PROBLEM Exercises in Taxation Based on recent decisions of the Supreme Court Prepared by: Dr. Jeannie? Linv On General Principle: 1 General concepts on the power of taxation: Answer. 2) 2-fold nature of the power of taxation — itis a legislative power and an inherent power. b) Taxation is @ supreme, plenary, unlimited and comprehensive power ©) It is not absolute because its exercise is subject to constitutional limitations and inherent restriction and to contracts 4) The power of taxation is imprescriptible )_Itis the most important among the inherent powers of the State 4) _Itis subject to international comity 9) Itis territorial hy tis generally non-delegable i) Itis not subject to judicial interference j) The *No Injunction Rule" when Congress exercises the power of taxation ik) Itimposes a tax burden on taxpayers |) Money collected from the exercise of this power must be spent only for a public purpose Define the power of taxation: ‘Answer. Itis the inherent power of the sovereign exercised through the legislature to impose burdens upon subjects or objects within the territorial jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. Who exercises the power of taxation? Answer. The power of taxation is exercise by the legislative body of the Government How extensive is the scope of the power of taxation? Answer. Itis supreme, plenary, unlimited and comprehensive. But, the seemingly unlimited nature of taxation is not absolute, The power of taxation is subject to constitutional limitations and inherent restrictions. Doctrine of International Comity defined. ‘Answer. This concept holds that between and among nations there is mutual courtesy and reciprocity. It is a basic principle in international law that all states are equally sovereign. Each state observes co-equal sovereignty by not taxing the properties, income or effects of fellow states. Consistent with this, embassies or consular offices of foreign governments in the Philippines including international organizations and their non-Filipino staff are not subject to Philippine taxation Importance of tax treaties: (Deutsche Bank Ag Manila Branch vs. CIR, August 19, 2015) ‘Answer. Tax treaties are entered info between and among nations "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." Tax treaties and conventions are drafted with the view towards thc elimination of intemational juridical double taxation, This is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. The BIR issued RMO No. 1-2000 requiring taxpayers who intend to avail of special treatment under tax treaties/conventions to file their application with the International Tax Affairs Division (ITAD) of the BIR at least 15 days before the transaction. X is qualified to avail of preferential tax treatment under a tax treaty but failed to comply with the 18-day period notice to BIR. Hence, BIR denied X’s claim. Will RMO No. 1-2000 prevail over tax treaties or Tax conventions? (Deutsche Bank Ag Manila Branch vs., CIR, August 19, 2013) 110. "1. 42. ‘Answer. RMO No. 1-2000 requires that any availment of the tax treaty relief must be preceded by an application with the International Tax Affairs Division (ITADS) of the BIR at least 15 days before the transaction. It was implemented to obviate any erroneous interpretation andlor application of the treaty provisions. The objective of the BIR is to forestall assessments against corporations who erroneously availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as well as to save such investors from the tedious process of claims for a refund due to an inaccurate application of the tax treaty provisions. However, there is nothing in RMO NO. 1-2000 that would indicate deprivation of entitlement to a tax treaty relief for falure to comply with the 16-day period. Illustration: X, resident foreign corporation is granted 10% preferential tax rates under an international treaty. X has paid 15% Branch Profit Remittance Tax (BPRT) to the BIR instead of 10%. It now claims for the refund of the excess payment. BIR denies the claim contending that RMO NO. 1-2000 clearly requires an application with the BIR-ITAD at least 15 days before the transaction for the lower rate. Having failed to comply X is not entitled to the tax refund Held. The RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of the benbfits under said agreement ‘Therefore, RMO No. 1-2000 should not operate to divest entitlement to the relief provided under a treaty or convention as it would impair the value of the tax treaty, a denial will constitute a violation of the duty required by good faith in complying with an international agreement. At most, the application for @ tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the elief. The obligation to comply with a tax treaty must take precedence over the objective of RMO- 1-2000. Doctrine of non-delegability of the power of taxation defined. Answer. The taxing power of the government is vested exclusive in the legislative body (Congress) and it is non-delegable pursuant to the doctrine of separation of the branches of the government to enslire a system of checks and balances. Neither can the power of taxation be delegated to private pergons/corporations Exception to the rule: 'a) Under the Constitution and the Local Government Code, the local government units are allowed to exercise the power to tax to enable them to exercise fiscal autonomy. b) Under the Constitution and the Tariff and Customs Code, the President is empowered to fix the amounts of tariffs (importiexport taxes) depending on the trade conditions. ‘¢) Those powers that are not legislative in character but merely advisory or ministerial in their nature can be delegated d) Other cases that require expedient and effective administration and implementation of assessment and collection of taxes Origination Rule defined. Angwer. All proposed revenue measures must originate from the lower house of the Congress. Doetrine of Territoriality defined. Answer. The power of taxation can only be exercised within the territorial jurisdiction of the taxing authority A law was passed requiring resident Filipinos and non-resident Filipinos with properties abroad to pay real property taxes on their properties situated in their country of residence to help the Philippine government address and contain its budgetary deficits for the interest of its people at large. The reason of the imposition is that every Filipino has the responsible to share proportionately the cost of governance. Is the law valid? Why? ‘Answer. The Doctrine of Territoriality applies to real property taxes. Thus, the government cannot exercise the power of taxation beyond its territorial jurisdiction involving real properties situated abroad even is the same are owned by Filipinos, because the situs of taxation of real property is the plage where the property is located Can the Congress enact or raise revenues even without a constitutional grant? ‘Answer. There is no need for a constitutional grant for the State to exercise the inherent power of taxation because this power is a necessary attribute of sovereignty without which the State can neither exist not endure13, Lifeblood Doctrine defined: Answer. Taxation is the indispensable and inevitable price we have to pay for a civilized society. ‘Without taxes, the government cannot exists and continue its existence. It would be paralyzed for lack of the motive power to activate and operate. Taxes are the lifeblood of the government and without it ‘government would not be able to deliver basic services to the people. 14. How is the Lifeblood Doctrine of taxation carried out? Answer. Collection of taxes may not be enjoined by injunction; Taxes should be collected with dispatch; Delay in tax payments warrants the imposition of 25% surcharge and 20% interest ‘Taxpayers should pay their taxes without unnecessary delay: Taxes are not subject to set-off or legal compensation: ‘Tax officials remiss in their functions are subject to administrative sanctions A valid tax may result in destruction of the taxpayer's property andior business. 18, Necessity Theory defined: Answer. The existence of the government is a necessity. Thus, the State has the right to call citizens, residents and property within its territorial jurisdiction and powers to contribute 16. Discuss briefly the importance of taxation as an attribute of sovereignty. (Bar 1988). ‘Answer. The main source of government's revenue is taxes. Itis the lifeblood of the government and without it the State can neither survive nor continue to perform its functions and defray all its expenses. Without tax money the government would nat be able to undertake the purposes for which it was organized, it cannot detiver the basic services to the people, hence, the power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government without being expressly granted by the people 17. Why is our tax statutes strictly construed against the government? Answer. This is because the power of taxation is a very destructive power that interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. (Phil, Health Care Providers, Inc. vs. CIR, G. R. No. 167330, September 18, 2009) 18. Is the President empowered to fix tax rates under the NIRC? ‘Answer. The President has no power to fix tax rates under the NIRC; her power as provided under the Constitution applies to importexports taxes. This is supported by the Doctrine of Ejusdem Generis. 419. Suppose a law is passed by the Congress allowing the President to raise the VAT rate should the particular economic conditions in the country prevail and be met. Is there an undue delegation of the power of taxation to the President? ‘Answer. No undue delegation of the power under the given facts, because the President was not given discretion as to what rate of tax is to be imposed, Neither was she given full discretion to increase the tax rate but could only do so, if the particular conditions as provided by the Congress are met 20. The President passed an executive order offering all taxpayers with previous tax deficiencies or delinquencies to pay a minimum tax in exchange for relief from tax assessment in the period of delinquency. This act was to alleviate our national problem on huge budgetary deficit. s this a valid exercise of the power of taxation by the President? Answer. The President cannot issue an executive order condoning tax liabilities. That power belongs exclusively to the Congress. The condoning power of the President applies to criminal cases upon conviction of the accused and not in taxation, 21. To be valid, a tax must be levied for a public purpose, when is this obtaining? Answer. It is for a public purpose if — a. Itis levied for the support of the government: b. Its levied for some of the recognized objects or purpose of the government,Itis used directly to promote the welfare of the people or of the general majority of the people or the country in equal measures d._ tis levied to address a governmental need Its levied to address a calamity or to the immediate needs for the government for the people The expenditure enhances the social program of the government 9. The expenditure has a transcendental importance and it has a far reaching implication 22, Of late, our government appropriated big sum of money for the relocation of the illegal settlers. A cause oriented group questioned the same for being violative of the general Principle in taxation that taxes are exacted only for a public purpose which means that taxes cannot be used for purely private purpose or for the exclusive benefit of private persons, it would be a robbery for the State to tax its citizens and use the funds generated for a private purpose (benefiting a group of identified private individuals). Is the contention valid? (Planters Products, inc. vs, Fertiohil Corp., 548 SCRA 486) ‘Answer. The Supreme Court held that public money may now be used for the relocation of illegal settlers, forlost-cost housing and urban or agrarian reform because these projects enhance the social justice programs of the government. Public purpose is an elastic concept that can be hammered to fit modem standards, This is traditionally viewed as essentially government functions, like the delivery of basic services to the people, building roads and bridges that benefit the greater majority of the people. 23. A law was enacted imposing a tax on farmers producing potatoes, the proceeds of the said imposition are to be used exclusively for the protection and promotion of the potato industry, Part of the money realized was for the research of potato sickness and on methods of better production, Some of the farmers challenged the validity of the law, contending that the same violates the rule on public purposeness of an imposition because it is going to benefit private individuals (potato farmers only). Decide with reason, ‘Answer. The law would be valid under the stated circumstances. Taxation is for a public purpose when the proceeds of the tax are used not only to support the existence of the State but likewise for some recognized objects of government or directly to promote the welfare of the community. An intendment of the law to protect the potato industry may be considered as properly embraced within ‘such recognized objects of government along with like objectives as promoting social justice, the equitable distribution of wealth, economic progress, public welfare and similar goals or purposes. 24, All mail users in the month of August every year, are required to affixed Anti-TB stamps in addition to the regular stamps whenever letters and packages are transmitted through the post office. X questioned the constitutionality of the mandate (RA No. 1635) contending that the imposition is not for a public purpose. (Gomez vs, Palomar, 25 SCRA 827) a) Is X correct? Why? b) What is “public purpose in taxation? ¢) Who determines the public purposeness of a tax law? Answer. a). The eradication of a dreaded disease (TB) is a public purpose. The money raised from the sale of the Anti-TB stamps is spent for the benefit of the Philippine Tuberculosis Society, a private organization, without appropriation by law. But, the Solicitor General points out the society is not really the beneficiary but only the agency through which the State acts in carrying out what is, essentially @ public function. The money is treated as a special fund and as such need not be appropriated by law. b) Public purpose means that the tax measure is one which affects the inhabitants of the state as a community and not merely as individuals. That the tax must be used for government or promotion of community welfare ©) The power to determine whether the purpose of taxation is public or private resides in Congress. 25, Our brethren in the Mindanao region refuse to pay their taxes to the government because they believe that they derived no personal benefits from the tax. n fact, the deteriorating peace and order condition of the region where the AFP continues their war operations against the unlawful elements makes it impossible for people thereat to live a peaceful life. Neither can the businessmen maintain their business activities regularly nor the employment of ordinary people without interruptions and fear. Is their refusal to pay taxes valid? Reason. Answer. The refusal to pay taxes because the taxpayers receive no direct benefit is not vali. Benefits extended by the government to its people are presumed to have received by the latter. It 4‘must be noted that the only benefit to which a taxpayer is constitutionally entitled is that derived from his employment of the privileges af living in an organized society, established and safeguarded by the devotion of taxes to public purposes. In taxation, no special or direct benefit is received by the taxpayer except that the government Secures to the citizen that general benefit resulting from the protection of his person and property and the welfare ofall 26. Our government has three (3) inherent powers. Power of taxation, Police Power and the Power of Eminent Domain. Of these three, may the government use the police power to collect money from the people? Answer. Yes. The Government may use its inherent police power to support collections of money. ‘The money collected is referred to as regulatory fees, permits or licenses. This police power is exercise for the common good of the people. 27. “X's" application for a building permit for the construction of a four-storey commercial building at the business central t was denied for reason that he does not want to ‘comply with the condition that a parking space at the basement of his proposed building must be included in the plan and structure. He contends that an additional Php 400K in the budget has to be set aside for such requirement and to force him into that is an affront to his right on due process. The issue is the legality of the issuance of a permit fee for the proposed bullding with the required parking space. Can the government refused the issuance of said permit without violating the right of a taxpayer to construct improvement on his property accor to his preference and budget? Resolve. Answer. A building permit fee is based on the exercise of the police power of the government for the best interest and welfare of the people. With the worsening traffic conditions everywhere in the metropolis, it is imperative that the government must come up with solutions to ease traffic congestion, Private parties are not isolated when it comes to the betterment of our society. Each of us is duty bound to enhance the welfare of our people and a requirement of this kind from the private sector validly enforced is designed to benefit the general public at large. This and many other sacrifices demanded from the citizens is a price that we have to pay for living in a civilized society. 28. The general pi by this concept? \ciples in taxation prohibit direct duplicate taxation. What do you understand ‘Answer. This direct duplicate taxation means two taxes are imposed on the same subject matter, for the same purpose, within the same tax period, by the same taxing authority. It is necessary that the two taxes being imposed are of the same kind or character. (City of Manila vs. Coca-Cola Bottiers, Phils., August 5, 2009) igarette manufacturers in the country are complaining that they are subjected to double taxation because the stemmed leaf tobacco (raw materials) that they use in the production of cigarettes and cigars were already taxed and again when their finished products of cigarettes and cigars are ready for sale another imposition is required of them to pay. Is the argument of the manufacturers correct? Answer. No. There is no double taxation in the given facts. The (a) stemmed leaf tobacco, and (b) the cigars and cigarettes are two products that are subject to different excise taxes under the Tax Code. There are 2 different subjects of taxation; hence, double taxation does not exist 30. What international juridical double taxation? ‘Answer. The imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. There is international double taxation when one of the taxing authorities is a foreign government. (La Suerte Factory vs. CTA, En Banc, GR. No. 125346, November 11, 2014) 34. What are the methods used in tax treaties to avoid international double taxation? Answer. 2) The first method is setting out the respective rights to tax ofthe state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states. However, for other items of income or capital both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limitedb) The second method for the elimination of double taxation applies whenever the state of source is Given a full or limited right to tax together with the state of residence. in this case, the treaties ‘make it incumbent upon the state of residence to allow relief in order to avoid double taxation, There are two methods used in tax treaties to avoid intemational double taxation - the exemption method and the credit method. in the exemption method, the income or capital ‘which ie taxable in the state of source or situs is exempted in the state of residence. although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital, In the credit method, although the income or capital which is taxed in the state of source is stil taxable in the state of residence, the tax paid in the former is Credited against the tax levied in the fatter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas, the credit method focuses upon the tax 32. When is there indirect double taxation? Is this allowed? ‘Answer. If the two imposing tax authorities are not the same (national and local), the double taxation is merely one of indirect duplicate taxation. There is no prohibition to indirect double taxation, 33. Will the imposition of a business tax by the City government against an entity already paying a franchise tax result to double taxation considering that both taxes are based on the gross receipts and sales of taxpayer's business? ‘Answer. A franchise tax is a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state, and is imposed only on franchise holders. On the other hand, @ “city or business tax’ is a percentage tax based on a given ratio between the gross sales or receipts and the burden imposed upon the taxpayer. It is imposed on any person engaged in the sale ‘Of goods or services. They are not of the same kind or character. Hence, no double taxation. (Sky Cable Corp. vs. City Treasurer of Quezon City, CTA case No. 102, February 10, 2014) 34, X Corporation in engaged in insurance business. Part of its activities is lending money to its policy holders. The CIR imposes additional percentage tax on the said activity because the former believes “X” is also a lending investor. Is the tax official correct? ‘Answer. When @ company is taxed on its main business, it is no longer taxable further for engaging in an activity or work which is merely a part of, incidental to and is necessary to its main business - to require X to pay additional percentage tax and fixed taxed again for an activity which is necessarily a part of the same business, the CIR must prove that there Is a law expressly requiring X such additional payment of tax because unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that imposition of @ tax cannot be presumed. (2005 case) 35. Are there available remedies against double taxation? Answer. Yes, there are possible remedies against double taxation, such as ~ } Provision for tax exemption f) Allowance for tax credit 4} Allowance and/or application for tax incentives h) Application of the Principle of Reciprocity i) Use of Allowable deductions i) Use of tax discounts k)__ Entering into tax treaties 36. Bi Al ly explain why direct double taxation does NOT violate (a) Rule of equality, (b) Rule of ity-to-pay and (c) Rule of Reciprocity. Answer. Direct double taxation means that the same subject or object of taxation is taxed twice by the same taxing authority for the same purposes during the same tax period. There is no express constitutional prohibition against double taxation, notwithstanding the fact that the same is apparently inconsistent with the uniformity clause of the Constitution.37. 38. 39. 40, at. Rule on Equality - means that taxpayers shall be treated alike under tke circumstances and Conditions both in privileges conferred and labiltes imposed Rule on Ability-to-pay ~ The more money one has the more taxes he should pay, the less money he has, the less taxes he should pay. This refers also to privileges enjoyed. More privileges more taxes — less privileges enjoyed less taxes paid. Rule on Reciprocity - Our government will grant tax privileges to @ subject of another country Provided our citizen in that foreign country is also granted same or similar privileges. Direct double taxation does not violate any of the above-three rules because all those that are similarly situated are taxed alike, (a) What is meant by situs of taxation? (b) What determines the situs of taxation in the Philippines? Answer. (2) Tax situs means the place of taxation; the state which has jurisdiction to impose @ articular tax upon persons, property interest, rights, or transactions, (b) Generally, the elements which are considered in determining the situs of taxation, or the power of a state to exercise the taxing power in a particular instance, are the citizenship of the taxpayer, his residence; the source of the income; the nature or kind of tax and the protection and benefits afforded to the persons or property sought to be taxed. What is meant by “Eclectic Theory” in the determination of tax situs? ‘Answer. This theory provides for the application of the law to the elements of a transaction occurring in the place of the forum. It coincides with the “territoriality” of taxation under which a taxing authority has the right to impose a tax and fix a tax situs, among other things, at the place where the privilege is exercised. What is the situs of taxation in electronic transactions? Answer. Sec, 23 of the E-Commerce Act (RA 8792) provides an electronic data message or electronic document is deemed to be dispatched at the place where the originator has its place of business and received at the place where the addressee has its place of business. The tax situs will be at that place, Where is the tax situs of personal services rendered by an individual? CIR vs. Juliana Baler- Nickel 500 SCRA 87 2006) ‘Answer. Personal services are taxable at the place where the services were performed and NOT (a) at the place of residence of the payor or (b) the place where the contract for service is entered into or (6) the place of payment thereat Dividends ~ has its source in the residence of the corporation paying the dividend. Income from business or profession — at the place where the business or profession is exercise or in the country of the income eamer or it depends on the kind of income earned. Rents and Royalties — has its source where the property is used or located Sale of real property ~ has its source where the property is located Sale of personal property — those that are produced in the Philippines but sold abroad — income shall be treated as derived from partly within and partly without the Philippines Shares of stocks of Domestic Corporation — gains are considered as sourced within the Philippines regardless of where they were sold Franchise tax — payable at the place of where the franchise is granted ve vue e e F, a non-resident Filipino now residing in Australia offered to sell to “A” her inherited jewelries from her grandmother. F showed pictures of the jewelries to “A” and thereafter the price was agreed upon in Sidney, Australia. They also agreed that the delivery of the items and payment of the consideration shall all be finalized after two (2) weeks in the Philippines. Where is the tax situs of this transaction? ‘Answer. The perfection of the contract of sale was in Australia. Since the contract was consensual and meeting of minds of both parties were consummated abroad the gain on the sale of the jewelries will be taxable abroad and not in the Philippines. E, is a non-resident citizen, she is subject to income only on her income realized within the Philippines.42. C, a non-resident corporation based in Japan. It bought two (2) condominium units in Makati City and now leases the unit to some Japanese businessmen visiting the Philippines. The Contract of lease was perfected abroad and the payment of rentals was likewise concluded in Japan. What C liable to pay real property and income taxes here? ‘Answer. C will pay the annual real property tax on improvement to the city of Makati because the Property is located there. It shall likewise pay income tax on its rent income because the income has its source where the property is located 43. N, a Nepalese student came to the Philippines to pursue a medical course in one of the universities in Manila, He will be here for at least 4 years. Can we impose personal tax on N during his stay here? ‘Answer. N will pay personal tax in the Philippines even if he is an alien because he is residing in the Philippines. 44. X is a Japanese mechanical engineer by profession working in a company that produces machineries. He was recently assigned to the Philippines for 3 months to supervise the assembly and installation of some equipment and machines purchased by Filipino businessmen from his company. X made arrangement with his employer to send him directly to the Philippines 1/3 of his monthly salary and the remaining 2/3 to be released to his wife in Japan. Is X's salary taxable here? Answer. The entire (1/3 + 2/3) salary of X is taxable here because the services producing the entire income were rendered here. The arrangement he made as to how he will divide his income to his family has nothing to do with income taxation, Sec. 30 of the Tax Code maintains that disposition of income is immaterial to income taxation 45. X, a businessman bought machineries from Taiwan on installment. The sale’s contract was executed abroad and the 30% down payment on the purchase price was paid by X directly to the supplier in Taiwan. Thereafter, X sends the monthly installment payments (prin interest) to the supplier abroad through his depositary bank. Is the monthly payment subject to tax in the Philippines? (NDC vs. CIR, 177 SCRA 500) Answer. Tax situs of interest income is the domicile or residence of the debtor and NOT where the activity was undertaken. The interest portion is subject to withholding tax which the payor must withhold and remit to the BIR because that is interest income to the supplier, Interest income is taxable in our country. 46. Disting h Revenue Regulations (RR) from BIR Rulings: ‘Answer. These are formal pronouncement intended to clarify or explain the law and carry into effect its general provisions by providing the details of administration and procedure. They have the force and effect of law and they are part and parcel of the tax law. Whereas, BIR Rulings are less general interpretation of tax laws at the administrative level being issued from time to time by the CIR. 2 RRs are substantive laws. Hence, they are not intended to be liberally construed. (BPI Leasing Corp vs. CA, 416 SCRA 4) RRs are issued by the Secretary of Finance per recommendation of the Commissioners. For validity Revenue Regulations must be published The validity of a revenue regulation is determined by the regular court and not by the Court of Tax Appeals, RRs have the force and effect of law ‘They are part and parcel of the law they seek to implement ‘They must not be bigger than the law they seek to implement They are generally non-retroactive ‘The SF exercises rule-making power via the issuance of Revenue Regulations, hence, his power is not merely interpretative, (8P/ Leasing Corp. 2003) woo Vvvve 47. Enumerate at least six (6) distinctions between Revenue Regulations and BIR Rulings. Answer. a) Revenue Regulations are part and parcel of our Tax Laws; BIR Rulings are not part of our Tax Laws, b) Revenue Regulations are issued by the Secretary of Finance, whereas, BIR Rulings are issued by the Commissioner of internal Revenue.48, 49, 50. st. 52. ©) Revenue Regulations must be published for validity; whereas, BIR Rulings do not need Publication, 4d) Revenue Regulations are formal pronouncements intended to clarify or explain the tax law; BIR Rulings are merely advisory service to the taxpayer, they are not conclusive, ©) Revenue Regulations have the force and effect of law; BIR Rulings are administrative opinions on Queries and do not have the force and effects of law, f) Revenue regulations have the nature of permanence unless revoked and non-retroactive in application whereas, BIR rulings are always revocable. What are the elements of a valid Revenue Regulation? Answer. a) It must be germane to the objects and purpose of the law b) It does not contradict but conforms to the standards of the law prescribed, and ©) Its issued for the purpose of carrying into effect the general provisions of the law. As a general rule Revenue Regulations are non-retroactive. The only exception to this is when the retroactive application will not cause injury to the taxpayer. Who is not entitled to the benefit of this rule? ‘Answer. Sec. 246, NIRC maintains that this rule does not apply to (a) a taxpayer who deliberately misstates or omits material facts from his tax return or in any document required of him by the BIR, (b) to a taxpayer who acted in bad faith, and (c) where the facts subsequently gathered by the BIR ‘are materially different from the facts on which the ruling is based, (Fiinvest Dev’, Corp., July 18, 2011, BPI Family Savings Bank, inc. vs. Supreme Trensiiner, Inc, et. al, February 26, 2011) Same as: What is the exception to the rule that Revenue Regulations are non-retroactive in application? (CIR vs. Filinvest Develoment Corporation, July 19, 2011) ‘Any revocation, modification or reversal of a Revenue Regulation shall not be applied retroactively if to so apply it would cause injury or be prejudicial to the taxpayer. X believes that the Revenue Regulation recently issued by the BIR has expanded the law it seeks to implement. X was secking reconsideration in the application of said Revenue Regulation but the CIR denied his motion. X seasonably filed a petition for review before the CTA arguing that the regulation is void. Did the CTA acquire jurisdiction on the matter? (British American Tobacco Inc., vs. Camacho, 562 SCRA 511) Answer, No. CTA has no jurisdiction to pass upon the validity of revenue regulation. It is the RTC that exercises jurisdiction over the same. Among the CTA's jurisdiction is to determine the validity of a decision or ruling rendered by the CIR on issues involving (a) disputed assessment, (b) refund of internal revenue taxes, (c) penalties imposed without authority and (d) other matters found in other laws, part of law, or special law administered by the BIR. The CIR issued 2 Revenue Memorandum Circulars affecting pawnshops. X, a pawnshop operator contested the RMCs and filed a case in the RTC. CIR filed a Motion to dismiss contending that RTC has no jurisdiction. RTC denied CIR's Motion to Dismiss. Was the RTC correct? Answer. The power to review culings issued by the CIR Is lodged with the CTA and not with the RTC. The Revenue Memorandum Circulars are ruling or opinions issued by the CIR implementing the provisions of the Tax Cade on the taxabilty of pawnshop. Clearly the questioned opinion may be the subject of a review and the CTA has jurisdiction to pass upon the same. The regular court has no jurisdiction over the issues obtaining under the given facts X Corporation relied on the implementing general circular issued by the CIR in withholding 30% of one-half of the rentals it paid for use of films. After 3 years of relying on said circular, the CIR revoked the same for being “erroneous for lack of legal basis” by issuing a new circular which based the tax prescribed on the gross income instead of on half of the income. X was issued an assessment for the deficiency. As counsel for X, what legal action would you take? Answer. | would contest the validity of the retroactive application of the new circular. The Tax Code 953, 84, 55. Provides that any revocation, modification or reversal of any of the rules and regulations or any rulings of circulars promulgated by the CIR shall not be given retroactive application if it will be prejudicial to the taxpayers. The SC has also held in the case of ABS-CBN Broadcasting Corp. vs CTA that in the interest of justice and fair play, rulings and circulars promulgated by the CIR have no retroactive application where to so apply them would be prejudicial to taxpayers, who relied in good faith and religiously complied with no less than a circular issued by the highest official of the BIR and epproved by the Secretary of Finance. PBCom filed its quarterly ITR for the 1" & 2” qrts. of 2006, Later, if suffered losses and reported a net loss for 2005 & 2006. However, it earned rent income for which taxes were previously withheld by their lessees. In August 2007, said taxpayer believed that it is entitled to a tax credit representing tax overpayments in the 1" & 2” qrts. of 2005. In July 2008, it also intended to claim refund of the creditable taxes withheld from 2008 & 2006 rentals. PBCom requested an opinion from the CIR as to the prescriptive period to claim for a tax refundicredit. The CIR advised PBCom to apply for tax credit under the provisions of the Civil Code actionable documents can be enforced within a period of 10 years. Thus, the CIR changed the Prescriptive period for tax refund under a Revenue Memorandum Circular (RMC.) PBCom relied on said circular. Is the claim for refund beyond the 2-year period valid as the same was based on the RMC issued by the CIR? Answer. The claim for refund is already time barred. Taxes are the lifeblood of the nation, thus the Modes to enforce collection should be summary and rarely interfered with. From the same Perspective, claims for refund/credit should be exercised within the time fixed by law in order not to unduly delay the BIR jn its functions to collect taxes. The RMC issued by the CIR is beyond the Provision of the law. An erronequs interpretation of the law does not vest the taxpayer with a shield ‘against judicial action. The RMC issued by the CIR was changing the prescriptive period of 2 years to 10 years and it created a clear inconsistency with the provision of the Tax Code. The CIR rendered an interpretation which is not in harmony with the statute, Hence, his interpretation could not be given weight for to do 50 Would in effect, amend the statute What is the Doctrine of Operative Fact? Answer. This principle has been incorporated in Sec. 226 of the NIRC (The non-retroactivity of rulings). This rule provides that taxpayers may rely upon a rule or ruling issued by the CIR from the time the rule or ruling is issued up to its reversal by the CIR or by the Court. Any reversal is not given retroactive effect. Application: X applied for tax credit ofits unutilized input taxes in April 28, 2005. The claim was well within the 2-year period. At the time of X’s application it relied upon BIR Ruling DA 489-03 which maintains that the taxpayer claiming need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of petition for review. Many taxpayers relied on this BIR issuance and it was allowed because of the Doctrine of Equitable Estoppel. In the case of CIR vs. Aichi Forging Company of Asia, inc., G.R. No. 184823, October 10, 2010, 632 SCRA 422, the Supreme Court ruled that BIR Ruling DA 489-03 is erroneous and rectified the same reiterating the jurisdictional and mandatory requirement of the "420 + 30” day period should be complied with in a claim for unutiized input taxes under the Tax Code In view of this development, the SC maintained that the only exception to the 120 + 30 period are those claims validly filed between December 10, 2003 to October 6, 2010 when the ruling was issued until its overturned in the Aichi case. > The “120 + 30-day" period is used to determine when to appeal to the CTA NOTE: Administrative practices, not formalized into a rule or ruling are not covered by the Doctrine of Operative Facts because a mere administrative practice may not be uniformly and consistently applied. They are usually not known to the general public and can be availed of only by those with informal contacts with the government agency. How are BIR rulings classified? Answer. a. Rulings of first impression — They are the rulings, opinions and interpretations of the CIR with respect to the provisions of the NIRC and other tax laws without established precedents. The 10