TAXATION LAW 2019 BAR EXAM

A.1. On October 5, 2016, the Bureau of Internal Revenue (BIR) sent KLM Corp. a Final
Assessment Notice (FAN), stating that after its audit pursuant to a Letter of Authority duly
issued therefor, KLM Corp. had deficiency value-added and withholding taxes.
Subsequently, a warrant of distraint and/or levy was issued against KLM Corp. KLM Corp.
opposed the actions of the BIR on the ground that it was not accorded due process because
it did not even receive a Preliminary Assessment Notice (PAN) after the BIR' s
investigation, which the BIR admitted.

(a) Distinguish a PAN from a FAN. (2%)

Suggested Answer:

Preliminary Assessment Notice Final Assessment Notice

(PAN) (FAN)
As to purpose There exists sufficient basis to It calls for the payment of the
of issuance assess the taxpayer for any taxpayer’s deficiency taxes.
deficiency taxes after review and
evaluation.
As to The taxpayer may reply to the The taxpayer may protest the
taxpayer’s findings within 15 days from the FAN within 30 days from the
remedy after receipt of PAN. date of receipt.
receipt
As to effect of If the taxpayer fails to respond Collection of assessed taxes by
issuance within 15 days from date of the government through
receipt of the PAN, he shall be administrative and judicial
considered in default, in which remedies.
case, a formal letter of demand
and assessment notice shall be
caused to be issued by the
Commissioner.
As to effect of If a PAN is not issued, then the Violation of due process
non-issuance subsequent issuance of the FAN requirement.
shall be void for violation of due
process requirement.

Exceptions: a PAN shall not be

required in any of the following
cases:
1. When the finding for any
deficiency tax is the result of
mathematical
2. error in the computation of
the tax appearing on the face

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 of the tax return filed by the
taxpayer; or
3. When a discrepancy has been
determined between the tax
withheld and the amount
actually remitted by the
withholding agent; or
4. When a taxpayer who opted
to claim a refund or tax credit
of excess creditable
withholding tax for a taxable
period was determined to
have carried over and
automatically applied the
same amount claimed against
the estimated tax liabilities
for the taxable quarter or
quarters of the succeeding
taxable year; or
5. When the excise tax due on
excisable articles has not been
paid; or
6. When an article locally
purchased or imported by an
exempt person, such as, but
not limited to, vehicles,
capital equipment,
machineries and spare parts,
has been sold, traded or
transferred to non-exempt
persons.

(b) Are the deficiency tax assessment and warrant of distraint and/or levy issued
against KLM Corp. valid? Explain. (3%)

Suggested Answer: No, the deficiency tax assessment and warrant of distraint and/or
levy issued against KLM Corp. are invalid. This is so because the issuance of a PAN is
necessary before a FAN is issued in pursuance of the due process requirement
provided under Sec. 3 of RR No. 18-2013. It states that if the taxpayer fails to respond
within fifteen (15) days from date of receipt of the PAN, he shall be considered in
default, in which case, a Formal Letter of Demand and Final Assessment Notice
(FLD/FAN) shall be issued calling for payment of the taxpayer's deficiency tax
liability, inclusive of the applicable penalties. If the taxpayer, within fifteen (15) days
from date of receipt of the PAN, responds that he/it disagrees with the findings of
deficiency tax or taxes, an FLD/FAN shall be issued within fifteen (15) days from

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 filing/submission of the taxpayer’s response, calling for payment of the taxpayer's
deficiency tax liability, inclusive of the applicable penalties. From the foregoing, it can
be concluded that the taxpayer must first be given the opportunity to respond to the
PAN before a FAN is issued. Failure of the BIR to strictly comply with the
requirements laid down by law and its own rules is a denial of the taxpayer’s right to
due process.

A.2. For the purposes of value-added tax, define, explain or distinguish the following terms:

(a) Input tax and output tax (3 %)

Suggested Answer: Input tax means the value-added tax due from or paid by a VAT-
registered person in the course of his trade or business on importation of goods or
local purchase of goods, properties or services, including lease or use of property, from
a VAT-registered person. Output tax means the value-added tax due on the sale or
lease of taxable goods, properties or services by any person registered or required to
registered under Section 236 of the Tax Code. (Sec. 110[A], NIRC)

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

Suggested Answer:

Zero-rated Transactions Effectively Zero-rated

As to source Export sale of goods and
supply of services.
As to requirement of There is no need to file an
application and BIR application form and to
approval secure BIR approval
thereof.
As to requirements in The word “ZERO-
VAT invoice/receipt RATED” is not required to
be stamped on the face of
the VAT invoice or receipt
to be issued by the seller
of goods or services.
Reason: The buyer, as
shown by his address in
Transactions
Sale of goods or supply of
services to persons or entities
whose exemption under
special laws or international
agreements to which the
Philippines is a signatory.
An application must be filed
and the BIR approval is
necessary before the
transaction may be
considered as effectively
zero-rated.
The word “ZERO-RATED”
is required to be stamped on
the face of the VAT invoice
or receipt to be issued by the
seller of goods or services.
Reason: The buyer of the
goods or services is located
within the Philippines, or he

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 the sales invoice and located outside the
shipping documents, is Philippines merely by fiction
located outside the of law.
Philippines.

(c) Destination principle (2%)

Suggested Answer: Destination Principle provides that the destination of the goods
determines taxation or exemption from tax. Export sales of goods are subject to 0%
rate (or zero-rated) because the consumption of such goods will be made outside the
Philippines, while imports of goods are subject to 12% value-added tax because they
are for consumption within the Philippines. [Mamalateo, Reviewer on Tazation, 2019]

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 (V A T) 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%)

Suggested Answer: The phrase “in the course of trade or business” means 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. The rule of regularity, to the contrary notwithstanding, services
rendered in the Philippines by non-resident foreign persons shall be considered as
being rendered in the course of trade or business. (Sec. 105, NIRC)

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

Suggested Answer: No, Mr. X is incorrect in stating that the association dues are
subject to VAT. Sec. 109 (Y) of the NIRC, as amended by RA 10963 (TRAIN), provides
that association dues, membership fees, and other, assessments and charges collected
by homeowners associations and condominium corporations shall be exempted from
value-added tax. Hence, association dues cannot be subjected to 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

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 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%)

Suggested Answer:
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, That not more than thirty percent (30%) of said gifts shall be used by
such done for administration purposes. (Sec. 101, NIRC)

(b) Does the above transaction fall under any of the exemptions? Explain. (2%)

Suggested Answer: No, the above transaction does not fall under any of the
exemptions because it is a transfer for less than adequate and full consideration. Sec.
100 of the NIRC provides that where property is transferred for less than adequate and
full consideration in money or money’s worth, then the amount by which the fair
market value of the property exceeded the value of the consideration shall, for
purposes of donor’s tax, deemed a gift and shall be included in computing the
amount of gifts made during the calendar year.

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.
P10,000,000.00 constituting the value of their house in Alabang as their family home; and 2.
P200,000.00 in funeral expenses because no other expenses could be substantiated.

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

Suggested Answer: No, both deductions cannot be claimed because the deductibility
of funeral expenses in the computation of the net estate were deleted under Sec. 68 of
the NIRC, as amended by RA 10963 (TRAIN). With regard to the family home, A’s
heirs can claim the deduction pursuant Sec. 86 (A)(7) of the NIRC, as amended by RA
10963 (TRAIN) which provides that an amount equivalent to the current fair market
value of the decedent’s family home can be deducted in the computation of the net
estate, provided that it shall not exceed ten million pesos (P10,000,000), otherwise the
excess shall be subject to estate tax.

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 (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%)

Suggested Answer: Yes, a standard deduction in the amount of five million pesos
(P5,000,000) may be claimed by A’s heirs without need to present any documentary
evidence under Sec. 86 (A)(1) of the NIRC, as amended by RA 10963 (TRAIN) which
provides for a standard deduction of five million pesos (P5,000,000) in the value of the
gross estate of a citizen or resident of the Philippines, without substantiation.

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

Suggested Answer: Yes, the heirs include A's house in Los Angeles, California, USA,
in determining the gross estate of A. Sec. 85 of the NIRC, provides that the value of the
gross estate of the decedent shall be determined by including the value at the time of
his death of all property, real or personal, tangible or intangible, wherever situated.

A.6. XYZ Air, a 100% foreign-owned airline company based and registered in Netherlands, is
engaged in the international airline business and is a member signatory of the International
Air Transport Association. Its commercial airplanes neither operate within the Philippine
territory nor are its service passengers embarking from Philippine airports. Nevertheless,
XYZ Air is able to sell its airplane tickets in the Philippines through ABC Agency, its
general agent in the Philippines. As XYZ Air's ticket sales, sold through ABC Agency for
the year 2013, amounted to P5,000,000.00, the Bureau of Internal Revenue (BIR) assessed
XYZ Air deficiency income taxes on the ground that the income from the said sales
constituted income derived from sources within the Philippines.

Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident foreign corporation, it
should only be taxed for income derived from sources within the Philippines. However,
since it only serviced passengers outside the Philippine territory, the situs of the income
from its ticket sales should be considered outside the Philippines. Hence, no income tax
should be imposed on the same.

Is XYZ Air's protest meritorious? Explain. (5%)

Suggested Answer: No, XYZ Air’s protest is not meritorious. In the case of CIR v. BOAC, 149
SCRA 395, the Supreme Court ruled that when an airline owned by a foreign corporation
operates through a local agency where the latter sells and collects payment for sales of airplane
tickets in the Philippines, the same foreign corporation shall be considered as a resident
foreign corporation for purposes of taxation, though it did not carry passengers and/or cargo
in the Philippines. Here, XYZ Air is considered a resident foreign corporation since it sells its
ticket through a general sales agent. As such, revenues from XYZ Air’s ticket sales in the
Philippines through ABC Agency are taxable income.

A.7. Differentiate tax exclusions from tax deductions. (3%)

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 Suggested Answer:

TAX EXCLUSIONS TAX DEDUCTIONS

As to definition Exclusions from gross income Deductions from gross income
refer to a flow of wealth to the are the amounts which the law
taxpayer which are not treated as allows to be deducted from
part of gross income, for gross income in order to arrive
purposes of computing the at the net income.
taxpayer’s taxable income, due to
the following reasons:
1. It is exempted by the
fundamental law;
2. It is exempted by statute; and
3. It does not come within the
definition of income. (Sec. 61,
Rev. Regs. No. 2)
As to computation Pertain to the computation of Pertain to the computation of
gross income. net income.
As to whether a part Something received or earned by Something spent or paid in
of the gross income the taxpayer, which do not form earning gross income.
part of gross income.

A.8. B transferred his ownership over a 1,000-square meter commercial land and three-door
apartment to ABC Corp., a family corporation of which B is a stockholder. The transfer was
in exchange of 10,000 shares of stock of ABC Corp. As a result, B acquired 51% ownership
of ABC Corp., with all the shares of stock having the right to vote. B paid no tax on the
exchange, maintaining that it is a tax avoidance scheme allowed under the law. The Bureau
of Internal Revenue, on the other hand, insisted that B's alleged scheme amounted to tax
evasion.

Should B pay taxes on the exchange? Explain. (3%)

Suggested Answer: No, B should not pay the taxes on the exchange because the same is a tax-
free exchange under Sec. 40 (C)(2) of the NIRC. The requisites are as follows: (a) transferee is
a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor;
(c) the transfer is made by a person, acting alone or together with others, not exceeding four
(4) persons; and (d) as a result of such exchange the transferor, alone or together with others,
not exceeding four (4) persons, gains control of said corporation. The term “control” is defined
as ownership of stocks in a corporation possessing at least 51% of the total voting power of all
classes of stocks entitled to vote. Here, all the requisites are met.

A.9. GHI, Inc. is a corporation authorized to engage in the business of manufacturing ultra-high
density microprocessor unit packages. After its registration on July 5, 2005, GHI, Inc.
constructed buildings and purchased machineries and equipment. As of December 31, 2005,

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 the total cost of the machineries and equipment amounted to P250,000,000.00. However,
GHI, Inc. failed to commence operations. Its factory was temporarily closed effective
September 15, 2010. On October 1, 2010, it sold its machineries and equipment to JKL
Integrated for P300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010.

(a) Is the sale of the machineries and equipment to JKL Integrated subject to normal
corporate income tax or capital gains tax? Explain. (3%)

Suggested Answer: The sale of the machineries and equipment to JKL Integrated is
subject to capital gains tax because the same are capital assets. Sec. 39[A] of the NIRC
provides that capital assets do not include property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or business. Here, the machineries
and equipment sold were not primarily for sale to customers in the ordinary course of
trade or business of GHI, Inc. because the same were intended for the pursuance of its
manufacturing business, and by the fact that GHI, Inc. failed to commence business
operations. That being the case, the machineries and equipment are not ordinary assets
subject to normal corporate income tax.

(b) Distinguish an ordinary asset from a capital asset. (2%)

Suggested Answer: The term “capital assets” means property held by the taxpayer
whether or not connected with his trade or business, but does not include:
1. Stock in trade of the taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable
year; or
2. Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Property used in trade or business, of a character which is subject to the allowance
for depreciation; or
4. Real property used in trade or business of the taxpayer. (Sec. 39[A], NIRC)

Since the enumeration of capital assets is made in the negative manner, the four (4)
general types of assets listed are “ordinary assets.”

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%)

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 Suggested Answer: ABC Corp.’s contentions are incorrect. In order to constitute double
taxation in the objectionable or prohibited sense, the same property must be taxed twice when
it should be taxed once; both taxes must be imposed on the same property or subject matter,
for the same purpose, by the same State, Government, or taxing authority, within the same
jurisdiction or taxing district, during the same taxing period, and they must be the same kind
or character tax. Here, there is no double taxation in the prohibited sense because the taxing
authority and the jurisdiction are not same—national government and local government
respectively. Moreover, local government units may impose business tax pursuant to Sec. 143
of the Local Government Code. Hence, City X has the power to impose the tax.

B.11. Mr. D, a Filipino amateur boxer, joined an Olympic qualifying tournament held in Las
Vegas, USA, where he won the gold medal. Pleased with Mr. D's accomplishment, the
Philippine Government, through the Philippine Olympic Committee, awarded him a cash
prize amounting to Pl,000,000.00. Upon receipt of the funds, he went to a casino in Pasay
City and won the P30,000,000.00 jackpot in the slot machine. The next day, he went to a
nearby Lotto outlet and bought a Lotto ticket which won him a cash prize of P5,000.00.

Which of the above sums of money is/are subject to income tax? Explain. (5%)

Suggested Answer: P30,000,000 is subject to income tax because it is a passive income on

“other winnings”. Sec. 24 (B)(1) of the NIRC, as amended by RA 10963 (TRAIN), provides for
tax on certain passive income to which a final tax rate of twenty percent (20%) is imposed on
other winnings (except winnings amounting to ten thousand pesos (P10,000) or less from
Philippine Charity Sweepstakes and Lotto shall be exempt), derived from sources within the
Philippines. From the foregoing, it can be concluded that P5,000 is not taxable since winnings
not exceeding ten thousand pesos (P10,000) are not subject to tax. P1,000,000 is likewise not
subject to tax because this is excluded from the gross income under Sec. 32 (B)(7)(d) of the
NIRC which provides that all prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations shall not be included in gross income and shall
be exempted from taxation.

B.12. JKL-Philippines is a domestic corporation affiliated with JKL-Japan, a Japan-based

information technology company with affiliates across the world. Mr. F is a Filipino
engineer employed by JKL-Philippines. In 2018, Mr. F was sent to the Tokyo branch of JKL-
Japan based on a contract entered into between the two (2) companies. Under the said
contract, Mr. F would be compensated by JKL- Philippines for the months spent in the
Philippines, and by JKL-Japan for months spent in Japan. For the entirety of 2018, Mr. F
spent ten (10) months in the Tokyo branch.

On the other hand, Mr. J, a Japanese engineer employed by JKL-Japan, was sent to Manila
to work with JKL-Philippines as a technical consultant. Based on the contract between the
two (2) companies, Mr. J's annual compensation would still be paid by JKL-Japan.
However, he would be paid additional compensation by JKL-Philippines for the months
spent working as a consultant. For 2018, Mr. J stayed in the Philippines for five (5) months.

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 In 2019, the Bureau of Internal Revenue (BIR) assessed JKL-Philippines for deficiency
withholding taxes for both Mr. F and Mr. J for the year 2018. As to Mr. F, the BIR argued
that he is a resident citizen; hence, his income tax should be based on his worldwide
income. As to Mr. J, the BIR argued that he is a resident alien; hence, his income tax should
be based on his income from sources within the Philippines at the schedular rate under
Section 24 (A) (2) of the Tax Code, as amended by Republic Act No. 10963, or the "Tax
Reform for Acceleration and Inclusion" Law.

(a) ls the BIR correct in basing its income tax assessment on Mr. F's worldwide income?
Explain. (3%)

Suggested Answer: No, the BIR is incorrect in basing its income tax assessment on Mr.
F's worldwide income. Sec. 22 (E)(3) provides that a non-resident citizen is a citizen of
the Philippines who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the
taxable year. Sec. 23 (B) of the NIRC provides that a non-resident citizen is taxable only
on income derived from sources within the Philippines. Here, Mr. F is a non-resident
citizen since he stayed outside the Philippines for about ten (10) months, his presence
abroad considered to be most of the time during the taxable year. Hence, Mr. F shall
only be taxed on income derived from sources within the Philippines.

(b) Is the BIR correct in basing its income tax assessment on Mr. J's income within the
Philippines at the schedular rate? Explain. (3%)

Suggested Answer: No, the BIR is incorrect in basing its income tax assessment on Mr.
J's income within the Philippines at the schedular rate. Sec. 25 (A) of the NIRC provides
that a nonresident alien individual who shall come to the Philippines and stay therein
for an aggregate period of more than 180 days during any calendar year shall be
deemed a 'nonresident alien doing business in the Philippines' and shall be subject to
an income tax in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the Philippines.
However, Sec. 25 (B) of the NIRC provides that the entire income received from all
sources within the Philippines by every nonresident alien individual not engaged in
trade or business within the Philippines shall be subject to a tax equal to 25% of such
income. Here, Mr. J is considered as nonresident alien individual not engaged in trade
or business within the Philippines since his stay in the Philippines was only for a
period of 5 months or 150 days, short of the 180-day requirement in order to be
considered as a nonresident alien doing business in the Philippines. Hence, Mr. J is
subject to the income tax rate of 25% of his gross income, and not at the schedular rate.

B.13. As a way to augment the income of the employees of DEF, Inc., a private corporation, the
management decided to grant a special stipend of P50,000.00 for the first vacation leave that
any employee takes during a given calendar year. In addition, the senior engineers were
also given housing inside the factory compound for the purpose of ensuring that there are

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 available engineers within the premises every time there is a breakdown in the factory
machineries and equipment.

(a) Is the special stipend part of the taxable income of the employees receiving the
same? If so, what tax is applicable and what is the tax rate? Explain. (3%)

Suggested Answer: Yes, the special stipend is part of the taxable income of the
employees receiving the same because it is subject to fringe benefit tax. A “fringe
benefit” is defined as being any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee. Fringe benefits of rank-
and-file employees are treated as part of his compensation income subject to income
tax and withholding tax on compensation income, which must be withheld and
deducted by his employer from the compensation income of the employee. Being part
of compensation income, it subject to the 0%-35% graduated income tax rates provided
for under Sec. 24(A)(2)(a) of the NIRC, as amended by RA 10963 (TRAIN).

(b) Is the cash equivalent value of the housing facilities received by the senior
engineers subject to fringe benefits tax? Explain. (3%)

Suggested Answer: No, the housing facilities received by the engineers are not subject
to fringe benefits tax. Under RR No. 3-98, fringe benefit tax is not imposed if (1) the
fringe benefit is required by the nature of or necessary to the trade, business or
profession of the employer; or (2) when the fringe benefit is for the convenience or
advantage of the employer. Here, the housing facilities received by the engineers are
for the convenience of the employer, hence, not subject to fringe benefits tax.

B.14. City R owns a piece of land which it leased to V Corp. In sum, V Corp. constructed a public
market thereon and leased the stalls to vendors and small storeowners. The City Assessor
then issued a notice of assessment against V Corp. for the payment of real property taxes
(RPT) accruing on the public market building, as well as on the land where said market
stands.

Is the City Assessor correct in including the land in its assessment of RPT against V Corp.,
even if the same is owned by City R? Explain. (3%)

Suggested Answer: Yes, the City Assessor correct in including the land in its assessment of
RPT against V Corp., even if the same is owned by City R. While Sec. 234 of the LGC provides
that real property owned by the Republic of the Philippines or any of its political subdivisions
are exempted from payment of the real property tax, it admits of an exception where the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.
Here, the land, although owned by the city, is not exempt from real property tax because the
beneficial use has been granted to a taxable person, in this case, V. Corp.

B.15. Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual
compensation of Pl0,000,000.00, while Mr. S is a security guard in the same company

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 earning an annual compensation of P200,000.00. Both of them source their income only from
their employment with MNO Company.

(a) At the end of the year, is Mr. C personally required to file an annual income tax
return? Explain. (2.5%)

Suggested Answer: No, Mr. C is not required to personally file an annual income tax
return. Sec. 51-A of the NIRC, as inserted by RA 10963 (TRAIN), provides for
substituted filing of income tax returns by employees receiving purely compensation
income. Individuals taxpayers receiving purely compensation income, regardless of
amount, from only one employer in the Philippines for the calendar year, the income
tax of which has been withheld correctly by the said employer (tax due equals tax
withheld) shall not be required to file an annual income tax return. The certificate of
withholding filed by the respective employers, duly stamped “received” by the BIR,
shall be tantamount to the substituted filing of income tax returns by said employees.

(b) How about Mr. S? Is he personally required to file an annual income tax return?
Explain. (2.5%)

Suggested Answer: No, Mr. S is not required to file an annual income tax return
because he is exempt from income tax. Sec. 24 (A)(2)(a) provides that income of
individuals derived for each taxable year from all sources within and without the
Philippines by every individual citizen of the Philippines the amount of which is not
over P250,000 shall be taxable at the rate of 0%.

B.16. (a) Differentiate between a calendar year and a fiscal year. (2.5%)

Suggested Answer:

CALENDAR YEAR FISCAL YEAR

As to period Accounting period of 12 Accounting period of 12 months
months ending on the last day ending on the last day of any
of December. month other than December.
As to who may use 1. Individuals Corporations only.
2. General Professional
Partnerships
3. Corporations
4. Estate and Trusts

(b) When is the deadline for the filing of a corporation's final adjustment return for a
calendar year? How about for a fiscal year? (2.5%)

Suggested Answer: For calendar year, the final return is filed on or before the 15th day of April
following the close of the taxable year. For a fiscal year, the final return is filed on or before
the 15th day of the 4th month following the close of the taxable year.

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B.17. XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of Internal
Revenue. It secured a loan from ABC Bank with a 6% per annum interest. All interest
payments made by XYZ Corp. to ABC Bank is subject to a 2% creditable withholding tax.
At the same time, XYZ Corp. has a trust deposit with ABC Bank in the amount of
Pl00,000,000.00, which earns 2% interest per annum, but is subject to a 20% final
withholding tax on the interest income received by XYZ Corp.

(a) Who are the withholding agents in the case of: 1. the 20% final withholding tax; and
2. the 2% creditable withholding tax? Explain. (2.5%)

Suggested Answer:
1. ABC Bank. In the operation of the withholding tax system, the payee is the
taxpayer, the person on whom the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the government for the collection of the tax
in order to ensure its payment. Payors of withholding taxes are by themselves
constituted as withholding agents of the BIR. Here, the payee is XYZ Corp. and
the payor is ABC Bank. Hence, ABC Bank is the withholding agent.

2. XYZ Corp. In the operation of the withholding tax system, the payee is the
taxpayer, the person on whom the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the government for the collection of the tax
in order to ensure its payment. Payors of withholding taxes are by themselves
constituted as withholding agents of the BIR. Here, the payee ABC Bank. and the
payor is XYZ Corp. Hence, XYZ Corp. is the withholding agent.

(b) When is the deadline for filing a judicial claim for refund for any excess or
erroneous taxes paid in the case of: 1. the 20% final withholding tax; and 2. the 2%
creditable withholding tax? (2.5%)

Suggested Answer:
1. The deadline is within 2 years from the date of payment of the tax. [Sec. 229, NIRC]
2. The deadline is within 2 years from the date of monthly remittance of the claimed
creditable withholding taxes. [Secs. 204(c) and 229 of the NIRC; Sec. 2.58 of RR No. 2-
98, as amended by RR No. 17-2003]

B.18. After a Bureau of Internal Revenue (BIR) audit, T Corp., a domestic corporation engaged in
buying and selling of scrap metals, was found to have deficiency income tax of
P25,000,000.00, including interests and penalties, for the year 2012. For 2012, T Corp. filed
its income tax return (ITR) on April 15, 2013 because it used the calendar year for its
accounting. The BIR sent the Preliminary Assessment Notice (PAN) on December 23, 2015,
and eventually, the Final Assessment Notice (FAN) on April 11, 2016, which were received
by T Corp. on the same dates that they were sent. Upon receipt of the FAN, T Corp. filed its
protest letter on June 25, 2016.

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 Thereafter, and without action from the Commissioner of Internal Revenue (CIR), T Corp.
filed a petition for review before the Court of Tax Appeals, alleging that the assessment has
prescribed. For its part, the CIR moved to dismiss the case, pointing out that the assessment
had already become final because the protest was filed beyond the allowable period.

(a) Is T Corp.'s contention regarding the prescription of the assessment meritorious?

Explain. (2.5%)

Suggested Answer: No, T Corp.'s contention regarding the prescription of the

assessment is not meritorious. Sec. 203 of the NIRC provides that the assessment of
national internal revenue taxes prescribes within 3 years from the date of filing of the
return or from the last date prescribed by law, whichever comes later, if the tax return
filed was not false or fraudulent. Here, the FAN was issued on April 11, 2016 which is
within the 3-year prescriptive period counted from April 15, 2013, the date of filing of
the return. Hence, the assessment has not prescribed.

(b) Should the CIR's motion to dismiss be granted? Explain. (2.5%)

Suggested Answer: Yes, the CIR’s motion to dismiss should be granted. Protest to the
FAN must be made within 30 days from date of receipt of such FAN. The filing of the
protest against the FAN within the 30-day period from date of receipt is mandatory;
otherwise, the assessment would become final and executory. (RR No. 12-99) Here, the
protest to the FAN was filed on June 25, 2016 which is more than 30 days after the date
of its receipt--April 11, 2016. Hence, the assessment had already become final because
the protest was filed beyond the allowable period.

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 CTA 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%)

Suggested Answer: No, the BIR’s contention is not meritorious. In case of claiming
refund of erroneously paid or illegally collected taxes or penalties under Sec. 229 of
the NIRC, if the BIR denies the claim within the two-year period, the taxpayer should
file his judicial claim with the CTA Division within 30 days from the receipt of the

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 CIR’s denial but within the 2-year period from the date of payment. If, however, the
BIR does not act on the claim and the 2-year period is about to expire, then the taxpayer
should file a judicial claim within the same 2-year period from the date of payment of
the tax or penalty, regardless of any supervening cause that may arise after payment.,
otherwise, he will be barred. There is no need for exhaustion of administrative
remedies; it is only important that the administrative claim should be priorly filed.

(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%)

Suggested Answer: No, my answer would not be the same. BIR’s contention that the
claim must be dismissed by the CTA 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, is correct. In case of claiming for refund of unutilized excess input
VAT under Sec. 228 of the NIRC, the administrative claim must be filed with the CIR
within 2 years from the end of the taxable quarter when the zero-rated sales were
made. After filing the administrative claim, the BIR has 90 days from the date of
submission of complete documents in support of the administrative claim within
which to decide. The BIR official is now required to decide on the claim within the 90-
day period, failure to do so shall be punishable under Sec. 269, NIRC. There is a need
for exhaustion of administrative remedies—there must be a decision or denial of the
administrative claim by the BIR before filing the judicial claim.

B.20. ABC, Inc. owns a 950-square meter commercial lot in Quezon City. It received a notice of
assessment from the City Assessor, subjecting the property to real property taxes (RPT).
Believing that the assessment was erroneous, ABC, Inc. filed a protest with the City
Treasurer. However, for failure to pay the RPT, the City Treasurer dismissed the protest.

(a) Was the City Treasurer correct in dismissing ABC, Inc.'s protest? Explain. (2.5%)

Suggested Answer: Yes, the City treasurer is correct in dismissing ABC, Inc’s protest.
Sec. 252 of the LGC provides that no protest shall be entertained unless the tax is first
paid. When a taxpayer desires for any reason to pay his tax under protest, he shall
indicate the amount or portion thereof which he is contesting and such protest shall
be annotated on the tax receipts by writing thereon the word “paid under protest.”
The protest shall be confirmed in writing, with a statement of the ground therefor,
within 30 days. The written protest shall be filed with the provincial, city or municipal
treasurers with the Metropolitan Manila Area, who shall decide the protest within 60
days from the receipt of the protest. It is thus a requirement to pay the tax first under
protest before the written protest shall be filed with the city treasurer.

(b) Assuming that ABC, Inc. decides to appeal the dismissal, where should the appeal
be filed? (2.5%)

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 Suggested Answer: The appeal should be filed with the Local Board of Assessment
Appeals (LBAA). Sec. 226 of the LGC provides that any owner or person having legal
interest in the property who is not satisfied with the action of the provincial, city or
municipal assessor in the assessment of his property may, within sixty (60) days from
the date of receipt of the written notice of assessment, appeal to the Board of
Assessment Appeals of the provincial or city by filing a petition under oath in the form
prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.

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