PROBLEM EXERCISES IN TAXATION

(Series 2019 – Part II)

Prepared by: Dr. Jeannie P. Lim

1. Are BIR Rulings (RR NO. DA-489-03) binding if they were issued by the Deputy
Commissioner?

Answer. Yes. Sec. 4 of the Tax Code grants the CIR the exclusive and original power to interpret the
provisions of the Tax Code and other laws under his administration subject to review by the Secretary
of Finance. Sec. 7 on the other hand, allows the delegation of such power to any or to such
subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations
and restrictions as may be imposed under the rules and regulations promulgation by the Sec. of
Finance, upon recommendation of the CIR.

2. CIR’s interpretation of tax laws are subject to review by the Secretary of Finance. If
the later renders an adverse ruling in the exercise of his power to review
interpretations of the CIR, where does one seek recourse? (Philippine American Life
and Gen. Insurance Company vs. Sec. of Finance, G. R. No. 210987, November 24, 2014)

Answer. The NIRC is silent on the matter; However, Sec. 7(a)(1) of RA 1125, as amended addresses
the seeming gap. The adverse decision of the Secretary of Finance is appealable to the CTA.

3. X University is a private educational institution. It has converted itself to a NS-NP

foundation. Within the school campus are canteens, book stores, grocery stores,
ladies and men’s dormitories that are operated by the school. In addition, the
administration charges parking fees on vehicles coming into the premises during
business hours. All income realized from these commercial activities are brought
back for the support of the University.

a. Is the income realized from its business activities subject to income tax?
Reason.
b. Granting that all businesses inside the school campus are operated by
concessioners, is the lease income of the school taxable? Explain.

Answer. (a) No they are not subject to taxes and duties. The constitutional mandate provides that
assets and properties of an educational institution shall be exempt from duties and taxes. Sec. 30 of
the Tax Code does not apply to an educational institution.

(b) The concessioners will be paying their own income tax on their business operations within the
school campus. They cannot avail of the tax exemption of the school because tax exemption is non-
transferable. The lease income of the income that are exclusively used for educational services shall
remain exempt from income tax,

4. Are NS-NP hospitals allowed to engage in profit generating activities? Are they taxable on
money earned from medical services?

Answer. Yes they are allowed. The only consequence is that the income of whatever kind and
character of a charitable institution from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax. St. Luke’s Hospital is a corporation that is
not exclusively operating for charitable or social welfare purposes insofar as its revenues from paying
patients are concerned. Services to paying patients are activities conducted for profit as there is a
purpose to make profits over and above the cost of the medical services. (St. Luke’s Hospital vs. CIR)

5. A religious organization is planning to construct a bigger church and to renovate all existing
structures within its compound. The local government refuses to grant building permit for
reason that the religious organization does not want to pay the building permit fees
contending that the Constitution exempts religious organization from taxes. Is the argument
of the church official valid? Why?

Answer. The religious organization is not exempt from payment of the building permit fees, as this is
being imposed under the police power of the state. The tax exemption of the traditional exemptee is
limited property taxes and income tax and it does not cover other kinds of taxes.

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6. X committed an invalid payment by overpaying its final withholding taxes. X has documents to
prove such erroneous payment. X deducted such overpayment against the succeeding final
withholding taxes payable. The CIR denied the deduction. Is the tax official correct? (CIR vs.
Goulds Pumps (Phils.) Incorporated, August 12, 2012)

Answer. The overpayment cannot be used to offset or treated as advance tax payment for future
taxes payable and therefore it cannot be used against the succeeding final withholding tax due from
X.

7. The Municipality of X enacted a tax ordinance seeking to impose regulatory fees against “cell
sites” or transmission towers within its territorial jurisdiction. Super Communication, Inc.
refused to pay the assessed fees contending that (a) to imposition resulted to double taxation
because the towers are already subject to real property tax by the Province and (b) the
imposition is actually for the purpose of raising revenues and not for regulation in nature. Is
“Super” correct? (Smart Communications, Inc. vs. Mun. of Malvar, G.R. No. 204429, February 18,
2014)

Answer. The main purpose of the tax ordinance of X is to regulate certain construction activities of
the identified special projects, which included “cell sites” or telecommunications towers The fees
imposed by X is primarily regulatory in nature and not primarily revenue-raising. While the fees may
contribute to the revenues of Mun. X, this effect is merely incidental. If the generating of revenues is
the primary purpose and regulation is merely incidental, the imposition is a tax, but, if regulation is the
primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a
tax.

8. The distinctions between is tax and a fee is significant because the procedure for questioning
its validity is NOT the same. Where is the difference?

Answer. Sec. 187 of the LGC outlines the procedures for questioning the constitutionality of a tax
ordinance. The power behind the imposition of a regulatory fee is the police power of the government.
It cannot be questioned under Sec. 187 but rather by an action that touches upon the “abuse of
power” and the “public purposeness of the imposition.”

9. The 12 different kinds of income tax under RA 8424 (Tax Code):

Answer.
a) Graduated income tax on individuals (net and gross)
b) Normal corporate income tax
c) Final withholding tax on passive income
d) Final withholding tax on income payments to non-residents
e) Capital gains tax on sale, exchange of capital (income earned from property dealings)
f) Branch profit remittance tax on branches of foreign corporations (BPRT)
g) Tax on improperly accumulated earnings
h) Fringe benefit tax (FBT)
i) Preferential income tax rates on individuals
j) Preferential income tax on corporate taxpayers
j) Minimum corporate income tax (MCIT)
k) Optional corporate income tax (OCIT)

10. What is the scope of the Branch Profit Remittance Tax?

Answer. The tax covers the remittance of profits to their mother offices abroad of all resident foreign
corporations including ROHQs of multi-national companies, FCDUs or OBUs of foreign banks and
international carriers, EXCEPT PEZA-registered entities.

11. What is the Assignment of Income Doctrine?

Answer. An income is taxable to both the assignor and the assignee. Example: If X is entitled to his
salary of Php 350K but assigns it to Y. X constructively received said income because he has
complete control of it and he was able to assign it to Y. Y actually received it when it was assigned to
him by X without any condition. Hence, the income is taxable in the hands of X and subsequently it
shall be taxable in the hands of Y.

12. What is the Originating Rule in income taxation?

Answer. The cost of airline/shipping tickets of passengers/cargo originating from the Philippines will
be subject to the Gross Philippine Billings (GPB) tax of 2.5% wherever the tickets were bought and
paid.

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 NOTE:
 GPB tax of 2.5% applies only to resident foreign corporations not to local airline/shipping
companies because the latter are taxed at 30%.

 Offline carries (without landing rights in our country) that sell their tickets here through other
entities (travel agencies, local agents or other airlines with landing rights) are taxed like ordinary
resident foreign corporations. (30% on gross)

13. What is the Substance Over From Doctrine?

Answer. This doctrine provides that taxability is determined by the reality of the transaction rather
than the appearance which may be contrived.

14. What are the requisites for business/professional expense to be deductible?

Answer.
a) It must be ordinary and necessary

b) It must be paid or incurred within the taxable year

c) It must be paid or incurred in carrying on, or directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of profession;

d) It must substantially be proven, by evidence or records, the deductions claimed under the law,
otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction. (Atlas Mining vs. BIR, 102
SCRA 246)

e) It must not be against the law, morals, public policy or public order and

f) It must be reasonable

g) It should have been incurred in furtherance of profit.

15. Are expenses for repairs and improvements incurred by a businessman deductible from gross
income?

Answer. Repairs that significantly increase the value or prolong the useful life of properties are
capital expenditures. These are capitalized to the adjusted tax basis of the property and are included
in the subsequent annual provision for depreciation. Repairs that merely restore the value or
functionality of the property without causing increase in fair value or useful life of the property shall be
deducted as outright expense.

16. X Promotion organized a musical concert and invited well known singers from abroad. To
insure the safety of the viewing public X hire the additional services of policemen for
protection. May X deduct the additional expenses paid to the police force from its gross
income?

Answer. The SC held in the case of Calanoc vs. Collector, November 29, 1961, that the expenses for
police protection fees were not deductible as they are illegal since it was consideration for the
performance of functions required of policemen by law.

17. X Corporation was able to sell one of its commercial properties. The BOD decided to give
bonuses to their directors and officers by virtue of their position in the corporation. Are the
bonuses deductible from the gross income of X?

Answer. In the case of Aguinaldo Industries Corp. vs. CIR, February 25, 1982, the SC held that the
said bonuses cannot be deducted because there is no evidence that the said officers did any work
which would be the basis of the grant of the bonuses. One of the requisites for the deductibility of
bonuses is that they are given for personal services actually rendered.

18. What are the requisites for the deductibility of bad debts from gross income?

Answer.
a) There is an existing indebtedness due to the taxpayer which must be valid and legally
demandable.
b) The same must be connected with the taxpayer’s trade, business or practice of profession;

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 c) The same must not be sustained in a transaction entered into between related parties
enumerated under Sec. 36(B) of the Tax Code;
d) The same must be actually charged-off in the books of accounts of the taxpayer as of the end
of the taxable year,
e) The same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year, and
f) The debts are uncollectible despite diligent efforts exerted by the taxpayer, and
g) The debtor must be insolvent.

19. X, a businessman has several uncollected debts. Y owes X Php 500,000. Y can no longer be
located at his business address or heard of for the past 3 years. Can X deduct the Php 500,000
from his gross income as bad debts because apparently X can no longer recover that
amount?

Answer. When a debtor cannot be located or heard of his unpaid obligation is not bad debt. To be
claimed as bad debt there must be proof that the debtor is INSOLVENT. His absence is not proof of
insolvency.

20. X Corporation lent money to Y. The agreement contains a proviso that says X shall be entitled
to 20% of the annual profit of Y until the obligation is fully paid. Y was not able to pay the debt
due to losses, notwithstanding, Y still continued his business operation hoping for recovery.
Can X deduct Y’s obligation as bad debt?

Answer. No. X cannot deduct Y’s obligation as bad debt because Y is still operating and is not
insolvent. (Fernandez Hermanos, Inc. vs. CIR, September 30, 1969)

21. In 2015 X bought Php 200K worth of shares of stocks. Today, the value to the shares has
shrunk to Php 30K. Is the shrinkage in the value of the stocks considered deductible losses?

Answer. Shrinkage in value of the stocks through fluctuations of the market price or otherwise are not
deductible loss from gross income. The loss is not yet realized hence it is a mere paper loss before
actual disposition of the shares.

22. X owns a commercial building in the city. The land where the building stands has increased
tremendously in value. The building was recently renovated to keep up with the business
demands of the place. X’s accountant re-apprised the subject property at its latest fair market
value in X’s business books and records and thereafter claims a bigger depreciation
allowance. Is there any tax implication when a person updates the value of properties?

Answer. Under the ECONOMIC BENEFIT RULE in a re-appraisal of property” the remaining book
value is income if it is added to the cost of the new building whereby a bigger depreciation allowance
is claimed.

23. “X”, a resident citizen engaged in the sale of hardware and other building materials
appropriated an amount of money for the construction of a hollow block fence with iron grills
around the compound occupied by his business and property not only for safety reasons but
also to keep the property in an ordinary efficient condition. At the end of the tax period, he
deducted all expenses incurred from his gross income. The BIR denied the claim for expenses
alleging that the expenses are non-deductible business expenses. “X” believes otherwise. Is
the Tax official correct? Reason.

Answer. The tax official is correct. Expenditures which materially add to the value or useful life of
property are not allowable as expense deductions, but are treated as permanent investments to be
added to the cost basis of the property and charged off through depreciation, like those that are
incurred for replacements, alterations, improvements or additions, which prolong the life of the
property, increase its value, or make it adaptable to a different use. Capital expenditures of these
nature must be distinguished from costs of maintenance and incidental repairs which are deductible
as ordinary and necessary business expense in a given tax period.

24. X mortgaged his real property in the bank. In a financing arrangement for mortgage, does the
mortgagor, X, enjoy depreciation expense regarding the property he mortgaged?

Answer. Yes. The mortgagor retains ownership over the property mortgaged; hence, he is still
allowed to enjoy the depreciation expense.

25. Five (5) brothers and sisters co-owned a parcel of land which they inherited from their
parents. The subject property is registered jointly in their name as co-owners. Now, they want
to subdivide the property and have their own independent title of their proportionate share. Is

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 the transfer of title from the joint names of the co-owners pursuant to an agreement to
partition subject to a capital gains tax?

Answer. The partition is exempt from the capital gains tax. Dissolution by co-owners of co-ownership
through an agreement to partition is not covered by the imposition of the said tax because the transfer
of title from the co-owners is not barter, exchange or other disposition of realty that would warrant its
imposition. (BIR Ruling 145-98, October 9, 1998)

26. Is income realized from the sale of capital asset and ordinary assets included in the Income
Tax Return of the taxpayer and subject to income tax?

Answer. Income realized from the sale of capital asset is subject to the final withholding tax at source
and therefore is excluded from the Income Tax Return. Whereas, income realized from sale of
ordinary asset is part of gross income, included in the Income Tax Return.

27. In 1992 X inherited from his parents a house and lot. After paying the estate tax the title of the
property was registered in the name of X. Today, X wants to donate the subject property to his
children. Is the transfer of his house and lot by way of donation subject to capital gains tax?

Answer. No CGT is imposable in donation of properties even if the properties are classified as
capital assets.

28. X bought a vacant lot from a friend. Unfortunately, the Certificate of Title given to him by the
seller is not for the property he bought. Both seller and buyer did not notice the error. The
capital gains tax and DST were paid. Subsequently, X found out that he got the wrong title and
immediately asked the seller to give him the correct document. Will there be another capital
gains tax and DST payable because this time the transfer involves another Certificate of Title?
Reason.

Answer. No. The seller does not have to pay for another set of final withholding tax (CGT) and DST.
The CGT and DST are not imposable when there is an error in the description and conveyance of
properties sold.

29. S sold his real property to B undertaking to clear the same of its occupants within a period of
12 months. B gave an earnest money to S to show good faith. After a year S was not able to
clear the property. Thereafter the contract was cancelled. Is there taxation involved here?

Answer. Rescission of a contract would not give rise to a taxable event for 2 reasons: (a) the result of
the rescission is that it is as if there was no sale, transfer or exchange between the contracting parties
and hence, no income is realized, and (b) if consideration and/or object was given by the contracting
parties upon execution of the instrument, they shall return to each other the same without additional
monetary consideration because that is merely an acknowledgment of title of the original owner.

30. A Korean student bought a condominium unit in Makati City. After 4 years of use and
occupation of said property, the foreign student decided to sell the unit to a GOCC. Is the sale
taxable? What kind of tax is payable?

Answer. If seller of real property (condo) is an alien and buyer is GOCC/National Government or
LGU – it is subject to CGT. Whereas, if the seller of a capital asset is a resident citizen and the buyer
is a GOCC or the National Government or LGU, the seller shall enjoy alternative taxation. i. e., a
choice of subjecting the sale to CGT/DST or to subject the gain realized therefrom to income taxation,
if there by any.

31. S has a house and lot worth Php 5.0 million. He sold it for only Php 2.0 million as he was
leaving the country for good. The transaction resulted to a loss of Php 3.0 million. Is S still
required to pay the CGT and DST?

Answer. Yes, S is liable for both CGT and DST. The CGT is imposed on every sale of real property
classified as capital asset. This tax is based on the zonal value or consideration agreed upon
between or among the parties whichever is higher and it is not based on gain realized.

Under the TRAIN Law the tax base of the CGT is the zonal value of the property or the fair
market value of the LGU whichever is higher.

32. X, a resident citizen owns a house and lot in San Francisco, California, USA. He bought that
property in 2001 for Php 5.0M. Today, he sold that property to “F” a wealthy Filipino residing
in Quezon City for Php 10M. The Deed of Absolute Sale was executed here and payment was
course thru the local bank but transmitted to X’s account in the US. X paid the Capital Gains

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 Tax and Documentary Stamps Tax of Php 750,000 to the BIR. Six months thereafter, the tax
official assessed X of deficiency income tax and demanded payment thereof. In addition the
Php 750,000 was denied as a tax credit on X’s income tax return. Is the X official correct?

Answer. Yes, the property sold is not subject to CGT and DST because they are located outside the
Philippines. Only capital assets located within the Philippine are subject to these two taxes. The Php
750K paid cannot be claimed as tax credit in X’s income tax because these are non-deductible taxes.
The amount paid therefore is an erroneous payment which X can claim as tax refund. Hence, the
income earned by X from the sale of his house and lot in the US is subject to income tax.

33. Explain the DOCTRINE OF INVOLUNTARY CONVERSION OF PROPERTY.

Answer. When the government replaces/changes the property expropriated, it is not taxable because
the ownership of the new land is a continuity of the ownership of the old and no gain or income is
realized from the expropriation.

34. Are foreign income taxes paid by businessmen abroad deductible from their gross income
here?

Answer. Yes they are deductible but the privilege depends on the classification of the taxpayer.

WHO CAN DEDUCT? (a) citizens, (b) domestic corporations, (c) member of GPP, and (d)
beneficiary of an estate or trust.

WHO CANNOT DEDUCT? (a) alien individuals subject to gross income taxation, and (b) foreign
corporations.

35. Engineer Miero filed a case against his neighbor for destroying his sewer and water pipes. The
case was decided in favor of the Miero. In the decision compensatory, punitive, actual and
moral damages were awarded to him. If the judgment was fully satisfied are the damages paid
to Meiro subject to income tax?

Answer. The compensatory damages (for emotional distress and loss of reputation) constitute
taxable income; the punitive damage (money paid by wrongdoer to teach him a lesson) is also
taxable. Whereas, the actual (mere return of capital) and moral (an exclusion) damages are exempt
from income tax.

36. Are compensatory damages awarded to a litigant subject to income tax?

Answer. Compensatory damages are awarded for non-physical injuries like mental anguish,
emotional distress and loss of reputation they constitute taxable income. However, if the amount
received is compensation for personal injuries they are excluded from gross income and not taxable.

NOTE: Where fraud was established and subsequently punitive damages were awarded. Said
amount are taxable income and they cannot be classified as gift. (American case)

37. X hired the services of a law firm to defend him in a legal battle filed against him by some
disgruntled relatives. After the case was terminated X paid the law firm professional services.
Is the law firm subject to corporate income tax on said income?

Answer. Income payments to a general professional partnership for professional services are NOT
subject to corporate income tax and consequently, NO withholding tax. Instead, the individual
partners in the law firm shall be subject to income tax and withholding tax on their separate and
individual capacities based on their distributive share of the firm’s income.

38. What kind of tax is imposed on interest income earned from bank deposits and time deposits?

Answer. The interest income in Philippine peso earned from bank deposits is subject to 20% Final
Withholding Tax, however, if the interest earned is in foreign currency it is subject to 7.5% (15%
under the TRAIN Law) Final withholding tax computed in that currency. Time deposit is subject to
Documentary Stamps tax and the interest income earned therefrom is subject to 20% Final
Withholding Tax.

NOTE:
 Long term time deposit (more than 5 years) is exempt from the 20% final withholding tax but not
the documentary stamps tax.

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  Gains, or interest earned from trading, redemption or retirement of long-term securities are
exempt from income tax.

 Interest income earned from bonds is not synonymous with “gains or interests” earned from
trading, redemption, or retirement of long-term securities (time deposits).

 The bonds income is subject to withholding tax and income tax. Whereas, interest income from
passive investment like bank interest is subject to final withholding tax but exempt from income
tax.

39. What are deposit substitutes?

Answer. When funds are simultaneously obtained from 20 or more lenders/investors, there is
deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes.
Consequently, the seller is required to withhold the 20% Final Withholding Tax on the passive interest
income earned from the bonds. (BDO vs. Republic, G.R. No. 198756, January 13, 2015, En Banc)

40. Recently, our government decided to exempt minimum wage/income earners from income
taxation. X is a businessman operating a small “sari-sari” store within his residential house.
His yearly income is no more than the annual threshold of exemption granted to for minimum
income earners, is X exempt from income tax on his income earned in the course of his
business operation? (RA 9504)

Answer. The exemption from income tax of minimum compensation earners under RA 9504 applies
only to salaried persons, working either full time or part time and it does not apply to businessmen or
professionals exercising their profession. Hence, even if the business income or profit realized in one
year is less than the exemption threshold granted to salaried persons, it same is subject to income
tax.

41. Are GSIS, SSS, Medicare, Union dues, Pag-ibig, Phil-health contributions included in the
compensation income of employees?

Answer. The mandated contributions are not included as part of the compensation income of the
employees. The PERA (Personal Equity and Retirement Account) contributions from the employer to
an employee do not also form part of the gross income of the employee (RR No. 17-2011 and RA
9505)

42. What are the requirements set by law for the refund of excess creditable withholding tax?
(United International Pictures, AB vs. CIR, October 11, 2011, CIR vs. Team (Phils.) Operations Corp.,
GR No. 179260, April 2, 2014)

Answer.
a) The claim for refund was made within 2 years as prescribed by law, (Sec. 229, NIRC)

b) It must be shown on the return that the income received was declared as part of the gross
income, (Sec. 10, RR 6-85),

c) The fact of withholding is established by a copy of a statement duly issued by the payor-
withholding agent to the payee showing the amount paid and the amount of tax withheld
therefrom.

43. X is a local branch of a non-resident corporation. X solicits orders from local importers. It
merely relay to its head office abroad all purchase orders and the head office abroad actually
consummates the sale. Is X liable for income tax?

Answer. Yes, X is liable. An income tax is imposed on the gross income generated from
“constructive” trading and commission income derived from brokering, soliciting orders, purchases,
service contracts, trading, and construction.

44. X Corporation constructed a 40-Storey building in Makati City and its Board decided to cover
it with fire insurance. The chosen fire insurance company is abroad. X’s president was duly
authorized by the board to signed the insurance contract abroad, premium was paid there and
the policy was sent from abroad to its principal office here. Is the insurance premium paid
thereon taxable in the Philippines? (MERALCO vs. Yatco, et. al., 69 Phil. 89)

Answer. The insurance premiums paid abroad are taxable in the Philippines because the insured
property is located here and the Government must get something in return for the protection it gives

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 to the insured property, by reason of such protection, the insurer is benefited and government must
be compensated.

45. X Corporation was charged by his employees for violation of the Labor Laws. The decision of
the Labor Arbiter ruled that X is liable for Php 2.5 million. Before the amount could be settled
BIR also claims from X unpaid taxes. Will the claim for paid wages prevail over the unpaid
taxes?

Answer. In the case of CIR vs. Maritime Shipping Corporation, 238 SCRA 42, the highest court ruled
that when a corporation is still operational, wages shall prevail over unpaid taxes. Whereas, if the
corporation is already dissolved or has ceased operation, unpaid taxes prevails over unpaid wages.

NOTE: Unpaid taxes prevail over the claims of judgment creditors.

46. Both Insurance Companies and Pawnshops operators are lending money to their customers.
The BIR imposes the lending investor’s tax on both. Subject companies objected to the
additional imposition. Is the objection valid?

Answer. The SC ruled that Insurance companies are not lending investors. (Phil-Am Company,
2005) and Pawnshops operators are not lending investors. (Michel Lhullier Pawnshop) There
activities of lending money to their customers are incidental of their main business activities.

47. What do you understand by the phrase “no gain or loss is recognized” in case of corporate
adjustments?

Answer. This applies in cases of merger or consolidation and transfer of a controlled corporation
only. The gain is not taxable and loss could not be used as a deduction from gross income. The gain
realized after exchanges of properties between or among corporations is not subject to tax or in case
of loss; the loss cannot be used as a deduction from gross income.

This phrase does not refer to the general rule of gain or loss subject to income tax because in
income taxation, the gain is taxable and the loss is deductable.

48. What kind of sales or exchanges is exempt from income taxation?

Answer.
a) Exchanges solely in kind in mergers and consolidation

b) Transfers or exchanges of property for stock to gain control (51% or more of the total voting
power) by an individual or with others not exceeding four (4).

49. Define a de facto merger: (RMC – 1-02, April 25, 2002)

Answer. It is a procedure similar to a transfer to a controlled corporation under Sec. 40(C)(2) of the
Tax Code, except that at least 80% of the transferor’s assets, including cash are transferred to the
transferee, with the element of permanence and not merely a momentary holding. The requisites of a
de facto merger are: (a) there must be a transfer of all or substantially (at least 80%) all of the
properties of the transferor corporation solely for stocks, and (b) it must be undertaken for e bona fide
business purpose and not solely for the purpose of escaping the burden of taxation.

50. Distinguish a de facto merger and a “transfer to a controlled corporation”: (RMC No. 1-02, April
25, 2002)

Answer.

De Facto Merger Transfer to a controlled corporation

The transferor is a corporation
There is no requirement that the transferor gains
control of the transferee corporation as a pre-
requisite of tax exemption
The transferee acquires all or substantially all of
the properties of the transferor
The transferor may either be a corporation or an
individual
The transferor must gain control (more than 51% of
the total voting powers of all classes of shares of the
transferee entitled to vote) for tax exemption
No such requirement.

51. R Corporation (domestic) entered into a merger with its wholly-owned domestic subsidiaries S
Corporation and U Corporation. S and U transferred all their assets and liabilities to R. R
Corporation is the surviving corporation. R did not issue any shares of stocks to S and U in
consideration of the assets and liabilities it got from S and U because S and U are wholly-

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 owned by R. Is the merger between R, S and U tax free? Is there any tax implication under the
stated facts?

Answer. This activity is called upstream merger between a parent and its subsidiaries where the
parent company will not be issuing any shares to the subsidiaries in exchange for the assets
transferred to it. In effect, the transfer is in the nature of donation made by the subsidiaries to the
parent, hence subject to donor’s tax. The intended merger has the effect of dissolving and liquidating
the subsidiaries without payment of the corresponding taxes. (BIR Ruling No. 614-12, November 9,
2012)

52. “X” Corporation is a domestic corporation, which provides technical, research, management
and personnel assistance to its affiliates. The corporation receives payment for such services.
However, X does not file income tax returns nor pay income taxes as it contents that it is
operating in a purely reimbursement-of-cost basis without any intention of realizing profit. Is X
Corporation subject to income taxes?

Answer. Yes. Income is defined as “an amount of money coming to a person or corporation whether
as payment for services, interest or profit from investment,” (Conwi vs. CTA, 213 SCRA 83) the firm
receives payment for its services. Despite its contention that it is operating in a purely reimbursement-
of-cost basis, it still has to file the required tax returns and pay the corresponding income taxes
payable. It is not an exempt corporation.

53. X Corporation purchased all properties from Y Corporation under a Purchase and Sale
Agreement. The BIR noticed that the seller still has unpaid DST. Having evidence to prove that
X is now in possession of all properties of Y, BIR enforces the tax liabilities of Y against X. Is
the BIR correct? [CIR vs. Bank of Commerce, GR No. 180529 (2013)]

Answer. The purchase and sale of identified assets between 2 corporations under a Purchase and
Sale Agreement does not constitute a merger as defined under the Tax Code, the seller and
purchases are still considered separate and different entities from one another. Thus, X, the
purchaser cannot be held liable for the payment of the deficiency tax liability of Y.

54. Solid Rock International (SRI) is a business partnership. It is renting an office space at Php
60,000 per month. SRI is required by the lessor to cover the entire monthly rent for the whole
year with post dated check. No 5% expanded withholding tax on rent was deducted from the
payments. At the end of the year SRI deducted rent expenses from its gross income. There are
official receipts issued by the lessor to SRI acknowledging the receipt of payment. The BIR
disallowed the deduction. SRI disagrees. Is the tax officials correct? (CIR vs. Hambrecth & Quist
Phils. Inc., G.R. 169225, November 17, 2010)

Answer. Yes the BIR is correct. Compliance with the Substantiation Rule does not automatically
grant the privilege of deduction. The law on income taxation provides that when no withholding tax is
taken from the expense and one is required, (rentals are subject to withholding taxes) the expense is
not an allowable deduction.

55. X Bank purchased 53% of the voting stocks of Y, its own subsidiary. Subsequently, due to
economic depression and mismanagement of Y it became insolvent. May X Bank treat its loss
as a bad debt or an ordinary loss which it can deduct from its gross income? Why? (China
Banking Corp. vs. CA, July 19, 2000)

Answer. The equity investment in shares of stocks held by X in its subsidiary Y is not indebtedness.
The shares of stocks in question do not constitute a loan extended by X to Y or was it a debt subject
to obligatory repayment by the latter. The investment of X is a capital not an ordinary asset. Thus, any
loss sustained therefrom is a capital loss which can only be deducted from a capital gain and not from
ordinary income or gain.

56. LINK Corporation is a foreign corporation engaged in business in the country with branch
office in Makati City. In one occasion, it purchased shares of stocks of several local
corporations independently of its branch office’s business operation. The local corporations
declared cash dividends. What is the tax implication under the given facts? (Marubeni vs. CIR,
177 SCRA 500)

Answer. The cash dividends are subject to tax as though they are received by a non-resident foreign
corporation. The mere fact that a NRFC has a branch in the Philippines does not give it the character
of a resident corporation when it engages in transactions INDEPEDENTLY from its branch. Thus,
since the stocks were independently purchased by “Link”, the cash dividends are not intra-corporate
dividends which are normally exempt from tax instead they shall be subjected to remittance tax.

9
57. In the last five (5) years a big number of students from the private schools had transferred to
the public schools due to the high tuition fees of the former institutions. X, a private school
has a big dropped in the number of its enrollees and X has been sustaining losses for the last
three (3) years of its operation. Is X subject to the 2% MCIT?

Answer. The 2% MCIT applies only to domestic corporations, resident corporations or partnerships
that are subject to the corporate income tax of 30%. All those juridical entities not paying the 30%
corporate income tax or subject to a lower income tax rate is exempt from the 2% MCIT. A private
school is taxed at 10% only under the Predominance Test Rule. So that, if it pays 10% income tax on
its income earned instead of the normal corporate income tax of 30%, it is exempt from the 2% MCIT.

58. Distinctions between income tax and minimum corporate income tax:

Income Tax Minimum Corporate Income Tax (MCIT)

1. The purpose of this tax is for the government to
raise revenues
2. It is based on gross or net income
3. Applies to all kinds of income taxpayers,
whether natural or juridical
4. Payable when there is income, gain, profit or
interest realized that are not exempt under laws
5. Individual tax rates are between 5% - 32%,
(20% - 35%, Train Law) and corporate tax rate is
30%
6. There are allowable deductions
7. Does not have a 3-year carry forward feature
8. Subject to withholding taxes
9. Individual taxpayers pay income tax on or
before April 15 of every year. Corporate taxpayers
pay income tax 4 times a year.
10. No 3- year leeway does not apply to income
taxation
11. The rate is multiplied to the net taxable
income
The purpose of this is to stop the practice of
corporate entities from declaring losses when in truth
and in fact there are no losses sustained
It is based on gross income only
Applies only to corporate taxpayers covered by the
30% corporate tax rate
Payable whenever the corporate entity sustains an
operating loss or its net taxable income is less than
the 2% MCIT
The rate is 2% of the gross income
No deductions are allowed
It has a 3-year carry forward feature
No withholding taxes are allowed
Payable on or before April 15 of every year of loss
It has a 3-year leeway for newly organized
corporations
The 2% tax rate is multiplied to the gross income.

59. Briefly explain the rules on how co-ownership is subject to income tax.

Answer. Generally, the activities of the co-owners are usually limited to the preservation of the co-
ownership property and the collection of the income therefrom. In such a case, the co-ownership as
such entity, is NOT subject to income tax. The co-owners in an exempt co-ownership shall be liable
for income tax only in their separate distributive shares thereof. However, when the income of the
exempt co-ownership is invested by the co-owners in furtherance of profit, the co-owners in effect
constituted themselves into an unregistered partnership. In which case, the co-ownership will be
subject to income tax as a corporation.

When inherited property, remained undivided for more than 10 years, and no attempt was ever
made to divide the same among the co-heirs, nor was the property under administration proceedings
nor held in trust, the property should be considered as owned by an unregistered partnership and the
income derived therefrom is subject to corporate income tax. (BIR Ruling August 18, 1959)

60. X, a corporation overpaid its quarterly income tax in 2010. In its final adjustment return it
indicated that would carry-over (tax credit) that excess payment in the following year.
Subsequently, in 2011, X changed its mind and opted to apply for tax refund or for the
issuance of a tax credit certificate for the amount representing such overpayment. X claim
was denied by the CIR. C argued that the denial resulted to the unjust enrichment of the
government at its expense. Is the denial warranted? (United International Pictures, AB vs. CIR,
October 11, 2011, Mirant (Phils.) Operations, Corporation vs. CIR, June 15, 2011)

Answer. The BIR is correct. In cases of invalid payments of taxes (overpayment, illegal payment,
erroneous payment or there are penalties imposed without authority in a tax computation) the
taxpayer has the following remedies: (a) claim for tax refund, (b) apply for tax credit or (c) ask for the
issuance of a tax credit certificate corresponding to the amount of the invalid payment. These
remedies are alternative remedies. The availment of one will abandons the other remedies. Once a
choice of the remedies is made that decision is irrevocable. (Sec. 76. NIRC)

Note: The Irrevocable Rule does not apply to an instance where the taxpayer claims for tax refund
and thereafter moves for tax credit. Rather it applies only when a taxpayer avails of tax credit but later
changes his mind and moves for tax refund.

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61. X corporation cease operation due to very poor business activities. It has excess income tax
payments and decided to claim refund thereof. Where is the reckoning point of the 2-year
prescriptive period to validly claim the same? (Mindanao Geothermal Partnership vs. CIR, CTA
case No. 8250, November 9, 2012)

Answer. In case of DISSOLUTION, the 2-YEAR prescriptive period to file claim for refund of taxes
begins 30 DAYS AFTER APPROVAL by SEC of the Petition for Dissolution.

62. What is considered an invalid payment for tax purposes? (Sec. 76)

Answer. An invalid payment refers to an overpayment, illegal payment (collection without legal
basis), erroneous payment and penalties imposed in relation thereto.

63. An invalid payment of internal revenue tax may be claimed as tax refund or tax credit within a
period of two (2) years. Where is the reckoning point of the 2-year period?

Answer.
a) To an individual taxpayer - The 2-year period commences to run from payment of the tax if the
tax was paid on or before due date. However, if the tax was paid beyond the due date the 2-
year period to claim is reckoned from due date of the subject tax.

b) To a corporate taxpayer – The 2-year period is reckoned from the date of filing of the Final
Adjustment Return (“FAR”)

c) To a corporation operating inside the export processing zone – the period to claim an invalid
payment is SIX (6) YEARS counted from date of payment.

64. On April 20, 2014, X filed his income tax return plus the corresponding penalty. A year after,
he discovered that the penalty he paid was excessive. On February 9, 2016, he filed a claim for
refund with the BIR; On May 2, 2016 the BIR denied his claim. X received the notice of denial
only on June 6, 2016. On June 27, 2016, still well within 30-day period from receipt of the
denial, he appealed the case to the CTA, Will his appeal prosper? Why?

Answer. No. The law requires that the appeal to the CTA should be made within 30 days from receipt
of denial by the CIR AND within two (2) years after the payment of the tax or penalty. In the given
facts, while the appeal to the CTA was made within 30 days from receipt of the notice of denial by the
CIR, it was filed beyond the two-year period from date of payment. The law uses the conjunctive
“AND”, thus, both requisites must concur. X should not have waited for the decision of the CIR;
instead, he should have treated the inaction of the CIR an implied denial of his claim. He should have
filed an appeal before the CTA within 2 years from payment because CTA’s jurisdiction on matter of
tax refund is that the appeal should be filed before it within 2 years from payment. . (This is referred to
as the DOCTRINE OF THE TWIN PRESCRIPTIVE PERIOD ON REFUNDS)

65. (a) Are backwages, allowances and benefits awarded in a labor dispute subject to withholding
taxes?

Answer. Yes. They constitute remunerations for services that would have been performed by the
employee in the year when actually received or during the period for his dismissal from the service
which was subsequently ruled to be illegal. They money awarded to the employee is subject to
withholding tax on wages. (RMC 39-2012, August 3, 2012)

(b) Who has the obligation to withhold the 5% creditable withholding tax (CWT) on the money
awarded in a labor dispute?

Answer. The employers are mandated to withhold taxes on wages and this includes those
representing payments for backwages, allowances and benefits awarded in a labor dispute.

66. What are the requirements set by law for the refund of excess creditable withholding tax?
(United International Pictures, AB vs. CIR, October 11, 2011, CIR vs. Team (Phils.) Operations Corp.,
GR No. 179260, April 2, 2014)

Answer.
a) The claim for refund was made within two (2) years as prescribed by law, (Sec. 229, NIRC)

b) It must be shown on the return that the income received was declared as part of the gross
income, (Sec. 10, RR 6-85),

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 c) The fact of withholding is established by a copy of a statement duly issued by the payor-
withholding agent to the payee showing the amount paid and the amount of tax withheld
therefrom.

67. For purposes of transfer taxes when are intangible personal properties considered properties
situated in the Philippines?

Answer.
a) Franchise which must be exercised in the Philippines
b) Shares, obligations or bonds issued by domestic corporations
c) Shares, obligations or bonds issued by a foreign corporation, 85% of its business of which is
located in the Philippines.
d) Shares, obligation or bonds issued by a foreign corporation if such intangible personal properties
have acquired a business situs in the Philippines; and
e) Shares, rights in any business partnership or industry established in the Philippines. (Sec. 104,
Tax Code)

68. During his lifetime X bought a life insurance policy insuring his own life for Php 2.0 million.
Discuss the taxability or non-taxability of the life insurance proceeds for estate tax purposes:

Answer.
Situation Insurance Policy Name Beneficiary Taxability
The named beneficiary is either the The life insurance proceeds is
If the policy is REVOCABLE (1) estate or (2) his administrator or subject to estate tax
I. (3) his executor
The named beneficiary is not any of The life insurance proceeds are
II. If the policy is revocable the above subject to estate tax.
If the life insurance policy is The name beneficiary is any of the The life insurance proceeds is
III. IRREVOICABLE above three subject to estate tax
If the insurance policy is The named beneficiary is not any of The life insurance proceeds is NOT
IV. irrevocable the above subject to estate tax
If the policy is ambiguous The named beneficiary is not any of The life insurance proceeds are
V. (silent) as to whether or not it is the above subject to estate tax.
revocable or irrevocable

69. X is engaged in lease subsequently it decided to sell the property leased. Is the sale VATable?
(CIR vs. Magsaysay Lines, July 26. 2006)

Answer. The regular conduct or pursuit of a commercial or economic activity including transactions
incident thereto, by any person regardless of whether or not the person engage therein is non-stock,
non-profit private organization (regardless of the disposition of the income) and whether or not it sells
exclusively to members or their guests or government entity is VATable.

NOTE: If the sale conducted is in the pursuit of a commercial activity resulted to a loss, the sale is still
VATable.

70. What kind of business transactions will allow refund of unutilized input taxes? [Panasonic
Communications Imaging Corp. of the Phils. vs. CIR, GR No. 178090, February 8, 2010]

Answer.
a) Zero rated sales of VAT-registered exporters,

b) Effectively zero-rated sales of domestic VAT-registered businessmen and

c) those input taxes that were absorbed from the acquisition of capital goods by VAT-registered
businessmen.

71. X, a VAT-registered person engaged in Zero-rate sale. It filed a claim for tax credit of its
unutilized input taxes within 2-years. The 2-year period is almost expiring and there is still
inaction of the part of the CIR over his claim. Just before the 2-year period ended. X perfected
its appeal to the CTA invoking that the silence of the CIR is an implied denial of his claim. Did
the CTA acquire jurisdiction on X’s Petition for Review?

Answer. X’s appeal should be dismissed for being pre-mature. Unutilized input taxes are not
overpayment of taxes to the government. Had it been an excess payment of an IR tax then X’ petition
is valid and CTA has acquired jurisdiction of it under Sec. 229. The refund/credit of unutilized input
tax is under Sec. 112 of the Tax Code, which provides that upon submission of the complete
documents in support of the claim, the CIR is given 120 days to rule on the claim. If an adverse
decision is issued within the 120 days. X can perfect his appeal to the CTA or in case of inaction after

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 the 120 days, then X can appeal to the CTA only within 30-days from inaction invoking silence is an
implied denial of his claim. (Taganito Mining Corporation vs. CIR, G.R. No. 201195, November 26,
2014)

72. X, a VAT-registered exporter has shipped to the Middle East his finished products consisting
of garments and shoe wares. Now, he comes to you to inquire how to claim the unutilized
input VAT from the BIR. What is your advised?

Answer. I will advise him to show proof of the following in support of his claim –
a) His VAT registration with the BIR,
b) Proof of his payment of input VAT on capital goods purchased or on the purchase of raw
materials;
c) That input VAT payments were duly supported by VAT invoices or official receipts;
d) That he did not offset or apply the claimed input VAT payments on capital goods or raw
materials against any output VAT liability, and
e) That the administrative and judicial claims for a refund were filed within the two (2) years
prescriptive period. (Id.)

NOTE: Claim for unutilized input tax on zero-rated sale is evidentiary in nature and therefore a
detailed examination and verification of supporting documents submitted by the taxpayer is
mandatory.

73. Procedures in claiming for the unutilized creditable input VAT? (Nippon Express (Phils.) Corp.,
vs. CIR, March 13, 2013)

Answer.
a) An administrative claim (before the CIR) must be filed within 2 years after the close of the
taxable quarter when the zero-rated or effectively zero-rated sales were made,

b) The claimant must be able to submit complete documents in support of his/its claim within 2
years from the close of the taxable quarter.

c) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant the credit or issue a tax credit
certificate.

d) If the 120-day period expires without any decision of the CIR, such inaction may be considered
an implied denial of the claim,

e) A judicial claim with the CTA must be filed within 30 days from receipt of a denial of said claim
or from the expiry of the 120-day period without a decision from the CIR.

NOTE: The Doctrine of the Twin Prescriptive Period for invalid payments under RA 1125, DOES NOT
APPLY TO AN APPEAL BEFORE THE CTA INVOLVING CLAIMS FOR UNUTILIZED INPUT
TAXES.

74. X exported his goods on September 22, 2010. On January 24, 2012 it filed an administrative
claim for unutilized input taxes and on March 16, 2012 X submitted complete documents to the
BIR in support of the claim. Where is the reckoning period of the 120-day for the CIR to act on
the claim? (CE Cebu Geothermal Power Co., Inc. vs. CIR, CTA case No. 7740, September 2, 2011)

Answer. The administrative claim was filed on September 22, 2010 and the complete documents in
support of such claim were filed only on March 16, 2012. The Court held that the CIR had 120-days
from the March 16, 2012 (The date of submission of complete documents) or until July 14, 2012
within which to decide the claim.

75. What is the prescriptive period to claim for a refund of taxes of an enterprise duly registered
under the EPZA Law? (Commissioner of Customs vs. Phil. Phosphate Fertilizer Corp., September 1,
2004).

Answer. The EPZA Law itself is silent on the matter, and the prescriptive periods under the TCC and
other revenue laws are inapplicable by specific mandate of Sec 17(1) of the EPZA Law. This does not
mean however, that the prescriptive period will not lie. The provisions on solution indebiti of the Civil
Code may find application. solutio indebitii is a quasi-contract, thus the claim for refund must be
commenced within six (6) years from date of payment pursuant to Art. 1145(2) of the New Civil
Code. (This is an isolated exemption to the 2-year prescriptive period for refund under the Tax
Code)

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76. X is a VAT registered taxpayer. It is engaged in export activities. The goods it produced were
actually exported abroad on August 24, 2012. All receipts and documents relative to the export
are intact and available. Thereafter, X applied for the refund of its unutilized creditable input
taxes. The BIR disallowed the claim for reason that the sales receipts of X did not indicate that
the transaction was a “Zero-rated Sales.” X contends that such requirement is not provided
under the Tax Code. Is the BIR’s disallowance valid? (Eastern Telecommunication Phils., Inc. vs.
CIR, August 12, 2012, Microsoft Phils., Inc., vs. CIR, April 67, 2011)

Answer. Sec. 244 of the Tax Code explicitly grants the Sec. of Finance the authority to promulgate
the necessary rules and regulations for the effective enforcement of the provisions of the Tax Code.
The invoicing requirements he set under RR No. 7-95 was integrated with Sec. 113 of the NIRC when
RA 9337 was adopted. Thus, the need for taxpayers engaged in export activities to indicate in their
receipts and invoices that fact that the sale is “zero-rated” is mandatory. Failure to comply will warrant
the disallowance for any claim for credit of unutilized input taxes. Hence, BIR is correct.

The SC ruled that the printing of the word “zero-rated” is required to be placed on VAT invoices
covering the zero-rated sales in order to be entitles to claim for tax credit or refund. This requirement
prevents buyers from falsely claiming input VAT from their purchases when no VAT is actually paid.
Absent of such word, the government may be refunding taxes it did not collect. (Microsoft Phils., Inc.,
vs. CIR, April 6, 2011, Panasonic vs. CIR)

77. X, is a VAT-registered businessman engage in export activities. X filed a claim for tax credit of
his unutilized input taxes within the reglamentary period. X has submitted all documents in
support of said claim. CIR denied his claim for reason that the word “Zero-Rated Sales” is not
duly imprinted in X’s sales invoices and receipts but was merely rubber stamped ion violation
of the invoicing requiring under the VAT law. Is the denial valid?

Answer. The words “Zero-Rated Sales” although merely stamped and not pre-printed in the sales
invoices and receipts constitutes sufficient compliance with law. Since the imprinting of the words
“ZRS” was required merely to distinguish sales subject to 12% VAT from those that are subject to 0%
VAT and exempt sales, to enable the BIR to properly implement and enforce the other VAT
provisions of the Tax Code. The CIR should not literally interpret the provisions of the Tax Code to
the extent of denial of taxpayer’s right when the later has proven compliance to all requisites of law.
(Toledo Power, Inc. vs. CIR, January 20, 2014)

78. X ceased business operations effective December 31, 2012. On July 1, 2013, it filed an
Application for Registration Update with the BIR. On July 7, 2013, it filed an administrative
claim for issuance of a Tax Credit Certificate (TCC) of its unutilized input VAT with the BIR.
The BIR denied the claim for being premature. Is the denial correct?

Answer. The administrative claim for issuance of TCC is prematurely filed since the effectivity date of
X’s formal cessation of business is reckoned from the first day of the following month, or on August 1,
2013, where the application for Registration Update was filed on July 1, 2013. (Associated Swedish
Steels Phils., Inc. vs. CIR, CTA EB case No. 854, August 23, 2012)

79. X, Y and Z formed a business partnership. It is a VAT-registered entity for tax purposes.
Today, the partners decided to cease operation due to poor business activities. After paying
creditors some goods are left. The partners distributed the remaining inventories among
themselves. Is there any tax implication under the given facts?

Answer. Retirement from or cessation of business with respect to inventories of taxable goods
(including capital goods) then existing, when distributed to the partners are considered liquidating
dividends to the partners, the value thereof is Vatable. The tax base shall be the acquisition cost or
current market price whichever is lower as determined by the CIR.

80. X is a foreign corporation not engaged in trade or business in the Philippines. Y is a PEZA
entity, Y leased machines from X to be used by it for animation production. Is VAT imposable
under the given facts?

Answer. Since X is a non-resident lessor and a non-VAT registered taxpayer, the rental fees paid by
Y to X shall be exempt from VAT rather than subject to VAT at zero percent.

81. X Corporation owns various used delivery vans and cars, office tables and computers.
Management decided to dispose all of it to be replaced with new ones. Is the sale of all pre-
owned properties to its employees exempt from business taxes?

Answer. Sec. 105 of the Tax Code would show that a transaction “in the course of trade or business”
includes “transactions incident thereto. Hence, an isolated transaction may be considered incidental

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 transaction that is VATABLE. (Mindanao II Geothermal Partnership vs. CIR, G.R. No. 193301, March
11, 2013)

REITERATION: On judicial claim of unutilized input taxes before the CTA. (120 + 30 Rule)

A. San Roque case. (CIR vs. San Roque Power Corporation, G. R. No. 1874875,
February 12, 2013)

On March 28, 2003, San Roque filed an amended quarterly VAT return for 2001 by increasing its
input VAT. It filed a claim for refund on the same day. Due of CIR’s inaction, it filed a Petition for
Review with the CTA on April 10, 2003.

Ruling. San Roque failed to comply with the 120-day waiting period which is mandatory and
jurisdictional, the time expressly given by law to the CIR to decide whether to grant or deny the claim.
In this case, San Roque did not wait for the expiration of the 120-day period. Without a decision on its
claim and still within the 120-day it filed its judicial claim before the CTA. It violated the doctrine of
exhaustion of administrative remedies and renders the petition premature and thus without a cause
of action, with the effect that CTA dies not acquire jurisdiction over its petition.

B. Taganito case. (Taganito Mining Corporation vs. CIR, G. R. No. 196113, February
12, 2013

Taganito filed a written claim for refund of input VAT on November 14, 2006. Ninety two (92) days
later, or on February 14, 2007, it filed a petition for Review with the CTA for reason of inaction on the
part of the CIR to resolve its claim

Ruling. Taganito’s claim was filed after BIR Ruling No. DA-489-03 dated December 10. 2003 was issued.
Taganito can claim that in filing its judicial claim prematurely without waiting for the 120-day period to
expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of said BIR
Ruling which shields the filing of its judicial claim before the CTA from the vice of prematurity. Claims
filed between December 10, 2003 – October 6, 2010 need not comply with the 120 +30 Rule because
of the Doctrine of Operative Facts.

C. Philex Mining case. (Philex Mining Corporation vs. CIR, G. R. No. 196113, February 12,
2013)

On October 21, 2005 Philex filed its original VAT Return for the third quarter of taxable year 2005
and amended the VAT Return for the same quarter on December 1, 2005. On March 20, 2006, Philex
filed its claim for tax credit. However, due to the CIR’s inaction on subject claim, Philex filed a Petition
for Review before the CTA on October 17, 2007 pursuant to Sections 112 and 229 of the Tax Code.

Ruling. Philex’es Vat claim was amended on December 1, 2005. Since no additional supporting
documents were submitted then the 120-day period to resolved commences to run from the filing of
the written claim. Since there was inaction on the part of the CIR, the 120-day period expired on June
1, 2006. Thereafter, Philex had 30 days or until February 1, 2006 to file its Judicial claim before the
CTA. It filed its claim only on October 17, 2007 which is way beyond the 30-day provided by law.
Thus, Philex’es claim is time barred.

82. Cite examples of acts of the CIR that may be considered as denial of the taxpayer’s protest?

Answer.
a) Final demand letter reiterating to the taxpayer the CIR’s demand to pay an assessment in lieu
of an answer to the protest. (CIR vs. Ayala Securities, 70 SCRA 204, Surigao Electric vs. CTA,
57 SCRA 523, Allied Bank vs. CIR, February 5, 2010)

b) Filing of a civil suit for collection of the deficiency tax in lieu of an answer to taxpayer’s protest.
(CIR vs. Union Shopping, May 21, 1990)

c) The issuance of a warrant of distraint and levy in lieu of an answer to taxpayer’s protest. (CIR
vs. Union Shopping, May 21, 1990)

d) Final notice before seizure to taxpayer in lieu of an answer to the protest. ( CIR vs. Isabela
Cultural Corp., July 11, 2001)

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83. What is a compromise penalty?

Answer. A taxpayer’s criminal liability from his violation of the pertinent provisions of the Tax Code
may be settled extra-judicially instead of the BIR instituting a criminal action in court against the
taxpayer. It is now a well settled doctrine that compromise penalty cannot be imposed or collected
without the agreement and conformity of the taxpayer. (CIR vs. UST, November 28, 1958, Wander
Mechanical Engineering Corp. vs. CTA, et. al., 64 SCRA 555). If an offer of compromise by the BIR is
rejected by the taxpayer, the CIR should file a criminal action if it believes that the taxpayer is
criminally liable for violation of the tax law as the only way to enforce a penalty. Thus, compromise
penalty is in lieu of a criminal prosecution. As penalty, it can be imposed only on a finding of criminal
liability. (CIR vs. Abad, 23 SCRA 1132)

84. X, the withholding agent of “R” Corporation remitted to the BIR taxes that were not equal to
what he had withheld. The BIR demanded immediate settlement inclusive of interest and
penalties. X’s financial position at the moment demonstrates a clear inability to pay the
assessment. May the CIR accept the compromise proposal offered by X?

Answer. No. The person who is constituted as the withholding agent holds the taxes in trust for the
government, he is merely a tax collector not a taxpayer, as such, the effects of the tax amnesty
granting lower rate to taxpayers does not apply to the withholding agent. As a withholding agent, X
has already collected the taxes for the government and has the obligation to remit the same to the
BIR. His inability to pay the tax withheld is not a ground for compromise since the withholding tax is
not a tax upon him but only a procedure for the collection of the tax. To hold otherwise would be to
enrich the withholding agent at the expense of both the taxpayer and the government.

85. On what grounds may the CIR abate or cancel internal revenue tax liabilities of a taxpayer?

Answer. Under Sec. 204(B), in relation to Secs. 7(c) and 290 of the Tax Code, the CIR has the
authority to abate or cancel internal revenue tax liabilities based on any of the following grounds:

a) The tax or any portion thereof appears to be unjustly or excessively assessed, or

b) The administration and collection costs involved do not justify the collection of the amount due.
(The cost of collection is more than the tax to be collected.)

0–0–0–0–0-0

READ topics on:

(a) ASSESSMENT AND COLLECTION.
(b) Taxpayers’ remedies (Administrative and judicial)
(C) Government’s tax remedies to enforce collection

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