U.P.

LAW BOC TAXATION LAW PRE-WEEK REVIEWER

General Principles
Q1: Why is the power to tax considered inherent in a sovereign State?
A1: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this
power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of a
government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent state or government. No sovereign state can continue to exist without the
means to pay its expenses; and that for those means, it has the right to compel all citizens and property within
its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur.,Taxation 40)

Q2: What is the lifeblood Doctrine? Necessity Theory? The Benefits-Protection Theory?
A2:
Lifeblood Doctrine – Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are
collected.

Necessity Theory – The power of taxation proceeds upon the theory that the existence of government is a
necessity. It cannot continue without means to pay its expenses; and that for those means it has the right to
compel all citizens and property within its limits to contribute.

Benefits-Protection Theory – The basis is the reciprocal duties of protection and support between the State and
its inhabitants. The state collects taxes from the subjects of taxation in order that it may be able to perform the
functions of government. The citizens, on the other hand, pays taxes in order that they may be secured in the
enjoyment of the benefits of organized society.

Q3: What are the principles of a sound tax system

A3:
Fiscal adequacy – The sources of tax revenue should coincide with, and approximate the needs of, government
expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to
variations in public expenditures.

Administrative feasibility – Tax laws should be capable of convenient, just and effective administration. Each tax
should be capable of uniform enforcement by government officials, convenient as to the time, place, and manner
of payment, and not unduly burdensome upon, or discouraging to business activity.

Theoretical justice or equality – The tax burden should be in proportion to the taxpayer’s ability to pay. This is the
so-called ability to pay principle. Taxation should be uniform as well as equitable

Q4: Enumerate the four (4) inherent limitations on taxation. Explain each item briefly.
A4: Taxation is for public purpose. – The proceeds of the tax must be used (a) for the support of the State or (b)
for some recognized objective of the government or to directly promote the welfare of the community.
Taxation is inherently legislative- Only the legislature has the full discretion as to the persons, property,
occupation or business to be axed provided these are all within the State’s territorial jurisdiction. IT can also
finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection.
Taxation is territorial- Taxation may be exercised only within the territorial jurisdiction, the taxing authority.
Within the territorial jurisdiction, the taxing authority may determine the “place of taxation” or “tax situs”.
Taxation is subject to international comity. – This is a limitation which is founded on reciprocity designed to
maintain harmonious and productive relationships among the various state. Under international comity, a state
must recognize the generally- accepted tenets of international law, among which are the principles of sovereign
equality among states and of their freedom from suit without their consent, that limits that authority of a
government to effectively impose taxes in a sovereign state and its instrumentalities, as well as in its property
held, and activities undertaken in that capacity.

Q5: Enumerate the 3 stages or aspects of taxation. Explain each.

A5:
Levying – the act of the legislature in choosing the persons, properties, rights or privileges to be subjected to
taxation.

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Assessment and Collection – This is the act of executing the law through the administrative agencies of
government.

Payment – the act of the taxpayer in settling his tax obligations.

Q6: XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It
collected and received the following: (a) Tuition fees; (b) Dormitory fees; (c) Rentals from canteen
concessionaires; (d) Interest from money-market placements of the tuition fees; (e) Donation of a lot and
building by school alumni. Which of these income and donation would not be exempt from taxation?
A6: The following receipts by the non-stock, non-profit educational institution are not exempt from taxation, viz:
(c) Rentals from Canteen Concessionaires. Rental income is considered as unrelated to the school operations;
hence, taxable (DOF Order No. 137-87, Dec. 16, 1987)
(d) Interest from money-market placements of the tuition fees. The interest on the placement is taxable (DOF
Order No. 137-87). If however, the said interest is used actually, directly and exclusively for educational purposes
as proven by substantial evidence, the same will be exempt from taxation (CIR v. CA, 298 SCRA 83 11998]}.

The other items of income which were all derived from school-related activities will be exempt from taxation in
the hands of the recipient if used actually, directly and exclusively for educational purposes (Section 4 par. 3,
Article XTV, 1987 Constitution).

The donation to a non-stock, non-profit educational institution will be exempt from the donor's tax if used
actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the
donation is used for administration purposes (Section 4, par. 4, Art. XJV, 1987 Constitution, in relation to Section
101(AM3), NJRC).

Q7: The Roman Catholic Church owns a 2-hectare lot, in a town in Tarlac province. The southern side and
middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself,
the southeastern side by some commercial establishments, while the rest of the property, in particular the
northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land?
A7: No. The Church cannot claim tax exemption on the entire land. Only the southern side and middle part that
are occupied by the Church and a convent and the eastern side occupied by a school run by the Church itself are
exempt, because such parts of the 2-hectare lot are actually, directly and exclusively used for religious and
educational purposes. (Sec. 28[3], Art. VI, 1987 Constitution; Sec. 234, Local Government Code)
The southeastern side occupied by some commercial establishment is not tax exempt. If real property is used for
one or more commercial purposes, it is not exclusively used for the exempted purpose but is subject to taxation.
'Solely' is synonymous with 'exclusively.' (Lung Center of the Philippines v. Quezon City, G.R. No. 144104, June
29, 2004) The property must be exclusively (solely) used for religious or educational purposes.
Of course, it is apparent that the northwestern side, which is idle or unoccupied is not "actually, directly and
exclusively" used for religious or educational purposes, hence not exempt from taxation.

Q8: True or False. A law imposing a tax on income of religious institutions derived from the sale of religious
articles is valid.
A8: False. Congress can pass a law taxing income of religious institutions from its property or activities used for
profit but not for their income from exercise of religious activities. The imposition of a tax on income of a religious
institution from sale of religious articles is an infringement of religious freedom which is not allowed under the
fundamental law (American Bible Society v. City of Manila, 101 Phil. 385 (1957)).

Q9: "X" Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law
exempting the company's bond issues from taxes and the other exempting the company from taxes in the
operation of its public utilities. The two laws extending the tax exemptions were revoked by Congress before
their expiry dates. Were the revocations constitutional?
A9: Yes. The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers.
Since taxation is the rule and tax exemption, the exception, any tax exemption unilaterally granted can be
withdrawn at the pleasure of the taxing authority without violating the Constitution (Mactan Cebu International
Airport Authority v, Marcos, G.R No. 120082, September 11, 1996).

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Neither of these were issued by the taxing authority in a contract lawfully entered by it so that their revocation
would not constitute an impairment of the obligations of contracts.

Q10: Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on
the property for his business operations. The Municipal Assessor assessed Mr. Amado for real property taxes
on the land and the warehouse. Mr. Amado objected to the assessment, contending that he should not be
asked to pay realty taxes on the land since it is municipal property.
A10: Yes, the assessment is proper. The land, although owned by the municipality, is not exempt from real
property tax because the beneficial use has been granted to a taxable person. (Sec 234 (a), LGC)

Q11: Distinguish a tax amnesty from a tax exemption.

A11: Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from nonpayment of
taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive
application. (People v. Costonedo, G.R. No. L-46881, 1988).

Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge
or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 ME 365). It is generally prospective in
application.

Q12: Is double taxation a valid defense against the legality of a tax measure?
A12: No, double taxation standing alone and not being forbidden by our fundamental law is not a valid defense
against the legality of a tax measure (Pepsi Cola v Tanawan). However, if double taxation amounts to a direct
duplicate taxation, in that the same subject is taxed twice when it should be taxed but once, in a fashion that
both taxes are imposed for the same purpose by the same taxing authority, within the same jurisdiction or taxing
district. For the same taxable period and for the same kind or character of a tax, then it becomes legally
objectionable for being oppressive and inequitable.

Q13: Distinguish double taxation in the broad and strict sense.

A13: Double taxation in the strict sense (Direct Duplicate Taxation) exist when the following requisites concur: (i)
the same subject is taxed twice when it should be taxed once; (ii) for the same purpose; (iii) by the same taxing
authority; (iv) within the same jurisdiction or taxing district; (v) during the same taxing period; and (vi) of the
same kind or character of tax.

There is double taxation in the broad sense (Indirect Duplicate Taxation) if any of the elements for direct
duplicate taxation is absent.

Q14: Distinguish tax evasion and tax avoidance

A14: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it
usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand,
is a tax saving device within the means sanctioned by law, hence legal.

Q15: May taxes be the subject of set-off or compensation?

A15: No, taxes cannot be the subject of set-off or compensation for the following reasons:
(1) The lifeblood theory requires that there should be no unnecessary impediments to the collection of taxes to
make available to the government the wherewithal to meet its legitimate objectives; and
2) The payment of taxes is not a contractual obligation but arises out of a duty to pay, and in respect of the
positive acts of government, regarding the making and enforcing of taxes, the personal consent of the individual
taxpayer is not required. (Republic v. Mambulao Lumber Co., G.R. No. L-17725, February 28, 1962; Caltex v.
Commission on Audit, G.R. No. 92585, May 8, 1992; and Philex v. Commissioner of Internal Revenue, G.R. No.
125704, August 28, 1998)

However, there is a possibility that set-off may arise, if the claims against the government have been recognized
and an amount has already been appropriated for that purpose. Where both claims have already become
overdue and demandable as well as fully liquidated. Compensation takes place by operation of law under Art.
1200 in relation to Articles 1279 and 1290 of the New Civil Code. (Domingo v. Garlitos, G.R. No. L-18994, June
29, 1963)

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Q16: True or False. The doctrine of equitable recoupment allows a taxpayer whose claim for refund has
prescribed to offset tax liabilities with his claim of overpayment.
A16: True. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax
liability arising from the same transaction on which an overpayment is made and underpayment is due. The
doctrine finds no application to cases where the taxes involved are totally unrelated. Although it seems
equitable, it is not allowed in our jurisdiction (CIR v. UST, 104 Phil 1062 (1958))

Q17: Distinguish "direct taxes" from "indirect taxes." Give examples.

A17: Direct Taxes are demanded from the very person who should pay the tax and which he can not shift to
another. An Indirect Tax is demanded from one person with the expectation that he can shift the burden to
someone else, not as a tax but as part of the purchase price. Examples of direct taxes are the income tax, the
estate tax and the donor's tax. Examples of indirect taxes are the value-added tax, the percentage tax and the
excise tax on exciseable articles.

INCOME TAXATION
Q18: What is meant by taxable income?
A18: Taxable Income means the pertinent items of gross income specified in the Tax Code, less the deductions
and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other
special laws.

Q19: Explain briefly whether the following items are taxable or non-taxable: (a) Income from Jueteng; (b)
Gain arising from Expropriation of Property; (c) Taxes paid and subsequently refunded; (d) Recovery of Bad
Debts previously charged off; (e) Gain on the sale of a car used for personal purposes.
A19:
(a) Taxable. Gross income includes "all income derived from whatever source" (Sec. 32[A], NIRC), which was
interpreted as all income not expressly excluded or exempted from the class of taxable income, irrespective of
the voluntary or involuntary action of the taxpayer in producing the income. Thus, the income may proceed from
a legal or illegal source such as from jueteng. Unlawful gains, gambling winnings, etc. are subject to income tax.
The tax code stands as an indifferent neutral party on the matter of where the income comes from.
(b) Taxable. Sale exchange or other disposition of property to the government of real property is taxable. It
includes taking by the government through condemnation proceedings.
(c) Taxable only if the taxes were paid and claimed as deduction and which are subsequently refunded or
credited. It shall be included as part of gross income in the year of the receipt to the extent of the income tax
benefit of said deduction. (Sec. 34[C][1], NIRC) Not taxable if the taxes refunded were not originally claimed as
deductions.
(d) Taxable under the Tax Benefit Rule. Recovery of bad debts previously allowed as deduction in the preceding
years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit
of said deduction. (Sec. 34[E][1], NIRC)
(e) Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence the gain is
considered income. (Sec. 32[A][3] and Sec. 39[A][1], NIRC)

Q20: Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in Makati City in 1970 at a
consideration of P1 Million. In 2011, the land, which remained undeveloped and idle had a fair market value
of P20 Million. Mr. Antonio Ayala, another Filipino citizen, offered to buy the same for P20 Million. Is Mr.
Castillo liable for income tax in 2011 based on the offer to buy by Mr. Ayala?
A20: No. Mr. Castillo is not liable for income tax in 2011 because no income is realized by him during that year.
Tax liability for income tax attaches only if there is a gain realized resulting from a closed and complete
transaction (Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918).

Q21: Does a BIR ruling have a retroactive effect?

A21: The general rule is that a BIR ruling does not have a retroactive effect if giving it a retroactive application is
prejudicial to the taxpayer. However, if the first ruling is tainted with either of the following: (1) misstatement or
omission of materials facts, (2) the facts gathered by the BIR are materially different from the facts upon which
the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can have a retroactive application.
(ABS-CBN Broadcasting Co. v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246, NIRC).

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Q22: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so, does this
power of the Commissioner conflict with R.A. 1405 (Secrecy of Bank Deposits Law)
A22: The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of:
1) a decedent to determine his gross estate;
2) any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to
pay his tax liability (Sec. 6(F). NIRC).
3) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives
to Inquire into the bank deposits.

The limited power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of the Tax
Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a later legislation.

Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not
be considered unless and until he waives in writing his privilege under R.A. No. 1405, and such waiver shall
constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

Q23: A "fringe benefit" is defined as being any good, service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee. Would it be the employer or the employee who is legally
required to pay an income tax on it?
A23: It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is
imposed as a FINAL WITHHOLDING TAX placing the legal obligation to remit the tax on the employer, such that,
if the tax is not paid the legal recourse of the BIR is to go after the employer. Any amount or value received by
the employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person
who is legally required to pay (same as statutory incidence as distinguished from economic incidence) is that
person who, in case of non-payment, can be legally demanded to pay the tax.

Q24: Distinguish Global and Schedular tax system

A24: Under a global tax system, it does not matter whether the income received by the taxpayer is classified as
compensation income, business or professional income, passive investment income, capital gain, or other
income. All items of gross income, deductions, and personal and additional exemptions, if any, are reported in
one income tax return, and one set of tax rates are applied on the tax base.
Under a schedular tax system, different types of incomes are subject to different sets of graduated or flat income
tax rates. The applicable tax rate(s) will depend on the classification of the taxable income and the basis could
be gross income or net income. Separate income tax returns (or other types of return applicable) are filed by the
recipient of income for the particular types of income received

Q25: From what sources of income are the following persons/corporations taxable by the Philippine
government? (1) Citizen of the Philippines residing therein; (2) Non-resident citizen; (3) An individual citizen
of the Philippines who is working and deriving income from abroad as an overseas contract worker; (4) An
alien individual, whether a resident or not of the Philippines; and (5) A domestic corporation;
A25:
(1) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without
the Philippines.
(2) A nonresident citizen is taxable only on income derived from sources within the Philippines.
(3) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker is taxable only on income from sources within the Philippines.
(4) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines.
(5) A domestic corporation is taxable on all income derived from sources within and without the Philippines.

Q26: Weber Realty Company which owns a three-hectare land in Antipolo entered into a Joint Venture
Agreement (JVA) with Prime Development Company for the development of said parcel of land. Weber
Realty as owner of the land contributed the land to the Joint Venture and Prime Development agreed to
develop the same into a residential subdivision and construct residential houses thereon. They agreed that
they would divide the lots between them.

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Does the JVA entered into by and between Weber and Prime create a separate taxable entity?
A26: The JVA entered into between Weber and Prime does not create a separate taxable entity. The joint venture
is formed for the purpose of undertaking construction projects; hence, is not considered as a corporation for
income tax purposes.

Q27: Under the same facts as above, are the allocation and distribution of the saleable lots to Weber and
Prime subject to income tax?
A27: No. The allocation and distribution of the saleable lots to Weber and Prime is a mere return of their capital
contribution. The income tax is not due on a capital transaction because no income is realized from it. (BIR
Ruling No. DA-192-2001, October 17, 2011).

Q28: Under the same facts as above, is the sale by Weber or Prime of their respective shares in the saleable
lots to third parties subject to income tax?
A28: Yes. The sale by Weber and Prime of their respective shares to third parties is a closed and completed
transaction resulting in the realization of income, subject to income tax.

Q29: Mr. Infante was hit by a wayward bus while on his way to work. He survived and sued the bus company.
He was able to obtain a final judgment awarding him P400.000.00 as reimbursement for his
hospitalization, P60.000 for the salaries he failed to receive while hospitalized, P200,000.00 as moral
damages for his pain and suffering, and P 100,000.00 as exemplary damages. How much income did he
realize when he collected on the judgment?
A29: The income realized from the judgment is only the recovery for lost salaries. This constitutes taxable
income because were it not for the injury, he could have received it from his employer as compensation income.
All the other amounts received are either compensation for injuries or damages received on account of such
injuries' which are exclusions from gross income (Section 32(b)(4) NIRC).

Q30: Distinguish "Exclusion from Gross Income" from "Deductions From Gross Income".
A30: Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of
gross income, for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is
exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of
income. (Section 61, RR No. 2). Deductions from gross income, on the other hand, are the amounts, which the
law allows to be deducted from gross income in order to arrive at net income.
Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net
income. Exclusions are something received or earned by the taxpayer which do not form part of gross income
while deductions are something spent or paid in earning gross income.

Q31: What is the all events test

A31: The “all events test” is a test applied in the realization of income and expense by an accrual-basis taxpayer.
The test requires (1) the fixing of a right to the income or liability to pay; and (2) the availability of reasonably
accurate determination of such income or liability, to warrant the inclusion of the income or expense in the gross
income or deductions during the taxable year. (CIR v. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12,
2007)

Q32: What is the "immediacy test"?

A32: The “immediacy test” is applied to determine whether the accumulation of after tax profits by a domestic or
resident foreign corporation is really for the reasonable needs of the business. Under this test, the reasonable
needs of the business are construed to mean the immediate needs of the business, including reasonably
anticipated needs. The corporation should be able to prove an immediate need for the accumulation of earnings
and profits, or the direct correlation of anticipated needs to such accumulation of profits to justify the said
accumulation (Sec 3, RR No. 2-2001; Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103, cited
in Manila Wine Merchants, Inc. v. CIR, G.R. No. L-26145, Feb. 20, 1984)

Q33: What is meant by the "tax benefit rule"? Give an illustration of the application of the tax benefit rule.
A33: Tax Benefit Rule states that the taxpayer is obliged to declare as taxable income subsequent recovery of
bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad
debts were written-off and claimed as a deduction from income. It also applies to taxes previously deducted
from gross income but which were subsequently refunded or credited. The taxpayer is also required to report as

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taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer
enjoyed when such taxes were previously claimed as deduction from income.
Illustration. X Company has a business connected receivable amounting to P100,000.00 from Y who was
declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not able to pay,
prompting X Company to write-off the entire liability. During the year of write-off, the entire amount was
claimed as a deduction for income tax purposes reducing the taxable net income of X Company to only
P1,000,000.00. Three years later, Y voluntarily paid his obligation previously written-off to X Company. In the
year of recovery, the entire amount constitutes part of gross income of X Company because it was able to get full
tax benefit three years earlier.

Q34. Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its
brand franchise for one of its line products. In its income tax return, MFC included the advertising expense
as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain.
A34: No. The protection of taxpayer’s brand franchise is analogous to the maintenance of goodwill or title to
one’s property which is in the nature of a capital expenditure. An advertising expense as, of such nature does not
qualify as an ordinary business expense, because the benefit to be enjoyed by the taxpayer goes beyond one
taxable year (CIR v. General Foods Inc., 401 SCRA 545 (2003))

Q35: Distinguish Capital Asset and Ordinary Asset.

A35: The term "capital asset" regards all properties not specifically excluded in the statutory definition of capital
assets, the profits or loss on the sale or the exchange of which are treated as capital gains or capital losses.
Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses
realized must have to be treated as ordinary gains or ordinary losses.
Accordingly, "Capital Assets" includes property held by the taxpayer whether or not connected with his trade or
business, but the term does not include any of the following, which are consequently considered "ordinary
assets":
(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year;
(2) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business;
(3) property used in the trade or business of a character which is subject to the allowance for depreciation
provided in Section 34 (F) of the Tax Code; or
(4) real property used in trade or business of the taxpayer.

The statutory definition of "capital assets" practically excludes from its scope, it will be noted, all property held
by the taxpayer if used in connection with his trade or business.

Q36: How does "Income" differ from "capital"?

A36: Income differs from capital in that INCOME is any wealth which flows into the taxpayer other than a return
of capital while capital constitutes the investment which is the source of income. Therefore, capital is fund while
income is the flow. Capital is wealth, while income is the service of wealth. Capital is the tree while income is the
fruit (Vicente Madrigal et al v. James Rqfferty, 38 Phil. 414).

Q37: Explain if the following items are deductible from gross income for income tax purposes. Disregard
who is the person claiming the expense.
(1) Interest on loans used to acquire capital equipment or machinery;
(2) Depreciation of goodwill;
(3) Reserves for bad debts;
(4) Worthless securities
A37:
(1) Interest on loans used to acquire capital equipment or machinery is a deductible item from gross income. The
law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to
acquire property used in trade, business or exercise of a profession. (Section 34(B) (3), NIRC).
(2) Depreciation for goodwill is not allowed as deduction from gross income. While intangibles maybe allowed to
be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is
definitely limited in duration. (Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such is not the case with goodwill.

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(3) Reserve for Bad Debts is not allowed as deduction from gross income. Bad debts must be charged off during
the taxable year to be allowed as deduction from gross income. The mere setting up of reserves will not give rise
to any deduction. (Section 34(E). NTRC).
(4) Worthless Securities, which are ordinary assets, are not allowed as deduction from gross income because the
loss is not realized. However, if these worthless securities are capital assets, the owner is considered to have
incurred a capital loss as of the last day of the taxable year and, therefore, deductible to the extent of capital
gains. (Section 34(D)(4), NIRC). This deduction, however, is not allowed to a bank or trust company. (Section
34(E)(2), NIRC).

Q38. Give the requisites for deducibility of a loss.

A38: The requisites for deducibility of a loss are: (1) loss belongs to the taxpayer; (2) actually sustained and
charged off during the taxable year; (3) evidenced by a closed and completed transaction; (4) not compensated
by Insurance or other forms of indemnity; (5) not claimed as a deduction for estate tax purposes in case of
individual taxpayers; and (6) if it is a casualty loss it is evidenced by a declaration of loss filed within 45 days with
the BIR.

Q39. OXY is the president and chief executive officer of ADD Computers, Inc. When OXY was asked to join
the government service as director of a bureau under the Department of Trade and Industry, he took a leave
of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with OXY in
the government, ADD proposed to obtain a policy of insurance on his life. On ethical grounds, OXY objected
to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to
P100,000. Is said premium deductible by ADD Computers, Inc.?
A39: No. The premium is not deductible because it is not an ordinary business expense. The term "ordinary" is
used in the income tax law in its common significance and it has the connotation of being normal, usual or
customary (Deputy v. Du Pont, 308 US 488 [1940]). Paying premiums for the insurance of a person not
connected to the company is not normal, usual or customary.

Another reason for its non-deductibility is the fact that it can be considered as an illegal compensation made to
a government employee. This is so because if the insured, his estate or heirs were made as the beneficiary
(because of the requirement of insurable interest), the payment of premium will constitute bribes which are not
allowed as deduction from gross income (Section 34[A][1][c], NIRC).

On the other hand, if the company was made the beneficiary, whether directly or indirectly, the premium is not
allowed as a deduction from gross income (Section 36[A][4], NIRC).

Q40: In order to facilitate the processing of its application for a license from a government office,
Corporation A found it necessary to pay the amount of Php 100,000 as a bribe to the approving official. Is
the Php 100,000 deductible from the gross income of Corporation A? On the other hand, is the Php 100,000
taxable income of the approving official?
A40: Since the amount of Phpl00.000 constitutes a bribe, it is not allowed as a deduction from gross income of
Corporation A, (Section 34(A)(l)(c), NIRC). However, to the recipient government official, the same constitutes a
taxable income. All income from legal or illegal sources are taxable absent any clear provision of law exempting
the same. This is the reason why gross income had been defined to include income from whatever source
derived. (Section 32(A), NIRC). Illegally acquired income constitutes realized income under the claim of right
doctrine (Rutkin v. US, 343 US 130).

Q41. What are the requisites for Individuals to avail of Optional Standard Deduction?
A41:
(1) Taxpayer is a citizen or resident alien;
(2) Taxpayer’s income is not entirely from compensation;
(3) Taxpayer signifies in his return his intention to elect this deduction; otherwise he is considered as having
availed of the itemized deductions;
(4) Election is irrevocable for the year in which made; however, he can change to itemized deductions in
succeeding years.

Q42. Ernesto, a Filipino lawyer, filed his income tax return for 2007 claiming optional standard deductions.
Realizing that he has enough documents to substantiate his profession-connected expenses, he now plans

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to file an amended income tax return for 2007, in order to claim itemized deductions. Will Ernesto be
allowed to amend his return?
A42: No. Since Ernesto has elected to claim optional standard offered deduction, said election is irrevocable for
the taxable year for which the return is made

Q43: Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross
revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners,
including Atty. Gambino, in accordance with its articles of partnership.

In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim,
such as purchase of law books, entertainment expenses, car insurance and car depreciation.
The BIR disallowed the deductions.

Was the BIR correct?

A43: No. The BIR is wrong in disallowing the deductions claimed by Atty. Gambino. It appears that the general
professional partnership (GPP) claimed itemized deductions from its gross revenues in arriving at its
distributable net income. The share of a partner in the net income of the GPP must be reported by him as part of
his gross income from practice of profession and he is allowed to claim further deductions which are reasonable,
ordinary and necessary in the practice of profession and were not claimed by the partnership in computing its net
income (Sec 26, NIRC; RR No. 16-2008; 2-2010).

Q44: Anchor Banking Corporation, which was organized under the laws of the Philippines, set up a branch
office in Shanghai. During the year, the bank management decided not to include the P20 Million net
income of the Shanghai Branch in the annual Philippine income tax return filed with the BIR, which showed
a net taxable income of P30 Million, because the Shanghai Branch is treated as a foreign corporation and is
taxed only on income from sources within the Philippines, and since the loan and other business
transactions were done in Shanghai, these incomes are not taxable in the Philippines. Is the bank correct in
excluding the net income of its Shanghai Branch in the computation of its annual corporate income tax for
2010?
A44: No. A Domestic Corporation is taxable on all income derived from sources within and without the
Philippines. The income of the foreign branch and that of the Home Office will be summed up for income tax
purposes following the “single entity” concept and will all be included in the gross income of the domestic
corporation in the annual Philippine income tax return.

Q45: Under the same facts as above, should the Shanghai Branch remit profit to its Head Office in the
Philippines, is the branch liable to 15% branch profit remittance tax?
A45: No. The branch profit remittance tax is imposed only on remittances by branches of Foreign Corporation in
the Philippines to their Home Office abroad. It is the outbound branch profits that is subject to the tax not the
inbound profits.

Q46: In a qualified tax-free exchange of property for shares under Section 40 (c) (2) of the Tax Code, what is
the tax basis for computing the capital gains on: (a) the sale of the assets received by the Corporation; and
(b) the sale of the shares received by the stockholders in exchange of the assets?
A46: With respect to the asset received by the corporation the same as it would be in the hands of the transferor
increased by the amount of the gain recognized to the transferor on the transfer.
With respect to the shares received by the stockholders in exchange of the assets - the same as the basis of the
property, stock or securities exchanged, decreased by the money received and the fair market value of the other
property received, and increased by the amount treated as dividend of the shareholder and the amount of any
gain that was recognized on the exchange.

Q47: Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at P3.0 million
which they held in co-ownership. In 1995, they transferred the property to a newly organized corporation as
their equity which was placed at the zonal value of P6.0 million. In exchange for the property, the three
brothers thus each received shares of stock of the corporation with a total par value of P2.0 million or,
altogether, a total of P6.0 million; the brothers gained control of the corporation. No business was done by
the Corporation, and the property remained idle. In the early part of 1997, one of the brothers, who was in

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dire need of funds, sold his shares to the two brothers for P2.0 million. Is the transaction subject to any
internal revenue tax (other than the documentary stamp tax)?
A47: Yes. The exchange in 1995 is a tax-free exchange so that the subsequent sale of one of the brothers of his
shares to the other two (2) brothers in 1997 will be subject to income tax. This is so because the tax-free
exchange merely deferred the recognition of income on the exchange transaction. The gain subject to income tax
in the sale is measured by the difference between the selling price of the shares (P2 Million) and the basis of the
real property in the hands of the transferor at the time of exchange which is the fair market value of his share in
the real property at the time of inheritance (Section 40 (c)(2), NIRC). The net gain from the sale of shares of stock
is subject to the schedular capital gains tax of 5% for the first P100.000 and 10% for the excess thereof (Section
24(c), NIRC).

Q48: How does the final withholding tax system work?

A48: Under the final withholding tax system, the amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from payee on the said income (e.g., interest on
deposits, royalties, etc.). The liability for payment of the tax rests primarily on the payor as a withholding agent.
Thus, in case of the withholding agent’s failure to withhold the tax or in case of under-withholding, the deficiency
tax shall be collected from him. The payee is not required to file an income tax return for the particular income,
nor is he liable for the payment of the tax. [Sec. 2.57, RR No. 2-98] The finality of the withholding tax is limited
only to the payee’s income tax liability on the particular income. It does not extend to the payee’s other tax
liability on said income, such as when the said income is further subject to a percentage tax, such as gross
receipts tax in the case of a bank.

Q49: Under the withholding tax system, when should the tax be withheld?
A49: The obligation of the payor to deduct and withhold the tax arises at the time an income payment is paid or
payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the
payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due,
demandable or legally enforceable.

Where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is
applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in
which the same is claimed as an expense or amortized for tax purposes. [Mamalateo]

TRANSFER TAX
ESTATE TAX

Q50: How does the NIRC defines “gross estate”?

A50: The value of the gross estate of the decedent shall be determined by including the value at the time of his
death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the
case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part
of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. (Sec. 85,
NIRC)

Q51: For purposes of computing estate tax, how is the term “residence” interpreted? How may one change
his or her residence?
A51: For estate and inheritance tax purposes, the term "residence" is synonymous with the term "domicile". The
two terms may be used interchangeably without distinction. (Collector v. De Lara, 102 Phil 813) To effect the
abandonment of one's domicile, there must be (1) a deliberate and provable choice of a new domicile, coupled
with (2) actual residence in the place chosen, with (3) a declared or provable intent that it should be one's fixed
and permanent place of abode, one's home. (Velilla v. Posadas, 62 Phil 624)

Q52: The prominent Don Philip died intestate, leaving behind his wife Catherine, and his three daughters
Angelica, Eliza, and Peggy. Catherine renounced her conjugal share in favor of her favorite child, Angelica.
What is the tax implication of the renunciation by Catherine in favor Angelica?

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A52: Imelda is liable for Donor’s Tax. Section 11 of RR 2-2003 provides that the renunciation of the surviving
spouse of his or her share in the conjugal partnership or absolute community after dissolution of the marriage in
favor of the heirs of the deceased spouse or any other person is subject to donor’s tax.

Q53: When Don Manny died, leaving behind an estate of 1B pesos, his wife Doña Jinky decided to honor him
and his deeds by throwing a lavish funeral. Doña Jinky spent 20M pesos in total for the funeral. After
interment, Doña Dionisia, mother of Don Manny, offered masses to ensure that her son will go to heaven, for
which she paid 250,000 pesos in total. How much can the estate of Don Manny deduct from the masses that
Doña Dionisia offered?
A53: None. Section 6 of RR 2-2003 provides that expenses incurred after the interment, such as for prayers,
masses, entertainment, or the like are not deductible.

DONORS TAX

Q54: Donna donated a parcel land valued at 50M pesos to her daughter Sophie. At the time of donation, the
FMV of the land as per the CIR was 60M pesos. The FMV of the land however, according to the City
Assessor, was 70M pesos. Which is the correct valuation for purposes of computing the donor’s tax on the
gift?
A54: The valuation given by the City Assessor is correct. Section 102 of the NIRC provides that the FMV at the
time of the gift shall be considered the amount of the gift, and in case of real property, the provisions of Section
88 (B) shall apply. Section 88 (B) provides that the appraised value of the real property as of the time of death or
donation, shall be the value of the estate or the gift whichever is the higher of the FMV as determined by the CIR
or the FMV as shown in the schedule of values fixed by the Provincial and City Assessors.

Q55: When does an incomplete gift because of the donor’s reservation of power become complete?
A55: When either: (1) the donor renounces the power or (2) this right to exercise the reserved power ceases
because of the happening of some event or contingency of the fulfillment of some condition, other than because
of the donor’s death.

Q56: How is donor’s tax applicable to an exchange of shares of stock not traded through a local stock
exchange?
A56: In case the FMV of the shares of stock sold, bartered, or exchanged is greater than the amount of money
and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold,
bartered or exchanged over the amount of money and the FMV of the property, if any, received as consideration
shall be deemed a gift subject to the donor’s tax under Sec. 100 of the Tax Code, as amended.

Q57: Who is a “stranger” in relation to donor’s tax?

A57: A person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendant or relative by consanguinity in the collateral line within the 4th civil degree. Note: donations
between business organizations and those made between an individual and a business organization will be
treated as donations to strangers.

VALUE ADDED TAX

Q58. What is the difference between zero-rated entities and VAT-exempt entities?
A58:
Sales to zero-rated entities are:
1. VATable transactions subject to 0% VAT rate,
2. The input VAT (from the purchases) of a zero-rated entity may be allowed as tax credits or be refunded,
3. Zero-rated entities, being subject to VAT, are required to register.

Sales to VAT-exempt entities are:

1. Not subject to output tax,

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2. The VAT-exempt entity is not entitled to any input tax on its purchases even if a VAT invoice or receipt is
issued,
3. Registration is optional for VAT-exempt persons.

Q59: Price & Son is a VAT-registered corporation and is engaged in the business of importing books and
school supplies. In 2014, it imported 5M pesos worth of books, 2.5M worth of fountain pens and 2.5M worth
of bookstands. Is the transaction subject to VAT?
A59: Yes, but only as to the fountain pens and bookstands. The importation of books is a transaction exempt
from VAT pursuant to Section 109 of the NIRC.

Q60. What is the rule on the VAT treatment for lessors of residential units?
A60: Per RR 16-2011:
1. Monthly rental ≤ P12,800 = EXEMPT
2. Monthly rental > P12,800 but aggregate annual rentals ≤ P1,919,500 = 3% percentage tax
3. Monthly rental > 12,800 and aggregate annual rentals > P1,919,500 = 12% VAT

REMEDIES
Q61: Which cases may be compromised?
A61: Under Sec. 2 of RR No. 30-2002, the following cases may be compromised:
1. Delinquent accounts
2. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which
are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service
(LTS), Collection Service, Enforcement Service and other offices in the National Office
3. Civil tax cases being disputed before the courts
4. Collection cases filed in courts
5. Criminal violations, other than those already filed in court or those involving criminal tax fraud

Q62: Which cases may NOT be compromised?

A62: Under Sec. 2 of RR No. 30-2002, the following cases may NOT be compromised:
1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the
taxpayer's obligation to withhold
2. Criminal tax fraud cases confirmed as such by the CIR or his duly authorized representative
3. Criminal violations already filed in court
4. Delinquent accounts with duly approved schedule of installment payments
5. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction
in the original assessment and the taxpayer is agreeable to such decision by signing the required
agreement form for the purpose. On the other hand, other protested cases shall be handled by the
Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis
6. Cases which become final and executory after final judgment of a court, where compromise is requested
on the ground of doubtful validity of the assessment; and
7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer

Q63: When may the CIR offer a compromise?

A63: The CIR may compromise the payment of any internal revenue tax in the following cases:
1. A REASONABLE DOUBT as to the validity of the claim against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
(FINANCIAL INCAPACITY)

Q64: What is the limits of the CIR’s power to compromise:

A64: The CIR’s power to compromise is subject to the following:
1. For cases of financial incapacity: a minimum compromise rate equivalent to ten percent (10%) of the
basic assessed tax
2. For other cases: a minimum compromise rate equivalent to forty percent (40%) of the basic assessed
tax

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Q65: Does the Court of Appeals have the power to review compromise agreements forged by the CIR and a
taxpayer?
A65: No, for either of two reasons:
1. In instances in which the CIR is vested with authority to compromise, such authority should be exercised
in accordance with CIR’s discretion, and courts have no power, as a general rule, to compel him to
exercise such discretion one way or another (Koppel Phils., Inc. v. CIR, 87 Phil, 351 (1950);
2. If the CIR abuses his discretion by not following the parameters set by law, the CTA, not the Court of
Appeals, may correct such abuse if the matter is appealed to it. In case of arbitrary or capricious exercise
by the CIR of the power to compromise, the compromise can be attacked and reversed through the
judicial process. It must be noted however, that a compromise is considered as other matters arising
under the NIRC which vests the CTA with jurisdiction, and since the decision of the CTA is appealable to
the Supreme Court, the Court of Appeals is devoid of any power of review a compromise settlement
forged by the CIR (PNOC v. Savellano, G.R. No. 109976)

Q66: Are proceedings before the CTA in the exercise of its exclusive original jurisdiction in the nature of a
trial de novo?
A66: Yes. Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that
the Court of Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de
novo) where the parties must present their evidence accordingly if they desire the Court to take such evidence
into consideration (CIR v. Manila Mining Corp. G.R. No. 153204, Aug. 31, 2005)

Q67: What are the conditions that must be complied with before the Court of Tax Appeals may suspend the
collection of national internal revenue taxes?
A67: The CTA may suspend the collection of internal revenue taxes if the following conditions are met:
1. The case is pending appeal with the CTA;
2. In the opinion of the Court the collection will jeopardize the interest of the Government and/or the
taxpayer; and
3. The taxpayer is willing to deposit in Court the amount being collected or to file a surety bond for not
more than double the amount of the tax (Sec 11, RA 1125, as amended by RA 9282).

Q68: In criminal cases where the CTA has exclusive original jurisdiction, can the right to file a separate civil
action for the recovery of taxes be reserved?
A68: No. (Sec. 11, Rule 9, 2005 Revised CTA Rules)

Q69: What cases are under the exclusive appellate jurisdiction of the CTA?
A69: Exclusive appellate jurisdiction to review by appeal:
1. Decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by
the BIR;
2. Inaction of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by
the BIR, where the NIRC provides a specific period of action, in which the inaction shall be deemed a denial;
3. Decisions, orders or resolutions of the RTC in local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in cases involving liability of custom duties fees, or other money
charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Custom Law or other laws administered by the Bureau of
Customs;
5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property originally decided by the provincial or city board of
assessment appeals;
6. Decisions of the Secretary of Trade and Industry, in the case of non-agricultural product, commodity or
article, involving dumping and countervailing duties under Sec 301 and 302, respectively of the Tariff and
Customs Code, and safeguard measures under RA 8800, where either party may appeal the decision to
impose or not impose said duties

Criminal offenses:

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7. Over appeals from the judgements, resolutions, or orders of the RTC in tax cases originally decided by them,
in their respective territorial jurisdiction;
8. Over petitions for review of the judgements, resolutions or orders of the RTC in the exercise of their
appellate jurisdiction over tax cases originally decided by the MeTC, MTC, and MCTC in their respective
jurisdiction.

Q70: Can the CTA pass on the constitutionality or a revenue regulation or revenue memorandum circular (as
opposed to the regular courts)?
A70: Yes. The CTA can now rule on the validity or constitutionality of a revenue regulation or revenue
memorandum circular but only if it is involved in a tax assessment case or claim for tax refund. (Philamlife v. Sec.
of Finance, G.R. No. 210987, 24 November 2014)

Q71: Burgess Corporation imports orange concentrates as raw materials for the fruit drinks it sells locally.
The Bureau of Customs (BOC) imposed a 1% duty rate on the concentrates. Subsequently, the BOC changed
its position and held that the concentrates should be taxed at 7% duty rate. Burgess disagreed with the
ruling and questioned it in the CTA, which upheld the company’s position. The Commissioner of Customs
appealed to the CTA en banc without filing a motion for reconsideration. Resolve the appeal.
A71: The appeal should be dismissed because a motion for reconsideration is mandatory. (RA 9282; Rule 8,
Revised Rules of the CTA)

Q72: What are the rules on the period for filing an administrative VAT claim?
A72: Two-year prescriptive period
1. It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi)
2. The proper reckoning date for the 2-year prescriptive period is the close of the taxable quarter when the
relevant sales were made (San Roque) and not the date of payment. (Aichi)
3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008.
Atlas provides that the two-year prescriptive period for filing a VAT claim should be counted from the
date of filing of the VAT return and payment of the tax. (San Roque)

Q73: What are the rules on the period for filing a judicial VAT claim?
A73: 120 + 30 day prescriptive period
1. The taxpayer can file an appeal in one of two ways:
a. If the CIR denies the claim within the 120-day period, file the judicial claim within 30 days after the
denial.
b. If the CIR did not act within the 120-day period, file the judicial claim within 30 days from the
expiration of the 120-day period.

2. As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. (Aichi and San
Roque) Failure to comply with the 30-day period to appeal will result in dismissal by the CTA.

3. Premature filing of the judicial claim, or the filing of a petition prior to the lapse of the 120-day period
without any decision from the CIR will rob the CTA of its jurisdiction to entertain the refund case. (CIR v.
Aichi Forging Company of Asia, Inc., G.R. 184823, 6 October 2010).

As an exception to the general rule, premature filing is allowed only if filed between December 10, 2003
and October 5, 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque)

4. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force.
(San Roque)

5. These rules apply ONLY to claims for credit or refund of input tax. The rules under Section 204[C] and
229 cover erroneous payments or illegal collections and NOT refund of unutilized input VAT. The
reckoning date of Sec. 229 is the date of payment while in Sec. 112[A], the period is within 2 years after
the close of the taxable quarter when the sales were made.

Q74: What are BIR Rulings?

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A74: BIR Rulings are official position of the Bureau to queries raised by taxpayers and other stockholders relative
to clarification and interpretation of tax laws. They are considered valid and can be relied upon unless otherwise
determined by the courts or modified or revoked by subsequent rulings. BIR Rulings are to be accorded great
weight and respect but they are not binding upon the courts.

Q75: What is the remedy available to challenge an adverse BIR ruling?

A75: Request the Secretary of Finance to review the ruling. The power to interpret the provisions of this Code
and other tax laws shall be under the exclusive and original jurisdiction of the CIR, subject to review by the
Secretary of Finance. (NIRC, Sec. 4, par. 1); For decisions or inaction of the CIR in exercise of his quasi-judicial
powers, the remedy is a petition for review to the CTA. (Sec. 7, RA 1125)

Q76: What is an assessment notice? What are the requisites of a valid assessment? Explain.
A76: An assessment notice is a computation prepared by the BIR of the alleged unpaid taxes, plus interests,
penalties or surcharges, if any. However, a demand letter must accompany an assessment notice from the BIR in
order to result in valid assessment (RR No. 12- 99).
Requisites for valid assessment:
1. The taxpayer shall be informed in writing of the law and the facts on which the assessment is made
(Sec. 228, NIRC)
2. An assessment contains not only a computation of tax liabilities, but also a demand for payment within
a prescribed period (CIR v. PASCOR)
3. An assessment must be served on and received by the taxpayer (CIR v. PASCOR)

Q77: What are the differences between a request for reconsideration and a request for reinvestigation?
A77: Request for Reconsideration – plea for evaluation of assessment on the basis of existing records without
need of presentation of additional evidence. It does not suspend the period to collect the deficiency tax. Request
for Reinvestigation – plea for re-evaluation on the basis of newly discovered evidence that will be introduced for
examination for the first time. It suspends the prescriptive period to collect.

Q78: On March 10, 2010, Montague, Inc. received a preliminary assessment notice (PAN) dated March 1,
2010 issued by the CIR for deficiency income tax for its taxable year 2008. It failed to protest the PAN. The
CIR thereupon issued a final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was
received by the corporation on May 10, 2010. On May 25, 2010, Montague filed its protest against the FAN.
The CIR denied the protest on the ground that the assessment had already become final and executory, the
corporation having failed to protest the PAN. Is the CIR correct?
A78: No. The issuance of PAN does not give rise to the right of the taxpayer to protest. What can be protested by
the taxpayer is the FAN or that assessment issued following the PAN. Since the FAN was timely protested
(within 30 days from receipt thereof, the assessment did not become final and executory (Sec 228, NIRC; RR No.
12-99).

Q79: What is a jeopardy assessment?

A79: A tax assessment which was assessed without the benefit of complete or partial audit by an authorized
revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be
jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to
present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions,
exemptions, or credits claimed in his return. (Sec. 3(1)(a), RR 30-2002)

Q80: Fiyero was preparing his income tax return and had some doubt on whether a commission he earned
should be declared for the current year or for the succeeding year. He sought the opinion of his lawyer who
advised him to report the commission in the succeeding year. He heeded his lawyer's advice and reported
the commission in the succeeding year. The lawyer's advice turned out to be wrong; is Fiyero guilty of fraud?
A80: He is not guilty of fraud as he simply followed the advice of his lawyer. Prima facie evidence of a false or
fraudulent return: Substantial underdeclaration of taxable sales, receipts or income, or a substantial
overstatement of deductions. Failure to report sales, receipts or income in an amount exceeding thirty percent
(30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions,
shall render the taxpayer liable for substantial underdeclaration or for overstatement. (Sec. 248(B), NIRC)

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Q81: What is the effect of the execution by a taxpayer of a "waiver of the statute of limitations" on his
defense of prescription?
A81: The waiver of the statute of limitation executed by a taxpayer is not a waiver of the right to invoke the
defense of prescription. The waiver of the statute of limitation is merely an agreement in writing between the
taxpayer and the BIR that the period to assess and collect taxes due is extended to a date certain. If prescription
has already set in at the time of execution of the waiver or if the said waiver is invalid, the taxpayer can still raise
prescription as defense (Phil. Journalists Inc., v. CIR, G.R. No. 162852, Dec. 16, 2004)

Q82: On October 15, 2005, Todd Corporation imported 1,000 kilos of steel ingots and paid customs duties
and VAT to the Bureau of Customs on the importation. On February 17, 2009, the Bureau of Customs, citing
provisions of the Tariff and Customs Code on post-audit, investigated and assessed the Company for
deficiency customs duties and VAT. Is the BOC correct?
A82: No. The Bureau of Customs (BOC) has lost its right to assess deficiency customs duties and VAT. The
imported steel ingots in 2005 have been entered and the customs duties thereon had been paid by thereby
making the liquidation of the importation final and conclusive upon all parties after the expiration of three (3)
years from the date of final payment of duties and taxes (Sec 1603, TCC, as amended by RA 9135).

LOCAL GOVERNMENT TAXATION

Q83. What is the basis for the computation of business tax on contractors under the Local Government
Code?
A83: The business tax on contractors is a graduated annual fixed tax based on the gross receipts for the
preceding calendar year. However, when the gross receipts amount to P2 million or more, the business tax on
contractors is imposed as a percentage tax at the rate of 50% of 1% [Sec 143 (e), LGC].

Q84: How are retiring businesses taxed under the Local Government Code?
A84: Retiring businesses under the LGC are taxed in their gross sales or gross receipts in the current year and
not in the preceding year. If the tax paid in the current year is less than the tax due on gross sales or receipts of
the current year, the difference shall be paid before the business is considered officially retired (Sec 145, LGC).

Q85: The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the
Port of Manila. Can the City Government of Manila legally impose said levy on the corporation?
A85: No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping line, because taxes on the gross
receipts of transportation contractors and passengers or freight by hire and common carriers by air, land or
water is a limitation on the exercise of taxing powers by local government units [Sec 133 (j), LGC].

Q86: What is the nature of the taxing power of the provinces, municipalities and cities? How will the local
government units be able to exercise their taxing powers?
A86: The taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by
giving them the authority to create their own sources of revenue. The local government units do not exercise the
power to tax as an inherent power or by a valid delegation of the power by the Congress, but pursuant to a direct
authority conferred by the Constitution. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667
[1996]; NPC v. City of Cabanatuan, 401 SCRA 259 [2003]).

The local government units exercise the power to tax by levying taxes, fees and charges consistent with the basic
policy of local autonomy, and to assess and collect all these taxes, fees and charges which will exclusively accrue
to them. The local government units are authorized to pass tax ordinances (levy) and to pursue actions for the
assessment and collection of the taxes imposed in the said ordinances. (Section 129, and 132, Local Government
Code).

Q87: What are the exempted properties from real property tax?
A87 Under Sec. 234 of the LGC, the following are properties exempt from RPT:
1. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;
2. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes;

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3. All machineries and equipment that are actually, directly and exclusively used by local water districts and
government owned or controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power;
4. All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and
5. Machinery and equipment used for pollution control and environmental protection.

Q88: May LGUs impose taxes on bases or subjects not provided in the Local Government Code?
A88: Yes. LGUs may exercise the power to levy taxes, fees, or charges on any base or subject not otherwise
specifically enumerated in the (1) Local Government Code or (2) taxed under the NIRC or (3) other applicable
laws. These taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared
national policy. Additionally, the ordinance levying such taxes, fees, or charges, shall not be enacted without any
prior public hearing conducted for the purpose.

REAL PROPERTY TAX

Q89: Who may impose Real Property Tax?
A89: Only provinces and cities as well as municipalities within Metro Manila may impose RPTs. (Sec. 200 and
232, LGC). Municipalities outside Metro Manila and barangays cannot impose RPT.

Q90: What are the fundamental principles of real property taxation?

A90: (1) Real property shall be appraised at its current and fair market value
(2) Real property shall be classified for assessment purposes on the basis of its actual use
(3) Real property shall be assessed on the basis of a uniform classification within each LGU
(4) The appraisal, assessment, levy and collection of real property tax shall not be let to any private person
(5) The appraisal and assessment of real property shall be equitable.

TARIFF AND CUSTOMS CODE

Q91: What is the flexible tariff clause?
A91: The Flexible Clause refers to the power of the President upon recommendation of the National Economic
and Development Authority (NEDA) to:
1. Increase, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher
than one hundred percent (100%) ad valorem;
2. Establish import quota or to ban importation of any commodity as may be necessary; and
3. Impose additional duty on all import not exceeding ten percent (10%) ad valorem, whenever necessary.
[Sec. 102(u), CMTA]

Q92: When does importation begin? When does it end?

A92: Importation begins when the carrying vessel or aircraft enters the Philippine territory with the intention to
unload therein. [Sec. 1202, TCC; Sec. 103, CMTA] Imported goods shall be deemed “entered” in the Philippines
for consumption when the goods declaration is electronically lodged, together with any required supporting
documents, with the pertinent customs office. [Sec. 115, CMTA]
Importation is deemed terminated when:
1. The duties, taxes and other charges due upon the goods have been paid or secured to be paid at the
port of entry unless the goods are free from duties, taxes and other charges and legal permit for
withdrawal has been granted; or
2. In case the goods are deemed free of duties, taxes and other charges, the goods have legally left the
jurisdiction of the Bureau. [Sec. 1202, TCC; Sec. 103, CMTA]

Q93: What is the rule with regard to de minimis importations?

A93: No duties and taxes shall be collected on goods with an FOB or FCA value of ten thousand pesos
(₱10,000.00) or below. [Sec. 423, CMTA]

Q94: Distinguish between Misdeclaration, Misclassification, and Undervaluation of goods.

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A94: (a) Misdeclaration is as to the quantity, quality, description, weight, or measurement of the goods resulting
to a discrepancy in duty and tax to be paid between what is legally determined upon assessment and what is
declared.
(b) Misclassification is the insufficient or wrong description of the goods or use of wrong tariff heading resulting
to a discrepancy in duty and tax to be paid between what is legally determined upon assessment and what is
declared.
(c) Undervaluation when: (a) the declared value fails to disclose in frill the price actually paid or payable or any
dutiable adjustment to the price actually paid or payable; or (b) when an incorrect valuation method is used or
the valuation rules are not properly observed, resulting in a discrepancy in duty and tax to be paid between what
is legally determined as the correct value against the declared value. [Sec. 1400, CMTA]

Q95: What is the difference between Technical Smuggling and Outright Smuggling?
A95: Technical Smuggling is the act of importing goods into the country by means of fraudulent, falsified or
erroneous declaration of the goods to its nature, land, quality, quantity or weight, for the purpose of reducing or
avoiding payment of prescribed taxes, duties and other charges [Sec. 101(pp), CMTA]
Outright Smuggling is the act of importing goods into the country without complete customs prescribed
importation documents, or without being cleared by customs or other regulatory government agencies, for the
purpose of evading payment of prescribed taxes, duties and other government charges. [Sec. 101(ff), CMTA]

Q96: Mr. Evan made an importation which he declared at the Bureau of Customs (BOC) as "Used Truck
Replacement Parts." Upon investigation, the container vans contained 15 units of Porsche and Ferrari cars.
Characterize Mr. Evan's action.
A96: He committed smuggling. Smuggling refers to the fraudulent act of importing any goods into the
Philippines, or the act of assisting in receiving, concealing, buying, selling, disposing or transporting such goods,
with full knowledge that the same has been fraudulently imported, or the fraudulent exportation of goods. [Sec.
101(nn), CMTA; Section 3601, TCCP; Rieta v. People of the Philippines, 436 SCRA 273]

Q97: What is the dutiable value of an imported article subject to an ad valorem rate of duty under existing
law?
A97: The transaction value. [Section 201, Tariff and Customs Code, as amended by RA 8181]

Q98: Where should a taxpayer file a protest against an assessment issued by the Collector of Customs for
unpaid customs duties on imported goods?
A98: The Collector of Customs. [Section 2308, Tariff and Customs Code]

Q99: Under the Tariff and Customs Code, who becomes the owner of abandoned imported articles?
A99: Expressly abandoned goods, when the owner, importer, or consignee of the imported goods expressly
signifies in writing to the District Collector the intention to abandon the same, shall ipso facto be deemed the
property of the government. [Sec. 1130, CMTA]

Q100: Are forfeiture proceedings of goods illegally imported criminal in nature?

A100: No, a forfeiture proceeding under tariff and customs laws in not penal in nature, the main purpose of
which is to enforce the administrative fines or forfeiture incident to unlawful importation of goods or their
deliberate possession. The penalty in seizure cases is distinct and separate from the criminal liability that might
be imposed against the indicted importer or possessor and both kinds of penalties may be imposed (People v.
CFI of Rizal, et al., No. L-41686, 17 November 1980).

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