Training & Convention Division

University of the Philippines Law Center

SUGGESTED ANSWERS
to the
2018 BAR EXAMINATIONS IN
TAXATION LAW

KM Corporation, doing business in the City of Kalookan, has been a distributor

and retailer of clothing and household materials. It has been paying the City of
Kalookan local taxes based on Sections 15 (Tax on Wholesalers, Distributors or
Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City
(Code). Subsequently, the SangguniangPanglungsod enacted an ordinance
amending the Code by inserting Section 21 which imposes a tax on “Businesses
Subject to Excise, Value-Added and Percentage Taxes under the National
Internal Revenue Code (NIRC),” at the rate of 50% of 1% per annum on the
gross sales and receipts on persons “who sell goods and services in the course of
trade or business.” KM Corporation paid the taxes due under Section 21 under
protest, claiming that (a) local government units could not impose a tax on
businesses already taxed under the NIRC and (b) this would amount to double
taxation, since its business was already taxed under Sections 15 and 17 of the
Code.
(a) May local government units impose a tax on businesses already
subjected to tax under the NIRC? (2.5%)
SUGGESTED ANSWER:
Yes. Section 143 in relation to Section 151 of the Local Government
Code (LGC) provides for the power of cities to impose a local business tax,
and one of those which may be subjected to such tax are those businesses
that are subject to “excise tax, value-added tax or percentage tax” under the
NIRC, other than those specifically enumerated by the same provision.The
tax to be imposed by the city shall not exceed 2% of gross sales or gross
receipts of the preceding calendar year (Sec. 143(h), in relation to Sec. 151,
LGC).

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 (b) Does this amount to double taxation? (2.5%)

SUGGESTED ANSWER:
Yes. The three taxes are all in the nature of local business taxes on
wholesalers, retailers and service providers which are imposed by the same
taxing authority on the same subject matter for the same tax period; hence,
the elements of double taxation are present (Nursery Care Corporation v.
Anthony Acebedo, G.R. No. 180651, July 30, 2014).

ALTERNATIVE ANSWER:
Yes. Double taxation means taxing the same property twice when it
should be taxed only once; that is, “taxing the same person twice by the same
jurisdiction for the same thing”.

It is obnoxious when the taxpayer is taxed twice, when it should be

only once. In double taxation, which is otherwise described as “direct
duplicate taxation”, the two taxes must be imposed on the same subject
matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period, and the taxes must be of the
same kind or character.

Using the afore-mentioned test, there is indeed, double taxation since

KM Corporation is subjected to the taxes under both Sections 15 (Tax on
Wholesalers, Distributors or Dealers), 17 (Tax on Retailers) and 21 (tax on
Businesses Subject to Excise, Value-Added and Percentage Taxes under the
NIRC) of the Revenue Code of Kalookan City.These taxes are being
imposed: (1) on the same subject matter – the privilege of doing business in
Kalookan City; (2) for the same purpose – to make persons conducting
business within Kalookan City contribute to city revenues; (3) by the same
taxing authority – Kalookan City; (4) within the same taxing jurisdiction –
within the territorial jurisdiction of Kalookan City; (5) for the same taxing
periods – per calendar year; and (6) of the same kind or character – a local
business tax imposed on gross sales or receipts of the business (City of
Manila v. Coca-Cola Bottlers Philippines, Inc., G.R. No. 181845, August 4,
2009, 595 SCRA 299 and G.R. No. 167283, February 10, 2010, reiterated in
Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila, G.R.

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No. 181277, July 3, 2013, 700 SCRA 428, 439-442 both cited in Nursery Care
Corporation v. Acevedo, G.R. No. 180651, July 30, 2014).

II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in
architectural design, engineering, and construction work. Its principal office is
located in Makati City, but it has various infrastructure projects in the country
and abroad. Thus, KKI employs both local and foreign workers. The company
has adopted a policy that the employees’ salaries are paid in the currency of the
country where they are assigned or detailed.
Below are some of the employees of KKI. Determine whether the compensation
they received from KKI in 2017 is taxable under Philippine laws and whether
they are required to file tax returns with the Bureau of Internal Revenue (BIR).
(2% each)
(a) Kris Konejero, a Filipino accountant in KKI’s Tax Department in
the Makati office, and married to a Filipino engineer also working in
KKI;

SUGGESTED ANSWER:
Taxable.(Sec. 23 & 24(A), NIRC). Kris must file tax returns with the
BIR, unless she qualifies for substituted filing of income tax returns because
the tax was correctly withheld by the employer (Sec. 51(A)(2)(b), NIRC).

(b) Klaus Kloner, a German national who heads KKI’s Design

Department in its Makati office;
SUGGESTED ANSWER:
Taxable being an income earned by a resident alien from Philippine
sources (Sec. 23 & 24(A), NIRC). Klaus is required to file a tax return, unless
the compensation income from KKI is his only returnable income and the
withholding tax thereon was correctly withheld by his employer (Sec.
51(A)(2)(b), NIRC).

(c) KrisantoKonde, a Filipino engineer in KKI’s Design Department

who was hired to work at the principal office last January 2017. In April 2017,
he was assigned and detailed in the company’s project in Jakarta, Indonesia,
which project is expected to be completed in April 2019;

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SUGGESTED ANSWER:
His compensation from January 1 up to the time he left the Philippines
is taxable and he must file tax returns, unless the compensation income is his
only returnable income and the withholding tax thereon was correctly
withheld by KKI (Sec. 51(A)(2)(b), NIRC). The compensation for his services
abroad from the date of his actual assignment thereat up to the time of the
completion of the project is tax-exempt being an income from without
earned by a non-resident citizen (Sec. 23 and Sec. 42, NIRC). He is not
required to file a return for this income derived from without, because said
income is not subject to income tax in the Philippines (Sec. 23, NIRC).

(d) Kamilo Konde, Krisanto’s brother, also an engineer assigned to

KKI’s project in Taipei, Taiwan. Since KKI provides for housing and other basic
needs, Kamilo requested that all his salaries paid in Taiwanese dollars, be paid to
his wife in Manila in its Philippine Peso equivalent;
SUGGESTED ANSWER:
Not taxable and no need to file tax returns. Kamilo is a non-resident
citizen who is taxable only on income from within. Compensation for
services rendered outside of the Philippines is an income from without which
is not subject to the Philippine income tax (Sec. 23 and Sec. 42, NIRC).

(e) Karen Karenina, a Filipino architect in KKI’s Design Department

who reported back to KKI’s Makati office in June 2017 after KKI’s project in
Kuala Lumpur, Malaysia was completed.
SUGGESTED ANSWER:
Compensation from January 1 up to the time of her return in June
2017 is an income from without which is not taxable if received by a non-
resident citizen (Sec. 23 and Sec. 42, NIRC). Compensation from June 2017
to December 31, 2017 is an income from within and taxable to Karen who is
taxable on worldwide income from the time she regained the status of a
resident citizen and accordingly, must file returns to pay for the tax, unless
she is purely compensation income earner for which the withholding tax on
wages was correctly withheld by KKI (Sec 51(A)(2)(b), NIRC).

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 III

Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was
seconded to various KSI-affiliated corporations:
1. from 1999 to 2004 as Vice President of K-Gold Inc.,
2. from 2004 to 2007 as Vice President of KPB Bank;
3. from 2007 to 2011 as CEO of K-Com Inc.;
4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim
served as CEO for seven years until his retirement last December 12, 2017 upon
reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh
family and covered by a BIR-qualified multi employer-employee retirement plan
(MEERP), under which the employees may be moved around within the
controlled group (i.e., from one KSI subsidiary or affiliate to another) without
loss of seniority rights or break in the tenure. Kim was well-loved by his
employer and colleagues, so upon retirement, and on his last day in office, KSI
gave him a Mercedes Benz car worth PhP 5 million as a surprise, with a streamer
that reads: “You’ll be missed. Good luck, Sir Kim.”
(a) Are the retirement benefits paid to Kim pursuant to the MEERP
taxable? (2.5%)

SUGGESTED ANSWER:
(a) No. The recipient having served the group of companies covered by
the BIR-Qualified Retirement Plan for at least 10 years, not less than 50
years of age at the time of retirement and avails of the benefit only once, will
receive his retirement benefits tax-free (Sec. 32(B)(6)(a), NIRC).

(b) Which internal revenue tax, if any, will apply to the grant of the car
to Kim by the company? (2.5%)

SUGGESTED ANSWER:
It is subject to the income tax. The value of the Mercedes Benz car is
an income to Kim. It is in the nature of a compensatory gift which is
considered as income to the recipient. The car is in reality a recompense for
Kim’s past services. Compensation for services in whatever form paid is
part of gross income [Sec. 32(A)(1), NIRC; Commissioner v. Duberstein, 363
US 278 (1960)].

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ALTERNATIVE ANSWER:
The car was given on account of merits and the services he rendered to
KSI which do not constitute a demandable debt is renumeratory donation
and bsed on the generosity of KSI. It is a gift subject to donor’s tax,
provided Kim accepts the car (Art. 726, Civil Code).

IV

Years ago, Krisanto bought a parcel of land in Muntinlupa for only

PhP65,000. He donated the land to his son, Kornelio, in 1980 when the property
had a fair market value of PhP75,000, and paid the corresponding donor’s tax.
Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5 million and
paid the capital gains tax, documentary stamp tax, local transfer tax, and other
fees and charges. Katrina, in turn, donated the land to Klaret School last August
30, 2017 to be used as the site for additional classrooms. No donor’s tax was
paid, because Katrina claimed that the donation was exempt from taxation. At
the time of the donation to Klaret School, the land had a fair market value of PhP
65 million.
(a) Is Katrina liable for donor’s tax? (2.5%)

SUGGESTED ANSWER:
No. Donations in favor of an educational institution is exempt from
donor’s tax (Sec. 101, NIRC).

(b) How much in deduction from gross income may Katrina claim on
account of the said donation? (2.5%)

SUGGESTED ANSWER:
If Klaret School is an accredited non-government organization,
having been established as a non-profit domestic corporation, organized and
operated exclusively for educational purposes, the donation to it as a
qualified donee-institution is deductible in full (Sec. 34(H)(2)(c), NIRC).
The deduction from gross income shall be the acquisition cost of said
property by the donor which is P6.5 million (Sec. 34(H)(3), NIRC).

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ALTERNATIVE ANSWER:
Katrina may claim a deduction from her gross income an amount not
in excess of ten percent (10%) of her taxable income derived from trade,
business or profession as computed prior to the deduction of the value of the
donation made to Klaret School, and other charitable contributions that
may have been made by Katrina during the taxable year, after compliance
with the substantiation requirements (NIRC of 1997, Sec. 34 (H).

V
Spouses Konstantino and Korina are Filipino citizens and are principal
shareholders of a restaurant chain, Korina’s, Inc. The restaurant’s principal office
is in Makati City, Philippines.
Korina’s became so popular as a Filipino restaurant that the owners
decided to expand its operations overseas. During the period 2010-2015 alone, it
opened ten (10) stores throughout North America and five (5) stores in various
parts of Europe where there were large Filipino communities. Each store abroad
was in the name of a corporation organized under the laws of the state or country
in which the store was located. All stores had identical capital structures: 60% of
the outstanding capital stock was owned by Korina’s, Inc., while the remaining
40% was owned directly by the spouses Konstantino and Korina.
Beginning 2017, in light of the immigration policy enunciated by US
President Donald Trump, many Filipinos have since returned to the Philippines
and the number of Filipino immigrants in the US dropped significantly. On
account of these developments, Konstantino and Korina decided to sell their
shares of stock in the five (5) US corporations that were doing poorly in gross
sales. The spouses’ lawyer-friend advised them that they will be taxed 5% on the
first PhP100,000 net capital gain, and 10% on the net capital gain in excess of
PhP100,000.
Is the lawyer correct? If not, how should the spouses Konstantino and
Korina be taxed on the sale of their shares? (5%)

SUGGESTED ANSWER:
The lawyer’s advice is wrong. The capital gains tax of 5% for the first
P100,000 net capital gain, and 10% on the net capital gain in excess of
P100,000 applies only to the net capital gains realized from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation
(Sec. 24(C), NIRC). Since the shares of stock sold are shares of foreign
corporations held as capital assets, the recognized portion of the capital gain

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realized from the sale must be reported as part of their gross income in their
income tax returns where the taxable income will be subject to the
graduated income tax rates for individuals (Sec. 24(A)(1)(a) in relation to
Sec. 39, NIRC).

[Note: We suggest that the question be treated as a bonus question because of

the amendment of the tax regime under the TRAIN Law. The 5% and 10% on
net capital gain will no longer apply when the Bar Examination takers become
practising lawyers].

VI
Kria, Inc., a Korean corporation engaged in the business of manufacturing
electric vehicles, established a branch office in the Philippines in 2010. The
Philippine branch constructed a manufacturing plant in Kabuyao, Laguna, and
the construction lasted three (3) years. Commercial operations in the Laguna
plant began in 2014.
In just two (2) years of operation, the Philippine branch had remittable
profits in an amount exceeding 175% of its capital. However, the head office in
Korea instructed the branch not to remit the profits to the Korean head office
until instructed otherwise. The branch chief finance officer is concerned that the
BIR might hold the Philippine branch liable for the 10% improperly accumulated
earnings tax (IAET) for permitting its profits to accumulate beyond reasonable
business needs.
(a) Is the Philippine branch of Kria subject to the 10% IAET under the
circumstances stated above? (2.5%)
SUGGESTED ANSWER:
No. The IAET will not apply to a branch of a foreign corporation, it
being a Resident Foreign Corporation (RR No. 2-2001). The IAET applies
only to Domestic Corporations which permits their profits to accumulate
beyond its reasonable business needs, instead of being distributed as
dividends.

(b) Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)

SUGGESTED ANSWER:

No. It will be subject to BPRT only when actual or constructive

remittance of branch profits is made. The law provides that any profits

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remitted by a branch to its head office shall be subject to the BPRT (Sec.
28(A)(5), NIRC; Bank of America v. CA, G.R. No. 103092, July 21, 1994).

VII
Karissa is the registered owner of a beachfront property in Kawayan,
Quezon which she acquired in 2015. Unknown to many, Karissa was only
holding the property in trust for a rich politician who happened to be her lover. It
was the politician who paid for the full purchase price of the Kawayan property.
No deed of trust or any other document showing that Karissa was only holding
the property in trust for the politician was executed between him and Karissa.
Karissa died single on May 1, 2017 due to a freak surfing accident. She left
behind a number of personal properties as well as real properties, including the
Kawayan property. Karissa’s sister, Karen, took charge of registering Karissa’s
estate as a taxpayer and reporting, for income tax and VAT purposes, the rental
income received by the estate from real properties. However, it was only on
October 1, 2017 when Karen managed to file an estate tax return for her sister’s
estate. The following were claimed as deductions in the estate tax return:
1. Funeral expenses amounting to PhP 250,000;
2. Medical expenses amounting to PhP 100,000, incurred when Karissa
was hospitalized for pneumonia a month before her death; and
3. Loss valued at PhP 6 million, arising from the destruction of Karissa’s
condominium unit due to fire which occurred on September 15, 2017.
(a) Should the beachfront property be included in Karissa’s gross
estate? (2.5%)
SUGGESTED ANSWER:
Yes. The property is registered in the name of the decedent, so it’s a
property owned by her as of the time of death which must properly be
included as part of her gross estate. The extent of her interest in the
property, which is full ownership, must form part of her gross estate (Sec.
85(A), NIRC).

(b) Are the claimed deductions proper? (2.5%)

SUGGESTED ANSWER:
The claim of funeral expenses amounting to P250,000 is improper
being excessive in amount. The amount allowable as deduction for funeral
expenses is actual funeral expenses or 5% of the gross estate, whichever is

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lower, but in no case shall it exceed P200,000 (Sec. 86(a)(1)(a), NIRC). The
law allows the claim of medical expenses within one year prior to the
decedent’s death in an amount not exceeding P500,000. Since the amount
claimed as deduction was only P100,000 and was incurred within one month
from death, it constitutes a proper deduction (Sec. 86(A)(6), NIRC).
Likewise, the loss incurred during the settlement of the estate (after death)
but not beyond the last day prescribed by law for payment of the estate tax
(6 months from date), is a proper deduction from the gross estate, provided,
it is not compensated by insurance and not claimed as deduction for income
tax purposes. (Sec. 86(A)(1)(e), NIRC)

[Note: We suggest full credit be given for any answer. Exclude the question
on deduction. The provisions were amended by the TRAIN Law and is no
longer relevant to new entrants of the profession].

VIII
Upon the death of their beloved parents in 2009, Karla, Karlo, and Karlie
inherited a huge tract of farm land in Kanlaon City. The siblings had no plans to
use the property. Thus, they decided to donate the land, but were not sure to
whom the donation should be made. They consult you, a well-known tax law
expert, on the tax implications of the possible donations they plan to make, by
giving you a list of the possible donees:
1. The Kanlaon City High School Alumni Association (KCHS AA),
since the siblings are all alumni of the same school and are active
members of the organization. KCHS AA is an organization
intended to promote and strengthen ties between the school and its
alumni;
2. The Kanlaon City Water District which intends to use the land for its
offices; or
3. Their second cousin on the maternal side, Kikay, who serves as the
caretaker of the property.
Advise the siblings which donation would expose them to the least tax
liability. (5%)

SUGGESTED ANSWER:
I would advise them that the proposed donation to Kanlaon City
Water District, a government entity, will be exempt from donor’s tax, hence,

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would expose the siblings to the least donor’s tax liability (Sec. 101(A)(2),
NIRC). Donation to KCHS AA and donation to Kikay, the siblings’ second
cousin, are both donations to strangers, which will expose them to a donor’s
tax of 30% based on the fair market value of the property to be donated
(Sec. 99(B), NIRC).

[Note: The group suggests that any answer be given full credit. The provisions
were amended by the TRAIN Law].

IX
Karlito, a Filipino businessman, is engaged in the business of metal
fabrication and repair of LPG cylinder tanks. He conducts business under the
name and style of “Karlito’s Enterprises,” a single proprietorship. Started only
(5)years ago, the business has grown so enormously that Karlito decided to
incorporate it by transferring all the assets of the business, particularly the
inventory of goods on hand, machineries and equipment, supplies, parts, raw
materials, office furniture and furnishings, delivery trucks and other vehicles,
buildings, and tools to the new corporation, Karlito’s Enterprises, Inc., in
exchange for 100% of the capital stock of the new corporation, the stock
subscription to which shall be deemed fully paid in the form of the assets
transferred to the corporation by Karlito.
As a result, Karlito’s Enterprises, the sole proprietorship, ceased to do
business and applied for cancellation of its BIR Certificate of Registration.
The BIR, however, assessed Karlito VAT on account of the cessation of
business based on the current market price of the assets transferred to Karlito’s
Enterprises, Inc.
(a) Is the transfer subject to VAT? (2.5%)
SUGGESTED ANSWER:
Yes, the transfer of properties is subject to VAT, but only if Karlito is
VAT-registered or VAT registerable person. The transaction is a taxable
exchange involving properties which are for sale or for use in the course of
trade or business (Sec. 105, NIRC; Sec. 4.106-8, RR No. 16-2005).

ANOTHER ANSWER:
Yes, the same is subject to VAT as “transaction deemed sale” due to
retirement from or cessation of business with respect to all goods on hand,
whether capital goods, stock-in-trade, et.al., such as in the case of a change

11
of ownership of business when a sole proprietorship incorporates (Section
106 (B)4, NIRC, in relation to Section 4.106-7 (a)(4)(i), RR No. 16-2005).

[Note: We suggest that any answer should be given full credit. (1) The
exchange of property for shares of stock resulting to corporate control is
rendered exempt from VAT under Section 109(X), NIRC, as amended by
TRAIN Law. (2) It is confusing to the bar candidates on whether it is subject to
VAT due to the actual exchange or due to cessation of the business. While they
might be inclined to consider the transaction as a deemed-sale in view of the
cessation of business and eventual cancellation of Certificate of Registration, it
must be noted that at the time of cessation, the inventory of properties is no
longer with Karlito as an actual exchange took place before he retired from
business.]

(b) Is the transfer subject to income tax? (2.5%)

SUGGESTED ANSWER:
No. The same is considered as tax-free exchange where no gain or loss
shall be recognized in a transfer of property to a corporation by a person in
exchange for stock or unit of participation in such corporation of which as a
result of such exchange Karlito gained control of said corporation (Section
40(C)(2), NIRC).

X
Klaus, Inc., a domestic, VAT-registered corporation engaged in the land
transportation business, owns a house and lot along Katipunan St., Quezon City.
This property is being used by Klaus, Inc.’s president and single largest
shareholder, Atty. Krimson, as his residence. No business activity transpires
there except for the company’s Christmas party which is held there every
December. Atty. Krimson recently grew tired of the long commute from
Katipunan to his office in Makati City and caused the company to sell the house
and lot. The sale was recorded in the books of Klaus, Inc. as investment in real
property.
(a) Is the sale of the said property subject to VAT? (2.5%)
SUGGESTED ANSWER:
Yes. The real property sold is used in trade or business since it is
utilized to extend a fringe benefit, free use of housing unit, to the president

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of Klaus, Inc. It is considered as a transaction incidental to the VAT-
registered business of the seller (Mindanao Geothermal II v. CIR, G.R. No.
193301, March 11, 2013).

(c) Is the sale subject to 6% capital gains tax or regular corporate

income tax of 30%? (2.5%)

SUGGESTED ANSWER:
The property used in trade or business is not a capital asset but an
ordinary asset; hence, the gain from the sale will be subject to the regular
corporate income tax of 30%.

XI
Koko’s primary source of income is his employment with the government.
He earns extra from the land he inherited from his parents, and which land he has
been leasing to a private, non-stock, non-profit school since 2005.
Last January, the school offered to buy the land from Koko for an amount
equivalent to its zonal value plus 15% of such zonal value. Koko agreed but
required the school to pay, in addition to the purchase price, the 12% VAT. The
school refused Koko’s proposal to pass on the VAT contending that it was an
entity exempt from such tax. Moreover, it said that Koko was not regularly
engaged in the real estate business and, therefore, was not subject to VAT.
Consequently, Koko should not charge any VAT to the school.
(a) Is the contention of the school correct? (2.5%)
SUGGESTED ANSWER:
No. The exemption of the buyer pertains only to taxes for which it is
legally liable but not to taxes passed-on to it. The VAT is not a tax on the
buyer but merely considered as part of the purchase price. Accordingly, if
the sale is subject to VAT, the tax-exempt buyer cannot invoke its exemption
in order to avoid the imposition of the VAT on the transaction. Be that as it
may, the transaction will be subject to VAT only if Koko is either (1) VAT-
registered or (2) VAT-registerable person at the time of sale; otherwise, the
sale of the rented property will not be subject to VAT.

(b) Will your answer be the same if Koko signed up as a VAT-

registered person only in 2017? (2.5%)

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SUGGESTED ANSWER:

Yes. All transactions involving real property for sale or for lease in the
course of trade or business by VAT-registered person will be subject to
VAT(Sec. 106(A)(1)(a). Since the sale will take place at a time when the
seller is already VAT-registered, the sale is subject to VAT.

XII
The BIR Commissioner, in his relentless enforcement of the Run After Tax
Evaders (RATE) program, filed with the Department of Justice (DOJ) charges
against a movie and television celebrity. The Commissioner alleged that the
celebrity earned around PhP 50 million in fees from product endorsements in
2016 which she failed to report in her income tax and VAT returns for said year.
The celebrity questioned the proceeding before the DOJ on the ground that
she was denied due process since the BIR never issued any Preliminary
Assessment Notice (PAN) or a Final Assessment Notice (FAN), both of which
are required under Section 228 of the NIRC whenever the Commissioner finds
that proper taxes should be assessed.
Is the celebrity’s contention tenable? (2.5%)
SUGGESTED ANSWER:
No. In cases where a fraudulent return is filed with the intent to evade
a tax, a proceeding in court for the collection of such tax maybe filed without
assessment (Sec. 222(a), NIRC). Assessment is not necessary before the filing
of a criminal complaint for tax evasion (CIR v. Pascor Realty and
Development Corp., G.R. No. 128315, June 29, 1999).

XIII
The Collector at the Port of Koronadal seized 100 second-hand right-hand
drive buses imported from Japan. He issued warrants of distraint and scheduled
the vehicles for auction sale. Kamilo, the importer of the second-hand buses,
filed a replevin suit with the Regional Trial Court (RTC). The RTC granted the
replevin upon filing of a bond.
Did the RTC err in granting the replevin? (2.5%)
SUGGESTED ANSWER:
Yes. The RTC erred in granting the replevin. The Collector of
Customs has primary and exclusive jurisdiction in seizure cases. Such

14
exclusive jurisdiction precludes the regular courts from taking cognizance of
the subject matter and divests such courts of the prerogative to replevin
property subject to seizure and forfeiture proceedings for violation of the
Tariff and Customs Code (Collector v. Villaluz, L-34038, June 18, 1976; 71
SCRA 356).

XIV
The City of Kabankalan issued a notice of assessment against KKK, Inc.
for deficiency real property taxes for the taxable years 2013 to 2017 in the
amount of PhP 20 million. KKK paid the taxes under protest and instituted a
complaint entitled “Recovery of Illegally and/or Erroneously-Collected Local
Business Tax, Prohibition with Prayer to Issue TRO and Writ of Preliminary
Injunction” with the RTC of Negros Occidental.
The RTC denied the application for TRO. Its motion for reconsideration
having been denied as well, KKK filed a petition for certiorari with the Court of
Appeals (CA) assailing the denial of the TRO.
Will the petition prosper? (5%)
SUGGESTED ANSWER:
No. The Court of Appeals (CA) has no jurisdiction over the case
considering that it is the CTA which has exclusive appellate jurisdiction over
cases involving local taxes decided by RTC in the exercise of latter’s original
jurisdiction.

The power of the CTA includes that of determining whether or not

there has been grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the RTC in issuing an interlocutory order in cases
falling within the exclusive appellate jurisdiction of the tax court. It, thus,
follows that it is the CTA, by constitutional mandate, which is vested with
jurisdiction to issue writs of certiorari in these cases (Philam Life v. Secretary
of Finance, G.R. No. 210987, November 24, 2014); hence, the petition filed
with the CA will not prosper.

XV
In 2015, Kerwin bought a three-story house and lot in Kidapawan, North
Cotabato. The property has a floor area of 600 sq.m. and is located inside a gated
subdivision. Kerwin initially declared the property as residential for real property
tax purposes.

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 In 2016, Kerwin started using the property in his business of
manufacturing garments for export. The entire ground floor is now occupied by
state-of-the-art sewing machines and other equipment, while the second floor is
used as offices. The third floor is retained by Kerwin as his family’s residence.
Kerwin’s neighbors became suspicious of the activities going on inside the
house, and they decided to report it to the Kidapawan City Hall. Upon
inspection, the local government discovered that the property was being utilized
for commercial use. Immediately, the Kidapawan Assessor reclassified the
property as commercial with an assessment level of 50% effective January 2017,
and assessed Kerwin back taxes and interest. Kerwin claims that only 2/3 of the
building was used for commercial purposes since the third floor remained as
family residence. He argues that the property should have been classified as
partly commercial and partly residential.
(a) Is the Kidapawan assessor correct in assessing back taxes and
interest? (2.5%)
SUGGESTED ANSWER:
No. The assessor cannot assess back taxes and interest. Since this
involves a reassessment of real property due to a major change in its actual
use, the same cannot be given a retroactive effect. The reassessment shall
only be effective at the beginning of the quarter next following the
reassessment (Sec. 221, LGC).

(b) Is Kerwin correct that only 2/3 of the property should be considered
commercial? (2.5%)
SUGGESTED ANSWER:
Yes. The property must be classified, valued and assessed on the
basis of its actual use regardless of where located, whoever owns it, and
whoever uses it (Sec. 217, LGC).

ALTERNATIVE ANSWER:
No. One of the fundamental principles in the appraisal, assessment,
levy and collection of real property tax under Section 198 of the LGC is that
the real property shall be classified for assessment purposes on the basis of
its actual use. Section 199 of the LGC defines “actual use” as referring to the
purpose for which the property is principally or predominantly utilized by
the person in possession thereof. Hence, considering that, as admitted by
Kerwin, 2/3 of the property is used for commercial purposes, the entire
property must be classified as “commercial” for real property tax purposes.

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 (c) If Kerwin wants to file an administrative protest against the
assessment, is he required to pay the assessment taxes first? With
whom shall the protest be filed and within what period? (2.5%)
SUGGESTED ANSWER:
(a) Yes. No protest shall be entertained unless Kerwin first pays the
tax. The words “paid under protest” must be annotated on the tax receipts
issued by the treasurer. The protest in writing must be filed with the
treasurer within 30 days from payment of the tax (Sec. 252, LGC).

XVI
In an action for ejectment filed by Kurt, the lessor-owner, against Kaka,
the lessee, the trial court ruled in favor of Kurt. However, the trial court first
required Kurt to pay the realty taxes due on the property for 2016 before he may
recover possession thereof.
Kurt objected, arguing that the delinquent realty taxes were never raised as
an issue in the ejectment case. At any rate, Kurt claimed that it should be Kaka
who should be made liable for the realty taxes since it was Kaka who possessed
the property throughout 2016.
Is Kurt correct in resisting the trial court’s requirement to pay the taxes
first? (2.5%)
SUGGESTED ANSWER:
No. The Court may require the payment of delinquent real property
taxes before ruling on the ejectment case. The law provides that in any
action involving the ownership or possession of, or succession to, real
property, the Court may, motu proprio upon representation of the local
treasurer, award such ownership, possession or succession to any party to
the action upon payment to the court of the taxes with interest due on the
property (Sec. 268, LGC). Kurt cannot invoke the possession by Kaka in
order to escape payment, because the delinquent real property tax is a lien
on the property superior to all liens (Sec. 257, LGC).

XVII
Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization
which owns a vast tract of land in Kalinga.
KKI has devoted 1/2 of the land for various uses: a church with a cemetery
exclusive for deceased priests and nuns, a school providing K to 12 education,

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and a hospital which admits both paying and charity patients. The remaining 1/2
portion has remained idle.
The KKI Board of Trustees decided to lease the remaining 1/2 portion to a
real estate developer which constructed a community mall over the property.
Since the rental income from the lease of the property was substantial, the
KKI decided to use the amount to finance (1) the medical expenses of the charity
patients in the KKI Hospital and (2) the purchase of books and other educational
materials for the students of KKI School.
(a) Is KKI liable for real property taxes on the land? (2.5%)

SUGGESTED ANSWER:
Yes, but only on the leased portion. Article VI, Section 28(3) of the
1987 Constitution provides that “charitable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational purposes shall
be exempt from taxation”. The test of exemption from taxation is the use of
the property for purposes mentioned in the Constitution. The leased portion
of the land may be subject to real property tax since such lease is for
commercial purposes, thereby, removing the asset from the property tax
exemption granted under the Constitution (CIR v. De La Salle University,
Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016).

(b) Is KKI’s income from the rental fees subject to income tax? (2.5%)
SUGGESTED ANSWER:
Yes. Despite falling under the organizations enumerated under Section
30 of the NIRC, the last paragraph of the same provision makes KKI’s
income of whatever kind and character from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of the
disposition made of such income, subject to income tax (Sec. 30, NIRC last
paragraph).

XVIII
Kathang Isip, Inc. (KII) is a domestic corporation engaged in the business
of manufacturing, importing, exporting, and distributing toys both locally and
abroad. Its principal office is located in Kalookan City, Philippines. It has 50

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branches in different cities and municipalities in the country. When KII applied
for renewal of its mayor’s permit and licenses in its principal office in January
this year, Kalookan City demanded payment of the local business tax on the basis
of the gross sales reported by the corporation in its audited financial statements
for the preceding year. KII protested, contending that Kalookan City may tax
only the sales consummated by its principal office but not the sales consummated
by its branch offices located outside Kalookan City.
When Kalookan City denied the protest, KII engaged the services of Atty.
Kristeta Kabuyao to file the necessary judicial proceedings to appeal the decision
of Kalookan City. Atty. Kabuyao is a legal expert, but resides in Kalibo, Aklan
where her husband operates a resort. She, however, practices in Metro Manila,
including Kalookan City. The counsel representing the city, in the case filed in
Kalookan City by KII, questioned the use of Atty. Kabuyao’s Professional Tax
Receipt (PTR) issued in Aklan for a case filed in Kalookan City.
(a) Is KII’s contention that Kalookan City can only collect local
business taxes based on sales consummated in the principal office
meritorious? (2.5%)
SUGGESTED ANSWER:
Yes. Section 150 of the Local Government Code (LGC) provides that
for purposes of collection of taxes on business, when the taxpayer is
operating a branch or sales outlet elsewhere, the tax on the sales made
therein shall accrue and shall be paid to the city or municipality where such
branch or sales outlet is located.

(b) Is the Kalookan City counsel correct in saying that Atty. Kabuyao’s
PTR issued in Aklan cannot be used in Kalookan? (2.5%)
SUGGESTED ANSWER:
No. As provided under Section 139 of the LGC, payment of Atty.
Kabuyao of her PTR in Aklan entitles her to practice her profession in any
part of the Philippines.

XIX
The BIR assessed Kosco, Inc., an importer of food products, deficiency
income and value-added tax, plus 50% surcharge after determining that Kosco
Inc. had under-declared its sales by an amount exceeding 30% of that declared in
its income tax and VAT returns. Kosco denied the alleged under-declaration,
protested the deficiency assessment for income and value-added taxes and
challenged the imposition of the 50% surcharge on the ground that the surcharge
may only be imposed if Kosco Inc. fails to pay the deficiency taxes within the
time prescribed for their payment in the notice of assessment.

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 (a) Is the imposition of the 50% surcharge proper? (2.5%

SUGGESTED ANSWER:
Yes. As provided under Section 248(B) of the NIRC, 50% surcharge
on tax or on deficiency tax is also imposable in case a false or fraudulent
return is willfully made. Further, failure to report sales, receipts or income
in an amount exceeding 30% of that declared per return constitutes
substantial underdeclaration of sales and is prima facie evidence of a false or
fraudulent return. If not controverted, Kosco, Inc.’s underdeclaration of
sales is considered substantial as to consider the tax returns it filed as
falsified or fraudulent; hence, the imposition of 50% surcharge is proper.

(b) If your answer to (a) is yes, may Kosco enter into a compromise
with the BIR for reduction of the amount of surcharge to be paid?
(2.5%)
SUGGESTED ANSWER:
No. Surcharge is in the nature of a penalty, and not an internal
revenue tax that may be subject to compromise, pursuant to Section 204 of
the NIRC.

XX
Krisp Kleen, Inc. (KKI) is a corporation engaged in the manufacturing and
processing of steel and its by-products. It is both registered with the Board of
Investments, with a pioneer status, and with the BIR as a VAT entity. On
October 10, 2010, it filed a claim for refund/credit of input VAT for the period
January 1 to March 31, 2009 before the Commissioner of Internal Revenue
(CIR). On February 1, 2011, as the CIR had not yet made any ruling on its claim
for refund/credit, KKI, fearful that its period to appeal to the courts might
prescribe, filed an appeal with the Court of Tax Appeals (CTA).
(a) Can the CTA act on KKI’s appeal? (2.5%)
SUGGESTED ANSWER:
No. Pursuant to the pronouncement made the Supreme Court in the
case of Commissioner of Internal Revenue v. Aichi Forging Company of Asia,
Inc. (G.R. No. 184823, February 12, 2013), the observance of the “120+30-
day” period is jurisdictional. Now, counting 120 days from October 10, 2010,
the last day for the CIR to act on the claim for refund/credit fell on
February 7, 2011, thus making the February 1, 2011 filing premature.

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 (b) Will your answer be the same if KKI filed its appeal on March 20,
2011 and CIR had not yet acted on its claim? (2.5%)
SUGGESTED ANSWER:
Yes. The filing on March 20, 2011 is still not compliant with the
“120+30-day” rule. As mentioned, the CIR has until February 7, 2011 to
decide on the claim for refund/credit of input VAT. After the lapse of the
120-day period, the taxpayer-claimant has 30 days to file an appeal before
the CTA. In the present case, KKI had until March 9, 2011 to file the appeal
based on a deemed adverse decision on the claim for refund/credit; hence,
the filing on March 20, 2011 was belatedly done, and the CTA has no
jurisdiction over such claim for refund/credit.

-NOTHING FOLLOWS-

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