2019

A.2.

For purposes of value-added tax, define, explain or distinguish the following terms:

a) Input tax and output tax (3%)

Input tax or input vat are tax imposed on purchases of services or goods and importation of goods and capital
while output tax or output vat are tax imposed on sales of goods and services.

(b) Zero-rated and effectively zero-rated transactions (3%)

Effectively zero-rated sale of services refer to the sale of services by a VAT registered person to a person or entity
who was granted indirect tax exemption under special laws or international agreements.

For a “zero-rated good,” the government doesn't tax its retail sale but allows credits for the value-added tax (VAT)
paid on inputs

(c) Destination principle (3%)

Destination principle refers to goods and services which shall be subject to VAT at the place where they consumed
or rendered.

A.3.

All the homeowners belonging to ABC Village Homeowners' Association elected a new set of members of the Board
of Trustees for the Association effective January 2019. The first thing that the Board looked into is the need to
increase the prevailing association dues. Mr. X, one of the trustees, proposed an increase of 100% to account for
the payment of the 12% value-added tax (VAT) on the association dues which were being collected for services
allegedly rendered "in the course of trade or business" by ABC Village Homeowners' Association.

(a) What constitutes transactions done "in the course of trade or business" for purposes of
applying VAT? (2%)

Under the Tax Code, the term “in the course of trade or business” is defined as the regular conduct or pursuit of
a commercial or an economic activity, including transactions incidental thereto, by any person regardless of
whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members or their guests), or government
entity.

(b) Is Mr. X correct in stating that the association dues are subject to VAT? Explain. (3%)

Association dues, membership fees and other charges collected by home-owners associations are now exempt
from VAT.

A.4.

Due to rising liquidity problems and pressure from its concerned suppliers, P Corp. instituted a flash auction sale
of its shares of stock. P Corp. was then able to sell its treasury shares to Z, Inc., an unrelated corporation, for
Pl,000,000.00, which was only a little below the valuation of P Corp. 's shares based on its latest audited financial
statements. In connection therewith, P Corp. sought a Bureau of Internal Revenue ruling to confirm that,
notwithstanding the price difference between the selling price of the shares and their book value, the said
transaction falls under one of the recognized exemptions to donor's tax under the Tax Code.

(a) Cite the instances under the Tax Code where gifts made are exempt from donor's tax.
(3%)

1. Gifts made to or for the use of the National Government or any entity created by any of its agencies
which is not conducted for profit, or to any political subdivision of the said Government; and
2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited non-government organization, trust or philanthropic organization or research
institution or organization: Provided, however, not more than 30% of said gifts will be used by such
donee for administration purposes.
 (b) Does the above transaction fall under any of the exemptions? Explain. (2%)

A.5.

A, a resident Filipino citizen, died in December 2018. A's only assets consist of a house and lot in Alabang, where
his heirs currently reside, as well as a house in Los Angeles, California, USA. In computing A's taxable net estate,
his heirs only deducted: 1. ₱10,000,000.00 constituting the value of their house in Alabang as their family home;
and 2. ₱200,000.00 in funeral expenses because no other expenses could be substantiated.

(a) Are both deductions claimed by A's heirs correct? Explain. (2%)

No, Funeral expenses can no longer be claimed as deductions due to passage of TRAIN law. However, A’s heirs
can claim family home as deduction on its property located at Alabang.

(b) May a standard deduction be claimed by A's heirs? If so, how much and what proof needs
to be presented for the same to be validly made? (2%)

Yes. A standard deduction equivalent to 5M can be validly claimed without need to present any documentary
evidence.

(c) In determining the gross estate of A, should the heirs include A's house in Los Angeles,
California, USA? Explain. (2%)

Yes, the gross estate of a resident citizen shall include all properties, wherever situated.

A.10.

In 2018, City X amended its Revenue Code to include a new provision imposing a tax on every sale of merchandise
by a wholesaler based on the total selling price of the goods, inclusive of value-added taxes (VAT). ABC Corp., a
wholesaler operating within City X, challenged the new provision based on the following contentions: 1. the new
provision is a form of prohibited double taxation because it essentially amounts to City X imposing VAT which was
already being levied by the national government; and 2. since the tax being imposed is akin to VAT, it is beyond
the power of City X to levy the same

Rule on each of ABC Corp.'s contentions. (5%)

B.19.

On May 10, 2011, the final withholding tax for certain income payments to W Corp. was withheld and remitted to
the Bureau of Internal Revenue (BIR), and the corresponding return therefor was concomitantly filed on the same
date. Upon discovering that the amount withheld was excessive, W Corp. filed with the BIR a claim for refund for
erroneously withheld and collected final withholding income tax on May 3, 2013. A week after, and without waiting
for any decision from the Commissioner of Internal Revenue (CIR), W Corp. filed a petition for review before the
Court of Tax Appeals (CTA) to make sure that the petition was filed within the two (2)-year period for claiming
refunds.

In resisting the claim, the BIR contended that the claim must be dismissed by the CT A on the ground of non-
exhaustion of administrative remedies because it did not give the CIR the opportunity to act on the claim of refund.

(a) Is the BIR's contention meritorious? Explain. (2.5%)

NO, see CBK Power Co. Limited v. CIR (G.R. Nos. 193383-84, 193407-08, January 14, 2015)

(b) Assuming that the claim for refund filed by W Corp. is for excess and/or unutilized input
VAT for the second quarter of 2011, and for which the return was timely filed on July 25,
2011, would your answer be the same? Explain. (2.5%)
No, 120+30-day period rule is mandatory and jurisdictional. filing of judicial claim within the 120-day period is
premature (see San Roque case), except when the filing was made on December 10, 2003 to October 5, 2010, the
effective date of BIR Ruling No. DA-489-03. (CIR v. Toledo Power Co., G.R. No. 196415, December 02, 2015).

2018

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%)

It is not subject to donor's tax because donation to an educational institution is exempted by law provided that not
more than 30% of said amount is used for administrative purposes.

Another answer:

Yes. Sec 101 (a) (3) – Exempt from donor’s tax: Gifts in favor of an educational and/or charitable, religious, cultural
or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization: Provided, however, That not more than thirty percent (30%)
of said gifts shall be used by such donee for administration purposes.

For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited
nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a
school, college or university and/or charitable corporation, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no
dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees
or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.

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

Deductible amount is P6.5 million only. Donations and/or contributions made to qualified donee institutions
consisting of property other than money shall be based on the acquisition cost of the property. The donor is not
entitled to claim as full deduction the fair market value/zonal value of the lot donated. Section 34 (H), NIRC

Another answer:

None. Sec 34 (H)(1)- Contributions or gifts actually paid or made within the taxable year to, or for the use of the
Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public
purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious,
charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to nongovernment organizations, in accordance with rules and
regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the
net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of
ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's
taxable income derived from trade, business or profession as computed without the benefit of this and the following
subparagraphs.

Here, the donee is not qualified and thus, no deduction from gross income is allowed.
 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 PhP250,000;

2. Medical expenses amounting to PhP100,000, incurred when Karissa was hospitalized for pneumonia a
month before her death; and

3. Loss valued at PhP6 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%)

Yes. Sec 90 (A) - …the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or regardless
of the gross value of the estate, where the said estate consists of registered or registrable property… Gross estate
includes registrable properties.

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

Sec 86: Deductions from gross estate:

1. Expenses, losses, indebtedness, and taxes (ELIT):

a. Actual Funeral expenses - The amount deductible shall be the actual funeral expenses or 5% of
the gross estate, whichever is lower, and must not exceed P200,000.
b. Judicial expenses for testamentary or intestate proceedings
c. Claims against the estate
d. Claims against insolvent persons included in the gross estate
e. Unpaid mortgages or indebtedness upon the property
f. Losses incurred during the settlement of the estate

Requisites:

i. It should arise from fire, storm, shipwreck, or other casualty, robbery, theft or
embezzlement;
ii. Not compensated by insurance or otherwise;
iii. Not claimed as deduction in an income tax return of the taxable estate;
iv. Incurred during the settlement of the estate; and
v. Occurred before the last day for the payment of the estate tax (last day to pay: six
months after the decedent’s death) (Sec. 6(A)[5], R.R. 2-03)
vi. Unpaid taxes
2. Property previously taxed
3. Transfers for public use
4. The Family home
5. Standard deduction (1 Million)
6. Medical expenses - All medical expenses (cost of medicines, hospital bills, doctor’s fees, etc.) incurred
(whether paid or unpaid) with one (1) year before the death of the decedent shall be allowed as a
deduction provided:
a. that the same are duly substantiated with official receipts for services rendered by the decedent’s
attending physicians, invoices, statements of account duly certified by the hospital, and such
other documents in support thereof; and
 b. the total amount thereof, whether paid or unpaid, does not exceed Five Hundred Thousand
Pesos (P500,000). (Repealed by TRAIN) G. Amount received by heirs under R.A. No. 4917
(Retirement Benefits of Employees of Private Firms)
7. Net share of the surviving spouse in the conjugal property
As to the claims:
i. Funeral expenses: limited up to Php 200,000 only
ii. Medical expenses: actual amount can be claimed (Php 100,000)
iii. Loss: total amount

VIII

Upon the death of their beloved parents in 2009, Karla, Karla, 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%)

Donation to Kanlan City Water District.

1. Sec 99 (B): Donation to strangers – Subject to 30% of the net gifts

2. Sec 101 (A)(2): Exempt gifts – Gifts made to or for the use of the National Government or any entity created
by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government

3. Sec 99 (B): Donation to strangers – Subject to 30% of the net gifts

i. Strangers: a person who is not a:

(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or

(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.

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 five
(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%)

Not subject to VAT and income tax. Under the Train law, such transfer will qualify as a tax-free exchange where
the title over the property is transferred to a controlled corporation.

Another answer:
Not subject to VAT. Sec 106 (C) - Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed
in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under
circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated.

However, Sec 40(C)(2) transactions are covered by the exceptions laid down in RR 2-98.

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

No, not subject to income tax.

Sec 40 (C)(2) - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation:

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely
for the stock of another corporation also a party to the merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his
securities in such corporation, solely for stock or securities in such corporation, a party to the merger or
consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks
issued for services shall not be considered as issued in return for property.

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, lnc.'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%)

Yes. Incidental sale subject to VAT

In the Supreme Court (SC) case of Commissioner of Internal Revenue vs. Magsaysay Lines (G.R. No. 146984. July
28, 2006), the Supreme Court upheld a 1992 CTA decision which ruled that the sale of shipping vessels, made by
a corporation engaged in the sale of services, would not be subject to VAT. The Court further ruled that the VAT
is imposed on transactions which occur in the course of trade or business. Although there are incidental transactions
which invariably contribute to the production chain, these should not be subjected to VAT because since they do
not occur within the course of trade or business, “the providers of such goods or services would hardly, if at all,
have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections
since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business.”
Applying this SC decision to the facts provided in RMC 15-2011, the sale of the vehicles should not be subjected
to VAT because, although the company would profit from the sale, it was not made in the course of trade or
business or incidental thereto.

(b) Is the sale subject to 6% capital gains tax or regular corporate income tax of 30%?
(2.5%)

Subject to 6% CGT. The property is considered as a capital asset because it is not used in business. Further, it
was booked as an investment property, not an inventory or part of assets subject to depreciation. Sec. 39(A), NIRC

Another answer:
Subject to RCIT because it became a property which would properly be included in the inventory of a taxpayer.
The corporate income tax rate both for domestic and resident foreign corporations is 30% based on net taxable
income.

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%)

Yes, being non-stock and non-profit school provided its assets and revenues are proven actually, directly and
exclusively used for educational purposes.

Another answer:

No. sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business of the seller shall 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%)

Yes, the exemption granted to the non-stock and non-profit institution by the constitution, as in this case given,
cannot be subject to limitations by a statute like the NIRC.

Another answer:

No. If VAT-registered, no need to qualify. Subject to VAT regardless of the gross annual revenue.

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 KKl's appeal? (2.5%)

(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%)

Aichi case: 120+30 days is mandatory and jurisdictional the prescriptive period of 2 year.

Sec. 204 (c) and 229 are applied only in instances of erroneous payment and illegal collection. Sec. 112 (A) of
NIRC applies here. Sec. 31 Chapter VIII Book I of the Administrative Code of 1987 being the more recent law
governing legal period applies making 1 year = 12 months.

The principle of Lex Posterioni Derogati Priori applies. Thus, since it is filed on exactly Sept. 30, 2004 filing is timely.
filing an administrative claim is a condition precedent to a judicial claim for refund.

Sec. 112 (D) of the NIRC clearly provides that the CIR has 120 days from date of the submission of the complete
documents in support of the application within which to grant or deny the claim. In case of full or partial denial by
the CIR, the recourse is to appeal before the CTA within 30 days from receipt of the decision of the CIR.

However, if after the 120-day period the CIR fails to act on the application for tax refund, the remedy is to appeal
the inaction of the CIR to the CTA within 30 days.