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University of Santo Tomas

Faculty of Civil Law

TAXATION LAW
Pre-week Notes 2017
ACADEMICS COMMITTEE

SECRETARY GENERAL: CAMILLE ANGELICA B. GONZALES


EXECUTIVE COMMITTEE: EMNIE VALERIE B. DURAN, IRVIN L. PALANCA, MARIELLA A.
MARASIGAN, LARA NICOLE T. GONZALES

TAXATION LAW COMMITTEE

COMMITTEE HEAD: DARDECS N. VILLANUEVA


SUBJECT HEADS: JOYCE ANN MENDOZA AND LARA NICOLE T. GONZALES
MEMBERS: CLEA CONSTANTINA FERNANDEZ, KARMELA KATE SALVADOR, STEPHANIE RUBI,
KRISTIAN FABON, REALYN CANCINO, ELAINE CARINGAL

ATTY. AL CONRAD B. ESPALDON


ADVISER
UST LAW PRE-WEEK NOTES 2017

QUESTIONS WITH THE SAME TOPIC ASKED a. Are the reclaimed properties registered in the
name of LLL subject to real property tax?
IN 2015 AND 2016 BAR EXAMINATIONS b. Will your answer be the same in (a) if from 2010 to
the present time, LLL is leasing portions of the
a. Explain the procedure for claiming refunds or tax reclaimed properties for the establishment and use
credits of input VAT for zero-rated or effectively of popular fast-food restaurants J Burgers, G Pizza,
zero-rated sales under Sec. 112 of the Tax Code and K Chicken? (2015 BAR)
from the filing of an application with the CIR up to
the CTA. a. The reclaimed properties are not subject to real
b. Explain the procedure for claiming refunds of tax property tax because LLL is a government
erroneously or illegally collected under Sec. 229 of instrumentality. Under the law, real property owned
the Tax Code from the filing of the claim for by the Republic of the Philippines is exempt from real
refunds with the CIR up to the CTA. (2016 BAR) property tax unless the beneficial use thereof has
been granted to a taxable person (Sec. 234, LGC).
In order to be entitled to a refund/tax credit of excess When the title of the real property is transferred to
input VAT attribute to zero-rated or effectively zero- LLL, the Republic remains the owner of the real
rated sales, the following requisites must be complied property. Thus, such arrangement does not result in
with: the loss of the tax exemption. (Republic of the
Philippines, represented by The Philippine
1. The claim for refund must be filed with the Reclamation Authority v. City of Paranaque, 677 SCRA
Commissioner within 2 years counted from the last 246 [2012]).
day of the quarter when the zero-rated sale was
made (Sec 112, NIRC); Alternative Answer
2. The claim for refund must be accompanied by a
statement under oath that all documents to support NO. LLL is an instrumentality of the national government
the claim has been submitted at the time of filing of which cannot be taxed by local government units. LLL is
the claim for refund (RMC 54-14); not a GOCC taxable for real property taxes (City of Lapu-
3. The Commissioner must decide on the claim within Lapu v. PEZA, GR No. 184203, November 26, 2014).
120 days from date filing and the adverse decision is
appealable to the CTA within 30 days from receipt b. NO. As a rule, properties owned by the Republic of
(Sec. 112, NIRC; CIR v. Aichi Forging of Asia, Inc., 632 the Philippines are exempt from real property tax
SCRA 442 [2010]); except when beneficial use thereof has been granted,
4. If no decision is made within the 120 days period, for consideration or otherwise, to a taxable person.
there is a deemed denial or adverse decision which is When LLL leased out portions of the reclaimed
appealable to the CTA within 30 days from the lapse properties to taxable entities, such as popular fast
of the 120 days period (Sec. 112, NIRC; Sec. 7(a)(1), food restaurants, the reclaimed properties are
RA 1125 as amended by RA 9282). subject to real property tax (Sec. 234(a), LGC; GSIS v.
City Treasurer and City Assessor of the City of Manila,
The procedure for claiming refunds of tax erroneously or 2009).
illegally collected are the following:
Differentiate between double taxation in the strict
1. A written claim for refund must be filed with the sense and in a broad sense and give an example of
Commissioner within two years from date of each (2015 BAR).
payment of the tax (Sec. 204, NIRC);
2. A decision of the Commissioner denying the claim, is Double taxation in the strict sense (direct duplicate
appealable to the CTA within 30 days from receipt taxation) pertains to the direct double taxation. This
thereof or within two years from date of payment, means that the taxpayer is taxed twice by the same
whichever comes first (Sec. 229, NIRC; Sec 7(a)(1), RA taxing authority, within the same taxing jurisdiction,
1125 as amended by RA 9282); for the same property and for the same purpose.
3. If no decision is made by the Commissioner, the Example: Imposition of final withholding tax on cash
aggrieved taxpayer must consider the inaction as a dividends and requiring the taxpayer to declare this tax-
denial and appeal to the CTA must be filed before the paid income in his income tax returns.
lapse of two years counted from date of payment
(Sec. 229, NIRC). On the other hand, double taxation in the broad sense
pertains to indirect double taxation. This extends to all
LLL is a government instrumentality created by cases in which there is a burden of two or more
Executive Order to be primarily responsible for impositions. It is a double taxation other than those
integrating and directing all reclamation projects for covered by direct double taxation (CIR v. Solidbank Corp,
the National Government. It was not organized as a 436 SCRA 416 [2003]). Example: Subjecting the interest
stock or a non-stock corporation, nor was it intended income of banks on their deposits with other banks to the
to operate commercially and compete in the private 5% gross receipt tax (GRT) despite of the same income
market. By virtue of its mandate, LLL reclaimed having been subjected to 20% final withholding tax
several portions of the foreshore and offshore areas (FWT), is only a case of indirect double taxation. The GRT
of the Manila Bay, some of which were within the is a tax on the privilege of engaging in business while the
territorial jurisdiction of Q City. Certificates of title to FWT is a tax on privilege of earning income. (CIR v. Bank
the reclaimed properties in Q City were issued in the of Commerce, 459 SCRA 638 [2005]).
name of LLL in 2008. In 2014, Q City issued Warrants
of Levy on said reclaimed properties of LLL based on What are de minimis benefits and how are these
the assessment for delinquent property taxes for the taxed? Give three (3) examples of de minimis benefits.
years 2010 to 2013. (2015 BAR)

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TAXATION LAW

De minimis benefits are facilities and privileges furnished the City Assessors amounting to P2,500,000 because it is
or offered by an employer to his employees, which are not higher than the FMV determined by the CIR (Sec. 102 in
considered compensation subject to income tax and relation to Sec. 88(B), NIRC).
consequently to withholding tax, if such facilities or
privileges are of relatively small value and are offered or
PART I: GENERAL PRINCIPLES OF
furnished by the employer merely as means of promoting
the health, goodwill, contentment, or efficiency of his TAXATION
employees. If received by rank-and-file employees, they
are exempt from income tax on wages, if received by Briefly explain the following doctrines: lifeblood
supervisory or managerial employees, they are exempt doctrine; necessity theory; benefits received
from the fringe benefit tax (RR No. 2-98, as amended by RR principle; and, doctrine of symbiotic relationship.
No. 8-2000). (2016 BAR)

The following shall be considered as de minimis benefits: The following doctrines, explained:

1. Monetized unused vacation leave credits of private  Lifeblood doctrine - Without revenue raised from
employees not exceeding 10 days during the year; taxation, the government will not survive, resulting in
2. Monetized value of vacation and sick leave credits detriment society. Without taxes, the government
paid to government officials and employees; would be paralyzed for lack of motive power to
3. Medical cash allowance to dependents of employees, activate and operate it (CIR v. Algue, Inc. 158 SCRA 9
not exceeding P750 per employee per semester or [1988]).
P125 per month;  Necessity theory - The exercise of the power to tax
4. Rice subsidy of P1,500 or 1 sack of 50 kg rice per emanates from necessity, because without taxes,
month amounting to not more than P1,500; government cannot fulfill its mandate of promoting
5. Uniform and clothing allowance not exceeding P5,000 the general welfare and well-being of the people (CIR
per annum; v. Bank of Philippine Islands, 521 SCRA 373 [2007]).
6. Actual medical assistance not exceeding P10,000 per  Benefits received principle - Taxpayers receive
annum; benefits from taxes through the protection the state
7. Laundry allowance not exceeding P300 per month; affords to them. For the protection they get arises
8. Employees achievement awards, e.g. for length of their obligation to support the government through
service or safety achievement, which must be in the payment of taxes (CIR v. Algue, Inc. 158 SCRA 9 [1988]).
form of tangible personal property other than cash or  Doctrine of symbiotic relationship - Taxation arises
gift certificate, with an annual monetary value not because of the reciprocal relation of protection and
exceeding P10, 000 received by the employee under support between the state and taxpayers. The state
an established written plan which does not gives protection and for it to continue giving
discriminate in favor of highly paid employees; protection, it must be supported by the taxpayers in
9. Gifts given during Christmas and major anniversary the form of taxes (CIR v. Algue, Inc. 158 SCRA 9 [1988]).
celebrations not exceeding P5, 000 per employee per
annum; Explain the principles of a sound tax system. (2015
10. Daily meal allowance for overtime work and BAR)
night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis; The principles of a sound tax system are the following:
11. Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and a. Fiscal adequacy which means that the sources of
productivity incentive schemes provided that the total revenue should be sufficient to meet the demands of
annual monetary value received from both CBA and public expenditures;
productivity schemes combined do not exceed P10, b. Equality or theoretical justice which means that the
000 per employee per taxable year. tax burden should be proportionate to the taxpayer’s
ability to pay (this is the so-called ability to pay
Mr. L owned several parcels of land and he donated a principle); and
parcel each to his two children. Mr. L acquired both c. Administrative feasibility which means that the tax
parcels of land in 1975 for P200, 000.00. At the time law should be capable of convenience, just and
of donation, the fair market value of the two parcels effective administration.
of land, as determined by the CIR, was P2, 300,
000.00; while the fair market value of the same May legislative bodies enact laws to raise revenues in
properties as shown in the schedule of values the absence of constitutional provisions granting
prepared by the City Assessors was P2, 500, 000.00. said body the power of tax? Explain. (2005 BAR)
What is the proper valuation of Mr. L's gifts to his
children for purposes of computing donor's tax? YES. The constitutional provisions relating to the power
(2015 BAR) of taxation do not operate as grants of the power of
taxation to the government, but instead merely constitute
The valuation of Mr. L’s gift to his children is the fair a limitation upon a power which would otherwise be
market value (FMV) of the property at the time of practically without limit.
donation. The FMV is the higher of the FMV as
determined by the Commissioner or the FMV as shown in Moreover, it is inherent in nature, being an attribute of
the schedule of values fixed by the provincial or city sovereignty. There is, thus, no need for a constitutional
assessors. In this case, for the purpose of computing grant for the State to exercise this power.
donor’s tax, the proper valuation is the value prepared by
The Commissioner posits that the 1997 Tax Code
qualified the tax exemption granted to non-stock,
non-profit educational institutions such that the

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UST LAW PRE-WEEK NOTES 2017

revenues and income they derived from their assets, Lucky is HSC and not Rainier. It issued an assessment
or from any of their activities conducted for profit, for deficiency income tax in the amount of P79
are taxable even if these revenues and income are million against Lucky. Lucky argues that it resorted
used for educational purposes. Is he correct? to tax avoidance or a tax saving device, which is
allowed by the NIRC and BIR rules since it paid the
NO. The income, revenues and assets of non-stock, non- correct taxes based on its sale to Rainier. On the other
profit educational institutions proved to have been used, hand, Rainier and HSC also paid the prescribed taxes
directly and exclusively for educational purposes are arising from the sale by Rainier to HSC. Is the BIR
exempt from duties and taxes. correct in assessing taxes on Lucky? Explain. (2016
BAR)
Under Article XIV, Section 4 (3)1 of the 1987 Constitution,
it refers to two kinds of educational institutions: (1) non- YES. The sale of the property by Lucky to Rainer and
stock, non-profit educational institutions and (2) consequently the sale by Rainer to HSC being prompted
proprietary educational institutions. There is a marked more on the mitigation of tax liabilities than for legitimate
distinction between the treatment of two kinds of business purposes, therefore, constitutes tax evasion.
institutions. The tax exemption granted to non-stock, The real buyer from Lucky is HSC as evidenced by the
non-profit educational institutions is conditioned only on direct receipt of payments by the former from the latter
the actual, direct and exclusive use of their revenues and where the latter recorded “other investments – Lucky
assets for educational purposes. While tax exemptions Building.” The scheme of resorting to a two-step
may also be granted to proprietary educational transaction in selling the property to the ultimate buyer
institutions, these exemptions may be subject to in order to escape paying higher taxes is considered as
limitations imposed by Congress. outside of those lawful means allowed in mitigating tax
liabilities which makes Lucky criminally and civilly liable.
Further, a non-stock, non-profit educational institution is Hence, the BIR is correct in assessing taxes on Lucky (CIR
classified as a tax-exempt entity under Section 30, a v. Estate of Benigno P. Toda, Jr., 438 SCRA 290 [2004]).
proprietary educational institution is covered by Section
27. Section 30 provides that exempt organizations shall May the collection of taxes be barred by prescription?
not be taxed on income received by them as such. Section (2001 BAR)
27 (B), on the other hand, states that a proprietary
educational institution is entitled only to the reduced rate YES. The collection of taxes may be barred by
of 10% corporate income tax. The reduced rate is prescription. The prescriptive periods for collection of
applicable only if: (1) the proprietary educational taxes are governed by the tax law imposing the tax.
institution is nonprofit and (2) its gross income from However, if the tax law does not provide for prescription,
unrelated trade, business or activity does not exceed 50% the right of the government to collect taxes becomes
of its total gross income. Consistent with Article XIV, imprescriptible.
Section 4 (3) of the Constitution, these limitations do not
apply to non-stock, non-profit educational institutions. Distinguish a direct from an indirect tax. Give
examples (1994, 2000, 2001, 2006 BAR).
Thus, the Court ruled that the last paragraph2 of Section
30 of the Tax Code is without force and effect for being Direct taxes are demanded from the very person who, as
contrary to the Constitution insofar as it subjects to tax intended, should pay the tax which he cannot shift to
the income and revenues of non-stock, non-profit another. Income tax, estate and donor's tax are
educational institutions used, directly and exclusively for considered as direct taxes. Indirect taxes, on the other
educational purpose (CIR vs. De La Salle University, G.R. hand, are demanded in the first instance from one person
No. 196596, November 9, 2016, J. Brion). with the expectation that he can shift the burden to
someone else, not as a tax but as a part of the purchase
Lucky V Corporation (Lucky) owns a 10-storey price. Value-added tax, excise tax, other percentage taxes
building on a 2,000-square meter lot in the City of are indirect taxes.
Makati. It sold the lot and building to Rainier for P80
million. One month after, Rainier sold the lot and How to determine if a tax is direct or indirect
building to Healthy Smoke Company (HSC) for P200
million. Lucky filed its annual tax return and declared It is direct taxes when the impact or liability for the
its gain from the sale of the lot and building in the payment of tax as well as incidence or burden of tax falls
amount of P750, 000.00. on the same person. On the other hand, it is indirect taxes
when the impact or liability for the payment of tax falls
An investigation conducted by the BIR revealed that on one person but the incidence or burden thereof can be
two months prior to the sale of the properties to shifted or passed to another.
Rainier, Lucky received P40 million from HSC and not
from Rainier. Said amount of P40 million was debited NOTE: In indirect taxation, a distinction is made between
by HSC and reflected in its trial balance as "other inv. the liability for the tax and burden of the tax: The seller
- Lucky Bldg." The month after, another P40 million who is liable for the VAT may shift or pass on the amount
was reflected in HSC's trial balance as "other inv. - of VAT it paid on goods, properties or services to the
Lucky Bldg." The BIR concluded that there is tax buyer. In such a case, what is transferred is not the
evasion since the real buyer of the properties of seller's liability but merely the burden of the VAT (Diaz v.

1 All revenues and assets of non-stock, non-profit educational


institutions used, directly, and exclusively for educational 2 Notwithstanding the provisions in the preceding paragraphs, the
purposes shall be exempt from taxes and duties. Xxx Proprietary income of whatever kind and character of the foregoing
educational institutions, including those cooperatively owned, may organizations from any of their properties, real or personal, or from
likewise be entitled to such exemptions subject to the limitations any of their activities conducted for profit regardless of the
provided by law including restrictions on dividends and provisions for disposition made of such income shall be subject to tax imposed
reinvestment. (emphasis supplied) under this Code. (emphasis supplied)

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TAXATION LAW

The Secretary of Finance, G.R. No. 193007, July 19, 2011). 142 of the Tax Code. Is there double taxation in
Where the burden of the tax is shifted to the purchaser, prohibited sense when excise specific tax is imposed
the amount passed on to it is no longer a tax but becomes on stemmed leaf tobacco and again on the finished
an added cost on the goods purchased, which constitutes product of which stemmed leaf tobacco is a raw
a part of the purchase price. (Silkair v. CIR, G.R. No. material?
166482, January 25, 2012).
NONE. In this case, there is no double taxation in the
DOUBLE TAXATION prohibited sense despite the fact that they are paying the
specific tax on the raw material and on the finished
Explain the concept of double taxation. (2016 BAR) product in which the raw material was a part, because the
specific tax is imposed by explicit provisions of the NIRC
Double taxation occurs when the same subject or object on two different articles or products: (1) on the stemmed
of taxation is taxed twice when it should be taxed but leaf tobacco; and (2) on cigar or cigarette (La Suerte Cigar
once. Double taxation is prohibited when it is an & Cigarette Factory v. CA, G.R. No. 125346, November 11,
imposition of taxes on the same subject matter, for the 2014).
same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period, with the EXEMPTION FROM TAX
same kind or character of a tax (84 C.J.S. 131-132). It is
permissible if taxes are of different nature or character, Why are tax exemptions strictly construed against
or the two taxes are imposed by different taxing the taxpayer? (1996 BAR)
authorities (Villanueva v. City of Iloilo, 26 SCRA 578
[1968]). Tax exemptions are strictly construed against the
taxpayer because such provisions are highly disfavored
The City of Manila assessed and collected taxes from and may almost be said to be odious to the law (Manila
taxpayers pursuant to Sec. 15 (Tax on Wholesalers, Electric Company vs. Vera, 67 SCRA351). The exception
Distributors, or Dealers) and Sec. 17 (Tax on contained in the tax statutes must be strictly construed
Retailers) of the Revenue Code of Manila (Ordinance against the one claiming the exemption because the law
No. 7794). At the same time, the City of Manila does not look with favor on tax exemptions they being
imposed additional taxes upon the taxpayers contrary to the life-blood theory which is the underlying
pursuant to Sec. 21 of the Revenue Code of Manila, basis for taxes.
which imposes tax on a person who sold goods and
services in the course of trade or business based on As an incentive for investors, a law was passed giving
a certain percentage of his gross sales or receipts in newly established companies in certain economic
the preceding calendar year, as a condition for the zone exemption from all taxes, duties, fees, imposts
renewal of their respective business licenses for the and other charges for a period of three years. ABC
year 1999. Is there double taxation? Corp. was organized and was granted such incentive.
In the course of business, ABC Corp. purchased
YES. All the elements of double taxation concurred upon mechanical equipment from XYZ Inc. Normally, the
the City of Manila’s assessment on and collection from the sale is subject to a sales tax. XYZ Inc. claims, however,
petitioners of taxes pursuant to Sec. 21 of the Revenue that since it sold the equipment to ABC Corp. which is
Code of Manila. Firstly, because Sec. 21 of the Revenue tax exempt, XYZ should not be liable to pay the sales
Code of Manila imposed the tax on a person who sold tax. Is this claim tenable? (2004 BAR)
goods and services in the course of trade or business
based on a certain percentage of his gross sales or NO. Exemption from taxes is personal in nature and
receipts in the preceding calendar year, while Sec. 15 and covers only taxes for which the taxpayer-grantee is
Sec. 17 likewise imposed the tax on a person who sold directly liable. The sales tax is a tax on the seller who is
goods and services in the course of trade or business but not exempt from taxes. Since XYZ Inc. is directly liable for
only identified such person with particularity, namely, the sales tax and no tax exemption privilege is ever given
the wholesaler, distributor or dealer (Sec. 15), and the to him, therefore, its claim that the sale is tax exempt is
retailer (Sec. 17), all the taxes — being imposed on the not tenable. A tax exemption is construed in strictissimi
privilege of doing business in the City of Manila in order Juris and it cannot be permitted to exist upon vague
to make the taxpayers contribute to the city’s revenues — implications (Asiatic Petroleum Co., Ltd. V. Llanes, 49 Phil
were imposed on the same subject matter and for the 466 [1926]).
same purpose. Secondly, the taxes were imposed by the
same taxing authority (the City of Manila) and within the Philippine National Railways (PNR) operates the rail
same jurisdiction in the same taxing period (i.e., per transport of passengers and goods by providing train
calendar year). Thirdly, the taxes were all in the nature stations and freight customer facilities from Tutuban,
of local business taxes. Manila to the Bicol Province. As the operator of the
railroad transit, PNR administers the land,
In fine, the imposition of the tax under Section 21 improvements and equipment within its main station
constituted double taxation, and the taxes collected in Tutuban, Manila.
pursuant thereto must be refunded (Nursery Care
Corporation v. Acevedo, 731 SCRA 280, G.R. No. 180651, Invoking Section 193 of the Local Government Code
July 30, 2014, J. Bersamin). (LGC) expressly withdrawing the tax exemption
privileges of government-owned and controlled
Under the Sin Tax Law, stemmed leaf tobacco, a corporations upon the effectivity of the Code in 1992,
partially prepared tobacco, is subject to an excise tax the City Government of Manila issued Final Notices of
for each kilo thereof. On the other hand, cigars and Real Estate Tax Deficiency in the amount of P624,
cigarettes, of which stemmed leaf tobacco is a raw 000, 000.00 for the taxable years 2006 to 2010. On
material, are also subjected to specific tax under Sec. the other hand, PNR, seeking refuge under the

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UST LAW PRE-WEEK NOTES 2017

principle that the government cannot tax itself, corporate income tax (PAGCOR vs. BIR, GR No. 172087,
insisted that the PNR lands and buildings are owned March 15, 2011, J. Peralta).
by the Republic.
PAGCOR argues that the withdrawal of its exemption
Is the PNR exempt from real property tax? Explain from corporate income tax has the effect of changing
your answer. (2016 BAR) the main consideration and inducement for the
transactions of private parties with it; thus, the
YES. The exercise of the taxing power of LGUs is subject amendatory provision is violative of the non-
to the limitations enumerated in Sec. 133 of the LGC. impairment clause of the Constitution. Is PAGCOR’s
Under Sec. 133(o)3 of the LGC, LGUs have no power to tax contention tenable?
instrumentalities of the national government like the
PNR. Thus, PNR is not liable to pay real property tax NO. As regards franchises, Section 11, Article XII of the
except those portions which are leased to private persons Constitution provides that no franchise or right shall be
or entities. Moreover, the properties of PNR are owned by granted except under the condition that it shall be subject
the Republic of the Philippines and thus exempt from real to amendment, alteration, or repeal by the Congress
property tax (Sec. 234, LGC). when the common good so requires.

What is the taxable treatment of Government-Owned In this case, PAGCOR was granted a franchise to operate
and Controlled Corporations (GOCC)? and maintain gambling casinos, clubs and other
recreation or amusement places, sports, gaming pools,
GOCCs perform proprietary functions; hence they are i.e., basketball, football, lotteries, etc., whether on land or
subject to taxation. However, certain corporations have sea, within the territorial jurisdiction of the Republic of
been granted exemption under the Tax Code of 1997, as the Philippines. Under Section 11, Article XII of the
amended, to wit: Constitution, PAGCORs franchise is subject to
amendment, alteration or repeal by Congress such as the
1. Government Service Insurance System (GSIS) amendment under Section 1 of R.A. No. 9377. Hence, the
2. Social Security System (SSS) provision in Section 1 of R.A. No. 9337, amending Section
3. Philippine Health Insurance Corporation (PHIC) 27 (c) of R.A. No. 8424 by withdrawing the exemption of
4. Philippine Charity Sweepstakes Office (PCSO) PAGCOR from corporate income tax, which may affect
any benefits to PAGCORs transactions with private
PAGCOR was created on January 1, 1977 and its parties, is not violative of the non-impairment clause of
charter provides for the exemption from the payment the Constitution (PAGCOR vs. BIR, GR No. 172087, March
of any type of tax, except a franchise tax of five 15, 2011, J. Peralta).
percent (5%) of the gross revenue.
In view of the withdrawal of its tax privilege, is
On January 1, 1998, Tax Code of 1997 took effect. It PAGCOR’s income tax liability applicable to all types
provides, among others, that GOCCs shall pay of its income?
corporate income tax, except PAGCOR, GSIS, SSS, PHIC
and PCSO. Subsequently, the law was amended to NO. PAGCOR’s income is classified into two: (1) income
exclude PAGCOR from the enumeration of GOCCs that from its operations conducted under its Franchise
are exempt from payment of corporate income tax. (income from gaming operations); and (2) income from
its operation of necessary and related services (income
Consequently, PAGCOR assails the amendment for from other related services).
being unconstitutional, as it is violative of its right to
equal protection of the laws under Section 1, Article Under its charter, P.D. 1869, PAGCOR is subject to income
III of the Constitution. Is PAGCOR’s contention tax only with respect to its income from other related
tenable? services, while income from gaming operations is subject
to the five percent (5%) franchise tax only (PAGCOR vs.
NO. PAGCOR cannot find support in the equal protection BIR, GR No. 215427, December 10, 2014, J. Peralta).
clause of the Constitution. The exemption of PAGCOR
from paying corporate income tax was not based on a On 8 April 2009, PAGCOR granted to Bloomberry
classification showing substantial distinctions which Resorts and Hotels, Inc. a license to establish and
make for real differences, but the exemption was granted operate an integrated resort and casino complex at
upon the request of PAGCOR that it be exempt from the the Entertainment City, project site of PAGCOR. Thus,
payment of corporate income tax. A perusal of the being one of its licensees, Bloomberry only pays
legislative records of the Bicameral Conference Meeting PAGCOR license fees, in lieu of all taxes, consistent
of the Committee on Ways on Means dated October 27, with the PAGCOR Charter (P.D. No. 1869) providing
1997 would show that the exemption of PAGCOR from for the exemption from taxes of persons or entities
the payment of corporate income tax was due to the contracting with PAGCOR in casino operations.
acquiescence of the Committee on Ways on Means to the
request of PAGCOR that it be exempt from such tax. However, when the Tax Code was amended to
exclude PAGCOR from the enumeration of GOCCs
With the amendment of the Tax Code, PAGCOR has been exempt from paying corporate income tax, BIR issued
excluded from the enumeration of GOCCs that are exempt RMC No. 33-2013, which is being assailed by
from paying corporate income tax. It is the legislative Bloomberry as invalid, stating among others that
intent that PAGCOR be subject to the payment of

3 “SEC. 133. Common Limitations on the Taxing Powers of Local (o) Taxes, fees or charges of any kind on the National Government, its
Government Units. — Unless otherwise provided herein, the exercise of agencies and instrumentalities and local government units.”
the taxing powers of provinces, cities, municipalities, and barangays (Emphasis supplied)
shall not extend to the levy of the following: xxx

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PAGCOR's contractees and licensees are subject to In a citizen’s suit, the interest of the petitioner assailing
income tax under the Tax Code. the constitutionality of a statute must be direct and
personal. He must be able to show, not only that the law
Is the assailed RMC subjecting the contractees and or any government act is invalid, but also that he
licensees of PAGCOR to income tax valid considering sustained or is in imminent danger of sustaining some
that PAGCOR Charter grants tax exemptions to such direct injury as a result of its enforcement, and not merely
contractees and licensees? that he suffers thereby in some indefinite way. It must
appear that the person complaining has been or is about
NO. Section 13 of the PAGCOR Charter states that to be denied some right or privilege to which he is
payment of the 5% franchise tax by PAGCOR and its lawfully entitled or that he is about to be subjected to
contractees and licensees exempts them from payment of some burdens or penalties by reason of the statute or act
any other taxes, including corporate income tax. Said complained of (Francisco, Jr. v. Nagmamalasakit na mga
provision was neither amended nor repealed by any Manananggol ng mga Manggagawang Pilipino, Inc., 415
subsequent laws (i.e. Section 1 of R.A. No. 9337); hence, it SCRA 44, G.R. No. 160262, November 10, 2003).
is still in effect.
PART II: NATIONAL TAXATION
Thus, like PAGCOR, its contractees and licensees remain
exempted from the payment of corporate income tax and
other taxes. As the PAGCOR Charter states in unequivocal
INCOME TAXATION
terms that exemptions granted for earnings derived from
What is the concept of “income from whatever
the operations conducted under the franchise specifically
source”?
from the payment of any tax, income or otherwise, as well
as any form of charges, fees or levies, shall inure to the
Under Sec. 32 (A) of the NIRC, gross income means all
benefit of and extend to corporation(s), association(s),
income derived from whatever source. It includes all
agency(ies), or individual(s) with whom the PAGCOR or
income not expressly excluded or exempted from the
operator has any contractual relationship in connection
class of taxable income, irrespective of the voluntary or
with the operations of the casino(s) authorized to be
involuntary action of the taxpayer in producing the
conducted, so it must be that all contractees and licensees
income. Therefore, the source is immaterial – whether
of PAGCOR, upon payment of the 5% franchise tax, shall
derived from illegal, legal, or immoral sources, it is
likewise be exempted from all other taxes, including
taxable.
corporate income tax realized from the operation of
casinos.
Sure Arrival Airways (SAA) is a foreign corporation,
organized under the laws of the Republic of Nigeria.
However, the contractees and licensees, like PAGCOR,
Its commercial airplanes do not operate within
shall be liable for corporate income tax for income
Philippine territory, or service passengers
derived from "other related services" (Bloomberry
embarking from Philippine airports. The firm is
Resorts and Hotels, Inc. vs. BIR, G.R. No. 212530, August 10,
represented in the Philippines by its general agent,
2016, J. Perez).
Narotel. SAA sells airplane tickets through Narotel,
and these tickets are serviced by SAA airplanes
TAXPAYER’S SUIT outside the Philippines. The total sales of airplane
tickets transacted by Narotel for SAA in 2012
What is a taxpayer’s suit? amounted to P10, 000, 000.00. The Commissioner of
Internal Revenue (CIR) assessed SAA deficiency
It is a case where the act complained of directly involves income taxes at the rate of 30% on its taxable income,
the illegal disbursement of public funds collected through finding that SAA's airline ticket sales constituted
taxation. income derived from sources within the Philippines.

What are the requisites of a taxpayer’s suit? SAA filed a protest on the ground that the alleged
deficiency income taxes should be considered as
1. Public funds derived from taxation are disbursed by a income derived exclusively from sources outside the
political subdivision or instrumentality and in doing Philippines since SAA only serviced passengers
so, a law is violated or some irregularity is committed; outside Philippine territory. It, thus, asserted that the
and imposition of such income taxes violated the
2. The petitioner is directly affected by the alleged act. principle of territoriality in taxation. Is the theory of
SAA tenable? Explain. (2016 BAR)
NOTE: A taxpayer’s suit would fail if what are alleged to
be illegally disposed of are object which were acquired NO. The activity which gives rise to the income is the sale
from private sources (Joya, et al. v. PCGG, et al., G.R. No. of ticket in the Philippines, hence, the income from sale of
96541, August 24, 1993). tickets is an income derived from Philippines sources
which is subject to the Philippine income tax.
Distinguish taxpayer’s suit from a citizen’s suit Accordingly, there is no violation of the principle of
territoriality in taxation (Air Canada v. CIR, 778 SCRA 131,
In the case of a taxpayer’s suit, plaintiff is allowed to sue [2016]).
where there is a claim that public funds are illegally
disbursed, or that public money is being deflected to any What is Tax Benefit Rule or Equitable Doctrine of Tax
improper purpose, or that there is a wastage of public Benefit?
funds through the enforcement of an invalid or
unconstitutional law It is a principle that if a taxpayer recovers a loss or expense
that was deducted in a previous year, the recovery must

6
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be included in the current year's gross income to the Filipinos under the Dual Citizenship Law so that they will
extent that it was previously deducted. be encouraged to come home and invest their money in
our country.
What are the instances where tax benefit rule
applies? Mr. A, a citizen and resident of the Philippines, is a
professional boxer. In a professional boxing match
1. Recovery of bad debts – The recovery of bad debts held in 2013, he won prize money in United States
previously allowed as deduction in the preceding year (US) dollars equivalent to P300, 000, 000.
or years shall be included as part of the taxpayer’s
gross income in the year of such recovery to the extent a. Is the prize money paid to and received by Mr. A
of the income tax benefit of said deduction. in the US taxable in the Philippines? Why?
b. May Mr. A's prize money qualify as an exclusion
If the taxpayer did not benefit from deduction of the from his gross income? Why?
bad debt written-off because it did not result in any c. The US already imposed and withheld income
reduction of his income tax in the year of such taxes from Mr. A's prize money. How may Mr. A
deduction as in the case where the result of the use or apply the income taxes he paid on his prize
taxpayer’s business operation was a net loss even money to the US when he computes his income
without deduction of the bad debts written-off, his tax liability in the Philippines for 2013? (2015
subsequent recovery thereof shall be treated as a BAR)
mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income. a. YES. A citizen of the Philippines residing therein is
taxable on all income derived from sources within
2. Receipt of tax refunds or credit – If a taxpayer and without the Philippines (Sec. 23 A, NIRC). Mr. A,
receives tax credit certificate or refund for being a resident citizen, is taxable on the prize he
erroneously paid tax which was claimed as a received in United States.
deduction from his gross income that resulted in a b. NO. All prizes and awards granted to athletes in local
lower net taxable income or a higher net operating and international sports competitions and
loss that was carried over to the succeeding taxable tournaments, whether held in the Philippines or
year, he realizes taxable income that must be included abroad, and sanctioned by their national sports
in his income tax return in the year of receipt. associations are excluded from gross income. The
exclusion find application only to amateur athletes
The foregoing principle does not apply to tax credits where the prize was given in an event sanctioned by
or refunds of the following taxes since these are not the appropriate national sports association affiliated
deductible from gross income: with the Philippine Olympic Committee and not to
professional athletes like Mr. A. Therefore, the prize
a. Income tax; money would not qualify as an exclusion from Mr. A’s
b. Estate tax; gross income (Sec. 32 B [7] [d], NIRC).
c. Donor’s tax; and c. Mr. A has the option to claim foreign income tax
d. Special assessments. either as a deduction from gross income or as a tax
credit. The option of Mr. A is mutually exclusive.
Patrick is a successful businessman in the United
States and he is a sole proprietor of a supermarket If the option of Mr. A is a deduction from gross
which has gross sales of $10 million and an annual income, the income tax on his prize money imposed
income of $3 million. He went to the Philippines on a in US is included among the itemized deductions of
visit and, in a party, he saw Atty. Agaton who boasts the taxpayer. If Mr. A signifies in his return his desire
of being a tax expert. Patrick asks Atty. Agaton: if he to avail of the tax credit, he will be allowed a credit
(Patrick) decides to reacquire his Philippine on his tax due an amount equivalent to the income
citizenship under RA 9225, establish residence in tax paid or incurred in US during the taxable year but
this country, and open a supermarket in Makati City, not to exceed the limitation prescribed by law (Sec.
will the BIR tax him on the income he earns from his 34 [C][1][b], NIRC).
U.S. business? If you were Atty. Agaton, what advice
will you give Patrick? (2016 BAR) BBB, Inc., a domestic corporation, enjoyed a
particularly profitable year in 2014. In June 2015, its
I will advise Patrick that once he re-acquires his Board of Directors approved the distribution of cash
Philippine citizenship and establishes his residence in dividends to its stockholders. BBB, Inc. has individual
this country, his income tax classification would then be and corporate stockholders. What is the tax
a ‘resident citizen’. A resident citizen is taxable on all his treatment of the cash dividends received from BBB,
income, whether derived within or without the Inc. by the following stockholders?
Philippines; accordingly, the income he earns from his
business abroad will now be subject to the Philippine a. A resident citizen
income tax (Sec. 23, NIRC). b. Non-resident alien engaged in trade or business
c. Non-resident alien not engaged in trade or
Alternative Answer business
d. Domestic corporation
If Patrick becomes a dual citizen under RA 9225 in our e. Non-resident foreign corporation (2015 BAR)
country, he shall be allowed to acquire real properties
and engage himself in business here just like an ordinary a. A final withholding tax of 10% shall be imposed upon
Filipino without renouncing his foreign citizenship. In cash dividends actually or constructively received by
addition, his income abroad will not be taxed here. These a resident citizen from BBB, Inc. [Sec. 24(b)(2), NIRC].
are among the incentives we have extended to former

7
TAXATION LAW

b. A final withholding tax of 20% shall be imposed upon than the regular corporate income tax o the
cash dividends actually or constructively received by corporation (Sec. 27(A) and (E), NIRC; RR No. 9-
a non-resident alien engaged in trade or business 98).
from BBB, Inc [Sec. 24(a)(2), NIRC].
c. A final withholding tax equal to 25% of the entire Methods of Accounting
income received from all sources within the
Philippines, including the cash dividends received Distinguish cash method from accrual method of
from BBB, Inc [Sec. 25(b), NIRC]. accounting.
d. Dividends received by a domestic corporation from
another domestic corporation, such as BBB, Inc., shall In cash method, income is recognized only upon actual or
not be subject to tax [Sec. 27(d)(4), NIRC]. constructive receipt of cash payments or property but no
e. Dividends received by a non-resident foreign deductions are allowed from the cash income unless
corporation from a domestic corporation are actually disbursed through an actual or constructive
generally subject to an income tax of 30% to be payment in cash or property.
withheld at source [Sec. 28 (b)(1), NIRC]. However, a
final withholding tax of 15% is imposed on the Meanwhile, in accrual method, income is recognized in
amount of cash dividends received from a domestic the period it is earned, regardless of whether it has been
corporation like BBB, Inc. if the tax sparing rule received or not. In the same manner, expenses are
applies [Sec. 28(B)(5)(b), NIRC]. Pursuant to this rule, accounted for in the period they are incurred and not in
the lower rate of tax would apply if the country in the period they are paid (Domondon, 2013). Amounts of
which the non-resident foreign corporation is income accrue where the right to receive them become
domiciled would allow as a tax credit against the tax fixed, where there is created an enforceable liability.
due from it, taxes deemed paid in the Philippines of Similarly, liabilities are accrued when fixed and
15% representing the difference between the regular determinable in amount, without regard to
income tax rate and the preferential rate. indeterminacy merely of time of payment (CIR v. Isabela
Cultural Corp., G.R. No. 172231, 2007).
KKK Corp. secured its Certificate of Incorporation
from the Securities and Exchange Commission on Does the law provide for specific method of
June 3, 2013. It commenced business operations on accounting to be employed by the taxpayer?
August 12, 2013. In April 2014, Ms. J, an employee of
KKK Corp. in charge of preparing the annual income As a general rule, the law does not provide for a specific
tax return of the corporation for 2013, got confused method of accounting to be employed by the taxpayer.
on whether she should prepare payment for the The law only authorizes the CIR to employ particular
regular corporate income tax or the minimum method of accounting of income where:
corporate income tax.
a. The taxpayer does not employ a method for
a. As Ms. J's supervisor, what will be your advice? computing income, or
b. What are the distinctions between regular b. The taxpayer’s method for accounting does not clearly
corporate income tax and minimum corporate reflect the income (Domondon, 2015, citing Sec. 43 of
income tax (MCIT)? (2015 BAR) Tax Code).

a. As Ms. J’s supervisor, I will advise that KKK Corp. Isabela Cultural Corporation (ICC) incurred
should prepare payment for the regular corporate professional fees for legal and auditing services that
income tax and not the MCIT. Under the Tax Code, pertain to the 1984 and 1985. ICC did not claim
MCIT is only applicable beginning the 4th taxable deductions for said expenses in 1984 and 1985 since
year following the commencement of business the cost of the services was not yet determinable at
operation [Sec. 27(e)(1), NIRC]. that time. It claimed deductions only in 1986 when
b. The distinctions between regular corporate income ICC received the billing statements for said services.
tax and the minimum corporate income tax are the BIR, however, contends that since ICC is using the
following: accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985,
1. As to taxpayer: Regular corporate income tax should have been declared as deductions from
applies to all corporate taxpayers while income during the said years and the failure of ICC to
minimum corporate income tax applies to do so bars it from claiming said expenses as
domestic corporations and resident foreign deduction for the taxable year 1986. Decide.
corporations.
2. As to tax rate: Regular corporate income tax is The expenses should have been claimed as deductions in
30% while minimum corporate income tax is 1984 and1985. For a taxpayer using the accrual method,
2%. the accrual of income and expense is permitted when the
3. As to tax base: Regular corporate income tax is all-events test has been met.
based on the net taxable income while minimum
corporate income tax is based on gross income. The all-events test requires the right to income or liability
4. As to period of applicability: Regular corporate be fixed, and the amount of such income or liability be
income tax is applicable once the corporation determined with reasonable accuracy. However, the test
commenced its business operation, while does not demand that the amount of income or liability
minimum corporate income tax is applicable be known absolutely, only that a taxpayer has at his
beginning on the 4th taxable year following the disposal the information necessary to compute the
commencement of business operations. amount with reasonable accuracy. The amount of liability
5. As to imposition: The minimum corporate does not have to be determined exactly; it must be
income tax is imposed whenever it is greater determined with "reasonable accuracy."

8
UST LAW PRE-WEEK NOTES 2017

The propriety of an accrual must be judged by the facts corporation which are not traded in the stock
that a taxpayer knew, or could reasonably be expected to exchange (NIRC, Sec. 24 [C]):
have known, at the closing of its books for the taxable
year. From the nature of the claimed deductions and the Not over ₱100K …..……………….………..……5%
span of time during which the firm was retained, ICC can On any amount in excess of ₱100K ……10%
be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its 2. From Sale of Real Properties / Land and/or
legal services. The failure to determine the exact amount Buildings in the Philippines4 – capital gain derived is
of the expense during the taxable year when they could subject to 6% capital gains tax based on the gross
have been claimed as deductions cannot thus be selling price or current fair market value,
attributed solely to the delayed billing of these liabilities whichever is higher. No loss is recognized because
by the firm. For one, ICC, in the exercise of due diligence gain is presumed.
could have inquired into the amount of their obligation to
the firm, especially so that it is using the accrual method Gains from sale to the government of real property
of accounting. For another, it could have reasonably classified as capital asset:
determined the amount of legal and retainer fees owing
to its familiarity with the rates charged by their long time The taxpayer has the option to either:
legal consultant (CIR v. Isabela Cultural Corp., G.R. No.
172231, 2007). a. Include as part of gross income subject allowable
deductions and personal exemptions, then subject
Income from Dealings in Property to the schedular tax (not available to a corporate
taxpayer); or
Distinguish “capital asset” from “ordinary asset.” b. Subject to final tax of 6% on capital gains (Sec. 24
(2003 BAR) [D], NIRC).

Ordinary assets refer to properties held by the taxpayer 3. From Sale of Other Capital Assets – the rules on
used in connection with his trade or business which capital gains and losses apply in the determination of
includes the following: [SOUR] the amount to be included in gross income subject to
the graduated rates of 5 - 32% for individuals and the
a. Stock in trade of the taxpayer or other property of a normal corporate income tax of 30% for corporations,
kind which would properly be included in the and not subject to capital gains tax.
inventory of the taxpayer if on hand at the close of the
taxable year; State with reason the tax treatment of the following
b. Property held by the taxpayer primarily for sale to in the preparation of annual income tax returns:
customers in the Ordinary course of trade or business; Income realized from sale of:
c. Property Used in the trade or business of a character
which is subject to the allowance for depreciation a. Capital assets; and
provided in the NIRC; and b. Ordinary assets. (2005 BAR)
d. Real property used in trade or business of the
taxpayer. a. Generally, income realized from the sale of capital
assets are not reported in the income tax return as
Capital assets, on the other hand, include property held they are already subject to final taxes (capital gains
by the taxpayer (whether or not connected with his trade tax on real property and shares of stocks not traded
or business) other than ordinary assets [SOUR] above. in the stock exchange). What are to be reported in the
annual income tax return are the capital gains
What is the difference between capital gains and derived from the disposition of capital assets other
ordinary gains? (1995 BAR) than real property or shares of stocks in domestic
corporations, which are not subject to final tax.
Capital gains are gains realized from the sale or exchange b. Income realized from sale of ordinary assets is part
of capital assets, while ordinary gains refer to gains of Gross Income, included in the Income Tax Return
realized from the sale or disposition of ordinary assets. (NIRC, Sec. 32 A [3]).

Discuss the tax treatment of capital gains and losses. NOTE: Ordinary assets and capital assets are subject to
different rules. There are special rules that apply only to
1. Capital gains from Sale of Stocks of Corporations capital transactions, to wit:

a. Stocks Traded in the Stock Exchange – subject to 1. Holding period rule


stock transaction tax of ½ of 1% on its gross selling 2. Capital loss limitation
price (Percentage Tax). 3. Net capital loss carry-over (NELCO)
b. Stocks Not Traded in the Stock Exchange – subject
to Capital Gains Tax. What is Holding Period Rule?

The holding period notwithstanding, a final tax at Where the taxpayer held the capital asset sold for more
the rates prescribed below is imposed upon the than 12 months, the gain derived therefrom is taxable
net capital gains realized during the taxable year only to the extent of 50%. Consequently, if the taxpayer
from the sale, barter or exchange or other held the capital asset sold for a year or less, the whole
disposition of shares of stock in a domestic gain shall be taxable. The same also applies to capital loss.

4 The Tax Code speaks of real property with respect to individual


taxpayers, estate and trust but only speaks of land and/or building with
respect to domestic corporations.

9
TAXATION LAW

It is a form of tax avoidance since the taxpayer can exploit As to who Can be Can be availed of
it in order to reduce his tax due (NIRC, Sec. 39 [B]). can avail availed of by by individual and
individual corporate
Only individual taxpayers can avail of the holding period taxpayer only taxpayer
rule. It is not allowed to corporations. As to period May be Allows carryover
of carry-over carried over of operating loss
NOTE: Holding period does not find application in the only in the in 3 succeeding
case of disposition of: next taxable years or
succeeding in case of mining
1. shares of stock, and taxable year companies 5
2. real property considered as capital asset, whether years
the seller is an individual, trust, estate or a private
corporation. As to tax implication, distinguish shares of stocks not
listed and traded through stock exchange from those
What is Capital Loss Limitation Rule? listed and traded through stock exchange. (2008,
2011 BAR)
Losses from sale or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or
NOT listed Listed and
exchanges [NIRC, Sec. 39 (C)].
and traded traded
As to nature Income Business
Thus, capital loss is deductible only to the extent of
capital gain. The taxpayer can only deduct capital loss As to kind of Capital gains Percentage tax
from capital gain. If there is no capital gain, then no tax tax
deduction is allowed because you cannot deduct capital As to rate Not over ½ of 1%
loss from ordinary gain. ₱100,000 =
5%
Where the capital loss limitation rule will NOT apply: In excess of
₱100,000 =
a. If a bank or trust company incorporated under the 10%
laws of the Philippines, As to tax Net capital Gross selling
b. a substantial part of whose business is the receipt of base gain price
deposits,
c. sells any bond, debenture, note or certificate or other
evidence of indebtedness issued by any corporation, What is the tax treatment on sale or disposition of
with interest coupons or in registered form, real property located in the Philippines treated as
d. any losses resulting from such sale shall not be capital asset?
subject to the above limitations and shall not be
included in determining the applicability of such A final tax of 6% shall be imposed based on the higher
limitation to other losses (NIRC, Sec. 39 [C]). amount between:

What is Net Loss Carry Over (NELCO) rule? 1. The gross selling price; or
2. Whichever is higher between the current fair market
If any taxpayer, other than a corporation, sustains in any value as determined by:
taxable year a net capital loss, such loss (in an amount not 3.
in excess of the net income for such year) shall be treated a. Zonal Value – prescribed zonal value of real
in the succeeding taxable year as a loss from the sale or properties as determined by the CIR; or
exchange of a capital asset held for not more than 12 b. Assessed Value – the fair market value as shown
months (NIRC, Sec. 39 [D]). in the schedule of values of the Provincial and
City assessors (NIRC, Sec. 24 D [1]).
Rules with regard to NELCO:
NOTE: Actual gain or loss is immaterial since there is a
1. NELCO is allowed only to individuals, including conclusive presumption of gain. Also, the above rule shall
estates and trusts. apply only to domestic corporations, since foreign
2. The net loss carry-over shall not exceed the net corporations (RFC and NRFC) cannot own properties in
income for the year sustained and is deductible only the Philippines.
for the succeeding year.
3. The capital assets must not be real property or stocks What if the real property, which is a capital asset, is
listed and traded in the stock exchange. not located in the Philippines?
4. Capital asset must be held for not more than 12
months. Gains realized from the sale, exchange or other
disposition of real property, not located in the Philippines
Distinguish NELCO from Net Operating Loss Carry by resident citizens or domestic corporations shall be
Over (NOLCO) subject to ordinary income taxation (RR 7-2003, Sec. 4.
[F]) but subject to foreign tax credits.
BASIS NELCO NOLCO
As to source Arises from Arises from Such income may be exempt in case of non-resident
capital ordinary citizens, alien individuals and foreign corporations (RR 7-
transactions transactions 2003, Sec. 4. [F]).
meaning meaning
involving involving Hopeful Corporation obtained a loan from Generous
capital asset ordinary asset Bank and executed a mortgage on its real property to

10
UST LAW PRE-WEEK NOTES 2017

secure the loan. When Hopeful Corporation failed to Distinguish "Exclusion from Gross Income" from
pay the loan, Generous Bank extrajudicially "Deductions from Gross Income." Give an example of
foreclosed the mortgage on the property and each. (2001 BAR)
acquired the same as the highest bidder. A month
after the foreclosure, Hopeful Corporation exercised Exclusions from gross income refer to a flow of wealth to
its right of redemption and was able to redeem the the taxpayer which are not treated as part of gross
property. Is Generous Bank liable to pay capital gains income, for purposes of computing the taxpayer’s taxable
tax as a result of the foreclosure sale? Explain. (2014 income, due to the following reasons: (1) It is exempted
BAR) by the fundamental law; (2) It is exempted by statute; and
(3) It does not come within the definition of income (Sec.
NO. In a foreclosure of a real estate mortgage, the capital 61, RR No. 2).
gains tax accrues only after the lapse of the redemption
period because it is only then that there exists a transfer Deductions from gross income, on the other hand, are the
of property. Thus, if the right to redeem the foreclosed amounts, which the law allows to be deducted from gross
property was exercised by the mortgagor before the income in order to arrive at net income.
expiration of the redemption period, as in this case, the
foreclosure is not a taxable event (See RR No. 4-99; Exclusions pertain to the computation of gross income,
Supreme Transliner, Inc. v. BPI Family Savings Bank, Inc. while deductions pertain to the computation of net
G.R. No. 165617, February 25, 2011). income.

What is principal residence? Exclusions are something received or earned by the


taxpayer which do not form part of gross income while
Principal residence refers to the dwelling house, deductions are something spent or paid in earning gross
including the land on which it is situated, where the income.
individual and members of his family reside, and
whenever absent, the said individual intends to return. Example of an exclusion from gross income is proceeds of
Actual occupancy is not considered interrupted or life insurance received by the beneficiary upon the death
abandoned by reason of temporary absence due to travel of the insured which is not an income or 13th month pay
or studies or work abroad or such other similar of an employee not exceeding P30, 000 (now at P82, 000)
circumstances (RR No. 14-00). which is an income not recognized for tax purposes.
Example of a deduction is business rental.
Is sale of principal residence by an individual subject
to capital gains tax? (2015 BAR) Deductions from Gross Income

A sale of principal residence by an individual is exempt To be entitled to claim a tax deduction, the taxpayer must
from capital gains tax provided the following requisites competently establish the factual and documentary bases
are present: of its claim. (H. Tambunting Pawnshop vs. CIR, G.R. No.
173373, July 29, 2013, J. Bersamin).
1. Sale or disposition of the old actual principal
residence; What is the “Matching Concept” of deductibility?
2. By a citizen or resident alien;
3. Proceeds from which is fully utilized in acquiring or This posits that the deductions must, as a general rule,
constructing a new principal residence within 18 “match” the income, i.e. helped earn the income
calendar months from the date of sale or disposition; (Domondon, 2013).
4. Notify the CIR within 30 days from the date of sale or
disposition through a prescribed return of his Ordinary and necessary expenses must have been paid or
intention to avail the tax exemption; incurred during the taxable year for it to be deductible
5. Can be availed of once every 10 years; from gross income. Further, the deduction shall be taken
6. The historical cost or adjusted basis of his old for the taxable year in which 'paid or accrued' or 'paid or
principal residence shall be carried over to the cost incurred.' Otherwise, the expenses are barred as
basis of his new principal residence; deductions in subsequent years (CIR v. Isabela Cultural
7. If there is no full utilization, the portion of the gains Corporation, G.R. No. 172231, February 12, 2007).
presumed to have been realized shall be subject to
capital gains tax; and Distinguish Allowable Deductions from Personal
8. The 6% capital gains tax due shall be deposited with Exemptions. Give an example of an allowable
an authorized agent bank subject to release upon deduction and another example for personal
certification by the RDO that the proceeds of the sale exemption. (2001 BAR)
have been utilized (R.R. No. 14-00).
The distinction between allowable deductions and
If the taxpayer constructed a new residence and then personal exemptions are as follows:
sold his old house, is the transaction subject to capital
gains tax? a. As to amount — Allowable deductions generally refer
to actual expenses incurred in the pursuit of trade,
YES. Exemption from capital gains tax does not find business or practice of profession while personal
application since the law is clear that the proceeds should exemptions are arbitrary amounts allowed by law.
be used in acquiring or constructing a new principal b. As to nature — Allowable deductions constitute
residence. Thus, the old residence should first be sold business expenses while personal exemptions pertain
before acquiring or constructing the new residence. to personal expenses.
c. As to purpose — Deductions are allowed to enable the
Exclusions from Gross Income taxpayer to recoup his cost of doing business while

11
TAXATION LAW

personal exemptions are allowed to cover personal, d. they must be supported by receipts, records or other
family and living expenses. pertinent papers.
d. As to claimants — Allowable deductions can be
claimed by all taxpayers, corporate or otherwise, Tambunting did not discharge its burden of
while personal exemptions can be claimed only by substantiating its claim for deductions due to the
individual taxpayers. inadequacy of its documentary support of its claim. Its
reliance on withholding tax returns, cash vouchers,
Tambunting was assessed for deficiency income tax lessor’s certifications, and the contracts of lease was
as a result of disallowance of deductions from gross futile because such documents had scant probative value.
income on the ground that Tambunting had not The law required Tambunting to support its claim for
substantiated them by sufficient evidence. deductions with the corresponding official receipts
Tambunting argues against the assessment that: issued by the service providers concerned.

1. It had been able to point out the provisions of law c) Loss due to fire and theft - The documents submitted to
authorizing the deductions, and that the support the claim were not enough. What were required
provisions of Section 34 (A)(1)(b) of the 1997 Tax were for Tambunting to submit the sworn declaration of
Code, governing the types of evidence to prove a loss mandated by RR 12-77. Its failure to do so was
claim for deduction of expenses, were applicable prejudicial to the claim because the sworn declaration of
because the law took effect during the pendency loss was necessary to forewarn the BIR that it had
of the case in the CTA; suffered a loss whose extent it would be claiming as a
2. It proved its entitlement to the deductions deduction of its tax liability, and thus enable the BIR to
through all the documentary and testimonial conduct its own investigation of the incident leading to
evidence presented in court, namely: the loss. Indeed, the documents Tambunting submitted to
a) Loss on auction sales - subasta books and the BIR could not serve the purpose of their submission
rematado; without the sworn declaration of loss (H. Tambunting
b) Business expenses - withholding tax returns, Pawnshop vs. CIR, G.R. No. 173373, July 29, 2013, J.
cash vouchers, lessor’s certifications, and the Bersamin).
contracts of lease;
c) Loss due to fire and theft - certification from Congress issued a law allowing a 20% discount on the
the Bureau of Fire Protection, the certification purchases of senior citizens from, among others,
from the Police Station, accounting entry for recreation centers. This 20% discount can then be
the losses, and list of properties lost. used by the sellers as a "tax credit." At the initiative
of BIR, however, RA No. 9257 was enacted amending
Rule on the above contentions by Tambunting. the treatment of the 20% discount as a "tax
deduction." Equity Cinema filed a petition with the
The contentions of Tambunting are without merit. First, RTC claiming that RA 9257 is unconstitutional as it
the provisions of the 1997 Tax Code are not applicable forcibly deprives sellers a part of the price without
because the transactions involved occurred prior to its just compensation.
effectivity. Instead, what governs is the provisions of P.D.
1158 or the 1977 Tax Code. a. What is the effect of converting the 20% discount
from a "tax credit" to a "tax deduction"?
Second, tax deductions, being in the nature of tax b. If you are the judge, how will you decide the case?
exemptions, are to be construed in strictissimi juris Briefly explain your answer. (2016 BAR)
against the taxpayer. Corollary to this rule is the principle
that when a taxpayer claims a deduction, he must point to a. The effect of converting the 20% discount from a “tax
some specific provision of the statute in which that credit” to a tax deduction” is that the tax benefit
deduction is authorized and must be able to prove that he enjoyed by sellers of goods and services to senior
is entitled to the deduction which the law allows. In this citizens is effectively reduced. A tax credit reduces the
case, Tambunting failed to substantiate the deductions tax liability while a tax deduction merely reduces the
with sufficient evidence. tax base.

a) Loss on auction sales - The subasta books were not the Under the tax credit scheme, the establishments are
proper evidence of such losses from the auctions because paid back 100% of the discount they give to senior
they did not reflect the true amounts of the proceeds of citizens while under the tax deduction scheme, they
the auctions due to certain items having been left unsold are only paid back about 32% of the 20% discount
after the auctions. The rematado books did not also prove granted to senior citizens.
the amounts of capital because the figures reflected
therein were only the amounts given to the pawnees. b. I will decide in favor of the constitutionality of the law.
The 20% discount as well as the deduction scheme is
b) Business expenses - The requisites for the deductibility a valid exercise of the police power of the State
of ordinary and necessary trade or business expenses, (Manila Memorial Park Inc. v. Department of Social
like those paid for security and janitorial services, Welfare and Development, 711 SCRA 302 [2013]).
management and professional fees, and rental expenses,
are that: Freezy Corporation, a domestic corporation engaged
in the manufacture and sale of ice cream, made
a. the expenses must be ordinary and necessary; payments to an officer of Frosty Corporation, a
b. they must have been paid or incurred during the competitor in the ice cream business, in exchange for
taxable year; said officer’s revelation of Frosty Corporation’s trade
c. they must have been paid or incurred in carrying on secrets. May Freezy Corporation claim the payment
the trade or business of the taxpayer; and to the officer as deduction from its gross income?
Explain. (2014 BAR)

12
UST LAW PRE-WEEK NOTES 2017

NO. Payments made in exchange for the revelation of a such ceilings prescribed by rules and regulations, are
competitor’s trade secrets is considered as an expense allowed as deduction from gross income.
which is against law, morals, good customs or public
policy, which is not deductible (3M Philippines, Inc. v. CIR, In this case, the expenses incurred were to entertain the
G.R. No. 82833, September 26, 1988). investors of Golden Dragon; thus, the amount deductible
for entertainment, amusements and recreation expenses
Also, the law will not allow the deduction of bribes, is limited to the actual amount of paid or incurred but in
kickbacks and other similar payments. Applying the no case shall the deduction exceed 0.50% of net sales for
principle of ejusdem generis, payment made by Freezy taxpayers engaged in the sale of goods or properties (Sec.
Corporation would fall under “other similar payments” 34(A)(1)(a)(iv), NIRC as implemented by RR No. 10-2002).
which are not allowed as deduction from gross income
[Section 34(A)(1)(c), NIRC]. Henry, a U.S. naturalized citizen, went home to the
Philippines to reacquire Philippine citizenship under
Rakham operates the lending company that made a RA 9225. His mother left him a lot and building in
loan to Alfonso in the amount of P120, 000.00 subject Makati City and he wants to make use of it in his
of a promissory note which is due within one (1) year trading business. Considering that he needs money
from the note's issuance. Three years after the loan for the business, he wants to sell his lot and building
became due and upon information that Alfonso is and make use of the consideration. However, the lot
nowhere to be found, Rakham asks you for advice on has sentimental value and he wants to reacquire it in
how to treat the obligation as "bad debt." Discuss the the future. A friend of Henry told him of the "sale-
requisites for deductibility of a "bad debt?" (2016 leaseback transaction" commonly used in the U.S.,
BAR) which is also used for tax reduction. Under said
transaction, the lot owner sells his property to a
I will advise Rakham that that the obligation of Alfonso buyer on the condition that he leases it back from the
may now be considered as bad debts for having met the buyer. At the same time, the property owner is
yardstick of a debt which had become worthless. In order granted an option to repurchase the lot on or before
to be considered worthless, the taxpayers should an agreed date. Henry approaches you as a tax lawyer
establish that during the year from which a deduction is for advice.
sought, a situation developed as a result of which it
became evident the exercise of sound, objective business Explain what tax benefits, if any, can be obtained by
judgement that there remained no practical, but only Henry and the buyer from the sale-leaseback
vaguely theoretical prospect that the debt would ever be transaction? (2016 BAR)
paid (Collector of Internal Revenue v. Goodrich
International Rubber Co., 21 SCRA 1336 [1967]). A bad Henry will be entitled to claim rental expense as a
debt deductible if it complies with the following deduction from his gross income in the trading business.
requisites: His lease payments plus interest would be substantially
higher than the depreciation expense he may claim in
a. There must be a valid and subsisting debt. computing his taxable income; hence, the lease would
b. The obligation is connected with the taxpayer’s trade result in the additional benefit of increasing his
or business and is not between related parties. additional tax deductions. The buyer will be deriving
c. There is an actual ascertainment that the debt is rental income from the property and be able to claim
worthless. business deductions such as real property taxes, repairs
d. The debt is charged-off during the taxable year. A and maintenance, depreciation and other expenses
partial write-off is not allowed (PRC v. CA, 256 SCRA necessary for the renting out of the property.
667[1996]).
In 2012, Dr. K decided to return to his hometown to
Peter is the Vice-President for Sales of Golden Dragon start his own practice. At the end of 2012, Dr. K found
Realty Conglomerate, Inc. (Golden Dragon). A group that he earned gross professional income in the
of five (5) foreign investors visited the country for amount of P1, 000, 000.00; while he incurred
possible investment in the condominium units and expenses amounting to P560, 000.00 constituting
subdivision lots of Golden Dragon. After a tour of the mostly of his office space rent, utilities, and
properties for sale, the investors were wined and miscellaneous expenses related to his medical
dined by Peter at the posh Conrad's Hotel at the cost practice. However, to Dr. K’s dismay, only P320,
of P150, 000.00. Afterward, the investors were 000.00 of his expenses were duly covered by receipts.
brought to a party in a videoke club which cost the What are the options available for Dr. K so he could
company P200, 000.00 for food and drinks, and the maximize the deductions from his gross income?
amount of P80, 000.00 as tips for business promotion (2015 BAR)
officers. Expenses at Conrad's Hotel and the videoke
club were receipted and submitted to support the Dr. K may opt to use the optional standard deduction
deduction for representation and entertainment (OSD) in lieu of the itemized deduction. OSD is a
expenses. Decide if all the representation and maximum of forty percent (40%) of gross receipts during
entertainment expenses claimed by Golden Dragon the taxable year. Proof of actual expenses is not required,
are deductible. Explain. (2016 BAR) but Dr. K shall keep such records pertaining to his gross
receipts.
Reasonable allowance for entertainment, amusement,
and recreation expenses during the taxable year that are Personal and Additional Deductions
directly connected or related to the operation or conduct
of the trade, business or profession, or that are directly Mr. E and Ms. F are both employees of AAA Corp. They
related to or in furtherance of the conduct of his/her got married on February 14, 2011. On December 29,
trade, business, or exercise of a profession not to exceed 2011, the couple gave birth to triplets. On June 25,

13
TAXATION LAW

2013, they had twins. What were the personal 10-2008 implementing the provisions of R.A. 9504.
exemptions/deductions which Mr. E and Ms. F could Decide the following:
claim in the following taxable years:

a. For 2010 a. Whether an MWE is exempt for the entire taxable


b. For 2011 year 2008 or from 6 July 2008 only;
c. For 2013? (2015 BAR) b. Whether an MWE who becomes non-MWE during
the year still qualifies for the exemption;
a. For 2010, Mr. E and Ms. F are each entitled to personal c. Whether they are entitled to basic personal
exemptions of P50, 000 [Sec. 35(A), NIRC]. exemption;
d. Whether Sections 1 and 3 of RR 10-2008 are
b. For 2011, Mr. E and Ms. F are each entitled to basic consistent with the law in providing that an MWE
personal exemptions of P50, 000. In addition, Mr. E who receives other benefits in excess of the
could claim additional exemptions for three (3) statutory limit of P30, 000 (Now at P82, 000) is no
qualified dependent children in the amount of P25, longer entitled to the exemption provided by R.A.
000 for each child [Sec. 35(B), NIRC]. 9504.

c. For 2012, Mr. E and Ms. F are each entitled to basic


personal exemptions of P50, 000. In addition, Mr. E. a. The MWE is exempt for the entire taxable year 2008.
could claim additional exemptions for four (4) As it stands, the calendar year 2008 remained as one
qualified dependent children in the amount of P25, taxable year for an individual taxpayer. Therefore,
000 for each child [Sec. 35(B), NIRC]. RR 10-2008 cannot declare the income earned by a
minimum wage earner from 1 January 2008 to 5 July
On 17 June 2008, R.A. 9504 was approved and signed 2008 to be taxable and those earned by him for the
into law. The law increased the basic personal rest of that year to be tax-exempt. To do so would be
exemption from P20, 000 for a single individual, P25, to contradict the NIRC and jurisprudence, as taxable
000 for the head of the family, and P32, 000 for a income would then cease to be determined on a
married individual to P50, 000 for each individual. It yearly basis.
also increased the additional exemption for each
dependent not exceeding four from P8, 000 to P25, NOTE: The above ruling that the MWE exemption is
000. Are the increased personal and additional available for the entire taxable year 2008 is premised
exemptions applicable to the entire taxable year on the fact of one's status as an MWE during the entire
2008 or prorated, considering that R.A. 9504 took year of 2008.
effect only on 6 July 2008?
b. When the wages received exceed the minimum wage
The increased personal and additional exemptions
anytime during the taxable year, the employee loses
should be applied to the entire taxable year 2008.
the MWE qualification. Therefore, wages become
taxable as the employee ceased to be an MWE. But
Nothing expressly provides or even suggests a prorated
the exemption of the employee from tax on the
application of the exemptions for taxable year 2008.
income previously earned as an MWE remains.
Thus, there’s no reason to make any distinction between
The improvement of one's wage cannot justly
the income earned prior to the effectivity of the
operate to make the employee liable for tax on the
amendment (from 1 January 2008 to 5 July 2008) and
income earned as an MWE.
that earned thereafter (from 6 July 2008 to 31 December
2008) as none is indicated in the law. The principle that
c. One who ceases to be an MWE is still entitled to the
the courts should not distinguish when the law itself does
personal and additional exemptions. The MWE
not distinguish squarely applies to this case.
exemption is separate and distinct from the personal
and additional exemptions. One's status as an MWE
Moreover, the legislative policy of full taxable year
does not preclude enjoyment of the personal and
treatment of the personal and additional exemptions
additional exemptions.
has been in our jurisdiction as established, not by the
amendments introduced by R.A. 9504, but by the
Thus, when one is an MWE during a part of the year
provisions of Section 35 the 1997 NIRC. Said provision
and later earns higher than the minimum wage and
does not allow the prorating of the personal and
becomes a non-MWE, only earnings for that period
additional exemptions even in case a status-changing
when one is a non-MWE is subject to tax. It also
event occurs during the taxable year. Rather, it allows the
necessarily follows that such an employee is entitled
taxpayer the maximum exemptions that can be availed,
to the personal and additional exemptions that any
notwithstanding the fact that the latter's actual status
individual taxpayer with taxable gross income is
would qualify only for a lower exemption if prorating
entitled.
were employed (Soriano v. Secretary of Finance, G.R. Nos.
184450, 184508, 184538 & 185234, January 24, 2017).
d. Sections 1 and 3 of RR 10-2008 add a requirement not
found in the law by effectively declaring that an MWE
Minimum Wage Earners
who receives other benefits in excess of the statutory
limit of P30,000 is no longer entitled to the exemption
R.A. 9504 was approved and took effect on 6 July
provided by R.A. 9504.
2008. The law granted MWEs exemption from
payment of income tax on their minimum wage,
R.A. 9504 is explicit as to the coverage of the
holiday pay, overtime pay, night shift differential pay
exemption: the wages that are not in excess of the
and hazard. On 24 September 2008, the BIR issued RR
minimum wage as determined by the wage boards,
including the corresponding holiday, overtime, night

14
UST LAW PRE-WEEK NOTES 2017

differential and hazard pays. The minimum wage 1. That the claim for refund was filed within the two-
exempted by R.A. 9504 is distinct and different from year reglementary period pursuant to Section 229 of
other payments including allowances, honoraria, the NIRC;
commissions, allowances or benefits that an employer 2. When it is shown on the ITR that the income payment
may pay or provide an employee. received is being declared part of the taxpayer’s
gross income; and
The treatment of bonuses and other benefits that an 3. When the fact of withholding is established by a copy
employee receives from the employer in excess of the of the withholding tax statement, duly issued by the
P30, 000 (now at P82, 000) is taxable. The treatment payor to the payee, showing the amount paid and
of this excess cannot operate to disenfranchise the income tax withheld from that amount.
MWE from enjoying the exemption explicitly granted
by R.A. 9504 (Soriano v. Secretary of Finance, G.R. Nos. Once the foregoing requirements are met, the taxpayer is
184450, 184508, 184538 & 185234, January 24, 2017) deemed to have discharged the burden of proving its
claim for refund or issuance of tax credit certificate
Corporate taxpayer’s options in case of excess (Republic v. Team (Phils.) Energy Corp., G.R. No. 188016,
quarterly income taxes paid January 14, 2015, J. Bersamin).

What are the mechanisms and remedies that a What Section 76 requires, just like in all civil cases, is to
taxpayer may opt to exercise in case the sum of the prove the prima facie entitlement to a claim, including the
quarterly tax payments made during the said taxable fact of not having carried over the excess credits to the
year exceeds the total tax due on the entire taxable subsequent quarters or taxable year. It does not say that
income of that year? to prove such a fact, succeeding quarterly ITRs are
absolutely needed. This simply underscores the rule that
The taxpayer shall either: any document, other than quarterly ITRs may be used to
establish that indeed the non-carry over clause has been
a. Carry-over the excess credit against the estimated complied with, provided that such is competent, relevant
quarterly income tax liabilities for the taxable and part of the records (Winebrenner & Inigo Insurance
quarters of the succeeding taxable years; or Brokers, Inc. vs. CIR, G.R. No. 206526, January 28, 2015, J.
b. be credited or refunded with the excess amount paid Mendoza).
(Sec 76, NIRC).
In its 1997 ITR, PM Management International Inc.
NOTE: The above options are alternative and not expressly signified that it had a CWT of P1.2M for
cumulative in nature, that is, the choice of one precludes taxable year 1997 to be claimed as tax credit in
the other. The carry-over option, once actually or taxable year 1998. However, due to its net-loss
constructively chosen by a corporate taxpayer, becomes position in 1998, the taxpayer was unable to claim
irrevocable. The logic behind the rule is to ease tax the P1.2M as tax credit.
administration, particularly the self-assessment and
collection aspects (Republic v. Team (Phils.) Energy Corp., On April 12, 2000, the taxpayer filed with BIR a
G.R. No. 188016, January 14, 2015, J. Bersamin). written claim for the refund of the P1.2M unutilized
CWT for taxable year 1997. Is the taxpayer entitled to
Claim for tax refund or credit of excess and unutilized refund?
creditable withholding tax (CWT)
NO. Inasmuch as the respondent already opted to carry
The annual income tax returns (ITR) for taxable over its unutilized CWT of P1.2M to taxable year 1998,
years 2002 and 2003 of Team (Phils.) Energy Corp., the carry-over could no longer be converted into a claim
reflect overpaid income taxes or excess CWTs. It for tax refund because of the irrevocability rule
indicated in the ITRs its option for the refund of the provided in Section 76 of the NIRC of 1997. Thereby, the
tax overpayments. It then filed an administrative respondent became barred from claiming the refund.
claim for refund or issuance of tax credit certificate
with the BIR. Due to the inaction of the BIR, it filed a However, in view of its irrevocable choice, the
Petition for Review with the CTA which rendered respondent remained entitled to utilize that amount of
decision in favor of Team (Phils.) Energy Corp., P1.2M as tax credit in succeeding taxable years until fully
ordering the refund or the issuance of tax credit exhausted. In this regard, prescription did not bar it from
certificate in its favor. applying the amount as tax credit considering that there
is no prescriptive period for the carrying over of the
In its motion for reconsideration, CIR asserts that the amount as tax credit in subsequent taxable years (CIR vs.
final adjustment return was not sufficient to PL Management International Philippines, Inc., April 4,
establish the claim for refund because it only 2011, J. Bersamin).
reflected the sum of the payments made and the taxes
due for the year. It contends that the quarterly return What is the effect of failure to signify preference in
was necessary to prove that the sum, as stated in the the return?
adjusted return, was correct. Is the contention of BIR
tenable? Failure to signify preference in the return does not bar
outright a claim for refund.
NO. The submission of quarterly returns is not necessary
to prove entitlement for refund. The requirements for The corporation must signify its intention by marking the
entitlement of a corporate taxpayer for a refund or the corresponding option box provided in the final
issuance of tax credit certificate involving excess adjustment return (FAR). While a taxpayer is required to
withholding taxes are as follows: mark its choice in the form provided by the BIR, this
requirement is only for facilitating tax collection to ease

15
TAXATION LAW

tax administration, particularly the self-assessment and Discuss the nature and purpose of withholding tax
collection aspects. system under the law.

Failure to signify one's intention in the FAR does not The purpose of the withholding tax system is threefold:
mean outright barring of a valid request for a refund, (1) to provide the taxpayer with a convenient way of
should one still choose this option later on. Despite the paying his tax liability; (2) to ensure the collection of tax,
failure of taxpayer to make the appropriate marking in and (3) to improve the government’s cashflow.
the BIR form, the filing of its written claim effectively
serves as an expression of its choice to request a tax Under the withholding tax system, the payor is the
refund, instead of a tax credit. To assert that any future taxpayer upon whom the tax is imposed, while the
claim for a tax refund will be instantly hindered by a withholding agent simply acts as an agent or a collector
failure to signify one's intention in the FAR is to render of the government to ensure the collection of taxes. It is,
nugatory the clear provision that allows for a two-year therefore, indisputable that the withholding agent is
prescriptive period (Philam Asset Management Inc. v. CIR, merely a tax collector and not a taxpayer. The liability of
G.R. Nos. 156637/162004, December 14, 2005). the withholding agent is independent from that of the
taxpayer. The former cannot be made liable for the tax
Filing of income tax return due because it is the latter who earned the income subject
to withholding tax. The withholding agent is liable only
Indicate whether each of the following individuals is insofar as he failed to perform his duty to withhold the
required or not required to file an income tax return: tax and remit the same to the government. The liability
for the tax, however, remains with the taxpayer because
a. Filipino citizen residing outside the Philippines the gain was realized and received by him.
on his income from sources outside the
Philippines. While the withholding agent can be held accountable for
b. Resident alien on income derived from sources its negligence in performing its duty to withhold the
within the Philippines. amount of tax due on the transaction, the taxpayer and
c. Resident citizen earning purely compensation the one which earned income on the transaction, remains
income from two employers within the liable for the payment of tax as the taxpayer shares the
Philippines, whose income taxes have been responsibility of making certain that the tax is properly
correctly withheld. withheld by the withholding agent, so as to avoid any
d. Resident citizen who falls under the classification penalty that may arise from the nonpayment of the
of minimum wage earners. withholding tax due (Rizal Commercial Banking
e. An individual whose sole income has been Corporation vs. CIR, G.R. No. 170257, September 7, 2011, J.
subjected to final withholding tax. (2015 BAR) Mendoza).

a. Not required. The income of a non-resident Filipino Note that withholding tax is merely a method of collecting
citizen is taxable only on income sourced within the income tax in advance. The perceived tax is collected at
Philippines. Accordingly, his income from sources the source of income payment to ensure collection.
outside the Philippines is exempt from income tax Consequently, those subjected to the final withholding
[Sec. 51(A)(1)(b), NIRC] tax are no longer subject to the regular income tax (Banco
b. Required. A resident alien is taxable only on income de Oro vs. Republic of the Philippines, G.R. No. 198756
derived from sources within the Philippines [Sec. (Resolution), August 16, 2016, J. Leonen).
51(A)(1)(c), NIRC].
c. Required. A resident citizen who is earning purely In 2011, the BIR issued a Ruling where it declared
compensation income from two employers should that all treasury bonds (including PEACe Bonds),
file income tax return. If the compensation income is regardless of the number of purchasers/lenders at
received concurrently from two employers during the time of origination/issuance are considered
the taxable year, the employee is not qualified for deposit substitutes. The PEACe Bonds are thus
substituted filing [Sec. 51(A)(2)(b), NIRC]. subject to 20% final withholding tax on interest
d. Not required. Under the law, all minimum wage income from deposit substitutes. Is the BIR ruling
earners in the private and public sector shall be valid?
exempt from payment of income tax [Sec.
51(A)(2)(d), NIRC in relation to R.A. No. 9504]. NO. Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of
e. Not required. Under the law, an individual whose the Tax Code of 1997, a final withholding tax at the rate
sole income has been subjected of final withholding of 20% is imposed on interest on any currency bank
tax pursuant to Sec. 57(A), NIRC, need not file a deposit and yield or any other monetary benefit from
return. What he received is a tax paid income [Sec. deposit substitutes and from trust funds and similar
51(A)(2)(c), NIRC]. arrangements.

WITHHOLDING TAX Deposit substitutes are defined under Section 22(Y)5 of


the Tax Code with the addition of the qualifying phrase
for public – borrowing from 20 or more individual or

5 SEC. 22. Definitions - When used in this Title: xxx (Y) The term ‘deposit notes, repurchase agreements, including reverse repurchase
substitutes’ shall mean an alternative form of obtaining funds from the agreements entered into by and between the Bangko Sentral ng
public (the term 'public' means borrowing from twenty (20) or more Pilipinas (BSP) and any authorized agent bank, certificates of
individual or corporate lenders at any one time) other than deposits, assignment or participation and similar instruments with recourse:
through the issuance, endorsement, or acceptance of debt instruments Provided, however, That debt instruments issued for interbank call
for the borrower’s own account, for the purpose of relending or loans with maturity of not more than five (5) days to cover deficiency in
purchasing of receivables and other obligations, or financing their own reserves against deposit liabilities, including those between or among
needs or the needs of their agent or dealer. These instruments may banks and quasi-banks, shall not be considered as deposit substitute
include, but need not be limited to, bankers’ acceptances, promissory debt instruments.

16
UST LAW PRE-WEEK NOTES 2017

corporate lenders at any one time. Hence, the number of except a rank and file employee, such as but not limited
lenders is determinative of whether a debt instrument to: [HEV-HIM-HEEL]
should be considered a deposit substitute and
consequently subject to the 20% final withholding tax 1. Housing
(Banco de Oro vs. Republic of the Philippines, G.R. No. 2. Expense account
198756, January 15, 2015, J. Leonen). 3. Vehicle of any kind
4. Household personnel such as maid, driver and others
Based on the definition of deposit substitutes, what is 5. Interest on loans at less than market rate to the
the meaning of “at any one time”? extent of the difference between the market rate and
the actual rate granted
The phrase “at any one time” for purposes of determining 6. Membership fees, dues and other expenses athletic
the “20 or more lenders” would mean every transaction clubs or other similar organizations
executed in the primary or secondary market in 7. Expenses for foreign travel
connection with the purchase or sale of securities. 8. Holiday and vacation expenses
9. Educational assistance to the employee or his
For example, where the financial assets involved are dependents
government securities like bonds, the reckoning of “20 or 10. Life or health insurance and other non-life insurance
more lenders/investors” is made at any transaction in premiums or similar amounts in excess of what the
connection with the purchase or sale of the Government law allows (NIRC, Sec. 33 [B]; R.R. 3-98, Sec. 2.33 [B]).
Bonds, such as:
What is the tax treatment of fringe benefits?
1. Issuance by the Bureau of Treasury of the bonds to
GSEDs in the primary market; If the benefit is not tax-exempt and the recipient is:
2. Sale and distribution by GSEDs to various
lenders/investors in the secondary market; 1. A rank and file employee – the value of such fringe
3. Subsequent sale or trading by a bondholder to benefit shall be considered as part of the
another lender/investor in the secondary market compensation income of such employee subject to tax
usually through a broker or dealer; or payable by the employee;
4. Sale by a financial intermediary-bondholder of its 2. A managerial or supervisory employee – the value
participation interests in the bonds to individual or shall not be included in the compensation income of
corporate lenders in the secondary market. such employee subject to tax. The FBT is payable by
the employer on behalf of the employee (NIRC, Sec.
When, through any of the foregoing transactions, funds 33).
are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public What is the nature of FBT?
borrowing and the bonds at that point in time are deemed
deposit substitutes. Consequently, the seller is required FBT is imposed on the grossed-up monetary value (GMV)
to withhold the 20% final withholding tax on the imputed of fringe benefit furnished, granted or paid by the
interest income from the bonds (Banco de Oro vs. Republic employer to the employee, except rank and file
of the Philippines, G.R. No. 198756, January 15, 2015, J. employees (R.R. 3-98, Sec. 2.33 [A]).
Leonen).
FBT is treated as a final income tax on the employee that
NOTE: Debt instruments that do not qualify as deposit shall be withheld and paid by the employer on a calendar
substitutes are subject to the regular income tax. quarterly basis (CIR v. Secretary of Justice, G.R. No. 177387,
November 9, 2016, J. Bersamin).
Distinguish indirect taxes from withholding taxes.
What are the fringe benefits exempt from FBT?
Indirect taxes, like VAT and excise tax, are different from
withholding taxes (direct taxes). To distinguish, indirect 1. Fringe benefits which are authorized and exempted
taxes, the incidence of taxation falls on one person but the from tax under the NIRC or special laws (e.g.
burden thereof can be shifted or passed on to another separation benefits which are given to employees who
person, such as when the tax is imposed upon goods are involuntarily separated from work);
before reaching the consumer who ultimately pays for it. 2. Contributions of the employer for the benefit of the
On the other hand, in case of withholding taxes, the employee to retirement, insurance and
incidence and burden of taxation fall on the same entity, hospitalization benefit plans;
the statutory taxpayer. The burden of taxation is not 3. Benefits given to the rank and file employees, whether
shifted to the withholding agent who merely collects, by granted under a collective bargaining agreement or
withholding, the tax due from income payments to not;
entities arising from certain transactions and remits the 4. De minimis benefits, whether given to rank and file
same to the government (Asia International Auctioneers, employees or to supervisory or managerial
Inc. v. CIR, G.R. No. 179115, September 26, 2012). employees;
5. Fringe benefits granted to employee as required by
the nature of, or necessary to the trade, business or
FRINGE BENEFITS TAX (FBT) profession of the employer;
6. Fringe benefits granted for the convenience of the
What is fringe benefit? employer (Employer’s Convenience Rule) (NIRC, Sec.
32; R.R. 3-98, Sec. 2.33 [C]).
Fringe benefit is any good, service or other benefit
furnished or granted by an employer in cash or in kind in NOTE: Although a fringe benefit may be exempted from
addition to basic salaries, to an individual employee, the FBT, it may still fall under a different tax under

17
TAXATION LAW

another law, such as the compensation income tax or the contends that the discount is nothing more than a
like. privilege and its availment is restricted.

PAGCOR extends car plan extended by PAGCOR to its Is the BIR assessment correct? Explain. (2016 BAR)
qualified officers. It asserts that the car plan was
granted "not only because it was necessary to the NO. The courtesy discounts given to rank and file
nature of the trade of PAGCOR but it was also granted employees are considered “de minimis benefits” falling
for its convenience." Is PAGCOR liable to withhold under the category of other facility and privileges
FBT on its car plan? furnished or offered by an employer to his employees
which are of relatively small value intended to promote
YES. For FBT, PAGCOR is a mere withholding agent the health, goodwill, contentment or efficiency of the
inasmuch as the FBT is imposed on PAGCOR's employees employee. These benefits are not considered as
who receive the fringe benefit. PAGCOR's liability as a compensation subject to income tax and consequently to
withholding agent is not covered by the tax exemptions withholding tax (Sec.2.78.1 of RR No. 10-2008). If these “de
under its Charter. minimis benefits” are furnished to supervisors and
managers, the same are also exempt from the fringe
The car plan extended by PAGCOR to its qualified officers benefits tax (RR No. 3-98; Sec. 33, NIRC).
is evidently considered a fringe benefit as defined under
Section 33 of the Tax Code. To avoid the imposition of the Alternative Answer:
FBT on the benefit received by the employee, and,
consequently, to avoid the withholding of the payment YES, the BIR assessment is correct. De minimis benefits
thereof by the employer, PAGCOR must sufficiently are benefits of relatively small values provided by the
establish that the fringe benefit is required by the nature employers to the employee on top of the basic
of, or is necessary to the trade, business or profession of compensation intended for the general welfare of the
the employer, or when the fringe benefit is for the employees. It is considered exempt from income tax on
convenience or advantage of the employer, which compensation as well as from fringe benefit tax, provided
PAGCOR failed to establish. it does not exceed P10, 000 per employee per taxable
year.
Accordingly, PAGCOR should have withheld the FBT from
the officers who have availed themselves of the benefits This list of de minimis benefits is exclusive and anything
of the car plan and remitted the same to the BIR (CIR v. that is given which is not on the list, shall not be
Secretary of Justice, G.R. No. 177387, November 9, 2016, J. considered de minimis. The 5% discount of purchase
Bersamin). price of its products, not being in this enumeration, is
subject to tax as well as to withholding tax on
Is PAGCOR’s payment of membership dues and fees to compensation.
cover various memberships in social, athletic clubs
and similar organizations subject to FBT? TRANSFER TAX
NO. PAGCOR’s nature of business is casino operations
and it derives business from its customers who play at the In 2011, Solar Computer Corporation (Solar)
casinos. In furtherance of its business, it usually attends purchased a proprietary membership share covered
its VIP customers, amenities such as playing rights to golf by Membership Certificate No. 8 from the Mabuhay
clubs. The membership of PAGCOR to these golf clubs and Golf Club, Inc. for P500, 000.00. On December 27,
other organizations are intended to benefit customers 2012, it transferred the same to David, its American
and not its employees. Moreover, the membership is consultant, to enable him to avail of the facilities of
under the name of PAGCOR, and as such, cannot be the Club. David executed a Deed of Declaration of
considered as fringe benefits because it is the customers Trust and Assignment of Shares wherein he
and not the employees of PAGCOR who benefit from such acknowledged the absolute ownership of Solar over
memberships. the share; that the assignment was without any
consideration; and that the share was placed in his
Considering that the payments of membership dues and name because the Club required it to be done. In
fees are not borne by PAGCOR for its employees, they 2013, the value of the share increased to P800,
cannot be considered as fringe benefits which are subject 000.00.
to FBT. Hence, PAGCOR is not liable to withhold FBT from
its employees (CIR v. Secretary of Justice, G.R. No. 177387, Is the said assignment a "gift" and, therefore, subject
November 9, 2016, J. Bersamin). to gift tax? Explain. (2016 BAR)

Mapagbigay Corporation grants all its employees NO. The transfer is not a taxable donation because there
(rank and file, supervisors, and managers) 5% is no divestment of ownership by the transferor. The
discount of the purchase price of its products. During purpose of the transfer is simply to allow David to avail
an audit investigation, the BIR assessed the company of the facilities of the Club. The execution of a “Deed of
the corresponding tax on the amount equivalent to Declaration of Trust and Assignment of Shares” where
the courtesy discount received by all the employees, the absolute ownership by Solar of the share is
contending that the courtesy discount is considered acknowledged would show that there is no
as additional compensation for the rank and file relinquishment of ownership by Solar. The transfer being
employees and additional fringe benefit for the merely a transfer in form but not in substance, the same
supervisors and managers. In its defense, the is not subject to gift tax.
company argues that the discount given to the rank
and file employees is a de minimis benefit and not Alternative Answer:
subject to tax. As to its managerial employees, it

18
UST LAW PRE-WEEK NOTES 2017

The assignment is a “gift” subject to gift tax. The absence settlement of the estate. The notarial fee paid for the
of donative intent does not exempt the sales of stock extrajudicial settlement is clearly deductible expense
transaction from donor’s tax since Sec. 100 of the NIRC since such settlement effected the distribution of estate
categorically states that the amount by which the fair to lawful heirs. Similarly, the attorney's fees paid to the
market value of the property exceeded the value of the guardian of property of the deceased during his lifetime
consideration shall be deemed a gift. Thus, even if there should also be considered as a deductible administration
is no actual donation, the difference in price is considered expense (CIR v. CA, G.R No. 123206, Mar. 22, 2000).
a donation by fiction of law (Philam Life and General
Insurance Co. v. of finance and CIR, 741 SCRA 579 [2014]). BIR issued an Estate Tax Assessment Notice
demanding payment of the deficiency estate tax
Jennifer is the only daughter of Janina who was a against Jose Fernandez’s estate. The administrator
resident in Los Angeles, California, U.S.A. Janina died claims that in as much as the valid claims of creditors
in the U.S. leaving to Jennifer one million shares of against the estate are in excess of the gross estate, no
Sun Life (Philippines), Inc., a corporation organized estate tax was due.
and existing under the laws of the Republic of the
Philippines. Said shares were held in trust for Janina May the actual claims of the creditors be fully allowed
by the Corporate Secretary of Sun Life and the latter as deductions from the gross estate of Jose despite
can vote the shares and receive dividends for Janina. the fact that the claims were reduced or condoned
The Internal Revenue Service (IRS) of the U.S. taxed through compromise agreements entered into by the
the shares on the ground that Janina was domiciled Estate with its creditors?
in the U.S. at the time of her death.
YES. Under the date-of-death valuation rule, claims
Can the CIR of the Philippines also tax the same existing at the time of death should be made the basis of
shares? Explain. (2016 BAR) the determination of allowable deductions. Thus, post-
death developments, such as condonation in this case, are
YES. The property being a property located in the not material in determining the amount of the deduction
Philippines, it is subject to the Philippine estate tax (Dizon, et. al v. CA, G.R. No. 140944, April 30, 2008).
irrespective of the citizenship or residence of the
decedent (Sec. 85, NIRC). However, if Janina is a non- VALUE-ADDED TAX (VAT)
resident alien at her time of her death, the transmission
of the shares of stock can only be taxed applying the What is the Destination Principle and Cross Border
principle of reciprocity (Sec. 104, NIRC). Doctrine in VAT?

What is a judicial expense for purposes of deductions Under the Destination Principle, the goods and services
from the gross estate of the decedent? are taxed only in the country where these are consumed,
and in connection with the said principle, the Cross-
Judicial expenses are expenses of administration which Border Doctrine mandates that no VAT shall be imposed
include all expenses “essential to the collection of the to form part of the cost of the goods destined for
assets, payment of debts or the distribution of the consumption outside the territorial border of the taxing
property to the persons entitled to it.” In other words, the authority. Hence, actual export of goods and services
expenses must be essential to the proper settlement of from the Philippines to a foreign country must be free of
the estate. VAT, while those destined for use or consumption within
the Philippines shall be imposed with 10% (now 12%)
However, it does not include the following: VAT (Atlas Consolidated Mining and Development
Corporation v. CIR, G.R. No. 141104 & 148763, June 8,
1. Expenditures incurred for the individual benefit of 2007).
the heirs, devisees, legatees;
2. Compensation paid to a trustee of the decedent’s Who is liable to pay VAT?
estate when it appeared that such trustee was
appointed for the purpose of managing the The seller is the one statutorily liable for the payment of
decedent’s real property for the benefit of the the tax but the amount of the tax may be shifted or passed
testamentary heir; on to the buyer, transferee or lessee of goods, properties
3. Premiums paid on the bond filed by the or services.
administrator as an expense of administration since
the giving of a bond is in the nature of a qualification In case of importation, the importer is the one liable for
for the office and not necessary for the settlement of VAT (Sec. 4.105-2, R.R. 16-2005).
the estate; and
4. Attorney’s fees incident to litigation incurred by the What are the elements of VATable transaction?
heirs in asserting their respective rights (CIR v. CA,
G.R No. 123206, Mar. 22, 2000). The following must be present in order for a transaction
to be subjected to 12% VAT:
May the notarial fee paid for the extrajudicial
settlement and the attorney's fees in the 1. It must be done in the ordinary course of trade or
guardianship proceedings be allowed as deductions business;
from the gross estate of decedent in order to arrive at 2. There must be a sale, barter, exchange, lease of
the value of the net estate? properties, or rendering of service in the Philippines;
and
YES. Administration expenses, as an allowable deduction 3. It is not VAT-exempt or VAT zero-rated (Ingles, 2015).
from the gross estate of the decedent for purposes of
arriving at the value of the net estate, have been
construed to include all expenses essential to the proper

19
TAXATION LAW

What is Rule of Regularity? (In the course of trade or a tax is a burden on the taxpayer, it cannot be presumed
business) nor can it be extended by implication. As it is, the power
to impose amusement tax on cinema/theater operators
It means the regular conduct or pursuit of a commercial or proprietors remains with the local government.
or an economic activity, including transactions
incidental thereto, by any person regardless of whether A contrary ruling will subject cinema/theater operators
or not the person engaged therein is a non-stock, non- or proprietors to a total of 40% tax, the 10% (now 12%)
profit private organization (irrespective of the VAT being on top of the 30% amusement tax imposed by
disposition of its net income and whether or not it sells the LGC of 1991, thereby killing the “[goose] that lays the
exclusively to members or their guests), or government golden egg[s].”
entity (Sec. 105, NIRC).
The “lease of motion picture films, films, tapes and discs”
There should be: under Sec. 108 of the NIRC is not the same as the showing
1. Commercial or economic activity – It implies that a or exhibition of motion pictures or films. “Exhibition” is
transaction is conducted for profit; and defined as “to show or to display. x x x To produce
2. Regularity or habituality in the action – Regularity anything in public so that it may be taken in possession”.
involves more than one isolated transaction and On the other hand, “lease” is defined as “a contract by
involves repetition and continuity of action (Ingles, which one owning such property grants to another the
2015). right to possess, use and enjoy it on specified period of
time in exchange for periodic payment of a stipulated
Is the requirement of regularity absolute? price, referred as rent.” Thus, the legislature never
intended to include cinema/theater operator operators
NO. The following are exceptions to regularity: or proprietors in the coverage of VAT (CIR v. SM Prime
Holdings, Inc., G.R. No. 183505, February 26, 2010).
1. Non-resident alien who perform services in the
Philippines are deemed to be making sales in the The BIR subjected to VAT the total amount of money
course of trade or business, even if the performance of or its equivalent actually received by MEDICARD
services is not regular (Sec. 4.105-3, RR 16-2005). from members including the amount earmarked and
2. Importations are subject to VAT whether in the eventually paid by MEDICARD to the medical service
course of trade or business or not. providers. The CIR contends that the act of
3. Any business where the gross sales or receipts do not earmarking or allocation is by itself an act of
exceed P100, 000 during the 12-month period shall ownership and management over the funds. Is BIR
be considered principally for subsistence or correct?
livelihood and not in the course of trade or business.
NO. For purposes of determining the VAT liability of an
Is profit required for VAT to be imposed? HMO, the amounts earmarked and actually spent for
medical utilization of its members should not be included
NO. VAT is a tax on transaction, there is no need for a in the computation of its gross receipts.
taxable gain, unlike in the income tax. It is not required
either by law or jurisprudence (Ingles, 2015). Based on industry practice, MEDICARD informs its
would-be member beforehand that 80% of the amount
VAT is a tax on transactions imposed at every stage of the would be earmarked for medical utilization and only the
distribution process on the sale, barter, exchange of remaining 20% comprises its service fee. The act of
goods or property, and on the performance of services, earmarking or allocating 80% of the amount it received
even in the absence of profit attributable thereto. The term as membership fee at the time of payment weakens the
“in the course of trade or business” applies to all ownership imputed to it. By earmarking or allocating
transactions. Even a non-stock, non-profit corporation or 80% of the amount, MEDICARD unequivocally recognizes
government entity is liable to pay VAT for the sale of that its possession of the funds is not in the concept of
goods and services (CIR v. COMASERCO, March 30, 2000). owner but as a mere administrator of the same. For this
reason, at most, MEDICARD's right in relation to these
Are toll fees collected by tollway operators are amounts is a mere inchoate owner which would ripen
subject to VAT? into actual ownership if, and only if, there is
underutilization of the membership fees at the end of the
YES, because tollway operators are not VAT exempt fiscal year. Prior to that, MEDICARD is bound to pay from
franchise holders and tollway operation is not a VAT the amounts it had allocated as an administrator once its
exempt transaction. VAT is imposed on “all kinds of members avail of the medical services of MEDICARD's
services” including tollway operations which are engaged healthcare providers (Medicard Philippines, Inc. vs. CIR,
in construction, maintaining and operating expressways G.R. No. 222743, April 5, 2017, J. Reyes).
(Diaz v. Sec. of Finance, 654 SCRA 96).
In June 2013, DDD Corp., a domestic corporation
Are gross receipts derived from sales of admission engaged in the business of leasing real properties in
tickets in showing motion pictures subject to VAT? the Philippines, entered into a lease agreement of a
residential house and lot with EEE, Inc., a non-
NO. The legislative intent is not to impose VAT on persons resident foreign corporation. The residential house
already covered by the amusement tax. The repeal by the and lot will be used by officials of EEE, Inc. during
LGC of 1991 of the Local Tax Code transferring the power their visit to the Philippines. The lease agreement
to impose amusement tax on cinema/theater operators was signed by representatives from DDD Corp. and
or proprietors to the local government did not grant nor EEE, Inc. in Singapore. DDD Corp. did not subject the
restore the said power to the national government nor said lease to VAT believing that it was not a domestic
did it expand the coverage of VAT. Since the imposition of

20
UST LAW PRE-WEEK NOTES 2017

service contract. Was DDD Corp. correct? Explain. BIR issued RR No. 16-2005, specifically identifying
(2015 BAR) PAGCOR as one of the franchisees subject to VAT
imposed under the Tax Code of 1997, as amended by
DDD Corp. is not correct. Lease of properties shall be R.A. No. 93376. Is said regulation valid?
subject to VAT irrespective of the place where the
contract of lease was executed if the property is leased or NO. The provision in RR No. 16-2005 subjecting PAGCOR
used in the Philippines. to VAT is invalid for being contrary to R.A. No. 9337.

Is a pawnshop operator liable for VAT? Nowhere in R.A. No. 9337 is it provided that petitioner
can be subjected to VAT. The law is clear as to the removal
NO. It is now settled that for purposes of determining of petitioner's exemption from the payment of corporate
their tax liability, pawnshops are treated as non-bank income tax only. The RR No. 16-2005, therefore, cannot
financial intermediaries. Being as such, it is no longer go beyond the provisions of R.A. No. 9337. Since PAGCOR
liable for VAT but it is subject to percentage tax on gross is exempt from VAT under R.A. No. 9337, the BIR
receipts from 0% to 5%, as the case may be, by virtue of exceeded its authority in subjecting PAGCOR to VAT
R.A. No. 9238 (H. Tambunting Pawnshop, Inc. v. CIR, G.R. under RR No. 16-2005; hence, the said regulatory
No. 172394, October 13, 2010, J. Bersamin). provision is null and void (PAGCOR vs. BIR, GR No. 172087,
March 15, 2011, J. Peralta).
The BIR issued RMC No. 65-2012 imposing VAT on
association dues and membership fees collected by According to the BIR, R.A. No. 77167 has expressly
condominium corporations from its member repealed, amended, or withdrawn the 5% franchise
condominium-unit owners. The RMC’s validity is tax provision in PAGCOR's Charter; hence, PAGCOR
challenged before the Supreme Court by the was liable for VAT. The CIR argues that PAGCOR's
condominium corporations. gambling operations are embraced under the phrase
sale or exchange of services, including the use or
The Solicitor General, counsel for BIR, claims that lease of properties; that such operations are not
association dues, membership fees, and other among those expressly exempted from VAT under
assessment/ charges collected by a condominium Section 38 of R.A. No. 7716; and that the legislative
corporation are subject to VAT since they constitute purpose to withdraw PAGCOR's 5% franchise tax was
income payments or compensation for the beneficial manifested by the language used in Section 20 9 of R.A.
services it provides to its members and tenants. No. 7716. Is the contention of the BIR tenable?

On the other hand, the lawyer of the condominium NO. Firstly, a basic rule in statutory construction is that a
corporations argues that such dues and fees are special law cannot be repealed or modified by a
merely held in trust by the condominium subsequently enacted general law in the absence of any
corporations exclusively for their members and used express provision in the latter law to that effect. A special
solely for administrative expenses in implementing law must be interpreted to constitute an exception to the
the condominium corporations’ purposes. general law in the absence of special circumstances
Accordingly, the condominium corporations, do not warranting a contrary conclusion. R.A. No. 7716, a
actually render services for a fee subject to VAT. general law, did not provide for the express repeal of
PAGCOR's Charter, which is a special law.
Whose argument is correct? Decide. (2014 BAR)
Secondly, R.A. No. 7716 indicates that Congress has not
The lawyer of the condominium corporations is correct. intended to repeal PAGCOR's privilege to enjoy the 5%
The association dues, membership fees, and other franchise tax in lieu of all other taxes. The law does not
assessment/charges do not constitute income payments specifically exclude PAGCOR's exemption under P.D. No.
because they were collected for the benefit of the unit 1869 from the grant of exemptions from VAT; hence, the
owners and the condominium corporation is not created petitioner's contention that R.A. No. 7716 expressly
as a business entity. The collection is the money of the amended PAGCOR's franchise has no leg to stand on (CIR
unit owners pooled together and will be spent exclusively v. Secretary of Justice, G.R. No. 177387, November 9, 2016,
for the purpose of maintaining and preserving the J. Bersamin).
building and its premises which they themselves own and
possess (First e-Bank Tower Condominium Corp., v. BIR, Zero-rated Transactions
Special Civil Action No. 12-1236, RTC Br. 146, Makati City).

6 An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, "The phrase 'sale or exchange of services' means the performance
112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the of all kinds of service in the Philippines for others for a fee,
National Internal Revenue Code of 1997, As Amended, and For Other remuneration or consideration, including x x x service of franchise
Purposes grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under
7 An Act Restructuring the Value Added Tax (VAT) System, Widening its Section 117 of this Code; x x x"
Tax Base and Enhancing its Administration, and for these Purposes
Amending and Repealing the Relevant Provisions of the National SEC. 12. Section 117 of the National Internal Revenue Code, as amended,
Internal Revenue Code, as Amended, and For Other Purposes is hereby further amended further to read as follows:
"SEC.117. Tax on Franchises. - Any provision of general or
8 SEC. 3. Section 102 of the National Internal Revenue Code, as special law to the contrary notwithstanding, there shall be
amended, is hereby further amended to read as follows: levied, assessed and collected in respect to all franchises on
"SEC. l 02. Value-added tax on sale of services and use or lease of electric, gas and water utilities a tax of two percent (2%) on the
properties. - (a) Rate and base of tax. - There shall be levied, gross receipts derived from the business covered by the law
assessed and collected, a value-added tax equivalent to 10% (now granting the franchise. x x x"
at 12%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties. 9 SEC. 20. Repealing Clauses. - The provisions of any special law relative
to the rate of franchise taxes are hereby expressly repealed. xx x

21
TAXATION LAW

Distinguish Zero-rated v. VAT-exempt transactions solar, wind, hydropower, geothermal, ocean energy,
BASIS EXEMPT ZERO-RATED and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels
Nature of Not taxable; Transaction is
(Sec. 108, NIRC).
transaction removes VAT taxable for
at the exempt VAT purposes
What is an ECOZONE or a Special Economic Zone?
stage although the
tax levied is
An ECOZONE has been described as selected areas with
0%
highly developed or which have the potential to be
By whom made Need not be a Made by a developed into agro-industrial, industrial, tourist,
VAT-registered VAT-registered recreational, commercial, banking, investment and
person person financial centers whose metes and bounds are fixed or
Input tax Not subject to May claim delimited by Presidential Proclamations. An ECOZONE
output tax, thus input tax credit may contain any or all of the following: industrial estates
cannot claim although the (IEs), export processing zones (EPZs), free trade zones
input tax credit transaction and tourist/recreational centers.
resulted to
zero output tax RA No. 7916 provides that ECOZONES shall be managed
Tax Cannot avail of Tax by PEZA as a separate customs territory; thus, creating
Credit/Refund tax credit or Credit/Refund the fiction that the ECOZONE is a foreign territory.
refund. Thus,
may result in The national territory of the Philippines outside of the
increased proclaimed borders of the ECO ZONE shall be referred to
prices as the Customs Territory (CIR v. Toshiba Information
Equipment (Phils.), Inc., G.R. No. 150154, August 9, 2005).
What are the zero-rated sales under the Tax Code?
Is the sale of goods to ecozone, such as PEZA,
The following sales by VAT-registered persons shall be considered as export sale?
subject to zero percent (0%) rate:
YES. While an ecozone is geographically within the
1. Export sales;
Philippines, it is deemed a separate customs territory and
2. Foreign currency denominated sale; and
is regarded in law as foreign soil. Sales by suppliers from
3. Effectively zero-rated sales (Section 106, NIRC)
outside the borders of the ecozone to this separate
customs territory are deemed as exports and treated as
The following services performed in the Philippines by
export sales. These sales are zero-rated or subject to a tax
VAT-registered persons shall be subject to zero percent
rate of zero percent (CIR v. Sekisui Jushi Philippines, Inc.,
(0%) rate:
G.R. No. 149671, July 21, 2006).
1. Processing, manufacturing or repacking goods for
NOTE: Following the Philippine VAT system's adherence
other persons doing business outside the Philippines
to the Cross-Border Doctrine and Destination Principle,
which goods are subsequently exported, where the
no VAT shall be imposed to form part of the cost of goods
services are paid for in acceptable foreign currency
destined for consumption outside of the territorial
and accounted for in accordance with the rules and
border of the taxing authority. As a result, all sales of
regulations of the Bangko Sentral ng Pilipinas (BSP);
goods, properties, and services made by a VAT-registered
2. Services other than those mentioned in the preceding
supplier from the Customs Territory to an ECOZONE
paragraph rendered to a person engaged in business
enterprise shall be subject to VAT, at zero percent (0%)
conducted outside the Philippines or to a
rate, regardless of the latter's type or class of PEZA
nonresident person not engaged in business who is
registration (Revenue Memorandum Circular No. 74-99).
outside the Philippines when the services are
performed, the consideration for which is paid for in
What is “effectively zero-rated sale of goods and
acceptable foreign currency and accounted for in
properties”?
accordance with the rules and regulations of the BSP
i.e. recruitment;
The term “effectively zero-rated sale of goods and
3. Services rendered to persons or entities whose
properties” shall refer to the local sale of goods and
exemption under special laws or international
properties by a VAT-registered person to a person or
agreements to which the Philippines is a signatory
entity who was granted indirect tax exemption under
effectively subjects the supply of such services to
special laws or international agreement.
zero percent (0%) rate;
4. Services rendered to persons engaged in
Since the buyer is exempt from indirect tax, the seller
international shipping or international air transport
cannot pass on the VAT and therefore, the exemption
operations, including leases of property for use
enjoyed by the buyer shall extend to the seller, making
thereof;
the sale effectively zero-rated (R.M.C. 50-2007).
5. Services performed by subcontractors and/or
contractors in processing, converting, or
Distinguish Effectively Zero-rated v. Automatic Zero-
manufacturing goods for an enterprise whose export
rated transaction
sales exceed seventy percent (70%) of total annual
production; BASIS EFFECTIVELY AUTOMATIC
6. Transport of passengers and cargo by air or sea ZERO-RATED ZERO-RATED
vessels from the Philippines to a foreign country; and TRANSACTION TRANSACTION
7. Sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass,

22
UST LAW PRE-WEEK NOTES 2017

Nature Refers to sales to Refers to export 3. The recipient of such services is doing business
persons or sales and foreign outside of the Philippines.
entities whose currency
exemption under denominated In relation to above, is the condition of being
special laws or sales “consumed abroad” necessary in order for services
international performed in the Philippines by a VAT-registered
agreements to person to be zero-rated?
which the
Philippines is a NO. As a general rule, the VAT system uses the
signatory destination principle as a basis for the jurisdictional
Need to An application for No need to file an reach of the tax. Goods and services are taxed only in the
apply for zero-rating must application form country where they are consumed. Thus, exports are
zero-rating be filed and the and to secure BIR zero-rated, while imports are taxed.
BIR approval is approval before
necessary before the sale is However, the law clearly provides for an exception to the
the transaction considered zero- destination principle; that is, for a zero percent VAT rate
may be rated. for services that are performed in the Philippines, “paid for
considered in acceptable foreign currency and accounted for in
effectively zero- accordance with the rules and regulations of the BSP.”
rated.
For whose Intended to Primarily Thus, for the supply of service to be zero-rated as an
benefit is it benefit the intended to be exception, the law merely requires that first, the service
intended purchaser who, enjoyed by the be performed in the Philippines; second, the service fall
not being directly seller who is under any of the categories in Section 102(b) of the Tax
and legally liable directly and Code; and, third, it be paid in acceptable foreign currency
for the payment of legally liable for accounted for in accordance with BSP rules and
the VAT, will the VAT, making regulations (CIR vs. American Express International, Inc.
ultimately bear such seller (Philippine Branch), G.R. No. 152609. June 29, 2005).
the burden of the internationally
tax shifted by the competitive by NOTE: In Accenture Inc. v. CIR, G.R. No. 190102, July 11,
suppliers. allowing the 2012, the Court ruled that to come within the purview of
refund or credit of Section 108 (B)(2), it is not enough that the recipient of
input taxes that the service be proven to be a foreign corporation; rather,
are attributable to it must be specifically proven to be doing business
export sales. outside the Philippines. The fact that the clients are
Stamping Required. The Not required. The foreign does not automatically mean that these clients
of “zero- buyer, as shown buyer, as shown were doing business outside the Philippines.
rated” on by his address in by his address in
VAT invoice the sales invoice the sales invoice Pursuant to Sec. 11 of the "Host Agreement" between
or receipt and shipping and shipping the United Nations and the Philippine government, it
documents, is documents, is was provided that the World Health Organization
located outside located outside (WHO), "its assets, income and other properties shall
the Philippines the Philippines. be: a) exempt from all direct and indirect taxes."
merely by fiction Precision Construction Corporation (PCC) was hired
of law. to construct the WHO Medical Center in Manila. Upon
Effect Results in no tax chargeable against the completion of the building, the BIR assessed a 12%
purchaser. VAT on the gross receipts of PCC derived from the
construction of the WHO building. The BIR contends
The seller can claim a refund or a tax that the 12% VAT is not a direct nor an indirect tax on
credit certificate for the VAT previously the WHO but a tax that is primarily due from the
charged by suppliers. contractor and is therefore not covered by the Host
Agreement. The WHO argues that the VAT is deemed
For services other than processing manufacturing, or an indirect tax as PCC can shift the tax burden to it. Is
repacking of goods under Sec 108 (B)(2)10 of the Tax the BIR correct? Explain. (2016 BAR)
Code, what are the requirements to qualify for zero-
rating? NO. Since World Health Organization (WHO), the
contractee, is exempt from direct and indirect taxes
1. The services other than “processing, manufacturing pursuant to an international agreement where the
or repacking of goods” must be performed in the Philippines is a signatory, the exemption from indirect
Philippines, taxes should mean that the entity or person exempt is the
2. That the payment for such services be in acceptable contactor itself because the manifest intention of the
foreign currency accounted for in accordance with agreement is to exempt the contractor so that no tax may
BSP rules, and that be shifted to the contractee (CIR v. John Gotameo & Sons,
Inc., 148 SCRA 36 [1987]).The immunity of WHO from
indirect taxes extends to the contractor by treating the

10 SECTION 108. Value-added Tax on Sale of Services and Use or Lease of (2) Services other than those mentioned in the preceding paragraph, the
Properties. xxx consideration for which is paid for in acceptable foreign currency and
(B) Transactions Subject to Zero Percent (0%) Rate. — The following accounted for in accordance with the rules and regulations of the
services performed in the Philippines by VAT-registered persons shall Bangko Sentral ng Pilipinas (BSP) xxx
be subject to zero percent (0%) rate: xxx

23
TAXATION LAW

sale of service as effectively zero-rated when the law contract price of the goods, properties and services it had
provided that – “services rendered to persons or entities procured to complete the project (Malayan Insurance, Inc.
whose exemption under special laws or international vs. St. Francis Realty Square Realty Corporation, G.R. Nos.
agreements to which the Philippines is a signatory 198916-17, January 11, 2016, J. Peralta).
effectively subjects the supply of such service to zero
percent (0%) rate” [Section 108(B)3, NIRC]. Accordingly, NOTE: In Malayan Insurance, Inc. vs. St. Francis Realty
the BIR is wrong in assessing the 12% VAT from the Square Realty Corporation, the Court further held that St.
contractor, Precision Construction Corporation. Francis would also be entitled to avail of the same tax
credit provisions upon the eventual sale of its
OUTPUT AND INPUT VAT proportionate share of the reserved units allocated and
transferred to it by Malayan. The allocation of and
Malayan Insurance, as Owner, and St. Francis Square transfer of such units to St. Francis is subject to output
Realty Corp, as Developer, executed a Joint Project VAT which Malayan could offset against its input VAT. In
Development Agreement for the construction, turn, St. Francis would incur input VAT which it may later
development of a condominium Project. St. Francis offset against its output VAT upon the sale of the said
was not able to complete the Project. The parties units. This is in accordance with the tax credit method
entered to an agreement where Malayan undertook of computing the VAT of a taxpayer whereby the input
to complete the Project. The basis for the distribution tax shifted by the seller to the buyer is credited
and disposition of the condominium units is the against the buyer’s output taxes when it in turn sells
parties’ respective capital investments in the Project. the taxable goods, properties or services.
Despite the completion of the Project, the issue of
actual cost of construction has not been resolved to VAT REFUND
the mutual satisfaction of the parties.
Who may claim for refund/apply for issuance of tax
St. Francis contends that, among others, Input VAT credit certificate?
should not be treated as part of construction cost. It
claims that even from an accounting standpoint, The following can avail of refund or tax credit:
input tax is not entered into the books as part of cost;
input VAT is treated as account in a different account, 1. Zero-rated and effectively zero-rated sales - Any
either under “Other assets” or “Input Tax”, which is VAT-registered person, whose sales are zero-rated or
an asset account. Besides, the input VAT is offset or effectively zero-rated (Sec. 112 [A]); and
credited against output VAT to determine the net 2. Cessation of business or VAT status - A person
VAT due or payable to the government. whose registration has been cancelled due to
retirement from or cessation of business, or due to
St. Francis finally notes that since input VAT had changes in or cessation of status under Section 106(C)
already been claimed by Malayan, and its audited of NIRC (Sec. 112[B]).
financial statements show the offsetting of input VAT
against output VAT, then justice and equity dictate What is the period to file claim for refund/apply
that it should not be allowed to claim it as part of the issuance of tax credit certificate?
ARCC.
The claim, which must be in writing for both cases, must
Rule on the above contention of St. Francis. be filed within two years from the close of the taxable
quarter when the sales were made by any VAT-
The contention of St. Francis is without merit. Input VAT registered person whose sales are zero-rated or
should be allowed as part of the construction cost. In effectively zero-rated [Sec. 112(A), NIRC]. The two-year
determining whether input VAT should be included as period should be reckoned from the close of the taxable
part of the construction cost, the issue is not the technical quarter when the relevant sales were made pertaining to
classification of taxes under accounting rules, but the input VAT regardless of whether said tax was paid or
whether such tax was incurred and paid as part of the not (CIR vs Mirant Pagbilao Corporation, GR 172129,
construction cost. Given that input VAT is, strictly September 12, 2008).
speaking, a financial cost and not a direct construction
cost, it cannot be denied that Malayan had to pay input Meanwhile, any person whose registration has been
VAT as part of the contract price of goods and properties cancelled due to retirement from or cessation of business,
purchased, and services procured in order to complete or due to changes in or cessation of status may, within
the project. two years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input
Anent the claim that it would be unjust and inequitable if tax which may be used in payment of his other internal
Malayan would be allowed to include its input VAT in the revenue taxes.
construction cost, as well as to offset such tax against its
output tax, the Court held that such coincidence does not What are the requirements in claim for refund or tax
result in unjust enrichment at the expense of St. Francis. credit for unutilized input VAT?
Unjust enrichment claims do not lie simply because one
party benefits from the efforts or obligations of others, A claim for refund or tax credit for unutilized input VAT
but instead it must be shown that a party was unjustly may be allowed only if the following requisites concur,
enriched in the sense that the term unjustly could mean namely:
illegally or unlawfully. In offsetting its input VAT against
1. The taxpayer is VAT-registered;
output VAT, Malayan is merely availing of the benefits of
2. The taxpayer is engaged in zero-rated or effectively
the tax credit provisions of the law, and it cannot be said
zero-rated sales;
to have benefitted at the expense or to the damage of St.
3. The input taxes are due or paid;
Francis. After all, Malayan is justified in including in the
construction cost the input VAT it had paid as part of the

24
UST LAW PRE-WEEK NOTES 2017

4. The input taxes are not transitional input taxes as it claim (Pilipinas Total Gas, Inc. vs. CIR, G.R. No. 207112,
cannot be claimed as a refund or credit; December 8, 2015, J. Mendoza).
5. The input taxes have not been applied against output
taxes during and in the succeeding quarters; NOTE: The above rule cannot be applied retroactively.
6. The input taxes claimed are attributable to zero- Thus, prior to June 11, 2014, the rule is that from the date
rated or effectively zero-rated sales; an administrative claim for excess unutilized VAT is filed,
7. For zero-rated sales under Section 106(A)(2)(1) and a taxpayer has thirty (30) days within which to submit
(2); 106(B); and 108(B)(1) and (2), the acceptable the documentary requirements sufficient to support his
foreign currency exchange proceeds have been duly claim, unless given further extension by the CIR. Should
accounted for in accordance with the rules and the taxpayer, on the date of his filing, manifest that he no
regulations of the BSP; longer wishes to submit any other addition documents to
8. Where there are both zero-rated or effectively zero- complete his administrative claim, the 120-day period
rated sales and taxable or exempt sales, and the input allowed to the CIR begins to run from the date of filing.
taxes cannot be directly and entirely attributable to
any of these sales, the input taxes shall be For calendar year 2011, FFF, Inc., a VAT-registered
proportionately allocated on the basis of sales corporation, reported unutilized excess input VAT in
volume; and the amount of P1, 000, 000.00 attributable to its zero-
9. The claim is filed within two years after the close of rated sales. Hoping to impress his boss, Mr. G, the
the taxable quarter when such sales were made accountant of FFF, Inc., filed with the BIR on January
(Luzon Hydro Corporation v. CIR, G.R. No. 188260, 31, 2013 a claim for tax refund/credit. Not having
November 13, 2013, J Bersamin). received any communication from the BIR, Mr. G filed
a Petition for Review with the CTA on March 15, 2013,
Discuss the procedure in a claim for refund. praying for the tax refund/credit of the P1, 000,
000.00 unutilized excess input VAT of FFF, Inc. for
 An administrative claim must be filed with the CIR 2011.
within two years after the close of the taxable quarter
when the zero-rated or effectively zero-rated sales a. Did the CTA acquire jurisdiction over the Petition
were made. of FFF, Inc.?
 The CIR has 120 days from the date of submission of b. Discuss the proper procedure and applicable
complete documents in support of the administrative time periods for administrative and judicial
claim within which to decide whether to grant a claims for refund/credit of unutilized excess
refund or issue a tax credit certificate. The 120-day input VAT. (2015 BAR)
period may extend beyond the two-year period from
the filing of the administrative claim if the claim is a. NO. The CTA has not acquired jurisdiction over the
filed in the later part of the two-year period. If the 120- Petition of FFF, Inc. because the juridical claim has
day period expires without any decision from the CIR, been prematurely filed on March 15, 2013. The
then the administrative claim may be considered to be Supreme Court ruled that the 30-day period after the
denied by inaction. expiration of the 120-day period fixed by law for the
 A judicial claim must be filed with the CTA within 30 CIR to act on the claim for refund is jurisdictional and
days from the receipt of the CIR's decision denying the failure to comply would bar the appeal and deprive
administrative claim or from the expiration of the the CTA of its jurisdiction to entertain the appeal.
120-day period without any action from the CIR.
 All taxpayers, however, can rely on BIR Ruling No. DA- In this case, Mr. G filed the administrative claim on
489-03 from the time of its issuance on 10 December January 31, 2013. The petition for review should
2003 up to its reversal by this Court in Aichi on 6 have been should have been filed on June 30, 2013.
October 2010, as an exception to the mandatory and Filing the judicial claim on March 15, 2013 is
jurisdictional 120+ 30-day periods (Takenaka premature, thus the CTA did not acquire jurisdiction.
Corporation – Philippine Branch vs. CIR, G.R. No.
193321, October 19, 2016, J. Bersamin, citing Mindanao b. The administrative claim must be filed with the CIR
II Geothermal Partnership vs. CIR). within the two-year prescriptive period. The proper
reckoning period date for the two-year prescriptive
Under the law, the CIR has 120 days from the date of period is the close of the taxable quarter when the
submission of complete documents to decide a claim relevant sales were made. However, as an exception,
for tax credit or refund of creditable input taxes. are claims applied only from June 8, 2007 to
When should the submission of documents be September 12, 2008, wherein the two-year
deemed “completed” for purposes of determining the prescriptive period for filing a claim for tax refund or
running of the 120-day period? credit of unutilized input VAT payments should be
counted from the date of filing of the VAT return and
RMC 54-201411 dated June 11, 2014 requires that the payment of the tax.
application for VAT refund/tax credit must be
accompanied by complete supporting documents. Thus, The taxpayer can file a judicial claim in one of two
the taxpayer, at the time he files his claim, must complete ways: (1) file the judicial claim within thirty days
his supporting documents and attest that he will no after the CIR denies the claim within the 120-day
longer submit any other document to prove his claim. period, or (2) file the judicial claim within 30 days
Further, the taxpayer is barred from submitting from the expiration of the 120-day period if the
additional documents after he has filed his administrative

11 The application for VAT refund/tax credit must be accompanied by Upon submission of the administrative claim and its supporting
complete supporting documents as enumerated in Annex “A” hereof. documents, the claim shall be processed and no other documents shall
In addition, the taxpayer shall attach a statement under oath attesting be accepted/required from the taxpayer in the course of its evaluation.
to the completeness of the submitted documents. xxx (emphasis supplied)

25
TAXATION LAW

Commissioner does not act within the 120-day constitute sufficient secondary proof of effectively
period. zero-rated sales.

As a general rule, the 30-day period to appeal is both Luzon Hydro argued that its sale of electricity to NPC
mandatory and jurisdictional. As an exception, was automatically zero-rated pursuant to RA No.
premature filing is allowed only if filed between 9136 (EPIRA Law); hence, it need not prove that it
December 10, 2003 and October 5, 2010, when the had zero-rated sales in the period from January 1,
BIR Ruling No. DA-489-03 was still in force. 2001 to December 31, 2001 by the presentation of
VAT official receipts that would contain all the
Distinguish between administrative cases appealed necessary information required under the Tax Code.
(1) due to inaction and those (2) dismissed at the Evidence of sale of electricity to NPC other than
administrative level due to the failure of the taxpayer official receipts could prove zero-rated sales.
to submit supporting documents.
Is the contention of Luzon Hydro tenable?
If an administrative claim was dismissed by the CIR due
to the taxpayer’s failure to submit complete documents NO. Luzon Hydro did not produce evidence showing that
despite notice/request, then the judicial claim before the it had zero-rated sales for taxable year 2001. The
CTA would be dismissible, not for lack of jurisdiction, but claimant did not reflect any zero-rated sales from its
for the taxpayer’s failure to substantiate the claim at the power generation in its VAT returns, which indicated that
administrative level. When a judicial claim for refund or it had not made any sale of electricity. Had there been
tax credit in the CTA is an appeal of an unsuccessful zero-rated sales, it would have reported them in the
administrative claim, the taxpayer has to convince the returns. Indeed, it carried the burden not only that it was
CTA that the CIR had no reason to deny its claim. It, thus, entitled under the substantive law to the allowance of its
becomes imperative for the taxpayer to show the CTA claim for refund or tax credit but also that it met all the
that not only is he entitled under substantive law to his requirements for evidentiary substantiation of its claim.
claim for refund or tax credit, but also that he satisfied all
the documentary and evidentiary requirements for an Although the claimant has correctly contended that the
administrative claim. It is, thus, crucial for a taxpayer in a sale of electricity by a power generation company like it
judicial claim for refund or tax credit to show that its should be subject to zero-rated VAT under Republic Act
administrative claim should have been granted in the (RA) No. 9136, its assertion that it need not prove its
first place. Consequently, a taxpayer cannot cure its having actually made zero-rated sales of electricity by
failure to submit a document requested by the BIR at the presenting the VAT official receipts and VAT returns
administrative level by filing the said document before cannot be upheld. It could not be permitted to substitute
the CTA. such vital and material documents with secondary
evidence like financial statements.
On the other hand, a judicial claim due to the inaction of
the BIR, and thus the administrative claim was never Thus, Luzon Hydro did not competently establish its
acted upon, there was no decision for the CTA to review claim for refund or tax credit (Luzon Hydro Corporation v.
on appeal per se. Consequently, the CTA may give CIR, G.R. No. 188260, November 13, 2013, J Bersamin).
credence to all evidence presented by a taxpayer,
including those that may not have been submitted to the Is failure to print the word “zero-rated” on the
CIR as the case is being essentially decided in the first invoices or receipts fatal to a claim for refund or
instance. The Total Gas must prove every minute aspect credit of input VAT on zero-rated sales?
of its case by presenting and formally offering its
evidence to the CTA, which must necessarily include YES. Failure to print the word “zero-rated” on the
whatever is required for the successful prosecution of an invoices or receipts is fatal to a claim for refund or credit
administrative claim (Pilipinas Total Gas, Inc. vs. CIR, G.R. of input VAT on zero-rated sales.
No. 207112, December 8, 2015, J. Mendoza).
Well-settled is the fact that actions for tax refund are in
Pursuant to their agreement, the electricity produced the nature of a claim for exemption and the law is
by the Luzon Hydro was to be sold exclusively to NPC. construed in strictissimi juris against the taxpayer. The
Relative to its sale to NPC, Luzon was granted by the pieces of evidence presented entitling a taxpayer to an
BIR a certificate for Zero Rate for VAT purposes. On exemption are also strictissimi scrutinized and must be
November 26, 2001, Luzon filed a claim for refund or duly proven. The invoicing requirement is reasonable
tax credit relative to its unutilized input VAT alleging and must be strictly complied with, as it is the only way
that it had incurred input VAT on its domestic to determine the veracity of its claim (KEPCO Philippines
purchases of goods and services used in its Corporation vs. CIR, G.R. No. 179961, January 31, 2011, J.
generation and sales of electricity to NPC in the four Mendoza).
quarters of 2001.
MMM, Inc., a domestic telecommunications company,
The CIR denied the claim contending that Luzon handles incoming telecommunications services for
Hydro failed to demonstrate that the taxes sought to non-resident foreign companies by relaying
be refunded were erroneously or illegally collected. international calls within the Philippines. To
In its VAT returns for the four quarters of 2001, no broaden the coverage of its telecommunications
amount of zero-rated sales was declared. Likewise, it services throughout the country, MMM, Inc. entered
did not submit any VAT official receipt of payments into various interconnection agreements with local
for services rendered to NPC. The only proof carriers. The non-resident foreign corporations pay
submitted by petitioner is a letter from Regional MMM, Inc. in US dollars inwardly remitted through
Director of Revenue Region No. 1, stating that the Philippine banks, in accordance with the rules and
financial statements and annual income tax return regulations of the Bangko Sentral ng Pilipinas.

26
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MMM, Inc. filed its Quarterly VAT Returns for 2000. refund covering the taxable year 2002 on the basis of
Subsequently, MMM, Inc. timely filed with the BIR an its sales invoice.
administrative claim for the refund of the amount of
P6, 321, 486.50, representing excess input VAT For failure of the BIR to act on its claim, Takenaka
attributable to its effectively zero-rated sales in filed a Petition for Review with CTA on March 10,
2000. The BIR ruled to deny the claim for refund of 2004. Did the CTA properly acquire jurisdiction over
MMM, Inc. because the VAT official receipts the case?
submitted by MMM, Inc. did not bear the words "zero-
rated" as required under Sec. 4.108-1 of Revenue NO. The CTA should deny petitioner's claim for tax refund
Regulations (RR) No. 7-95. On appeal, the CTA or credit for lack of jurisdiction.
division and the CTA en banc affirmed the BIR ruling.
Takenaka timely filed its administrative claim on April
MMM, Inc. appealed to the Supreme Court arguing 11, 2003, within the two-year prescriptive period after
that the NIRC itself did not provide for such a the close of the taxable quarter when the zero-rated sales
requirement. RR No. 7-95 should not prevail over a were made. The BIR had 120 days, or until August 9,
taxpayer's substantive right to claim tax refund or 2003, to decide the claim. Considering that the BIR did
credit. not act on the petitioner's claim on or before August 9,
2003, the latter had until September 8, 2003, the last day
a. Rule on the appeal of MMM, Inc. of the 30-day period, within which to file its judicial claim.
b. Will your answer in (a) be any different if MMM, However, it brought its petition for review in the CTA
Inc. was claiming refund of excess input VAT only on March 10, 2004, or 184 days after the last day for
attributable to its effectively zero-rated sales in the filing.
2012? (2015 BAR)
Clearly, the petitioner belatedly brought its judicial claim
a. The appeal of MMM, Inc. must be denied. MMM, Inc.’s for refund, and the CTA did not acquire jurisdiction over
position that the requirements under RR No. 7-95 the claim for tax refund.
should not prevail over a taxpayer’s substantive right
to claim tax refund is unmeritorious. The Secretary of NOTE: Although Takenaka's judicial claim was brought
Finance has the authority to promulgate the well within the two-year prescriptive period, the two-
necessary rules and regulations for the effective year prescriptive period refers to the period within which
enforcement of the provisions of the NIRC. Such rules the taxpayer can file an administrative claim, not the
and regulations are given weight and respect by the judicial claim with the CTA.
courts in view of the rule-making authority given to
those who formulate them and their specific In the preceding problem, are sales invoices
expertise in their respective fields. sufficient as evidence to prove zero-rated sale of
services by Takenaka to PIATCO thereby entitling
An applicant for a claim for tax refund or tax credit him to claim the refund of its excess input VAT?
must not only prove entitlement to the claim, but also
comply with all the documentary and evidentiary NO. The claim for refund must be denied on the ground
requirements. Consequently, the CTA and the CTA en that the taxpayer had not established its zero-rated sales
banc correctly ruled that the failure to indicate the of services through the presentation of official receipts.
words “zero-rated” on the invoices and receipts
issued by a taxpayer would result in the denial of the As evidence of an administrative claim for tax refund or
claim for refund or tax credit. (Eastern tax credit, there is a certain distinction between a receipt
Telecommunications Philippines, Inc. v. CIR, 2015) and an invoice.

b. NO, my answer will not be different if the claim for Section 113 of the Tax Code of 1997 provides that a VAT
refund is for effectively zero-rated sales in 2012. The invoice is necessary for every sale, barter or exchange of
requirement to print the word “zero-rated” is no goods or properties, while a VAT official receipt properly
longer by mere regulations but is now clearly pertains to every lease of goods or properties, as well as
provided by law as follows – “If the sale is subject to to every sale, barter or exchange of services.
zero percent (0%) value-added tax, the term “zero-
rated sale” shall be written or printed prominently The taxpayer submitted sales invoices, not official
on the invoice receipt. Failure to comply with this receipts, to support its claim for refund. In light of the
invoicing requirement is fatal to a claim for refund of distinction between a receipt and an invoice, the
input taxes attributable to the zero-rated sale (Sec. submissions were inadequate to comply with the
113(B)(2)(c), NIRC). substantiation requirements for administrative claims
for tax refund or tax credit (Takenaka Corporation –
Takenaka entered into an On-Shore Construction Philippine Branch vs. CIR, G.R. No. 193321, October 19,
Contract with Philippine Air Terminal Co., Inc. 2016, J. Bersamin).
(PIATCO), a PEZA-registered entity, for the
construction of the Ninoy Aquino Terminal III. The CTA denied the claim for refund by Taganito on
its input VAT on importation of capital goods for
Takenaka filed its quarterly VAT returns for the failure of the latter to substantiate its claim.
taxable year 2002. The BIR, on the other hand, issued However, Taganito insists that the official receipts
VAT Ruling No. 011-03 which states that the sales of issued by the bank authorized to collect import
goods and services rendered by Takenaka to PIATCO duties and taxes are the best evidence to prove its
are subject to zero-percent (0%). This prompted payment of the input tax being claimed. It also points
Takenaka on April 11, 2003 to file its claim for VAT to the report of the independent CPA which allegedly
reviewed the IEIRDs and subsidiary ledger

27
TAXATION LAW

containing the description of the dump trucks. Is SEC. 112 (VAT) SEC. 229 (OTHER
Taganito’s claim tenable? TAXES)
Period is 2 years after the Period is 2 years from
NO. IEIRD is required to properly substantiate the close of the taxable the date of payment of
payment of the duties and taxes on imported goods. quarter when the sales the tax
were made
Moreover, even assuming that the importations were The 30-day period of Period to file an
duly substantiated, Taganito's claim still would not appeal to the CTA need not administrative claim
prosper because it failed to present evidence to show that necessarily fall within the before the CIR AND
it properly amortized the related input VAT over the two-year prescriptive judicial claim with the
estimated useful life of the capital goods in its subsidiary period, as long as the CTA must fall within the
ledger, as required by RR 16-0512. This is made apparent administrative claim 2-year prescriptive
by the fact that Taganito's claim for refund is for the full before the CIR is filed period
amount of the input VAT on the importation, rather than within the two-year
for an amortized amount, and by its failure to present its prescriptive period. This
subsidiary ledger (Taganito Mining Corporation vs. CIR, is because Sec. 112 (D) of
G.R. No. 201195, November 26, 2014, J. Mendoza). the 1997 NIRC mandates
that a taxpayer can file the
Under Section 229 of the Tax Code, no such suit or judicial claim: (1) only
proceeding shall be filed for the recovery of tax within thirty days after the
erroneously or illegally collected after the expiration Commissioner partially or
of two (2) years from the date of payment of the tax fully denies the
or penalty. Is this applicable to claims for a refund or claim within the 120-day
tax credit for unutilized creditable input VAT? period, or (2) only within
thirty days from the
NO. The two-year period under Section 229 does not expiration of the 120-day
apply to claims for a refund or tax credit for unutilized period if the
creditable input VAT because it is not considered Commissioner does not act
"excessively" collected. Instead, it is settled that Section within the 120-day period
112 applies to claims for a refund or tax credit for (CIR v. San Roque Power
unutilized creditable input VAT, thereby making the 120+ Corporation, G.R. Nos.
30-day period prescribed therein mandatory and 187485, 196113, 197156,
jurisdictional in nature (Taganito Mining Corporation vs. February 12, 2013)
CIR, G.R. No. 198076, November 19, 2014, J. Mendoza).

Is a taxpayer, located within an ECOZONE, entitled to OTHER PERCENTAGE TAX (OPT)


the refund of its unutilized input taxes incurred
before it became a PEZA-registered entity? What is the nature of OPT?

NO. The purchases of goods and services by the taxpayer As a rule, VAT is imposed on every sale, barter, or
that were destined for consumption within the ECOZONE exchange of goods or services and on importations.
should be free of VAT; hence, no input VAT should then However, there are instances where the same does not
be paid on such purchases, rendering the taxpayer not apply because the transaction is subject to OPT as
entitled to claim a tax refund or credit. required by the NIRC.

Verily, if the taxpayer had paid the input VAT, the proper Percentage tax is a tax imposed on sale, barter, exchange
recourse is not against the Government but against the or importation of goods, or sale of services based upon
seller who had shifted to it the output VAT (Coral Bay gross sales, value in money of receipts derived by the
Nickel Corp. vs. CIR, G.R. No. 190506, June 13, 2016, J. manufacturer, producer, importer or seller measured by
Bersamin). certain percentage of the gross selling price or receipts. If
the transaction is subject to OPT, it is no longer subject to
Distinguish Sec. 112 on refund for VAT from Sec. 229 VAT. Nonetheless, OPT as well as VAT may be imposed
on refund of other taxes. together with excise taxes (Tabag, 2015).

12 SECTION 4.110-3. Claim for Input Tax on Depreciable Goods. - Where


a VAT-registered person purchases or imports capital goods, which are Where the aggregate acquisition cost (exclusive of VAT) of the existing
depreciable assets for income tax purposes, the aggregate acquisition or finished depreciable capital goods purchased or imported during any
cost of which (exclusive of VAT) in a calendar month exceeds one calendar month does not exceed one million pesos (P1,000,000.00), the
million pesos (P1,000,000.00), regardless of the acquisition cost of each total input taxes will be allowable as credit against output tax in the
capital good, shall be claimed as credit against output tax in the month of acquisition.
following manner:
(a) If the estimated useful life of a capital good is five (5) years or more Capital goods or properties refers to goods or properties with estimated
– The input tax shall be spread evenly over a period of sixty (60) months useful life greater than 1 year and which are treated as depreciable
and the claim for input tax credit will commence in the calendar month assets under Sec. 34(F) of the tax Code, used directly or indirectly in the
when the capital good is acquired. The total input taxes on purchases or production or sale of taxable goods or services. Xxx
importations of this type of capital goods shall be divided by 60 and the
quotient will be the amount to be claimed monthly. SECTION 4.113-3. Accounting Requirements. Xxx A subsidiary record in
(b) If the estimated useful life of a capital good is less than five (5) years ledger form shall be maintained for the acquisition, purchase or
– The input tax shall be spread evenly on a monthly basis by dividing importation of depreciable assets or capital goods which shall contain,
the input tax by the actual number of months comprising the estimated among others, information on the total input tax thereon as well as the
useful life of a capital good. The claim for input tax credit shall monthly input tax claimed in VAT declaration or return.
commence in the month that the capital goods were acquired.

28
UST LAW PRE-WEEK NOTES 2017

What is the basis of “gross receipts” for purposes of Who is directly liable to pay to the excise tax?
computing the 3% Percentage Tax under Section
118(A)13 of the Tax Code? For the first type of goods, namely, goods manufactured
or produced in the Philippines for domestic sales or
RR No. 15-200214 prescribes that “gross receipts” for the consumption or for any other disposition, Section 130 of
purpose of determining Common Carrier’s Tax shall be the Tax Code states that, unless otherwise specifically
the same as the tax base for calculating Gross Philippine allowed, the taxpayer obligated to file the return and pay
Billings Tax. Gross revenues shall be based on the actual the excise taxes due thereon is the
amount received by the airline company as reflected on manufacturer/producer. On the other hand, with
the plane ticket. respect to the second kind of goods, which are things
imported, Section 131 of the Tax Code states that the
EXCISE TAX taxpayer obligated to file the return and pay the excise
taxes due thereon is the owner or importer, unless the
Define excise tax? imported articles are exempt from excise taxes and the
person found to be in possession of the same is other than
The term "excise tax" under Title VI of the Tax Code of those legally entitled to such tax exemption (Philippine
1997 relates to taxes applied to (1) goods manufactured Airlines, Inc. vs CIR, G.R. No. 198759, July 1, 2013, J. Perlas-
or produced in the Philippines for domestic sale or Bernabe).
consumption or for any other disposition and to (2)
things imported (Sec. 129, Tax Code). When is excise tax on taxable goods due for payment?

Excise taxes are considered as a kind of indirect tax, the The liability for the payment of the excise tax arises
liability for the payment of which may fall on a person before the removal of the goods from the place of their
other than whoever actually bears the burden of the tax. production, and in case of imported things, before the
Simply put, the statutory taxpayer may shift the economic release of articles from the customshouse.
burden of the excise tax payment to another – usually the
buyer (Chevron Philippines, Inc. vs. CIR, G.R. No. 210836, Is payment of excise tax on taxable goods prior to
September 1, 2015, J. Bersamin). their removal from the place of production or
customshouse absolute?
NOTE: The excise tax imposed shall be in addition to the
value-added tax imposed under Title IV of the Tax Code. YES. The subsequent sale, consumption or other
disposition of the goods becomes relevant only to
What are the types of excise tax? determine whether any exemption or tax relief may be
granted thereafter.
Excise taxes as used in our Tax Code fall under two types:
Verily, it is the actual sale, consumption or disposition of
(1) specific tax which is based on weight or volume the taxable goods that confirms the proper tax treatment
capacity and other physical unit of measurement; of goods previously subjected to the excise tax. If any of
and the goods enumerated under Title VI of the NIRC are
(2) ad valorem tax which is based on selling price or manufactured or produced in the Philippines and
other specified value of the goods (Sec. 129, NIRC; CIR eventually sold, consumed, or disposed of in any other
v. Pilipinas Shell Petroleum Corp., G.R. No. 188497, manner domestically, therefore, there can be no claim for
February 19, 2014, J. Villarama, Jr.). any tax relief inasmuch as the excise tax was properly
levied and collected from the manufacturer-seller
When does the liability for excise tax accrue? (Separate opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014).
The accrual and payment of the excise tax under Title VI
of the NIRC materially rest on the fact of actual Are local manufacturers entitled to tax refund on
production, manufacture or importation of the taxable paid excise taxes on its petroleum products sold to
goods (i.e., alcohol products, tobacco products, petroleum international carriers?
products, automobiles and nonessential goods, mineral
products) in the Philippines and on their presumed or YES. Under Section 135(a)15 of the Tax Code, the shifting
intended domestic sale, consumption or disposition of the burden of the excise tax to the international
(Separate opinion of J. Bersamin in CIR v. Pilipinas Shell carriers who buy petroleum products from the local
Petroleum Corp., G.R. No. 188497, 2014).

area of the tax coupon forming an integral part of the plane ticket.
13 Sec. 118. Percentage Tax on International Carriers. ― (A) Xxx (emphasis supplied)
International air carriers doing business in the Philippines shall pay a 15 SECTION 135. Petroleum Products Sold to International Carriers and
tax of three percent (3%) of their quarterly gross receipts. Exempt Entities or Agencies. — Petroleum products sold to the following
are exempt from excise tax:
14 Sec. 5. Determination of Gross Philippine Billings. ― (a) In computing
for “Gross Philippine Billings,” there shall be included the total amount a. International carriers of Philippine or foreign registry on their
of gross revenue derived from passage of persons, excess baggage, use or consumption outside the Philippines: Provided, that the
cargo and/or mail, originating from the Philippines in a continuous and petroleum products sold to these international carriers shall be
uninterrupted flight, irrespective of the place of sale or issue and the stored in a bonded storage tank and may be disposed of only in
place of payment of the passage documents. accordance with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the
The gross revenue for passengers whose tickets are sold in the Commissioner;
Philippines shall be the actual amount derived for transportation b. Exempt entities or agencies covered by tax treaties,
services, for a first class, business class or economy class passage, conventions and other international agreements for their use
as the case may be, on its continuous and uninterrupted flight from or consumption: Provided, however, that the country of said
any port or point in the Philippines to its final destination in any foreign international carrier or exempt entities or agencies
port or point of a foreign country, as reflected in the remittance

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TAXATION LAW

manufacturers is prohibited. Said international carriers and erroneous upon the sale of the petroleum products
are thus allowed to purchase the petroleum products to CDC.
without the excise tax component which otherwise
would have been added to the cost or price fixed by the Section 20416 of the Tax Code allows Chevron as the
local manufacturers or distributors/sellers. statutory taxpayer to claim the refund or the credit of the
excise taxes thereby paid (Chevron Phil. Inc. v. CIR, G.R. No.
Thus, local manufacturers or distributors/sellers, as the 210836, September 01, 2015, J. Bersamin).
statutory taxpayers who is directly liable to pay the excise
tax on its petroleum products upon their removal from In cases involving excise tax exemptions on
the place of production, is entitled to a refund or credit of petroleum products under Section 135 of the Tax
the excise taxes it paid for petroleum products sold to Code, who is the proper party to claim for tax refund?
international carriers (CIR v. Pilipinas Shell Petroleum
Corp., G.R. No. 188497, February 19, 2014, J. Villarama, Jr.). Section 204(c) of the NIRC states that it is the statutory
taxpayer which has the legal personality to file a claim for
NOTE: Excise tax on petroleum products is essentially a refund. Accordingly, in cases involving excise tax
tax on property, the direct liability for which pertains to exemptions on petroleum products under Section 135 of
the statutory taxpayer (i.e., manufacturer, producer or the NIRC, the Court has consistently held that it is the
importer). Any excise tax paid by the statutory taxpayer statutory taxpayer who is entitled to claim a tax refund
on petroleum products sold to any of the entities or based thereon and not the party who merely bears its
agencies named in Section 135 of the Tax Code exempt economic burden.
from excise tax is deemed illegal or erroneous, and should
be credited or refunded to the payor (Chevron Philippines, Is the above rule absolute?
Inc. vs. CIR, G.R. No. 210836, September 1, 2015, J.
Bersamin). NO. The above rule should not apply to instances where
the law clearly grants the party to which the economic
Chevron filed a claim for refund or tax credit for the burden of the tax is shifted an exemption from both direct
excise taxes paid on its importation of petroleum and indirect taxes. In which case, the latter must be
products that it had sold to the Clark Development allowed to claim a tax refund even if it is not considered
Corporation (CDC), an entity exempt from direct and as the statutory taxpayer under the law.
indirect taxes. The CTA denied Chevron’s claim
stating that there was nothing in Section 135(c) of the Thus, the propriety of a tax refund claim is hinged on the
Tax Code that explicitly exempted Chevron as the kind of exemption which forms its basis. If the law confers
seller of the imported petroleum products from the an exemption from both direct or indirect taxes, a
payment of the excise taxes; and holding that because claimant is entitled to a tax refund even if it only bears the
it did not fall under any of the categories exempted economic burden of the applicable tax. On the other hand,
from paying excise tax, Chevron is not entitled to the if the exemption conferred only applies to direct taxes,
tax refund or tax credit. Is CTA correct? then the statutory taxpayer is regarded as the proper
party to file the refund claim (Philippine Airlines, Inc. vs
NO. Pursuant to Section 135(c) petroleum products sold CIR, G.R. No. 198759, July 1, 2013, J. Perlas-Bernabe).
to entities that are by law exempt from direct and indirect
taxes are exempt from excise tax. The phrase which are DOCUMENTARY STAMP TAX (DST)
by law exempt from direct and indirect taxes describes
the entities to whom the petroleum products must be What is the nature of DST?
sold in order to render the exemption operative. Section
135(c) should thus be construed as an exemption in A DST is a tax on documents, instruments, loan
favor of the petroleum products on which the excise agreements, and papers evidencing the acceptance,
tax was levied in the first place. assignment, sale or transfer of an obligation, right or
property incident thereto. The DST is actually an excise
Inasmuch as its liability for the payment of the excise tax, because it is imposed on the transaction rather than
taxes accrued immediately upon importation and prior to on the document (Philippine Bank of Communications vs.
the removal of the petroleum products from the CIR, G.R. No. 194065, June 20, 2016, C.J. Sereno).
customshouse, Chevron was bound to pay, and actually
paid such taxes. But the status of the petroleum products According to Section 200 (D) of the Tax Code, the DST
as exempt from the excise taxes would be confirmed only may be paid by imprinting the stamps through a
upon their sale to CDC, which is an entity exempt from documentary stamp metering machine, on the
direct and indirect taxes. Before then, Chevron did not taxable document. What is DS metering machine?
have any legal basis to claim the tax refund or the tax
credit as to the petroleum products. Consequently, the The DS metering machine was developed and used for
payment of the excise taxes by Chevron upon its businesses with material DST transactions like banks and
importation of petroleum products was deemed illegal insurance companies for their regular transactions.
These businesses authorized by the BIR may load

exempts from similar taxes petroleum products sold to unfit for use and refund their value upon proof of destruction. No credit
Philippine carriers, entities or agencies; and or refund of taxes or penalties shall be allowed unless the taxpayer
c. Entities which are by law exempt from direct and indirect taxes. files in writing with the Commissioner a claim for credit or refund
within two (2) years after payment of the tax or penalty: Provided,
16 SEC 204. Authority of the Commissioner to Compromise, Abate and however, that a return filed showing an overpayment shall be
Refund or Credit Taxes. – The Commissioner may – x x x x considered as a written claim for credit or refund. (Emphasis and
(C) Credit or refund taxes erroneously or illegally received or penalties underscoring supplied)
imposed without authority, refund the value of internal revenue stamps
when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered

30
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documentary stamps on their DS metering machine in Who is liable to pay DST?


accordance with the rules and regulations. In other
words, this system allows advanced payment of the DST on documents, loan agreements, and papers shall be
DST for future applications (Philippine Bank of levied, collected and paid for by the person making,
Communications vs. CIR, G.R. No. 194065, June 20, 2016, C.J. signing, issuing, accepting, or transferring the same.
Sereno). The Tax Code provides that whenever one party to the
document enjoys exemption from DST, the other party
Should the date of purchase of documentary stamps not exempt from DST shall be directly liable for the tax.
for loading and reloading on the DS metering Thus, it is clear that DST shall be payable by any party to
machine be deemed as payment of the DST for the the document, such that the payment and compliance by
purpose of counting the two-year prescriptive period one shall mean the full settlement of the DST due on the
for filing a claim for a refund or tax credit? document (CIR vs. De La Salle University, G.R. No. 196596,
November 9, 2016, J. Brion).
NO. Under Section 229 of the Tax Code, the claim for a
refund of erroneously paid DST must be within two years NIRC REMEDIES
from the date of payment of the DST.
What are the remedies of a taxpayer?
The payment of the DST upon loading/reloading of the DS
metering machine must not be considered as the "date of These are legal actions which a taxpayer can avail to seek
payment" when the prescriptive period to file a claim for relief from the undue burden or oppressive effect of tax
a refund/credit must commence. For DS metering laws, or as means to check possible excesses by revenue
machine users, the payment of the DST upon officers in the performance of their duties.
loading/reloading is merely an advance payment for
future application. Remedies before payment
1. Administrative remedies
The liability for the payment of the DST falls due only a. Protest of assessment;
upon the occurrence of a taxable transaction. Therefore, i. Reconsideration
the date of imprinting the documentary stamp on the ii. Reinvestigation
taxable document must be considered as the date of b. Compromise; and
payment contemplated under Section 229 of the NIRC c. Abatement
(Philippine Bank of Communications vs. CIR, G.R. No. 2. Judicial Remedies
194065, June 20, 2016, C.J. Sereno).
Remedies after payment
The BIR assessed PNB for deficiency DST on its 1. Administrative remedies
interbank call loans. BIR claims that PNB's interbank a. Tax refund
call loans were included in the concept of loan b. Tax credit
agreements; hence, the interbank call loans were 2. Judicial remedies
subject to DST. Is the contention of BIR tenable?
What are the remedies of the Government?
NO. PNB's interbank call loans are not taxable under
Section 180 of the Tax Code. An interbank call loan refers These are courses of action provided or allowed in the
to the cost of borrowings from other resident banks and law to implement the tax laws or enforce tax collection.
non-bank financial institutions with quasi-banking
authority that is payable on call or demand. It is 1. Administrative remedies
transacted primarily to correct a bank's reserve a. Tax lien
requirements. It does not fall under the definition of a b. Distraint and levy
loan agreement (CIR vs. PNB, G.R. No. 195147, July 11, c. Forfeiture of real property
2016, J. Bersamin). d. Suspension of business operation
e. Non-availability of injunction to restrain
NOTE: Section 180 provides that DST of Php0.30 on each collection of tax
Php200.00, or fractional part thereof, shall only be 2. Judicial remedies
imposed on the face value of: a. Ordinary civil action
b. Criminal action
1. loan agreements;
2. bills of exchange; What is Letter of Authority (LOA)?
3. drafts;
4. instruments and securities issued by the A LOA is the authority given to the appropriate revenue
Government or any of its instrumentalities; officer assigned to perform assessment functions. It
5. certificates of deposits drawing interest; empowers or enables said revenue officer to examine the
6. orders for the payment of any sum of money books of account and other accounting records of a
otherwise than at sight or on demand; and taxpayer for the purpose of collecting the correct amount
7. promissory notes, whether negotiable or non- of tax. A LOA is premised on the fact that the examination
negotiable, except bank notes issued for circulation, of a taxpayer who has already filed his tax returns is a
and on each renewal of any such note. power that statutorily belongs only to the CIR himself or
his duly authorized representatives pursuant to Section
Interbank call loans, although not considered as deposit
substitutes for taxation purposes, are not expressly
included among the taxable instruments listed in Section
180; hence, they may not be held as taxable. (CIR vs. PNB,
G.R. No. 195147, July 11, 2016, J. Bersamin).

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TAXATION LAW

617 of the Tax Code. Hence, unless undertaken by the CIR NO. When an assessment is made within the prescriptive
himself or his duly authorized representatives, other tax period, receipt by the taxpayer may or may not be
agents may not validly conduct any of these kinds of within said period.
examinations without prior authority (Medicard
Philippines, Inc. vs. CIR, G.R. No. 222743, April 5, 2017, J. However, the rule does not dispense with the
Reyes). requirement that the taxpayer should actually receive the
assessment notice, even beyond the prescriptive period
Is Letter Notice (LN) sufficient for purposes of (CIR vs. GJM Philippines Manufacturing, Inc., G.R. No.
compliance with the requirement of LOA? 202695, February 29, 2016, J. Peralta).

NO. LN is entirely different and serves a different purpose Who has the burden of proof to establish receipt of
than a LOA. assessment by the taxpayer?

First, a LOA addressed to a revenue officer is specifically It has been settled that while a mailed letter is deemed
required under the NIRC before an examination of a received by the addressee in the course of mail, this is
taxpayer may be had while an LN is not found in the NIRC merely a disputable presumption subject to
and is only for the purpose of notifying the taxpayer that controversion, the direct denial of which shifts the
a discrepancy is found based on the BIR's RELIEF System. burden to the sender to prove that the mailed letter was,
Second, a LOA is valid only for 30 days from date of issue in fact, received by the addressee.
while an LN has no such limitation. Third, a LOA gives the
revenue officer only a period of 120 days from receipt of If the taxpayer denies having received an assessment
LOA to conduct his examination of the taxpayer whereas from the BIR, it then becomes incumbent upon the latter
an LN does not contain such a limitation. to prove by competent evidence that such notice was
indeed received by the addressee. Here, the onus
What is the effect of absence of LOA? probandi has shifted to the BIR to show by contrary
evidence that taxpayer indeed received the assessment in
The absence of LOA violates taxpayer’s right to due the due course of mail.
process. There must be a grant of authority before any
revenue officer can conduct an examination or To prove the fact of mailing, it is essential to present the
assessment. Equally important is that the revenue officer registry receipt issued by the Bureau of Posts or the
so authorized must not go beyond the authority given. In Registry return card which would have been signed by
the absence of such an authority, the assessment or the taxpayer or its authorized representative. And if said
examination is a nullity (CIR vs. SONY Philippines, Inc. G.R. documents could not be located, the CIR should, at the
No. 178697, November 17, 2010). very least, submit a certification issued by the Bureau of
Posts and any other pertinent document executed with
What is the presumption in cases of tax assessments? its intervention (CIR vs. GJM Philippines Manufacturing,
Inc., G.R. No. 202695, February 29, 2016, J. Peralta).
All presumptions are in favor of the correctness of tax
assessments. The good faith of the tax assessors and the A perusal of the FAN against a taxpayer will show that
validity of their actions are thus presumed. They will be other than a tabulation of the alleged deficiency taxes
presumed to have taken into consideration all the facts to due, no further detail regarding the assessment was
which their attention was called. Hence, it is incumbent provided by the BIR. Only the resulting interest,
upon the taxpayer to credibly show that the assessment surcharge and penalty were anchored with legal
was erroneous in order to relieve himself from the basis. The BIR argues that a scrutiny of the BIR
liability it imposes (CIR v. Secretary of Justice, G.R. No. records of respondent would show that the details of
177387, November 9, 2016, J. Bersamin). the factual finding of EWT were itemized from the
PAN issued by petitioner. Is the assessment valid?
The FLD issued against a taxpayer stated that the
amounts therein were “estimates based on best NO. Section 228 of the Tax Code provides that the
possible sources.” Is the assessment valid? taxpayer shall be informed in writing of the law and the
facts on which the assessment is made. Otherwise, the
NO. A taxpayer should be informed in writing of the law assessment is void.
and the facts on which the assessment is made,
otherwise, the assessment is void. An assessment, in The law requires that the legal and factual bases of the
order to stand judicial scrutiny, must be based on facts. assessment be stated in the formal letter of demand and
The presumption of the correctness of an assessment, assessment notice. Thus, such cannot be presumed.
being a mere presumption, cannot be made to rest on There was no going around the mandate of the law that
another presumption (Spouses Pacquiao vs. CTA, G.R. No. the legal and factual bases of the assessment be stated in
213394, April 6, 2016, J. Mendoza). writing in the formal letter of demand accompanying the
assessment notice.
If assessment is made within the prescriptive period,
is it necessary that the receipt of such assessment by In this case, BIR should have at least attached a detailed
the taxpayer be within the prescriptive period also? notice of discrepancy or stated an explanation why the
amount of deficiency tax is collectible against taxpayer
and how the same was arrived at. Any short-cuts to the

17 SEC. 6. Power of the Commissioner to Make Assessments and Prescribe authorize the examination of any taxpayer and the assessment of the
Additional Requirements for Tax Administration and Enforcement. – correct amount of tax: Provided, however, that failure to file a return
(A) Examination of Return and Determination of Tax Due. - After a return shall not prevent the Commissioner from authorizing the examination
has been filed as required under the provisions of this Code, the of any taxpayer. (emphasis supplied)
Commissioner or his duly authorized representative may

32
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prescribed content of the assessment or the process liability as it is deemed a denial of the protest filed by the
thereof should not be countenanced (CIR vs. United latter, which may also be appealed before the CTA.
Salvage and Towage (Phils.) Inc, G.R. No. 197515, July 2,
2014, J. Peralta). An FDDA that does not inform the taxpayer in writing of
the facts and law on which it is based renders the decision
When does an assessment become a disputed void. Therefore, it is as if there was no decision rendered
assessment? by the CIR. It is tantamount to a denial by inaction by the
CIR, which may still be appealed before the CTA and the
Where a taxpayer questions an assessment and asks the assessment evaluated on the basis of the available
CIR to reconsider or cancel the same because he (the evidence and documents (CIR vs. Liquigaz Philippines
taxpayer) believes he is not liable therefor, the Corporation, G.R. No. 215534, April 18, 2016, J. Mendoza).
assessment becomes a "disputed assessment" that the
CIR must decide. Thus, an assessment becomes a Is substantial compliance of the notice requirement
disputed assessment after a taxpayer has filed its protest under Section 228 of the NIRC allowed?
to the assessment in the administrative level (CIR vs.
Liquigaz Philippines Corporation, G.R. No. 215534, April YES. The notice requirement under Section 228 of the
18, 2016, J. Mendoza). NIRC is substantially complied with whenever the
taxpayer had been fully informed in writing of the factual
Section 228 of the NIRC declares that an assessment and legal bases of the deficiency taxes assessment, which
is void if the taxpayer is not notified in writing of the enabled the latter to file an effective protest.
facts and law on which it is made. Is this requirement
applicable to both Formal Letter of Demand / Formal NOTE: In one case, the Supreme Court held that
Assessment Notice (FLD/FAN) and Final Decision on considering the exchange of correspondence and
Disputed Assessment (FDDA)? documents between the BIR and taxpayer in which the
former explained at length the factual and legal bases of
YES. The requirement of providing the taxpayer with the deficiency tax assessments, the requirement of
written notice of the factual and legal bases applies both Section 228 was substantially complied with. Taxpayer’s
to the FLD/FAN and the FDDA. right to due process was thus not violated (Samar I
Electric Cooperative v. CIR, G.R. No. 193100, December 10,
Although Section 228 is silent with regards to a decision 2014).
on a disputed assessment by the CIR which fails to state
the law and facts on which it is based, it should not be Taxpayer duly protested a PAN it received from the
read restrictively as to limit the written notice only to the BIR. Subsequently, the BIR issued a FAN to the
assessment itself. Moreover, RR No. 12-99 detailed the taxpayer. The demand letter states: “This is our final
process of assessment and required that both the decision based on investigation. If you disagree, you
FAN/FLD and the FDDA state the law and facts on which may appeal the final decision within 30 days from
it is based. receipt hereof, otherwise said deficiency tax
assessment shall become final, executory and
The Court raises the possibility that the amounts demandable.” Instead of filing a protest on the
reflected in the FDDA were arbitrarily made if the factual assessment, the taxpayer filed a petition for review
and legal bases thereof are not shown. Thus, the rule is in with the CTA. The BIR filed a motion to dismiss on the
observance of due process—to afford the taxpayer ground that the taxpayer failed to exhaust
adequate opportunity to file a protest on the assessment administrative remedies by filing a protest on the
and thereafter file an appeal in case of an adverse assessment. Should the motion be granted?
decision (CIR vs. Liquigaz Philippines Corporation, G.R. No.
215534, April 18, 2016, J. Mendoza). NO. This case is an exception to the rule on exhaustion of
administrative remedies, i.e., estoppel on the part of BIR.
What is the effect of void FDDA? The taxpayer cannot be blamed for not filing a protest
against the FAN since the language used and the tenor of
A void FDDA does not ipso facto render the assessment the demand letter indicate that it is the final decision of
void. A “decision” differs from an “assessment.” the CIR on the matter. The CIR must indicate, in a clear
and unequivocal language, whether its action on a
The difference is apparent in Section 7 of R.A. 1125, as disputed assessment constitutes its final determination
amended, where the CTA is conferred with appellate thereon in order for the taxpayer concerned to determine
jurisdiction over the decision of the CIR in cases involving when his or her right to appeal to the tax court accrues.
disputed assessments, as well as inaction of the CIR in Thus, the CIR is now estopped from claiming that it did
disputed assessments. From the foregoing, it is clear that not intend the FAN to be a final decision (Allied Banking
what is appealable to the CTA is the “decision” of the CIR Corp. v. CIR, G.R. No. 175097, February 5, 2010).
on disputed assessment and not the assessment itself.
Soaring Eagle paid its excise tax liabilities with Tax
After the protest to the assessment by the taxpayer, the Credit Certificates (TCCs) which it purchased through
CIR either issues a decision on the disputed assessment the One Stop Shop Inter-Agency Tax Credit Center
or fails to act on it and is, therefore, considered denied. (Center) of the Department of Finance. The Center is
The taxpayer may then appeal the decision on the a composite body of the DOF, BIR, BOC and the BOI.
disputed assessment or the inaction of the CIR. As such, The TCCs were accepted by the BIR as payments. A
the FDDA is not the only means that the final tax liability year after, the BIR demanded the payment of alleged
of a taxpayer is fixed, which may then be appealed by the deficiency excise taxes on the ground that Soaring
taxpayer. Under the law, inaction on the part of the CIR Eagle is not a qualified transferee of the TCCs it
may likewise result in the finality of a taxpayer’s tax purchased from other BOI-registered companies.
The BIR argued that the TCCs are subject to post-

33
TAXATION LAW

audit as a suspensive condition. On the other hand, that he may either pay the amount of the assessment or
Soaring Eagle countered that it is a buyer in good contest its validity in court. It would surely be prejudicial
faith and for value who merely relied on the Center's to the interest of the taxpayer for the Government
representation of the genuineness and validity of the collecting agency to unduly delay the assessment and the
TCCs. If it is ordered to pay the deficiency, Soaring collection because by the time the collecting agency
Eagle claims the same is confiscatory and a violation finally gets around to making the assessment or making
of due process. Is the assessment against Soaring the collection, the taxpayer may then have lost his papers
Eagle valid? Explain. (2016 BAR) and books to support his claim and contest that of the
Government, and what is more, the tax is in the meantime
NO. The assessment is invalid because the TCCs used by accumulating interest which the taxpayer eventually has
Soaring Eagle are valid and effective. A TCC is an to pay.
undertaking by the government through the BIR or DOF,
acknowledging that a taxpayer is entitled to a certain Likewise, the prescriptive period for the filing of actions
amount of tax credit from either an overpayment of for collection of taxes is justified by the need to protect
income taxes, a direct benefit granted by law or other law-abiding citizens from possible harassment. Also, it is
sources and instances granted by law such as on specific principally intended to afford protection to the taxpayer
unused input taxes and excise taxes on certain goods. As against unreasonable investigations as the indefinite
such, tax credit is transferable in accordance with extension of the period for assessment deprives the
pertinent laws, rules, and regulations (Pilipinas Shell taxpayer of the assurance that he will no longer be
Petroleum Corp. v. CIR, 541 SCRA 316 [2007]). subjected to further investigation for taxes after the
expiration of a reasonable period of time. Thus, the legal
A Rehabilitation Court declared LCI to be under provisions on prescription should be liberally construed
corporate rehabilitation and issued an Order to protect taxpayers and that, as a corollary, the
providing, among others, the suspension of all exceptions to the rule on prescription should be strictly
actions or proceedings, in court or otherwise, for the construed (CIR vs. Basf Coating + Inks Phils., Inc, G.R. No.
enforcement of claims against LCI. The BIR was 198677, November 26, 2014, J. Peralta).
notified of the rehabilitation proceedings involving
LCI. Despite the foregoing, the BIR, through Misajon, On January 9, 1996, BIR issued assessment notice
still opted to assess and sent FAN requiring LCI to pay against a taxpayer for taxable year 1992. The
deficiency taxes. As such, Misajon was cited for taxpayer protested arguing that the assessment is
contempt by the court. Misajon argued that (a) they void because the right of the government to assess
only performed such acts to toll the prescriptive and collect deficiency taxes from it has prescribed.
period for the collection of deficiency taxes; and (b) BIR, on the other hand, argued that its right to collect
to cite them in indirect contempt would unduly the deficiency tax has not yet prescribed because
interfere with their function of collecting taxes due to while the final assessment notice and demand letter
the government. Is Misajon correct? were issued on January 9, 1996, the five (5)-year
prescriptive period to collect was interrupted when
NO. It was improper for Misajon to collect, or even respondent filed its request for reinvestigation on
attempt to collect, deficiency taxes from LCI outside of the March 14, 1997 which was granted by the BIR on
rehabilitation proceedings, and in the process, willfully January 22, 2001. Thus, the period for tax collection
disregard the Order lawfully issued by the Rehabilitation should have begun to run from the date of the
Court. reconsidered or modified assessment. Is BIR correct?

The act of sending FAN and FLD is part of assessment and NO. The statute of limitations on assessment and
collection of deficiency taxes, an action or proceeding for collection of national internal revenue taxes was
the enforcement of a claim which should have been shortened from five (5) years to three (3) years by virtue
suspended pursuant to the Order. Misajon could have of Batas Pambansa Blg. 700. Thus, BIR has three (3) years
easily tolled the running of such prescriptive period, and from the date of actual filing of the tax return to assess a
at the same time, perform their functions as officers of the national internal revenue tax or to commence court
BIR, without defying the Order by simply ventilating their proceedings for the collection thereof without an
claim before the Rehabilitation Court (BIR vs. Lepanto assessment. However, when it validly issues an
Ceramics, Inc., G.R. No. 224764, April 24, 2017, J. Perlas- assessment within the three (3)-year period, it has
Bernabe). another three (3) years within which to collect the tax
due by distraint, levy, or court proceeding. The
Statute of Limitations assessment of the tax is deemed made and the three (3)-
year period for collection of the assessed tax begins to run
What is the purpose of statute of limitations on the on the date the assessment notice had been released,
assessment and collection of taxes? mailed or sent to the taxpayer.

Prescription in the assessment and in the collection of The Collection Letter for deficiency taxes for taxable year
taxes is provided by the Legislature for the benefit of both 1992 was only issued on February 21, 2002, despite the
the Government and the taxpayer; for the Government fact that the FANs for the deficiency taxes for taxable year
for the purpose of expediting the collection of taxes, so 1992 was issued as early as January 9, 1996. Clearly, five
that the agency charged with the assessment and (5) long years had already lapsed, beyond the three (3)-
collection may not tarry too long or indefinitely to the year prescriptive period, before collection was pursued
prejudice of the interests of the Government, which needs by the BIR.
taxes to run it; and for the taxpayer so that within a
reasonable time after filing his return, he may know the Further, while the request for reinvestigation was made
amount of the assessment he is required to pay, whether on March 14, 1997, the same was only acted upon by
or not such assessment is well founded and reasonable so petitioner on January 22, 2001, also beyond the three (3)

34
UST LAW PRE-WEEK NOTES 2017

year statute of limitations reckoned from January 9, 1996, the basis that the same had already prescribed under
notwithstanding the lack of impediment to rule upon Tax Code.
such issue. Moreover, the request for reinvestigation
should be granted or at least acted upon in due course On its Petition for Review, MERALCO argued that
before the suspension of the statute of limitations may set exemption was provided and ascertained only
in (CIR vs. United Salvage and Towage (Phils.) Inc, G.R. No. through BIR Ruling No. DA-342-2003 and that the
197515, July 2, 2014, J. Peralta). prescriptive period for initiating an action on the
ground of quasicontract or solutio indebiti under
More than 12 years after the filing of the protest, the Article 1145 of the New Civil Code is six (6) years. Is
CIR rendered a decision reiterating the deficiency MERALCO correct?
DST assessment against CBC and ordered the
payment thereof within 30 days from receipt of the NO. Section 22918 of the Tax Code provides
Decision. taxpayer/claimant a period of two (2) years from the date
of payment of tax to file a claim for refund before the BIR.
Consequently, CBC filed a Petition for Review with the The prescriptive period provided is mandatory
CTA. On 11 March 2002, the CIR filed an Answer with regardless of any supervening cause that may arise after
a demand for CBC to pay the assessed DST. Is the right payment. It should be pointed out further that while the
of the BIR to collect the assessed DST from CBC prescriptive period of two (2) years commences to run
barred by prescription? from the time that the refund is ascertained, the propriety
thereof is determined by law (in this case, from the date
YES. Under the law, the time limit for the government to of payment of tax), and not upon the discovery by the
collect the assessed tax is set at three years, to be taxpayer of the erroneous or excessive payment of taxes.
reckoned from the date when the BIR The issuance by the BIR of the Ruling declaring the tax-
mails/releases/sends the assessment notice to the exempt status of NORD/LB, if at all, is merely
taxpayer. Further, Section 319(C) states that the assessed confirmatory in nature. There is no basis that the subject
tax must be collected by distraint or levy and/or court exemption was provided and ascertained only through
proceeding within the three-year period. BIR Ruling No. DA-342-2003, since said ruling is not the
operative act from which an entitlement of refund is
However, in this case, there was neither a warrant of determined. In other words, the BIR is tasked only to
distraint or levy served nor a collection case filed in court confirm what is provided under the Tax Code on the
by the BIR within the three-year period. The BIR’s matter of tax exemptions as well as the period within
Answer in the case filed before the CTA could not, by any which to file a claim for refund.
means, have qualified as a collection case as required by
law. Further, the demand was made almost thirteen years Moreover, MERALCO is misguided when it relied upon
from the date from which the prescriptive period is to be the six (6)-year prescriptive period for initiating an
reckoned. Thus, the attempt to collect the tax was made action on the ground of quasicontract or solutio indebiti
way beyond the three-year prescriptive period (China under Article 1145 of the New Civil Code. There is solutio
Banking Corporation vs. CIR, GR. No. 172509, February 4, indebiti where: (1) payment is made when there exists no
2015, C.J. Sereno). binding relation between the payor, who has no duty to
pay, and the person who received the payment; and (2)
MERALCO obtained a loan from Norddeutsche the payment is made through mistake, and not through
Landesbank Girozentrale (NORD/LB). Pursuant liberality or some other cause. Here, there is a binding
thereto, MERALCO remitted to the BIR the relation between BIR as the taxing authority in this
withholding tax on its interest payments to jurisdiction and MERALCO which is bound under the law
NORD/LB. Sometime in 2001, MERALCO discovered to act as a withholding agent of NORD/LB Singapore
that NORD/LB is a foreign government-owned Branch, the taxpayer. Hence, the first element of solutio
financing institution of Germany and requested for a indebiti is lacking. Moreover, such legal precept is
BIR Ruling with regard to the tax-exempt status of inapplicable to the present case since the Tax Code, a
NORD/LB. On October 7, 2003, the BIR issued Ruling special law, explicitly provides for a mandatory period
No. DA-342-2003 declaring that the interest for claiming a refund for taxes erroneously paid (CIR
payments made to NORD/LB are exempt from the ten vs. Manila Electric Company, G.R. No. 181459, June 9, 2014,
percent (10%) final withholding tax, since it is a J. Peralta).
financing institution owned and controlled by the
foreign government of Germany. What is the rule on suspension of the running of
prescriptive period to assess in case a taxpayer
Consequently, on July 13, 2004, relying on the cannot be located in the address given in the return?
aforesaid BIR Ruling, MERALCO filed with the BIR a
claim for tax refund or issuance of tax credit Under Section 22319 of the Tax Code, the running of the
certificate for the erroneously paid or overpaid final Statute of Limitations shall be suspended when the
withholding tax. Said claim was denied by the BIR on taxpayer cannot be located in the address given by him in

18 Section 229. Recovery of Tax Erroneously or Illegally Collected. – xxx proceeding in court and for sixty (60) days thereafter; when the
In any case, no such suit or proceeding shall be filed after the taxpayer requests for a reinvestigation which is granted by the
expiration of two (2) years from the date of payment of the tax or Commissioner; when the taxpayer cannot be located in the address
penalty regardless of any supervening cause that may arise after given by him in the return filed upon which a tax is being assessed
payment xxx. (emphasis supplied) or collected: Provided, that, if the taxpayer informs the
Commissioner of any change in address, the running of the Statute
19 Sec. 223. Suspension of Running of Statute of Limitations. – The of Limitations will not be suspended; when the warrant of distraint or
running of the Statute of Limitations provided in Sections 203 and 222 levy is duly served upon the taxpayer, his authorized representative, or
on the making of assessment and the beginning of distraint or levy a a member of his household with sufficient discretion, and no property
proceeding in court for collection, in respect of any deficiency, shall be could be located; and when the taxpayer is out of the Philippines.
suspended for the period during which the Commissioner is prohibited (emphasis supplied)
from making the assessment or beginning distraint or levy or a

35
TAXATION LAW

the return filed upon which a tax is being assessed or 2. Except for waiver of collection of taxes which shall
collected. indicate the particular taxes assessed, the waiver need
not specify the particular taxes to be assessed nor the
However, the above rule on the suspension of the three- amount thereof, and it may simply state "all internal
year period to assess apply only if the BIR Commissioner revenue taxes" considering that during the
is not aware of the whereabouts of the taxpayer. In case assessment stage, the CIR or her duly authorized
the BIR, by all indications, is well aware that taxpayer had representative is still in the process of examining and
moved to its new address, as shown by the documents determining the tax liability of the taxpayer.
which form part of its records with the BIR, the running 3. Since the taxpayer is the applicant and the executor of
of the three-year period to assess respondent is not the extension of the period of limitation for its benefit
suspended. (CIR vs. Basf Coating + Inks Phils., Inc, G.R. No. in order to submit the required documents and
198677, November 26, 2014, J. Peralta). accounting records, the taxpayer is charged with the
burden of ensuring that the waivers of statute of
What are the requisites in order that request for limitation are validly executed by its authorized
reinvestigation will suspend the statute of representative. The authority of the taxpayer's
limitations? representative who participated in the conduct of
audit or investigation shall not be thereafter
Two things must concur: there must be a request for contested to invalidate the waiver.
reinvestigation and the CIR must have granted it. Thus, 4. The waiver may be notarized. However, it is sufficient
request for reinvestigation alone will not suspend the that the waiver is in writing as specifically provided
statute of limitations (China Banking Corporation vs. CIR, by the NIRC, as amended.
GR. No. 172509, February 4, 2015, C.J. Sereno). 5. Considering that the waiver is a voluntary act of the
taxpayer, the waiver shall take legal effect and be
What is the nature of waiver of statute of limitations? binding on the taxpayer upon its execution thereof.
6. It shall be the duty of the taxpayer to submit its duly
Waiver of the statute of limitations is not a waiver of the executed waiver to the CIR or officials previously
right to invoke the defense of prescription but rather an designated in existing issuances or the concerned
agreement between the taxpayer and the BIR that the revenue district officer or group supervisor as
period to issue an assessment and collect the taxes due is designated in the Letter of Authority/Memorandum
extended to a date certain. It is not a unilateral act by the of Assignment who shall then indicate acceptance by
taxpayer of the BIR but is a bilateral agreement between signing the same. Such waiver shall be executed and
two parties. duly accepted prior to the expiration of the period to
assess or to collect. The taxpayer shall have the duty
Since a waiver of the statute of limitations is a derogation to retain a copy of the accepted waiver.
of the taxpayer’s right to security against prolonged and 7. Note that there shall only be two (2) material dates
unscrupulous investigations, waivers of this kind must be that need to be present on the waiver:
carefully and strictly construed (Philippine Journalists,
Inc. v. CIR, G.R. No. 162852, December 16, 2004). a. The date of execution of the waiver by the taxpayer
or its authorized representative; and
What is the effect of a defect in a waiver of statute of b. The expiry date of the period the taxpayer waives
limitations? the statute of limitations.

A defect in the waiver results to the non-extension of the 8. Before the expiration of the period set on the
period to assess or collect taxes, and makes the previously executed waiver, the period earlier set may
assessment issued by the BIR beyond the three-year be extended by subsequent written waiver (RMO 14-
prescriptive period void (CIR vs Philippine Daily Inquirer, 2016).
G.R. No. 213943, March 22, 2017, J. Carpio).
After being assessed by the BIR with alleged
What are the guidelines on proper execution of deficiency income taxes, VVV Corporation (VVV)
waivers? through Enrique, its President, executed a waiver of
the prescriptive period. The waiver was signed by
1. The waiver may be, but not necessarily, in the form Revenue District Officer (RDO) Alfredo. However, the
prescribed by RMO No. 20-90 or RDAO No. 05-01. The waiver did not state the date of execution by the
taxpayer's failure to follow the aforesaid forms does taxpayer and date of acceptance by the BIR. Enrique
not invalidate the executed waiver, for as long as the was also not furnished a copy of the waiver by the
following are complied with: BIR.

a) The Waiver of the Statute of Limitations under VVV claims that the waiver is void due to non-
Section 222(b) and (d) shall be executed before the compliance with RMO 20-90. Hence, the period for
expiration of the period to assess or to collect assessment had already prescribed. Moreover, since
taxes. The date of execution shall be specifically the assessment involves P2 Million, the waiver
indicated in the waiver. should have been signed by the CIR and instead of a
b) The waiver shall be signed by the taxpayer himself mere RDO. On the other hand, the BIR contends that
or his duly authorized representative. In the case the requirements of RMO No. 20-90 are merely
of a corporation, the waiver must be signed by any directory; that the execution of the waiver by VVV
of its responsible officials; was a renunciation of its right to invoke prescription
c) The expiry date of the period agreed upon to and that the government cannot be estopped by the
assess/collect the tax after the regular three-year mistakes committed by its revenue officers. Is VVV
period of prescription should be indicated; liable? Explain. (2016 BAR)

36
UST LAW PRE-WEEK NOTES 2017

NO. The waiver was executed after VVV Corporation Shell Petroleum Corporation, G.R. No. 187631, July 8, 2015,
(VVV) was assessed for deficiency income taxes J. Peralta).
obviously to justify the assessment made after
prescription had set in. This is the reason why VVV is May Congress, under the 1987 Constitution, abolish
invoking prescription due to the alleged invalidity of the the power to tax of local governments? (2003 BAR)
waiver for failure to comply with the requisites set forth
under RMO 20-90. A waiver executed beyond the NO. The Congress cannot abolish the local government’s
prescriptive period is ineffective (CIR v. The Stanley power to tax as it cannot abrogate what is expressly
Works Sales (Phils), Inc. 743 SCRA 642 [2014]). granted by the fundamental law. The only authority
conferred to Congress is to provide the guidelines and
RCBC assails the validity of the waivers of the statute limitations on the local government’s exercise of the
of limitations on the ground that the said waivers power to tax.
failed to indicate acceptance or agreement of the CIR,
as required under Section 223(b) of the 1997 Tax Local taxpayers who are engaged in the retail
Code. RCBC further argues that the principle of business of selling general merchandise within the
estoppel cannot be applied against it because its territorial jurisdiction of Davao City assails the
payment of the other tax assessments does not validity of the City Ordinance No. 158-05, Series of
signify a clear intention on its part to give up its right 2005, for being violative of Section 191 21 of the LGC
to question the validity of the waivers. Is RCBC which allows an adjustment in local tax rates not
correct? more than once every five years, and not exceeding
10%.
NO. Under Article 1431 of the Civil Code, the doctrine of
estoppel is anchored on the rule that “an admission or Under the old tax ordinance, wholesalers and
representation is rendered conclusive upon the person retailers were grouped as one, thus, the tax base and
making it, and cannot be denied or disproved as against tax rate imposed upon retailers were the same as that
the person relying thereon.” A party is precluded from imposed upon wholesalers. The new tax ordinance
denying his own acts, admissions or representations to provided different tax treatment between wholesale
the prejudice of the other party in order to prevent fraud and retail businesses pursuant to the LGC. They
and falsehood. alleged that they used to pay only 50% of 1 % of the
business tax rate under the old Davao City Ordinance
Estoppel is clearly applicable in this case. RCBC, through No. 230, Series of 1990, but in the assailed new
its partial payment of the revised assessments issued ordinance, it will require them to pay a tax rate of
within the extended period as provided for in the 1.5%, or an increase of 200% from the previous rate.
questioned waivers, impliedly admitted the validity of
those waivers. Had petitioner truly believed that the Is the assailed ordinance valid?
waivers were invalid and that the assessments were
issued beyond the prescriptive period, then it should not YES. The assailed ordinance does not violate the
have paid the reduced amount of taxes in the revised limitation imposed by Section 191 of the LGC on the
assessment. Thus, RCBC is estopped from questioning the adjustment of tax rate.
validity of the waivers (Rizal Commercial Banking
Corporation vs. CIR, G.R. No. 170257, September 7, 2011, J. Section 191 of the LGC presupposes that the following
Mendoza). requirements are present for it to apply, to wit:

(i) there is a tax ordinance that already imposes a tax in


PART III: LOCAL TAXATION
accordance with the provisions of the LGC; and
(ii) there is a second tax ordinance that made
Is power to tax inherent in local government unit adjustment on the tax rate fixed by the first tax
(LGU)? ordinance.
NO. Although the power to tax is inherent in the State, the In this case, both elements are not present. First, it cannot
same is not true for LGUs because although the mandate be said that the old tax ordinance was imposed in
to impose taxes granted to LGUs is categorical and long accordance with the provisions of the LGC. The old tax
established in the 1987 Philippine Constitution, the same ordinance of Davao City was enacted before the LGC came
is not all encompassing as it is subject to limitations as into law. Thus, the assailed new ordinance was actually
explicitly stated in Section 5, Article X 20 of the 1987 the first to impose the tax on retailers in accordance with
Constitution. The power to tax must be exercised within the provisions of the LGC. As to the second requirement,
the guidelines and limitations that Congress may provide. the new tax ordinance imposed the new tax base and the
new tax rate as provided by the LGC for retailers. It must
Moreover, the power to tax “is an attribute of be emphasized that a tax has two components, a tax base
sovereignty,” and as such, inheres in the State. Such, and a tax rate. However, Section 191 contemplates a
however, is not true for provinces, cities, municipalities situation where there is already an existing tax as
and barangays as they are not the sovereign; rather, they authorized under the LGC and only a change in the tax
are mere “territorial and political subdivisions of the rate would be effected. Again, the new ordinance
Republic of the Philippines” (Batangas City vs. Pilipinas provided, not only a tax rate, but also a tax base that were

21 Section 191. Authority of Local Government Units to Adjust Rates of


20 SECTION 5. Each local government unit shall have the power to Tax Ordinances. - Local government units shall have the authority to
create its own sources of revenues and to levy taxes, fees, and charges adjust the tax rates as prescribed herein not oftener than once every five
subject to such guidelines and limitations as the Congress may provide, (5) years, but in no case shall such adjustment exceed ten percent (10%)
consistent with the basic policy of local autonomy. Such taxes, fees, and of the rates fixed under this Code.
charges shall accrue exclusively to the local governments.

37
TAXATION LAW

appropriate for retailers, following the parameters assessment than a commercial classification. Within
provided under the LGC. the premises of the Hospital, the Association
constructed the St. Michael's Medical Arts Center
Moreover, the resulting increase in the tax rate for (Center) which will house medical practitioners who
retailers was merely incidental. When Davao City enacted will lease the spaces therein for their clinics at
the assailed ordinance, it merely intended to rectify the prescribed rental rates. The doctors who treat the
glaring error in the classification of wholesaler and patients confined in the Hospital are accredited by
retailer in the old ordinance (Mindanao Shopping the Association.
Destinations Corporation vs. Hon. Rodrigo Duterte, G.R. No.
211093, June 6, 2017, J. Peralta). The City Assessor classified the Center as
"commercial" instead of "special" on the ground that
Is LGU empowered under the LGC to impose business the Hospital owner gets income from the lease of its
taxes on persons or entities engaged in the business spaces to doctors who also entertain out-patients. Is
of manufacturing and distribution of petroleum the City Assessor correct in classifying the Center as
products? "commercial?" Explain. (2016 BAR)

Among the common limitations on the taxing powers of NO. The Medical Arts Center is an integral part of the
LGUs under Section 133 of the LGC is paragraph (h)22 Hospital and should be classified assessment purpose as
which specifies the two kinds of taxes which cannot be “special”. The fact alone that the doctors holding clinics in
imposed by LGUs: (1) excise taxes on articles enumerated the center are those duly accredited by the Association
under the NIRC, as amended; and (2) taxes, fees or who owns the Hospital, and these doctors are the ones
charges on petroleum products. who can treat the Hospital’s patients confined in it, takes
away the said Medical Arts Center from being categorized
The above provision makes plain that the prohibition a “commercial” since tertiary hospital is required by law
with respect to petroleum products extends not only to to have a pool of physicians who comprise the required
excise taxes thereon, but all “taxes, fees or charges” medical departments in various medical fields (City
(Batangas City vs. Pilipinas Shell Petroleum Corporation, Assessor of Cebu City v. Association of Benevola de Cebu,
G.R. No. 187631, July 8, 2015, J. Peralta). Inc., 524 SCRA 128 [(2007]).

The City of Maharlika passed an ordinance imposing In 2014, M City approved an ordinance levying
a tax on any sale or transfer of real property located customs duties and fees on goods coming into the
within the city at a rate of fifty percent (50%) of one territorial jurisdiction of the city. Said city ordinance
percent (1%) of the total consideration of the was duly published on February 15, 2014 with
transaction. Jose sold a parcel of land in the city, effectivity date on March 1, 2014.
which he inherited from his deceased parents, and
refused to pay the aforesaid tax. He instead filed a a. Is there a ground for opposing said ordinance?
case asking that the ordinance be declared null and b. What is the proper procedural remedy and
void since the tax it imposed can only be collected by applicable time periods for challenging the
the national government, as in fact he has paid the ordinance? (2015 BAR)
Bureau of Internal Revenue (BIR) the required
capital gains tax. If you were the City Legal Officer of a. YES, on the ground that the ordinance is ultra vires.
Maharlika, what defenses would you raise to sustain The taxing powers of local government units, such as
the validity of the ordinance? (2016 BAR) M City, cannot extend to the levy of taxes, fees and
charges already imposed by the national
I would argue that the city is allowed to levy a tax on government, and this includes, among others, the
transfer of real property ownership (Sec. 135, LGC). The levy of customs duties under the Tariff and Customs
capital gains tax which is an income tax collected by the Code [Sec. 133(e), LGC].
national government is entirely different from the tax on b. Any question on the constitutionality or legality of
sale or transfer imposed by the ordinance. The tax tax ordinance may be raised on appeal within 30
imposed by the ordinance not being in the nature of an days from effectivity to the Secretary of Justice. The
income tax, the imposition of the income tax by the Secretary of Justice shall render a decision within 60
national government will not pre-empt the tax sought to days from the date of receipt of the appeal.
be imposed by the ordinance. I would further argue that Thereafter, within 30 days after receipt of the
the imposition by the national government of a tax will decision or the lapse of the 60-day period without the
pre-empt Local Government Units (LGU) only if there is Secretary of Justice acting upon the appeal, the
no specific provision under the Local Government Units aggrieved party may file the appropriate proceedings
Code giving said power (Bulacan v. CA, 299 SCRA 442 with the Regional Trial Court (Sec. 187, LGC).
[1998]).
Are submarine or undersea communications cables
The Philippine-British Association, Inc. (Association) subject to real property tax?
is a non-stock, non-profit organization which owns
the St. Michael's Hospital (Hospital). Sec. 216 in YES. Submarine or undersea communications cables are
relation to Sec. 215 of the LGC classifies all lands, akin to electric transmission lines which as declared in
buildings and other improvements thereon actually, Manila Electric Company v. City Assessor and City
directly, and exclusively used for hospitals as Treasurer of Lucena City are "no longer exempted from
"special." A special classification prescribes a lower real property tax" and may qualify as "machinery" subject

22 SECTION 133. Common Limitations on the Taxing Powers of Local (h) Excise taxes on articles enumerated under the National Internal
Government Units. – Unless otherwise provided herein, the exercise of Revenue Code, as amended, and taxes, fees or charges on petroleum
taxing powers of provinces, cities, municipalities, and barangays shall products. (emphasis supplied)
not extend to the levy of the following: x x x x

38
UST LAW PRE-WEEK NOTES 2017

to real property tax under the LGC (Capitol Wireless Inc. Thus, a letter to the Treasurer questioning the imposition
vs. The Provincial Treasurer of Batangas, G.R. No. 180110, of business tax while paying the assessed amount is a
May 30, 2016, J. Peralta). valid protest (China Banking Corporation vs. City
Treasurer of Manila, GR. No. 204117, July 1, 2015, J.
Is payment under protest necessary when the Mendoza).
reasonableness of the amount of real property tax
assessed is being questioned? The Provincial Assessor of Batangas had determined
that the submarine cable systems of Capwire are
YES. Settled is the rule that should the taxpayer/real taxable real property. Consequently, Capwire
property owner question the excessiveness or received a Warrant of Levy from the Provincial
reasonableness of the assessment, Section 252 of the LGC Treasurer. Thereafter, Capwire filed a Petition for
of 1991 directs that the taxpayer should first pay the tax Prohibition and Declaration of Nullity of Warrant of
due before his protest can be entertain. There shall be Levy with the RTC which dismissed said petition
annotated on the tax receipts the words "paid under because of the latter's failure to comply with the
protest." It is only after the taxpayer has paid the tax due requirements set in Sections 226 and 229 of the LGC,
that he may file a protest in writing within 30 days from that is, by not availing of remedies before
payment of the tax to the Provincial, City or Municipal administrative bodies like the LBAA and the CBAA
Treasurer, who shall decide the protest within sixty days and for failure to pay the tax assessed against it under
from receipt. In no case is the local treasurer obliged to protest pursuant to Section 252.
entertain the protest unless the tax due has been paid.
Capwire asserts that recourse to the LBAA, or
A taxpayer alleges that payment under protest under payment of the tax under protest, is inapplicable to
Section 252 of the LGC is only required when the the case since there is no question of fact involved. It
reasonableness of the amount assessed is being contends that there is only a pure question of law
questioned. However, in challenging the very since the issue is whether its submarine cable system
authority and power of the assessor to impose the is taxable. Capwire holds the position that the cable
assessment and of the treasurer to collect the tax, system is not subject to tax because cable system lies
such payment is not a condition sine qua non for the outside of Philippine territory, i.e., on international
LBAA to entertain the challenge on the validity of the waters. Is Capwire correct?
tax imposed on its tax-exempt properties. Is the
taxpayer correct? NO. In disputes involving real property taxation, the
general rule is to require the taxpayer to first avail of
NO. As settled in jurisprudence, a claim for exemption administrative remedies and pay the tax under protest
from the payment of real property taxes does not actually before allowing any resort to a judicial action, except
question the assessor's authority to assess and collect when the assessment itself is alleged to be illegal or is
such taxes, but pertains to the reasonableness or made without legal authority. Stated differently, the
correctness of the assessment by the local assessor, a general rule of a prerequisite recourse to administrative
question of fact which should be resolved, at the very first remedies applies when questions of fact are raised, but
instance, by the LBAA. the exception of direct court action is allowed when
purely questions of law are involved.
Section 206 of the LGC categorically provides that every
person by or for whom real property is declared, who Capwire’s proposition that the cables lie entirely beyond
shall claim exemption from payment of real property Philippine territory, and therefore, outside of Philippine
taxes imposed against said property, shall file with the sovereignty, is a fact that is not subject to judicial notice.
provincial, city or municipal assessor sufficient Therefore, Capwire's resort to judicial action, premised
documentary evidence in support of such claim. The on its legal conclusion that its cables lie entirely on
burden of proving exemption from local taxation is upon international waters, without first administratively
whom the subject real property is declared. Real property substantiating such a factual premise, is improper. Facts
not declared and proved as tax-exempt shall be included must be threshed out administratively, as the courts in
in the assessment roll and the local assessor has the these types of cases step in at the first instance only when
authority to assess the property for realty taxes, and any pure questions of law are involved (Capitol Wireless Inc.
subsequent claim for exemption shall be allowed only vs. The Provincial Treasurer of Batangas, G.R. No. 180110,
when sufficient proof has been adduced supporting the May 30, 2016, J. Peralta).
claim. Thus, if the property being taxed has not been
dropped from the assessment roll, taxes must be paid Is a tax declaration be validly considered as a notice
under protest if the exemption from taxation is insisted of assessment for purposes of real property taxation?
upon (National Power Corporation vs. The Provincial
Treasurer of Benguet, G.R. No. 209303, November 14, 2016, NO. Tax declarations cannot be validly considered as a
J. Peralta). notice of assessment. A notice of assessment fixes and
determines the tax liability of a taxpayer and is a notice
What constitute a valid protest? Is there any formal to the effect that the amount stated therein is due as tax
requirement prescribed by law? and a demand to pay thereof. Such notice should
effectively inform the taxpayer of the value of a specific
The law does not prescribe any formal requirement to property, or proportion thereof subject to tax, including
constitute a valid protest. To constitute a valid protest, it the discovery, listing, classification, and appraisal of
is sufficient if what has been filed contains the properties.
spontaneous declaration made to acquire or keep some
right or to prevent an impending damage. Accordingly, a Tax declarations cannot be considered as notices of
protest is valid so long as it states the taxpayer’s objection assessment. First, a tax declaration is issued pursuant to
to the assessment and the reasons therefor.

39
TAXATION LAW

Section 22 of P.D. No. 46423 which mandates "that upon also be published once a week for two (2) consecutive
discovery of real property, the provincial, city or weeks, in a newspaper of general circulation in the
municipal assessor shall make an appraisal and province, city, or municipality.
assessment of such real property in accordance with
Section 5 of the law, irrespective of any previous Section 258 of the LGC further requires that should the
assessment on taxpayer’s valuation thereon," while a treasurer issue a warrant of levy, the same shall be mailed
notice of assessment is issued pursuant to Section 27 of to or served upon the delinquent owner of the real
the law which mandates the "assessor xxx to give written property or person having legal interest therein, or in
notice within thirty days of such assessment, to the case he is out of the country or cannot be located, the
person in whose name the property is declared." administrator or occupant of the property. At the same
time, the written notice of the levy with the attached
Second, a tax declaration is to be issued "upon discovery" warrant shall be mailed to or served upon the assessor
by the assessor of the "real property" to be appraised and and the Registrar of Deeds of the province, city or
assessed, while a "written notice of assessment" has to be municipality within the Metropolitan Manila Area where
issued by the assessor "within thirty days" from "such the property is located, who shall annotate the levy on the
assessment." tax declaration and certificate of title of the property,
respectively.
Third, no tax accrues as a result of the assessor's issuance
of a tax declaration, for at that time, the assessor is merely Section 260 of the LGC also mandates that within thirty
tasked "to determine the assessed value of the property, (30) days after service of the warrant of levy, the local
meaning, the value placed on taxable property for ad treasurer shall proceed to publicly advertise for sale or
valorem tax purposes." On the other hand, the written auction the property or a usable portion thereof as may
notice of assessment is what ripens into a demandable be necessary to satisfy the tax delinquency and expenses
tax (Romeo Pucyutan vs. Manila Electric Company, Inc., GR of sale. Such advertisement shall be effected by posting a
No. 197136, April 18, 2016, J. Peralta). notice at the main entrance of the provincial, city or
municipal building, and in a publicly accessible and
Is the issuance of the writ of execution necessary for conspicuous place in the barangay where the real
purposes of local tax refund or credit? property is located, and by publication once a week for
two (2) weeks in a newspaper of general circulation in
NO. Section 252(c) of the LGC of the Philippines is very the province, city or municipality where the property is
clear that “[i]n the event that the protest is finally decided located.
in favor of the taxpayer, the amount or portion of the tax
protested shall be refunded to the taxpayer, or applied as Requirements for a tax delinquency sale under the LGC
tax credit against his existing or future tax liability.” It is are mandatory. Strict adherence to the statutes governing
not necessary for the issuance of the writ of execution tax sales is imperative not only for the protection of the
because the remedy has already been provided by law. taxpayers, but also to allay any possible suspicion of
collusion between the buyer and the public officials
The issuance of the Writ of Execution is superfluous, called upon to enforce the laws (Corporate Strategies
because the judgment of the trial court can neither be Development Corp. vs. Agojo, G.R. No. 208740, November
considered a judgment for a specific sum of money 19, 2014, J. Mendoza).
susceptible of execution by levy or garnishment under
Section 9, Rule 39 of the Rules of Court nor a special Who has the burden to prove compliance with the
judgment under Section 11, Rule 39 thereof. (Coca-Cola validity of the proceedings leading up to the tax
Bottlers Philippines, Inc. vs. City of Manila, G.R. No. 197561, delinquency sale under the LGC?
April 7, 2014, J. Peralta).
The burden to prove compliance with the validity of the
In an appeal from a decision of the LBAA to the CBAA, proceedings leading up to the tax delinquency sale is
is the “fresh period rule” applicable? incumbent upon the buyer or the winning bidder. This is
premised on the rule that a sale of land for tax
NO. While it is evident in jurisprudence that the filing of delinquency is in derogation of property and due process
motion for reconsideration before the LBAA is allowed, it rights of the registered owner. In order to be valid, the
is also settled that the "fresh period rule" in the case of steps required by law must be strictly followed. The
Neypes, et al. v. Court of Appeals applies only to judicial burden to show that such steps were taken lies on the
appeals and not to administrative appeals. person claiming its validity, for the Court cannot allow
mere presumption of regularity to take precedence over
An appeal from a decision of the LBAA to the CBAA, is not the right of a property owner to due process accorded no
judicial but administrative in nature. Thus, the "fresh less than by the Constitution.
period rule" in Neypes does not apply (National Power
Corporation vs. The Provincial Treasurer of Benguet, G.R. It is well settled that there could be no presumption of the
No. 209303, November 14, 2016, J. Peralta). regularity of any administrative action which resulted in
depriving a taxpayer of his property through a tax sale.
Discuss the rules for a valid tax delinquency sale. This is an exception to the rule that administrative
proceedings are presumed to be regular (Corporate
Under Section 254 of the LGC, it is required that the notice Strategies Development Corp. vs. Agojo, G.R. No. 208740,
of delinquency must be posted at the main hall and in a November 19, 2014, J. Mendoza).
publicly accessible and conspicuous place in each
barangay of the local government unit concerned. It shall

23 P.D. No. 464. (The Real Property Tax Code) was superseded by
Republic Act No. 7160, otherwise known as the Local Government Code
of 1991.

40
UST LAW PRE-WEEK NOTES 2017

PART IV: TARIFF AND CUSTOMS involvement of the importers, the brokers and even some
customs officials and personnel.
Under the Tariff and Customs Code, as amended: The crime of unlawful importation under Section 3601 of
the TCCP is complete, in the absence of a bona fide intent
a. When does importation begin and when is it to make entry and pay duties when the prohibited article
deemed terminated? enters Philippine territory. Importation, which consists
b. In what cases is the decision of the Collector of bringing an article into the country from the outside, is
automatically reviewed by the Commissioner of complete when the taxable, dutiable commodity is
Customs? In what instance/s is the decision of the brought within the limits of the port of entry. Entry
Commissioner automatically appealed to the through a customs house is not the essence of the act. On
Secretary of Finance? (1995, 2015 BAR) the other hand, as regards Section 3602 of the TCCP
which particularly deals with the making or attempting
a. Importation begins when the carrying vessel or to make a fraudulent entry of imported or exported
aircraft enters the jurisdiction of the Philippines with articles, the term “entry” in customs law has a triple
the intention to unlade therein. Importation is meaning, namely: (1) the documents filed at the
deemed terminated upon payment of the duties, customs house; (2) the submission and acceptance of
taxes, and other charges due upon the articles, or the documents; and (3) the procedure of passing goods
secured to be paid, at a port of entry and the legal through the customs house. In view thereof, it is only for
permit for withdrawal shall have been granted, or in charges for unlawful importation under Section 3601
case said articles are free of duties, taxes and other that the BOC must first prove that the subject articles
charges, until they have legally left the jurisdiction of were imported. For violation of Section 3602, in contrast,
Customs (Sec. 1202 of the Tariff and Customs Code). what must be proved is the act of making or attempting
to make such entry of articles (Bureau of Customs vs.
Importation begins from the time the carrying vessel Devanadera, G.R. No. 193253, September 8, 2015, J.
or aircraft enters Philippine territorial jurisdiction Peralta)
with the intention to unload therein and ends at the
time the goods are released or withdrawn from the How is outright smuggling committed under Sec
customhouse upon payment of the customs duties or 3601?
with legal permit to withdraw (Viduya vs. Berdiago,
73 SCRA 553). Smuggling is committed by any person who:
b. Whenever the decision of the Collector of Customs in a. fraudulently imports or brings into the Philippines
any seizure proceedings is adverse to the any article contrary to law;
government, the said decision is automatically b. assists in so doing any article contrary to law; or
elevated to the Commissioner of Customs for review, c. receives, conceals, buys, sells or in any manner
and if such decision is affirmed by the Commissioner facilitate the transportation, concealment or sale of
of Customs, the same shall be elevated to and finally such goods after importation, knowing the same to
reviewed by the Secretary of Finance (Sec. 2315 of the have been imported contrary to law.
Tariff and Customs Code).
NOTE: The phrase contrary to law qualifies the phrases
Differentiate outright smuggling from technical imports or brings into the Philippines and assists in so
smuggling. doing, not the word article.

In outright smuggling, or the unlawful importation under How is technical smuggling committed under Sec
Section 3601 of the TCCP, goods and articles of commerce 3602?
are brought into the country without the required
importation documents, or are disposed of in the local The following acts or omissions constitute crime/s:
market without having been cleared by the BOC or other
authorized government agencies, to evade the payment a. making or attempting to make any entry of imported
of correct taxes, duties and other charges. Such goods and or exported article:
articles do not undergo the processing and clearing i. by means of any false or fraudulent invoice,
procedures at the BOC, and are not declared through declaration, affidavit, letter, paper or by any
submission of import documents, such as the import means of any false statement, written or verbal;
entry and internal revenue declaration. or
ii. by any means of any false or fraudulent practice
On the other hand, in technical smuggling, or the various whatsoever; or
fraudulent practices against customs revenue under b. knowingly effecting any entry of goods, wares or
Section 3602, the goods and articles are brought into the merchandise, at less than the true weight or measures
country through fraudulent, falsified or erroneous thereof or upon a false classification as to quality or
declarations, to substantially reduce, if not totally avoid, value, or by the payment of less than the amount
the payment of correct taxes, duties and other charges. legally due; or
Such goods and articles pass through the BOC, but the c. knowingly and willfully filing any false or fraudulent
processing and clearing procedures are attended by entry or claim for the payment of drawback or refund
fraudulent acts in order to evade the payment of correct of duties upon the exportation of merchandise; or
taxes, duties, and other charges. Often committed by d. making or filing any affidavit, abstract, record,
means of misclassification of the nature, quality or value certificate or other document, with a view to securing
of goods and articles, undervaluation in terms of their the payment to himself or others of any drawback,
price, quality or weight, and misdeclaration of their kind, allowance or refund of duties on the exportation of
such form of smuggling is made possible through the merchandise, greater than that legally due thereon.

41
TAXATION LAW

What is the rule on undervaluation, misclassification importation, was obtained only after the forfeiture of the
and misdeclaration in the import entry? 6,500 sacks of rice had been effected on January 26, 1999.

Under Sec. 2503 of R.A. No. 765124, when the Moreover, the proof of the rice being smuggled was
undervaluation, misclassification or misdeclaration in patently insufficient. In contrast, the records showed that
the import entry is intentional, the importer shall be the 6,500 sacks of rice were of local origin, having been
subject to the penal provision under Sec. 3602. purchased from Sablayan, Occidental Mindoro from a
licensed grains dealer. The local origin was substantiated
Enumerate the elements under the first form of by the official receipts, business license and certificate of
fraudulent practice, which is the act of making an registration issued by the NFA in favor of the source in
entry by means of false and fraudulent invoice and Sablayan, Occidental Mindoro, Mintu Rice Mill, and its
declaration punished under Section 3602 of the proprietor.
TCCP?
Still, the BOC insisted that the 6,500 sacks of rice were
The elements to be established are: unlawfully imported because the shipment was not
accompanied by the necessary import documents. Such
a. there must be an entry of imported or exported insistence was based on the premise that the rice
articles; shipment was imported. The premise was plainly
b. the entry was made by means of any false or erroneous. Since it was established that the 6,500 sacks
fraudulent invoice, declaration, affidavit, letter, or of rice were of local origin, the shipment need not be
paper; and accompanied by import documents (M/V Don Martin Voy
c. there must be intent to avoid payment of taxes 047 and its Cargoes vs. Secretary of Finance, G.R. No.
(Mercado vs. People of the Philippines, G.R. No. 167510, 160206, July 15, 2015, J. Bersamin).
July 8, 2015, J. Bersamin).
Does the Bureau of Customs have jurisdiction over
The M/V Don Martin and its cargo of rice were seized seizure cases within the Subic Freeport Zone?
and forfeited on January 26, 1999 because it was
alleged that the subject 6,500 bags of rice are of YES. The Bureau of Customs have exclusive jurisdiction
imported variety which are not covered by proper over seizure cases within the Subic Freeport Zone.
import documents, hence, in violation of Section
2530 (a), (f), (k) and (l), paragraph (1), of the TCCP. The authority of the Bureau of Customs to seize and
To prove that the rice shipment was imported, rice forfeit goods and articles entering the Subic Bay Freeport
samples were submitted to and examined by the does not contravene the nature of the Subic Bay Freeport
PRRI and NFA which rendered the results of the as a separate customs authority. Indeed, the investors can
laboratory analyses of the rice samples on February generally and freely engage in any kind of business as
4, 1999 and February 5, 1999, respectively. Was well as import into and export out goods with minimum
there probable cause in effecting the said forfeiture? interference from the Government.

NO. To warrant the forfeiture of the 6,500 sacks of rice Yet, the treatment of the Subic Bay Freeport as a separate
and the carrying vessel, there must be a prior showing of customs territory cannot completely divest the
probable cause that the rice cargo was smuggled. Thus, Government of its right to intervene in the operations and
the BOC should establish probable cause prior to management of the Subic Bay Freeport, especially when
forfeiture by proving: patent violations of the customs and tax laws are
discovered. After all, Section 602 of the Tariff and
a. that the importation or exportation of the 6,500 Customs Code vests exclusive original jurisdiction in the
sacks of rice was effected or attempted contrary to Bureau of Customs over seizure and forfeiture cases in
law, or that the shipment of the 6,500 sacks of rice the enforcement of the tariff and customs laws (Agriex
constituted prohibited importation or exportation; Co., Ltd. v. Villanueva, G.R. No. 158150, September 10, 2014,
and J. Bersamin).
b. that the vessel was used unlawfully in the
importation or exportation of the rice, or in What is the proper remedy to assail the order of the
conveying or transporting the rice, if considered as Commissioner of Customs?
contraband or smuggled articles in commercial
quantities, into or from any Philippine port or place. The proper recourse of a taxpayer is an appeal in due
course to the CTA, in accordance with Section 7(4) of RA
The evidence (results of the laboratory analyses of the No. 1125, as amended25, in relation to Section 2402 of the
rice samples) offered by BOC to establish that the 6,500 Tariff and Customs Code26, within 30 days after the
sacks of rice were smuggled or were the subject of illegal receipt of the order27 (Agriex Co., Ltd. v. Villanueva, G.R.
No. 158150, September 10, 2014, J. Bersamin).

24 An Act to Revitalize and Strengthen the Bureau of Customs, 26 Section 2402. Review by Court of Tax Appeals. - The party aggrieved
Amending for the Purpose Certain Sections of the Tariff and Customs by the ruling of the Commissioner in any matter brought before him
Code of the Philippines upon protest or by his action or ruling in any case of seizure may appeal
to the Court of Tax Appeals, in the manner and within the period
25 Section 7. Jurisdiction. - The CTA shall exercise: a. Exclusive appellate prescribed by law and regulations.
jurisdiction to review by appeal, as herein provided: xxx 4. Decisions of Unless an appeal is made to the Court of Tax Appeals in the
the Commissioner of Customs in cases involving liability for customs manner and within the period prescribe by laws and regulations, the
duties, fees or other money charges, seizure, detention or release of action or ruling of the Commissioner shall be final and conclusive.
property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or other laws 27 Section 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any
administered by the Bureau of Customs. party adversely affected by a decision, ruling or inaction of the
Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the

42
UST LAW PRE-WEEK NOTES 2017

In the course of its business undertakings in the be taken as contemplated by Section 2402 of the
period from 1991 to 1994, URC imported oil products Tariff and Customs Code; that what Section 7 of RA
into the country. On January 11, 1996, Oilink was No. 1125 referred to as a decision that was
incorporated. URC and Oilink had interlocking appealable to the CTA was a judgment or order of the
directors when Oilink started its business. Commissioner of Customs that was final in nature,
not merely an interlocutory one; that Oilink did not
On March 4, 1998, the District Collector of the Port of exhaust its administrative remedies under Section
Manila, formally demanded that URC pay the taxes 2308 of the Tariff and Customs Code. Rule on the
and duties on its oil imports that had arrived Commissioner’s contention.
between January 6, 1991 and November 7, 1995. Said
demand was challenged by URC. However, on The position of the Commissioner of Customs lacks merit.
November 25, 1998, the Customs Commissioner
formally directed that URC pay the assessed The principle of non-exhaustion of administrative
deficiency taxes. On July 2, 1999, the Commissioner remedies is not an iron-clad rule because there were
made a final demand upon URC and Oilink. instances in which the immediate resort to judicial action
was proper. This was one such exceptional instance when
On July 8, 1999, Oilink protested the assessment the principle did not apply. The Commissioner of
alleging that it was not the party liable for the Customs already decided to deny the protest by Oilink on
assessed deficiency taxes. The same was denied on July 12, 1999, and stressed then that the demand to pay
July 12, 1999 and the Commissioner stressed that it was final. In that instance, the exhaustion of
would not issue any clearance to Oilink unless that administrative remedies would have been an exercise in
liability be paid first. Thus, on July 30, 1999, Oilink futility because it was already the Commissioner of
appealed to the CTA. The Commissioner contends Customs demanding the payment of the deficiency taxes
that the CTA should not take cognizance of the case and duties.
because of the lapse of the 30-day period within
which to appeal, arguing that on November 25, 1998
URC had already received the BoC’s final assessment PART V: JUDICIAL REMEDIES
demanding payment of the amount due within 10
days, but filed the petition only on July 30, 1999. Is What is the jurisdiction of CTA? (2016 BAR)
the Commissioner’s contention tenable?
Pursuant to Section 7 of RA No. 1125, as amended, the
NO. The reckoning date for Oilink’s appeal was July 12, CTA shall exercise:
1999 which is the date when the Commissioner denied
the protest of Oilink. Clearly, the filing of the petition on a. Exclusive appellate jurisdiction to review by appeal,
July 30, 1999 by Oilink was well within its reglementary as herein provided:
period to appeal. The insistence by the Commissioner on
reckoning the reglementary period to appeal from 1. Decisions of the Commissioner of Internal
November 25, 1998, the date when URC received the final Revenue in cases involving disputed
demand letter, is unwarranted. The November 25, 1998 assessments, refunds of internal revenue taxes,
final demand letter of the BoC was addressed to URC, not fees or other charges, penalties in relation
to Oilink. As such, the final demand sent to URC did not thereto, or other matters arising under the
bind Oilink unless the separate identities of the National Internal Revenue or other laws
corporations were disregarded in order to consider them administered by the Bureau of Internal Revenue;
as one (Commissioner of Customs v. Oilink International 2. Inaction by the Commissioner of Internal
Corp., G.R. No. 161759, July 2, 2014, J. Bersamin). Revenue in cases involving disputed
assessments, refunds of internal revenue taxes,
NOTE: In this case, the Court held that the doctrine of fees or other charges, penalties in relations
piercing the corporate veil has no application here thereto, or other matters arising under the
because the Commissioner of Customs did not establish National Internal Revenue Code or other laws
that Oilink had been set up to avoid the payment of taxes administered by the Bureau of Internal Revenue,
or duties, or for purposes that would defeat public where the National Internal Revenue Code
convenience, justify wrong, protect fraud, defend crime, provides a specific period of action, in which case
confuse legitimate legal or judicial issues, perpetrate the inaction shall be deemed a denial;
deception or otherwise circumvent the law. It is also 3. Decisions, orders or resolutions of the Regional
noteworthy that from the outset the Commissioner of Trial Courts in local tax cases originally decided
Customs sought to collect the deficiency taxes and duties or resolved by them in the exercise of their
from URC, and that it was only on July 2, 1999 when the original or appellate jurisdiction;
Commissioner of Customs sent the demand letter to both 4. Decisions of the Commissioner of Customs in
URC and Oilink. That was revealing, because the failure of cases involving liability for customs duties, fees
the Commissioner of Customs to pursue the remedies or other money charges, seizure, detention or
against Oilink from the outset manifested that its belated release of property affected, fines, forfeitures or
pursuit of Oilink was only an afterthought. other penalties in relation thereto, or other
matters arising under the Customs Law or other
Based on the preceding problem, the Commissioner laws administered by the Bureau of Customs;
of Customs posits that the final demand letter dated 5. Decisions of the Central Board of Assessment
July 2, 1999 from which Oilink appealed was not the Appeals in the exercise of its appellate
final “action” or “ruling” from which an appeal could jurisdiction over cases involving the assessment

Secretary of Agriculture or the Central Board of Assessment Appeals or expiration of the period fixed by law for action as referred to in Section
the Regional Trial Courts may file an appeal with the CTA within thirty 7(a)(2) herein. x x x
(30) days after the receipt of such decision or ruling or after the

43
TAXATION LAW

and taxation of real property originally decided including government-owned and controlled
by the provincial or city board of assessment corporations, remain in the exclusive appellate
appeals; jurisdiction of the CTA (Philippine National Oil Company
6. Decisions of the Secretary of Finance on customs vs. Philippine National Bank, G.R. No. 109976, April 26,
cases elevated to him automatically for review 2005).
from decisions of the Commissioner of Customs
which are adverse to the Government under Which court has jurisdiction over a special civil
Section 2315 of the Tariff and Customs Code; and action for certiorari questioning an interlocutory
7. Decisions of the Secretary of Trade and Industry, order of the RTC in a tax case?
in the case of nonagricultural product,
commodity or article, and the Secretary of The CTA has appellate jurisdiction over a special civil
Agriculture in the case of agricultural product, action for certiorari assailing an interlocutory order
commodity or article, involving dumping and issued by the RTC in a local tax case, despite the fact that
countervailing duties under Section 301 and there is no categorical statement to that effect under R.A.
302, respectively, of the Tariff and Customs No. 1125, as well as the amendatory R.A. No. 9282.
Code, and safeguard measures under Republic
Act No. 8800, where either party may appeal the The court ruled that CTA has jurisdiction over a special
decision to impose or not to impose said duties. civil action for certiorari via express constitutional
mandate and for being inherent in the exercise of its
b. Exclusive appellate jurisdiction in criminal offenses: appellate jurisdiction (City of Manila v. Hon. Grecia-
1. Over appeals from the judgments, resolutions or Cuerdo, G.R. No. 175723, February 4, 2014, J. Peralta)
orders of the Regional Trial Courts in tax cases
originally decided by them, in their respected Does the CTA have original jurisdiction over a
territorial jurisdiction. petition for certiorari?
2. Over petitions for review of the judgments,
resolutions or orders of the Regional Trial Courts YES. Concededly, there is no clear statement under R.A.
in the exercise of their appellate jurisdiction over No. 1125, the amendatory R.A. No. 9282, let alone in the
tax cases originally decided by the Metropolitan Constitution, that the CTA has original jurisdiction over a
Trial Courts, Municipal Trial Courts and petition for certiorari. By virtue of Section 1, Article VIII
Municipal Circuit Trial Courts in their respective of the 1987 Constitution, vesting judicial power in the
jurisdiction. Supreme Court and such lower courts as may be
established by law, to determine whether or not there has
PNB appealed to the Department of Justice (DOJ) the been a grave abuse of discretion on the part of any branch
BIR assessment against it for deficiency withholding or instrumentality of the Government, in relation to
tax. PNB alleged that its appeal to the DOJ was Section 5(5), Article VIII thereof, vesting upon it the
sanctioned under P.D. No. 24228, which provided for power to promulgate rules concerning practice and
the administrative settlement of disputes between procedure in all courts, the Court declared that the CA's
government offices, agencies, and instrumentalities, original jurisdiction over a petition for certiorari
including government-owned and controlled assailing the DOJ resolution in a preliminary
corporations. It argued that P.D. No. 242, the more investigation involving tax and tariff offenses was
recent law, repealed Section 7 of R.A. No. 1125. Is necessarily transferred to the CTA pursuant to Section 7
PNB’s contention tenable? of R.A. No. 9282,40 and that such petition shall be
governed by Rule 65 of the Rules of Court, as amended.
NO. P.D. No. 242 is a general law that deals with
administrative settlement or adjudication of disputes, Accordingly, it is the CTA, not the CA, which has
claims and controversies between or among government jurisdiction over the petition for certiorari assailing the
offices, agencies and instrumentalities, including DOJ resolution of dismissal of the BOC's complaint-
government-owned or controlled corporations. Its affidavit against a taxpayer for violation of the TCCP
coverage is broad and sweeping, encompassing all (Bureau of Customs vs. Devanadera, G.R. No. 193253,
disputes, claims and controversies. On the other hand, September 8, 2015, J. Peralta).
R.A. No. 1125 is a special law dealing with a specific
subject matter the creation of the CTA, which shall Does the CTA have exclusive jurisdiction to
exercise exclusive appellate jurisdiction over the tax determine the constitutionality or validity of tax
disputes and controversies enumerated therein. laws, rules and regulations, and other administrative
issuances of the CIR?
Following the rule on statutory construction that
between a general law and a special law, the special law YES. The CTA has jurisdiction to pass upon the
prevails, then P.D. No. 242 should not affect R.A. No. 1125. constitutionality or validity of a tax law or regulation
R.A. No. 1125, specifically Section 729 thereof on the when raised by the taxpayer as a defense in disputing or
jurisdiction of the CTA, constitutes an exception to P.D. contesting an assessment or claiming a refund. It is only
No. 242. Disputes, claims and controversies, falling under in the lawful exercise of its power to pass upon all matters
Section 7 of Rep. Act No. 1125, even though solely among brought before it, as sanctioned by Section 7 of RA No.
government offices, agencies, and instrumentalities, 1125, as amended.

28 Prescribing the Procedure for Administrative Settlement or (1) Decisions of the Collector of Internal Revenue in cases involving
Adjudication of Disputes, Claims and Controversies Between or Among disputed assessments, refunds of internal revenue taxes, fees or other
Government Agencies and Instrumentalities, Including Government- charges, penalties imposed in relation thereto, or other matters arising
Owned or Controlled Corporations, and for Other Purposes under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue; xxx
29 SECTION 7. Jurisdiction. The Court of Tax Appeals shall exercise
exclusive appellate jurisdiction to review by appeal, as herein provided
-

44
UST LAW PRE-WEEK NOTES 2017

The Supreme Court also declared that the CTA may betrays the principle that judgments must, at some point,
likewise take cognizance of cases directly challenging the attain finality. A court that can revisit its own final
constitutionality or validity of a tax law or regulation or judgments leaves the door open to possible endless
administrative issuance (revenue orders, revenue reversals or modifications which is anathema to a stable
memorandum circulars, rulings). legal system (CIR vs. Kepco Ilijan Corporation, G.R. No.
199422, June 21, 2016, J. Peralta).
Section 7 of RA No. 1125, as amended, is explicit that,
except for local taxes, appeals from the decisions of quasi- GGG, Inc. offered to sell through competitive bidding
judicial agencies (Commissioner of Internal Revenue, its shares in HHH Corp., equivalent to 40% of the total
Commissioner of Customs, Secretary of Finance, Central outstanding capital stock of the latter. JJJ, Inc.
Board of Assessment Appeals, Secretary of Trade and acquired the said shares in HHH Corp. as the highest
Industry) on tax-related problems must be brought bidder. Before it could secure a certificate
exclusively to the Court of Tax Appeals (CTA). authorizing registration/tax clearance for the
transfer of the shares of stock to JJJ, Inc., GGG, Inc. had
In other words, within the judicial system, the law to request a ruling from the BIR confirming that its
intends the CTA to have exclusive jurisdiction to resolve sale of the said shares was at fair market value and
all tax problems. Petitions for writs of certiorari against was thus not subject to donor's tax. In BIR Ruling No.
the acts and omissions of the said quasi-judicial agencies 012-14, the CIR held that the selling price for the
should, thus, be filed before the CTA. shares of stock of HHH Corp. was lower than their
book value, so the difference between the selling
RA No. 9282, a special and later law than Batas Pambansa price and the book value of said shares was a taxable
Blg. 129, provides an exception to the original jurisdiction donation. GGG, Inc. requested the Secretary of
of the Regional Trial Courts over actions questioning the Finance to review BIR Ruling No. 012-14, but the
constitutionality or validity of tax laws or regulations. Secretary affirmed said ruling. GGG, Inc. filed with the
Except for local tax cases, actions directly challenging the Court of Appeals a Petition for Review under Rule 43
constitutionality or validity of a tax law or regulation or of the Revised Rules of Court. The Court of Appeals,
administrative issuance may be filed directly before the however, dismissed the Petition for lack of
CTA. jurisdiction declaring that it is the CTA which has
jurisdiction over the issues raised. Before which
Furthermore, with respect to administrative issuances Court should GGG, Inc. seek recourse from the
(revenue orders, revenue memorandum circulars, or adverse ruling of the Secretary of Finance in the
rulings), these are issued by the Commissioner under its exercise of the latter's power of review? (2015 BAR)
power to make rulings or opinions in connection with the
implementation of the provisions of internal revenue GGG, Inc. should seek recourse with the CTA which has
laws. Tax rulings, on the other hand, are official positions jurisdiction.
of the Bureau on inquiries of taxpayers who request
clarification on certain provisions of the Tax Code, other There is no provision in law that expressly provides
tax laws, or their implementing regulations. Hence, the where exactly the adverse ruling of the Secretary of
determination of the validity of these issuances clearly Finance under Sec. 4 of the NIRC is appealable. However,
falls within the exclusive appellate jurisdiction of the CTA RA 1125, as amended, addresses the seeming gap in the
under Section 7(1) of RA No. 1125, as amended, subject law as it vests upon the CTA, albeit impliedly, with
to prior review by the Secretary of Finance, as required jurisdiction over the case as “other matters” arising
under RA No. 8424 (Banco De Oro vs. Republic of the under the NIRC or other laws administered by the BIR.
Philippines, G.R. No. 198756 (Resolution), August 16, 2016, Furthermore, the Supreme Court held that the
J. Leonen). jurisdiction to review the rulings of the Secretary of
Finance on the issues raised against a ruling of the CIR,
Does the CTA En Banc have jurisdiction to take pertains to the CTA in the exercise of its appellate
cognizance of the petition for annulment of final jurisdiction (Philamlife v. The Sec. of Finance and CIR, GR
judgment rendered by one of its Divisions? No. 210987, November 24, 2014).

NO. The Revised Rules of the CTA and even the Rules of On May 15, 2013, CCC, Inc. received the Final Decision
Court which apply suppletorily thereto provide for no on Disputed Assessment issued by the CIR dismissing
instance in which the en banc may reverse, annul or void the protest of CCC, Inc. and affirming the assessment
a final decision of a division. Verily, the Revised Rules of against said corporation. On June 10, 2013, CCC, Inc.
the CTA provide for no instance of an annulment of filed a Petition for Review with the CTA in division.
judgment at all. On July 31, 2015, CCC, Inc. received a copy of the
Decision dated July 22, 2015 of the CTA division
The divisions in collegial courts are not considered dismissing its Petition. CCC, Inc. immediately filed a
separate and distinct courts but are divisions of one and Petition for Review with the CTA en banc on August 6,
the same court. There is no hierarchy of courts within the 2015. Is the immediate appeal by CCC, Inc. to the CTA
collegial court. For instance, the Supreme Court sitting en en banc of the adverse Decision of the CTA division
banc is not an appellate court vis-a-vis its divisions, and the proper remedy? (2015 BAR)
it exercises no appellate jurisdiction over the latter.
NO, CCC, Inc. should first file a motion for reconsideration
Thus, it appears contrary to these features that a collegial with the CTA Division. Petition for review of a decision or
court, sitting en banc, may be called upon to annul resolution of the Court in Division must be preceded by
decision of one of its divisions which had become final the filing of a timely motion for reconsideration or new
and executory, for it is tantamount to allowing a court to trial with the Division. Before the CTA En Banc could take
annul its own judgment and acknowledging that a cognizance of the petition for review concerning a case
hierarchy exists within such court. In the process, it also falling under its exclusive appellate jurisdiction, the

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TAXATION LAW

litigant must sufficiently show that it sought prior evidence require that these documents must be formally
reconsideration or moved for a new trial with the offered before the CTA.32
concerned CTA division.
As an exception to the above rule, the evidence may be
BOC Deputy Commissioner rendered decision on admitted provided the following requirements are
April 19, 1999 upholding the forfeiture of the 6,500 present: (1) the same must have been duly identified by
sacks of rice of Palacio Shipping, Inc. Consequently, testimony duly recorded; and (2) the same must have
on June 21, 1999, Palacio brought a petition for been incorporated in the records of the case.
review in the CTA to seek the nullification of the
decision and to obtain the release of the rice In this case, BIR admitted that it failed to formally offer
shipment. the PANs as evidence. Worse, it advanced no justifiable
reason for such fatal omission. Instead, it merely alleged
On the other hand, the BOC argued that the April 19, that the existence and due execution of the PANs were
1999 decision by BOC Deputy Commissioner had duly tackled by its witnesses. Thus, this is not sufficient
already attained finality. Palacio insisted that they to seek exception from the general rule requiring a formal
were not furnished a copy of the decision and that offer of evidence, since no evidence of positive
they only learned of the decision on June 1, 1999. identification of such PANs by witnesses was presented.

Has the BOC decision attained finality? While CTA is not governed strictly by technical rules of
evidence, as rules of procedure are not ends in
NO. The April 19, 1999 decision of BOC would become themselves but are primarily intended as tools in the
final and immutable if Palacio did not appeal it in the CTA administration of justice, the presentation of PANs as
within 30 days from receipt thereof. Such period of evidence of the taxpayer’s liability is not mere procedural
appeal was expressly set in Section 1130 of R.A. No. 1125. technicality. It is a means by which a taxpayer is informed
Thus, the 30-day period for filing the appeal in the CTA of his liability for deficiency taxes. It serves as basis for
commenced to run for the petitioners only after June 1, the taxpayer to answer the notices, present his case and
1999, which was the date when they unquestionably adduce supporting evidence. More so, the same is the
acquired notice of the adverse decision. Accordingly, they only means by which the CTA may ascertain and verify
had until July 1, 1999 within which to appeal. With their the truth of respondent's claims (CIR vs. United Salvage
petition for review being filed on June 21, 1999, which and Towage (Phils.) Inc, G.R. No. 197515, July 2, 2014, J.
was well within the 30-day period, their appeal was Peralta).
timely (M/V Don Martin Voy 047 and its Cargoes vs.
Secretary of Finance, G.R. No. 160206, July 15, 2015, J. Does an appeal to the CTA from the decision of the CIR
Bersamin). suspend the collection of tax?

In a case before the CTA, the BIR failed to formally As a rule, an appeal to the CTA from the decision of the
offer the PANs of EWTs for taxable years 1994 and CIR will not suspend the payment, levy, distraint, and/or
1998. On appeal, it avers that their existence and due sale of any property of the taxpayer for the satisfaction of
execution were duly tackled during the presentation his tax liability as provided by existing law (Sec. 11 of R.A.
of witnesses. It also claims that although the PANs No. 1125, as amended by RA No. 9282).
were not marked as exhibits, their existence and
value were properly established, since the BIR In what instance may the CTA suspend the collection
records for taxable years 1994 and 1998 were of taxes?
forwarded to the CTA and made part of the CTA
records. The CTA may order the suspension of the collection of
taxes when in the opinion of the Court the collection by
Moreover, it contends that technical rules of evidence the BIR or BOC may jeopardize the interest of the
should not be strictly applied in the interest of Government and/or the taxpayer, provided that the
substantial justice, considering that the mandate of taxpayer either: (1) deposits the amount claimed; or (2)
the CTA explicitly provides that its proceedings shall files a surety bond for not more than double the amount
not be governed by the technical rules of evidence. (Sec. 11 of R.A. No. 1125, as amended by RA No. 9282).
Rule on BIR’s contention.
May the bond requirement be dispensed with by the
The contention of the BIR is without merit. CTA?

Under Section 831 of R.A. No. 1125, the CTA is YES. CTA has ample authority to issue injunctive writs to
categorically described as a court of record. Moreover, as restrain the collection of tax and to even dispense with
cases filed before it are litigated de novo, party litigants the deposit of the amount claimed or the filing of the
shall prove every minute aspect of their cases. Thus, no required bond, whenever the method employed by the
evidentiary value can be given the pieces of evidence CIR in the collection of tax jeopardizes the interests of a
submitted by the BIR, as the rules on documentary taxpayer for being patently in violation of the law. Thus,

30 Section 11. Who may appeal; effect of appeal. — Any person, processes. It shall have the power to promulgate rules and regulations
association or corporation adversely affected by a decision or ruling of for the conduct of the business of the Court, and as may be needful for
the Collector of Internal Revenue, the Collector of Customs or any the uniformity of decisions within its jurisdiction as conferred by law,
provincial or city Board of Assessment Appeals may file an appeal in the but such proceedings shall not be governed strictly by technical rules of
Court of Tax Appeals within thirty days after the receipt of such decision evidence.
or ruling. x x x
32 SEC. 34. Offer of evidence. – The court shall consider no evidence
31 Section 8. Court of record; seal; proceedings. - The Court of Tax which has not been formally offered. The purpose for which the
Appeals shall be a court of record and shall have a seal which shall be evidence is offered must be specified. (Rule 132)
judicially noticed. It shall prescribe the form of its writs and other

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UST LAW PRE-WEEK NOTES 2017

whenever it is determined by the courts that the method TCT No. T-244532 and for the reconveyance of
employed by the Collector of Internal Revenue in the property that fell within the exclusive and original
collection of tax is not sanctioned by law, the bond jurisdiction of the RTC due to such causes of action
requirement under Section 11 of R.A. No. 1125 should be being incapable of pecuniary estimation and
dispensed with. involving title to, or possession of, real property, or
any interest therein. Is Alcantara’s contention
The purpose of the rule is not only to prevent tenable?
jeopardizing the interest of the taxpayer, but more
importantly, to prevent the absurd situation wherein the NO. Despite assailing the supposedly illegal confiscation
court would declare “that the collection by the summary of his property in order to satisfy his tax liabilities,
methods of distraint and levy was violative of law, and Alcantara was really challenging the assessment and
then, in the same breath require the petitioner to deposit collection of taxes made against him for being in violation
or file a bond as a prerequisite for the issuance of a writ of his right to due process. As such, the complaint
of injunction” (Spouses Pacquiao vs. CTA, G.R. No. 213394, concerned the validity of the assessment and eventual
April 6, 2016, J. Mendoza). collection of the taxes by the BIR. The declaration of
nullity of the sale and reconveyance was founded on the
BIR assessed Tridharma with deficiency IT and VAT validity of the assessment and eventual collection by the
totaling P4.4 billion. Tridharma filed a Motion to BIR.
Suspend Collection of Tax. Tridharma's Financial
Statements indicate that its net worth was at around Accordingly, the RTC had no jurisdiction to resolve the
P900 million only. The CTA granted Tridharma's issues raised in Alcantara's complaint. The remedies
Motion for Suspension of Collection of Tax, provided, available to a taxpayer under the law provides that prior
however, that Tridharma deposits with the CTA a resort to the administrative remedies was necessary;
surety bond equivalent to P4.4 billion. otherwise, the assessment would attain finality. Yet,
Alcantara immediately invoked the authority of the
Tridharma commenced special civil action for courts to protect his rights instead of first going to the CIR
certiorari alleging that CTA committed grave abuse of for redress of his concerns about the assessment and
discretion in requiring Tridharma to file a surety collection of taxes. His judicial recourse thus suffered
bond despite the supposedly patent illegality of the from fatal prematurity because his doing so rendered the
assessment that was beyond the petitioner's net assessment final.
worth. Decide.
Moreover, the CTA, and not the CA, has exclusive
The surety bond amounting to P4.4B imposed by the CTA appellate jurisdiction over the appeal of the decisions of
was within the parameters delineated in Section 11 of the CIR (Alcantara v. Republic, G.R. No. 192536, March 15,
R.A. 1125, as amended. The CTA, however, gravely 2017, J. Bersamin).
abused its discretion under Section 11 because it fixed
the amount of the bond at nearly five times the net worth After filing an Information for violation of Sec. 254 of
of the petitioner without conducting a preliminary the Tax Code (Attempt to Evade or Defeat Tax) with
hearing to ascertain whether there were grounds to the CTA, the Public Prosecutor manifested that the
suspend the collection of the deficiency assessment on People is reserving the right to file the corresponding
the ground that such collection would jeopardize the civil action for the recovery of the civil liability for
interests of the taxpayer. taxes. As counsel for the accused, comment on the
People's manifestation. (2015 BAR)
Although the amount of P4.4B was itself the amount of
the assessment, it behooved the CTA to consider other The manifestation is not proper. The corresponding civil
factors recognized by the law itself towards suspending action for the recovery of the civil liability for taxes is not
the collection of the assessment, like whether or not the allowed to be reserved separately.
assessment would jeopardize the interest of the taxpayer,
or whether the means adopted by the CIR in determining Any provision of law or the Rules of Court to the contrary
the liability of the taxpayer was legal and valid. Simply notwithstanding, the criminal action and the
prescribing such high amount of the bond equal to the corresponding civil action for the recovery of civil
deficiency assessment would practically deny to the liability for taxes and penalties shall at all times be
petitioner the meaningful opportunity to contest the simultaneously instituted with, and jointly determined in
validity of the assessments, and would likely even the same proceeding by the CTA, the filing of the criminal
impoverish it as to force it out of business (Tridharma action being deemed to necessarily carry with it the filing
Marketing Corporation v. CTA, G.R. No. 215950, June 20, of the civil action, and no right to reserve the filling of
2016, J. Bersamin). such civil action separately from the criminal action will
be recognized (Sec. 7[b][1], RA 1125, as amended).
Alcantara directly brought an action in the RTC
ostensibly to demand reconveyance of property sold
upon forfeiture for nonpayment of a tax assessment.
The case was dismissed on the ground that the RTC
had no jurisdiction over the complaint because he
was thereby seeking to challenge the validity of the
assessment made by the BIR.

On appeal to CA, Alcantara insisted on the


competence of the RTC to take cognizance of his
complaint. He contended that his complaint is one for
the declaration of the nullity of TCT No. T-195677 and

47