1.

AA Municipality, has an ordinance which requires that all stores, restaurants, and other
establishments selling liquor should pay a fixed annual fee of P20,000. Subsequently, the
municipal board proposed and ordinance imposing a sales tax equivalent to 5% of the
amount paid for the purchase or consumption of liquor in stores, restaurants and other
establishments. The municipal mayor refused to sign the ordinance on the ground that it
would constitute double taxation. Is the refusal of the mayor justified? Reason briefly. (5%)

No,the mayor’s refusal is unjustified.

Double taxation exist when additional taxes are laid on the same subject on same
taxing jurisdiction during same taxing period and for the same purpose.
In this case, the Fixed annual fee is not a tax per se while the 5% contribution is
clearly a tax, though both are levied by the same subject but the two cannot be said to be
levied for the same purpose. Therefore, the mayor’s refusal is unjustified.

2. May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims
against his other tax liabilities? Explain your answer. (3%)

No, a taxpayer who has pending claims for VAT input Credit or refund cannot set-off
such claims against other tax liabilities because taxes are classified to different types for
different purpose and each tax as specified by the its provision in law sets different tax rates.

3. Bank A deposits money with Bank B which earns interest that is subjected to the 20% final
withholding tax. At the same time, Bank A is subjected to the 5% gross receipts tax on its
interest income on loan transactions to customers. Bank A claims that there is double
taxation and that they should no longer be taxed of one of the two. Is Bank A’s claim correct?
(5%)

No, Bank A is not correct.

Double taxation exist when additional taxes are laid on the same subject on same
taxing jurisdiction during same taxing period and for the same purpose.
In this case, the taxable subject is different wherein the interest is levied from the
money deposit while the other is for loan transactions. Therefore, Bank A is incorrect.

4. Differentiate tax avoidance from tax evasion. (3%)

Tax avoidance pertains to schemes employed by a tax payer to minimize his taxes
which are not contrary to law, while tax evasion on the other hand pertains to unlawful
schemes employed by the taxpayer in order to decrease the taxable amount.

5. Briefly explain the following doctrines: A. Lifeblood Theory. (2%) B. Necessity Theory. (2%)
C. Benefits Received Theory. (2%)

A. Lifeblood theory states that taxes are the lifeblood of the government, thus a government
cannot exist without taxes, thus it needs taxes in order to support the government. And for
this reason
B. Necessity Theory states that a state necessarily needs to collect taxes in order to
preserve its Sovereignty and the means to support the government.
C. Benefits Received Theory- pertains to the effects of the collection of taxes, That by giving
the tax directly support the government which would do its efforts to improve the State which
its People may benefit.
6. Explain briefly the principles of a sound tax system. (3%)

The principle of sound tax system sates that a tax system must have a fiscal adequacy
which means that sources of revenue must be sufficient to meet the government
expenditures, administrative feasibility which pertains to laws and regulations must be
capable of being effectively enforced and theoretical justice which means that taxes must be
based on the tax payer’s ability to pay.

7. XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It
has no more cash and all it has are unsold glass panels. It received an assessment from BIR
for deficiency income taxes. It wasn’t to pay but due to lack of cash, it seeks permission to
pay in kind with glass panes. Should the BIR grant the requested permission? (2%)

No, BIR should not grant the requested permission.

Taxes is pecuniary in nature and therefore cannot be substituted by things other
than money.

8. Congress passed a sin tax that increased the tax rates on cigarettes by 1,000%. The law
was thought to be sufficient to drive many cigarette companies out of business, and was
questioned by a cigarette company that would go out of business because it would not be
able to pay the increased tax. Is there any merit on the part of the cigarette company’s query?
Explain. (5%)

Yes, There is merit on the part of the cigarette company’s query.

Taxation is one of the inherent powers of the State whose purpose is to support the
government. However, even if inherent, it is subjected to limitations such as due process,
taht such should not be confiscatory nor oppressive.
In this case, the company’s query must be given merit as to deny such would be a
violation to the due process of law, Furthermore, the intention of congress in making such
law is clearly oppressive and confiscatory. Therefore, there is merit on the part of the
cigarette company’s query.

9. Briefly discuss the Inherent Limitations of the Power of Taxation. (5%)

The inherent limitations of the Power of Taxation is that it cannot levy taxes on itself thus any
governmental agencies performing essential governmental purposes are exempted from tax
contributions, because by doing so would entail that it is taxing itself.

10. Define Taxation. (3%)

Taxation is one of the inherent powers of the State wherein taxes are enforced to the person
or property of the State by virtue of its Sovereignty, for the support of the government and for
public needs.
11. Ninjavan Airways is a foreign corporation organized and existing under and by virtue of
the Mexico. Its principal office is likewise located in Mexico. In the Philippines it is an
international carrier having no landing rights. Ninjavan Airways has a general sales agent in
the Philippines, Keri Corp. Ker Corp sells passage documents for compensation for Ninjavan
Airways’ off-line flights for the carriage of passenger and cargo between ports or points
outside the territorial jurisdiction of the Phiilppines. Ninjavan Arways is likewise not
registered with the Securities and Exchange Commission as a corporation, branch office or
as a partnership. It is not licensed to do business in the Philippines. It paid a corporate tax of
30% of its gross billings. However, it subsequently claim for refund contending that its
income should be taxed at the rate of 2 ½% of its gross Philippines billings as an
International Carrier doing business in the Philippines. It claims that its income is not
sourced within the Philippines.Is Ninajavan Airways correct? Explain (5%)

Yes, Ninjavan Airways is correct.

The tax code states that taxes should be levied on services performed inside our
territory.
In this case, since the business merely operates through its agent as an
International Carrier doing business in the Philippines, and no evidence states that such
services was rendered here in our territory then Philippines has no jurisdiction to tax the
company. Therefore, Ninjavan Airways is correct.

12. Differentiate between double taxation in the strict sense and in a broad sense and give
an example of each. (3%)

Double taxation in a strict sense is when a subject is taxed by same taxing authority, on the
same taxing period within the same taxing jurisdiction, while indirect double taxation extends
to all cases where there is burden of two or more impositions for example when a company
is taxed by its corporate profits first then taxed again when profits are distributed as
dividends.

13. Chichi Insurance Corporation authorized Mr. Goku, its president and owner of 99.99% of
its shareholders to sell a commercial building for an amount not less P 40 Million.A month
later, Mr. Goku purportedly sold the property for P50 Million to Mr. Vegeta, who in turn, sold
the same property to Bulma Inc. These transactions were evidenced by Deeds of Absolute
Sale notarized on the same day by the same notary public. For the sale of the property to
Bulma Inc., Mr. Vegeta paid capital gains tax in the amount of P10 Million. Three years later
Mr. Goku died.The Commissioner of Internal Revenue now assesses the estate of Mr. Goku
for deficiency tax and alleges that the series of transactions for the sale of the building is one
in the nature of tax evasion. The estate of Mr. Goku claims that it is a valid and legitimate
effect of a well-thought tax planning.Is the Commissioner of Internal Revenue correct?
Explain. (5%)

14. Ragnar Lothbrok, a lessor of a property, pays real estate tax on the premises, a real
estate dealer’s tax based on the rental receipts and income tax on the rentals. Ragnar
claims that this is double taxation. Decide. (5%)

No, there is no double taxation.

Double taxation exist when additional taxes are laid on the same subject on same taxing
jurisdiction during same taxing period and for the same purpose.
In this case, Different subject are taxed where one pertains to the real estate where the
property is taxed while the other for rental and income where the income from such property
is taxed. Therefore, there is no double taxation.
15. In 2009, Eren Yaeger, a resident Filipino citizen, received dividend income from a US-
based corporation which owns a chain of Filipino restaurants in the West Coast, USA. The
dividend remitted to Eren is subject to US withholding tax with respect to a non-resident alien
like Eren. (A.)What will be your advice to Eren in order to lessen the impact of possible
double taxation on the same income? (3%) (B.) Would your answer in A, be in the same if
Eren became a US immigrant in 2008 and had become a non-resident Filipino citizen?
Explain the difference in treatment for Philippines income tax purposes. (3%)

A. The tax code requires that a resident citizen are taxed on its taxable income both inside
and outside, in order for Erin to prevent it, he must apply for US citizenship in order to lessen
the impact of possible double taxation on the same income.
B. IF Erin becomes a US immigrant my answer would be different, the tax code states that
immigrants are considered Non-resident Citizens, and therefore not subject to taxation on
taxable incomes outside the Philippines.

16. May the Congress, under the 1987 Constitution, abolish the power to tax of the local
governments? (3%)
No, the power of taxation of the local government cannot be abolish.
The 1987 constitution gives the local government the power to create its own revenues, and
therefore it may levy taxes, fees or any charges in accordance and limitations set by the
legislature. Since such power is provided by the constitution itself, then the congress may
not enact laws that would abolish such power because by doing so would tantamount to a
constitutional violation.