration fee is thus more of an administrative fee, one tax of 10% on the value of the vessels." Magsaysay
not imposed on the exercise of a privilege, much less a constitutional Lines, Inc., offered to buy the shares and the vessels for
right. (Tolentino v. Secretary of Finance, et al., and companion P168,000,000.00. The bid was made by Magsaysay Lines,
cases, 235 SCRA 630) purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc., and FIM
16. Explain the proper interpretation of the Limited of the Marden Group based in Hongkong . The bid
term In the Course of Trade or Business. was approved by the Committee on Privatization, and a
SUGGESTED ANSWSER: VAT is not a singular- Notice of Award was issued to Magsaysay Lines.
minded tax on every transactional level. Its assessment bears direct Is the sale subject to VAT ?
relevance to the taxpayer s role or link in the production chain. SUGGESTED ANSWER: No. The sale is not subject to VAT.
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
Hence, as affirmed by Section 99 of the Tax Code and its September 30, 1955 (97 Phil. 992), the term "carrying on business"
subsequent incarnations, the tax is levied only on the sale, barter or does not mean the performance of a single disconnected act, but
exchange of goods or services by persons who engage in such means conducting, prosecuting and continuing business by
activities, in the course of trade or business. These transactions performing progressively all the acts normally incident thereof; while
outside the course of trade or business may invariably contribute to "doing business" conveys the idea of business being done, not from
the production chain, but they do so only as a matter of accident or time to time, but all the time. [J. Aranas, UPDATED NATIONAL
incident. As the sales of goods or services do not occur within the INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
course of trade or business, the providers of such goods or services (1988)]. "Course of business" is what is usually done in the
would hardly, if at all, have the opportunity to appropriately credit any
management of trade or business. [Idmi v. Weeks & Russel, 99 So.
VAT liability as against their own accumulated VAT collections since
761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
the accumulation of output VAT arises in the first place only through
What is clear therefore, based on the aforecited jurisprudence,
the ordinary course of trade or business. (Commissioner of Internal
is that "course of business" or "doing business" connotes regularity of
Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28,
activity. In the instant case, the sale was an isolated transaction. The
2006)
sale which was involuntary and made pursuant to the declared policy
of Government for privatization could no longer be repeated or
16-A. Pursuant to a government program of carried on with regularity. It should be emphasized that the normal
privatization, NDC, a VAT-registered entity created for the VAT-registered activity of NDC is leasing personal property.
40
This finding is confirmed by the Revised Charter of the NDC
which bears no indication that the NDC was created for the primary 19. What sale of or lease of real properties subject
purpose of selling real property. (Commissioner of Internal Revenue to VAT ?
v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006) SUGGESTED ANSWER: Sale of real properties primarily for
sale to customers or held for lease in the ordinary course of trade or
17. Under the Value Added Tax (VAT), the tax business of the seller shall be subject to VAT. (Rev. Regs. No. 16-
st
is imposed on sales, barter, or exchange or goods and 2005, Sec. 4.106-3, 1 par.)
services. The VAT is also imposed on certain Thus, capital transactions of individuals are not subject to
transactions deemed sales. What are these so-called VAT. Only real estate dealers are subject to VAT.
transactions deemed sales ?
SUGGESTED ANSWER: 20. On Jan. 10, 2008, X, a domestic corporation
a. Transfer, use or consumption not in the course of engaged in the real estate business, sold a building for
business or properties originally intended for sale or for use in the P10,000,000.00. Is the sale subject to the value-added tax
course of business. xxx (VAT)? If so, how much? Explain.
b. Distribution or transfer to: SUGGESTED ANSWER: Yes. 12% on the gross selling price
1) Shareholders or investors as share in the profits because the sale was made in the ordinary course of trade of
of the VAT- registered person; xxx or business of X, a domestic corporation engaged in the real estate
2) Creditors in payment of debt or obligation business.
c. Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods were consigned. 21. What sale of real property exempt from
Consigned goods returned by the consignee within the 60-day period VAT ?
are not deemed sold. SUGGESTED ANSWER: The following sales of real
d. Retirement from or cessation of business, with properties are exempt from VAT, namely:
respect to all goods on hand, a. Sale of real properties not primarily held for sale to
1) whether capital goods, stock-in-trade, supplies or customers or held for lease in the ordinary course of trade or
materials as of the date of such retirement, or cessation, business;
2) whether or not the business is continued by the b. Sale of real properties utilized for low-cost housing as
new owner or successor. xxx [Rev. Regs. No. 16-2005, defined by RA No. 7279, otherwise known as the Urban and
Sec. 4.106-7, paraphrasing, arrangement and numbering Development Housing Act of 1992 and other related laws, such as
supplied] RA No. 7835 and RA No. 8763.
xxx xxx xxx
18. What transactions considered retirement or c. Sale of real properties utilized for socialized housing as
cessation of business deemed sale subject to VAT ? defined under RA No. 7279, and other related laws wherein the price
SUGGESTED ANSWER: ceiling per unit is P225,000.00 or as may from time to time be
a. Change of ownership of the business. There is change determined by the HUDCC and the NEDA and other related laws.
in the ownership of the business where a single proprietorship xxx xxx xxx
incorporates; or d. Sale of residential lot valued at One Million Five
1) the proprietor of a single proprietorship sells his Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot
entire business. and other residential dwellings valued at Two Million Give Hundred
b. Dissolution of a partnership and creation of a new Thousand Pesos (P2,500,000.00) and below where the instrument of
partnership which takes over the business. [Rev. Regs. No. 16-2005, sale/transfer/disposition was executed on or after November 1, 2005,
Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering provided, That not later than January 31, 2009 and every three (3)
supplied] years thereafter, the amounts stated herein shall be adjusted to its
41
present value using the Consumer Price Index, as published by the e. lessors or distributors of cinematographic films;
National Statistics Office (NSO); provided, further, that such f. persons engaged in milling, processing, manufacturing
adjustment shall be published through revenue regulations to be or repacking goods for others;
issued not later than March 31 of each year. g. proprietors, operators or keepers of hotels, motels, rest-
If two or more adjacent residential lots are sold or disposed in houses, pension houses, inns, resorts; theaters, and movie houses;
favor of one buyer, for the purpose of utilizing the lots as one h. proprietors or operators of restaurants, refreshment
residential lot, the sale shall be exempt from VAT only if the parlors, cafes and other eating places, including clubs and caterers;
aggregate value of the lots do not exceed P1,500,000.00. Adjacent i. dealers in securities;
residential lots, although covered by separate titles and/or separate j. lending investors;
tax declarations, when sold or disposed of to one and the same k. transportation contractors on their transport of goods or
buyer, whether covered by one or separate Deed of Conveyance, cargoes, including persons who transport goods or cargoes for hire
shall be presumed as a sale of one residential lot. [Rev. Regs. No. and other domestic common carriers by land relative to their
4.109-1 (B), (p), paraphrasing and numbering supplied] transport of goods or cargoes;
l. common carriers by air and sea relative to their
22. What is the VAT on services and lease of transport of passengers, goods or cargoes from one place in the
properties ? Philippines to another place in the Philippines;
SUGGESTED ANSWER: m. sales of electricity by generation companies,
a. There shall be levied, assessed, and collected, transmission, and/or distribution companies;
b. a value-added tax equivalent to ten percent (10%) of n. franchise grantees of electric utilities, telephone and
gross receipts telegraph, radio and television broadcasting and all other franchise
c. derived from the sale or exchange of services, grantees except franchise grantees of radio and/or television
1) including the use or lease of properties. broadcasting whose annual gross receipts of the preceding year do
d. Provided, That the President, upon the recommendation not exceed Ten Million Pesos (P10,000,000.00), and franchise
of the Secretary of Finance, shall, effective January 1, 2006, raise the grantees of gas and water utilities;
rate of value-added tax to twelve percent (12%), after any of the o. non-life insurance companies (except their crop
following conditions has been satisfied: insurances), including surety, fidelity, indemnity and bonding
1) Value-added tax collection as a percentage of companies; and
Gross Domestic product (GDP) of the previous year exceeds p. similar services regardless of whether or not the
two and four-fifth percent (2 4/5%); or performance thereof calls for the exercise or use of the physical or
2) National government deficit as a percentage of mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A.
st
GDP of the previous year exceeds one and one-half percent No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1 par.,
(1 1/2%). [NIRC of 1997, Sec. 108 (A), as amended by R.A. arrangement and numbering supplied]
No. 9337, arrangement and numbering supplied]
24. X Corporation rendered technical
23. Sale or exchange of services , defined. services through its work engineers to PNB and SSS
The term sale or exchange of services means the performance of in the construction of their buildings. The work
all kinds of services in the Philippines for others for a fee, engineers acted as overseers of X Corporation,
remuneration or consideration, whether in kind or in cash, including rendering their professional services as employees of X
those performed or rendered by the following: corporation. Should X Corporation be subjected to VAT
a. construction and service contractors;
b. stock, real estate, commercial, customs and
or should it be subjected to tax on the professional
immigration brokers; services of those employees themselves? Decide the
c. lessors of property, whether personal or real; case with reason.
d. persons engaged in warehousing services SUGGESTED ANSWER: X Corporation is subject to VAT.
42
[Commissioner of Internal Revenue v. Seagate Technology
25. Also included in the phrase sale or exchange (Philippines), G. R. No. 153866, February 11, 2005]
of services. Under a zero-rating scheme, the sale or exchange of a
a. The lease or the use of or the right or privilege to use particular service is completely freed from the VAT, because the
any copyright, patent, design or model, plan, secret formula or seller is entitled to recover, by way of a refund or as an input tax
process, goodwill, trademark, trade brand or other like property or credit, the tax that is included in the cost of purchases attributable to
right; the sale or exchange. The tax paid or withheld is not deducted from
b. The lease or the use of, or the right to use any the tax base. (Commissioner, of Internal Revenue v. American
industrial, commercial or scientific equipment; Express International, Inc. (Philippine Branch), G. R. No. 152609,
c. The supply of scientific, technical, industrial or June 29, 2005 citing various cases)
commercial knowledge or information;
d. The supply of any assistance that is ancillary and 28. Situs of taxation of zero-rated VAT services
subsidiary to and is furnished as a means of enabling the application such as facilitating the collection of receivables from
or enjoyment of any such property, or right as is mentioned in credit card members situated in the Philippines and
subparagraph (2) hereof or any such knowledge or information as is payment to service establishments in the Philippines. The
mentioned in subparagraph (3) hereof; or place where the service is rendered determines the jurisdiction
e. The supply of services by a non-resident person or his (Commissioner of Internal Revenue v. American Express
employee in connection with the use of property or rights belonging International, Inc. (Philipppine Branch), G. R. No. 152609, June 29,
to, or the installation or operation of any brand, machinery or other 2005 citing [N]o state may tax anything not within its jurisdiction
apparatus purchased from such non-resident person; without violating the due process clause of the [C]constitution.
f. The supply of technical advice, assistance or services Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900,
rendered in connection with technical management or administration January 17, 1936, per Malcolm, J.) to impose the VAT
of any scientific, industrial or commercial undertaking, venture, [Commissioner, supra citing Deoferio, Jr. and Mamalateo, The Value
project of scheme; Added Tax in the Philippines (2000), p. 93]
g. The lease of motion picture films, film tapes and discs; Performed in the Philippines, the service is necessarily subject
h. The lease or the use of or the right to use radio, to its jurisdiction [Commissioner, supra citing Alejandro, The Law on
television, satellite transmission and cable television time. (Rev. Taxation (1966 rev. ed.) p. 33], for the State necessarily has to have
nd
Regs. No. 16-2005, Sec. 4.108-2, 2 par.) a substantial connection [Commissioner, supra citing Garner (ed.
th
in chief), Black s Law Dictionary (8 ed., 1999), p. 1503] to it in
26. Zero-rated Sales of Goods or Properties. order to enforce a zero rate. [Commissioner, supra citing De Leon,
th
A zero-rated sale of goods or properties by a sale by a VAT- The Fundamentals of Taxation (12 ed., 1998), p. 3] The place of
registered person is a taxable transaction for VAT purposes but the payment is immaterial [Commissioner, supra citing Deoferio, Jr. and
sale does not result in any output tax. Mamalateo, The Value Added Tax in the Philippines (2000), p. 93],
However, the input tax on the purchases of goods, properties or much less is the place where the output of the service will be further
services related to such zero-rated sale shall be available as tax or ultimately used.
credit or refund in accordance with Rev. Regulations No. 16-2005. This is so because the law neither makes a qualification nor
st
(Rev. Regs. No. 16-2005, 1 par.) adds a condition in determining the tax situs of a zero-rated service.
(Commissioner, supra)
27. Concept of VAT zero-rating. The tax rate is
set at zero. When applied to the tax base, such rate obviously 29. What is the destination principle the
results in no tax chargeable against the purchaser. The seller of VAT ?
such transactions charges no output tax, but can claim a refund or a SUGGESTED ANSWER: As a general rule, the VAT system
tax credit certificate for the VAT previously charged by suppliers. uses the destination principle as a basis for the jurisdictional reach of
the tax.
43
Goods and services are taxed only in the country where they b. Considered export sales under Executive Order No.
are consumed. Thus, exports are zero-rated, while imports are taxed. 224;
c. Foreign currency denominated sale; and
30. Is there any exception to the destination d. Sales to persons or entities demed tax-exempt under
principle ? special law or international agreement. (Rev. Regs. No. 16-2005,
nd
Sec. 4.106-5, 2 par., paraphrasing supplied)
SUGGESTED ANSWER: Yes. The law clearly provides for
an exception to the destination principle; that is, for a zero percent
VAT rate for services that are performed in the Philippines, "paid for 34. Sale of gold to the Central Bank considered as
in acceptable foreign currency and accounted for in accordance with export sales. As export sales, the sale of gold to the Central Bank
the rules and regulations of the [BSP]." is zero-rated, hence, no tax is chargeable to it as purchaser. Zero
rating is primarily intended to be enjoyed by the seller, which
31. Rationale for zero-rating of exports. The charges no output VAT but can claim a refund of or a tax credit
Philippine VAT system adheres to the Cross Border Doctrine, certificate for the input VAT previously charged to it by suppliers.
according to which, no VAT shall be imposed to form part of the cost (Commissioner of Internal Revenue v. Manila Mining Corporation,
of goods destined for consumption outside of the territorial border of G.R. No. 153204, August 31, 2005)
the taxing authority. [Commissioner of Internal Revenue v. Toshiba 35. Sales to ecozone, such as PEZA, considered
Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, export-sale. Notably, while an ecozone is geographically within the
2005]
Philippines, it is deemed a separate customs territory and is regarded
The Cross Border Doctrine is also known as the destination
in law as foreign soil. Sales by suppliers from outside the borders of
principle.
the ecozone to this separate customs territory are deemed as
Hence, actual or constructive export of goods and services
exports and treated as export sales. These sales are zero-rated or
from the Philippines to a foreign country must be zero-rated for VAT;
subject to a tax rate of zero percent. (Commissioner of Internal
while, those destined for use or consumption within the Philippines
Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21,
shall be imposed the twelve percent (12%) VAT.
2006 citing various authorities)

32. Zero-rated sale distinguished from 36. Ecozone , defined. An ECOZONE or a Special
exempt transactions: Economic Zone has been described as [S]elected areas with
a. A zero-rated sale is a taxable transaction but does not highly developed or which have the potential to be developed into
result in an output tax WHILE an exempt transaction is not subject to agro-industrial, industrial, tourist, recreational, commercial, banking,
the output tax. investment and financial centers whose metes and bounds are fixed
b. The input tax on the purchases of a VAT registered or delimited by Presidential Proclamations. An ECOZONE may
person who has zero-rated sales may be allowed as tax credits or contain any or all of the following: industrial estates (IEs), export
refunded WHILE the seller in an exempt transaction is not entitled to processing zones (EPZs), free trade zones and tourist/recreational
any input tax on his purchases despite the issuance of a VAT invoice centers. The national territory of the Philippines outside of
or receipt. the proclaimed borders of the ECOZONE shall be referred to as the
c. Persons engaged in transactions which are zero rated Customs Territory. [Commissioner of Internal Revenue v. Toshiba
being subject to VAT are required to register WHILE registration is Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9,
optional for VAT-exempt persons. 2005]

33. Zero-rated sales by VAT-registered persons. 37. Zero-rated sale of service, defined. A zero-rated
The following sales by VAT-registered persons shall be subject to sale of service (by a VAT-registered person) is a taxable transaction
zero percent (0%) rate: for VAT purposes, but shall not result in any output tax. However, the
a. Export sales; input tax on purchases of goods, properties or services related to
44
such zero-rated sale shall be available as tax credit or refund in Its services, having been performed in the Philippines are therefore
accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, also consumed in the Philippines. Thus, its services are exempt
Sec. Sec. 4.108-5 (a), words in italics supplied) from the destination principle and are zero-rated.
The BIR could not change the law. (Commissioner, of Internal
38. Service performed by American Express Revenue v. American Express International, Inc. (Philipppine
in facilitating the collection of receivables from credit Branch), G. R. No. 152609, June 29, 2005)
card members situated in the Philippines and payment to
service establishments in the Philippines in behalf of its
40. A foreign Consortium composed of
Hong-Kong based client is subject to VAT but zero-rated. BWSC-Denmark, Mitsui Engineering and Shipbuilding
This is so because it meets all the requirements for VAT imposition, Ltd., and Misui and Co., Ltd., which entered into a
as follows: contract with NAPOCOR for the operation and
a. It regularly renders in the Philippines the service of maintenance of two power barges appointed BWSC-
facilitating the collection and payment of receivables belonging to a Denmark as its coordination manager. BWSCMI was
foreign company that is a clearly separate and distinct entity. established as the subcontractor to perform the actual
b. Such service is commercial in nature; carried on over a
work in the Philippines. The Consortium paid BWSCMI in
sustained period of time; on a significant scale with a reasonable
degree of frequency; and not at random, fortuitous, or attenuated. acceptable foreign exchange and accounted for in
c. For this service, it definitely receives consideration in accordance with the rules and regulations of the BSP.
foreign currency that is accounted for in conformity with law. Through a February 14, 1995 ruling the BIR declared
d. It is not an entity exempt under any of our laws or that BWSCMI may choose to register as a VAT persons
international agreements. (Commissioner, of Internal Revenue v. subject to VAT at zero rate. For 1996, it filed the proper
American Express International, Inc. (Philipppine Branch), G. R. No. VAT returns showing zero rating. On December 29, 1997,
152609, June 29, 2005)
believing that it is covered by Rev. Regs. 5-96, dated
39. While the service performed by American February 20, 1996, BWSCMI paid 10% output VAT for the
Express is subject to VAT it is zero-rated, and BIR period April-December 1996, through the Voluntary
Revenue Regulations that alter the legal requirements for Assessment Program (VAP).
zero-rating are ultra vires and invalid. The VAT system uses On January 7, 1999, BWSCMI was able to obtain a
the destination principle which posits that the goods and services are Ruling from the BIR reconfirming that it is subject to VAT
taxed only in the country where they are consumed, at zero-rating. On this basis, BWSCMI applied for a
However, the law itself provides for clear exceptions under refund of the output VAT it paid.
which the supply of services shall be zero-rated, among which are a. Is BWSCMI subject to the 10% VAT or is it zero
the following: rated ?
a. The service is performed in the Philippines; SUGGESTED ANSWER: Yes. BWSCMI is not zero rated
b. The services are within the categories provided for and is subject to the 10% VAT. It is rendering service for the
under the Tax Code; and Consortium which is not doing business in the Philippines. Zero-
c. It is paid for in acceptable foreign currency of the rating finds application only where the recipient of the services are
Bangko Sentral ng Pilipinas. other persons doing business outside of the Philippines. BWSCMI
American Express renders assistance to its foreign clients by provides services to the Consortium which by virtue of its contract
receiving the bills of service establishments located in the country with NAPOCOR is doing business within the Philippines.
and forwarding them to their clients abroad. The services are (Commissioner of Internal Revenue v. Burmeister and Wain
performed or successfully completed upon send to its foreign clients Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January
the drafts and bills it has gathered from service establishments here, 22, 2007)
45
b. Could it obtain a refund of the VAT it paid Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No.
through the VAP ? Explain. 150154, August 9, 2005]
SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund b. An exempt transaction shall not be the subject of any
of the 10% output VAT it paid the based on the non-retroactivity of billing for output VAT but it shall not also be allowed any input tax
the prejudicial revocation of the BIR Rulings which held that it s credits WHILE an exempt party being zero-rated is allowed to claim
services are subject to 0% VAT and which BWSCMI invoked in input tax credits.
applying for refund of the output VAT. (Commissioner of Internal
Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, 43. What transactions are from VAT ?
Inc., supra) SUGGESTED ANSWER: (Subject to the election by a VAT-
NOTES AND COMMENTS: registered person not to be subject to the value-added tax), the
a. Do not confuse the BWSCMI case with the following shall be exempt from VAT:
(A) Sale or importation of agricultural and marine food
American Express case. American Express International, Inc. products in their original state, livestock and poultry of a kind
(Philippine Branch)] is a VAT-registered person that facilitates the generally used as, or yielding or producing foods for human
collection and payment of receivables belonging to its non-resident consumption; and breeding stock and genetic materials therefor.
foreign client [American Express International, Inc. (Hongkong Livestock shall include cows, bulls and calves, pigs, sheep,
Branch)], for which it gets paid in acceptable foreign currency goats and rabbits. Poultry shall include fowls, ducks, geese and
inwardly remitted and accounted for in accordance with BSP rules turkey, Livestock or poultry does not include fighting cocks, race
and regulations. (Commissioner of Internal Revenue v. Burmeister horses, zoo animals and other animals generally considered as pets.
and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, Marine food products shall include fish and crustaceans, such
January 22, 2007) as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters,
mussels and clams.
41. VAT-Exempt transactions, defined. Meat, fruit, fish, vegetables and other agricultural and marine
a. The sale of goods or properties and/or services and the food Products classified under this paragraph shall be considered in
use or lease of properties that is their original state even if they have undergone the simple processes
b. not subject to VAT (output tax) and of preparation or preservation for the market, such as freezing,
c. the seller is not allowed any tax credit on VAT (input drying, salting, broiling, roasting, smoking or stripping, including those
tax) purchases. using advanced technological means of packaging, such as shrink
The person making the exempt sale of goods, properties or wrapping in plastics, vacuum packing, tetra-pack, and other similar
services shall not bill any output tax to his customers because the packaging methods. Polished and/or husked rice, corn grits, raw
said transaction is not subject to VAT. [Rev. Regs. No. 16-2005, cane sugar and molasses, ordinary salt, and copra shall be
Sec. 4.109-1 (A), arrangement and numbering supplied] considered in their original state.
Sugar whose content of sucrose by weight, in the dry state,
42. VAT-exempt transactions distinguished from has a polarimeter reading of 99.5o and above are presumed to be
VAT-exempt entities. a. refined sugar.
An exempt transaction, on the one hand, involves goods or Cane sugar produced from the following shall be presumed,
services which, by their nature, are specifically listed in and expressly for internal revenue purposes, to be refined sugar:
exempted from the VAT under the Tax Code, without regard to the (1) product of a refining process,
tax status VAT-exempt or not of the party to the transaction. (2) products of a sugar refinery, or
An exempt party, on the other (3) product of a production line of a sugar mill accredited
hand, is a person or entity granted VAT exemption under the Tax by the BIR to be producing sugar with polarimeter reading of 99.5o
Code, a special law or an international agreement to which the and above, and for which the quedanissued therefor, and verified by
Philippines is a signatory, and by virtue of which its taxable the Sugar Regulatory Administration, identifies the same to be of a
transactions become exempt from VAT. [Commissioner of Internal polarimeter reading of 99.5o and above.
46
Bagasse is not included in the exemption provided for under (4) Service rendered by franchise grantees of radio
this section. and/or television broadcasting whose annual gross receipts
(B) Sale or importation of fertilizers; seeds, seedlings and of the preceding year do not exceed Ten Million Pesos
fingerlings; fish, prawn, livestock and poultry feeds, including (P10,000,000.00) and by franchises of gas and water utilities.
ingredients, whether locally produced or imported, used in the (Sec. 119)
manufacture of finished feeds (except specialty feeds for race (5) Service rendered for overseas dispatch message
horses, fighting cocks, aquarium fish, zoo animals and other animals or conversation originating from the Philippines. (Sc. 120)
generally considered as pets); (6) Services rendered by any person, company or
Specialty feeds refers to non-agricultural feeds or food for corporation (except purely cooperative companies or
race horses, fighting cocks, aquarium fish, zoo animals and other associations ) doing life insurance business of any sort in the
animals generally considered as pets. Philippines. (Sec. 123)
(C) Importation of personal and household effects belonging (7) Services rendered by fire, marine or
to the residents of the Philippines returning from abroad and miscellaneous insurance agents of foreign insurance
nonresident citizens coming to resettle in the Philippines: Provided, companies. (Sec. 124)
That such goods are exempt from customs duties under the Tariff (8) Services of proprietors, lessees or operators of
and Customs Code of the Philippines; cockpits, cabarets, night or day clubs, boxing exhibitions
(D) Importation of professional instruments and implements, professional basketball games, jai-Alai and race tracks.
wearing apparel, domestic animals, and personal household effects (Sec. 125). and
(except any vehicle, vessel, aircraft, machinery, other goods for use (9) Receipts on sale, barter or exchange of shares of
in the manufacture and merchandise of any kind in commercial stock listed and traded through the local stock exchange or
quantity) belonging to persons coming to settle in the Philippines, for through initial public offering. (Sec. 127)
their own use and not for sale, barter or exchange, accompanying (F) Services by agricultural contract growers and milling for
such persons, or arriving within ninety (90) days before or after their others of palay into rice, corn into grits and sugar cane into raw
arrival, upon the production of evidence satisfactory to the sugar;
Commissioner of Internal Revenue, that such persons are actually Agricultural contract growers refers to those persons
coming to settle in the Philippines and that the change of residence is producing for others poultry, livestock or other agricultural and marine
bona fide; food products in their original state.
(E) Services subject to percentage tax under Title V of the Tax (G) Medical, dental, hospital and veterinary services except
Code, as enumerated below: those rendered by professionals;
(1) Sale or lease of goods or properties or the Laboratory services are exempted. If the hospital or clinic
performance of services of non-VAT-registered persons, operates a pharmacy or drug store, the sale of drugs and medicine is
other than the transactions mentioned in paragraphs (A) to subject to VAT.
(U) of Sec. 109 (1) of the Tax Code, the annual sales and/or (H) Educational services rendered by private educational
receipts of which does not exceed the amount of One Million institutions, duly accredited by the Department of Education
Five Hundred thousand Pesos (P1,500,000.00), Provided, (DEPED), the Commission on Higher Education (CHED), the
That not later than January 31, 2009 and every three (3) Technical Education And Skills Development Authority (TESDA) and
years thereafter, the amount herein stated shall be adjusted those rendered by government educational institutions;
to its present value using the Consumer Price Index, as Educational services shall refer to academic, technical or
published by the National Statistics Office (NSO). (Sec. 116, vocational education provided by private educational institutions duly
Tax Code) accredited by the DepED, the CHED and TESDA and those rendered
(2) Services rendered by domestic common carriers by government educational institutions and it does not include
by land for the transport of passengers and keepers of seminars, in-service training, review classes and other similar
garages. (Sec. 117) services rendered by persons who are not accredited by the DepED,
(3) Services rendered by international air/shipping the CHED and/or the TESDA.
carriers. (Sec. 118)
47
(I) Services rendered by individuals pursuant to an (Q) Lease of a residential unit with a monthly rental not
employer-employee relationship; exceeding Ten thousand pesos (P 10,000) Provided, That not later
(J) Services rendered by regional or area headquarters than January 31, 2009 and every three (3) years thereafter, the
established in the Philippines by multinational corporations which act amount herein stated shall be adjusted to its present value using the
as supervisory, communications and coordinating centers for their Consumer Price Index as published by the National Statistics Office
affiliates, subsidiaries or branches in the Asia-Pacific Region and do (NSO);
not earn or derive income from the Philippines; (R) Sale, importation, printing or publication of books and
(K) Transactions which are exempt under international any newspaper, magazine, review or bulletin which appears at
agreements to which the Philippines is a signatory or under special regular intervals with fixed prices for subscription and sale and which
laws, except those under Presidential Decree No. 529 Petroleum is not devoted principally to the publication of paid advertisements;
Exploration Concessionaires under the Petroleum Act of 1949; and; (S) Sale, importation or lease of passenger or cargo
(L) Sales by agricultural cooperatives duly registered with vessels and aircraft, including engine, equipment and spare parts
the Cooperative Development Authority (CDA) to their members as thereof for domestic or international transport operations; Provided,
well as sale of their produce, whether in its original state or that the exemption from VAT on the importation and local purchase
processed form, to non-members; their importation of direct farm of passenger and/or cargo vessels shall be limited to those of one
inputs, machineries and equipment, including spare parts thereof, to hundred fifty (150) tons and above, including engine and spare parts
be used directly and exclusively in the production and/or processing of said vessels; Provided, further, that the vessels be imported shall
of their produce; comply with the age limit requirement, at the time of acquisition
(M) Gross receipts from lending activities by credit or multi- counted from the date of the vessel s original commissioning, as
purpose cooperatives duly registered and in good standing with the follows: (i) for passenger and/or cargo vessels, the age limit is
Cooperative Development Authority; fifteen years (15) years old, (ii) for tankers, the age limit is ten (10)
(N) Sales by non-agricultural, non-electric and non-credit years old, and (iii) For high-speed passenger cars, the age limit is
cooperatives duly registered with the Cooperative Development five (5) years old, Provided, finally, that exemption shall be subject to
Authority: Provided, That the share capital contribution of each the provisions of section 4 of Republic Act No. 9295, otherwise
member does not exceed Fifteen thousand pesos (P15,000) and known as The Domestic Shipping Development Act of 2004.
regardless of the aggregate capital and net surplus ratably distributed (T) Importation of fuel, goods and supplies by persons
among the members; engaged in international shipping or air transport operations;
Importation by non-agricultural, non-electric and non-credit Provided, that the said fuel, goods and supplies shall be used
cooperatives of machineries and equipment, including spare parts exclusively or shall pertain to the transport of goods and/or
thereof, to be used by them are subject to VAT. passenger from a port in the Philippines directly to a foreign port
(O) Export sales by persons who are not VAT-registered; without stopping at any other port in the Philippines; provided, further,
(P) Sale of real properties not primarily held for sale to that if any portion of such fuel, goods or supplies is used for purposes
customers or held for lease in the ordinary course of trade or other than that mentioned in this paragraph, such portion of fuel,
business, or real property utilized for low-cost and socialized housing goods and supplies shall be subject to 10% VAT (now 12%);
as defined by Republic Act No. 7279, otherwise known as the Urban (U) Services of banks, non-bank financial intermediaries
Development and Housing Act of 1992, and other related laws, such performing quasi-banking functions, and other non-bank financial
as RA No. 7835 and RA No. 8765, residential lot valued at One intermediaries; and
million five hundred thousand pesos (P 1,500,000) and below, house (V) Sale or lease of goods or properties or the
and lot, and other residential dwellings valued at Two million five performance of services other than the transactions mentioned in the
hundred thousand pesos (P 2,500,000) and below: Provided, That preceding paragraphs, the gross annual sales and/or receipts do not
not later than January 31, 2009 and every three (3) years thereafter, exceed the amount of One million five hundred thousand pesos
the amounts herein stated shall be adjusted to their present values (P1,500,000): Provided, That not later than January 31, 2009 and
using the Consumer Price Index, as published by the National every three (3) years thereafter, the amount herein stated shall be
Statistics Office (NSO);
48
adjusted to its present value using the Consumer Price Index as
published by the National Statistics Office (NSO). RETURNS AND WITHHOLDING
For purposes of the threshold of P1,500,000.00, the husband
and wife shall be cnsidered separate taxpayers. However, the 1. Income tax returns being public documents, until
aggregation rule for each taxpayer shall apply. For instance, if a controverted by competent evidence, are competent evidence, are
profesional, aside from the practice ofhis profession, also derives prima facie correct with respect to the entries therein. (Ropali Trading
revenue from other lines of business which are otherwise subject to v. NLRC, et al., 296 SCRA 309, 317)
VAT, the same shall be combined for purposes of determining
whether the threshold has been exceeded. Thus, the VAT-exempt 2. Married individuals, whether citizens, resident or
sales shall to be icluded in determining the threshold. [NIRC of 1997, non-resident aliens, who do not derive income purely from
Sec. 109 (1), as amended by R. A. No. 9337; words in italics from compensation shall file a return for the taxable year to include the
Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses income of both spouses, but where it is impracticable for the
supplied] spouses to file one return, each spouse may file a separate return of
income but the returns so filed shall be consolidated by the Bureau for
44. X is engaged in the importation and sale of purposes of verification. [Section 51 (D) of the NIRC of 1997]
books and magazines. Is the importation of books and
magazines subject to the 10% VAT? Explain. 3. Individuals required to file an income tax return.
SUGGESTED ANSWER: No. Sale, importation, printing or a. Every Filipino citizen residing in the Philippines;
publication of books and any newspaper, magazine, review or bulletin b. Every Filipino citizen residing outside the Philippines on
which appears at regular intervals with fixed prices for subscription his income from sources within the Philippines;
and sale and which is not devoted principally to the publication of c. Every alien residing in the Philippines on income derived
paid advertisements; from sources within the Philippines; and
d. Every nonresident alien engaged in trade or business or
45. Is there any tax to be paid by persons exempt in the exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC
of 1997]
from VAT ?
SUGGESTED ANSWER: Yes.
4. Individuals who are not required to file an income tax
a. Any person, whose sales or receipts are exempt under
return.
Sec. 109 (1) (V) of the Tax Code,
(V) Sale or lease of goods or properties or the a. An individual whose gross income does not exceed his
performance of services other than the transactions total personal and additional exemptions for dependents, Provided,
mentioned in the preceding paragraphs, the gross annual That a citizen of the Philippines and any alien individual engaged in
sales and/or receipts do not exceed the amount of One business or practice of profession within the Philippines shall file an
million five hundred thousand pesos (P1,500,000): Provided, income tax return regardless of the amount of gross income;
That not later than January 31, 2009 and every three (3) b. An individual with respect to pure compensation income
years thereafter, the amount herein stated shall be adjusted for services in whatever form paid, including, but not limited to fees,
to its present value using the Consumer Price Index as salaries, wages, commissions, and similar items, derived from sources
published by the National Statistics Office (NSO), from the within the Philippines, the income tax on which has been correctly
payment of VAT and withheld, Provided, That an individual deriving compensation
b. who is not a VAT-registered person concurrently from two or more employers at any time during the taxable
c. shall pay a tax equivalent to three percent (3%) of his year shall file an income tax return: Provided, further, That an
gross monthly sales or receipts; individual whose pure compensation income derived from sources
Provided, that cooperatives shall be exempt from the three within the Philippines exceeds Sixty thousand pesos (P60,000.00),
(3%) gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, shall also file an income tax return;
Sec. 4.116-1, arrangement, numbering and words in italics supplied)
49
c. An individual whose sole income has been subject to final be withheld, in order to compel the withholding agent to withhold the
withholding tax; tax under any and all circumstances. In effect, the responsibility for the
d. An individual who is exempt from income tax pursuant to collection of the tax as well as the payment thereof is concentrated
the provisions of the NIRC of 1997, and other laws, general or special. upon the person over whom the Government has jurisdiction.
[Sec. 51 (A) (2), NIRC of 1997] (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R.
NOTES AND COMMENTS: Amendments under Rep. Act No. Nos. 118498 & 124377, October 12, 1999) The system facilitates tax
9504 are not incouded. collection.

5. An individual who is not required to file an income 12. The two (2) types of withholding at source are the 1) final
tax return may nevertheless be required to file an information withholding tax; and 2) creditable withholding tax.
return. [Sec. 51 (A) (3), NIRC of 1997]
13. Under the final withholding tax system the amount of
6. A corporation files its income tax return and pays its income tax withheld by the withholding agent is constituted as a
income tax four (4) times during a single taxable year. Quarterly full and final payment of the income due from the payee on the
st st
returns are required to be filed for the first three quarters, then a final said income. [1 sentence, 1 par., Sec. 2.57 (A), Rev. Regs. No. 2-
adjustment return is filed covering the total taxable income for the 98]
whole taxable year, be it calendar or fiscal. The liability for payment of the tax rests primarily on the payor or
the withholding agent.. Thus, in case of his failure to withhold the tax or
7. An individual earning from the practice of his in case of under withholding, the deficiency tax shall be collected from
profession or who engages in trade or business files his income the payor withholding agent. The payee is not required to file an
tax return and pays his income tax four (4) times during a single income tax return for the particular income.
taxable year. Quarterly returns are required to be filed for the first
three quarters, then an annual income tax return is filed covering the 14. Under the creditable withholding tax system, taxes
total taxable income for the whole of the previous calendar year. withheld on certain income payments are intended to equal or at
least approximate the tax due from the payee on the said income.
8. The purpose of the above four (4) times a year The income recipient is still required to file an income tax return and/or
requirement is to make available sufficient funds to meet the pay the difference between the tax withheld and the tax due on the
st nd
budgetary requirements, on a quarterly basis thereby increasing income. [1 and 2 sentences, Sec. 257(B), Rev. Regs. No. 2-98]
government liquidity. It also eases hardships on the part of individuals
who are required to make this four time return. Thus, the taxpayer does 15. The two kinds of creditable withholding taxes are (a)
not have to raise large sums of money in order to pay the tax. taxes withheld on income payments covered by the expanded
withholding tax; and (b) taxes withheld on compensation income.
9. An individual earning purely compensation income
files only one annual income tax return covering the total taxable 16. Payments to the following are exempt from the
compensation income for the whole of the previous calendar year. requirement of withholding or when no withholding taxes
required:
10. Under the withholding tax system, taxes imposed or a. National Government and its instrumentalities including
prescribed by the NIRC of 1997 are to be deducted and withheld provincial, city, or municipal governments;
by the payors from payments made to payees for the former to b. Persons enjoying exemption from payment of income
pay directly to the Bureau of Internal Revenue. It is also known as taxes pursuant to the provisions of any law, general or special, such as
collection of the tax at source. but not limited to the following:
1) Sales of real property by a corporation which is
11. A withholding agent is explicitly made personally registered with and certified by the HLURB or HUDCC as
liable under the Tax Code for the payment of the tax required to engaged in socialized housing project where the selling price of
50
the house and lot or only the lot does not exceed P180,000.00 in a. the 25% surcharge for late filing or late payment [Sec.
Metro Manila and other highly urbanized areas and 248 (A), NIRC of 1997] (also known as the delinquency surcharge),
P150,000.00 in other areas or such adjusted amount of selling and
price for socialized housing as may later be determined and b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B),
adopted by the HLURB; Ibid.]
2) Corporations registered with the Board of Investments
and enjoying exemptions from income under the Omnibus 3. Define deficiency income tax.
Investment Code of 1997; SUGGESTED ANSWER: Deficiency income tax is the amount
3) Corporations exempt from income tax under Sec. by which the tax imposed under the NIRC of 1997 exceeds the amount
30, of the Tax Code, like the SSS, GSIS, the PCSO, etc. shown as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1),
However, income payments arising from any activity which is NIRC of 1997]
conducted for profit or income derived from real or personal
property shall be subject to a withholding tax. (Sec. 57.5, Rev. 4. Deficiency interest, defined. The interest assessed
Regs. No. 2-98) and collected on any unpaid amount of tax at the rate of 20% per
annum or such higher rate as may be prescribed by regulations, from
17. A erroneously withheld the amount of 15% from the the date prescribed for payment until the amount is fully paid. [Sec.
selling price of books authored by W when the correct rate 249 (A) (B), NIRC of 1997]
should have been 10% only. Since W is out of the country,
A applied for a refund of the excess withholding of 5%. May 5. Delinquency interest, defined. The interest assessed
A properly apply for the refund ? Explain. and collected on the unpaid amount until fully paid where there is
SUGGESTED ANSWER: Yes. In applications for refund, the failure on the part of the taxpayer to pay the amount die on any return
withholding agent is a taxpayer because if he does not pay the tax shall required to be filed; or the amount of the tax due for which no return is
be collected from him. (Commissioner of Internal Revenue v. Procter & required; or a deficiency tax, or any surcharge or interest thereon, on
Gamble Philippine Manufacturing Corporation, 204 SCRA 377, 383- the date appearing in the notice and demand by the Commissioner of
386), Internal Revenue. [Sec.249 (c), NIRC of 1997]
NOTES AND COMMENTS:
a. For tax amnesty purposes, the withholding agent is 6. After resolving the issues the BIR Commissioner
not a taxpayer because he is made to pay the tax where he fails to reduced the assessment. Was it proper to impose delinquency
withhold as a penalty and not that the tax is due from him. interest despite the reduction of the assessment ? Why ?
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. SUGGESTED ANSWER: Yes. The intention of the law is to
No. 108576, January 20, 1999, the Anscor case) discourage delay in the payment of taxes due to the State and in this
sense the surcharge and interest charged are not penal but
PENALTIES, INTERESTS AND SURCHARGES compensatory in nature they are compensation to the State for the
delay in payment, or for the concomitant tuse of the funds by the
1. What are surtaxes or surcharges ? taxpayer beyond the date he is supposed to have paid them to the
SUGGESTED ANSWER: Surtaxes or surcharges, also known State. (Bank of the Philippine Islands v. Commissioner of Internal
as the civil penalties, are the amounts imposed in addition to the tax Revenue, G. R. No. 137002, July 27, 2006)
required.
They are in the nature of penalties and shall be collected at the 7. Compromise penalty, defined. The amount agreed
same time, in the same manner, and as part of the tax. [Sec.248 (A), upon between the taxpayer and the Government to be paid as a
NIRC of 1997] penalty in cases of a compromise.

2. What are the two (2) kinds of civil penalties ? 8. As a result of divergent rulings on whether it is
SUGGESTED ANSWER: subject to tax or not, the taxpayer was not able to pay his taxes
51
on time. Imposed surcharges and interests for such delay, the 4. The legal remedies under the NIRC of 1997
taxpayer not invokes good faith with the BIR countering by saying available to an aggrieved taxpayer at the administrative level with
that good faith is not a valid defense for violation of a special law. respect to assessment of internal revenue taxes are the following:
Furthermore, the BIR further raises the defense that the a. Upon receipt of a pre-assessment notice, the taxpayer
government is not bound by the errors of its agents. Who is shall respond to the same within fifteen (15) days from receipt which is
rd
correct ? the period provided for by implementing rules and regulations. [3 par.,
ANSWER: The taxpayer is correct. The settled rule is that good Sec. 228 (e), NIRC of 1997]
faith and honest belief that one is not subject to tax on the basis of b. Upon the issuance of an assessment notice, the taxpayer
previous interpretation of government agencies tasked to implement shall protest administratively by filing a request for reconsideration or
the tax, are sufficient justification to delete the imposition of surcharges. reinvestigation within thirty (30) days from receipt of the assessment in
(Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal such form and manner as may be prescribed by implementing rules
Revenue, G. R. No. 166786, September 11, 2006) and regulations.
c. Within sixty (60) days from the filing of the protest, all relevant
REPUBLIC ACT NO. 1125, CREATING THE supporting documents shall be submitted; otherwise the assessment
th
shall become final. (4 par., Ibid.)
COURT OF TAX APPEALS INCLUDING
JURISDICTION OF THE CTA, AS AMENDED 5. The legal remedies under the NIRC of 1997
available to an aggrieved taxpayer at the judicial level with respect
1. The Court of Tax Appeals is the special tax court to assessment of internal revenue taxes:
created under Republic Act No. 1125, as amended, and is a. If the protest is denied in whole or in part, or
composed of a Presiding Justice and eight (8) Associate Justices, b. is not acted upon within one hundred eighty (180) days from
organized into three (3) divisions. submission of documents,
c. the taxpayer adversely affected by the decision or inaction
2. Why was the Court of Tax Appeals created ? may appeal to the Court of Tax Appeals within thirty (30) days from
SUGGESTED ANSWER: receipt of the said decision, or from the lapse of the one hundred eighty
a. To prevent delay in the disposition of tax cases by the (180) day period; otherwise, the decision shall become final,
then Courts of First Instance (now RTCs), in view of the backlog of executory and demandable. [last par., Sec. 228 (e), NIRC of 1997]
civil, criminal, and cadastral cases accumulating in the dockets of such d. On appeal, the taxpayer should apply for the issuance of a
courts; and writ of preliminary injunction to enjoin the BIR from collecting the tax
b. To have a body with special knowledge which ordinary subject of the appeal.
Judges of the then Courts of First Instance (now RTCs), are not likely e. A decision of a division of the Court of Tax Appeals
to possess, thus providing for an adequate remedy for a speedy adverse to the taxpayer or the government may be the subject of a
determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 motion for reconsideration or new trial, a denial of which is appealable
Phil. 209; Lacsamana, et al., etc., v. CTA, et al., 102 Phil. 931) to the Court of Tax Appeals en banc by means of a petition for review.
f. A decision of the Court of Tax Appeals en banc adverse to
3. The legal remedies under the NIRC of 1997 and other the taxpayer or the government may be appealed to the Supreme
laws available to an aggrieved taxpayer may be classified into the tax Court through a petition for review on certiorari filed with fifteen (15)
remedies with respect to: days from notice, and extendible for justifiable reasons for thirty (30)
a. assessment; days only.
b. collection, and
c. refund of internal revenue taxes. 6. The legal remedy under the NIRC of 1997 available to an
The remedies may also be classified into the administrative or aggrieved taxpayer at the administrative level with respect to refund
the judicial remedies. or recovery of tax erroneously or illegally collected, is to file a claim for
52
st
refund or credit with the Commissioner of Internal Revenue. (1 par., b. A Letter of Authority is issued authorizing BIR examiner to
Sec. 229, NIRC of 1997) audit or examine the tax return and determines whether the full and
complete taxes have been paid.
7. What is the legal remedy under the NIRC of 1997 c. If the examiner is satisfied that the tax return is truly
at the judicial level with respect to refund or recovery of tax reflective of the taxable transaction and all taxes have been paid, the
erroneously or illegally collected ? process ends. However, if the examiner is not satisfied that the tax
SUGGESTED ANSWER. The legal remedy under the NIRC of return is truly reflective of the taxable transaction and that the taxes
1997 at the judicial level with respect to refund or recovery of tax have not been fully paid, a Notice of Informal Conference is issued
erroneously or illegally collected, is the filing of a suit or proceeding with inviting the taxpayer to explain why he should not be subject to
the Court of Tax Appeals additional taxes.
a. before the expiration of two (2) years from the date of d. If the taxpayer attends the informal conference and the
payment of the tax regardless of any supervening cause that may arise examiner is satisfied with the explanation of the taxpayer, the process
nd
after payment (2 par., Sec. 229, NIRC of 1997), or is again ended.
b. within thirty (30) days from receipt of the denial by the If the taxpayer ignores the invitation to the informal conference,
Commissioner of the application for refund or credit. (Sec. 11, R.A. No. or if the examiner is not satisfied with taxpayer s explanation,, and he
1125) believes that proper taxes should be assessed, the Commissioner of
Internal Revenue or his duly authorized representative shall then notify
the taxpayer of the findings in the form of a pre-assessment notice.
8. The two (2) year period and the thirty (30) day period The pre-assessment notice requires the taxpayer to explain within
should be applied on a whichever comes first basis. Thus, if the 30 fifteen (15) days from receipt why no notice of assessment and letter of
days is within the 2 years, the 30 days applies, if the 2 year period is demand for additional taxes should be directed to him.
about to lapse but there is no decision yet by the Commissioner which e. If the Commissioner is satisfied with the explanation of the
would trigger the 30-day period, the taxpayer should file an appeal, taxpayer, then the process is again ended.
despite the absence of a decision. (Commissioners, etc. v. Court of If the taxpayer ignores the pre-assessment notice by not
Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.) responding or his explanations are not accepted by the Commissioner,
then a notice of assessment and a letter of demand is issued.
9. Where the taxpayer is a corporation the two year The notice of assessment must be issued by the
prescriptive period from date of payment for refund of income taxes Commissioner to the taxpayer within a period of three (3) years from
should be the date when the corporation filed its final adjustment return the time the tax return was filed or should have been filed whichever is
not on the date when the taxes were paid on a quarterly basis. the later of the two events. Where the taxpayer did not file a tax return
(Philippine Bank of Communications v. Commissioner of Internal or where the tax return filed is false or fraudulent, then the
Revenue, et al., G.R. No. 112024, January 28, 1999) Commissioner has a period of ten (10) years from discovery of the
Generally speaking it is the Final Adjustment Return, in which failure to file a tax return or from discovery of the fraud within which to
amounts of the gross receipts and deductions have been audited and issue an assessment notice. The running of the above prescriptive
adjusted, which is reflective of the results of the operations of a periods may however be suspended under certain instances.
business enterprise. It is only when the return, covering the whole The notice of assessment must be issued within the
year, is filed that the taxpayer will be able to ascertain whether a tax is prescriptive period and must contain the facts, law and jurisprudence
still due or refund can be claimed based on the adjusted and audited relied upon by the Commissioner. Otherwise it would not be valid.
figures. (Bank of the Philippine Islands v. Commissioner of Internal f. The taxpayer should then file an administrative protest by
Revenue, G.R. No. 144653, August 28, 2001) filing a request for reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment notice.
10. Outline of tax remedies of a taxpayer and the The taxpayer could not immediately interpose an appeal to the
government relative to ASSESSMENT of internal revenue taxes. Court of Tax Appeals because there is no decision yet of the
a. The taxpayer files his tax return. Commissioner that could be the subject of a review.
53
To be valid the administrative protest must be filed within the 11. Requisites for Formal Letter of Demand and
prescriptive period, must show the error of the Bureau of Internal Assessment Notice. The formal letter of demand and assessment
Revenue and the correct computations supported by a statement of notice shall be issued by the Commissioner or his duly authorized
facts, and the law and jurisprudence relied upon by the taxpayer. representative. The letter of demand calling for payment of the
There is no need to pay under protest. If the protest was not taxpayer s deficiency tax or taxes shall state the facts, the law, rules
seasonably filed the assessment becomes final and collectible and the and regulations, or jurisprudence on which the assessment is based,
Bureau of Internal Revenue could use its administrative and judicial otherwise, the formal letter of demand and assessment notice shall
remedies in collecting the tax. be void. The same shall be sent to the taxpayer only by registered
g. Within sixty (60) days from filing of the protest, all relevant mail or by personal delivery.
supporting documents shall be submitted, otherwise the assessment
shall become final and collectible and the BIR could use its 11-A.. What is the burden of taxpayers seeking tax refunds
administrative and judicial remedies to collect the tax. or credits ?
Once an assessment has become final and collectible, not SUGGESTED ANSWER: It has always been the rule that those
even the BIR Commissioner could change the same. Thus, the seeking tax refunds or credits bear the burden of proving the factual
taxpayer could not pay the tax, then apply for a refund, and if denied basis of their claims and of showing, by words too plain to be mistaken,
appeal the same to the Court of Tax Appeals. that the legislature intended to entitle them to such claims. (Atlas
h. If the protest is denied in whole or in part, or is not acted Consolidated Mining and Development Corporation v. Commissioner of
upon within one hundred eighty (180) days from the submission of Internal Revenue, G. R. No. 145526, March 16, 2007, See
documents, the taxpayer adversely affected by the decision or inaction Commissioner of Internal Revenue v. Seagate Technology
may appeal to the Court of Tax Appeals within thirty (30) days from (Philippines) G. R. No. 153866, 11 February 2005, 451 SCRA 132)
receipt of the adverse decision, or from the lapse of the one hundred
eighty (180-) day period, with an application for the issuance of a writ of 12. What is the nature of proceedings before the Court of
preliminary injunction to enjoin the BIR from collecting the tax subject of Tax Appeals ?
the appeal. SUGGESTED ANSWER:
If the taxpayer fails to so appeal, the denial of the First, a judicial claim for refund or tax credit in the CTA is by no
Commissioner or the inaction of the Commissioner would result to the means an original action, but rather an appeal by way of petition for
notice of assessment becoming final and collectible and the BIR could review of a previous, unsuccessful administrative claim.
then utilize its administrative and judicial remedies to collect the tax. Therefore, as in every appeal or petition for review, a petitioner
i. A decision of a division of the Court of Tax Appeals adverse has to convince the appellate court that the quasi-judicial agency a quo
to the taxpayer or the government may be the subject of a motion for did not have any reason to deny its claims.
reconsideration or new trial, a denial of which is appealable to the Second, cases filed in the CTA are litigated de novo. Thus, a
Court of Tax Appeals en banc by means of a petition for review. . petitioner should prove every minute aspect of its case by presenting,
The Court of Tax Appeals, has a period of twelve (12) months formally offering and submitting its evidence to the CTA.
from submission of the case for decision within which to decide. Since it is crucial for a petitioner in a judicial claim for refund or
j. If the decision of the Court of Tax Appeals en banc affirms tax credit to show that its administrative claim should have been
the denial of the protest by the Commissioner or the assessment in granted in the first place, part of the evidence to be submitted to the
case of failure by the Commissioner to decide the taxpayer must file a CTA must necessarily include whatever is required for the successful
petition for review on certiorari with the Supreme Court within fifteen prosecution of an administrative claim. (Atlas Consolidated Mining and
(15) days from notice of the judgment on questions of law. An Development Corporation v. Commissioner of Internal Revenue, G. R.
extension of thirty (30) days may for justifiable reasons be granted. If No. 145526, March 116, 2007)
the taxpayer does not so appeal, the decision of the Court of Tax
Appeals would become final and this has the effect of making the 13. What is the jurisdiction of the Court of Tax
assessment also final and collectible. The BIR could then use its
Appeals ?
administrative and judicial remedies to collect the tax.
SUGGESTED ANSWER:
54
a. Exclusive appellate jurisdiction to review by appeal, Customs Code, and safeguard measures under Republic Act No.
as herein provided: 8800, where either party may appeal the decision to impose or not
1. Decisions of the Commissioner of Internal to impose said duties. (DIVISION)
Revenue in cases involving disputed assessments, refunds of b. Jurisdiction over cases involving criminal offenses as
internal revenue taxes, fees or other charges, penalties, in relation herein provided:
thereto, or other matters arising under the National Internal 1. Exclusive original jurisdiction over all criminal
Revenue Code or other laws administered by the Bureau of cases arising from violations of the National Internal Revenue
Internal Revenue ; (DIVISION) Code or Tariff and Customs Code and other laws administered by
2. Inaction by the Commissioner of Internal Revenue the Bureau of Internal Revenue or the Bureau of Customs:
in cases involving disputed assessments, refunds or internal Provided, however, That offenses or felonies mentioned in this
revenue taxes, fees or other charges, penalties in relation thereto, paragraph where the principal amount of taxes and fees,
or other matter arising under the National Internal Revenue Code exclusive of charges and penalties claimed, is less than One
or other laws administered by the Bureau of Internal Revenue, million pesos (P1,000,000.00) or where there is no specified
where the National Internal Revenue Code provides a specific amount claimed shall be tried by the regular Courts and the
period of action, in which case the inaction shall be deemed a jurisdiction of the CTA shall be appellate. Any provision of law or
denial; (The inaction on refunds in two years from the time tax the Rules of Court to the contrary notwithstanding, the criminal
was paid. Thus, if the prescriptive period of two years is about to action and the corresponding civil action for the recovery of civil
expire, the taxpayer should interpose a petition for review with the liability for taxes and penalties shall at all times be simultaneously
CTA DIVISION) instituted with, and jointly determined in the same proceeding by
3. Decisions, orders or resolutions of the Regional the CTA, the filing of the criminal action being deemed to
Trial Courts in local tax cases originally decided or resolved by necessarily carry with it the filing of the civil action, and no right to
them in the exercise of their original or appellate jurisdiction; (If reserve the filing of such civil action separately from the civil action
original DIVISION; if appellate EN BANC) will be recognized.
4. Decisions of the Commissioner of Customs in 2. Exclusive appellate jurisdiction in criminal
cases involving liability for customs duties, fees or other money offenses:
charges, seizure, detention or release of property affected, fines, a) Over appeals from the judgments,
forfeitures or other penalties in relation thereto, or other matters resolutions or orders of the Regional Trial Courts in tax
arising under the Customs Law or other laws administered by the cases originally decided by them, in their respective
Bureau of Customs; (DIVISION) territorial jurisdiction.
5. Decisions of the Central Board of Assessment b) Over petitions for review of the judgments,
Appeals in the exercise of its appellate jurisdiction over cases resolutions or orders of the Regional Trial Courts in the
involving the assessment and taxation of real property originally exercise of their appellate jurisdiction over tax cases
decided by the provincial or city board of assessment appeals; originally decided by the Metropolitan Trial Courts,
(EN BANC) Municipal Trial Courts and Municipal Circuit Trial Courts
6. Decisions of the Secretary of Finance on customs in their respective jurisdiction.
cases elevated to him automatically for review from decisions of c. Jurisdiction over tax collection cases:
the Commissioner of Customs which are adverse to the 1. Exclusive original jurisdiction in tax collection
Government under Section 2315 of the Tariff and Customs Code; cases involving final and executory assessments for taxes, fees,
(This has reference to forfeiture cases where the decision is to charges and penalties: Provided, however, That collection cases
release the seized articles DIVISION) where the principal amount of taxes and fees, exclusive of
7. Decisions of the Secretary of Trade and Industry, charges and penalties, claimed is less than One million pesos
in case of nonagricultural product, commodity or article, and the (P1,000,000) shall be tried by the proper Municipal Trial Court,
Secretary of Agriculture in the case of agricultural product, Metropolitan Trial Court and Regional Trial Court.
commodity or article, involving dumping and countervailing duties
under Section 301 and 302, respectively, of the Tariff and
55
2. Exclusive appellate jurisdiction in tax collection 14. Applicability of Proton Pilipinas Corporation vs.
cases: Republic, etc., G. R. No. 165027, October 16, 2006. The case was
a. Over appeals from judgments, resolutions, decided on factual antecedents before R. A. No. 9282 which grants
or orders of the Regional Trial Courts in tax collection criminal jurisdiction to the Court of Tax Appeals if the value of the tax is
cases originally decided by them, in their respective P1 million or more.
territorial jurisdiction. Interpreting the provisions of Republic Act No. 8249, which
b. Over petitions for review of the judgments, provides that the civil action for recovery of civil liability should be jointly
resolutions or orders of the Regional Trial Courts in the determined in the criminal proceeding by the Sandiganbayan or
exercise of their appellate jurisdiction over tax collection appropriate courts, the prohibition of reservation of the criminal aspect,
cases originally decided by the Metropolitan Trial Courts, the Supreme Court said that tax collection cases may be tried
Municipal Trial Courts and Municipal Circuit Trial Courts, separately, and not before the Sandiganbayan in Rep. Act No. 3019
in their respective jurisdiction. (Sec. 7, R. A. No. 1125, cases. This is so because, Rep. Act No. 3019 is silent on the definition
as amended by R. A. No. 9282, emphasis and words in of civil liability and the application of Art. 104 of the Revised Penal
parentheses supplied) Code does not cover taxes. Consequently, the Supreme Court ruled
The petition for review to be filed with the that on the tax collection case the RTC would have jurisdiction.
CTA en banc as the mode for appealing a Interpretation by the author in the light of Rep. Act. 9282. If it
decision, resolution, or order of the CTA is a criminal case cognizable by the Sandiganbayan, then this court
retains jurisdiction, with the civil jurisdiction being cognizable by the
Division, under Section 18 of Republic Act No.
CTA or the lower courts depending on the amount.
1125, as amended, is not a totally new remedy, If the issue is a purely tax case, even if it involves cases
unique to the CTA, with a special application cognizable by the Sandiganbayan, then jurisdiction vests upon the CTA
or use therein. To the contrary, the CTA merely or the lower courts depending on the amount of the tax.
adopts the procedure for petitions for review and
appeals long established and practiced in other 15. On January 24, 1995, the then Secretary of
Philippine courts. Accordingly, doctrines, principles, Finance, through the recommendation of the then
rules, and precedents laid down in jurisprudence by this Commissioner of Internal Revenue issued Revenue Regulations
Court as regards petitions for review and appeals in
[Rev. Reg.] No. 1-95, providing the Rules and Regulations to
courts of general jurisdiction should likewise bind the
Implement the Tax Incentives Provisions Under Paragraphs (b)
CTA, and it cannot depart therefrom. (Santos v. People,
et al, G. R. No. 173176, August 26, 2008) and (c) of Section 12, [R.A.] No. 7227, [o]therwise known as the
Bases Conversion and Development Act of 1992.
Subsequently, Rev. Reg. No. 12-97 was issued providing for the
13-A. General rule: The denial of a motion to
Regulations Implementing Sections 12(c) and 15 of [R.A.] No.
quash is an interlocutory order which is not the proper 7227 and Sections 24(b) and (c) of [R.A.] No. 7916 Allocating
subject of an appeal or a petition for certiorari. Two Percent (2%) of the Gross Income Earned by All
According to Section 1, Rule 41 of the Revised Rules of Court, Businesses and Enterprises Within the Subic, Clark, John Hay,
governing appeals from the Regional Trial Courts (RTCs) to the Poro Point Special Economic Zones and other Special
Court of Appeals, an appeal may be taken only from a judgment
Economic Zones under PEZA. On September 27, 1999, Rev.
or final order that completely disposes of the case or of a matter
Reg. No. 16-99 was issued Amending [RR] No. 1-95, as
therein when declared by the Rules to be appealable. Said
amended, and other related Rules and Regulations to Implement
provision, thus, explicitly states that no appeal may be taken from
an interlocutory order. (Santos v. People, et al, G. R. No. 173176, the Provisions of paragraphs (b) and (c) of Section 12 of [R.A.]
August 26, 2008) No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992 Relative to the Tax Incentives
Granted to Enterprises Registered in the Subic Special
Economic and Freeport Zone.
56
On June 3, 2003, the Commissioner of Internal Revenue The power to decide disputed assessments, refunds of internal
issued Revenue Memorandum Circular (RMC) No. 31-2003 revenue taxes, fees or other charges, penalties imposed in relation
setting the Uniform Guidelines on the Taxation of Imported thereto, or other matters arising under this Code or other laws or
Motor Vehicles through the Subic Free Port Zone and Other portions thereof administered by the Bureau of Internal Revenue is
Freeport Zones that are Sold at Public Auction, which vested in the Commissioner, subject to the exclusive appellate
provided for the tax treatments on the transactions involved in jurisdiction of the Court of Tax Appeals. (as amended by the NIRC of
the importation of motor vehicles through the SSEFZ and other 1997, emphases supplied, Asia International Auctioneers, Inc., etc et
legislated Freeport zones and subsequent sale thereof through al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007)
public auction. This was later amended by RMC No. 32-2003. NOTES AND COMMENTS: The author disputes this doctrine.
Asia International Auctioneers and others filed a The decisions of the Commission under other matter refers to the
complaint before the RTC of Olongapo City, to declare Void, quasi-judicial decisions and not to the quasi-legislative powers of the
Commissioner.
Ultra Vires, and Unconstitutional [RMC] No. 31-2003 dated June
3, 2003 and [RMC] No. 32-2003 dated June 5, 2003, Rev. Reg.
Nos. 1-95, 12-97 and 16-99 dated January 24, 1995, August 7, 16. What is the characteristic of a BIR denial
1997 and September 27, 1999, respectively, of a protest such as would enable the taxpayer to appeal
They contended that jurisdiction over the case at bar the same to the Court of Tax Appeals ?
properly pertains to the regular courts as this is an action to SUGGESTED ANSWER: The Commissioner of Internal
declare as unconstitutional, void and against the provisions of Revenue should always indicate to the taxpayer in clear and
[R.A. No.] 7227 the RMCs issued by the CIR. They do do not unequivocal language whenever his action on an assessment
challenge the rate, structure or figures of the imposed taxes, questioned by a taxpayer constitutes his final determination on the
rather they challenge the authority of the respondent disputed assessment.
Commissioner to impose and collect the said taxes. They also On the basis of his statement indubitably showing that the
claim that the challenge on the authority of the CIR to issue the Commissioner s communicated action is his final decision on the
RMCs does not fall within the jurisdiction of the Court of Tax contested assessment, the aggrieved taxpayer would then be able to
Appeals (CTA). take recourse to the tax court at the opportune time. Without needless
difficulty, the taxpayer would be able to determine when his right to
Does the RTC have jurisdiction ?
appeal to the tax court accrues. (Commissioner of Internal Revenue v.
SUGGESTED ANSWER: No. It is the Court of Tax Appeals
Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing
that has exclusive jurisdiction.
Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue,
In the case at bar, the assailed revenue regulations and
G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing
revenue memorandum circulars are actually rulings or opinions of the
Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289,
CIR on the tax treatment of motor vehicles sold at public auction
within the SSEZ to implement Section 12 of R.A. No. 7227 which 28 June 1974, 57 SCRA 523)
provides that exportation or removal of goods from the territory of NOTES AND COMMENTS:
the [SSEZ] to the other parts of the Philippine territory shall be a. Reasons for the rule requiring CIR s unequivocal
subject to customs duties and taxes under the Customs and Tariff language on his action on the protest.
Code and other relevant tax laws of the Philippines. They were 1) It would obviate all desire and opportunity on the
issued pursuant to the power of the CIR under Section 4 of the part of the taxpayer to continually delay the finality of the
National Internal Revenue Code, viz: assessment and, consequently, the collection of the amount
Section 4. Power of the Commissioner to Interpret Tax Laws demanded as taxes by repeated requests for recomputation
and to Decide Tax Cases.-- The power to interpret the provisions of and reconsideration.
this Code and other tax laws shall be under the exclusive and original 2) On the part of the Commissioner of Internal
jurisdiction of the Commissioner, subject to review by the Secretary Revenue, this would encourage his office to conduct a careful
of Finance. and thorough study of every questioned assessment and render
a correct and define decision thereon in the first instance.
57
3) This would also deter the Commissioner of Internal to pay; otherwise, its properties would be subjected to distraint and
Revenue from unfairly making the taxpayer grope in the dark levy.
and speculate as to which action constitutes the decision
appealable to the tax court. 18. The taxpayer seasonably protested the
4) Of greater import, this rule of conduct would meet assessment issued by the Commissioner of Internal
a pressing need for fair play, regularity, and orderliness in
administrative action. . (Commissioner of Internal Revenue v. Revenue. During the pendency of the protest the CIR
Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 issued a warrant of distraint and levy to collect the taxes
citing Oceanic Wireless Network, Inc. v. Commissioner of subject of the protest.
Internal Revenue, G. R. No. 148380, 9 December 2005, 477 As counsel what advice shall you give the taxpayer.
SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Explain briefly your answer.
Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523) SUGGESTED ANSWER: The taxpayer should appeal, by way
of a petition for review, to the Court of Tax Appeals not on the ground
17. Cite acts of BIR Commissioner that may be of the denial of the protest but on other matter arising under the
considered as denial of a protest which serve as basis for provisions of the National Internal Revenue Code. The actual issuance
appeal to the Court of Tax Appeals. of a warrant of distraint and levy in certain cases cannot be considered
SUGGESTED ANSWER: a final decision on a disputed assessment.
a. Filing by the BIR of a civil suit for collection of the To be a valid decision on a disputed assessment, the decision
deficiency tax is considered a denial of the request for reconsideration. of the Commissioner or his duly authorized representative shall (a)
(Commissioner of Internal Revenue v. Union Shipping Corporation, 185 state the facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based, otherwise, the decision
SCRA 547)
shall be void, in which case the same shall not be considered a
b. An indication to the taxpayer by the Commissioner in
decision on the disputed assessment; and (b) that the same is his final
clear and unequivocal language of his final denial not the issuance of
decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not
the warrant of distraint and levy. What is the subject of the appeal is
complied with by the mere issuance of a warrant of distraint and levy.
the final decision not the warrant of distraint. (Commissioner of Internal
(Commissioner of Internal Revenue v. Union Shipping Corp., 185
Revenue v. Union Shipping Corporation, 185 SCRA 547)
SCRA 547)
c. A BIR demand letter sent to the taxpayer after his protest
Furthermore, a motion for the suspension of the collection of the
of the assessment notice is considered as the final decision of the
tax may be filed together with the petition for review (Sec. 3, Rule 10,
Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of
RRCTA effective December 15, 2005) because the collection of the tax
Tax Appeals, et al., 57 SCRA 523)
may jeopardize the interest of the taxpayer.
d. A letter of the BIR Commissioner reiterating to a taxpayer
his previous demand to pay an assessment is considered a denial of
the request for reconsideration or protest and is appealable to the 18-A. As a general rule, there must always be a decision of
Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, the Commissioner of Internal Revenue or Commissioner of
70 SCRA 204) Customs before the Court of Tax Appeals, would have
e. Final notice before seizure considered as jurisdiction. If there is no such decision, the petition would be
commissioner s decision of taxpayer s request for reconsideration dismissed for lack of jurisdiction unless the case falls under any of the
who received no other response. Commissioner of Internal Revenue v. following exceptions.
Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that
not only is the Notice the only response received: its content and tenor 19. Instances where the Court of Tax Appeals
supports the theory that it was the CIR s final act regarding the would have jurisdiction even if there is no decision yet by
request for reconsideration. The very title expressly indicated that it the Commissioner of Internal Revenue:
was a final notice prior to seizure of property. The letter itself clearly a. Where the Commissioner has not acted on the disputed
stated that the taxpayer was being given this LAST OPPORTUNITY assessment after a period of 180 days from submission of complete
58
supporting documents, the taxpayer has a period of 30 days from the however, That when in the opinion of the Court the collection by the
expiration of the 180 day period within which to appeal to the Court of aforementioned government agencies may jeopardize the interest of
Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of the Government and/or the taxpayer the Court at any stage of the
Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, proceeding may suspend the said collection and require the taxpayer
July 11, 2001) either to deposit the amount claimed or to file a surety bond for not
b. Where the Commissioner has not acted on an application more than double the amount with the Court. (Sec. 11, Rep. Act No.
for refund or credit and the two year period from the time of payment is 1125, as amended by Sec.9, Rep. Act No. 9282 )
about to expire, the taxpayer has to file his appeal with the Court of Tax The Supreme Court may enjoin the collection of taxes under its
Appeals before the expiration of two years from the time the tax was general judicial power but it should be apparent that the source of the
paid. power is not statutory but constitutional.
It is disheartening enough to a taxpayer to be kept waiting for The Supreme Court did not grant the provisional remedy prayed
an indefinite period for the ruling,. It would make matters more for in Southern Cross Cement Corporation v. The Philippine Cement
exasperating for the taxpayer if the doors of justice would be closed for Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004 for it would
such a relief until after the Commissioner, would have, at his personal be tantamount to enjoining the collection of taxes, a peremptory judicial
convenience, given his go signal. (Commissioner of Customs, et al, v. act which is traditionally frowned upon unless there is a clear statutory
Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.) basis for it. Evident is the clear legislative intent that the imposition of
safeguard measures, despite the availability of judicial review, should
20. Instances where the Court of Tax Appeals not be enjoined notwithstanding any timely appeal of the imposition.
This so because the Safeguard Measures Act states that the filing of a
would have jurisdiction even if there is no decision of the
petition for review before the CTA does not stop, suspend, or otherwise
Commissioner of Customs: toll the imposition or collection of the appropriate tariff duties or the
a. Decisions of the Secretary of Trade and Industry or the adoption of other appropriate safeguard measures.
Secretary of Agriculture in anti-dumping and countervailing duty cases
are appealable to the Court of Tax Appeals within thirty (30) days from 22. General rule: The rule is that in the absence of
receipt of such decisions. accounting records of a taxpayer, his tax liability may be determined by
b. In case of automatic review by the Secretary of Finance in estimation. The petitioner (Commissioner of Internal Revenue) is not
seizure or forfeiture cases where the value of the importation exceeds required to compute such tax liabilities with mathematical exactness.
P5 million or where the decision of the Collector of Customs which fully Approximation in the calculation of taxes due is justified. To hold
or partially releases the shipment seized is affirmed by the otherwise would be tantamount to holding that skillful concealment is
Commissioner of Customs. an invincible barrier to proof. [Commissioner of Internal Revenue v.
c. In case of automatic review by the Secretary of Finance of a Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citing
decision of a Collector of Customs acting favorably upon a customs United States v. Johnson, 319 U.S. 1233 (1943)] However, the rule
protest. does not apply where the estimation is arrived at arbitrarily and
capriciously. [Commissioner of Internal Revenue v. Hantex Trading
21. As a general rule, No court shall have the Co., Inc., citing United States v. Rindskopf, 105 U.S.418 (1881)]
authority to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge. (Sec. 218, 23. Meaning of "best evidence obtainable" under Sec. 6 (B),
NIRC) NIRC of 1997. This means that the original documents must be
No appeal taken to the CTA from the decision of the produced. If it could not be produced, secondary evidence must be
Commissioner of Internal Revenue or the Commissioner of Customs or adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal
the Regional Trial Court, provincial, city or municipal treasurer or the Revenue, CA - G.R. SP No. 47172, September 30, 1998)
Secretary of Finance, the Secretary of Trade and Industry and NOTES AND COMMENTS:
Secretary of Agriculture, as the case may be shall suspend the a. The secondary evidence referred to are those that may
payment, levy, distraint, and/or sale of any property of the taxpayer for be adduced using the general methods for reconstructing a taxpayer s
the satisfaction of his tax liability as provided by existing law: Provided, income or the indirect approach to tax investigation.
59
The best evidence envisaged in Section 16 of the 1977 NIRC during the years in question. (Ibid., in turn citing Kenney v.
[now Sec. 6 (B),NIRC of 1997] includes the corporate and accounting Commissioner, 111 F.2d 374)
records of the taxpayer who is the subject of the assessment process,
the accounting records of other taxpayers engaged in the same line of 25. The following are the general methods developed by the
business, including their gross profit and net profit sales. Bureau of Internal Revenue for reconstructing a taxpayer s
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. income where the records do not show the true income or where no
No. 136975, March 31, 2005 citing De Leon, The National Internal return was filed or what was filed was a false and fraudulent return
Revenue Code Annotated, p. 37) (a) Percentage method;
Such evidence also includes data, record, paper, document or (b) Net worth method.;
any evidence gathered by internal revenue officers from other (c) Bank deposit method;
taxpayers who had personal transactions or from whom the subject (d) Cash expenditure method;
taxpayer received any income; and record, data, document and (e) Unit and value method;
information secured from government offices or agencies, such as the (f) Third party information or access to records method;
SEC, the Central Bank of the Philippines, the Bureau of Customs, and (g) Surveillance and assessment method. (Chapter XIII.
the Tariff and Customs Commission. (sic, Commissioner v. Hantex Indirect Approach to Investigation, Handbook on Audit Procedures and
Trading Co., Inc., supra) Techniques Volume I, pp. 68-74)
The law allows the BIR access to all relevant or material
records or data in the person of the taxpayer. It places no limit or 26. Third party information or access to records method.
condition on the type or form of the medium by which the record The BIR may require third parties, public or private to supply
subject of the order of the BIR is kept. (Ibid.) information to the BIR, and thus, obtain on a regular basis from any
Purpose of the best evidence obtainable rule under Sec, 6 person other than the person whose internal revenue tax liability is
(B), NIRC of 1997. The purpose of the law is to enable the BIR to get subject to audit or investigation, or from any office or officer of the
at the taxpayer s records in whatever form they may be kept. national and local governments, government agencies and
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. instrumentalities including the Bangko Sentral ng Pilipinas and
No. 136975, March 31, 2005) government-owned or controlled corporations, any information such
as, but not limited to, costs and volume of production, receipts or sales
24. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make
and gross incomes of taxpayers, and the names , addresses, and
or amend a tax return from his own knowledge or obtained
financial statements of corporations, mutual fund companies,
through testimony or otherwise. Thus, the Commissioner of Internal
insurance companies, regional operating headquarters or multinational
Revenue investigates any circumstance which led him to believe that
companies, joint accounts, associations, joint ventures or consortia and
the taxpayer had taxable income larger than that reported. Necessarily,
registered partnerships, and their members; xxx [Sec. 5 (B), NIRC of
this inquiry would have to be outside of the books because they
1997)
supported the return as filed. He may take the sworn testimony of the
taxpayer, he may take the testimony of third parties; he may examine
27. A pre-assessment notice is a letter sent by the Bureau
and subpoena, if necessary, traders and brokers accounts and
of Internal Revenue to a taxpayer asking him to explain within a period
books and the taxpayer s books of accounts. The Commissioner is
of fifteen (15) days from receipt why he should not be the subject of an
not bound to follow any set of patterns. The existence of unreported
assessment notice. It is part of the due process rights of a taxpayer.
income may be shown by any particular proof that is available in the
As a general rule, the BIR could not issue an assessment notice
circumstances of the particular situation. [Commissioner of Internal
without first issuing a pre-assessment notice because it is part of the
Revenue v. Hantex Trading Co., Inc. citing Campbell, Jr., v.
due process rights of a taxpayer to be given notice in the form of a pre-
Guetersloh, 287 F.2d 878 (1961)]
assessment notice, and for him to explain why he should not be the
Citing its ruling in a previous case, a U.S. appellate court subject of an assessment notice.
declared that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other
sources of information to establish income made by the taxpayer
60
28. Instances where a pre-assessment notice is
not required before a notice of assessment is sent to the 31. What is a self-assessed tax ?
SUGGESTED ANSWER: A tax that the taxpayer himself
taxpayer. assesses or computes and pays to the taxing authority. It is a tax that
a. When the finding for any deficiency tax is the result of self-assessed by the taxpayer without the intervention of an
mathematical error in the computation of the tax as appearing on the assessment by the tax authority to create the tax liability.
face of the return; or The Tax Code follows the pay-as-you-file system of taxation
b. When a discrepancy has been determined between the tax under which the taxpayer computes his own tax liability, prepares the
withheld and the amount actually remitted by the withholding agent; or return, and pays the tax as he files the return. The pay-as-you-file
c. When a taxpayer opted to claim a refund or tax credit of system is a self-assessing tax return.
excess creditable withholding tax for a taxable period was determined Internal revenue taxes are self-assessing. [Dissent of J. Carpio
to have carried over and automatically applied the same amount in Philippine National Oil Company v. Court of Appeals, et al., G. R. No.
claimed against the estimated tax liabilities for the taxable quarter or 109976, April 26, 2005 and companion case citing Tupaz v. Ulep, 316
quarters of the succeeding table year; or
SCRA 118 (1999) in turn citing Vitug and Acosta, Tax Law and
d. When the excess tax due on excisable articles has not been st
Jurisprudence, 1 edition, 1997, p. 267]
paid; or
A clear example of a self-assessed tax is the annual income tax,
e. When an article locally purchased or imported by an exempt
which the taxpayer himself computes and pays without the intervention
person, such as, but not limited to vehicles, capital equipment,
of any assessment by the BIR. The annual income tax becomes due
machineries and spare parts, has been sold, trade or transferred to
and payable without need of any prior assessment by the BIR. The
non-exempt persons. (Sec. 228, NIRC of 1997)
BIR may or may not investigate or audit the annual income tax return
filed by the taxpayer. The taxpayer s liability for the income tax does
29. The word assessment when used in connection with not depend on whether or not the BIR conducts such subsequent
taxation, may have more than one meaning. More commonly the investigation or audit.
word assessment means the official valuation of a taxpayer s However, if the taxing authority is first required to investigate,
property for purpose of taxation. The above definition of and after such investigation to issue the tax assessment that creates
assessment finds application under tariff and customs taxation the tax liability, then the tax is no longer self-assessed. (Dissent of J.
as well as local government taxation. Carpio in Philippine National Oil Company v. Court of Appeals, et al.,
For real property taxation, there may be a special meaning G. R. No. 109976, April 26, 2005 and companion case)
to the burdens that are imposed upon real properties that have
been benefited by a public works expenditure of a local 32. On October 28, 1988 taxpayer bank received a notice
government. It is sometimes called a special assessment or a special of assessment from the BIR informing it that deficiency taxes are
levy. (Commissioner of Internal Revenue v. Pascor Realty and due from the said taxpayer bank without any findings of law or
Development Corporation, et al., G.R. No. 128315, June 29, 1999) fact but supported only with a computation. On December 10,
For internal revenue taxation assessment as laying a tax. 1988, the taxpayer bank counsel filed a letter that as soon as
The ultimate purpose of an assessment to such a connection is to this is explained and clarified in a proper notice of assessment,
ascertain the amount that each taxpayer is to pay. (Commissioner of we shall inform you of the taxpayer s decision on whether to pay
Internal Revenue v. Pascor Realty and Development Corporation, et or protest the assessment. The taxpayer bank insists that the
al., G.R. No. 128315, June 29, 1999) assessment was not valid. Of course, BIR took the opposite view
contending further that there was no seasonable protest, hence
30. An assessment is a notice duly sent to the the tax is sue and collectible. Who is correct ?
taxpayer which is deemed made only when the BIR SUGGESTED ANSWER: The BIR is correct. Under the old law
releases, mails or sends such notice to the taxpayer. Sec. 270, it is enough merely that the BIR Commissioner shall notify
(Commissioner of Internal Revenue v. Pascor Realty and Development the taxpayer of his findings
Corporation, et al., G.R. No. 128315, June 29, 1999)
61
The taxpayer bank counsel s December 10, 1988 letter is not a latter s real liability, but to take advantage of every opportunity to
seasonable protest because it was filed thirty (30) days after receipt of molest peaceful, law-abiding citizens. Without such a legal defense
the assessment on October 28, 1988. (Commissioner of Internal taxpayers would furthermore be under obligation to always keep their
Revenue v. Bank of Philippine Islands, G. R. No. 134062, April 17, books and keep them open for inspection subject to harassment by
2007) unscrupulous tax agents. The law on prescription being a remedial
NOTES AND COMMENTS: The statement, The taxpayer shall measure should be interpreted in a way conducive to bringing about
be informed in writing of the law and the facts on which the assessment the beneficent purpose of affording protection to the taxpayer within
is made; otherwise the assessment shall be void is an amendment to the contemplation of the Commission which recommend the approval
Sec. 270 (now renumbered to Sec. 228) which took effect only on of the law. [Republic of the Philippines v. Ablaza, 108 Phil. 1105,
January 1, 1998 upon the effectivity of the Tax Reform Act of 1997. 1108, cited in Bank of Philippine Islands (Formerly Far East Bank and
Trust Company) v. Commissioner of Internal Revenue, G. R. No.
33. What are the prescriptive periods for making 174942, March 7, 2008]
assessments of internal revenue taxes ?
SUGGESTED ANSWER: 35. Unreasonable investigation contemplates cases
a. Three (3) years from the last day within which to file a where the period for assessment extends indefinitely because this
return or when the return was actually filed, whichever is later (Sec. deprives the taxpayer of the assurance that it will not longer be
203, NIRC of 1997). The CIR has three (3) years from the date of subjected to further investigation for taxes after the expiration of a
actual filing of the tax return to assess a national internal revenue tax reasonable period of time. (Philippine Journalists, Inc. v.
or to commence court proceedings for the collection thereof without Commissioner of Internal Revenue, G. R. No. 162852, December 16,
an assessment. [Bank of Philippine Islands (Formerly Far East Bank 2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)
and Trust Company) v. Commissioner of Internal Revenue, G. R. No. Laws on prescription should be liberally construed in favor of the
174942, March 7, 2008] taxpayer. Reason: for the purpose of safeguarding taxpayers from an
b. ten years from discovery of the failure to file the tax return unreasonable examination, investigation or assessment, our tax laws
or discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997) provide a statute of limitation on the collection of taxes. Thus, the law
; or on prescription, being a remedial measure, should be liberally
c. within the period agreed upon between the government and construed in order to afford such protection, As a corollary, the
the taxpayer where there is a waiver of the prescriptive period for exceptions to the law on prescription should perforce be strictly
assessment (Sec. 222 (b), NIRC of 1997). construed. [Philippine Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004 citing Commissioner
34. Purpose of period of limitations in taxation. of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby
For the purpose of safeguarding taxpayers from any unreasonable International Tire Co., Inc.),., et al., G.R. No. 104171, February 24,
examination, investigation or assessment, our tax law provides a statute 1999, 303 SCRA 546]
of limitations in the collection of taxes. [Commissioner of Internal The prescriptive period was precisely intended to give the
Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International taxpayers peace of mind. (Commissioner of Internal Revenue v. B.F.
Tire Co., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue,
G. R. No. 162852, December 16, 2004;], as well as their assessments. 36. A jeopardy assessment is a delinquency tax
The law prescribing a limitation of actions for the collection of assessment which was assessed without the benefit of complete or
the income tax is beneficial both to the Government and to its citizens; partial audit by an authorized revenue officer, who has reason to
to the Government because tax officers would be obliged to act believe that the assessment and collection of a deficiency tax will be
promptly in the making of assessment, and to citizens because after jeopardized by delay because of the taxpayer s failure to comply with
the lapse of the period of prescription citizens would have a feeling of the audit and investigation requirements to present his books of
security against unscrupulous tax agents who will always find an accounts and/or pertinent records, or to substantiate all or any of the
excuse to inspect the books of taxpayers, not to determine the
62
deductions, exemptions, or credits claimed in his return. [Sec. 3.1 (a), Diez Vda. de Gabriel v. Commissioner of Internal Revenue, G.R. No.
Rev. Regs. No. 6-2000) 155541, January 27, 2004)
Jeopardy assessment is an indication of the doubtful validity of
the assessment, hence it may be subject to a compromise. [Sec. 3.1 38. What are the requirements for the validity
(a), Rev. Regs. No. 6-2000]
of a formal letter of demand and assessment notice ?
SUGGESTED ANSWER:
37. During Juliana s lifetime, her business affairs were
a. There must have been previously issued a pre-assessment
managed by the Philippine Trust Company (Philtrust). She died notice until excepted;
on April 3, 2001.Two days after her death, Philtrust, through its b. It must have been issued prior to the prescriptive period;
Trust Officer, filed her Income Tax Return for 2000, without and
indicating that Juliana died. c. The letter of demand calling for payment of the taxpayer s
On May 22, 2001, Philtrust filed a verified petition with the deficiency tax or taxes shall state the facts, the law, rules and
RTC for appointment as Special Administrator. This was denied regulations, or jurisprudence on which the assessment is based,
by the court who appointed one of the heirs as Special otherwise, the formal letter of demand and assessment notice shall be
Administrator. Philtrust s motion for reconsideration was void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
denied.
After an investigation by the BIR of the decedent s income 39. What is the presumption that flows from a taxpayer s
tax liability, it sent, on November 18, 2003, a demand letter and a failure to protest an assessment ?
Notice of Assessment to Juliana c/o Philtrust at the latter s SUGGESTED ANSWER: Tax assessments by tax
address which was stated in the 1998 Income Tax Return. No examiners are presumed correct and made in good faith. The
response was made neither was the BIR advised that Juliana taxpayer has the duty to prove otherwise. In the absence of proof of
already died. any irregularities in the performance of duties, an assessment duly
On June 18, 2005, the BIR Commissioner issued warrants made by a Bureau of Internal Revenue examiner and approved by his
of distraint and levy to enforce collection of the deficiency income superior officers will not be disturbed. All presumptions are in favor of
tax liability which was served on Juliana s heir. On November the correctness of tax assessments. (Commissioner of Internal
22, 2005, the BIR filed with the estate court a motion for allowance Revenue v. Bank of Philippine Islands., G, R. No. 134062, April 17,
of claim. The heir claimed that there was no proper service of the 2007 citing Sy Po v. Court of Appeals, G. R. No. L-81446, 18 August
notice of assessment and that the filing of the motion was time- 1988, 164 SCRA 524, 530, citations omitted)
barred. On the other hand the BIR made the submission that both
the issuance of the assessment notice and the motion were all 40. What are the reasons for presumption of correctness of
properly made on Philtrust. Furthermore the lapse of the 30-day assessments ?
period within which to protest made the assessment final, SUGGESTED ANSWER:
a. Lifeblood theory
executory and uncontestable and not time barred.
b. Presumption of regularity (Commissioner of Internal
Rule on the conflicting claims of the parties.
Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31,
SUGGESTED ANSWER: I would rule in favor of the heir.
2005) in the performance of public functions. (Commissioner of
There was no proper service of the notice of assessment
Internal Revenue v. Tuazon, Inc., 173 SCRA 397)
because the death of Juliana automatically severed the legal
c. The likelihood that the taxpayer will have access to the
relationship of principal and agent between her and Philtrust. The
relevant information [Commissioner of Internal Revenue, supra citing
severed relationship could not be revived on the mere fact that Philtrust
United States v. Rexach, 482 F.2d 10 (1973). The certiorari was
filed her Tax Return two days after her death.
denied by the United States Supreme Court on November 19, 1973)
Philtrust s failure to file a notice of death subjects it to penal
d. The desirability of bolstering the record-keeping
sanctions which do not include the indefinite tolling of the prescriptive
requirements of the NIRC. (Ibid.)
period for making deficiency tax assessments, or the waiver of the
notice requirement for such assessments. (Estate of the late Juliana
63
41. Give instances where prima facie correctness because of the provisions of Sec. 223, NIRC of 1997 which provides
of a tax assessment does not apply. for the suspension of the prescriptive period:
SUGGESTED ANSWER: The prima facie correctness of a tax
assessment does not apply upon proof that an assessment is utterly 43. The signatures of both the Commissioner
without foundation, meaning it is arbitrary and capricious. Where the and the taxpayer, are required for a waiver of the
BIR has come out with a naked assessment i.e., without any prescriptive period, thus a unilateral waiver on the part of the
foundation character, the determination of the tax due is without taxpayer does not suspend the prescriptive period. [Commissioner of
rational basis. [Commissioner of Internal Revenue v. Hantex Trading Internal Revenue v. Court of Appeals, et al., G.R. No. 115712,
Co., Inc., G, R. No. 136975, March 31, 2005 citing United States v. February 25, 1999 (Carnation case)]
Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a
situation, the determination of the Commissioner contained in a 44. The act of requesting a reinvestigation alone does
deficiency notice disappears. [Commissioner of Internal Revenue, not suspend the running of the prescriptive period. The request
supra citing a U.S. Court of Appeals ruling, in Clark and Clark v. for reinvestigation must be granted by the CIR. The Supreme
Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] Hence, Court declared that the burden of proof that the request for
the determination by the CTA must rest on all the evidence introduced reinvestigation had been actually granted shall be on the
and its ultimate determination must find support in credible evidence. Commissioner of Internal Revenue. Such grant may be expressed in
[Commissioner of Internal Revenue, supra] its communications with the taxpayer or implied from the action of the
Commissioner or his authorized representative in response to the
42. What are the instances that suspends the request for reinvestigation. [Bank of Philippine Islands (Formerly Far
running of the prescriptive periods (Statute of Limitations) East Bank and Trust Company) v. Commissioner of Internal
within which to make an assessment and the beginning of Revenue, G. R. No. 174942, March 7, 2008]
distraint or levy or of a proceeding in court for the
45. Philippine Journalists, Inc. (PJI) filed its Annual
collection, in respect of any tax deficiencies? Income Tax Return for the calendar year ended December 31,
SUGGESTED ANSWER: 1994 which showed a net income of P30 million and the tax due
a. When the Commissioner is prohibited from making the
as P10 million. An examination of PJI s books of account and
assessment, or beginning distraint, or levy or proceeding in court and
other accounting records for the period January 1, 1994 to
for sixty (60) days thereafter;
December 31, 1994 showed deficiency VAT, Income Tax and
b. When the taxpayer requests for and is granted a
reinvestigation by the commissioner; Withholding Tax in the total amount of P1`27 million. During the
c. When the taxpayer could not be located in the address given September 22, 1997 informal conference with the Revenue District
by him in the return filed upon which the tax is being assessed or Officer, PJI s Comptroller executed a waiver of statute of
collected; limitations provided for under sections 223 and 224 of the NIRC.
d. When the warrant of distraint and levy is duly served upon On October 5, 1998, the BIR issued a Pre-Assessment Notice
the taxpayer, his authorized representative, or a member of his which was followed by Assessment/Demand No.33-1-000757-94
household with sufficient discretion, and no property could be located; stating a total deficiency taxes in the amount of P111 million for
and income tax, VAT and expanded withholding taxes, inclusive of
e. When the taxpayer is out of the Philippines. interest and compromise penalty.
NOTES AND COMMENTS: On March 16, 1999, the BIR sent to PJI a Preliminary
The holding in Commissioner of Internal Revenue v. Court of Collection Letter to pay the assessment within 10 days from
Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) receipt. On November 10,1999, a Final Notice Before Seizure was
that the waiver of the period for assessment must be in writing and issued giving PJI 10 days from receipt within which to pay. PJI
have the written consent of the BIR Commissioner is still doctrinal received the final notice on November 24, 1999 and on November
26, 1999 PJI asked that it be clarified on how the tax liability of
64
P111 million was arrived at and requested for an extension of 30 having been issued pursuant to an invalid assessment. (Philippine
days from receipt of the clarification within which to reply. PJI, Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No.
through a follow-up letter, asserted it never received 162852, December 16, 2004)
Assessment/Demand No. 33-1-000757-94. On March 28, 2000 PJI 46. What are the two ways of protesting an
received a Warrant of Distraint and/or Levy. PJI then appealed to assessment notice for an internal revenue tax ?
the CTA. Alternatively, what are the two types of protests ? Explain
The following issues are for resolution in the appeal:
briefly.
a. Does the CTA have jurisdiction over the appeal ?
SUGGESTED ANSWER:
b. Was the Waiver of the Statute of Limitations valid ? a. Request for reconsideration which refers to a plea for re-
c. Were the Assessment/Demand and the Warrant of evaluation of an assessment on the basis of existing records without
Distraint and/or Levy valid ? need of additional evidence. It may involve both a question of fact or of
Will the appeal prosper? Explain briefly your answer. law or both.
SUGGESTED ANSWER: Yes, it will prosper. b. Request for reinvestigation which refers to a plea for re-
a. The CTA has jurisdiction to determine if the warrant of evaluation of an assessment on the basis of newly-discovered
distraint and levy issued by the BIR is valid and to rule if the Waiver of evidence or additional evidence that a taxpayer intends to present in
the Statute of Limitations was validly effected. This is so because the the investigation. It may also involve a question of fact or law or both.
CTA has exclusive appellate jurisdiction to review by appeal decisions (Commissioner of Internal Revenue v. Philippine Global
of the Commissioner of Internal Revenue in cases involving other Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev.
matters arising under the National Internal Revenue Code or other laws Regs. No. 12-85)
administered by the Bureau of Internal Revenue. [Sec. 7 (a) (1). R.
A. No. 1125, as amended by R. A. No. 9282) Thus it was previously
ruled that the CTA had jurisdiction to act on a petition to invalidate and
47. What is that type of protest that suspends
annul the distraint orders of the Commissioner. [Ynares-Santiago, J. the running of the statute of limitations for the beginning of
Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. distraint or levy or a proceeding in court for collection ?
No. 162852, December 16, 2004 citing Panrtoja v. David, 111 Phil. Why ?
197; 1 SCRA 608 (1961)] Likewise upheld by the Supreme Court was SUGGESTED ANSWER: It is that type of protest when the
the decision of the CTA declaring several waivers executed by the taxpayer requests for a reinvestigation which is granted by the
taxpayer as null and void, thus invalidating the assessments issued by Commissioner (Sec. 223, NIRC of 1997), that suspends the running
the BIR. (Ibid., citing Commissioner of Internal Revenue v. Court of of the statute of limitations for collection of the tax. (Commissioner of
Appeals, G. R. No. 115712, 25 February 1999, 303 SCRA 614) Internal Revenue v. Philippine Global Communication, Inc., G. R. No.
b. The Waiver of the Statute of Limitations is not valid 167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of
because it did not specify a definite agreed date between the BIR and 1997) When a taxpayer demands a reinvestigation, the time employed
PJI, within which the former may assess and collect revenue taxes. in reinvestigation should be deducted from the total period of limitation.
Furthermore, the waiver is also defective from the government [Commissioner of Internal Revenue, supra citing Republic v. Lopez,
side because it was signed only by a revenue district officer, and not 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]
the Commissioner, as so required. Finally, PJI was not furnished a Undoubtedly, a reinvestigation, which entails the reception and
copy of the waiver. evaluation of additional evidence, will take more time than a
c. The waiver document is incomplete and defective and reconsideration of a tax assessment which will be limited to the
thus the three-year prescriptive period within which to assess was not evidence already at hand; this justifies why the former can suspend the
tolled or extended and continued to run until April 17, 1998. running of the statute of limitations on collection of the assessed tax,
Consequently, Assessment/Demand No. 33-1-000757-94 issued on while the latter cannot. (Commissioner of Internal Revenue v.
December 9, 1998 was invalid because it was issued beyond the three Philippine Global Communication, Inc., G. R. No. 167146, October 31,
(3) year period. In the same manner, the Warrant of Distraint and/or 2006 citing Bank of Philippine Islands v. Commissioner of Internal
Levy which PJI received on March 28, 2000 is also null and void for
65
Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230- A compromise penalty could not be imposed by the BIR, if the
231) taxpayer did not agree. A compromise being, by its nature, mutual in
essence requires agreement. The payment made under protest could
48. What are the requirements for the validity only signify that there was no agreement that had effectively been
reached between the parties. (Vda. de San Agustin, et al., v.
of a taxpayer s protest ?
Commissioner of Internal Revenue, G. R. No. 138485, September 10,
SUGGESTED ANSWER:
2001)
a. It must be filed within the reglementary period of thirty
(30) days from receipt of the notice of assessment.
b. The taxpayer must not only show the errors of the Bureau 50-A. What tax cases may be the subject of a
of Internal Revenue but also the correct computation through compromise ?
1) A statement of the facts, the applicable law, rules SUGGESTED ANSWER: The following cases may, upon
and regulations, or jurisprudence on which the taxpayer s taxpayer s compliance with the basis for compromise, be the subject
protest is based, matter of compromise settlement:
2) If there are several issues involved in the disputed a. Delinquent accounts;
assessment and the taxpayer fails to state the facts, the b. Cases under administrative protest after issuance of the
applicable law, rules and regulations, or jurisprudence in support Final Assessment Notice to the taxpayer which are still pending in the
of his protest against some of the several issues on which the Regional Offices, Revenue District Offices, Legal Service, Large
assessment is based, the same shall be considered undisputed Taxpayer Service (LTS), Collection Service, Enforcement Service and
issue or issues, in which case, the taxpayer shall be required to other offices in the National Office;
pay the corresponding deficiency tax or taxes attributable c. Civil tax cases being disputed before the courts;
thereto. (Sec. 3.1.5, Rev. Regs. 12-99) d. Collection cases filed in courts;
c. Within sixty (60) days from filing of the protest, the e. Criminal violations, other than those already filed in court, or
th
taxpayer shall submit all relevant supporting documents. [4 par., Sec. those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
228 (e), NIRC of 1997]
51. What tax cases could not be the subject of
49. What is the procedure for suspension of collection
compromise ?
of taxes ?
SUGGESTED ANSWER:
SUGGESTED ANSWER: Where the collection of the amount
a. Withholding tax cases unless the applicant-taxpayer
of the taxpayer s liability, sought by means of a demand for
invokes provisions of law that cast doubt on the taxpayer s obligation
payment, by levy, distraint or sale of property of the taxpayer, or by
to withhold.;
whatever means, as provided under existing laws, may jeopardize
b. Criminal tax fraud cases, confirmed as such by the
the interest of the government or the taxpayer, an interested party
Commissioner of Internal Revenue or his duly authorized
may file a motion for the suspension of the collection of the tax
representative;
liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with
c. Criminal violations already filed in court;
the Court of Tax Appeals.
d. Delinquent accounts with duly approved schedule of
The motion for suspension of the collection of the tax may be
installment payments;
filed together with the petition for review or with the answer, or in a
e. Cases where final reports of reinvestigation or
separate motion filed by the interested party at any stage of the
reconsideration have been issued resulting to reduction in the original
proceedings. (Sec. 3, Rule 10, RRCTA effective December 15,
assessment and the taxpayer is agreeable to such decision by signing
2005)
the required agreement form for the purpose. On the other hand, other
protested cases shall be handled by the Regional Evaluation Board
50. A compromise is a contract whereby the (REB) or the National Evaluation Board (NEB) on a case to case basis;
parties, by making reciprocal concessions, avoid a litigation or put an
end to one already commenced. (Art. 2028, Civil Code)
66
f. Cases which become final and executory after final (because the return is false or fraudulent with intent to evade tax or of
judgment of a court where compromise is requested on the ground of failure to fail a return), within a period of ten (10) years from discovery
doubtful validity of the assessment; and of the falsity, fraud or omission may be collected by distraint or
g. Estate tax cases where compromise is requested on the levy or by a proceeding in court within five (5) years following the
ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. assessment of the tax. [Sec. 222 (c), in relation to Sec. 222 (a)
30-2002) NIRC of 1997, emphasis supplied)
c. Collection upon an extended assessment. Where a tax
52. The Commissioner may compromise the has been assessed with the period agreed upon between the
payment of any internal revenue tax when: Commissioner and the taxpayer in writing (which should initially be
a. A reasonable doubt as to the validity of the claim against within three (3) years from the time the return was filed or should have
the taxpayer exists provided that the minimum compromise entered been filed), or any extensions before the expiration of the period
into is equivalent to forty percent (40%) of the basic tax; or agreed upon, the tax may be collected by distraint or levy or by a
b. The financial position of the taxpayer demonstrates a clear proceeding in court within the period agreed upon in writing
inability to pay the assessed tax provided that the minimum before the expiration of the five (5) year period. The period so
compromise entered into is equivalent to ten percent (10%) of the basic agreed upon may be extended by subsequent written agreements
assessed tax made before the expiration of the period previously agreed upon.
In the above instances the Commissioner is allowed to enter into [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997,
a compromise only if the basic tax involved does not exceed One emphasis supplied)
million pesos (P1,000,000.00), and the settlement offered is not less d. Collection upon a return that is not false or fraudulent, or
than the prescribed percentages. [Sec. 204 (A), NIRC of 1997] where the assessment is not an extended assessment. Except as
In instances where the Commissioner is not authorized, the provided in Section 222, internal revenue taxes shall be assessed
compromise shall be subject to the approval of the Evaluation Board within three (3) years after the last day prescribed by law for the filing of
composed of the Commissioner and the four (4) Deputy the return, and no proceeding in court without assessment for the
Commissioners. collection of such taxes shall be begun after the expiration of
such period; Provided, That in case where a return is filed beyond the
53. The Commissioner of Internal Revenue is period prescribed by law, the three (3) year period shall be computed
from the day the return was filed. For purposes of this Section, a return
authorized to abate or cancel a tax liability, when:
filed before the last day prescribed by law for the filing thereof shall be
a. The tax or any portion thereof appears to be unjustly or
considered filed on such last day. (Sec. 203, NIRC of 1997,
excessively assessed; or
emphasis supplied)
b. The administration and collection costs involved do not justify
When the BIR validly issues an assessment within the three
the collection of the amount due. [Sec. 204 (B), NIRC of 1997]
(3)-year period, it has another three (3) years within which to collect
the tax due by distraint, levy, or court proceeding. The assessment
54. What is the prescriptive period for collecting internal of the tax is deemed made and the three (3)-year period for collection
revenue taxes ? of the assessed tax begins to run on the date the assessment notice
SUGGESTED ANSWER: There are four (4) prescriptive had been released, mailed or sent to the taxpayer. [Bank of
periods for the collection of an internal revenue tax: Philippine Islands (Formerly Far East Bank and Trust Company) v.
a. Collection upon a false or fraudulent return or no return Commissioner of Internal Revenue, G. R. No. 174942, March 7,
without assessment. In case of a false or fraudulent return with the 2008 citing BPI v. Commissioner of Internal Revenue, G.R. No.
intent to evade tax or of failure to file a return, a proceeding in court 139736, 17 October 2005, 473 SCRA 205, 222-223)
for the collection of such tax may be filed without assessment, at any NOTES AND COMMENTS:
time within ten (10) years after the discovery of the falsity, fraud or
a. Both the former Sec. 269, NIRC of 1977 and Sec.222
omission. [Sec. 222 (a), NIRC of 1997)
of NIRC of 1997 do not refer to a regular return. It is clear that
b. Collection upon a false or fraudulent return or no return
in enacting Sec. 222, entitled Exceptions as to the period of limitation
with assessment. Any internal revenue tax which has been assessed
67
of assessment and collection of taxes, the NIRC of 1997 has obligation to return it arises. The BIR received something when
eliminated sub-paragraph c of the former Sec. 269 of the NIRC, also there [was] no right to demand it, and thus, it has the obligation to
entitled Exceptions as to the period of limitation of assessment and return it. State Land Investment Corporation v. Commissioner of
collection of taxes. Said Sec. 269 (c), reads Any internal revenue Internal Revenue supra citing Citibank, N. A. v. Court of Appeals and
tax which has been assessed within the period of limitation above- Commissioner of Internal Revenue, G.R. No. 107434, October 10,
prescribed may be collected by distraint or levy or by a proceeding in 1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v. Mathay,
court within three years following the assessment of the tax. Sr., 89 SCRA 586 (1979). It is an ancient principle that no one, not
A perusal of Sec. 222 of the NIRC is clear that it covers only even the state, shall enrich oneself at the expense of another.
three scenarios only. 1) No assessment was made upon a false or Indeed, simple justice requires the speedy refund of the wrongly held
fraudulent return or omission to file a return; 2) an assessment was taxes. (Ibid.)
made upon a false or fraudulent return or omission to file a return; and
3) an extended assessment issued within a period agreed upon by the
Commissioner and the taxpayer. The same scenarios are those
referred to in the former Sec. 269 which provided for a prescriptive 56. The filing of an administrative claim for
period for collection of three (3) years. refund with the BIR, before filing a case with the Court of
It is clear therefore that neither Sec. 222 nor the former Sec. Tax Appeals, is necessary for the following reasons:
269 provide for an instance where the assessment was made upon a
regular return or one that is not false or fraudulent, or that there was
an agreement to extend the period for assessment.
Resort should therefore be made to the three (3) year period a. To afford the Commissioner an opportunity to correct his
referred to in Sec. 203 of the NIRC of 1997 which reads, Except as errors or that of subordinate officers. (Gonzales v. Court of Tax
provided in Section 222, internal revenue taxes shall be assessed Appeals, et al., 14 SCRA 79)
within three (3) years after the last day prescribed by law for the filing of b. To notify the Government that such taxes have been
the return, and no proceeding in court without assessment for the questioned and the notice should be borne in mind in estimating the
collection of such taxes x x x (paraphrasing and emphasis revenue available for expenditures. (Bermejo v. Collector, G.R. No. L-
supplied) 3028, July 28, 1950)

55. What is solutio indebeti as applied to tax cases ? 57. As a general rule the filing of an application for
SUGGESTED ANSWER: This is erroneous payment of taxes refund or credit with the Bureau of Internal Revenue is an
and occurs when the taxpayer pays under a mistake of fact, as for the administrative precondition before a suit may be filed with the
instance in a case where he is not aware of an existing exemption in Court of Tax Appeals. Is there any exception ?
his favor at the time the payment was made. Such payment is held to SUGGESTED ANSWER: Yes. The failure to first file a written
be not voluntary and therefore, can be recovered or refunded. claim for refund or credit is not fatal to a petition for review involving a
(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel disputed assessment where an assessment was disputed but the
Corporation, G. R. No. 147295, February 16, 2007) protest was denied by the Bureau of Internal Revenue.
NOTES AND COMMENTS: Technicalities and legalisms, To hold that the taxpayer has now lost the right to appeal from
however exalted, should not be misused by the government to keep the ruling on the disputed assessment and require him to file a claim
money not belonging to it, thereby enriching itself at the expense of for a refund of the taxes paid as a condition precedent to his right to
its law-abiding citizens. State Land Investment Corporation v. appeal, would in effect require of him to go through a useless and
Commissioner of Internal Revenue, G. R. No. 171956, January 18, needless ceremony that would only delay the disposition of the case,
2008 citing BPI-Family Savings Bank, Inc. v. Court of Appeals, G.R. for the Commissioner would certainly disallow the claim for refund in
No. 122480, April 12, 2000, 330 SCRA 507. the same way as he disallowed the protest against the assessment.
Under the principle of solutio indebiti provided in Art. 2154, The law, should not be interpreted as to result in absurdities. (vda. de
Civil Code, If something is received when there is no right to San Agustin., etc., v. Commissioner of Internal Revenue, G.R. No.
demand it, and it was unduly delivered through mistake, the
68
138485, September 10, 2001 citing Roman Catholic Archbishop of issuance of a tax credit certificate or to claim a cash refund. If the
Cebu v. Collector of Internal Revenue, 4 SCRA 279) option to carry over the excess credit is exercised, the same shall be
NOTE: Reconciliation between above two numbers (56 irrevocable for that taxable period.
and 57). An application for refund or credit under Sec. 229 of the In exercising its option, the corporation must signify in its
NIRC of 1997 is required where the case filed before the CTA is a annual corporate adjustment return (by marking the option box
refund case, which is not premised upon a disputed assessment. provided in the BIR form) its intention either to carry over the excess
There is no need for a prior application for refund or credit, if the refund credit or to claim a refund. To facilitate tax collection, these remedies
is merely a consequence of the resolution of the BIR s denial of a are in the alternative and the choice of one precludes the other.
protested assessment. [Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R.
No. 176290, September 21, 2007 citing Philippine Bank of
58. What is the nature of the taxpayer s remedy of either Communications v. Commissioner of Internal Revenue, 361 Phil. 916
to ask for a refund of excess tax payments or to apply the same in (1999)]
payment of succeeding taxable periods taxes ? This is known as the irrevocability rule and is embodied in
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now the last sentence of Section 76 of the Tax Code. The phrase such
Sec. 76 of the NIRC of 1997) provides that any excess of the total option shall be considered irrevocable for that taxable period
quarterly payments over the actual income tax computed in the means that the option to carry over the excess tax credits of a
adjustment or final corporate income tax return, shall either (a) be particular taxable year can no longer be revoked.
refunded to the corporation, or (b) may be credited against the The rule prevents a taxpayer from claiming twice the excess
estimated quarterly income tax liabilities for the quarters of the quarterly taxes paid: (1) as automatic credit against taxes for the
succeeding taxable year. To ease the administration of tax collection, taxable quarters of the succeeding years for which no tax credit
these remedies are in the alternative and the choice of one precludes certificate has been issued and (2) as a tax credit either for which a
the other. Since the Bank has chosen the tax credit approach it cannot tax credit certificate will be issued or which will be claimed for cash
anymore avail of the tax refund. (Philippine Bank of Communications v. refund. (Systra Philippines, Inc., supra citing De Leon, Hector, THE
Commissioner of Internal Revenue, et al., G.R. No. 112024, January NATIONAL INTERNAL REVENUE CODE, Seventh Edition, 2000, p.
28, 1999) 430)
NOTES AND COMMENTS:
a. The choice, is given to the taxpayer, whether to 60. In the year 2000 Systra derived excess tax credits
claim for refund under Sec. 76 or have its excess taxes applied as and exercised the option to carry them over as tax credits for
tax credit for the succeeding taxable year, such election is not final. the next taxable year. However, the tax due for the next taxable
Prior verification and approval by the Commissioner of Internal year is lower than excess tax credits. It now applies for a refund
Revenue is required. The availment of the remedy of tax credit is not of the unapplied tax credits. May its refund be granted ? If the
absolute and mandatory. It does not confer an absolute right on the refund is denied, does Systra lose the unapplied tax credits ?
part of the taxpayer to avail of the tax credit scheme if it so chooses. Explain briefly your answer.
Neither does it impose a duty on the part of the government to sit back SUGGESTED ANSWER: Systra s claim for refund should
and allow an important facet of tax collection to be at the sole control be denied. Once the carry over option was made, actually or
and discretion of the taxpayer. (Paseo Realty & Development constructively, it became forever irrevocable regardless of whether
Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, the excess tax credits were actually or fully utilized Under Section 76
2004) of the Tax Code, a claim for refund of such excess credits can no
longer be made. The excess credits will only be applied against
59. What is the irrevocability rule in claims income tax due for the taxable quarters of the succeeding taxable
years.
for refund and what is the rationale behind this ?
Despite the denial of its claim for refund, Systra does not lose
SUGGESTED ANSWER: A corporation entitled to a tax credit
the unapplied tax credits. The amount will not be forfeited in favor of
or refund of the excess estimated quarterly income taxes paid has
the government but will remain in the taxpayer s account. Petitioner
two options: (1) to carry over the excess credit or (2) to apply for the
69
may claim and carry it over in the succeeding taxable years, component, is in context intended to apply to suits for any national
creditable against future income tax liabilities until fully utilized. internal revenue tax alleged to have been erroneously or illegally
(Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. assessed or collected, or of any penalty claimed to have been collected
No. 176290, September 21, 2007 citing Philam Asset Management, without authority, or of any sum alleged to have excessively or in any
Inc. v. Commissioner of Internal Revenue, G.R. Nos. manner wrongfully collected.
156637/162004, 14 December 2005, 477 SCRA 761) Analyzing the underlying reason behind the advance payment
Supposing in the above problem that Systra permanent (to help the government) made by XYZ it would be improper to treat
ceased operations, what happens to the unapplied credits ? the same as erroneous, wrongful or illegal payment of tax within the
SUGGESTED ANSWER: Where, the corporation permanently meaning of Sec. 229 of the NIRC of 1997.
ceases its operations before full utilization of the tax credits it opted An availment of tax credit due for reasons other than the
to carry over, it may then be allowed to claim the refund of the erroneous or wrongful collection of taxes may have a different
remaining tax credits. In such a case, the remaining tax credits can prescriptive period. (Commissioner of Internal Revenue v. Philippine
no longer be carried over and the irrevocability rule ceases to apply. National Bank, G.R. No. 161997, October 25, 2005 citing
Cessante ratione legis, cessat ipse lex. (Footnote no. 23, Systra Commissioner of Internal Revenue v. The Philippine Life Insurance
Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. Co., et al. G.R. No. 105208, May 29, 1995) Absent any specific
176290, September 21, 2007) provision in the Tax Code or special laws, that period would be ten (10)
NOTES AND COMMENTS: The holding in State Land years under Article 1144 of the Civil Code. (Commissioner of Internal
Investment Corporation v. Commissioner of Internal Revenue, G. R. Revenue v. Philippine National Bank, supra)
No. 171956, January 18, 2008 that the taxpayer is entitled to a refund
because during the succeeding year there was no tax due against 61. ABC Bank filed with the BIR an application for a tax
which the excess tax credits may be applied is not doctrinal. This is credit/refund for alleged excess payments of its gross receipts tax
rd th
so because it interpreted the provisions of then Sec. 69 of the NIRC, (GRT) for the 3 and 4 quarters of 2003 and the entire 2004
which did not provide for the irrevocability rule now contained in amounting to P14 million. Since no action was taken by the
Sec. 76 of the NIRC of 1997. Commissioner on its claim, ABC filed a case with the CTA on
October 18, 2005 to comply with the two-year reglementary period
60-A. In early April 1999 XYZ Bank advanced the amount of and avoid the prescription of its action. Only July 30, 2007, the
P180 million to the BIR its income tax payment for the bank s CTA rendered a decision denying the claim for ABC s failure to
1999 operations in response for the government s call to file its formal offer of evidence in the CTA.
generate more revenues for national development. In separate ABC Bank now seeks refuge in Onate v. Court of Appeals,
letters dated April 19 and 29, 1999 and May 14, 1999 XYZ 320 Phil. 344; 250 SCRA 283 (1995) where the Supreme Court
requested for the issuance of a Tax Credit Certificate (TCC) to be allowed evidence, not formally offered, to be considered on
utilized against future tax obligations of the bank. condition that: (1) evidence must have been identified by
By the end of 1999, a credit balance in the amount of P73 testimony duly recorded and (2) it must have been incorporated
million remain which was carried over for the years 2000 to 2004 in the records of the case.
but was not availed of because XYZ incurred losses during the Is ABC correct ?
period. On July 28, 2005 PNB reiterated its request for the SUGGESTED ANSWER: No. A tax refund s in the nature of a
issuance of a TCC for the P73 million balance. The BIR rejected tax exemption which must be construed strictissimi juris against the
the request on the ground of among others prescription having taxpayer. The taxpayer must present convincing evidence to
been applied for beyond the two-year reglementary period for substantiate a claim for refund. Without any documentary evidenced
filing claims for refund as set forth in Sec. 229 of the NIRC of on record, ABC failed to discharge the burden of proving its right to a
1997. tax credit/tax refund. (Far East Bank & Trust Company v.
Has the claim prescribed ? Explain briefly your answer. Commissioner of Internal Revenue, G. R. No. 149589, September 15,
SUGGESTED ANSWER: The claim has not prescribed. Sec. 2006)
229 of the Tax Code, as couched, particularly its statute of limitations
70
62. A simultaneous filing of the application with the BIR sum, an option not proximately available if the taxpayer chooses
for refund/credit and the institution of the court suit with the CTA instead to receive a tax credit. (Commissioner of Customs v. Philippine
is allowed. There is no need to wait for a BIR denial. REASONS: Phosphate Fertilizer Corporation, G. R. No. 144440, September 1,
a. The positive requirement of Section 230 NIRC (now Sec. 2004)
229, NIRC of 1997); NOTES AND COMMENTS: It may be that there is no essential
b. The doctrine that delay of the Commissioner in rendering difference between a tax refund and a tax credit since both are moves
decision does not extend the peremptory period fixed by the statute; of recovering taxes erroneously or illegally paid to the government.
c. The law fixed the same period two years for filing a claim for (Commissioner of Customs v. Philippine Phosphate Fertilizer
refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. Corporation, G. R. No. 144440, September 1, 2004)
204 [C], NIRC of 1997), and for filing suit in court under Sec. 230,
NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments 65. What are the three (3) conditions for the
under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period grant of a claim for refund of creditable withholding tax ?
(thirty days from receipt of decision) for appealing to the court, thus SUGGESTED ANSWER:
clearly implying that the prior decision of the Commissioner is a. The claim is filed with the Commissioner of Internal
necessary to take cognizance of the case. (Commissioner of Internal Revenue within the two-year period from the date of the payment of the
Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. tax.
34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et b. It is shown on the return of the recipient that the income
al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151) payment received was declared as part of the gross income; and
c. The fact of withholding is established by a copy of a
63. The grant of a refund is founded on the assumption statement duly issued by the payee showing the amount paid and the
that the tax return is valid, i.e. that the facts stated therein are true amount of tax withheld therefrom. (Banco Filipino Savings and
and correct. (Commissioner of Internal Revenue v. Court of Tax Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27,
Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the 2007)
tax return it would be virtually impossible to determine whether the NOTES AND COMMENTS:
proper taxes have been assessed and paid. After all, it is axiomatic that a. Proof of fact of withholding. Sec. 10. Claim for tax
a claimant has the burden of proof to establish the factual basis of his credit or refund. (a) Claims for Tax Credit or Refund of Income tax
or her claim for tax credit or refund. Tax refunds, like tax exemptions, deducted and withheld on income payments shall be given due course
are construed strictly against the taxpayer. (Paseo Realty & only when it is shown on the return that the income payment received
Development Corporation v. Court of Appeals, et al., G. R. No. 119286, has been declared as part of the gross income and the fact of
October 13, 2004) withholding is established by a copy of the Withholding Tax Statement
However, in BPI-Family Savings Bank v. Court of Appeals, 386 duly issued by the payor to the payee showing the amount paid and the
Phil. 719; 326 SCRA 641 (2000), refund was granted, despite the amount of the tax withheld therefrom xxx (Rev. Regs. No. 6-85, as
failure to present the tax return, because other evidence was presented amended)
to prove that the overpaid taxes were not applied. (Ibid.) The document which may be accepted as evidence of the third
condition, that is, the fact of withholding, must emanate from the payor
64. Discuss the difference between tax refund and tax itself, and not merely from the payee, and must indicate the name of
credit. the payor, the income payment basis of the tax withheld, the amount of
SUGGESTED ANSWER: There are unmistakable formal and the tax withheld and the nature of the tax paid. . (Banco Filipino
practical differences between the two modes. Formally, a tax refund Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No.
requires a physical return of the sum erroneously paid by the taxpayer, 155682, March 27, 2007)
while a tax credit involves the application of the reimbursable amount
against any sum that may be due and collectible from the taxpayer. 65-A. What should be established by a taxpayer for
On the practical side, the taxpayer to whom the tax is refunded the grant of a tax refund ? Why ?
would have the option, among others, to invest for profit the returned
71
SUGGESTED ANSWER: A taxpayer needs to establish not an employer for the benefit of some or all of his officials or employees,
only that the refund is justified under the law, but also the correct wherein contributions are made by such employer for the officials or
amount that should be refunded. employees, or both, for the purpose of distributing to such officials and
If the latter requisite cannot be ascertained with particularity, employees the earnings and principal of the fund thus accumulated,
there is cause to deny the refund, or allow it only to the extent of the and wherein it is provided in said plan that at no time shall any part of
sum that is actually proven as due. the corpus or income of the fund be used for, or be diverted to, any
Tax refunds partake of the nature of tax exemptions and are purpose other than for the exclusive benefit of the said officials or
thus construed strictissimi juris against the person claiming the employees. [Sec. 32 (B) (6 ) (a), NIRC of 1997]
exemption. The burden in proving the claim for refund necessarily falls c. Extent of exemption. The tax exemption enjoyed by
on the taxpayer. (Far East Bank Trust and Company, etc., v. employees trust is absolute irrespective of the nature of the tax. It
Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, does not apply only to the tax on interest income from money market
2006) placements, bank deposits, other deposit substitute instruments and
government security, because the source of the interest income does
66. What are the requisites for the refund of not have any effect on the exemption enjoyed by employee s trusts.
illegally deducted taxes from the income of an employees (Far East Bank Trust and Company, etc., v. Commissioner of Internal
Revenue, et al., G. R. No. 138919, May 2, 2006)
trust fund ?
SUGGESTED ANSWER: What has to be established, as a
67. A bank-trustee of employee trusts filed an
matter of evidence, is that the amount sought to be refunded to the
application for the refund of taxes withheld on the interest
bank-trustee corresponds to the tax withheld on the interest income
incomes of the investments made of the funds of the
earned from the exempt employees trust. The need to be
determinate is important, specially if the bank trustee, in the ordinary employees trusts. Instead of presenting separate accounts for
course of its banking business, earns interest income not only from its interest incomes made of these investments, the bank-trustee
investments of employees trusts, but on a whole range of accounts instead presented witness to establish that it would next to
which do not enjoy the same broad exemption as employees trusts. impossible to single out the specific transactions involving the
(Far East Bank Trust and Company, etc., v. Commissioner of Internal employees trust funds from the totality of all interest income
Revenue, et al., G. R. No. 138919, May 2, 2006) from its total investments. On the above basis will the
NOTES AND COMMENTS: application for refund prosper ?
a. Employees trust fund, defined. An employees trust SUGGESTED ANSWER: No. The application for refund will
fund is a trust established by an employer to provide retirement, not prosper.
pension, or other benefits to employees - it is a separate taxable entity The bank-trustee needs to establish not only that the refund is
established for the exclusive benefit of the employees. (Development justified under the law (which is so because incomes of employees
Bank of the Philippines v. Commission on Audit, 422 SCRA 459) trusts are tax exempt), but also the correct amount that should be
b. Income of employees trust is tax exempt. Any refunded.
provision of law to the contrary notwithstanding, the retirement benefits Tax refunds partake of the nature of tax exemptions and are
received by official and employees of private firms, whether individual thus construed strictissimi juris against the person or entity claiming
or corporate, in accordance with a reasonable private benefit plan the exemption. The burden in proving the amount to be refunded
maintained by the employer shall be exempt from all taxes and shall necessarily falls on the bank-trustee, and there is an apparent failure
not be liable to amendment, levy or seizure by or under any legal or to do so.
equitable process whatsoever except to pay a debt of the official or A necessary consequence of the special exemption enjoyed
employee concerned to the private benefit plan or that arising from alone by employees trusts would be a necessary segregation in the
liability imposed in a criminal action x x x (Sec. 1, Rep. Act 4917) accounting of such income, interest or otherwise, earned from those
A tax-exempt employees trust fund is referred to under the trusts from that earned by the other clients of the bank-trustee. (Far
NIRC of 1997 as a reasonable private retirement plan, which means East Bank and Trust Company, etc., v. Commissioner, etc., et al.,
a pension, gratuity, stock bonus or profit-sharing plan maintained by G.R. No. 138919, May 2, 2006) The amounts that are the exempt
72
earnings of the employee s trust has not been shown as they have reflecting a refundable amount of P101,897,741, but only
been commingled with the interest income of the other clients of the P77,931,812 was applied as tax credit for the succeeding taxable
bank-trustee. year 1988.
Acting on a yearly routinary Letter of Authority No.
68. CTA Circular No. 1-95 clearly requires that 0018064 NA dated June 27, 1988 issued by petitioner, directing
photocopies of the receipts or invoices must be pre-marked and the investigation of tax liabilities of respondent for taxable year
submitted to the CTA to verify the correctness of the summary 1987, an investigation was conducted by Revenue Officer
listing and the CPA certification. CTA Circular No. 1-95, issued on Frederick Capitan which showed that respondent was liable for
25 January 1995, reads: 1. deficiency income tax in the amount of P2,340,902.52; and 2.
1. The party who desires to introduce as evidence such deficiency franchise tax in the amount of P2,838,335.84.
voluminous documents must present: (a) Summary containing the On April 17, 1989, respondent filed an amended final
total amount/s of the tax account or tax paid for the period involved corporate Income Tax Return ending December 31, 1988
and a chronological or numerical list of the numbers, dates and reflecting a refundable amount of P107,649,729.
amounts covered by the invoices or receipts; and (b) a Certification of Respondent thus filed on March 30, 1990 a letter-claim for
an independent Certified Public Accountant attesting to the
refund or credit in the amount of P107,649,729 representing
correctness of the contents of the summary after making an
overpaid income taxes for the years 1987 and 1988.
examination and evaluation of the voluminous receipts and invoices.
Petitioner not having acted on its request, respondent
Such summary and certification must properly be identified by a
competent witness from the accounting firm. filed on April 6, 1990 a judicial claim for refund or credit with the
2. The method of individual presentation of each and every Court of Tax Appeals.
receipt or invoice or other documents for marking, identification and It is gathered that respondent paid the deficiency
comparison with the originals thereof need not be done before the franchise tax in the amount of P2,838,335.84. It protested the
Court or the Commissioner anymore after the introduction of the payment of the alleged deficiency income tax and claimed as an
summary and CPA certification. It is enough that the receipts, alternative remedy the deduction thereof from its claim for
invoices and other documents covering the said accounts or refund or credit.
payments must be pre-marked by the party concerned and The Court of Tax Appeals granted the P107,649,729 claim
submitted to the Court in order to be made accessible to the for refund, or in the alternative for the BIR to issue a tax credit.
adverse party whenever he/she desires to check and verify the Is the Court of Tax Appeals correct ?
correctness of the summary and CPA certification. However, the SUGGESTED ANSWER: Yes. Section 69 of the National
originals of the said receipts, invoices or documents should be ready Internal Revenue Code of 1986, now Sec. 76 provides, if the sum of
for verification and comparison in case doubt on the authenticity of the quarterly tax payments made during a taxable year is not equal to
the particular documents presented is raised during the hearing of the total tax due on the entire taxable income of that year as shown in
the case. (Emphasis supplied) its final adjustment return, the corporation has the option to either:
(a) pay the excess tax still due, or (b) be refunded the excess amount
69. Manila Electric Company a grantee of a legislative paid. The returns submitted are merely pre-audited which consist
franchise under Act No. 484, as amended by Republic Act No. mainly of checking mathematical accuracy of the figures in the
4159 and Presidential Decree No. 551,
1[3]
had been paying a 2% return. After such checking, the purpose of which being to insure
prompt action on corporate annual income tax returns showing
franchise tax based on its gross receipts, in lieu of all other
refundable amounts arising from overpaid quarterly income taxes,
taxes and assessments of whatever nature. Upon the effectivity
(Revenue Memorandum Order No. 32-76 dated June 11, 1976) the
of Executive Order No. 72 on February 10, 1987, however,
refund or tax credit is granted. (Commissioner of Internal Revenue v.
respondent became subject to the payment of regular corporate
Manila Electric Company, G. R. No. 121666, October 10, 2007)
income tax.
For the last quarter ending December 31, 1987,
respondent filed on April 15, 1988 its tentative income tax TARIFF AND CUSTOMS LAWS
73
4. Customs duties defined. Customs duties is the name
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF given to taxes on the importation and exportation of commodities, the
INTERNAL REVENUE tariff or tax assessed upon merchandise imported from, or exported to,
a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No.
TARIFF AND CUSTOMS CODE 134114, July 6, 2001)

1. When does importation begin, and why is it 5. Special customs duties are additional import duties
imposed on specific kinds of imported articles under certain
important to know whether importation has already begun
conditions. The special customs duties under the Tariff and Customs
or not ? Code (TCCP) are the anti-dumping duty, the countervailing duty, the
SUGGESTED ANSWER: Importation begins when the discriminatory duty, and the marking duty, and under the Safeguard
conveying vessel or aircraft enters the jurisdiction of the Philippines Measures Act (SMA) additional tariffs as safeguard measures.
with intention to unlade therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of Customs to enforce the 6. The special customs duties are imposed for the
provisions of the TCCP including seizure and forfeiture also begins protection of consumers and manufacturers, as well as Philippine
from the beginning of importation. Thus, the Bureau of Customs
products.
obtains jurisdiction over imported articles only after importation has
begun.
7. Dumping duty is an additional special duty
2. When is importation deemed terminated amounting to the difference between the export price and
and why is it important to know whether importation has the normal value of such product, commodity or article
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, Anti-
already ended?
Dumping Act of 1999. ) imposed on the importation of a product,
SUGGESTED ANSWER: Importation is deemed terminated
commodity or article of commerce into the Philippines at less than its
upon payment of the duties, taxes and other charges due upon the
normal value when destined for domestic consumption in the exporting
agencies, or secured to be paid, at the port of entry and the legal
country which is causing or is threatening to cause material injury to a
permit for withdrawal shall have been granted.
domestic industry, or materially retarding the establishment of a
In case the articles are free of duties, taxes and other charges,
domestic industry producing the like product. [Sec. 301 (s) (5), TCC,
until they have legally left the jurisdiction of the customs. (Sec. 1202,
as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999 ]
TCCP) The Bureau of Customs loses jurisdiction to enforce the TCCP
and to make seizures and forfeitures after importation is deemed
terminated. 8. When is the anti-dumping duty imposed ?
SUGGESTED ANSWER: The anti-dumping duty is imposed
3. The flexible tariff clause is a provision in the a. Where a product, commodity or article of commerce is
exported into the Philippines at a price less than its normal value when
Tariff and Customs Code, which implements the constitutionally destined for domestic consumption in the exporting country,
delegated power to the Congress to further delegate to the President of b. and such exportation is causing or is threatening to cause
the Philippines, in the interest of national economy, general welfare material injury to a domestic industry, or materially retards the
and/or national security upon recommendation of the NEDA (a) to establishment of a domestic industry producing the like product. [Sec.
increase, reduce or remove existing protective rates of import duty, 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act
provided that, the increase should not be higher than 100% ad of 1999 ]
valorem; (b) to establish import quota or to ban imports of any
commodity, and (c) to impose additional duty on all imports not 9. Normal value for purposes of imposing the anti-
exceeding 10% ad valorem, among others. dumping duty is the comparable price at the date of sale of like
product, commodity, or article in the ordinary course of trade when
74
destined for consumption in the country of export. [Sec. 301 (s) (3 ), upon the production, manufacture or exportation of such product
TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of commodity or article, and the importation of such subsidized product,
1999 ] commodity, or article has caused or threatens to cause material injury
to a domestic industry or has materially retarded the growth or prevents
10. The imposing authority for the anti-dumping duty is the establishment of a domestic industry. (Sec. 302, TCCP as
the Secretary of Trade and Industry in the case of non-agricultural amended by Section 1, R.A. No. 8751)
product, commodity, or article or the Secretary of Agriculture, in
the case of agricultural product, commodity or article, after formal 15. The imposing authority for the countervailing duties is
investigation and affirmative finding of the Tariff Commission. [Sec. 301 the Secretary of Trade and Industry in the case of non-
(a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of agricultural product, commodity, or article or the Secretary of
1999 ] Agriculture, in the case of agricultural product, commodity or
article, after formal investigation and affirmative finding of the Tariff
11. Even when all the requirements for the imposition Commission.
have been fulfilled, the decision on whether or not to impose a Even when all the requirements for the imposition have been
definitive anti-dumping duty remains the prerogative of the Tariff fulfilled, the decision on whether or not to impose a definitive anti-
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, dumping duty remains the prerogative of the Tariff Commission. (Sec.
Anti-Dumping Act of 1999 ] Thus, the cabinet secretaries could not 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act
contravene the recommendation of the Tariff Commission. They could of 1999 )
not impose the anti-dumping duty or any special customs duty without
the favorable recommendation of the Tariff Commission. 16. The countervailing duty is equivalent to the value of the
specific subsidy.
12. In the determination of whether to impose the anti-
dumping duty, the Tariff Commission, may consider among 17. Marking duties are the additional customs duties
others, the effect of imposing an anti-dumping duty on the imposed on foreign articles (or its containers if the article itself cannot
welfare of the consumers and/or the general public, and other be marked), not marked in any official language in the Philippines, in a
related local industries. (Sec. 301 (a), TCC, as amended by Rep. conspicuous place as legibly, indelibly and permanently in such manner
Act No. 8752, Anti-Dumping Act of 1999 ) as to indicate to an ultimate purchaser in the Philippines the name of
the country of origin.
13. The amount of anti-dumping duty that may be imposed
is the difference between the export price and the normal value of 18. The Commissioner of Customs imposes the marking
such product, commodity or article. (Sec. 301 (s) (1), TCC, as duty.
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999 )
The anti-dumping duty shall be equal to the margin of dumping 19. The marking duty is equivalent to five percent (5%) ad
on such product, commodity or article thereafter imported to the valorem.
Philippines under similar circumstances, in addition to ordinary duties,
taxes and charges imposed by law on the imported product, 20. A discriminatory duty is a new and additional
commodity or article.
customs duty imposed upon articles wholly or in part the growth or
product of, or imported in a vessel, of any foreign country which
14. What are countervailing duties and when are imposes, directly or indirectly, upon the disposition or transportation in
they imposed ? transit through or re-exportation from such country of any article wholly
SUGGESTED ANSWER: Countervailing duties are additional or in part the growth or product of the Philippines, any unreasonable
customs duties imposed on any product, commodity or article of charge, exaction, regulation or limitation which is not equally enforced
commerce which is granted directly or indirectly by the government in upon like articles of every foreign country, or discriminates against the
the country of origin or exportation, any kind or form of specific subsidy commerce of the Philippines, directly or indirectly, by law or
75
administrative regulation or practice, by or in respect to any customs, 26. The above transaction value is the primary
tonnage, or port duty, fee, charge, exaction, classification, regulation, method of determining dutiable value. If the transaction value of
condition, restriction or prohibition, in such manner as to place the the imported article could not be determined using the above, the
commerce of the Philippines at a disadvantage compared with the following alternative methods should be used one after the other:
commerce of any foreign country. a. Transaction value of identical goods
b. Transaction value of similar goods
21. The President of the Philippines imposes the c. Deductive method
discriminatory duties. d. Computed method
e. Fallback method
22. Safeguard measures are emergency measures,
including tariffs, to protect domestic industries and producers from 27. How and to whom should claims for refund of
increased imports which inflict or could inflict serious injury on them. customs duties be made ?
The CTA is vested with jurisdiction to review decisions of the SUGGESTED ANSWER: All claims for refund of duties shall be
Secretary of Trade and Industry imposing safeguard measures as made in writing and forwarded to the Collector of Customs to whom
provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). such duties are paid, who upon receipt of such claim, shall verify the
(Southern Cross Cement Corporation v. The Philippine Cement same by the records of his Office, and if found to be correct and in
Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004) accordance with law, shall certify the same to the Commissioner of
The DTI Secretary cannot impose the safeguard measures if the Customs with his recommendation together with all necessary papers
Tariff Commission does not favorably recommend its imposition. and documents. Upon receipt by the Commissioner of such certified
claim he shall cause the same to be paid if found correct. (Sec. 1708,
23. Imposing authority for safeguard measures. The TCC)
imposing authority for the countervailing duties is the Secretary
of Trade and Industry in the case of non-agricultural product, 28. What is mean by the term entry in Customs Law
commodity, or article or the Secretary of Agriculture, in the case ?
of agricultural product, commodity or article, after formal SUGGESTED ANSWER: It has a triple meaning.
investigation and affirmative finding of the Tariff Commission. a. the documents filed at the Customs house;
b. the submission and acceptance of the documents; and
24. Safeguards measures that may be imposed. c. Customs declaration forms or customs entry forms
Additional tariffs, import quotas or banning of imports. required to be accomplished by passengers of incoming vessels or
passenger planes as envisaged under Sec. 2505 of the TCCP
25. The basis of dutiable value of merchandise that (Failure to declare baggage). (Jardeleza v. People, G.R. No.
is subject to ad valorem customs duties the transaction value, 165265, February 6, 2006)
which shall be the price actually paid or payable for the goods when
sold for export to the Philippines, adjusted by adding certain cost 29. A flight stewardess arrived from Singapore. Upon her
elements to the extent that they are incurred by the buyer but are not arrival she was asked whether she has anything to declare. She
included in the price actually paid or payable for the imported goods, answered none, and she submitted her Customs Baggage
and may include the following: Declaration Form which she accomplished and signed with
a. Cost of containers and packing, nothing or written on the space for items to be declared. When
b. Insurance, and her hanger bag was examined some pieces of jewelry were found
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act concealed within the lining of said bag.
No. 9135) She was then convicted of violating of Sec. 3601 of the
Tariff and Customs Code for unlawful importation which
penalizes any person who shall fraudulently import or bring into
the Philippines any article contrary to law.
76
She now appeals claiming that lower court erred n Rodriguez v. Court of Appeals, G. R. No. 115218, September 18,
convicting her under Sec. 3601 when the facts alleged both in the 1995, 248 SCRA 288, 296)
information and those shown by the prosecution constitute the NOTES AND COMMENTS:
offense under Sec. 2505 Failure to Declare Baggage, of which a. Importation consists of bringing an article into the
she was acquitted. Is she correct ? country from the outside. Importation begins when the conveying
SUGGESTED ANSWER: No. Sec. 3601 does not define a vessel or aircraft enters the jurisdiction of the Philippines with
crime. It merely provides, inter alia, the administrative remedies which intention to unload therein.
can be resorted to by the Bureau of Customs when seizing dutiable b. When unlawful importation is complete. In the
articles found the baggage of any person arriving in the Philippines absence of a bona fide intent to make entry and pay duties when the
which is not included in the accomplished baggage declaration prohibited article enters the Philippine territory. Importation is
submitted to the customs authorities, and the administrative penalties complete when the taxable, dutiable commodity is brought within the
that such person must pay for the release of such goods if not imported limits of the port of entry. Entry through a custom house is not the
contrary to law. essence of the act. (Jardeleza v. People, G.R. No. 165265, February
Such administrative penalties are independent of the criminal 6, 2006)
liability for smuggling that may be imposed under Sec. 3601, and other
provisions of the TCC which can only be determined after the 31. The Collector of Customs sitting in
appropriate criminal proceedings, prescinding from the outcome in any seizure and forfeiture proceedings has exclusive
administrative case that may have been filed and disposed of by the
jurisdiction to hear and determine all questions touching
customs authorities.
Indeed the second paragraph of Sec. 2505 provides that nothing on the seizure and forfeiture of dutiable goods. RTCs are
shall prevent the bringing of a criminal action against the offender for precluded from assuming cognizance over such matters
smuggling under Section 3601. (Jardeleza v. People, G. R. No. even through petitions of certiorari, prohibition or
165265, February 6, 2006) mandamus. (The Bureau of Customs, et al., v. Ogario, et al.,
G.R. No. 138081, March 20, 2000)
29-A. Payment is not a defense in smuggling. When upon What is the rationale for this doctrine ?
trial for violation of this section, the defendant is shown to have SUGGESTED ANSWER:
possession of the article in question, possession shall be deemed a. Regional Trial Courts have no jurisdiction to replevin a
sufficient evidence to authorize conviction, unless the defendant shall property which is subject to seizure and forfeiture proceedings for
explain the possession to the satisfaction of the court: Provided, violation of the Tariff and Customs Code otherwise, actions for
however, That payment of the tax due after apprehension shall not forfeiture of property for violation of the Customs laws could easily be
constitute a valid defense in any prosecution under this section. (last undermined by the simple device of replevin. (De la Fuente v. De
par., Sec. 3601, TCC) Veyra, et al., 120 SCRA 455)
b. The doctrine of exclusive customs jurisdiction over
30. How is smuggling committed ? customs cases to the exclusion of the RTCs is anchored upon the
SUGGESTED ANSWER: Smuggling is committed by any policy of placing no unnecessary hindrance on the government s
person who: drive, not only to prevent smuggling and other frauds upon Customs,
a. fraudulently imports or brings into the country any article c. but more importantly, to render effective and efficient the
contrary to law; collection of import and export duties due the State, which enables the
b. assists in so doing any article contrary to law; or government to carry out the functions it has been instituted to perform.
c. receives, conceals, buys, sells or in any manner (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA
facilitates the transportation, concealment or sale of such goods after 35, 43)
importation, knowing the same to have been imported contrary to d. The issuance by regular courts of writs of preliminary
law. (Jardeleza v. People, G.R. No. 165265, February 6, 2006 citing injunction in seizure and forfeiture proceedings before the Bureau of
Customs may arouse suspicion that the issuance or grant was for
77
consideration other than the strict merits of the case. (Zuno v.
Cabredo, 402 SCRA 75 [2003]) 36. Instances where there is no right of redemption of
e. Under the doctrine of primary jurisdiction, the Bureau of seized and forfeited articles:
Customs has exclusive administrative jurisdiction to conduct searches, a. There is fraud;
seizures and forfeitures of contraband without interference from the b. The importation is absolutely prohibited, or
courts. It could conduct searches and seizures without need of a c. The release of the property would be contrary to law.
judicial warrant except if the search is to be conducted in a dwelling (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.
place. 126634, January 25, 1999)
Where an administrative office has obtained a technical
expertise in a specific subject, even the courts must defer to this 37. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated
expertise. in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the
Supreme Court clarified that the fraud contemplated by law must be
32. A claiming to be the owner of a vessel which is actual and not constructive. It must be intentional, consisting of
the subject of customs warrant of seizure and detention sought deception, willfully and deliberately done or resorted to in order to
the intercession of the RTC to restrain the Bureau of Customs induce another to give up some right.
from interfering with his property rights over the vessel. Would
the suit prosper? 38. Requisites for forfeiture of imported
SUGGESTED ANSWER: No. His remedy was not with the
goods:
RTC but with the CTA, as issues of ownership of goods in the
a. Wrongful making by the owner, importer, exporter or
custody of customs officials are within the power of the CTA to
consignee of any declaration or affidavit, or the wrongful making or
determine.
delivery by the same person of any invoice, letter or paper all
The Collector of Customs has exclusive jurisdiction over
touching on the importation or exportation of merchandise.
seizure and forfeiture proceedings and trial courts are precluded from
b. the falsity of such declaration, affidavit, invoice, letter or
assuming cognizance over such matters even through petitions for
paper; and
certiorari, prohibition or mandamus. (Commissioner of Customs v.
c. an intention on the part of the importer/consignee to
Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)
evade the payment of the duties due. (Republic, etc., v. The Court of
Appeals, et al., G.R. No. 139050, October 2, 2001)
33. The customs authorities do not have to prove to the
satisfaction of the court that the articles on board a vessel were 39. On January 7, 1989, the vessel M/V Star Ace,
imported from abroad or are intended to be shipped abroad coming from Singapore laden with cargo, entered the Port of
before they may exercise the power to effect customs searches, San Fernando, La Union for needed repairs. When the Bureau of
seizures, or arrests provided by law and continue with the Customs later became suspicious that the vessel s real purpose
administrative hearings. (The Bureau of Customs, et al., v. Ogario, et in docking was to smuggle cargo into the country, seizure
al., G.R. No. 138081, March 20, 2000)
proceedings were instituted and subsequently two Warrants of
Seizure and Detention were issued for the vessel and its cargo.
34. The Tariff and Customs Code allows the Bureau of
Cesar does not own the vessel or any of its cargo but
Customs to resort to the administrative remedy of seizure, such as
claimed a preferred maritime lien. Cesar then brought several
by enforcing the tax lien on the imported article when the
cases in the RTC to enforce his lien. Would these suits prosper ?
imported articles could be found and be subject to seizure and
SUGGESTED ANSWER: No. The Bureau of Customs having
forfeiture. first obtained possession of the vessel and its goods has obtained
jurisdiction to the exclusion of the trial courts.
35. The Tariff and Customs Code allows the Bureau of When Cesar has impleaded the vessel as a defendant to
Customs to resort to the judicial remedy of filing an action in court enforce his alleged maritime lien, in the RTC, he brought an action in
when the imported articles could not anymore be found.
78
rem under the Code of Commerce under which the vessel may be LOCAL GOVERNMENT TAXATION, IN GENERAL
attached and sold.
However, the basic operative fact is the actual or constructive 1. The fundamental principles of local taxation are:
possession of the res by the tribunal empowered by law to conduct the a. Uniformity;
proceedings. This means that to acquire jurisdiction over the vessel, b. Taxes, fees, charges and other impositions shall be
as a defendant, the trial court must have obtained either actual or equitable and based on ability to pay, for public purposes, not unjust,
constructive possession over it. Neither was accomplished by the RTC excessive, oppressive or confiscatory, not contrary to law, public policy,
as the vessel was already in the possession of the Bureau of Customs. national economic policy or in restraint of trade;
(Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. c. The levy and collection shall not be let to any private
111202-05, January 31, 2006) person;
NOTES AND COMMENTS: d. Inures solely to the local government unit levying the tax;
a. Forfeiture of seized goods in the Bureau of Customs e. The progressivity principle must be observed.
is in the nature of a proceeding in rem, i.e. directed against the res
or imported goods and entails a determination of the legality of their
importation. In this proceeding, it is in legal contemplation the property
2. A law which deprives local government units of
itself which commits the violation and is treated as the offender, without their power to tax would be unconstitutional. The constitution has
reference whatsoever to the character or conduct of the owner. delegated to local governments the power to levy taxes, fees and other
The issue is limited to whether the imported goods should be charges. This constitutional delegation may only be removed by a
forfeited and disposed of in accordance with law for violation of the constitutional amendment.
Tariff and Customs Code. .(Transglobe International, Inc. v. Court of
Appeals, et al., G.R. No. 126634, January 25, 1999) 3. The primary reason for the withdrawal of tax
Forfeiture of seized goods in the Bureau of Customs is a exemption privileges granted to government owned and
proceeding against the goods and not against the owner. (Asian controlled corporations and all other units of government was that
Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27, such privilege resulted to serious tax base erosion and distortions in
2006 citing Transglobe) the tax treatment of similarly situated enterprises, hence resulting in the
need for these entities to share in the requirements of development,
40. The Collector of Customs upon probable cause that fiscal or otherwise, by paying the taxes and other charges due them.
the articles are imported or exported, or are attempted to be (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14,
imported or exported, in violation of the tariff and customs laws 2003)
shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, 4. National Power Corporation (NPC) is of the
then a search warrant should be issued by the regular courts not the insistence that it is not subject to the payment of franchises taxes
Bureau of Customs. imposed by the Province of Isabela because all of its shares are
There may be instances where no warrants issued by the owned by the Republic of the Philippines. It is thus, an
Bureau of Customs or the regular courts is required, as in search and instrumentality of the National Government which is exempt from
seizures of motor vehicles and vessels. local taxation. As such it is not a private corporation engaged in
business enjoying franchise
41. Smuggled goods seized by virtue of a court warrant Is such contention meritorious ?
should be surrendered to the court that issued the warrant and SUGGESTED ANSWER: No. Philippine Long Distance
not to the Bureau of Customs because the goods are in custodia Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No.
legis. 143867, August 22, 2001, upheld the authority of the City of Davao, a
local government unit, to impose and collect a local franchise tax
LOCAL GOVERNMENT TAXATION because the Local Government Code has withdrawn all tax exemptions
previously enjoyed by all persons and authorized local government
79
units to impose a tax on business enjoying a franchise tax Professional Regulation Commission (PRC). for example, a lawyer
notwithstanding the grant of tax exemption to them. who is also a Certified Public Accountant (CPA) must pay the
professional tax imposed on lawyers and that fixed for CPAs, if he is to
5. Professional tax may be imposed by a practice both professions. [Sec. 238 (f), Rule XXX, Rules and
province or city but not by a municipality or barangay. Regulations Implementing the Local Government Code of 1991]
a. Transaction taxed: Exercise or practice of profession
requiring government licensure examination. 8. X City issued a notice of assessment against ABC
b. Tax rate: In Accordance with a taxing ordinance which Condominium Corporation for unpaid business taxes. The
should not exceed P300.00. Condominium Corporation is a duly constituted condominium
c. Tax base: Reasonable classification by the sanggunian. corporation in accordance with the Condominium Act which
d. Exception: Payment to one province or city no longer owns and holds title to the common and limited common areas of
subject to any other national or local tax, license or fee for the practice the condominium. Its membership comprises the unit owners
of such profession in any part of the Philippine professionals and is authorized under its By-Laws to collect regular
exclusively employed in the government. assessments from its members for operating expenses, capital
e. Date of payment: or on before January 31 or engaging in expenditures on the common areas and other special
the profession. assessments as provided for in the Master Deed with
f. Place of payment: Province or city where the ?Declaration of Restrictions of the Condominium.
professional practices his profession or where he maintains his ABC Condominium Corporation insists that the X City
principal office in case he practices his profession in several places.
Revenue Code and the Local Government Code do not contain
provisions upon which the assessment could be based. Resolve
6. Requirements: Any individual or corporation the controversy.
employing a person subject to professional tax shall require payment SUGGESTED ANSWER: ABC is correct. Condominium
by that person of the tax on his profession before employment and corporations are generally exempt from local business taxation under
annually thereafter. the Local Government Code, irrespective of any local ordinance that
Any person subject to the professional tax shall write in deeds, seeks to declare otherwise.
receipts, prescriptions, reports, books of account, plans and designs, X City, is authorized under the Local Government Code, to
surveys and maps, as the case may be, the number of the official impose a tax on business, which is defined under the Code as trade
receipt issued to him. or commercial activity regularly engaged in as a means of livelihood or
Exemption: Professionals exclusively employed in the with a view to profit. By its very nature a condominium corporation is
government shall be exempt from payment. (Sec. 139, LGC) not engaged in business, and any profit that it derives is merely
NOTE: For the purpose of collecting the tax, the provincial or city incidental, hence it may not be subject to business taxes. (Yamane ,
treasurer or his duly authorized representative shall require from such etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993,
professionals their current annual registration cards issued by October 25, 2005)
competent authority before accepting payment of their professional tax
for the current year. The PRC shall likewise require the professionals
REAL PROPERTY TAXATION
presentation of proof of payment before registration of professionals or
renewal of their licenses. (last par., Art. 228, Rules and Regulations
Implementing the Local Government Code of 1991) 1. What are the fundamental principles of
real property taxation ?
7. Who are the professionals who, if they are in SUGGESTED ANSWER: The fundamental principles of real
practice of their profession, are subject to professional tax ? property taxation are:
SUGGESTED ANSWER: The professionals subject to the a. Appraisal at current and fair market value;
professional tax are only those who have passed the bar b. Classification for assessment on the basis of actual use;
examinations, or any board or other examinations conducted by the c. Assessment on the basis of uniform classification;
80
d. Appraisal, assessment, levy and collection shall not be let its approval, and posted in at lease two (2) prominent places in the
to a private person; provincial capitol, city, municipal or barangay hall for a minimum of
e. Appraisal and assessment shall be equitable. three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,.
NOTES AND COMMENTS: Real properties shall be appraised at the G.R. No. 119172, March 25, 1999)
current and fair market value prevailing in the locality where the property is
situated and classified for assessment purposes on the basis of its actual use.
(Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 4. What are the approaches in estimating the fair market
154126, October 11, 2005) value of real property for real property tax purposes ?
ANSWER:
2. Who determines the fair market value of properties ? a. Sales Analysis Approach. The sales price paid in actual
SUGGESTED ANSWER: The reasonable market value is market transactions is considered by taking into account valid sales
determined by the assessor in the form of a schedule of fair market data accumulated from among the Registrar of Deeds, notaries public,
values. The schedule is then enacted by the local sanggunian. appraisers, brokers, dealers, bank officials, and various sources stated
under the Local Government Code.
b. Income Capitalization Approach. The value of an
3. What is the fair market value of properties ? income-producing property is no more than the return derived from it.
ANSWER: Fair market value is the price at which a property An analysis of the income produced is necessary in order to estimate
may be sold by a seller who is not compelled to sell and bought by a the sum which might be invested in the purchase of the property.
buyer who is not compelled to buy, taking into consideration all uses to c. Reproduction cost approach is a formal approach used
which the property is adopted and might in reason be applied. exclusively n appraising man-made improvements such as buildings
The criterion established by the statute contemplates a and other structures, based on such data as materials and labor costs
hypothetical sale. Hence, the buyers need not be actual and existing to reproduce a new replica of the improvement.
purchasers. (Allied Banking Corporation, etc., v. Quezon City The assessor uses any or all of these approaches in analyzing
Government, et al., G. R. No. 154126, October 11, 2005 citing Army the data gathered to arrive at the estimated fair market value to be
and Navy Club, Manila v. Trinidad, 44 Phil. 383 ) included in the ordinance containing the schedule of fair market values.
NOTE: In fixing the value of real property, assessors have to (Allied Banking Corporation, etc., v. Quezon City Government, et al., G.
consider all the circumstances and elements of value and must R. No. 154126, October 11, 2005 citing Local Assessment Regulations
exercise prudent discretion in reaching conclusions. [Allied Banking No. 1-92)
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
October 11, 2005 citing Reyes v. Almanzor, 196 SCRA 322, 327
(1991)])
5. Quezon City passed an ordinance whereby the
parcels of land sold, ceded. Transferred and conveyed for
Preparation of fair market values:
remuneratory consideration after the effectivity of this revision
a. The city or municipal assessor shall prepare a schedule
of fair market values for the different classes of real property situated in shall be subject to real estate tax based on the actual amount
their respective Local Government Units for the enactment of an reflected in the deed of conveyance or the current approved zonal
ordinance by the sanggunian concerned; and valuation of the Bureau of Internal Revenue prevailing at the time
b. The schedule of fair market values shall be published in a of sale, cession, transfer and conveyance, whichever is higher, as
newspaper of general circulation in the province, city or municipality evidenced by the certificate of payment of the capital gains tax
concerned or the posting in the provincial capitol or other places as issued therefore.
required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, Is the proviso for the basis in determining the value for real
February 19, 1999) property tax purposes valid ?
Proposed fair market values of real property in a local SUGGESTED ANSWER: No. The proviso being contrary to
government unit as well as the ordinance containing the schedule public policy and for restraining trade is not valid for the following
must be published in full for three (3) consecutive days in a reasons:
newspaper of local circulation, where available, within ten (10) days of a. It mandates an exclusive rule in determining the fair
market value and departs from the established procedures such as the
81
sales analysis approach, the income capitalization approach and the SUGGESTED ANSWER: As a rule, tax declarations or realty tax
reproduction approach provided under the rules implementing the payments of property are not conclusive evidence of ownership,
statute. It unduly interferes with the duties statutorily placed upon the nevertheless, they are good indicia of possession in the concept of
local assessor by completely dispensing with his analysis and owner, for no one in his right mind would be paying taxes for a property
discretion which the Local Government Code and the regulations that is not in his actual or constructive possession. They constitute at
require to be exercised. An ordinance that contravenes any statute is least proof that the holder has a claim of title over the property.
ultra vires and void. The voluntary declaration of a piece of property for taxation
b. The consideration approach in the ordinance is illegal purposes manifests not only one s sincere and honest desire to obtain
since the appraisal, assessment, levy and collection of real property title to the property and announces his adverse claim against the State
tax shall not be let to any private person , it will also completely and all other interested parties, but also the intention to contribute
destroy the fundamental principle in real property taxation that real needed revenues to the government. Such an act strengthens one s
property shall be classified, valued and assessed on the basis of its bona fide claim of acquisition of ownership. (Buenaventura, et al., v.
actual use regardless of where located, whoever owns it, and whoever Republic, G. R. No. 166865, March 2, 2007 citing Heirs of Simplicio
uses it. Allowing the parties to a private sale to dictate the fair market Santiago v. Heirs of Mariano E. Santiago, G. R. No. 151440, 17 June
value of the property will dispense with the distinctions of actual use 2003, 404 SCRA 193, 199 200)
stated in the Local Government Code and in the regulations.
c. The invalidity is not cured by the prhase whichever is 7. Give examples of personal property under the
higher because an integral part of that system still permits valuing civil law that may be considered as real property for purposes of
real property in disregard of its actual use. taxes.
d. The ordinance would result to real property assessments SUGGESTED ANSWER: Personal property under the civil law
more than once every three (3) years and that is not the congressional may be considered as real property for purposes of taxes where the
intent as shown in the provisions of the Local Government Code and property is essential to the conduct of the business.
the regulations. Consequently, the real property tax burden should not a. Underground tanks are essential to the conduct of the
be interpreted to include those beyond what the Code or the business of a gasoline station without which it would not be operational.
regulations expressly clearly state. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114
e. The proviso would provide a chilling effect on real SCRA 296)
property owners or administrators to enter freely into contracts b. Light Rail Transit (LRT) improvements such as buildings,
reflecting the increasing value of real properties in accordance with carriageways, passenger terminals stations, and similar structures do
prevailing market conditions. not form part of the public roads since the former are constructed over
While the Local Government Code provides that the the latter in such a way that the flow of vehicular traffic would not be
assessment of real property shall not be increased once every three (3) impaired. The carriageways and terminals serve a function different
years, the questioned proviso subjects the property to a higher from the public roads. Furthermore, they are not open to use by the
assessment every time a sales transaction is made. Real property general public hence not exempt from real property taxes. Even
owners would therefore postpone sales until after the lapse of the three granting that the national government owns the carriageways and
(3) year period, or if they do so within the said period they shall be terminal stations, the property is not exempt because their beneficial
compelled to dispose of the property at a price not exceeding the last use has been granted to LRTA a taxable entity. (Light Rail Transit
prior conveyance in order to avoid a higher tax assessment.
Authority v. Central Board of Assessment Appeals, et al., G. R. No.
In the above two scenarios real property owners are effectively
127316, October 12, 2000)
prevented from obtaining the best price possible for their properties
c. The Supreme Court of New York in Consolidated Edison
and unduly hampers the equitable distribution of wealth. (Allied
Company of New York, Inc., et al., v. The City of New York, et al., 80
Banking Corporation, etc., v. Quezon City Government, et al., G. R. No.
Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of
154126, October 11, 2005)
Batangas, G. R. No. 168557, February 16, 2007 and companion case,
held that barges on which were mounted gas turbine power plants
6. What is the nature of a tax declaration ?
designated to generate electrical power, the fuel oil barges which
82
supplied fuel oil to the power plant barges, and the accessory Supreme Court in other cases. Thus, do not cite the doctrine as
equipment mounted on the barges were subject to real property taxes. emanating from the May 18, 2001 decision.
Moreover, Article 415(9) of the Civil Code provides that [d]ocks
and structures which, though floating, are intended by their nature and 10. Secretary of Justice can take cognizance of a case
object to remain at a fixed place on a river, lake or coast are involving the constitutionality or legality of tax ordinances where
considered immovable property by destination being intended by the there are factual issues involved. (Figuerres v. Court of Appeals, et
owner for an industry or work which may be carried on in a building or al., G.R. No. 119172, March 25, 1999)
on a piece of land and which tend directly to meet the needs of said Taxpayer files appeal to the Secretary of Justice, within 30
industry or work.
days from effectivity thereof. In case the Secretary decides the
appeal, a period also of 30 days is allowed for an aggrieved party to go
8. The restriction upon the power of courts to impeach tax
to court. But if the Secretary does not act thereon, after the lapse of 60
assessment without a prior payment, under protest, of the taxes days, a party could already seek relief in court within 30 days from the
assessed is consistent with the doctrine that taxes are the lapse of the 60 day period.
lifeblood of the nation, and as such their collection cannot be These three separate periods are clearly given for compliance
curtailed by injunction or any like action; otherwise, the state or, in this as a prerequisite before seeking redress in a competent court. Such
case, the local government unit, shall be crippled in dispensing the statutory periods are set to prevent delays as well as enhance the
needed services to the people, and its machinery gravely disabled. orderly and speedy discharge of judicial functions. For this reason the
(Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) courts construe these provisions of statutes as mandatory. (Reyes, et
Thus, the trial court has no jurisdiction to entertain a petition for al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999)
prohibition absent payment under protest of the tax assessed. (Ibid.)
NOTES AND COMMENTS: While the above May 18, 2001 11. Public hearings are mandatory prior to approval of
decision was set aside by the Supreme Court when it granted the tax ordinance, but this still requires the taxpayer to adduce evidence
petitioner s second motion for reconsideration on June 29, 2004, the to show that no public hearings ever took place. (Reyes, et al., v. Court
author submits that the above doctrine in the May 18, 2001 decision is of Appeals, et al., G.R. No. 118233, December 10, 1999) Public
still valid, because what was reversed in the second motion for hearings are required to be conducted prior to the enactment of an
reconsideration was the garnishment of Meralco s assets. The ordinance imposing real property taxes. (Figuerres v. Court of Appeals,
remand to the lower court was for the resolution of whether or not an
et al., G.R. No. 119172, March 25, 1999)
assessment was issued to Meralco.
12. The concurrent and simultaneous remedies afforded
9. Unpaid realty taxes attach to the property and is local government units in enforcing collection of real property
chargeable against the person who had actual or beneficial use taxes:
and possession of it regardless of whether or not he is the owner. a. Distraint of personal property;
To impose the real property tax on the subsequent owner which was b. Sale of delinquent real property, and
neither the owner not the beneficial user of the property during the c. Collection of real property tax through ordinary court
designated periods would not only be contrary to law but also unjust. action.
Consequently, MERALCO the former owner/user of the
property was required to pay the tax instead of the new owner 13. The remedy of levy can be pursued by putting up for
NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231, May sale the real property subject of tax, i.e., the delinquent property
18, 2001) upon which the tax lien attaches, regardless of the present owner or
NOTE: The above May 18, 2001 decision was set aside by possessor thereof. However this remedy is only one of the other
the Supreme Court when it granted the petitioner s second motion for remedies. (Manila Electric Company v. Barlis, G.R. No. 114231, May
reconsideration on June 29, 2004. The author submits that the above 18, 2001)
ruling in the May 18, 2001 decision is still valid, not on the basis of the NOTE: The above May 18, 2001 decision was set aside by the
May 18, 2001 decision but in the light of pronouncements of the Supreme Court when it granted the petitioner s second motion for
83
reconsideration on June 29, 2004. The author submits that the above a. Upon denial, FELS elevated the matter to the Local
ruling in the May 18, 2001 decision is still valid, not on the basis of the Board of Assessment Appeals (LBAA), where it raised the
May 18, 2001 decision, in the light of pronouncements of the Supreme following issues:
Court in other cases. Thus, do not cite the doctrine as emanating from 1) Since NPC is tax-exempt then FEL s should
the May 18, 2001 decision. also be tax-exempt because of its contract with NPC.
2) The power barges are not real property subject
14. The LGU could also avail of the remedy of distraint to real property taxes.
and levy of personal property subjecting any personal property of b. Upon the other hand the Local Treasurer insists that
the taxpayer to execution. thus, the issuance of the warrants of the assessment has attained a state of finality hence the appeal to
garnishment over MERALCO s bank deposits was not improper or the LBAA should be dismissed.
irregular. (Manila Electric Company v. Barlis, et al., G.R. No. 114231, Rule on the conflicting contentions.
May 18, 2001) SUGGESTED ANSWER:
NOTE: The above May 18, 2001 decision was set aside by the a. All the contentions of FELS are without merit:
Supreme Court when it granted the petitioner s second motion for 1) NPC is not the owner of the power barges nor the
reconsideration on June 29, 2004. The author submits that the above operator of the power barges. The tax exemption privilege
ruling in the May 18, 2001 decision is still valid, not on the basis of the granted to NPC cannot be extended to FELS. the covenant is
May 18, 2001 decision, in the light of pronouncements of the Supreme between NPC and FELs and does not bind a third person not
Court in other cases. Thus, do not cite the doctrine as emanating from privy to the contract such as the Province of Batangas.
the May 18, 2001 decision. 2) The Supreme Court of New York in Consolidated
Edison Company of New York, Inc., et al., v. The City of New
58. Notice and publication, as well as the legal York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc.,
requirements for a tax delinquency sale, are mandatory, and the v. Province of Batangas, G. R. No. 168557, February 16, 2007
failure to comply therewith can invalidate the sale. The prescribed and companion case, held that barges on which were mounted
notices must be sent to comply with the requirements of due process. gas turbine power plants designated to generate electrical
(De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable power, the fuel oil barges which supplied fuel oil to the power
Sayo, 290 SCRA 223,236) plant barges, and the accessory equipment mounted on the
barges were subject to real property taxes.
16. The reason behind the notice requirement is that tax Moreover, Article 415(9) of the Civil Code provides that
sales are administrative proceedings which are in personam in [d]ocks and structures which, though floating, are intended by
nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 their nature and object to remain at a fixed place on a river, lake
SCRA 314) or coast are considered immovable property by destination
being intended by the owner for an industry or work which may
be carried on in a building or on a piece of land and which tend
directly to meet the needs of said industry or work.
17. FELS Energy, Inc., had a contract to supply NPC with b. The Treasurer is correct. The procedure do not allow a
motion for reconsideration to be filed with the Provincial Assessor.
the electricity generated by FELS power barges. The contract
To allow the procedure would indeed invite corruption in the
also stated that NPC shall be responsible for all real estate taxes
system of appraisal and assessment. it conveniently courts a graft-
and assessments. FELS then received an assessment of real prone situation where values of real property ay be initially set
property taxes on its power barges from the Provincial Assessor unreasonably high, and then subsequently reduced upon the request of
of Batangas. If filed a motion for reconsideration with the a property owner. In the latter instance, allusions of possible cover,
Provincial Assessor. illicit trade-off cannot be avoided, and in fact can conveniently take
place. Such occasion for mischief must be prevented and excised
from our system. (FELS Energy, Inc., v. Province of Batangas, G. R.
84
No. 168557, February 16, 2007 and companion case, citing Callanta v. g. The decision of the CTA may be the subject of a motion
Office of the Ombudsman. G. R. Nos. 115253-74, January 30, 1998, for reconsideration or new trial after which an appeal may be
285 SCRA 648) interposed by means of a petition for review on certiorari directed to the
Supreme Court on pure questions of law within a period of fifteen (15)
18. A special levy or special assessment is an imposition by a days from receipt extendible for a period of thirty (30) days.
province, a city, a municipality within the Metropolitan Manila Area, a
municipality or a barangay upon real property specially benefited by a 22. A City Ordinance adopting a method of assessment
public works expenditure of the LGU to recover not more than 60% of was nullified by the Supreme Court. A taxpayer who has paid his
such expenditure. real property taxes on the basis of the nullified ordinance now
posits that the return of the real property tax erroneously
19. If the ground for the protest is validity of the real collected and paid is a necessary consequence of the Supreme
property tax ordinance and not the unreasonableness of the amount Court s nullification of the ordinance and there is no need to
collected the tax must be paid under protest, and the issue of legality claim for a refund. Is this correct ?
may be raised to the proper courts on certiorari without need of SUGGESTED ANSWER: No. The entitlement to a tax refund
exhausting administrative remedies. does not necessarily call for the automatic payment of the sum
claimed. The amount of the claim being a factual matter, it must still be
20. If the ground for the protest is unreasonableness of the proven in the normal course and in accordance with the administrative
amounts collected there is need to pay under protest and procedure for obtaining a refund of real property taxes, as provided
administrative remedies must be resorted to before recourse to the under the Local Government Code. (Allied Banking Corporation, etc.,
proper courts. v. Quezon City Government, et al., G. R. No. 154126, September 15,
2006)
21. Procedure for refund of real property taxes based on NOTE: In the above Allied Banking case, the Supreme Court
unreasonableness or excessiveness of amounts collected. provided for the starting date of computing the two-year prescriptive
a. Payment under protest at the time of payment or within period within which to file the claim with the Treasurer, which is from
thirty (30) days thereafter, protest being lodged to the provincial, city or finality of the Decision. The procedure to be followed is that shown
in the case of a municipality within the Metro Manila Area the municipal below.
treasurer.
b. The treasurer has a period of sixty (60) days from receipt 23. Procedure for refund of real property taxes based on
of the protest within to decide. validity of the tax measure or solutio indebeti.
c. Within thirty (30) days from receipt of treasurer s a. Payment under protest not required, claim must be
decision or if the treasurer does not decide, within thirty (30) days from directed to the local treasurer, within two (2) years from the date the
the expiration of the sixty (60) period for the treasurer to decide, the taxpayer is entitled to such reduction or readjustment, who must
taxpayer should file an appeal with the Local Board of Assessment decide within sixty (60) days from receipt.
Appeals. b. The denial by the local treasurer of the protest would fall
d. The Local Board of Assessment Appeals has 120 days within the Regional Trial Court s original jurisdiction, the review being
from receipt of the appeal within which to decide. the initial judicial cognizance of the matter. Despite the language of
e. The adverse decision of the Local Board of Assessment Section 195 of the Local Government Code which states that the
Appeals should be appealed within thirty (30) days from receipt to the remedy of the taxpayer whose protest is denied by the local treasurer is
Central Board of Assessment Appeals. to appeal with the court of competent jurisdiction, labeling the said
f. The adverse decision of the Central Board of Assessment review as an exercise of appellate jurisdiction is inappropriate since the
Appeals shall be appealed to the Court of Tax Appeals (En Banc) by denial of the protest is not the judgment or order of a lower court, but of
means of a petition for review within thirty (30) days from receipt of the a local government official. (Yamane , etc. v. BA Lepanto
adverse decision. Condominium Corporation, G. R. No. 154993, October 25, 2005)
85
c. The decision of the Regional Trial Court should be 26. What is meant by actual, direct and exclusive
appealed by means of a petition for review directed to the Court of Tax use of the property for charitable purposes is the direct and
Appeals (Division). immediate and actual application of the property itself to the
d. The decision of the Court of Tax Appeals (Division) may purposes for which the charitable institution is organized. It is not the
be the subject of a review by the Court of Tax Appeals (en banc). use of the income from the real property that is determinative of
e. The decision of the Court of Tax Appeals (en banc) may whether the property is used for tax-exempt purposes.
be the subject of a petition for review on certiorari on pure questions of If real property is used for one or more commercial purposes, it
law directed to the Supreme Court. is not exclusively used for the exempted purpose but is subject to
taxation,. The words dominant use or principal use cannot be
24. Charitable institutions, churches and substituted for the words used exclusively without doing violence to
parsonages or convents appurtenant thereto, mosques, non- the Constitution and the law. Solely is synonymous with exclusively.
profit cemeteries, and all lands, buildings and improvements that (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
are actually, directly and exclusively used for religious, charitable 144104, June 29, 2004)
or educational purposes are exempt from taxation. [Sec.28 (3)
Article VI, 1987 Constitution] 27. Portions of the land of a charitable institution, such as
a hospital, leased to private entities as well as those parts of the
25. The constitutional tax exemptions refer only to hospital leased to private individuals are not exempt from real
real property that are actually, directly and exclusively used for property taxes. On the other hand, the portion of the land occupied by
religious, charitable or educational purposes, and that the only the hospital and portions of the hospital used for its patients, whether
constitutionally recognized exemption from taxation of revenues are paying or non-paying, are exempt from real property taxes. (Lung
those earned by non-profit, non-stock educational institutions which are Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104,
actually, directly and exclusively used for educational purposes. June 29, 2004)
(Commissioner of Internal Revenue v. Court of Appeals, et al., 298
SCRA 83) 28. As a general principle, a charitable institution does
The constitutional tax exemption covers property taxes only. not lose its character as such and its exemption from taxes
What is exempted is not the institution itself, those exempted from real simply because it derives income from paying patients, whether
estate taxes are lands, buildings and improvements actually, directly out-patient, or confined in the hospital, or receives subsidies from
and exclusively used for religious, charitable or educational purposes. the government. So long as the money received is devoted or used
(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. altogether to the charitable object which it is intended to achieve; and
144104, June 29, 2004 citing Justice Davide) no money inures to the private benefit of the persons managing or
operating the institution. (Lung Center of the Philippines v. Quezon
31. The 1935 Constitution stated that the lands, City, et al., etc., G. R. No. 144104, June 29, 2004)
buildings, and improvements are used exclusively but the
present Constitution requires that the lands, buildings and 29. What property are exempt from the payment of
improvements are actually, directly and exclusively used. The real property tax under the Local Government Code ?
change should not be ignored. Reliance on past decisions would have SUGGESTED ANSWER:
sufficed were the words actually as well as :directly are not added. a. Real property owned by the Republic of the Philippines or
There must be proof therefore of the actual and direct use to be any of its political subdivisions except when the beneficial use thereof
exempt from taxation. (Lung Center of the Philippines v. Quezon City, has been granted to a taxable person for a consideration or otherwise;
et al., etc., G. R. No. 144104, June 29, 2004 citing Province of Abra v. b. Charitable institutions, churches, parsonages or convents
Hernando, 107 SCRA 105) appurtenant thereto, mosques, non-profit or religious cemeteries, and
all lands, buildings and improvements actually, directly and exclusively
used for religious, charitable and educational purposes;
86
c. Machineries and equipment, actually, directly and 31. A telecommunications company was granted by
exclusively used by local water districts; and government owned and Congress on July 20, 1992, after the effectivity of the Local
controlled corporations engaged in the supply and distribution of water Government Code on January 1, 1992, a legislative franchise
and generation and transmission of electric power; with tax exemption privileges which partly reads, The grantee,
d. Real property owned by duly registered cooperatives; its successors or assigns shall be liable to pay the same taxes
e. Machinery and equipment used for pollution control and on their real estate, buildings and personal property, exclusive of
environmental protection. this franchise, as other persons or corporations are now or
hereafter may be required by law to pay. This provision existed
30. The Manila International Airport Authority in the company s franchise prior to the effectivity of the Local
(MIAA) was subject to real property taxes by the municipality of Government Code. A City then enacted an ordinance in 1993
Paranaque on its airport lands, and buildings on the ground that imposing a real property on all real properties located within the
the Local Government Code has withdrawn exemptions city limits, and withdrawing all tax exemptions previously
previously enjoyed by government-owned and controlled granted. Among properties covered are those owned by the
corporations. MIAA contends otherwise as it claims it is not a company from which the City is now collecting P43 million. The
government owned or controlled corporation. Who is correct. properties of the company were then scheduled by the City for
SUGGESTED ANSWER: MIAA is correct because it is not a sale at public auction.
government owned or controlled corporation but an instrumentality of The company then filed a petition for the issuance of a
the government that is exempt from taxation. writ of prohibition claiming exemption under its legislative
It is not a stock corporation because its capital is not divided franchise. The City defended its position raising the following:
into shares, neither is it a non-stock corporation because there are a. There was no exhaustion of administrative remedies
no members. It is instead an instrumentality of the government upon because the matter should have first been filed before the Local
which the local governments are not allowed to levy taxes, fees or Board of Assessment Appeals;
other charges. b. The company s properties are exempt from tax
An instrumentality refers to any agency of the National under its franchise.
Government, not integrated within the department framework vested Resolve the issues raised.
with special functions or jurisdiction by law, endowed with some if not SUGGESTED ANSWERS:
all corporate powers, administering special funds, and enjoying a. There is no need to exhaust administrative remedies as
operational autonomy, usually through a charter. This term includes the appeal to the LBAA is not a speedy and adequate remedy within
regulatory agencies chartered institutions and government-owned or the law. This is so because the properties are already scheduled for
controlled corporations. [Sec. 2 (10), Introductory Provisions, auction sale.
Administrative Code of 1987] It is an instrumentality exercising not Furthermore one of the recognized exceptions to the rule on
only governmental but also corporate powers. It exercises exhaustion is that if the issue is purely legal in character which is so
governmental powers of eminent domain, police power authority, and in this case.
levying of fees and charges. b. The properties are exempt from taxation. The grant of
Finally, the airport lands and buildings are property owned by taxing powers to local governments under the Constitution and the
the government that are devoted to public use and are properties of Local Government Code does not affect the power of Congress to
the public domain. (Manila International Airport Authority v. City of grant tax exemptions.
Pasay, et al., G. R. No. 163072, April 2, 2009 citing Manila The term exclusive of this franchise is interpreted to mean
International Airport Authority v. Court of Appeals, et al., G. R. No. properties actually, directly and exclusively used in the radio or
155650, July 20, 2006) telecommunications business. The subsequent piece of legislation
which reiterated the phrase exclusive of this franchise found in the
previous tax exemption grant to the company is an express and real
intention on the part of Congress to once against remove from the
LGC s delegated taxing power, all of the company s properties that
87
are actually, directly and exclusively used in the pursuit of its
franchise. (The City Government of Quezon City, et al., v. Bayan
Telecommunications, Inc., G. R. No. 162015, March 6, 2006)
NOTES AND COMMENTS:
a. Note the confusion in the decision. It cited Mactan
Cebu which stated that the taxing power of local government units is
no longer merely by virtue of a valid delegation as before, but
pursuant to direct authority but in the concluding portion referred to
it as the LGC s delegated taxing power. Which is which,
delegated or direct grant ? The author submits that the weight of
jurisprudence shows that it is a direct grant not a delegated power. If
a question is asked then state it is a direct grant.

32. The owner operator of a BOT and not the ultimate


owner is subject to real property taxes. Consistent with the BOT
concept and as implemented, BPPC the owner-manager-operator
of the project is the actual user of its machineries and equipment.
BPPC s ownership and use of the machineries and equipment are
actual, direct, and immediate, while NAPOCOR s is contingent and,
at this stage of the BOT Agreement, not sufficient to support its claim
for tax exemption. (National Power Corporation v. Central Board of
Assessment Appeals, et al., G, R. No. 171470, January 30, 2009)

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