1.

When President Duterte signed into law Republic Act No. 10963 otherwise known as Tax Reform for
Acceleration and Inclusion (TRAIN) Act, he exercised his veto power. Explain the Veto Power of the President
under the Constitution and how was it applied in the approval of the TRAIN Act. (5%)
Suggested Answer:
The veto power of the President is granted in the Constitution through Article VI, Section 27 (1). Generally,
when a President disapproves a bill, he or she exhibits such disapproval by executing a veto to invalidate the
whole law. The power must generally be exercised in its entirety.
However, an exception exists under Article VI, Section 27 (2) when the bill is an appropriation, revenue or tariff
bill. When any of these bills are involved, the President may execute a line or item veto. Such veto will not
invalidate the whole bill but only the particular item under consideration. The other items to which the President
does not object shall not be affected by this veto.
An example of this exercise can be seen in recent events. Republic Act 10963, also known as the Tax Reform
for Acceleration and Inclusion (TRAIN) law, was passed on Dec. 19, 2017. This law amended certain
provisions of the old tax law, the National Internal Revenue Code (NIRC).
The President rejected the line that reduced income tax rate of employees of regional headquarters, regional
operating headquarters, offshore banking units and petroleum service contractors and subcontractors as it was
violative of the Equal Protect Clause under the 1987 Constitution as well as the rule of equity and uniformity in
the application of the burden of taxation.
The President also vetoed the zero-rating of sales of goods and services to separate customs territory and
tourism enterprise zones, citing that it “goes against the principle of limiting the VAT [value-added tax] zero-
rating to direct exporters.”
Duterte likewise vetoed the exemption from percentage tax of gross sales and receipts not more than
P500,000 and the exemption of various petroleum products from excise tax when used as input, feedstock, or
as raw material in the manufacturing of petrochemical products, in the refining of petroleum products, or as
replacement fuel for natural gas fired combined cycle power plants, as such will result in unnecessary erosion
of revenues and would lead to abuse.
Finally, President Duterte also vetoed the provision involving earmarking of incremental tobacco taxes, as the
provision will effectively diminish the share of the health sector in the proposed allocation.

2.
a. What is a tax amnesty? (2.5%)
Suggested Answer:
Tax amnesty is defined as a measure that condones the liabilities incurred by a taxpayer due to his incorrect or
non-payment of taxes on condition that the tax filer complies with certain requirements (Yoingco, 1998). It is a
general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax law.
Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a
general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application.

b. Who has the power to grant a tax amnesty? (2.5%)

3.
Mission Hospital is registered as a proprietary non-profit hospital. It caters to both paying and non-paying
(ward) patients. The BIR assessed Mission Hospital for deficiency income taxes because when it derived
income from paying patients, it lost its character as a charitable organization thus subject to 30% regular
income tax. Mission Hospital filed an administrative protest assailing the assessment and claimed that as a
non-stock, non-profit charitable and social welfare organization under Section 30(E) and (G) of the 1997 NIRC,
as amended, it is exempt from paying income tax. Decide. (5%)
Suggested Answer:
CIR vs St. Luke’s
No. The Court finds that Mission Hospital is a corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively”
for charitable or social welfare purposes to be completely exempt from income tax. An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such
income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
Mission Hospital fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the
NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant
to its corporate purposes. Mission Hospital, as a proprietary non-profit hospital, is entitled to the preferential tax
rate of 10% on its net income from its for-profit activities.
Mission Hospital is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.

4.
Your balikbayan cousin, who works as a nurse in Canada, came to visit you for 6 months to do the following: a)
to sell her house in Manila and with the proceeds, purchase a farm lot in your province where she plans to
retire in 2010; b) to check on her dollar remittances to her savings account with Banco de Oro which she
opened when she left the country more than 5 years ago. Your cousin subsequently found a buyer for her
house, the actress Angel Locsin, and they immediately executed a deed of absolute sale duly notarized. A few
weeks after, your cousin told you about the unfortunate confrontation she had with Angel Locsin who
demanded for the return of her money because the Register of Deeds refused to transfer title to the house to
her name unless proof of payment of taxes from the sale was presented. Your cousin was also distraught to
find out that her savings account was being subjected to withholding tax. “Akala ko ba exempt fr om tax kaming
mga OFW?”, she asked you. What would be your reply?
Suggested Answer:
I would tell her that while OFW’s are not taxable on their income from sources without or outside the
Philippines, they are still taxable on their income from sources within the Philippines. The sale of her house,
being located in the Philippines, would bring about Philippine-sourced income which is subject to the 6%
capital gains tax on the sale or exchange of real property located in the Philippines, based on the gross selling
price or fair market value, whichever is higher. Likewise, since the savings account is maintained within the
Philippines with a local bank, the interest income she earns from it is Philippine sourced passive income
subject to the 20% final withholding tax.
5.
Chalap Food Corporation (CFC) incurred substantial advertising expenses in order to protect its brand
franchise for Chalap Ketchup, one of its main products. In its income tax return, CFC included the advertising
expenses as deduction from gross income, claiming it as an ordinary business expense. Is CFC correct?
SUGGESTED ANSWER:
No, CFC’s claim that the advertising expense is an ordinary business expense is not correct. Under the Law on
Income Taxation, advertising expenses the purpose of which is the protection of the 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, 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)]. Here the purpose of the advertising expenses incurred by CFC is the protection of its
brand franchise for Chalap Ketchup. Hence CFC’s claim is not correct.

6.
In January 2013, Abet opened a stock trading account with BPI Trade, a licensed Philippine Stock Exchange
stockbroker, and bought, through BPI Trade, 10,000 Bank of the Philippine Islands (BPI) shares at P80 per
share or a total of P800,000. BPI shares are listed and traded at the Philippine Stock Exchange (PSE). In
February 2015, the price of BPI shares at the PSE had risen to P100 per share. a) Abet sold the 10,000 BPI
shares at the PSE and received P1,000,000. Is Abet subject to income tax on the sale of his BPI shares? Is he
liable for any other tax and if so for how much? b) What if instead of selling the 10,000 BPI shares at the PSE,
Abet sold them directly to his friend Binny and received P1,000,000. Is Abet subject to income tax on the sale?
If so for how much?
SUGGESTED ANSWERS:
a) Abet is not subject to the income tax but to the percentage tax. Under the NIRC, sale of shares of stock
listed and traded through a local stock exchange is subject to the percentage tax of ½ of 1% of the gross
selling price. Here the BPI shares are listed and traded at the PSE, a local stock exchange. Hence the sale
thereof is subject to the percentage tax of ½ of 1% of the gross selling price of P1,000,000 or P5,000.
b) Yes is subject to income tax at 10% of the capital gain of P200,000 or P20,000. Under the NIRC, sale of
shares not sold through the stock exchange are subject to income tax of 10% of the capital gain where such
capital gain exceeds P100,000. Here the BPI shares were sold not through the stock exchange but directly to
the buyer Binny and the capital gain exceeded P100,000. Hence the capital gain is subject to income tax of
10% of P200,000 or P20,000.

7.
XYZ Company imported backhoe loaders. It recorded the purchase as a capital expenditure and treated the
backhoe loaders as capital goods. The corresponding input tax on this importation was recorded in full on the
date of purchase. It later on filed for a claim for refund on the full amount of input tax on this importation. Will
the claim for refund prosper? (5%)

8.
The Bureau of Customs issued a memorandum that all container vans stored and unclaimed in its warehouse
for a period of at least four years, shall be destroyed and sold as scrap regardless of contents. XYZ an
importer opposed the said memorandum on the ground that it is violative of due process clause under the
constitution. The BOC on the other hand claims that it is within its powers as provided in the TCC. Decide.
Suggested Answer:
I would decide in favor of XYZ. Under the Law on Taxation, the power of the Bureau of Customs’ power to
forfeit and consequently destroy goods in its warehouse is limited to goods which are prohibited and illegal per
se. There is no proof that the goods contained in the vans are illegal per se or prohibited per se. Hence, the
Bureau of Customs cannot exercise such power of outright forfeiture and destruction.

9.
Mang Gerry opened a small cafeteria in Diliman, Quezon City. His suppliers and customers are all local
residents of Diliman, Quezon City. Since he registered with the BIR as a VAT-taxpayer, Mang Gerry filed a
VAT return wherein he applied a transitional input tax credit. However, after one year of operations, Mang
Gerry had an unutilized transitional input tax credit. May Mang Gerry successfully ask for the refund or
issuance of a tax credit certificate for his unutilized transitional input taxes? If so, before what office should he
file his claim and within what period? (5%)
Suggested Answer:
No, he may not. The law permits the refund of unutilized creditable input VAT attributable to zero-rated sales
only, to the exclusion of transitional input VAT. Had his excess creditable input VAT arose from zero-rated
sale, not transitional input VAT, Mang Gerry would have been entitled to apply for the refund or tax credit
before the CIR within two years counted from the close of the taxable quarter when such zero-rated sale was
made. (Secs. 111 and 112, NIRC)

10.
What is the lifeblood theory in taxation? (5%)
Suggested Answer:
The lifeblood theory constitutes the theory of taxation, which provides that the existence of government is a
necessity; that government cannot continue without means to pay its expenses; and that for these means it
has a right to compel its citizens and property within its limits to contribute.
In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of the government and should
be collected without necessary hindrance. They are what we pay for a civilized society. Without taxes, the
government would be paralyzed for lack of motive power to activate and operate it. The government, for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the
people and enhance their moral and material values.