DOMONDON Bar Review Series

FREE PRE-WEEK

PRE-WEEK NOTES
TAXATION LAW
Specially prepared for the LEGAL EDUCATION BOARD
for the use of Candidates for the January 23, 2022 Bar
Examinations, specially those affected by Typhoon
Odette. The assistance of Central Book Store in printing
and releasing these materials is greatly appreciated.

COLOR CODED: HYPOTHETICAL

BAR REVIEW QUESTIONS &
ANSWERS
Based on the SYLLABUS FOR
THE 2020/21 BAR EXAMINATIONS
Per Bar Bulletin No. 31, s. 2022 issued January 4, 2022
Suggested answers are based on selected canonical
jurisprudential doctrines up to March 31, 2021;
laws, rules and regulations until June 30, 2019

by

ABELARDO T. DOMONDON
AB, BSC, MA, JD, LLM, DCL (C.A.U.), PhD (CAND.)
Lawyer-CPA-Customs Broker
Commissioner, Legal Education Board

2022 SPECIAL EDITION

For VENNY VALDEZ my one and only whose inspiration
and support brought me to where I am. For my late
parents, JOSE CONCEPCION DOMONDON and INES
JIMENEZ TORRES, who shall always be honored and
remembered.

2022 Special Edition

Copyright 2022 by Abelardo T. Domondon

I am not registering this work with the Philippine

Intellectual Property Office but I own the materials from the
moment I created them.

All persons are allowed free use of these materials

which may be reproduced in any form or any means,
electronic or mechanical, including photocopying or
xeroxing without written permission from the author so
long as the authorship is recognized.

Please dessiminate and distribute to those in need of

the materials.

ABELARDO T. DOMONDON
 BAR CANDIDATE’S PRAYER*

Lord God, the creator of all, and fount of all

knowledge and wisdom, I implore you to guide me in my
undertaking to become a lawyer.

Open my mind to absorb, remember and live the

principles of law and justice distilled in my readings and in
the lectures I attend.

I beseech you to illumine the thoughts of the bar

reviewers so they could be your instruments in guiding me.

Fill me with your grace, so I would have a clear mind

in identifying the issues raised in the bar questions. Give
light for me to discover the correct, just and ethical
answers to the bar questions so I could pass the Bar.

Finally, grant me the serenity to accept whatever is

thy will and show me the correct path to take for your
greater glory.

AMEN

___________
* A non-sectarian prayer written by Prof. Abelardo T. Domondon.

3
 FOREWORD
Typhoon Odette has caused unspeakable
devastation in the Visayan region. With barely a month
before the Bar Examinations, a lot of the bar reviewees
therein have lost their homes, their books and their
momentum.
The Legal Education Board and its stakeholders, the
Integrated Bar of the Philippines (IBP), the Philippine
Association of Law Schools (PALS) and the Association of
Law Students of the Philippines (ALSP) have quickly
joined their efforts to assist the reviewees in their dire
predicament. Soon, not a few legal education institutions
have made their pre-week reviewers available online to
those seriously hit by Odette.
On the other hand, with no time to waste, the
reviewer is determined to read only what he must know,
can process and might remember during crunch time.
“Pre-Week Notes on Taxation”, written by seasoned
bar reviewer and Commissioner of the LEB, Hon.
Abelardo T. Doondon, delivers just that.
A subject in which amendments and repeals are
commonplace, the book walks the reader through the
remaining as well as the new tax laws, so methodically as
only an author who is a lawyer, certified public accountant,
statistician, foreign service officer and most importantly, an
educator – all rolled into one – can. Shorn of any
condition for its publication and released without the
author expecting or desiring earnings therefrom, it is
intended for this book, foremost, to revive the bar

4
candidates’ optimism and take away from them any feeling
of bar disaster. Given its unhindered availability, through
the generosity of Mr. Paolo Sibal and Central Book
Supply, anyone who wishes to expand his or her
knowledge of Tax Law, affected or not by Typhoon Odette,
will benefit exceedingly from this material.
While the intellectual gain is invaluable, there is more
to this work than the academic light it brings. In the midst
of the uncertainty, panic and grief that Odette has inflicted
upon the properties in the Visayas and the spirit of its
people, and as the pandemic continues to have a grip on
all nations, this book, a product of pure altruism, is a
reminder of all that is still right and good in us, in others
and in this world.

ANNA MARIE MELANIE B. TRINIDAD

Chairperson, Legal Education Board

5
 PREFACE TO THE 2022 SPECIAL EDITION

Bar Bulletin No. 31, S. 2022 is a game-changer because it

sought to “(a) reduce the coverage; and (b) shorten the duration
of the 2020/21 Bar Examinations to only two days: January 23,
2022, Sunday; and January 25, 2022, Tuesday.” All pre-week
materials have to be adjusted to meet the reduced coverage as
well the attendant limitation of the number of questions. From
the former 18 to 20 questions with subdivisions, there are now
only three (3) questions. The Bar Candidate is advised to
concentrate on the basic objective questions as well as
canonical doctrines from 2015 up to 2022, specially the case of
La Sallian Educational Innovators (etc.), Inc. v. Commissioner
of Internal Revenue, G.R. No. 202792, February 27, 2019.

This Book was written as a labor of love for those who are
going to take the January 23, 2022 Bar Examination in Taxation
Law serving as a memory jogger so the reader should note the
following marks:
*** must know.
** should know.
* nice to know.
Without any star, just browse.

Master the concepts not the questions. This Pre-Week

Notes is a summary of the concepts that would probably be asked
in the January 23, 2022 Bar Examination in Taxation Law.
The questions merely illustrate how the concepts are applied to a
set of facts.

All the best for the 2022 Bar Candidates especially for the
victims of Typhoon “Odette.” My prayers are always with you.

Ad Majorem Dei Gloriam.

267 Carandang Avenue

Bigain 1st, San Jose, Batangas
January 7, 2022
THE AUTHOR

6
 i. BASIC PRINCIPLES OF TAXATION IN
THE CONSTITUTION

***1. The exercise of the power of taxation is

considered as plenary and unlimited because the very
existence of the government is dependent for its existence
upon the revenues collected from taxation.
Are there any limitations imposed upon the power of
taxation ? Why ? If there are, what in general are the
limitations ?
SUGGESTED ANSWER: Yes. The limitations exist in order to
prevent an abuse of this otherwise unlimited power. The limitations on
the power of taxation are the following:
a. Inherent limitations. These are part and parcel of the
power of taxation and originate from the very nature of taxation.
b. Constitutional limitations. These are the restrictions
imposed by the constitution.
The limitations on power to tax, not assumed. [Kasamahan Realty
Development Corporation (now known as Stag Trading Corporation) v. Commissioner
of Internal Revenue, CTA Case No. 6204, February 16, 2005)
The failure of a tax measure to achieve its objectives is not a
ground for its nullification. (Soriano v. Secretary of Finance, G.R. No. 184450,
and companion cases, January 24, 2017)
Ch

***2. Taxation as an attribute of sovereignty is

peculiarly and essentially legislative. As a power, it had
been described as broad, unlimited, supreme and plenary,
subject only to constitutional restrictions and its inherent
limitations. Discuss said inherent limitations.
SUGGESTED ANSWER: The inherent limitations on the power
of taxation which are also known as the elements, tenets or
characteristics of taxation are:
a. The tax imposed should be for a public purpose.
b. There should be no improper delegation of the taxing
power.
c. The power to tax is limited to the territorial jurisdiction of
the taxing government.
d. Exemption of government entities is recognized.
e. Observance of international comity such that property of
foreign sovereigns, are not subject to taxation.

7
 Some authorities include double taxation. While this may be
so, it is submitted that double taxation is properly a constitutional
limitation.

*** 3. The European Union General System of

Preferences (EU GSP+) is a special incentive arrangement
for sustainable development and good governance in the
form of zero duties. It is a unilateral trade arrangement,
which offers zero tariffs on 6,274 products or 66% of all EU
tariff lines. It is a part of the broader Generalized System of
Preferences (GSP) of the EU and, as a developmental tool it
seeks to encourage export diversification in developing
countries. Among the industries that enjoy the privilege is
the pineapple industry. In order to continually enjoy
protection under EU GSP+ the Philippines should ensure
that the EU Monitoring Team must not identify a serious
failure to its effective implementation of any of numerous
conventions which include International Drug Control
Conventions, UN Human Rights Conventions International
Covenant on Civil and Political Rights (ICCPR), etc.
Unfortunately, the EU GSP+ Momitoring Team, in its last
visit, expressed grave concerns on the Philippines’
performance on human rights, the war on drugs, etc.. It
now appears that the Philippines might lose the privilege of
enjoying the benefits under the EU GSP+.
To provide means for the rehabilitation and
stabilization of the preserved pineapple industry so as to
prepare it for the eventuality of the loss of the EU GPS+
privilege, Congress passes a law increasing the existing
tax on the processing of preserved pineapple on a
graduated basis. All collections made under the law are to
accrue to a special fund to be spent only for the purposes
enumerated therein, among which are to place the
preserved pineapple industry in a position to maintain and
ultimately to insure its continued existence despite the loss
of the EU GSP+ privilege, and to afford laborers employed
in the industry a living wage and to improve their working
conditions. Mr. Omar Reyes, a pineapple planter, files a suit
questioning the constitutionality of the law alleging that the
tax is not for a public purpose as the same is being levied

8
exclusively for the aid and support of the preserved
pineapply industry. Decide the same.
SUGGESTED ANSWER: The tax is valid because it is for a
public purpose.
It is an exercise of police power which is for the general welfare
of the entire country because the preserved pineapple industry is one
of the pillars of the Philippine economy which affects the welfare of the
State. (Republic v. Bacolod-Murcia Co., G.R. No. L-19824, July 9, 1966)
It is a pillar of the Philippine economy providing employment for
thousands of workers, providing much needed foreign exchange, and
otherwise contributes to economic development and progress.
Public purpose is the heart of a tax law. [Planters Products, Inc. v.
Fertiphil Corporation, 548 SCRA 485 (2008)]

***
4. Explain the general rule on non-delegation of
the legislative authority to tax as well as its constitutional
basis.
SUGGESTED ANSWER: There should be no improper
delegation of legislative authority to tax. The power to tax is inherent
in the State, such power being inherently legislative, based on the
principle that taxes are a grant of the people who are taxed, and the
grant must be made by the immediate representatives of the people;
and where the people have laid the power, there it must remain and
be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation,
G.R. Nos. 167274-75, July 21, 2008)
The constitutional principle of separation of powers ordains that
each of the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere. [Abakada Guro Party List (Formerly AASJS),
etc. v. Ermita, G.R. No.168056, September 1, 2005]
A logical corollary to the doctrine of separation of powers is the
principle of non-delegation of powers, as expressed in the Latin
maxim: potestas delegata non delegari potest which means that what
has been delegated, cannot be further delegated. (Abakada, supra
citations omitted)
This doctrine is based on the ethical principle that such
delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own
judgment and not through the intervening mind of another. (Abakada,
supra)

***
5. What is the extent of the legislative power that
may not be delegated ?

9
 SUGGESTED ANSWER: The legislative power that may not
be delegated is the discretion to ascertain the following:
a. basis, amount, or rate of tax;
b. person or property that is subject to tax;
c. exemptions and exclusions from tax; and
d. manner of collecting the tax - may not be delegated away
by Congress. (La Suerte Cigar & Cigarette Factory v. Court of Appeals, G.R. No.
125346, November 11, 2014, and companion cases, paraphrasing and arrangement
supplied)

***6. What are the exceptions to the rule against

delegation of the taxing power ?
SUGGESTED ANSWER: The following are some of the
instances where there may be exceptions to the rule against
delegation of the taxing power:
a. When the constitution itself authorizes the delegation
such as in the flexible tariff clause where the constitution has
authorized Congress to delegalte to the President certain aspects of
taxation;
b. Where there is a valid delegation to administrative bodies
provided there is compliance with the requirements of completeness
and existence of sufficiently determinate standards to guide the
delegate.
Where the law leaves the hands of the lawmaker complete in all
aspects there could be delegated to administrative authorities the
power of subordinate legislation, i.e. the issuance of implementing
rules and regulations.
If the law is not complete, there may still be a valid delegation to
administrative authorities provided that there exists sufficiently
determinate standards that provide adequate guidelines or limitations
in the law that map out the boundaries of the delegate’s authority and
canalize the delegation. (Soriano v. Secretary of Finance, G.R. No.
184450, and companion cases, January 24, 2017)
This would prevent a total transference of the legislative
authority to tax to the administrative authority who is not allowed to
step into the shoes of the legislature and exercise a power essentially
legislative. [Abakada Guro Party List (Formerly AASJS), etc. v. Ermita, G.R.
No. 168056, September 1, 2005]

***7. What are the constitutional limitations or

restrictions upon the taxing power ?
SUGGESTED ANSWER: There are two kinds of constitutional
limitations.

10
 a. Provisions directly affecting taxation. Direct or specific
limitations. Provisions in the constitution that contain the words tax,
taxation or others, of similar import.
Some examples of the provisions directly affecting taxation are:
1) Prohibition against imprisonment for non-payment
of poll tax. (CONST., art. III, sec. 20)
2) Majority vote of Congress for grant of tax
exemptions. [Ibid., art. VI, sec. 28 (4)]
3) President’s veto power on appropriation, revenue,
tariff bills. [Ibid., art. VI, sec. 27 (2)]
b. Provisions indirectly affecting taxation. Indirect or
general limitations. Provisions in the constitution that do NOT contain
the words tax, taxation or others of similar import.
Some examples of constitutional provisions indirectly affecting
taxation:
1) Due process. (CONST., art. III, sec. 1)
2) Equal protection. (Ibid.)
3) Religious freedom. (Ibid., sec. 5)
4) Non-impairment of obligations of contract. (Ibid.,
sec. 10)

***
8. Taxation as an attribute of sovereignty is
peculiarly and essentially legislative. As a power, it had
been described as broad, unlimited, supreme and plenary,
subject only to constitutional restrictions and its inherent
limitations. The constitutional restrictions are the specific
or direct limitations and the general or indirect limitations.
What are the specific or direct constitutional
limitations on the power of taxation ?
SUGGESTED ANSWER: The specific or direct constitutional
limitations on the power of taxation or those where there is mention of
the word “tax”, “taxation” or any of their variations such as the
following
a. Prohibition against imprisonment for non-payment of poll
tax. (CONST., art. III, sec. 20)
b. Uniformity and equality of taxation. (Ibid., art. VI, sec. 28)
c. Grant by Congress of authority to the president to impose
tariff rates. (Ibid., art. VI, sec. 28, 2nd par.)
d. Prohibition against taxation of religious, charitable
entities, and educational entities. [Ibid., art. VI, sec. 28 (3)]
e. Prohibition against taxation of non-stock, non-profit
institutions. (Ibid., art. XIV, sec. 4)
f. Majority vote of Congress for grant of tax exemptions.
[Ibid., art. VI, sec. 28 (4)]

11
 g. Prohibition on use of tax levied for special purpose. [Ibid.,
art. VI, sec. 29 (3)]
h. President’s veto power on appropriation, revenue, tariff
bills. [Ibid., art. VI, sec. 27 (2)]
i. Non-impairment of jurisdiction of the Supreme Court.
(Ibid., art. VIII, sec. 5)
j. Grant of power to the local government units to create its
(their) own sources of revenue. (Ibid., art. X, sec. 5)
k. Flexible tariff clause. [Ibid., art. VI, sec. 28 (2)]
l. Exemption from real property taxes. [Ibid., art. VI, sec. 28 (3)]
m. No appropriation or use of public money for religious
purposes. [[bid., art. VI, sec. 29 (2)]
n. Mandate for Congress to evolve a progressive system of
taxation. [Ibid, art. VI, Sec. 28 (1), 2nd sentence]
o. Origination of appropriation, revenue or tariff bills. (Ibid.,
art. VI, sec. 24)
p. Automatic release of LGU’s just share in national taxes.
(Ibid., art. X, sec. 6)
q. Tax exemption of grants, endowments, donations or
contributions. [Ibid., art. XIV, sec. 4 (4)]
NOTE NOT PART OF THE ANSWER: The reader should note that
the specific or direct constitutional provisions include words like tax, taxation,
revenue or tariff bills, use of public money, or words of similar import WHILE
the general or indirect constitutional limitations do not include such words.

***9. Under the 1987 Constitution, may the

government tax income of non-profit educational
institution operated by religious orders ? What policy
considerations are to be taken into account ?
SUGGESTED ANSWER: No. The revenue of non-stock, non-
profit educational institutions which are actually, directly and
exclusively used for educational purposes, irrespective of whether or
not they are operated by religious orders under the 1987 Constitution.
are exempt from income taxation. (La Sallian Educational Innovators (etc.), Inc.
v. Commissioner of Internal Revenue, G.R. No. 202792, February 27, 2019 citing 1987
Constitution, Article XIV)
The policy consideration is to encourage the establishment of
educational institutions which are not profit motivated. The tax
exemption would translate to lower tuition fees providing access to
education for all

***9. What does constitutional equality in taxation

mean?

12
 SUGGESTED ANSWER: Equality of taxation means that all
persons who are similarly situated should be treated alike both in
privileges conferred and burdens imposed.
Constitutional equality in taxation means the application of the
concept of equal protection of the laws which prohibits discrimination
other than these instances where there is valid classification.
Thus, persons who are similarly situated, or who belong to the
same class, should be given by law the same protection and privileges
as well as imposed the same burdens and obligations.
“The constitutional guarantee of equal protection is not violated
by an executive issuance which was issued to simply reinforce
existing taxes applicable to both the private and public sector.”
[Confederation for Unity, Recognition and Advancement of Government Employees
(Courage) v. Commissioner, etc., G.R. No. 213446, and companion cases July 03,
2018, paraphrasing supplied]

***10. What are the requisites for a valid

classification ?
SUGGESTED ANSWER: All that is required of a valid
classification is that it be reasonable, which means that
a. the classification should be based on substantial
distinctions which make for real differences, that
b. it must be germane to the purpose of the law; that
c. it must not be limited to existing conditions only; and that
d. it must apply equally to each member of the class. This
Court has held that the standard is satisfied if the classification or
distinction is based on a reasonable foundation or rational basis and is
not palpably arbitrary.
The equal protection clause recognizes a valid classification,
that is, a classification that has a reasonable foundation or rational
basis and not arbitrary. (Drugstores Association of the Philippines, Inc., et al. v.
National Council on Disability Affairs, G.R. No. 194561, September 14, 2016)
ALTERNATIVE STATEMENT: The United States Supreme
Court has established different tests to determine the validity of a
classification and compliance with the equal protection clause. The
recognized tests are:
a. strict scrutiny (or compelling interest test) for laws
dealing with freedom of the mind or restricting the political process.
Applying strict scrutiny, the focus is on the presence of compelling,
rather than substantial, governmental interest and on the absence of
less restrictive means for achieving that interest. (White Light Corporation
v. City of Manila, etc., G.R. No. 122846, January 20, 2009)
b. The rational basis standard of review for economic
legislation. (Ibid.) Under this test, laws or ordinances are upheld if they
rationally further a legitimate governmental interest. (Ibid.)

13
 The standard is met if the classification or distinction is based
on a reasonable foundation or rational basis and is not palpably
arbitrary. [ABAKADA Guro Party List, etc. v. Purisima, etc., G.R. No. 166715, August
14, 2008]
c. A third standard, denominated as heightened or
intermediate level of scrutiny (in While Light this was called immediate
scrutiny), Intentional discriminations against members of a quasi-
suspect class violate equal protection unless they are substantially
related to important government objectives. (White Light, supra)

***11. Executive Order No. 97-A specified the

secured areas that shall be completely tax and duty-free in
the Subic Special Economic Zone (SSEZ) consisting of the
presently fenced-in former Subic Naval Base without
granting the same to those outside the SSEZ. Is there a
violation of the equal protection clause ?
SUGGESTED ANSWER: No. Equal protection allows for a
reasonable classification.
a. Significant distinctions exist between the two groups.
Those outside of the SSEZ maintain their business within Philippine
customs territory while those within the SSEZ operate within the so-
called “separate customs territory.” To grant the same privileges
would clearly defeat the statute’s intent to carve a territory out of the
military reservations in Subic Bay where free flow of goods and capital
is maintained.
b. The classification is germane to the purpose of Rep. Act
No. 7227. As held in Tiu, the real concern of the law is to convert the
lands formerly occupied by the US military bases into economic or
industrial areas. In furtherance of such objective, Congress deemed it
necessary to extend economic incentives, in terms of a complete
package of tax incentives and other benefits, to the establishments
within the zone to attract and encourage foreign and local investors.
c. The classification is not limited to the existing conditions
when the law was promulgated but to future conditions as well,
inasmuch as the law envisioned the former military reservation to
ultimately develop into a self-sustaining investment center.
d. The classification applies equally to all retailers found
within the “secured area.” As ruled in Tiu, the individuals and
businesses within the “secured area,” being in like circumstances or
contributing directly to the achievement of the end purposes of the
law, are not categorized further. They are all similarly treated, both in
privileges granted and in obligations required. (Coconut Oil Refiners
Association, Inc. v. Torres, etc., G.R. No. 132527, July 29, 2005)

14
 *** 12. Quezon City Ordinance No. SP-2235, S-
2013 was enacted on December 16, 2013 and took effect
ten days after when it was approved by City Mayor. The
proceeds collected from the garbage fees on residential
properties shall be deposited solely and exclusively in an
earmarked special account under the general fund to be
utilized for garbage collections.
1. The Ordinance set forth the schedule and
manner for the collection of garbage fees as
follows:
On all domestic households in Quezon City;
LAND AREA IMPOSABLE FEE
Less than 200 sq. m. Php 100.00
201 sq. m. – 500 sq. m. Php 200.00
501 sq. m. – 1,000 sq. m. Php 300.00
1,001 sq. m. – 1,500 sq. m. Php 400.00
1,501 sq. m. – 2,000 sq. m. or more Php 500.00
On all condominium unit and socialized housing
projects/units in Quezon City;
FLOOR AREA IMPOSABLE FEE
Less than 40 sq. m. Php 25.00
41 sq. m. – 60 sq. m. Php 50.00
61 sq. m. – 100 sq. m. Php 75.00
101 sq. m. – 150 sq. m. Php100.00
151 sq. m. – 200 sq. [m.] or more Php200.00
On high-rise Condominium Units
a) High-rise Condominium – The
Homeowners Association of highrise condominiums
shall pay the annual garbage fee on the total size of
the entire condominium and socialized Housing Unit
and an additional garbage fee shall be collected
based on area occupied for every unit already sold or
being amortized.
b) High-rise apartment units – Owners of
high-rise apartment units shall pay the annual
garbage fee on the total lot size of the entire
apartment and an additional garbage fee based on the
schedule prescribed herein for every unit occupied.

15
 SECTION 3. of the ordinance contains a penalty
clause which reads: “A penalty of 25% of the garbage fee
due plus an interest of 2% per month or a fraction thereof
(interest) shall be charged against a household owner who
refuses to pay the garbage fee herein imposed.”
Rule on the validity of the ordinance.
SUGGESTED ANSWER: The ordinance is null and void.
It violates the equal protection clause of the Constitution and
the provisions of the LGC that an ordinance must be equitable and
based as far as practicable on the taxpayer’s ability to pay, and not
unjust, excessive, oppressive, confiscatory. (Ferrer, Jr. v. City Mayor
Bautista, G.R. No. 210551, June 30, 2015 citing LGC, Secs. 130 and 186)
In the subject ordinance, the rates of the imposable fee depend
on land or floor area and whether the payee is an occupant of a lot,
condominium, social housing project or apartment.
The rates being charged by the ordinance are unjust and
inequitable: a resident of a 200 sq. m. unit in a condominium or
socialized housing project has to pay twice the amount than a resident
of a lot similar in size; unlike unit occupants, all occupants of a lot with
an area of 200 sq. m. and less have to pay a fixed rate of Php100.00;
and the same amount of garbage fee is imposed regardless of
whether the resident is from a condominium or from a socialized
housing project.
Indeed, the classifications under Ordinance No. S-2235 are not
germane to its declared purpose of “promoting shared responsibility
with the residents to attack their common mindless attitude in over-
consuming the present resources and in generating waste.”
Instead of simplistically categorizing the payee into land or floor
occupant of a lot or unit of a condominium, socialized housing project
or apartment, the City Council should have considered factors that
could truly measure the amount of wastes generated and the
appropriate fee for its collection. Factors include, among others,
household age and size, accessibility to waste collection, population
density of the barangay or district, capacity to pay, and actual
occupancy of the property.
On top of an unreasonable classification, the penalty clause
lacks the limitation required by Section 168 of the LGC, which
provides that, in no case shall the total interest on the unpaid amount
or portion thereof exceed thirty-six (36) months.” (Ibid.)

*** 13. What is the scope of the tax exemption of

all schools, whether non-stock, non-profit or proprietary
(for profit) including those that are cooperatively owned ?

16
 SUGGESTED ANSWER:
a. All donations, grants, endowments or contributions used
actually, directly and exclusively for educational purposes
1) shall be exempt from tax
2) subject to conditions prescribed by law. (CONST.,
art. XIV, sec. 4)
b. All lands, buildings, and improvements
1) actually, directly and exclusively used
2) for educational purposes. [CONST., art. VI, sec. 28
(3),

14. What is the basic rationale for the

constitutionally granted tax exemptions for private (non-
government) schools ?
SUGGESTED ANSWER: The relief given to private (non-
government) schools by the constitution is expected to be passed on
to the students in the form of lower tuition fees. (Southeast Asian Regional
Center for Graduate Study and Research in Agriculture [SEARCA] v. Commissioner of
Internal Revenue, CTA Case No. 4982, October 6, 1995)
In this manner the schools would be assisting the State provide
education for all without using government resources because it would
the private school that would take the economic burden of providing
education.

***
15. There are areas of common constitutional
tax exemptions granted to both non-stock, non-profit and
proprietary (for profit) educational institutions.
a. Are there any instances of constitutional tax
exemptions that are granted only to non-stock, non-profit
but not to proprietary (for profit) educational institutions ?
SUGGESTED ANSWER: Yes.
“All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.” [CONST., art. XIV, sec. 4
(3), 1st par., 1st sentence]
b. In what manner may proprietary educational
institutions avail of the same tax exemption privileges ?
SUGGESTED ANSWER: “Proprietary educational institutions,
including those cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law, including
restrictions on dividends and provisions for reinvestment.” [CONST., art.
XIV, sec. 4 (3), 2nd par.]

17
 ***
16. The Constitution provides – “That rule of
taxation shall be uniform and equitable. Congress shall
evolve a progressive system of taxation. (Art VI, Sec. 28
(L). What do you understand by “a progressive system of
taxation”?
Discuss briefly the rationale for its inclusion in the
1987 Constitution.
SUGGESTED ANSWER: Taxation is progressive when its rate
goes up depending on the resources of the person affected. [Abakada
Guro Party List (Formerly AASJS) etc. v. Ermita, G.R. No. 168056, September 1, 2005]
It should be noted that the foregoing definition is clearly
deficient. It is not the mere increase in the rate alone in relation to
income (the tax base) but the increase in the tax rate must be at faster
rate than the increase in the tax base. If the tax rate increases in the
same proportion as the increase on the tax base, the tax is a
proportional tax not a progressive tax.
The progressive system of taxation is exemplified by the
income tax rate which increases as the net taxable increases.
It is based on the ability to pay and in implementation of the
social justice principle that the more affluent should contribute more to
the community’s benefit.
The progressive system of taxation is constitutionally imposed
to achieve social justice through redistribution of income. Progressive
income taxes alleviate the margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, G.R. No.
158540, August 3, 2005)
Among the general rationale for the progressive system of
taxation are the following:
a. It represents a procedurally legitimate outcome of a
political process based on sound democratic principles.
b. It furthers (not guarantees) the end of achieving a
modest redistribution of wealth.
c. It limits the wealth and power of the extremely wealthy.
d. It compensates for regressive national taxes such as the
value-added tax, etc. (Adapted from Dodge, Joseph M. The Logic of Tax, West
Publishing Company, St. Paul, Minn, USA, 1989)

***17. E.O. 313 intended to create a trust fund out

of the coco-levy funds to provide economic assistance to
the coconut farmers and, assisting other agriculturally-
related programs which would ultimately, benefit the
coconut farmers.
Is E.O. 313 violative of the constitution ?

18
 SUGGESTED ANSWER: Yes. “Clearly, E.O. 313 above runs
counter to the constitutional provision which directs that all money
collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. Assisting other
agriculturally-related programs is way off the coco-fund’s objective of
promoting the general interests of the coconut industry and its
farmers.” (Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa
sa Niyugan (PKSMMN), et al. v. Executive Secretary, G.R. Nos. 147036-37, April 10,
2012, and companion cases)

***18. State the provisions of our constitution

that indirectly affects taxation.
SUGGESTED ANSWER: The general or indirect constitutional
limitations on the power of taxation are the provisions on:
a. Due process. (CONST., Art. III, Sec. 1)
b. Equal protection. (Ibid.)
c. Religious freedom. (Ibid., Sec. 5)
d. Non-impairment of obligations of contract. (Ibid., Sec. 10)
e. Freedom of the press. (Ibid., Sec. 4)
f. No taking of private property without just compensation.
(Ibid., Sec. 9)
g. Law-making process:
1) Bill should embrace only one subject expressed in
the title thereof. [Ibid., Art VI, Sec. 26 (1)]
2) Three readings on three separate days. [Ibid., Sec.
26(2)]
3) Printed copies in final form distributed three (3)
days before passage. (Ibid.)
h. Presidential power to grant reprieves, commutations and
pardons and remit fines and forfeitures after conviction by final
judgment. (Ibid., Art. VII, Sec. 19)
i. Preference to Filipinos. (Ibid., Art. XII; Sec. 12)
j. Policy on cooperatives. (Ibid., Art. XII, Sec. 1, last par., last
sentence)
k. Reducing Commission on Audit’s audit function over tax
revenues is unconstitutional.

19. What is the meaning of “deprivation? to fall

within the ambit of the due process protection?
SUGGESTED ANSWER: A “deprivation” of liberty or property,
as a result of the exercise of the power of taxation, which requires
compliance with due process, requires something more than mere
negligent conduct by government officials, even though such conduct
causes injury. It may occur as a result of a legislative act enacting a

19
tax statute or that of administrative authorities implementing a tax
statute.
Since the due process clause is to protect the people from the
arbitrary acts of government the “deprivation” must be that of the
government or its agents, and not that of private entities or
persons. Thus, the failure of a government entity or its agents to
protect an individual against being harmed by others is not covered by
the due process clause. (De Shaney v. Winnebago County Department of Social
Services, 489 U.S. 189)

**19.What are the requisites for the observance of

due process in taxation ?
SUGGESTED ANSWER: Due process in taxation requires:
a. The tax must be for public purpose
b. imposed within its territorial jurisdiction.
c. There should be no arbitrariness or oppression in its
1) assessment and
2) collection. (Pepsi-Cola Co. of the Phil. v. Municipality of Tanauan,
Leyte, 69 SCRA 460, arrangement and numbering supplied)
Due process in taxation does not require:
a. Determination through judicial inquiry of
1) property subject to tax, and
2) amount of tax to be imposed.
b. Notice and hearing as to:
1) amount of the tax, and
2) manner of apportionment. Reason: Lifeblood theory.
(Ibid.)

***
20. What are the requisites of administrative
due process or what is known as the “Ang Tibay” doctrine
?
SUGGESTED ANSWER: The requisites are:
a. The right to notice, be it actual or constructive, of the
filing of the proceedings that may affect a person’s legal rights.
b. The right to a hearing which includes the right to present
one’s case and submit evidence in support thereof. This is the right of
a person to a reasonable opportunity to defend himself, introduce
witnesses and relevant evidence.
c. A tribunal so constituted as to give the person
reasonable assurance of honesty and impartiality, and which must be
of competent jurisdiction.
d. The tribunal must consider the evidence present.
e. The decision must have something to support itself.

20
 f. The evidence must be substantial.
g. The decision must be rendered on the evidence
presented at the hearing, or at least contained in the record and
disclosed to the parties affected.
h. The tribunal or any of its judges, must act on its or his
own independent consideration of the law and facts of the
controversy. and
i. The tribunal should, in all controversial questions render
its decision in such a manner that the parties to the proceeding may
know the various issues involved, and the reasons for the decision
rendered. (Ang Tibay v. C.I.R., 69 Phil. 635)

***21. Give exceptions or instances where notice

is dispensed with before the issuance of an assessment.
SUGGESTED ANSWER: The following are the instances
where notice for informal conference may be dispensed with before
issuance of a preliminary assessment notice and where a pre-
assessment notice is not required before issuing an assessment
notice:
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return filed by the taxpayer;
b. When a discrepancy has been determined between the
tax withheld and the amount actually remitted by the withholding
agent; or
c. When a taxpayer who has 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
d. When the excise tax due on excisable articles has not
been paid; or
e. 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. (NIRC of 1997, Sec. 228; Rev. Regs. No.
12-99, Sec. 3.1.3)

***22. Explain briefly the meaning of “Impairment”

and its rationale as used in the Constitution.
SUGGESTED ANSWER: There is “impairment” when a law
substantially invalidates, releases, or extinguishes the obligations of a

21
contract, or that derogates substantial contractual rights. (Home Building
& Loan Association v. Blaisdell, 290 U.S. 398)
The rationale for the non-impairment clause. When the state
grants an exemption on the basis of a contract, consideration is
presumed to be paid to the state, and the public is supposed to
receive the whole equivalent therefore. Thus, the exemption from
taxation will be binding upon succeeding legislation and a tax could
not be imposed without infringing on the impairment clause.

***
23. What circumstances are considered as
impairment of the obligations of contract ?
SUGGESTED ANSWER: The circumstances are:
a. When a person is deprived of the benefits of his contract;
or
b. When the law takes from the party his whole contract and
all the rights which it has intended to confer; or
c. When the terms of a statute is altered by imposing new
conditions, or dispensing with conditions, or which adds new duties, or
releases or lessens any part of the contract, obligation or substantially
defeats its end (Oshkosh Waterworks Co. v. Oshkosh, 187 U.S. 437), thereby
1) diminishing the value of the contract;
2) changing the intention of the parties;
3) changing the mode of payment; and
4) changing the remedy to enforce the contract
without leaving any substantial remedy.

***24.
What are the requisites for permissible
“impairments”?
SUGGESTED ANSWER: While it is true that the non-
impairment clause protects against the state’s destruction of the rights
arising under or enforcement of existing contracts, there may be
instances of legislation modifying contractual obligations. To be valid
the impairing legislation:
a. must serve an important and legitimate public interest;
and
b. is a reasonable and narrowly tailored means of
promoting that interest.
The Court should consider, among other things,
a. the severity of the impairment,
b. the reasonable reliance and expectations of the
contracting parties,
c. the strength and breadth of the socio-economic problems
involved,

22
 d. whether the law serves the general public welfare or
benefits only special interests,
e. whether the law operates in an area already regulated by
the state, and
f. whether the impact of the law is permanent (rather than
temporary) or immediate (as opposed to gradual). (Energy Reserves
Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400)

***25. What are regulatory taxes ? Illustrate.

SUGGESTED ANSWER: Regulatory taxes are those imposed
in the joint exercise of the power of taxation and police power. Taxes
raise revenues and at the same time promote general welfare or
protect the health, safety or morals of the general populace.
An illustration of regulatory taxes are the coco-levy funds that
were raised with the use of the police and taxing powers of the State
for the benefit of the coconut industry and its farmers in general.
[Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa sa Niyugan
(PKSMMN) v. Executive Secretary, G.R. Nos. 147036-37, April 10, 2012, and
companion cases]

***26.How may the power to tax be utilized to carry

out the social justice program of our government ?
SUGGESTED ANSWER: The power to tax carries out the
social justice program of our government through redistribution of
income using the progressive system of taxation. The compensatory
purpose of taxation is to implement the social justice provisions of the
constitution through the progressive system of taxation, which would
result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between
the rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, G.R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times
expanded the scope of the state activity, and taxation has become a
tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as
public welfare and similar objectives. (Batangas Power Corporation v.
Batangas City, G.R. No. 152675, and companion case, April 28, 2004)

***27.What is the nature of the state’s power to tax

? Why is it so ?
SUGGESTED ANSWER: The nature of the state’s power to tax
is two-fold. It is both an inherent power and a legislative power.
a. Taxation is inherent in nature being an attribute of
sovereignty [Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 614

23
SCRA 605 (2010)] and consequently it exists with or without a
constitutional provision to the effect. (Cooley, Constitutional Limitations, p.
787)
This is so, because without tax revenues the state’s very
existence would be imperiled for lack of funds to perform the essential
obligations of the state.
b. Taxation is a legislative power because it involves the
promulgation of rules. Taxation is a set of rules, why should the tax
be paid, who pays the tax, how much is the tax to be paid, to whom it
should be paid, and when the tax should be paid.
The power to tax is inherent in the State, such power being
inherently legislative, based on the principle that taxes are a grant of
the people who are taxed, and the grant must be made by the
immediate representatives of the people, and where the people have
laid the power, there it must remain and be exercised. [Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, 559 SCRA 160 (2008)]

***28. What is the scope of the inherent legislative

power to tax ?
SUGGESTED ANSWER: The legislature wields the power
a. to define what tax shall be imposed,
b. why it should be imposed,
c. how much tax shall be imposed,
d. against whom (or what) it shall be imposed
e. and where it shall be imposed. [Chamber of Real Estate and
Builders’ Associations, Inc. v. Romulo, 614 SCRA 606 (2010)]
ALTERNATIVE ANSWER: The legislature is given the
discretion to determine the
a. nature (kind),
b. object (purpose),
c. extent (rate),
d. coverage (subjects), and
e. where the situs (place) of taxation primarily lies. (Tan v.
Del Rosario Jr.; Carag v. Del Rosario Jr. 237 SCRA 324, arrangement and numbering
supplied)
It is clear from the above that the legislative power to tax does
not include collection of the tax which is none other than the execution
of the tax laws that the legislative department has promulgated.
By constitutional allocation collection of taxes is part of the
functions of the executive department.

***28. Describe the power of taxation. May a

legislative body enact laws to raise revenues in the

24
absence of a constitutional provision granting said body
the power to tax ? Explain.
SUGGESTED ANSWER: The state’s power to tax is two-fold. It
is both an inherent power and a legislative power. The power to tax is
inherent in the State, such power being inherently legislative, based
on the principle that taxes are a grant of the people who are taxed,
and the grant must be made by the immediate representatives of the
people. Where the people have laid the power, there it must remain
and be exercised. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, 559 SCRA 160 (2008)]
A legislative body may enact laws to raise revenues despite the
absence of a constitutional provision granting that body the power to
tax. Taxation is inherent in nature being an attribute of sovereignty
[Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 614 SCRA 605
(2010)] and consequently it exists with or without a constitutional
provision to the effect. (Cooley, Constitutional Limitations, p.787)
This is so, because without taxes the state’s very existence
would be imperiled for lack of funds to perform the essential
obligations of the state.
Taxation is a legislative power because it involves the
promulgation of rules. Taxation is a set of rules, who pays the tax,
how much is the tax to be paid, to whom it should be paid, and when
the tax should be paid.

**29. Distinguish taxation from police power.

SUGGESTED ANSWER: The distinctions are the following:
a. Purpose: Taxation is for revenue while police power is for
general welfare.
Police power is the power of the State to enact legislation that
may interfere with personal liberty or property in order to promote the
general welfare, while the power of taxation is the power to levy taxes
to be used for public purpose. [Planters Products, Inc. v. Fertiphil Corporation,
548 SCRA 485 (2008)]
In distinguishing tax regulation as form of police power, the
determining factor is the purpose of the implemented measure – if the
purpose is primarily to raise revenue, then it will be deemed a tax
even though the measure results in some form of regulation. On the
other hand, if the purpose is primarily to regulate, then it is deemed a
regulation and an exercise of the police power of the state, even
though incidentally, revenue is generated. [Chevron Philippines, Inc. v.
Bases Conversion Development Authority, 630 SCRA 519 (2010)]
b. Amount: In taxation, the amount of tax collected is
practically unlimited while under police power, the license fee should
not exceed cost of regulation.

25
 c. Compensation: In taxation, the enjoyment of public
services while in police power, the feeling of having done something
good for society in general.
d. Property taken: In taxation, generally money while under
police power, any property, other than money, which is the source of
the danger health, safety or morals.
e. What is done with the property taken: Taxation is
constructive because the money collected is spent for building
infrastructure or providing public services while police power is
destructive. The property taken is usually destroyed.
f. Relation to the non-impairment clause: Taxation is
inferior to the non-impairment clause and could not override the same
while police power is superior to the non-impairment clause.
g. Scope. Taxation interferes with property rights only while
police power regulates both liberty and property.
h. Surrender. Taxation may be bargained away through a
contract such that if the government issues a tax-exempt bond, it
could not withdraw the exemption because it would violate the non-
impairment clause while police power cannot be bargained away.

**30. How has the growing importance of local

taxation been underscored by the 1987 Constitution ?
SUGGESTED ANSWER: The importance of local taxation has
been underscored by the 1987 Constitution when it delegated to each
local government unit the power to create its own sources of revenue
and to levy taxes, fees and charges so long as the proceeds accrue
exclusively to the local government unit imposing and levying the
same.
However, this power of local government units is subject to
such guidelines and limitations as the Congress may provide.

***31. The 1987 Constitution, Art. X Sec. 5 grants to

local government units the power to create their own
sources of revenue and to levy taxes, fees and charges.
Discuss further whether or not local government units may
levy taxes without an act passed by Congress on the
theory that they now enjoy the sovereign power of taxation
unlike in the past when they possessed only delegated
power to do so.
SUGGESTED ANSWER: Local government units could not
levy taxes without an act passed by Congress. This is so, because
the provision of the Constitution delegating the power of taxation to
local government units is not self-executing. The exercise of the

26
power is subject to such guidelines and limitations as Congress may
provide.
Presently, those guidelines and limitations are found in the
Local Government Code.

32. Petitioner Smart Communications, Inc. (Smart)

is a domestic corporation engaged in the business of
providing telecommunications services to the general
public. In the course of its business, Smart constructed a
telecommunications tower within the territorial jurisdiction
of the Municipality of Malvar, Batangas, The construction
of the tower was for the purpose of receiving and
transmitting cellular communications within the covered
area.
On 30 July 2003, the Municipality passed Ordinance
No. 18, series of 2003, entitled “An Ordinance Regulating
the Establishment of Special Projects.” On 24 August 2004,
Smart received from the Permit and Licensing Division of
the Office of the Mayor of the Municipality an assessment
letter with a schedule of payment for the total amount of
₱389,950.00 for Smart’s telecommunications tower.
Is the imposition a tax ?
SUGGESTED ANSWER: No. The imposition of fees on “cell
sites” is under police power.
The main purpose of Ordinance No. 18 is to regulate certain
construction activities of the identified special projects, which includes
“cell sites” or telecommunications towers. Thus, the fees imposed in
Ordinance No. 18 are primarily regulatory in nature, and not primarily
revenue-raising. They are not taxes. While the fees may contribute to
the revenues of the Municipality, this effect is merely incidental. (Smart
Communications, Inc. v. Municipality of Malvar, Batangas, G.R. No. 204429, February
18, 2014)

33. Quezon City passed Ordinance No. SP-2095 that

imposes a Socialized Housing Tax (SHT) equivalent to 0.5%
on the assessed value of land in excess of Php100,000.00.
The special assessment shall accrue to the General Fund
under a special account to be established for the purpose.
Effective for five (5) years, the Socialized Housing Tax
(SHT) shall be utilized by the Quezon City Government for
the following projects: (a) land purchase/land banking; (b)
improvement of current/existing socialized housing
facilities; (c) land development; (d) construction of core

27
houses, sanitary cores, medium-rise buildings and other
similar structures; and (e) financing of public-private
partnership agreement of the Quezon City Government and
National Housing Authority (NHA) with the private sector.
Under certain conditions, a tax credit shall be enjoyed
by taxpayers regularly paying the special assessment: The
tax credit to be granted shall be equivalent to the total
amount of the special assessment paid by the property
owner.
Is the imposition valid ?
SUGGESTED ANSWER: Yes. The ordinance imposing the
Socialized Housing Tax of Quezon City, (SHT) is valid.
The tax is not a pure exercise of taxing power or merely to raise
revenue; it is levied with a regulatory purpose. The levy is primarily in
the exercise of the police power for the general welfare of the entire
city. It is greatly imbued with public interest.
Removing slum areas in Quezon City is not only beneficial to
the underprivileged and homeless constituents but advantageous to
the real property owners as well. The situation will improve the value
of their property investments, fully enjoying the same in view of an
orderly, secure, and safe community, and will enhance the quality of
life of the poor, making them law-abiding constituents and better
consumers of business products. (Ferrer, Jr. v. City Mayor Bautista, G.R. No.
210551, June 30, 2015)

34. The city of Makati, in order to solve the traffic

problem in its business districts, decided to impose a tax,
to be paid by the driver, on all private cars entering the city
during peak hours from 8:00 a.m. to 9:00 a.m. from
Mondays to Fridays, but exempts those cars carrying more
than two occupants, excluding the driver. Is the ordinance
valid ?
SUGGESTED ANSWER: Yes. It is an imposition under the
police power because it seeks to promote the general welfare, for the
protection of the health, safety and convenience of the public who
would be affected by the traffic problem.

***35. Uptown University is a non-stock, non-

profit educational institution. It owns a piece of land in
Batangas City on which its three 2-storey school buildings
stood. Two of the buildings are devoted to classrooms,
laboratories, a canteen, a bookstore, and administrative

28
offices. The third building is reserved as dormitory for
student athletes who are granted scholarships for a given
academic year.
Can the City Treasurer of Batangas City collect real
property taxes on the land and building of Uptown
University? Explain your answer.
SUGGESTED ANSWER: No. It appears that the land and
buildings of Uptown University are acutally, directly and exclusively
used for educational purposes.
They are constitutionally exempt from taxation because all
lands, buildings and improvements actually, directly and exclusively
used for educational purposes shall be exempt from taxation. [CONST.,
art. VI, sec. 28 (3), paraphrasing supplied]

**
36. What are the five (5) circumstances that must
be present in order to qualify “taking” as an exercise of
eminent domain which requires just compensation ?
SUGGESTED ANSWER: The circumstances are:
“First, the expropriator must enter a private property.
Second, the entrance into private property must be for more
than a momentary period.
Third, the entry into the property should be under warrant or
color of legal authority.
Fourth, the property must be devoted to a public use or
otherwise informally appropriated or injuriously affected.
Fifth, the utilization of the property for public use must be in
such a way as to oust the owner and deprive him of all beneficial
enjoyment of the property. (Southern Luzon Drug Corporation v. The Department
of Social Welfare and Development, G.R. No. 199669, April 25, 2017, arrangement
supplied)

**37.
What is the concept of “taking” which requires
just compensation ?
SUGGESTED ANSWER: There are two different types of
taking that can be identified.
a. A “possessory” taking occurs when the government
confiscates or physically occupies property.
b. A “regulatory” taking occurs when the government’s
regulation leaves no reasonable economically viable use of the
property.
What is crucial in judicial consideration of regulatory takings is
that government regulation is a taking if it leaves no reasonable
economically viable use of property in a manner that interferes with

29
reasonable expectations for use. A regulation that permanently denies
all economically beneficial or productive use of land is, from the
owner’s point of view, equivalent to a “taking” unless principles of
nuisance or property law that existed when the owner acquired the
land make the use prohibitable. When the owner of real property has
been called upon to sacrifice all economically beneficial uses in the
name of the common good, that is, to leave his property economically
idle, he has suffered a taking. (Southern Luzon Drug Corporation v. The
Department of Social Welfare and Development, G.R. No. 199669, April 25, 2017)
The circumstances that must be present for eminent domain
are absent in the senior citizens and PWDs discount. (Ibid.)

Theory and basis of taxation

**1. What is the underlying theory of taxation ?

SUGGESTED ANSWER: The underlying theory of taxation is
the lifeblood doctrine.
Under this doctrine, taxes constitute the blood that runs
through the veins of the government for without taxes, the government
can neither exist nor endure. (National Power Corporation v. City of
Cabanatuan, G.R. No. 149110, April 9, 2003)
Without revenue raised from taxation, the government will not
survive, resulting in detriment to society. Without taxes, the
government would be paralyzed for lack of motive power to activate
and operate it. (Commissioner of Internal Revenue v. Algue, Inc., 158 SCRA 8, 16-
17)

*2. Briefly explain the necessity theory.

SUGGESTED ANSWER: The theory behind the exercise of the
power to tax emanates from necessity, for without taxes, government
cannot fulfill its mandate of promoting the general welfare and well
being of the people. [Republic v. Caguioa, 536 SCRA 193 (2007)]

**3. Discuss the basis of taxation.

SUGGESTED ANSWER: The basis of taxation is the symbiotic
relationship which is the reciprocal relation of protection and support
between the state and the taxpayers. The state gives protection and
for it to continue giving protection it must be supported by the
taxpayers in the form of taxes.
a. Taxes are what we pay for a civilized society. Without
taxes, the government would be paralyzed for lack of motive power to
activate and operate it.

30
 b. Despite the natural reluctance to surrender part of one’s
hard-earned income to the taxing authorities, every person who is able
must contribute his share in running the government.
c. The government, for its part, is expected to respond in
the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values.
This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power. (Commissioner of Internal Revenue v.
Algue, Inc., 158 SCRA 8, 16-17)

**4. Briefly explain the symbiotic relation principle.

SUGGESTED ANSWER: The symbiotic relation principle is the
reciprocal relation of protection and support between the state and the
taxpayers. The state gives protection and for it to continue giving
protection it must be supported by the taxpayers in the form of taxes.

5. Explain briefly the concept of jurisdiction in

relation to taxation.
SUGGESTED ANSWER: Jurisdiction in taxation is basically
territorial in character. Unless the state could exercise jurisdiction
over persons and property, then it could not enforce and implement
tax measures.
This is so because as a general rule the taxing authority could
give protection only to subjects and objects within its territorial
boundaries hence, those given protection should contribute to the
expenses necessary to provide protection.

**6. Explain the principles of a sound tax system.

SUGGESTED ANSWER: The basic principles (sometimes
referred to as the tenets, elements, characteristics) of a sound tax
system are:
a. Fiscal adequacy which means that the revenues
generated by taxation should be sufficient to meet the needs of
government.
b. Equality or theoretical justice which means that the tax
should be collected only from those that have the ability to pay.
c. Administrative feasibility which means that tax laws
should be easily implemented in order to assure the smooth flow into
the treasury of the fiscally adequate amounts.
The principles or canons serve as standards in order to
determine whether a tax system is able to meet the purposes or
objectives of taxation.

31
 7. Evaluate the Philippine tax system from the
viewpoint of a sound tax system.
SUGGESTED ANSWER: The Philippine tax system is not a
sound tax system because it does not meet the principles of a sound
tax system.
It is not fiscally adequate because the revenues generated are
sufficient to finance the operations needs of the government. This is
exemplified by the billions of pesos that the government has to borrow
domestically and internationally in order to fund government
expenditures.
There is also no theoretical justice because the burden falls
upon the poor. This is illustrated by the fact that most tax revenues
are generated by indirect taxes.
The tax system is likewise complex that it violates the principle
of administrative feasibility. Some taxpayers still find difficulty in
applying the VAT. So also, the two methods of taxing corporations
results to confusion.

*8. Explain and illustrate fiscal adequacy as a

principle of a sound tax system.
SUGGESTED ANSWER: This means that the tax system must
be able to provide sufficient revenues in order to meet the legitimate
objects of government. Stated otherwise, the taxes collected must be
able to finance government expenditures and their variations. (Chavez
v. Ongpin, G.R. No. 76778, June 6, 1990, 186 SCRA 331, 338)
As an illustration, to continue collecting real property taxes
based on valuations arrived at several years ago, in disregard of the
increases in the value of real properties that have occurred since then,
is not in consonance with a sound tax system. Fiscal adequacy
requires that the sources of revenues must be adequate to meet
government expenditures. (Ibid.)

9. What is meant by theoretical justice as a canon of

a sound tax system ?
SUGGESTED ANSWER: The tax should be collected on the
basis of ability to pay through a progressive system of taxation. Thus,
the incidence or burden of taxation should fall more on those who
could afford.

10. Explain administrative feasibility as a principle

of a sound tax system.

32
 SUGGESTED ANSWER: The tax measures should be easily
implemented in order to assure the smooth flow into the treasury of
the fiscally adequate amounts.

11. Are tax laws imprescriptible ?

SUGGESTED ANSWER: As a general rule, the right of the
government to collect taxes is imprescriptible because the very
existence of the state depends upon the exercise of this power.
Where the government has not by express statutory provision,
provided a limitation upon its right to assess unpaid taxes, such right
is imprescriptible. [Kasamahan Realty Development Corporation (now known as
Stag Trading Corporation) v. Commissioner of Internal Revenue, CTA Case No. 6204,
February 16, 2005]
Statutes may, however, provide for prescriptive periods for the
collection of particular kinds of taxes in order to respect the due process
rights of taxpayers.

Situs of taxation

**1. What is meant by situs of taxation ? Illustrate.

SUGGESTED ANSWER: The situs of taxation is the place or
authority that has the right to impose and collect taxes. (Commissioner of
Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18, 2001)
Illustration of situs of taxation. The situs of the services for the
“design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and
commissioning, coordination” of contractual projects are in two
countries.
The acts occurred in two countries – Japan and the Philippines.
While the construction and installation work were completed within the
Philippines, it is clear that some pieces of equipment and supplies
were completely designed and engineered in Japan. These services
were rendered outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractor’s tax. (Commissioner of Internal Revenue
v. Marubeni Corporation, G.R. No. 137377, December 18, 2001)

**2. What are the exceptions to the territoriality rule

?
SUGGESTED ANSWER:
a. Instances where tax laws operate outside territorial
jurisdiction.
1) Taxation of resident citizens on their incomes
derived from abroad.

33
 b. Where tax laws do not operate within the territorial
jurisdiction of the state.
1) When exempted by treaty obligations.
2) When exempted by international comity.

**3. What determines situs of taxation ?

SUGGESTED ANSWER: In general, situs of taxation is
determined by the place that gives protection which has the right to
levy and collect taxes. Specifically, the determinants are the
following:
a. The “benefits-protection theory” (symbiotic relationship).
The reciprocal relation of protection and support between the taxpayer
and the state. The state gives protection and in order to continue
giving protection, it must be supported in the form of taxes.
b. Jurisdiction, state or political unit that gives protection
has the right to demand support.
Technically tax laws are jurisdictional, or operate only within the
territorial jurisdiction of a state because that is where it could give
protection. This is subject to the concept of mobilia sequuntur
personam.
NOTE NOT PART OF THE ANSWER: There is a distinction between
a question asking for situs of taxation, in general (such as the question above)
and one which asks for the situs of various kinds of taxes (such as the situs of
income taxation, the situs of estate taxes, the situs of property taxes, etc.).

**4. Situs of taxation means the place of taxation,

the state which has jurisdiction to impose a particular tax
on persons, property or transaction. Bearing in mind the
general rule on situs of taxation and the provisions of the
National Internal Revenue Code, what is the situs of
taxation of the following stating the basis for your answer:
a. Transfer of property by death.
SUGGESTED ANSWER: For resident decedents, whether
Filipino citizens or not, the situs would be irrespective of where the
property real or personal, tangible or intangible, is located and in the
case of a nonresident decedents who are not Filipino citizens, the
situs would only be those property situated in the Philippines. (NIRC of
1997, Sec. 85, paraphrasing supplied)
The places of situs are the places that give protection.
b. Transfer of property by gift.
SUGGESTED ANSWER: The Philippines is the situs of taxation
of the donation or transfers of property by gift.

34
 1) Donations made in the Philippines irrespective of
the nationality of rhe donor, as well as the location of the
property. The basis is the protection made of the activity which
is the act of donation.
2) Donations made outside of the Philippines where
the donor is a Philippine citizen, irrespective of his residency or
location of the property donated. The basis is the protection
given to the donor who is a Filipino citizen.
3) Donations made outside of the Philippines where
the property donated is located in the Philippines irrespective of
the nationality or residency of the donor. The Philipines gives
protection to the property that is donated that is why it is the
situs of taxation.
NOTES NOT PART OF THE ANSWER: It is to be noted that the
residence and nationality of the donee are not taken into consideration for
determining whether the donation is subject to Philippine donor’s taxation or
not.
c. Business and occupation.
SUGGESTED ANSWER: The situs of business and occupation
is the place where the business and occupation are being conducted.
The reason being that this is the place which gives protection to the
business or occupation.
d. Situs of taxes on real propery.
SUGGESTED ANSWER: The place where the real property is
located under the principle of Lex rei sitae or lex situs because of the
following reasons:
1) The taxing authority has control because of the
stationary and fixed character of the property.
2) The place where the real property is situated
gives protection to the real property, hence the property or its
owner should support the government of that place.
e. Situs of taxation of personal property.
SUGGESTED ANSWER: The basis of taxation is determined
by the nature of the property whether it is tangible, intangible or mixed.
For tangible personal property the basis is mobilia sequuntur
personam (movables follow the person). The situs of taxation is the
place where the owner is found. This is generally, where the owner
resides.
The domicile of the owner is the place that provides protection
to the property because the intangible follows the owner.
For intangible personal property or mixed the basis is the place
where the property has acquired a business situs.
For example, taxes imposed on the sales of Philippine stocks
(stocks in domestic corporations) are taxable in the Philippines no

35
matter where they may be found, or where the owner’s domicile is
located.
f. Situs of excise taxes.
SUGGESTED ANSWER: The situs of taxation of excise tax
would depend whether the article is
1) a domestic product or mineral;
2) an imported article.
Situs of taxation of the excise tax on a domestic product or
mineral. The situs is the place of production or where mined or
extracted. [NIRC of 1997, Sec. 130 (A) (2), paraphrasing supplied]
Situs of taxation of imported articles. Place where the
customshouse from where released is located. In case of tax exempt
articles where the possessor is not entitled to the exemption, then the
place where the possessor is found. [Ibid., Sec. 130 (A) (1), paraphrasing
supplied]
Situs of franchise tax which is an excise tax. It should be
stressed that what the City of Iriga seeks to collect from CASURECO
III is “a franchise tax, which as defined, is a tax on the exercise of a
privilege.” [City of Iriga v. Camarines Sur III Electric Cooperative, Inc. (CASURECO
III), G.R. No. 19245, September 5, 2012]
The “franchise tax shall be based on gross receipts precisely
because it is a tax on business, rather than on persons or property.
Since it partakes of the nature of an excise tax the situs of taxation is
the place where the privilege is exercised, in this case in the City of
Iriga, where CASURECO III has its principal office and from where it
operates, regardless of the place where its services or products are
delivered. Hence, franchise tax covers all gross receipts from Iriga
City and the Rinconada area.” (Ibid.)
g. Situs of sales of property.
SUGGESTED ANSWER: The situs of taxation depends upon
whether the property is real or personal.
Gains, profits, and income from sale of real property located in
the Philippines are treated as gross income from sources within the
Philippines. [NIRC of 1997, Sec. 42 (A) (5)]
Thus, the situs is where the real property is located.
Tax treatment of gains, profits, and income derived from the
sale of personal property. Gains, profits and income derived:
1) From the purchase of personal property within and
its sale without the Philippines, or
2) From the purchase of personal property without
and its sale within the Philippines,
a) shall be treated as derived entirely from
sources within the country in which sold:
b) Provided, however, That gains from the
sales of shares of stock in a domestic corporation

36
 1) shall be treated as derived entirely
from sources within the Philippines
2) regardless of where the said shares
are sold. [Ibid., Sec. 42 (E), 2nd par., arrangement, and
numbering supplied]
Illustration of situs of sale of personal property. Sales of
encyclopedias were considered as perfected and consummated in the
U.S. because of showing that when the Philippine distributors placed
and/or sent their specific orders to P.F. Collier, U.S., they already
knew the price of the books. Such orders were shipped by the vendor
in the U.S. direct to the different buyers in the Philippines. [P.F. Collier,
Inc. (Philippine Branch) v. Commissioner of Internal Revenue, CTA Case No. 4355,
November 9, 1995]

Double taxation

***1. Is “double taxation” allowed or prohibited in

the Philippines? Illustrate.
SUGGESTED ANSWER: There is no specific provision in the
Constitution prohibiting double taxation. Unlike the United States
Constitution, double taxation is not specially prohibited in the
Philippine Constitution. (Manufacturers Life v. Meer, 89 Phil. 210)
However, where there is direct duplicate taxation, then there
may be violation of the constitutional precepts of equal protection and
uniformity in taxation.
st
If only the 1 element of direct duplicate taxation is present
(taxing the same subject or object twice, by the same taxing authority,
etc.), there is no violation of the equal protection clause because all
subjects and objects that are similarly situated are subject to the same
burdens and granted the same privileges without any discrimination
whatsoever,
nd
The presence of the 2 element, taxing all of the subjects and
objects within the territory for the first time, without taxing all for the
second time, results to discrimination among subjects and objects that
are similarly situated, hence violative of the equal protection clause.
At all events, there is no constitutional prohibition against
double taxation in the Philippines. (La Suerte Cigar & Cigarette Factory v. Court
of Appeals, G.R. No. 125346, November 11, 2014, and companion cases]

***
2. What are the usual methods of avoiding the
occurrence of double taxation ?
SUGGESTED ANSWER: The following are the methods for
easing the economic burden of double taxation:

37
 a. Tax treaties which exempts foreign nationals from local
taxation and local nationals from foreign taxation under the principle of
reciprocity.
b. Tax credits where foreign taxes are allowed as
deductions from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
d. Reduction of Philippine income tax rates.
EXPLANATION NOT PART OF THE ANSWER: The double taxation
referred to in the question is indirect duplicate taxation which is not a basis for
invalidating a tax measure. Thus, the taxpayer is subject to tax twice unlike in
the case of direct duplicate taxation where one of the tax measures may be
invalidated because it violates the equal protection clause.

***3. Is double taxation a valid defense against the

legality of a tax measure ?
SUGGESTED ANSWER: Yes. If the double taxation is in its
strict sense also known as direct duplicate taxation because it would
be a valid defense against a tax measure. The tax measure would be
nullified for being unconstitutional because it violates the equal
protection clause.

***4. Poro Point Corporation, doing business in the

City of San Fernando in La Union has been a distributor
and retailer of car parts and accessories. It has been
paying the City of San Fernando local taxes based on
Sections 15 (Tax on Wholesalers, Distributors or
Dealers) and 17 (Tax on Retailers) of the Revenue Code of
the City of San Fernando (Code). Subsequently, the
Sangguniang Panlungsod enacted an ordinance amending
the Code by inserting Section 21 which imposes a tax on
“Businesses Subject to Excise, Value-Added and
Percentage Taxes under the National Internal Revenue
Code (NIRC),” at the rate of 50% of 1 % per annum on the
gross sales and receipts on persons “who sell goods and
services in the course of trade or business.” Poro Point
Corporation paid the taxes due under Section 21 under
protest, claiming that (a) local government units could not
impose a tax on businesses already taxed under the NIRC
and (b) this would amount to double taxation, since its
business was already taxed under Sections 15 and 17 of
the Code.
Does this amount to double taxation ?

38
 SUGGESTED ANSWER: Yes. Double taxation means taxing
the same property twice when it should be taxed only once; that is,
“taxing the same person twice by the same jurisdiction for the same
thing.”
It is obnoxious when the taxpayer is taxed twice, when it should
be but once. Otherwise described as “direct duplicate taxation,” the
two taxes must be imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind
or character.
Using the aforementioned test, there is indeed double taxation
since Poro Point Corporation is subjected to the taxes under both
Sections 15 (Tax on Wholesalers, Distributors or Dealers), 17 (Tax on
Retailers) and 21 (Tax on Businesses Subject to Excise, Value-
Added and Percentage Taxes under the NIRC) of the Revenue Code
of the City of San Fernando.
These taxes are being imposed:
a. on the same subject matter - the privilege of doing
business in the City of San Fernando;
b. for the same purpose - to make persons
conducting business within the City of San Fernando contribute
to city revenues;
c. by the same taxing authority - City of San
Fernando;
d. within the same taxing jurisdiction - within the
territorial jurisdiction of the City of San Fernando;
e. for the same taxing periods - per calendar year;
and
f. of the same kind or character - a local business
tax imposed on gross sales or receipts of the business. (Nursery
Care Corporation v. Acevedo, etc., G.R. No. 180651, July 30, 2014)

***
5. A 20% final withholding tax (FWT) on interest
income and a 5% gross receipts tax (GRT) are both
imposed upon banks. Is there double taxation ?
SUGGESTED ANSWER: No because of the following reasons:
a. The taxes are imposed on two different subject matters.
The subject matter of the FWT is the passive income generated in the
form of interest on deposits and yield on deposit substitutes, while the
subject matter of the GRT is the privilege of engaging in the business
of banking.
A tax based on receipts is a tax on business rather than on the
property, hence it is an excise rather than a property tax. It is not an
income tax, unlike the FWT. One can be taxed for engaging in

39
business and further taxed differently for the income derived
therefrom. These two taxes are entirely distinct and are assessed
under different provisions. (Commissioner of Internal Revenue v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003)
b. Although both taxes are national in scope because they
are imposed by the same taxing authority – the national government
under the Tax Code – and operate within the same Philippine
jurisdiction for the purpose of raising revenues, the taxing periods they
affect are different.
The FWT is deducted and withheld as soon the income is
earned, and is paid every calendar quarter in which it is earned. On
the other hand, the GRT is neither deducted nor withheld, but is paid
only after every taxable quarter in which it is earned.
c. These two taxes are of different kinds or character. The
FWT is an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding. (Commissioner of Internal
Revenue v. Bank of Commerce, G.R. No. 149636, June 8, 2005)

***6. Is there a case of double taxation when an

item of income is taxed in the Philippines and the same
income is taxed in another country ?
SUGGESTED ANSWER: In its general sense yes, because the
same subject is taxed twice although by different taxing authorities
However, this type of double taxation is not prohibited by the
Constitution because it is not direct duplicate taxation which is
violative of equal protection and uniformity in taxation. The reason is
that the taxes are imposed for different purposes and by different
taxing authorities.

***7. Differentiate double taxation in the strict

sense (direct duplicate taxation) and in a broad sense
(indirect duplicate taxation). Give an example of each.
SUGGESTED ANSWER: The differences between double
taxation in the strict sense and in a broad sense are the following:
a. The following elements are all present in double taxation,
in its strict sense or direct duplicate taxation: The same object or
property is taxed twice by the same taxing authority, for the same
taxing purpose, during the same tax period, and taxing all the objects
or property within the same territory for the first time without taxing all
of them for the second time while the absence of one of the foregoing
elements results to double taxation in a broad sense or indirect
duplicate taxation.
b. Double taxation, in its strict sense or direct duplicate
taxation, is a defense against the imposition of taxes while double

40
taxation, in a broad sense, is not a defense against the imposition of
taxes.
c. Double taxation, in its strict sense, violates the equal
protection, as well as the uniformity and equality of protection clauses
of the 1987 Philippine Constitution resulting to nullification of one of
the tax laws while double taxation, in a broad sense, is not violative of
the 1987 Philippine Constitution.
d. In double taxation, in its strict sense, there could only be
one tax collected and the burden falls only once while double taxation,
in a broad sense, allows for the collection of the tax twice, thus the
economic burden falls twice.
An example of double taxation in its strict sense: Section 21 of
the Revenue Code of Manila imposed the tax on a person who sold
goods and services in the course of trade or business based on a
certain percentage of his gross sales or receipts in the preceding
calendar year, while Section 15 and Section 17 likewise imposed the
tax on a person who sold goods and services in the course of trade or
business but only identified such person with particularity, namely, the
wholesaler, distributor or dealer (Section 15), and the retailer (Section
17), all the taxes – being imposed on the privilege of doing business in
the City of Manila in order to make the taxpayers contribute to the
city’s revenues – were imposed on the same subject matter and for
the same purpose. (Nursery Care Corporation v. Acevedo, etc., G.R. No. 180651,
July 30, 2014)
An example of double taxation in a broad sense is where a 20%
final withholding tax (FWT) on interest income and a 5% gross
receipts tax (GRT) are both imposed upon banks. (Commissioner of
Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003)

***8. Your neighbor owns a row of apartments, one

unit of which he occupies as his residence and the rest, he
leases to tenants. He complains to you that he has to pay
the following taxes:
a. real estate taxes on the properties;
b. real estate dealer’s tax based on his rental
receipts;
c. income tax for said rental receipts;
d. community tax based on the assessed value of
the same properties.
He asks you whether or not the various impositions
constitute double taxation and therefore violative of the
Constitution. What will your answer be? Explain.

41
 SUGGESTED ANSWER: The various impositions constitute
double taxation because my neighbor is taxed twice.
However, this type of double taxation is not prohibited by the
Constitution because it is not direct duplicate taxation that is violative
of equal protection and uniformity in taxation. The reason is that the
taxes are imposed for different purposes and by different taxing
authorities.
NOTE NOT PART OF THE ANSWER: The answer may be
expanded by explaining the concept of direct duplicate taxation.

***9. In 2020, Batangas City amended its Revenue

Code to include a new provision imposing a tax on every
sale of merchandize by a wholesaler based on the total
selling price of the goods, inclusive of value-added taxes
(VAT). Kulambo’t Kumot Corp., a wholesaler operating
within Batangas City, challenged the new provision based
in the following contentions: 1. The new provision is a
form of prohibited double taxation because it essentially
amounts to Batangas City 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 Batangas City , to levy the same.
Rule on each of Kulambo’t Kumot Corp.’s
contentions.
SUGGESTED ANSWER: Kulambo’t Kumot Corp.’s contention
no. 1 is lacking in merit.
The same taxing authority that imposed the first tax should also
be the one that imposes the second tax is among the elements of
prohibited double taxation, which is also known as direct duplicate
taxation.
There is absent the element above described because there
are different taxing authorities. VAT is imposed by the national
government while the second tax is imposed by a local government
unit, Batangas City.
Kulambo’t Kumot Corp.’s contention no. 2 is likewise bereft of
merit.
Local government units such as Batangas City, may impose a
tax on any business that are “not otherwise specified in the preceding
paragraphs” of Sec. 143 (h) of the Local Government Code but
already subject to tax under the NIRC such as excise, value-added tax
or percentage provided the rate of tax does not exceed two percent
(2%) of gross sales or receipts of the preceding calendar year. [LGC,

42
Sec. 133 (h); Nursery Care Corporation v. Acevedo, etc., G.R. No. 180651, July 30,
2014)]

***10. In 2020, Eufronio a resident Filipino citizen,

received dividend income from a U.S.–based corporation
which owns a chain of motels in the East Coast, U.S.A. The
dividend remitted to Eufronio is subject to U.S. withholding
tax with respect of a non-resident alien like Eufronio.
A. What will be your advice to Eufronio in order to
lessen the impact of possible double taxation on the same
income ?
SUGGESTED ANSWER: I would advise Eufronio that he could
choose whether to avail of a tax credit deducting the withheld amount
from his tax due in the Philippines or deducting the withheld amount
from his gross income in the Philippines. [NIRC, Sec. 34 (1) (b)]
ALTERNATIVE ANSWER: I could advise Eufronio to become a
non-resident alien. In this maner he would not be subject to Philippine
income taxation on his dividend income from a US based corporation.
This is so because a non-resident alien is to be taxed only on
his income derived from sources within the Philippines. The dividend
is considered as income from without.

11. What are the methods resorted to by a tax treaty

in order to eliminate double taxation ?
SUGGESTED ANSWER: The methods are the:
First Method: The tax treaty sets out the respective rights to tax
by the state of source or situs and by 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.
Second Method: The state of source is given a full or limited
right to tax together with the state of residence. In this case, the treaty
makes it incumbent upon the state of residence to allow relief in order
to avoid double taxation. Two methods of relief are used under the
second method:
a. Tax exemption method (using the deduction method).
The income or capital which is 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. (This may be done using the
tax deduction method which allows foreign income taxes to be
deducted from gross income, in effect exempting the payment from

43
being further taxed.) (Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc., G.R. No. 127105, June 25, 1999)
Tax deduction method is a subtraction from income for tax
purposes, or an amount that is allowed by law to reduce income prior
to the application of the tax rate to compute the amount of tax which is
due.
A tax deduction reduces the income that is subject to tax in
order to arrive at taxable income. (Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G.R. No. 159647, April 15, 2005)
b. The credit method. Although the income or capital
which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited (deducted) against the
tax levied in the latter. (Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc., G.R. No. 127105, June 25, 1999)
Tax credit generally refers to an amount that is subtracted
directly from one’s total tax liability, an allowance against the tax itself,
or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever
applicable – the income tax that is determined after applying the
corresponding tax rates to taxable income. (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 15, 2005)
Author’s comments. The reader should note that the “double
taxation” referred to is the valid type which is double taxation in its general
sense or indirect duplicate taxation. Under this type, the two laws could
validly be enforced because there is no constitutional infirmity (as a result of
the absence for example of the same taxing authority that imposes the tax)
hence, there is collection of the two taxes imposing a dual economic burden
upon the taxpayer. Thus, the methods described are for the purpose of
eliminating if not easing the economic burden of “double taxation.”

Escape from taxation

***1.What is meant by shifting of the tax burden ?

What are the ways of shifting the burden of double taxation
?
SUGGESTED ANSWER: Shifting the burden of taxation
means transferring the economic burden from the one who pays the
tax to another.
a. One way of shifting the economic burden of the
tax is to include the tax as part of the selling price. The tax is
not billed separately but included in the selling price.
b. Another way is the method of listing the price
separately and defining taxable gross receipts as the amount
received less the amount of the tax added. The tax is then billed
separately. This method merely avoids payment by the seller of

44
 a tax on the amount of the tax. It is still the seller who is subject
to the tax and not the buyer. The additional amount paid by the
buyer is not payment for the tax but payment for the purchase
of the electric cables, etc. (Phil. Acetylene v. Commissioner of
Internal Revenue, G.R. No. L-19707, August 17, 1967)

***2. What are the taxes that may be shifted ?

SUGGESTED ANSWER: Indirect Taxes may be shifted. Most
business taxes are indirect taxes. Among such business taxes are the
following:
a. franchise tax,
b. contractor’s tax,
c. value-added tax,
d. documentary stamp taxes,
e. excise taxes, and
f. the percentage taxes.

***3.Upon whom does the impact of a tax fall ?

For purposes of refund why is it important to know upon
whom the impact of a tax lies ?
SUGGESTED ANSWER: The impact of a tax refers to the
statutory taxpayer. The person or entity stated in the law who is liable
for the tax.
Importance of knowing upon whom the impact of a tax lies for
refund purposes. The proper party to question or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden
thereof to another because once shifted, it is no longer in the nature of
a tax, but part of the purchase price or the cost of the goods or
services sold. [Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue,
G.R. No. 166482, January 25, 2012]

***4. What is meant by incidence of the tax ?

SUGGESTED ANSWER: The incidence of the tax refers to the
person or entity to whom the burden of the indirect tax is shifted. The
one who ultimately bears the burden of the tax.
A seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods and services is not necessarily
the person who ultimately bears the burden of the same tax. It is the
final purchaser or consumer of such goods or services who although
not directly and legally liable for the payment thereof, ultimately bears
the burden of the tax. [Context Corporation v. Commissioner of Internal Revenue,
433 SCRA 376 (2004)]

45
 ***5. “A” sold electric cables, etc. to the NEA, a
government corporation granted an exemption from all
taxes under its charter. Is the sale taxable? Suppose the
sales tax is shown in the invoices as billed or chargeable to
the said buyer, would your conclusion be the same ?
Explain.
SUGGESTED ANSWER: Yes, the sale is taxable. The sales
tax is a tax on the seller and not on NEA, the buyer, hence the buyer’s
exemption does not flow to the seller.
Yes. My conclusion would still be the same although the sales
tax is billed to NEA in the invoice. Sales taxes are indirect taxes, the
economic burden of which may be shifted to the buyer is of no
moment. The method of listing the price separately and defining
taxable gross receipts as the amount received less the amount of the
tax added merely avoids payment by the seller of a tax on the amount
of the tax. It is still the seller who is subject to the tax and not the
buyer. The additional amount paid by the buyer NEA is not payment
for the tax but payment for the purchase of the electric cables, etc.
(Phil. Acetylene v. Commissioner of Internal Revenue, G.R. No. L-19707, August 17,
1967)

***6. GASOLINA Corporation is a domestic

corporation engaged in the business of importing, refining
and selling petroleum products. During the period from
September 1, 2020 to December 31, 2020, GASOLINA
Corporation imported 225 million liters of Jet A-1 aviation
fuel and paid the excise taxes thereon. Seventy-five
percent (75%) of the total volume of aviation fuel imported
were actually sold to international carriers of Philippine
and foreign registries for their use or consumption outside
of the Philippines in the period from November 1, 2020, to
December 31, 2020. GASOLINA Corporation did not pass
on to the international carriers the excise taxes it paid on
the importation of petroleum products.
On June 25, 2021, GASOLINA Corporation filed an
administrative claim for refund or issuance of tax credit
certificate amounting to the excise taxes it had paid on the
importation of 225 million liters of Jet A-1 aviation fuel.
If you were the Commissioner of lnternal Revenue,
will you grant GASOLINA Corporation’s administrative

46
claim for refund or issuance of tax credit certificate.
Explain your answer.
SUGGESTED ANSWER: Yes. GASOLINA Corporation as the
statutory taxpayer is entitled to refund but only up to the extent of the
seventy-five percent (75%) of the total volume of aviation fuel
imported were actually sold to international carriers of Philippine and
foreign registries for their use or consumption outside of the
Philippines.
The excise tax on petroleum products is a tax on property;
hence, the exemption from the excise tax expressly granted under
Section 135 of the NIRC, in favor of international carriers, must be
construed in favor of the petroleum products on which the excise tax
was initially imposed.
Accordingly, the excise taxes that Wreck paid on its importation
of petroleum products subsequently sold to international carriers and
foreign registries for their use or consumption outside the Philippines
were illegal and erroneous, and should be credited or refunded to
GASOLINA in accordance with Section 204 of the NIRC. (Chevron
Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 210836, September 1,
2015)

***7. Define tax avoidance.

SUGGESTED ANSWER: Tax avoidance is the exploitation by
the taxpayer of legally permissible alternative rates or methods of
assessing taxable property or income in order to reduce or entirely
avoid tax liability. Example: Availing of all deductions allowed by law
or refraining from engaging in activities subject to tax.

***8. What is meant by tax evasion?

SUGGESTED ANSWER: A scheme used outside of lawful
means and when availed of, usually subjects the taxpayer to further or
additional administrative, civil or criminal liabilities. (Commissioner of
Internal Revenue v. The Estate of Benigno P. Toda, Jr., etc., G.R. No. 147188,
September 14, 2004)
A term that connotes fraud through the use of pretenses and
forbidden devices to lessen or defeat taxes. (Yutivo Sons Hardware
Company v. Court of Tax Appeals, 1 SCRA 160)

***9. What are the factors integrated in tax evasion

?
SUGGESTED ANSWER: The factors are:

47
 a. The end to be achieved, i.e. the payment of less than
that known by the taxpayer to be legally due, or the non-payment of
tax when it is shown that a tax is due;
b. An accompanying state of mind which is described as
being “evil,” in “bad faith,” “willfull,” or “deliberate and not accidental”;
and
c. A course of action or failure of action which is unlawful.
(Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr.,
etc., G.R. No. 147188, September 14, 2004)

10. As forms of escape from taxation, we hear of

“tax evasion” and “tax avoidance.” Differentiate between
them and give an instance of each.
SUGGESTED ANSWER: The following are the distinctions
between tax avoidance and tax evasion:
a. Means and methods used. Tax avoidance uses means
allowed under the law while tax evasion uses means outside the law.
b. Legality. Tax avoidance is legal while tax evasion is illegal.
c. Validity. Tax avoidance is valid while tax evasion is invalid.
d. Effect. Tax avoidance is minimization of taxes while tax
evasion almost always results in absence of tax payments.
e. Penalties. Tax avoidance does not result to any penalties
while tax evasion warrants the imposition of civil, administrative and
criminal penalties.
An example of tax evasion is indicating in the contract of sale of
real property the zonal valuation which is lower than the actual selling
price and the reporting the said zonal value in the capial gains tax
returns for purposes of taxation.
An example of tax avoidance is spreading a P500,000.00
donation over a period of two calendar years in order to avail of the tax
exemption of the first and second P250,000.00 donation.

***
11. Does resort to tax-saving devices constitute
fraud under our tax law? Explain your answer.
SUGGESTED ANSWER: No. There is fraud when there is a
deliberate intention, employing means outside the law, to deprive the
government of its right to collect taxes.
Resort to tax-saving devices does not constitute fraud so long
as legally permissible means and the method used by the taxpayer is
in good faith and at arms length. (Commissioner of Internal Revenue v. The
Estate of Benigno P. Toda, Jr., etc., G.R. No. 147188, September 14, 2004)
This is so because a taxpayer has the legal right by means
permitted by law to:
a. decrease the amount of what could be his taxes, or

48
 b. altogether avoid them. (Delpher Trades Corp. v. Intermediate
Appellate Court, 157 SCRA 349, arrangement and numbering supplied)

*** 12. Lucky V Corporation (Lucky) owns a 10-

storey building on a 2,000 square meter lot in the City of
Makati. It sold the lot and building to Rainier for P80
million. One month after, Rainier sold the lot and building
to Healthy Smoke Company (HSC) for P200 million, Lucky
filed its annual return and declared its gain from the sale of
the lot and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that
two months prior to the sale of the properties to Rainier,
Lucky received P40 million from HSC and not from Rainier.
Said amount of P40 million was debited by HSC and
reflected in its trial balance as “other inv. – Lucky Bldg.”
The BIR concluded that there is tax evasion since the real
buyer of the properties of Lucky is HSC and not Rainier. It
issued an assessment for deficiency income tax in the
amount of P79 million against Lucky. Lucky argues that it
resorted to tax avoidance or a tax saving device, which is
allowed by the NIRC and BIR rules since it paid the correct
taxes based on the sale to Rainier. On the other hand,
Rainier and HSC also paid the prescribed taxes arising
from the sale by Rainier to HSC. Is the BIR correct in
assessing taxes on Lucky ? Explain.
SUGGESTED ANSWER: Yes. The BIR is correct in assessing
the taxes on Lucky.
There was no tax avoidance, instead there was tax evasion on
the part of Lucky because of the simulated sale to Rainier which had
its apparent purpose to reduce the income tax to be paid by Lucky on
the sale to HSC.
The sale to Rainier was simulated as evidenced by the fact that
two months prior to the sale of the properties to Rainier, Lucky
received P40 million from HSC and not from Rainier.
The intermediary transaction (the simulated sale to Rainier),
was prompted more on the mitigation of tax liabilities than for
legitimate business purpose constitutes one of tax evasion.
(Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., etc., G.R.
No. 147188, September 14, 2004, 438 SCRA 290)

Exemption from taxation

49
 **1. What is meant by exemptions from taxation ?
SUGGESTED ANSWER: Exemption from taxation is the act of
the State in divesting itself of its prerogative to collect taxes upon
certain subjects and objects of taxation.

**2. Can a tax exemption be revoked ? Why ?

SUGGESTED ANSWER: Yes. A tax exemption may be
revoked because it is an act of liberality which could be taken back by
the Government.
Since taxation is the rule and exemption therefrom the
exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. (Mactan Cebu International Airport Authority v. Marcos, 261
SCRA 667)
There is no vested right in a tax exemption, more so when the
latest expression of legislative intent renders its continuance doubtful.
Flowing from the basic precept of constitutional law that no law
is irrepealable, Congress in the legitimate exercise of its lawmaking
powers, can enact a law withdrawing a tax exemption just as
efficaciously as it may grant the same. [Republic v. Caguioa, 536 SCRA 193
(2007)]

3. Are there any restrictions on the power to

revoke tax exemptions ? If so, what are they ?
SUGGESTED ANSWER: Yes. The following are the
restrictions:
a. Non-impairment clause. Where the exemption was
granted to private parties based on material consideration of a mutual
nature, which then becomes contractual and is covered by the non-
impairment clause of the Constitution. (Mactan Cebu International Airport
Authority v. Marcos, 261 SCRA 667)
“A municipal franchise once granted as a contract cannot be
altered or amended except by actual consent of the parties
concerned.” (Darmouth College v. Woodward, 4 Wheat, 578)
b. Adherence to form. If the exemption is granted by the
Constitution, its revocation may be effected through constitutional
amendment only.
Where the tax exemption grant is in the form of a special law
and not by a general law even if the terms of the general act are broad
enough to include the codes in the general law unless there is
manifest intent to repeal or alter the special law. (Commissioner of Internal
Revenue v. Court of Appeals, 207 SCRA 487)

Equitable recoupment

50
 **
What is the doctrine of equitable recoupment ? Is it
applicable in our jurisdiction ?
SUGGESTED ANSWER: The doctrine of equitable
recoupment holds that where the refund of a tax illegally or
erroneously collected or overpaid by a taxpayer is barred by
prescription, a tax presently being assessed against a taxpayer may
be recouped or set-off against the tax whose refund is now barred by
prescription. (U.S.T. v. Collector, 104 Phil. 1062)
The doctrine is not applicable in the Philippines because of the
lifeblood theory. Taxpayers would become lazy in paying taxes
because they could offset the alleged illegally or erroneously collected
or overpaid taxes. The same could also be said of tax collectors
relative to their duty to collect taxes because they know that the
taxpayers would not pay anyway because of the offset with previous
illegally or erroneously collected or overpaid taxes. (Ibid.)

Prohibition on compensation and set-off

***1.
May taxes be the subject of set-off or
compensation ? Explain.
SUGGESTED ANSWER: No. Taxes are not contractual
obligation but arise out of a duty to, and are the positive acts of
government, to the making and enforcing of which the personal
consent of the individual taxpayer is not required. (Republic v. Mambulao
Lumber Co., 4 SCRA 622)
The government and the taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is no such a debt,
demand, contract or judgment as is allowed to be set-off. (Caltex
Philippines, Inc. v. Commission on Audit, 208 SCRA 726, 756)
NOTE NOT PART OF THE ANSWER: The foregoing doctrine finds
application only to national taxes because of the lifeblood doctrine. Absence
or insufficiency of revenues from national taxes might lead to the demise of
the national government.
The doctrine does not find application to local government taxation
because the death of a local government unit does not result to the demise of
the national government.

***
2. Hansel obtained a judgment for a sum of
money against the municipality of Mabini. The judgment
has become final although execution has not issued. Upon
receiving an assessment for municipal sales taxes from the
Municipal Treasurer, Hansel executed a partial assignment

51
of his judgment sufficient to cover the assessment in favor
of the Municipality. May the Municipal Treasurer validly
accept the assignment ? Why ?
SUGGESTED ANSWER: Yes. The Municipal Treasurer validly
accept the assignment.
The parties in this case are mutually debtors and creditors of
each other, and since both of the claims became overdue,
demandable and fully liquidated, compensation takes place by
operation of law. (Domingo v. Garlitos, 8 SCRA 443)
NOTE NOT PART OF THE ANSWER: The doctrine finds application
only to local government taxation because the death of a local government
unit does not result to the demise of the national government.
The doctrine does not apply to national taxes because of the lifeblood
doctrine. Absence or insufficiency of revenues from national taxes might lead
to the demise of the national government.

Compromise

*1. What is a compromise ?

SUGGESTED ANSWER: A compromise is a contract whereby
the parties, through mutual agreement, make reciprocal concessions,
in order to avoid a litigation or put an end to one already commenced.
(CCP, Art. 2028)

*2. Distinguish compromise from abatement of

taxes.
SUGGESTED ANSWER: The distinctions between
compromise and abatement of taxes are the following:
a. Grounds: The grounds for compromise are either doubt
as to the validity of the assessment or financial incapacity to pay while
the grounds for abatement are the tax be unjustly or excessively
assessed, or the administration and collection costs do not justify the
amount due;
b. Effect: In compromise the tax is merely reduced while in
abatement the tax is cancelled.

Tax Amnesty

**
1. What is tax amnesty ? Discuss briefly its
nature and purpose.
SUGGESTED ANSWER: A tax amnesty is an absolute waiver
by the government of its right to collect what is due it. (ING Bank N.V.,

52
 It refers
etc. v. Commissioner of Internal Revenue, G.R. No. 167679, July 22, 2015)
to the articulation of the absolute waiver by a sovereign of its right to
collect taxes and power to impose penalties on persons or entities
guilty of violating a tax law. (CS Garment, Inc. v. Commissioner of Internal
Revenue, G.R. No. 182399, March 12, 2014)
It is in the nature of a tax amnesty that it partakes of an
absolute forgiveness or waiver of the Government of its rights to
collect what otherwise would be due it, and in this sense, prejudicial
thereto. [Philippine Banking Corporation (now Global Business Bank, Inc.) v.
Commissioner of Internal Revenue, 577 SCRA 366 (2009)]
Among the purposes of tax amnesty are the following:
a. To give tax evaders who wish to relent and are willing to
reform a chance to do so and thereby start with a clean tax slate. (Ibid.)
Tax amnesty aims to grant a general reprieve to tax evaders
who wish to come clean by giving them an opportunity to straighten
out their records. (Ibid.)
b. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go through the
tedious process of a tax case. To avail of a tax amnesty granted by
the government, and to be immune from suit on its delinquencies, the
taxpayer must have voluntarily disclosed his previously untaxed
income and must have paid the corresponding tax on such previously
untaxed income. (Bañas, Jr. v. Court of Appeals, G.R. No. 102967, February 10,
2000)

2. May a withholding tax agent avail of tax amnesty

? Why ?
SUGGESTED ANSWER: No.
The claim of a taxpayer under a tax amnesty shall be allowed
when the liability involves the deficiency in payment of income tax.
However, it must be disallowed when the taxpayer is assessed
on his capacity as a withholding tax agent because the person who
earned the taxable income was a person other than the withholding
agent. (LG Electronics Philippines, Inc., G.R. No. 165451, December 03, 2014)

**
3. Distinguish a tax amnesty from a tax
exemption.
SUGGESTED ANSWER: The distinctions between a tax
amnesty and tax exemption are as follows:
a. Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes (People v.
Castañeda, G.R. No. L-46881, September 15, 1988) while a tax exemption is
an immunity from civil liability only. It is an immunity or

53
privilege, a freedom from a charge or burden to which others
are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence
of retroactive application (Castañeda, supra) while a tax exemption
has prospective application.

Construction and interpretation of tax laws,

rules, and regulations

***1. How are grants of tax exemption construed in

our jurisdiction ? What is the rationale behind the principle
? Explain.
SUGGESTED ANSWER: Statutes granting tax exemptions are
construed in stricissimi juris against the taxpayer and liberally in favor
of the taxing authority. A claim of tax exemption must be clearly
shown and based on language in law too plain to be mistaken.
Otherwise stated, taxation is the rule, exemption is the exception.
(Quezon City v. ABS-CBN Broadcasting Corporation, G.R. No. 166408, October 6,
2008)
The rationale behind the principle of stricissimi juris or strict
interpretation of statutory provisions granting tax exemptions or
deductions against the claimant are:
a. To minimize differential treatment and foster impartiality,
fairness and equality of treatment among taxpayers. (Ibid.)
b. Lifeblood theory. Taxes are what we pay for civilized
society. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667)
Without the revenues generated from taxation the very existence of
the government may be imperiled because thre is no wherewithal to
perform the fuctions for which it was created. Hence, reduction in the
form of exemptions are strictly construed.
c. Taxation is a high prerogative of sovereignty whose
relinquishment is never presumed. (Luzon Stevedoring Corporation v. Court of
Appeals, 163 SCRA 647)
The State cannot be deprived of this most essential power and
attribute of sovereignty by vague implications of law and he who
claims an exemption must be able to justify his claim by the clearest
grant of statute. [Jaka Investments Corporation v. Commissioner of Internal
Revenue, 626 SCRA 16 (2010)]

2. Give an illustration where there is no

construction in favor of the government.
SUGGESTED ANSWER: Where grant of exemption is clear and
unambiguous, such as the exemption granted under the EPZA Law,
there is no construction in favor of the government.

54
 There is neither logic nor need to cast a speck of uncertainty on
a doubt-free situation to resolve the resulting forced question in favor
of the government. The disposition arises not out of blind solicitude
towards the concerns of business, but from the duty to affirm and
enforce a crystal-clear legislative policy and initiative intent.
Indeed, the revenue collectors of the government should be
cautious before attempting to gut away at concessions the State itself
has deemed worthy of award to deserving investors. It is unsound
practice and uncouth behavior to invite guests to dinner at home,
then charge them for the use of the silverware before allowing them to
dine. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G.R.
No. 144440, September 1, 2004)

***3. The rule that tax exemptions are to be strictly

construed against the taxpayer has certain exceptions.
What are they ?
SUGGESTED ANSWER: The exceptions or instances where
tax exemptions are to be liberally construed in favor of the taxpayer
and strictly against the taxing authority are the following:
a. When the statute granting exemption provides for liberal
construction thereof.
b. In case of special taxes relating to special cases and
affecting only special classes of persons.
c. If exemptions refer to the public property.
d. In cases of exemptions granted to charitable and
educational institutions or their property. (Cooley)
e. In cases of exemptions in favor of a government political
subdivision or instrumentality. (Maceda v. Macaraig, Jr., 197 SCRA 771)
f. A tax refund based on solutio indebeti.

***4. State the rule on the construction or

interpretation of laws imposing taxes. What is the rationale
behind it ?
SUGGESTED ANSWER: In case of doubt, tax laws must be
construed strictly against the State and liberally in favor of the
taxpayer. (Commissioner of Internal Revenue v. The Philippine American Accident
Insurance Company, Inc., G.R. No. 141658, March 18, 2005)
This is so because taxes, as burdens which must be endured
by the taxpayer, should not be unduly exacted or presumed to go
beyond what the law expressly and clearly declares. (Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008)

55
 ***5. Why is prescription in civil cases, involving
the collection of internal revenue taxes, construed strictly
against the government and liberally in favor of the
taxpayer ?
SUGGESTED ANSWER: Our tax law provides a statute of
limitations in the collection of taxes for the purpose of safe-guarding
taxpayers from any unreasonable examination, investigation or
assessment.
Thus, the law on prescription, being a remedial measure,
should be liberally construed in favor of the taxpayer in order to afford
such protection. (Commissioner of Internal Revenue v. BF Goodrich, Phils. Inc.,
“
G.R. No. 104171, February 24, 1999) As a corollary, the exceptions to the
law on prescription should perforce be strictly construed.” (Ibid.)
“A waiver of the statute of limitations under the NIRC, to a
certain extent, is a derogation of the taxpayers’ right to security
against prolonged and unscrupulous investigations and must therefore
be carefully and strictly construed.” (Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G.R. No. 162852, December 16, 2004)

***6. Why are periods of prescription in criminal

cases, involving tax offenses punishable under the
National Internal Revenue Code (NIRC) as amended,
construed strictly in favor of the government ?
SUGGESTED ANSWER: Statutes of limitations in criminal
cases constitute a surrender by the sovereign of its right to prosecute.
Hence, they receive a strict construction in favor of the Government.
(Lim v. Court of Appeals, G.R. No. 48134-37, October 18, 1990)

***7.A law was passed condoning unpaid real

property taxes. Will this law benefit the taxpayers who
have been prompt in paying their taxes? Explain.
SUGGESTED ANSWER: No. The condonation is in the nature
of tax exemptions which must be strictly construed against the
claimant.
Since there is no showing in the problem of any provision of the
law on condonation expressly extending the benefit of condonation to
those who have been prompt in paying their taxes, then they could not
benefit from it.

56
 ***8. Does exemption granted by law from payment
of all taxes carry with it automatically exemption from
payment of customs duties and license fees ?
SUGGESTED ANSWER: Yes but only with regard to the
payment of customs duties. There is no exemption from the payment
of license fees. When the law is clear and unequivocal there is no
need for the application of the principle of stict interpretation against
the taxpayer.
The exemption applies to “all taxes,” hence there is no need for
interpretation as “customs duties” are taxes. Ubi lex non distinguit
nec nos distinguire debemos (Where the law does not distinguish, we
should not distinguish). It is clear in the problem that there is no
distinction made as to what kind of taxes the exemption refers to.
However, there should be no exemption from the payment of
license fees because they are not taxes. They are imposed under
police power not under the power of taxation.

9. What is rule on the construction of revenue

regulations ?
SUGGESTED ANSWER: Revenue regulations are construed
in the same manner as laws because they partake of the nature of a
law.
In general, rules and regulations issued by administrative or
executive officers pursuant to the procedure or authority conferred by
law upon the administrative agency have the force and effect or
partake of the nature, of a statute.
Reason: Statutes express the policies, purposes, objective,
remedies and sanctions intended by the legislature in general terms.
The details and manner of carrying them out are oftentimes left to the
administrative agency entrusted with their enforcement.
In the case of revenue regulations, it is the Secretary of Finance
who promulgates the same, upon recommendation of the BIR
commissioner. These regulations are the consequences of a
delegated power to issue legal provisions that have the effect of law.
(Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191,
November 25, 2003)

*What is the nature of our internal revenue law ?

Explain briefly.
SUGGESTED ANSWER: Our internal revenue law is
a. not political in character;
b. civil in nature, not subject to ex post fact law prohibition;
c. not penal in character; and

57
 d. not retroactive in its application.

Jurisdiction, power, and functions of the

Commissioner of Internal Revenue

**1.What are the purposes of the grant of power to

Commissioner of Internal Revenue to obtain information,
and to summon, examine and take testimony of persons ?
SUGGESTED ANSWER: The purposes for the grant of the
power are:
a. To ascertain correctness of any return.
b. To make a return where none has been made.
c. To determine the liability of any person for any internal
revenue tax.
d. To collect from any person liability for any internal
revenue tax.
e. To evaluate tax compliance. (NIRC of 1997, Sec. 5, 1st par.,
arrangement and numbering supplied)

**2. What is the extent of the authority of the

Commissioner of Internal Revenue to make or amend a
return ?
SUGGESTED ANSWER: In case a person
a. fails to file a required return or other document at the
time prescribed by law, or
b. willfully or otherwise files a false or fraudulent return or
other document,
1) the Commissioner shall make or amend the return
a) from his own knowledge
b) and from such information as he can obtain
through testimony or otherwise, which shall be prima
facie correct and sufficient for all legal purposes. [NIRC of
1997, Sec. 6 (B), 2nd par., arrangement and numbering supplied]

**3. Relleve Corp. is a big manufacturer of industrial

products. It has several suppliers of raw materials. The
BIR suspects that some of the suppliers are not properly
reporting their income on their sales to Relleve Corp. The
CIR therefore: a. Issued an access letter to Relleve Corp.,
to furnish the BIR information on sales and payments to its
suppliers on the alleged ground that the suppliers are
committing tax evasion. Relleve Corp. and the suppliers

58
have not been issued by the BIR letters of authority to
examine. Relleve Corp. believes that the BIR is on a
“fishing expedition” and comes to you for counsel. What
is your advice ?
SUGGESTED ANSWER: I would advise Relleve Corp., to
supply the BIR with the information desired.
The BIR is authorized under the NIRC of 1997 to secure
information even from persons who are not under tax investigation.
The BIR Commissioner is allowed to investigate any
circumstance which led him to believe that the taxpayer had taxable
income larger than that reported. Necessarily, this inquiry would have to
be outside of the books because they supported the return as filed. He
may take the sworn testimony of the taxpayer; he may take the
testimony of third parties; he may examine and subpoena; if necessary,
traders’ and brokers’ accounts and books and the taxpayer’s books of
accounts. The Commissioner is not bound to follow any set of patterns.
The existence of unreported income may be shown by any particular
proof that is available in the circumstances of the particular situation.
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G.R. No. 136975, March
31, 2005)
It was once held that where the records of the taxpayer are
manifestly inaccurate and incomplete, the Commissioner may look to
other sources of information to establish income made by the taxpayer
during the years in question. (Ibid) .

*4. Rovick, Inc., sold a real property in Polangui,

Albay to Cathy Cat Corporation. The property has been
classified as residential and with a zonal valuation of
P1,000 per square meter. The capital gains tax was paid
based on the zonal value. The Revenue District Officer
(RDO), however, refused to issue the Certificate
Authorizing Registration for the reason that based on his
ocular inspection, the property should have a higher zonal
valuation determined by the Commissioner of Internal
Revenue because the area is already a commercial area.
Accordingly, the RDO wanted to make a recomputation of
the taxes due by using the fair market value appearing in a
nearby bank’s valuation list which is practically double the
existing zonal value. The RDO also wanted to assess a
donor’s tax on the difference between the selling price
based on the zonal value and the fair market value
appearing in a nearby bank’s valuation list.

59
 a. Does the RDO have the authority or discretion
to unilaterally use the fair market value as the basis for
determining the capital gains tax and not the zonal value as
determined by the Commissioner of Internal Revenue?
Reason Briefly.
SUGGESTED ANSWER: No. The RDO has no authority to
use a fair market value other than that prescribed in the Tax Code.
The power to prescribe the fair market value (zonal valuation) is
lodged with the Commissioner of Internal Revenue.
The fair market value prescribed for the computation of any
internal revenue tax shall be, whichever is higher of: (1) the fair market
value as determined by the Commissioner (referred to as zonal value);
or (2) the fair market value as shown in the schedule of values of the
provincial and city assessors (FMV per tax declaration). [NIRC, Sec.
6(E)] The use of the fair market value appearing in a nearby bank’s
valuation list, therefor, is not allowed for purposes of computing
internal revenue taxes.
b. Should the difference in the supposed taxable
value be legally subject to donor’s tax? Reason briefly.
SUGGESTED ANSWER: No. The difference in the supposed
taxable value cannot be legally subject to the donor’s tax, because the
use of a fair market value other than that prescribed by the Tax Code
is not allowed for computing any internal revenue tax. [NIRC, Section
6(E)]

***
5. Can the Commissioner of Internal Revenue
inquire into the bank deposits of a taxpayer? If so, does
this power of the Commissioner conflict with R.A. No. 1405
(Secrecy of Bank Deposits Law)?
SUGGESTED ANSWER: Yes. The Commissioner of Internal
Revenue has the power to inquire into the bank deposits of a taxpayer
in the following instances:
a. Where the taxpayer has authorized the Commissioner to
make an inquiry;
b. Where the inquiry is made in decedent’s bank account to
determine his gross estate.
c. Where the inquiry is made in the deposit account of any
taxpayer who has filed an application for compromise of his tax liability
by reason of financial incapacity to pay his tax liability. [NIRC of 1997,
Sec. 6 (F), 1st par., as amended by Rep. Act No. 10021, paraphrasing supplied]
d. Where the inquiry is made in the deposit account of a
specific taxpayer or taxpayers subject of a request for the supply of
tax information from a foreign tax authority. [Ibid., Sec. 6 (F), 3rd par., as
amended by Rep. Act No. 10021, paraphrasing supplied]

60
 The power of the Commissioner in the instances stated above
does not conflict with R.A. 1405 because the Commissioner’s power
to inquire into bank deposits authorized under the NIRC of 1997
constitutes exceptions to R.A. 1405.

Rule-making authority of the Secretary of

Finance

***
1. What is the extent of the rule making power of
administrative taxing authorities ?
SUGGESTED ANSWER:
a. The Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, shall promulgate all useful rules
and regulations for the effective enforcement of the provisions of the
NIRC. (NIRC of 1997, sec. 244) The Bureau of Internal Revenue is also
empowered to issue rules and opinions without need of Secretary of
Finance approval.
The issuance of revenue regulations is authorized by statute
and as such has the force and effect of law. (Arches v. Belosillo, 20 SCRA
32) In case of conflict between a law and an administrative regulation,
the law prevails (Wise & Co., Inc. v. Meer, etc., 78 Phil. 655); and
b. The Secretary of Finance shall, upon the
recommendation of the Commissioner of Customs, promulgate the
necessary rules and regulations for the effective implementation of the
Customs Modernization and Tariff Act. (CMTA, Sec. 1800)

*2. Discuss the power of the Commissioner of

Internal Revenue (CIR) to interpret tax laws and to decide
tax cases.
SUGGESTED ANSWER: The power to interpret the provisions
of the National Internal Revenue Code of 1997, as amended, and
other tax laws shall be under the exclusive and original jurisdiction of
the CIR, subject to review by the Secretary of Finance.
“The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the Tax Code or other laws or
portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.” [Confederation for Unity, Recognition
and Advancement of Government Employees (COURAGE) v. Commissioner, etc., G.R.
No. 213446, and companion cases, July 03, 2018]
“The CIR’s exercise of its power to interpret tax laws comes in
the form of revenue issuances, which include RMOs that provide

61
‘directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary
in the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.”
“
(Ibid.) These revenue issuances are subject to the review of the
Secretary of Finance.

3. What are the two kinds of rules that may be

adopted by administrative taxing authorities ? Illustrate
each.
SUGGESTED ANSWER:
a. Legislative rule. A legislative rule is in the nature of the
subordinate legislation, designed to implement a primary legislation by
providing the details thereof. (Commissioner of Internal Revenue v. Court
of Appeals, 261 SCRA 236, 246)
This is also known as a quasi-legislative rule.
1) Revenue Regulations (RRs) are legislative rules.
Revenue Regulations (RRs) are likewise issued by the
Commissioner of Internal Revenue but always subject to the
approval of the Secretary of Finance. They are legislative
rulings which necessitate hearing and publication.
RRs are issuances signed by the Secretary of Finance,
upon recommendation of the Commissioner of Internal Revenue,
that specify, prescribe or define rules and regulations for the
effective enforcement of the provisions of the National Internal
Revenue Code (NIRC) and related statutes. (www.bir.gov.ph); and
b. Interpretative rules. Interpretative rules are designed to
provide guidelines to the law which the administrative agency is in
charge of enforcing. (Misamis Oriental Association of Coco Traders, Inc. v.
Department of Finance Secretary, et al., 238 SCRA 63, 69)

**
4. What are the kinds of BIR interpretative
rulings ?
SUGGESTED ANSWER:
a. Rulings of first impression. These refers to the rulings,
opinions and interpretations of the Commissioner of Internal Revenue
with respect to the provisions of the NIRC and other tax laws without
established precedents. Provided, however, that the term shall
include reversal, modification or revocation of any existing ruling. [RAO
No. 1-99, [Sec. 3 (a)]
b. Rulings reiterating established precedents as delegated
by the Commissioner of Internal Revenue. These shall refer to mere
reiteration of previous rulings, opinions and interpretations of the

62
Commissioner, as delegated to duly authorized internal revenue
officers. [Ibid.,, Sec. 3 (b)]

***5.XYZ Corporation, an export-oriented company,

was able to secure a Bureau of Internal Revenue (BIR)
ruling in June 2020 that exempts from Tax the importation
of some of its raw materials. The ruling is of first
impression, which means the interpretations made by the
Commissioner of Internal Revenue is one without
established precedents. Subsequently, however, the BIR
issued another ruling which in effect would subject to tax
such kind of importation. XYZ Corporation is concerned
that said ruling may have a retroactive effect, which means
that all their importations done before the issuance of the
second ruling could be subject to tax.
a. What are BIR rulings?
SUGGESTED ANSWER: BIR rulings are official positions of
the Bureau on inquiries of taxpayers, who request clarification on
certain provisions of the National Internal Revenue Code (NIRC),
other tax laws, or their implementing regulations, usually for the
purpose of seeking tax exemptions. Rulings are based on particular
facts and circumstances presented and are interpretations of the law
at a specific point in time.
The Bureau also issues rulings to answer written questions of
individuals and juridical entities regarding their status as taxpayers
and the effects of their transactions for taxation purposes. (RMO No.
9-2014, Sec. 1)
b. What is required to make a BIR ruling of first
impression valid ?
SUGGESTED ANSWER: A BIR ruling of first impression to be
valid must not be against the law and it must be issued only by the
Commissioner of Internal revenue. (Philippine Bank of Communications v.
CIR, 302 SCRA 241)
Rulings of first impression shall be submitted together with their
dockets to the Secretary of Finance and shall not be valid unless
reviewed and approved by the Secretary of Finance. [RAO No. 1-99, Sec.
4 (a)]

***
6. The Commissioner of Internal Revenue
issued a BIR ruling to the effect that the transaction is
liable to income tax and value added tax. Upon receipt of

63
the ruling, a taxpayer does not agree thereto. What is his
proper remedy ?
SUGGESTED ANSWER: File an appeal to the Secretary of
Finance within thirty (30) days from receipt thereof.

7. In what instances do Revenue Rulings and

Regulations have retroactive effect even if prejudicial to the
taxpayer ?
SUGGESTED ANSWER: The following are the instances when
Revenue Rulings and Regulations would have retroactive effect even
if prejudicial to the interest of the taxpayer:
“a. Where the taxpayer deliberately misstates or omits
material facts from his return or on any document required of him by
the Bureau of Internal Revenue.
b. Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the
ruling is based; or
c. Where the taxpayer acted in bad faith.” (NIRC of 1997, Sec.
246)

**8.Due to uncertainty whether or not a new tax law

is applicable to printing companies, DEF Printers
submitted a legal query to the Bureau of Internal Revenue
on that issue. The BIR issued a ruling that printing
companies are not covered by the new law. Relying on this
ruling, DEF Printers did not pay said tax. Subsequently,
however, the BIR reversed the ruling and issued a new one
stating that the tax covers printing companies. Could the
BIR now assess DEF Printers for back taxes corresponding
to the years before the new ruling?
SUGGESTED ANSWER: No. The reversal would prejudice the
taxpayer who acted in good faith upon the previous BIR ruling.
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult question
of law. Absent fraud, bad faith or misrepresentation, the reversal of a
specific BIR , should apply prospectively. (Banco de Oro v. Republic of the
Philippines, G.R. No. 198756, August 16, 2016, paraphrasing supplied)
ALTERNATIVE ANSWER: Yes. “The general rule is that the
State cannot be put in estoppel by the mistakes or errors of its officials
or agents.” [The City of Davao, etc. v. The intestate estate of Amado S. Dalisay, etc.,
G.R. No. 207791, July 15, 2015) The foregoing doctrine finds application
specially in the case of taxation where the revenues collected is the
lifeblood upon which the government depends for its continued
existence.

64
 The Commissioner of Internal Revenue is not bound by the
ruling of his predecessors. He could reverse the same. To the
contrary, the overruling of decisions is inherent in the interpretation of
laws. (Misamis Oriental Association of Coco Traders, Inc. v. Secretary of Finance,
238 SCRA 63, 69)
NOTE NOT PART OF THE ANSWER: Where the alternative answer
finds application, the taxpayer should not be subject to the payment of
interests, fines, surcharges, and other penalties for the late payment of the
deficiency taxes. After all, the taxpayers should not be penalized for their
reliance in good faith upon the previous interpretation.

ii. INCOME TAX

Definition and nature

1. What is an income tax ? Give an example.

SUGGESTED ANSWER: It is a national tax on the net or the
gross income realized in a taxable year arising from property,
professions, trades and offices. (Fisher v. Trinidad, 43 Phil. 981) It is subject
to withholding. (Commissioner of Internal Revenue v. City-Trust Investment Phils.,
Inc., G.R. No. 138786, September 27, 2006 and companion case)
Example of an income tax. The tax imposed upon the pertinent
items of gross income derived by a resident citizen from conduct of
trade or business or the exercise of a profession. [NIRC of 1997, Sec. 24
(A) (1) (a) in relation to Sec. 31, as amended by TRAIN and Sec. 32 (A) (2)]

2. What is the nature of income tax ?

SUGGESTED ANSWER: It is an excise tax and not a tax on
property. It is an excise tax because it is a tax on the privilege to earn
income.
The theory that a tax on income is legally or economically a tax
on its source is no longer tenable. (Graves v. New York, 306 U.S. 466)
NOTE NOT PART OF THE ANSWER: The reader should not confuse
the nature of income tax with the nature of income tax laws or nature of
income taxation. They are different concepts altogether.

***3. Discuss the meaning of the schedular system

of taxation.
SUGGESTED ANSWER: A system employed where the
income tax treatment varies and is made to depend on the kind or
category of taxable income of the taxpayer. (Tan v. Del Rosario, Jr., 237
SCRA 324, 331)
It is a system which itemizes the different incomes and provides
for varied percentages of taxes, to be applied thereto.

65
 Sec. 24 (A) (2) (a), NIRC of 1997, as amended by the TRAIN,
provides for the application of the schedular system of income
taxation to individuals. There is adoption, effective January 1, 2018
until December 31, 2022, of a progressive rate which taxes at 20%
taxable incomes which goes beyond P250,000.00, progressively
increasing up to a high of 35% for taxable incomes exceeding
P8,000,000.00.

***4.To which system would you say the method of

taxation under the National Internal Revenue Code belongs
?
SUGGESTED ANSWER: The National Internal Revenue Code
has adopted the global system for corporations and the schedular
system of taxation for individuals.
Thus, it is sometimes referred to as the semi-schedular and
semi-global tax system.
ALTERNATIVE ANSWER: The system of taxation to which the
National Internal Revenue Code belongs is known as the semi-
schedular and the semi-global system.
The apparent intent of current amendatory laws to the income
tax law is to maintain, by and large, the global treatment on taxable
corporations and to increasingly shift the income tax system toward
the schedular approach in the income taxation of individual taxpayers.
(Tan v. Del Rosario, Jr. 237 SCRA 324, 331)

General principles

**1. What are the general principles of income

taxation ?
SUGGESTED ANSWER: The general principles are:
a. A citizen of the Philippines residing therein is taxable on
all income derived from sources within and without the Philippines;
b. A nonresident citizen is taxable only on income derived
from sources within the Philippines;
c. An individual citizen of the Philippines who is working
and deriving income abroad as an overseas contract worker is taxable
only on income from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;

66
 d. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within the
Philippines;
e. A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
sources within the Philippines. (NIRC of 1997, Sec. 23, arrangement and
numbering supplied)

**
2. Currently we hear of the system of income
taxation by basing the tax on the gross rather than on the
net income. What do you understand by “gross income
taxation” ?
SUGGESTED ANSWER: The gross income taxation in its
general sense is the taxation of all income received without any
deduction. The tax base, in gross income taxation in its broad
sense, is the total gross income of an individual or corporation
during the taxable year without any deductions allowed.
The system of gross compensation income is considered valid
because taxpayers may be classified into different categories. It is
enough that the classification must rest upon substantial distinctions
that make for real differences.
Taxpayers who are recipients of compensation income are
apart as a class because they are not entitled to make deductions as
they practically have no overhead expense. On the other hand, in the
case of professionals in the practice of their calling and businessmen,
there is no uniformity in the costs or expenses necessary to produce
their income. It would not be just to disregard the disparities by giving
all of them zero deductions and indiscriminately impose an all alike the
same tax rates on the basis of gross income. (Sison, Jr. v. Ancheta, 130
SCRA 654, 665-5)

**3.In general, on what does the taxability of

income depend as regards individuals and corporations?
Explain your answer, citing the incomes taxable under our
Income Tax Law.
SUGGESTED ANSWER: In general, the taxability of income,
as regards individuals and corporations, depends upon the:
a. Domiciliary theory. The location where the income
earner resides is the situs of taxation for the reason that it is there
where he is given protection; hence, he must support it.

67
 b. Nationality theory. The country where the income earner
is a citizen is the situs of taxation because a citizen is given protection
by his country no matter where he is found or no matter where he
earns his income. He is therefore obligated to support that country, in
exchange for the protection he receives.
The principle of mobilia sequuntur personam may likewise
apply as income taxation laws of his country follow the citizen no
matter where he is found. This applies to resident citizens on their
incomes derived from sources without the Philippines.
c. Source. The country which is the source of the income is
where the activity that produced the income took place. This is the
situs of taxation and not the place where the money originated. The
money may come from one place but if that is not where the activity
that produced the income, then it is not the source of the income for
tax purposes.
The important factor which determines the source of income of
personal services is not the residence of the payor, or the place where
the contract for service is entered into, or the place of payment, but the
place where the services were actually performed.
Prescinding from the above, the basis for taxability of income
depends on the following:
a. As regards individuals, the taxability of income depends
upon:
1) citizenship; or
2) residence of the recipient; or
3) the place where such income is derived.
b. With respect to corporations, the taxability of income
depends upon;
1) whether the corporation is a domestic or a foreign
corporation;
2) whether the foreign corporation is a resident or
nonresident.
Author’s observation. The question based on an actual Bar question
is unfair. It should be noted that the answer is rather lengthy and could not
be written within the time limitation for answering Bar questions. It is
suggested that the reader should be able to come up with a short
summarization.

***4. Atty. Mary created an irrevocable trust in favor

of her two minor children. The trust stipulates that 50% of
the net income should be distributed yearly to the children,
share and share alike, the balance to accumulate for
eventual distribution to the children at age 25. The income
for 2020 was P1 million.

68
 a) How will the income of the trust be taxable ?
SUGGESTED ANSWER: The trust created by Atty. Mary is
irrevocable in character, but only 50% of the income is distributable. In
this case the amount that is not distributed is not allowed to be
deductible from the gross income of the trust in order to arrive at
income subject to tax.
The amount that is not distributed, is taxed in the same manner
as individual citizens and resident alien individuals. It shall be subject
to the same exclusions, itemized deductions and tax rates with the
following qualifications:
1) allowed to use standard optional deduction,
[NIRC of 1997, Sec. 34 (L)]
2) in addition to the itemized deductions the trust may
deduct
(a) the amount of income for the taxable year
distributed currently by the fiduciary to the beneficiaries
[Ibid., Sec. 61 (A)];
(b) the amount of the income collected by the
guardian of an infant which is to be held or distributed as
the court may direct (Ibid.);
(c) the amount of income properly credited to
the beneficiaries. [Ibid., Sec. 61 (B)]
b) Will your answer remain the same if the trust
established by Atty. Mary is revocable ?
SUGGESTED ANSWER: No. The income which is part of a
revocable trust shall be included in computing the net income of Atty.
Mary, the grantor. (NIRC of 1997, Sec. 63)
c) When is a trust considered revocable ?
SUGGESTED ANSWER: A trust is considered as revocable
where at any time the power to revest in the grantor title to any part of
the corpus of the trust is vested (1) in the grantor either alone or in
conjunction with any person not having a substantial adverse interest
in the disposition of such part of the corpus or the income therefrom,
or (2) in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom. (NIRC of
1997, Sec. 63)

**5.Who are the taxpayers who are allowed to use

only the calendar year and not the fiscal year ? Which
among the following taxpayers is required to use only the
calendar year for tax purposes?
SUGGESTED ANSWER: Taxpayers other than corporations,
such as natural persons, estates, trusts, general professional
partnerships and a joint venture or consortium formed for the purpose

69
of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
[NIRC of 1997, Sec. 22 (B), 1st sentence]

**6.What kinds of taxpayers have the option to use

either the calendar or fiscal years ?
SUGGESTED ANSWER: Only corporations as defined under
the NIRC of 1997 have the option use either the calendar or the fiscal
years.
Corporations, as defined under the NIRC of 1997, include not
only corporations as defined and organized under the provisions of the
Corporation Code, but also “partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a
service contract with the Government.” [NIRC of 1997, Sec. 22 (B), 1st
sentence]

**7.
May an individual taxpayer change his/her
accounting period ? Why ?
SUGGESTED ANSWER: No. Only a corporation may change
its accounting periods but always subject to the approval of the
Commissioner of Internal Revenue and compliance with the
requirements for filing returns for short period resulting from change of
accounting period. (NIRC of 1997, Sec. 46, paraphrasing supplied)
An individual taxpayer cannot change his/her accounting period
because he/she is allowed only one, the calendar year.

**8. Define income for tax purposes.

SUGGESTED ANSWER: Income may be defined as “an
amount of money coming to a person or corporation within a
specified time, whether as payment for services, interest or profit
from investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the fruits of
one’s labor.” [Association of NonProfit Clubs, Inc. (ANPC), etc. v. Bureau of Internal
Revenue (BIR), etc., G.R. No. 228539, 26 June 2019]

70
 ** 9. The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association dues and
membership fees collected by condominium corporations
from its member condominium-unit owners. The RMC’s
validity is challenged before the Supreme Court (SC) by the
condominium corporations. The Solicitor general, counsel
for BIR, claims that association dues, membership fees,
and other assessment/charges collected by a
condominium corporation are subject to VAT since they
constitute income payments or compensation for the
beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium
corporations argues that such fees are merely held in trust
by the condominium corporations exclusively for their
members and used solely for administrative expenses in
implementing the condominium corporations’ purposes.
Accordingly, the condominium corporations do not
actually render services for a fee subject to VAT.
Whose argument is correct ? Decide.
SUGGESTED ANSWER The argument of the condominium
corporation’s lawyer is correct.
The condominium is not engaged in business which is a “trade
or commercial activity regularly engaged in as a means of livelihood or
with a view to profit.” (Yamane , etc. v. BA Lepanto Condominium Corporation,
G.R. No. 154993, October 25, 2005)
Thus, the association dues, membership fees, and other
assessments/charges are not income payments which constitutes
“yearly profits arising from property, professions, trades or offices, or
as a tax on a person’s income, emoluments, profits and the like.” (Ibid.)

**
10. Are membership fees, assessment dues,
and other fees of similar nature in recreational non-profit
clubs considered as income for tax purposes ?
SUGGESTED ANSWER: No. They only constitute
contributions to and/or replenishment of the funds for the maintenance
and operations of the facilities offered by recreational clubs to their
exclusive members.
“They represent funds “held in trust” by these clubs to defray
their operating and general costs and hence, only constitute
infusion of capital.

71
 Case law provides that in order to constitute ‘income,’ there
must be realized ‘gain.’ Clearly, because of the nature of membership
fees and assessment dues as funds inherently dedicated for the
maintenance, preservation, and upkeep of the clubs’ general
operations and facilities, nothing is to be gained from their collection.
This stands in contrast to the fees received by recreational
clubs coming from their income-generating facilities, such as bars,
restaurants, and food concessionaires, or from income-generating
activities, like the renting out of sports equipment, services, and other
accommodations. In these latter examples, regardless of the purpose
of the fees’ eventual use, gain is already realized from the moment
they are collected because capital maintenance, preservation, or
upkeep is not their pre-determined purpose. As such, recreational
clubs are generally free to use these fees for whatever purpose they
desire and thus, considered as unencumbered ‘fruits’ coming from a
business transaction.
“In fine, for as Iong as these membership fees, assessment
dues, and the like are treated as collections by recreational clubs from
their members as an inherent consequence of their membership, and
are, by nature, intended for the maintenance, preservation, and
upkeep of the clubs’ general operations and facilities, then these fees
cannot be classified as ‘the income of recreational clubs from
whatever source’ that are ‘subject to income tax.’ Instead, they only
form part of capital from which no income tax may be collected or
imposed.” [Association of NonProfit Clubs, Inc. (ANPC), etc. v. Bureau of Internal
Revenue (BIR), etc., G.R. No. 228539, 26 June 2019, reierated in Commissioner of
Internal Revenue v. Federation of Golf Clubs of the Philippines, Inc. (FEDGOLF), G.R.
No. 226449, July 28, 2020]
“It is a well-enshrined principle in our jurisdiction that the State
cannot impose a tax on capital as it constitutes an unconstitutional
confiscation of property.” (Ibid.)

**11. Mr. Matola bought his residential house and

lot in 2004 for P1 Million. In 2021, curious as to how much
his property is then valued, he asked a real estate broker to
reappraise the same. The real estate broker reported that
the value of his property has increased to P3 Million.
Should Mr. Matola report the P2 Million increase in his
income tax return for the year 2021 ? Reasons.
SUGGESTED ANSWER: No. The P2 Million increase in the
value of the residential house and lot is not considered as income
reportable as income of Mr. Cruz because such increase has not yet
been received by Mr. Cruz, either physically or constructively.

72
 Besides, capital gains of individuals on dispositions of real
property are subject to a final tax, the presumed capital gains tax.
Consequently, increases in valuation are not reported in the income
tax return. Increases in valuation of real property are not subject to
income tax, hence not reportable in the income tax return.
NOTE NOT PART OF THE ANSWER: The appropriate return to be
filed is the capital gains tax return, once the real property considered as
capital asset is disposed, whether the seller made a profit or not.

**12. In 2010, Corporation “X” had a capital stock of

1,000 shares without par value. At the time of its
incorporation, the value of each no-par value share was
P10. In 2020, due to its profitable operations, the
corporation earned a surplus of P200,000.00. The
corporation’s board of directors increased the stated value
of each share by P190 making each share worth P200. The
Bureau of Internal Revenue, for income tax purposes,
assessed each stockholder for the P190 increase. Is the
Bureau correct? Explain. (1989, dates and amounts supplied)
SUGGESTED ANSWER: No. The stockholders have not
physically or constructively received any income subject to tax. There
was no change in the proportion of their ownership in the corporation
considering that the shares of stock are without par value.
Furthermore, there was no realization of the income through the
change in stated value. When the stockholder disposes of the shares,
then the same would be subject to capital gains taxes.

**13. What is the “all events test” ? Explain briefly.

SUGGESTED ANSWER: The “all events test” is a test to
determine when income or liability is to be accrued.
An item that is reasonably ascertained as to amount and
acknowledged to be due has “accrued”; actual payment is not
essential to constitute “expense.” [Commissioner of Internal Revenue v. Isabela
Cultural Commission, 544 Phil. 488 (2007)]
Stated otherwise, an expense is accrued and deducted for tax
purposes when
a. the obligation to pay is already fixed;
b. the amount can be determined with reasonable accuracy;
and
c. it is already knowable or the taxpayer can reasonably be
expected to have known at the closing of its books for the taxable
year. (Ibid.)

73
 **14. CHED Corporation engaged the services of
the ABOGADO Law Firm in 2019 to defend the
corporation’s title over a property used in the business.
For the legal services rendered in 2020, the law firm billed
the corporation only in 2021. The corporation duly paid.
CHED Corporation claimed this expense as a
deduction from gross income in its 2021 return, because
the exact amount of the expense was determined only in
2021. Is YYY’s claim of deduction proper ? Reasons.
SUGGESTED ANSWER: No. Since CHED is a corporation, it
should be using the accrual method. As such, it should have
recognized the expense in 2019 when the amount of legal services
was agreed upon.
It was in 2019 that the liability to pay the attorney’s fees was
fixed as well as the availability of the reasonable accurate
determination of such liability. (Commissioner of Internal Revenue v. Isabela
Cultural Commission, G.R. No. 172231, February 12 2007)

***15. TOBAGO Engineering Co., Inc. (TECI) is a

Philippine corporation engaged in architectural design,
engineering, and construction work. Its principal office is
located in Bonifacio Global City (BGC), but it has various
infrastructure projects in the country and abroad. Thus,
TECI employs both local and foreign workers. The
company has adopted a policy that the employees’ salaries
are paid in the currency of the country where they are
assigned or detailed.
Below are some of the employees of TECI. Determine
whether the compensation they received from TECI in 2021
is taxable under Philippine laws and whether they are
required to file tax returns with the Bureau of Internal
Revenue (BIR).
(a) Rodrigo Gumal, a Filipino accountant in TECI’s
Tax Department in the BGC office, and married to a Filipino
engineer also working in TECI.
SUGGESTED ANSWER: Rodrigo is required to file an income
tax return on his income because he is a Filipino citizen residing in
the Philippines if TECI has failed to withhold the correct income taxes
or that his pure compensation income derived from sources within the
Philippines exceeds P60,000.00. [NIRC of 1997, Sec. 51 (A) (1)]

74
 ALTERNATIVE ANSWER: Rodrigo’s compensation he
received as an accountant in TECI’s Tax Department in the BGC
Office is taxable under Philippine law. This is so, because he is a
citizen of the Philippines residing therein hence he is taxable on all
income derived from sources within the Philippines. The situs of
income taxation is the place where the service was rendered, which in
this case, is the Philippines [NIRC of 1997, Sec. 23 (A)]
If Rodrigo received purely compensation income from TECI
who is his single employer and the latter, has withheld correctly the
income tax due from Rodrigo (tax due equals tax withheld) from his
income for the calendar year Rodrigo shall not be required to file an
annual income tax return. The certificate of withholding filed by TECI,
duly stamped ‘received’ by the BIR, shall be tantamount to the
substituted filing of income tax returns by Rdorigo. (NIRC of 1997, Sec. 51-
A, as inserted by the TRAIN)
However, if TECI, Rodrigo’s single employer has failed to
withhold the correct income tax due from Rodrigo, he being a Filipino
citizen would then be required to file an income tax return regardless
of the amount of his gross income because he is engaged in the
practice of his profession as an accountant. (Ibid., SEc. 51 (A) (2) (a) as
amended by the TRAIN)
(b) Adolf Dietrich, a German national who heads
TECl’s Design Department in its BGC office.
SUGGESTED ANSWER: Dietrich’s compensation he received
as the head of TECI’s Design Department in the BGC Office is taxable
under Philippine law because he is an alien individual resident of the
Philippines and is taxable on income derived from sources within the
Philippines. [NIRC of 1997, Sec. 23 (D)] The situs of income taxation is the
place where the service was performed, in this case, the Philippines.
If Dietrich received purely compensation income from TECI who
is his single employer and the latter, has withheld correctly the income
tax due from Dietrich (tax due equals tax withheld) from his income
for the calendar year he shall not be required to file an annual income
tax return. The certificate of withholding filed by TECI, duly stamped
‘received’ by the BIR, shall be tantamount to the substituted filing of
income tax returns by Dietrich. (NIRC of 1997, Sec. 51-A, as inserted by the
TRAIN)
However, if TECI, Dietrich’s single employer has failed to
withhold the correct income tax due from Dietrich, he being a resident
alien, would then be required to file an income tax return because he
earns income from within the Philippines. [Ibid., Sec. 51 (A) (4) (c)]
ALTERNATIVE ANSWER: However, if TECI, Dietrich’s single
employer, has failed to withhold the correct income tax due from
Dietrich, he being a resident alien, would then be required to file an

75
income tax return because he earns income from within the
Philippines. [Ibid., Sec. 51 (A) (4) (c)]
(c) Gabby Francisco, a Filipino engineer in TECI’s
Design Department who was hired to work at the principal
office last January 2021. In April 2021, he was assigned and
detailed in the company’s project in Riyadh, Saudi Arabia,
which project is expected to be completed in April 2023.
SUGGESTED ANSWER: Gabby’s compensation for the whole
taxable year 2021 is not subject to tax under Philippine law because
he is an individual citizen of the Philippines who is working and
deriving income from abroad in Riyadh, Saudi Arabia as an ”overseas
contract worker” which employment thereat requires him to be
physically present abroad most of the time during the taxable year
from April 2021 up to end December 2021. [NIRC of 1997, Sec. 23 (C)]
Since the basis for income taxation is the calendar year, it is as if he
earned all of his income from without the Philippines.
A non-resident citizen like Gabby is required to file an income
tax return only on income derived from sources within the Philippines.
[NIRC, Sec. 51A (4)(b)] Since his income, including his pay prior to his
assignment and detail abroad, is considered income derived from
sources outside the Philippines, he is not required to file an income
tax return on such income. There is likewise no showing that he
earned income from Philippine sources.
(d) Aaron Antonis is also an engineer assigned to
TECI’s project in Taipei, Taiwan. Since TECI provides for
housing and other basic needs, Aaron requested that all
his salaries, paid in Taiwanese dollars, be paid to his wife
in Manila in its Philippine Peso equivalent.
SUGGESTED ANSWER: Aaron’s compensation is not taxable
under Philippine laws since he is an individual citizen of the
Philippines who is working and deriving income from abroad in Taipei,
Taiwan as an overseas contract worker hence he is taxable only on
income derived from sources within the Philippines. [NIRC of 1997, Sec.
23 (C)] The fact that his compensation is paid to his wife does not
matter because the situs of income taxation is where the service that
earned him the income was performed.
A non-resident citizen like Aaron is required to file an income
tax return only on income derived from sources within the Philippines.
[NIRC, Sec. 51A (4)(b)] Since his income was derived from sources
outside the Philippines, he is not required to file an income tax return
on such income.
(e) Fil-Am de Castro, is a Filipino architect in TECl’s
Design Department who reported back to TECl’s BGC

76
office in August 2021 after TECI’s project in Belfast, Ireland
was completed.
SUGGESTED ANSWER: Fil-Am’s compensation earned for the
period 2021 is not subject to tax under Philippine Law because she is
an individual citizen of the Philippines who is working and deriving
income from abroad in Belfast, Ireland as an overseas contract worker
which employment thereat requires her to be physically present
abroad most of the time during the taxable year 2021. [NIRC of 1997, Sec.
23 (C)]
Since the basis for income taxation is the calendar year, it is as
if he earned all of her income from without the Philippines.
A non-resident citizen like Fil-Am is required to file an income
tax return only on income derived from sources within the Philippines.
[NIRC, Sec. 51A (4)(b)] Since her income, including her pay prior to her
return from abroad, is considered income derived from sources
outside the Philippines, she is not required to file an income tax return
on such income.

**16.
ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non-resident
foreign corporation based in the U.S. Under the agreement
which the parties forged in the U.S., XYZ granted ABC the
right to use a computer system program and to avail of
technical know-how relative to such program. In
consideration for such rights, ABC agreed to pay 5% of the
revenues it receives from customers who will use and
apply the program in the Philippines.
Discuss the tax implications of the transaction.
SUGGESTED ANSWER: The 5% payment is considered
royalty income of XYZ, a non-resident foreign corporation, derived
from sources within the Philippines subject to Philippine income
taxation. ABC should therefore withhold the appropriate taxes before
remitting the same to XYZ.
The 5% payment is considered as a royalty because it is paid
for the use of or the right or privilege to use in the Philippines XYZ’s
computer system program which is presumably covered by a
copyright or patent as well as the supply of technical know-how that is
ancillary and subsidiary to, and is furnished as a means of enabling
the application or enjoyment of the computer system program.
Since the service is rendered within the Philippines, it is
considered as income derived from the Philippines of a non-resident
foreign corporation. [NIRC of 1997, Sec. 42 (A) (4)]

77
 Consequently, the royalty income is subject to a final tax of 20%
based on the amount to be remitted to XYZ. [Ibid., Sec. 28 (B) (1), as
amended by the TRAIN]

**17. TEXECANA Co. is a U.S.A. corporation not

doing business in the Philippines. It holds 40% of the
shares of ABRA Co., a Philippine company while the 60% is
owned by PALAWAN Co., a Filipino-owned Philippine
corporation. TEXECANA Co. also owns 100% of the shares
of BALI Co., an Indonesian company which has a duly
licensed Philippine branch. Due to worldwide restructuring
of the TEXECANA Co. group, resulting from the COVID
Pandemic, it decided to sell all its shares in ABRA and
BALI Cos. The negotiations for the buy-out and the signing
of the Agreement of Sale were all done in the Philippines.
The Agreement provides that the purchase price will be
paid to TEXECANA Co.’s bank account in the U.S. and that
title to ABRA and BALI Cos. shares will pass from
TEXECANA Co. to PALAWAN Co. in U.S.A. where stock
certificates will be delivered. PALAWAN Co. seeks your
advice as to whether or not it will subject the payments of
the purchase price to withholding tax. Explain your advice.
SUGGESTED ANSWER: Yes. The payments of the purchase
price will be subject to withholding tax. TEXECANA Co., being a
foreign corporation is to be taxed on its income derived from sources
within the Philippines.
Considering that all the activities (including the consummation of
the sales) occurred within the Philippines, the income is considered as
income from within, subject to Philippine income taxation
Furthermore, The gains derived from the sale of shares in
ABRA Co., a domestic corporation, anywhere in the world, is
considered as income from within because the shares are considered
as having a business situs in the Philippines. Since domestic
corporations are organized and existing by virtue of Philippine law,
they are given protection by the Philippine government. Thus, their
shares of stock have obtained a business situs in the Philippines.
[NIRC of 1997, Sec. 42 (E), 4th pars., in relation to Sec. 42 (A) (6)]

Fringe benefits tax and de minimis benefits

**1.
As a way to augment the income of the
employees of DEF, Inc., a private corporation, the

78
management decided to grant a special stipend of
P50,000.00 for the first vacation leave that any employee
takes during a calendar year.
(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.
SUGGESTED ANSWER: It depends on the nature and
character of the employee.
If the employee is not a managerial employee, but a rank and
file employee, then the special stipend would be part of his taxable
income subject to the schedular rate.
If the employee is a managerial employee, and not a rank and
file employee, then the special stipend is not part of his taxable
income but subject to the fringe benefit tax which is a final tax of 35%
based on the grossed-up monetary value. (NIRC of 1997, sec. 33)
(b) Is the cash equivalent value of the housing
facilities received by the senior engineers subject to fringe
benefits tax ? Explain.
SUGGESTED ANSWER: No. Since the purpose of housing is
to make available engineers every time there is breakdown which is
for the convenience of the employer then it is not a fringe benefit
subject to the payment of the fringe benefits tax.

**2.What are de minimis benefits and how are they

taxed ? Give examples of de minimis benefits.
SUGGESTED ANSWER: De minimis benefits are ordinarily
facilities and privileges (such as entertainment, medical services, or
so-called “courtesy discounts” on purchases) of small amounts,
furnished or offered by an employer to his employees.
They “are not considered as compensation subject to income
tax and consequently to withholding tax, if such facilities are offered or
furnished by the employer merely as a means of promoting the health,
goodwill, contentment, or efficiency of his employees.” [Rev. Reg. No. 2-
98, Sec. 2.78,1 (A) (3), as amended by Rev. Reg. No. 8-2000]
De minimis benefits are NOT subject to tax on compensation
income as well as withholding tax on compensation income of both
managerial and rank and file employees. The amount of de minimis
benefits conforming to the ceiling herein prescribed shall not be
considered in determining the P90,000 ceiling of “other benefits”
excluded from gross income under Section 32 (B) (7) (e) of the Code,
as amended by the TRAIN, Provided that, the excess of the de
minimis benefits over their respective ceilings prescribed by these
regulations shall be considered as part of ‘other benefits’ and

79
employee receiving it will be subject to tax only on the excess over
P90,000.00 ceiling, provided, further, that MWEs receiving ‘other
benefits’ exceeding the P90,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries, wages and allowances,
just like an employee receiving compensation income beyond the
SMW.
The term ‘de minimis’ benefits which are exempt from the
fringe benefits tax shall include the following:
“(a) Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the year and the
monetized value of leave credits paid to government officials
and employees;
(b) Medical cash allowance to dependents of
employees not exceeding P750.00 per employee per semester
or P125 per month;
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-
kg. rice per month amounting to not more than P1,500.00;
(d) Uniforms and clothing allowance not exceeding
P5,000.00 per annum;
(e) Actual yearly medical benefits not exceeding
P10,000.00 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g. for length of
service or safety achievement, which must be in the form of a
tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding P10,000.00
received by an employee under an established written plan
which does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000 per employee
per annum;
(i) Flowers, fruits, books, or similar items given to
employees under special circumstances, e.g. on account of
illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not
exceeding twenty five percent (25%) of the basic minimum
wage.” [Rev. Reg. 3-98, Sec. 2.33 (C), last par., as amended by Rev. Reg.
No. 10-2000, Rev. Reg. No. 5-2008; Rev. Reg. No. 5-2011; and Rev. Reg. No.
8-2012)
Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive schemes,
provided that the total annual monetary value received from both CBA
and productivity incentive schemes combined do not exceed P10,000
per employee per taxable year. (Rev. Reg. 2-98, Sec. 2.78.1 (A) (3), as
amended by Rev. Reg. No. 8-2000, Rev. Reg. No. 5-2008, Rev. Reg. No. 10-2008,

80
Rev. Reg. No. 5-2011, and Rev. Reg. No. 8-2012, amount adjusted by the author to
conform with the increase provided for in the TRAIN]

*13.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. Would it
be the employer or the employee who is legally required to
pay an income tax on it ? Explain.
SUGGESTED ANSWER: The employer should pay the tax. It
is a final tax subject to withholding. As such, the obligation devolves
upon the withholding agent, in this case the employer to collect the tax
from itself.

**14. Mr. Psalmir is an executive of Baldago

Corporation. Aside from his salary, his employer provides
him with the following benefits: the free use of a
residential house in an exclusive subdivision, free use of
limousine and membership in a country club where he can
entertain customers of the corporation.
Which of these benefits, if any, must Mr. Psalmir
report as income ? Explain.
SUGGESTED ANSWER: None. All are subject to the fringe
benefits tax, except the value of the use of the country club which is
not taxable as it is for the convenience of the corporation.
The fringe benefits tax is a final tax, hence the items that are
subject to it are not reportable anymore as income in the annual
income tax return.

15. What is the tax treatment of the 13th month pay

and de minimis benefits ?
th
SUGGESTED ANSWER: The 13 month pay that does not
exceed P90,000.00 is excluded from gross income, hence not to be
included in the annual income tax return. Any amounts exceeding
P90,000.00 should be included in the preparation of the annual
income tax returns as part of gross compensation income, subject to
tax. [NIRC of 1997, Sec. 32 (B) (7) (e), as amended by Rep. Act No. 10653, and the
TRAIN paraphrasing supplied]
De minimis benefits are not to be included in the preparation of
annual income tax returns because they are not subject to income
taxation.

81
 Income from within and income from without the
Philippines

***1. A Co., a Philippine corporation, has an

executive (P) who is a Filipino citizen. A Co. has a
subsidiary in Hong Kong (HK Co.) and will assign P for an
indefinite period to work full time for HK Co. P will bring
his family to reside in HK and will lease out his residence in
the Philippines. The salary of P will be shouldered 50% by
A Co. while the other 50% plus housing, cost of living and
educational allowances of P’s dependents will be
shouldered by HK Co. A Co. will credit the 50% of P’s
salary to P’s Philippine bank account. P will sign the
contract of employment in the Philippines. P will also be
receiving rental income for the lease of his Philippine
residence.
Are these salaries, allowances and rentals subject to
Philippine income tax ?
SUGGESTED ANSWER: The salaries and allowances of P,
being derived from labor or personal services rendered outside of the
Philippines is considered as income from without. Since P is an
OCW, then he is to be taxed only on his income derived from within
the Philippines such as the rentals on his Philippine residence, and
not on his income from without.

***2. Ms. C, a resident citizen bought ready-to-

wear goods from Ms. B, a non-resident citizen.
a) If the goods were produced from Ms. B’s
factory in the Philippines, is Ms. B’s income from the
sale to Ms. C taxable in the Philippines ? Explain.
SUGGESTED ANSWER: Yes. The income of Ms. B from the
sale of ready-to-wear goods to Ms. C is taxable in the Philippines.
B, being a non-resident citizen, is taxable only on income
derived from sources within the Philippines. [NIRC of 1997, Sec. 23 (B)]
Since, the goods are produced and sold within the Philippines, the
income earned therefrom is considered as income from within,
Consequently, B’s income is subject to tax within the
Philippines.

Ordinary assets and capital assets and their

gains and losses

82
 **1. Distinguish an ordinary asset from a capital
asset.
SUGGESTED ANSWER: The following are the distinctions
between an ordinary asset and a capital asset:
a. Nature. An ordinary asset is used in trade, business or
exercise of a profession while a capital asset is not used in trade,
business or exercise of a profession.
b. Diminution in value. The diminution in value of an
ordinary asset may be allowed as a deduction from gross income in
the form of depreciation or otherwise while the diminution in value of a
capital asset, in the form of depreciation, or otherwise is not allowed
as a deduction from gross income because it is not used in trade,
business or exercise of a profession.
c. Taxability of income. The incomes derived from ordinary
assets are subject to inclusion in the income tax return of the earner
while In general, the incomes derived from the disposition of a capital
asset, is subject to a final tax, hence not to be included anymore in the
income tax return.
d. Deductibility of losses. Ordinary losses arising from the
use of ordinary assets, in trade, business or exercise of a profession
may be deducted from capital gains while capital losses arising from
disposition of a capital asset may only be deductible from a capital
gain.
e. Carry-over of losses. The concept of net operating loss
carry-over finds application in the taxation of losses incurred from the
transactions involving ordinary assets while it is the concept of the net
loss carry-over that applies to losses incurred as a result of
transactions involving capital assets.
f. Period for carry-over of losses. The loss incurred from
transactions involving ordinary assets may be carried over for a period
of three (3) or five (5) years while the carry-over of losses suffered
from the disposition of capital assets is only one (1) year.
g. Holding period. The holding period never find application
to the taxability of ordinary assets while the taxability of certain kinds
of capital assets may be subject to the holding period.

** 2. Klaus, Inc., a domestic, VAT-registered

corporation engaged in the land transportation business,
owns a house and lot along Katipunan St., Quezon City.
This property is being used by Klaus, lnc.’s president and
single largest shareholder, Atty. Krimson, as his residence.
No business activity transpires there except for the

83
company’s Christmas party which is held there every
December. Atty. Krimson recently grew tired of the long
commute from Katipunan to his office in Makati City and
caused the company to sell the house and lot. The sale was
recorded in the books of Klaus, Inc. as investment in real
property.
Is the sale subject to 6% capital gains tax or regular
corporate income tax of 30%?
SUGGESTED ANSWER: The sale is not subject to the 6%
capital gains tax but the gain derived from the sale is subject to the
regular corporate income tax of 30% because the house and lot is an
ordinary asset used in the trade of business of Klaus, Inc.
The house and lot is an ordinary asset. It is real property used
in the trade and business of Klaus, Inc.because it is being used by its
President as his residence. [NIRC of 1997, Sec. 39 (A) (1);
It should be noted that while the house and lot is an ordinary
asset used in the trade and business of Klaus, Inc., it is not part of the
“Goods or properties” the sale, barter or exchange of which may be
subject to VAT which include real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or
business. [NIRC of 1997, Sec. 106 (A) (1)], 1st par.; Rev. Regs. No. 16-2005, Sec.
4.106-2]

**
3. 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, 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.
SUGGESTED ANSWER: The sale of the machineries and
equipment, which are considered as ordinary assets because they
were intended to be used in the trade and business of GHI, Inc., is the
subject to the normal income tax rate.

84
 This despite the fact they were not actually used because GHI,
Inc. failed to commence operations.

*4. What is capital asset ? Illustrate with an

example.
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:
a. Stock in trade of the taxpayer, or
b. 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
c. Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or
d. Property used in the trade or business, of a character
which is subject to the allowance for depreciation; or real property
used in the trade or business of the taxpayer. [NIRC of 1997, Sec. 39 (A)
(1); Rev. Reg. No. 6-2008, Sec. 2 (u)] arrangement and numbering supplied]
The following are examples of capital assets:
a. Stock and securities held by taxpayers other than dealers
in securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects of arts
which are not used in trade or business;
f. Inherited large tracts of agricultural land which were
subdivided pursuant to the government mandate under land reform,
then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26,
1968) Improvements made on the property converts it to an ordinary
asset.
g. “Real property used by an exempt corporation in its
exempt operations, such as a corporation included in the enumeration
of Section 30 of the Code, shall not be considered used for business
purposes, and therefore considered as capital asset.” (Rev. Reg. No. 7-
2003, Sec. 3.b, 3rd par., last sentence)
h. “Real property, whether single detached, townhouse, or
condominium unit, not used in trade or business as validated from the
existing available records of the Bureau of Internal Revenue, owned
by an individual engaged in business, shall be treated as capital asset.
(Rev. Reg. No. 7-2003, Sec. 3.b., last par., as adjusted by the TRAIN)

**5. Mr. Pedro Aguirre, a resident citizen, is working

for a large real estate development company in the country

85
and in 2019, he was promoted to Vice-President of the
company. With more responsibilities comes higher pay. In
2020, he decided to buy a new car worth P2 Million and he
traded in his old car with a market value of P800,000.00,
and paid the difference of P1.2 Million to the car company.
The old car, which was bought three (3) years ago by the
father of Mr. Pedro Aguirre at a price of P700,000.00, was
donated by him and registered in the name of his son. The
corresponding donor’s tax thereon was duly paid by the
father.
a. What is the nature of the old car – capital asset
or ordinary asset? Explain your answer. (2012, dates
supplied)
SUGGESTED ANSWER: The old car is in the nature of a
capital asset because it is not used in trade of business of Mr.
Aguirre.
b. How much is the cost basis of the old car to Mr.
Aguirre? Explain your answer.
SUGGESTED ANSWER: The cost basis of the old car to Mr.
Aguirre is the value paid for by his father at the time the donation was
made. In this case, it is the value of P700,000.00 the price which the
father paid for the car.

*6. What does the term “ordinary income” include ?

SUGGESTED ANSWER: The term ordinary gain includes any
gain from the sale or exchange of property which is not a capital asset
or property. [NIRC of 1997, Sec. 22 (Z)]
An example would be the gain derived from the sale of items
held for sale in the ordinary course of business, such as the gains
from the sale of automobiles by a car dealer.

*7. What differentiates capital gains from ordinary

gains ?
SUGGESTED ANSWER: The following are the distinctions:
a. The source of capital gain is property not used in trade or
business while the source of ordinary gain is property used in trade or
business.
b. Some types of capital gains are adjusted by the holding
period, while the holding period does not find application to ordinary
gains.

86
 c. From certain types of capital gains may be deducted
ordinary losses, while only ordinary losses may be deducted from
ordinary gains.
d. The concept of net loss carryover applies to capital gains
taxation, while the concept of net operating loss carryover applies to
ordinary gains taxation.
e. Generally no deductions are allowed from capital gains
while deductions are usually allowed for ordinary gains.
f. Generally capital gains are subject to final taxes, while
this is not so with regard to ordinary gains;
g. The income from capital gains are not generally to be
included in the annual income tax return, while ordinary income is to
be included in the annual income tax return.
NOTE NOT PART OF THE ANSWER: The capital gains derived from
the sale, exchange or other disposition of capital assets which are not real
property, nor shares of stock are “lumped” with ordinary income reportable in
the income tax return. To this combined income would be deducted the
optional standard or itemized deductions, if any, to arrive at income subject to
tax.

Tax-free exchanges

***1. As of March 2012, Lucio, Susan, Ferdinand,

and Pamela, the COs collectively, were the majority
shareholders of Kareila Management Corporation
(KAREILA), a domestic corporation engaged as managers,
managing agents, consignor, concessionaire, or supplier
of business engaged in the operation of hotels,
supermarkets, groceries and the like. KAREILA had an
authorized capital stock of P500,000,000.00, wherein
1,703,125 shares were subscribed and fully paid. The COs
owned 99.9999% of the total subscribed shares while SY
owned the remaining 0.0001%.
The COs were also shareholders of Puregold Price
Club, Inc. (PUREGOLD), a corporation organized under the
Philippine laws and primarily engaged in the wholesale and
retail of general merchandise. From PUREGOLD’s
authorized capital stock of P3,000,000,000.00,
2,000,000,000.00 shares were subscribed and fully paid.
The COs owned 66.55% of PUREGOLD’s total subscribed
shares.]

87
 On March 27, 2012, PUREGOLD’s Board of Directors
approved the issuance of 766,406,250 PUREGOLD common
shares to the COs and SY in exchange for the transfer to
PUREGOLD of KAREILA’s 1,703,125.
On May 8, 2012, during PUREGOLD’s annual
stockholders meeting, this exchange was approved by the
stockholders representing two-thirds of PUREGOLD’s
outstanding capital stock.
On May 11, 2012, the COs and SY entered into a Deed
of Exchange with PUREGOLD wherein they agreed to
transfer all their KAREILA shares to PUREGOLD in
exchange for its shares.
Under the Deed of Exchange, the COs and SY each
would receive four hundred fifty (450) PUREGOLD shares
for every one (1) KAREILA share that they would transfer
to PUREGOLD. Accordingly, PUREGOLD issued to the
COSs and SY a total of 766,406,250 PUREGOLD shares
from the unissued portion of its authorized capital stock in
exchange for the 1,703,125 KAREILA shares:
As a result of the share swap under the Deed of
Exchange:
1. PUREGOLD acquired majority ownership of
KAREILA; and,
2. The COs who, prior to the share swap, already
collectively owned 66.5720% of the outstanding capital
stock of PUREGOLD consequently increased their
stockholdings to 75.8329% after the swap:
Is the exchange subject to tax ?
SUGGESTED ANSWER: No. The “requisites for the non-
recognition of gain or loss are as follows: (a) the 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 persons; and,
(d) as a result of the exchange the transferor, alone or together with
others, not exceeding four, gains control of the transferee.”
(Commissioner of Internal Revenue v. Co, G.R. No. 241424, February 26,
2020)
It is not necessary that, after the exchange, each of the
transferors individually gains control of the transferee corporation.
Also not prohibited are instances when the transferor gains further
control of the transferee corporation.

88
 The element of control is satisfied even if one of the transferors
is already owning at least 51% of the shares of the transferee
corporation, as long as after the exchange, the transferors, not more
than five, collectively increase their equity in the transferee corporation
by 51% or more.” (Ibid.)
The share swap transaction between the COs and PUREGOLD
is covered the rules on tax-free exchange because after the
exchange, the COs collectively increased their control over
PUREGOLD from 66.57% to 75.83%. Accordingly, the COs cannot be
held liable for income taxes on the supposed gain which may have
resulted from such transfer. (Ibid.)

***2. 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.
SUGGESTED ANSWER: No. B is not liable for any taxable gain
on the exchange.
The transaction is an exchange solely in kind exchanging
property (land and the apartment) for property(the shares of stock).
Thus, no gain is recognized as the property transferred to ABC Corp.
by B in exchange for the shares of stocks resulting to B’s gaining
control of ABC Corp. because he acquired ownership of 10,000 or
more than 50% ownership of ABC Corp.
ALTERNATIVE ANSWER: No. There is no taxable gain arising
from the exchange solely in kind exchanging land and an apartment
for shares of stock.
No gain or loss shall be recognized when B transferred the
1,000-square meter parcel of land and apartment building to ABC
Corp. by a person in exchange for stock in such a corporation of which
as a result of such exchange said B, alone gained control of said
corporation. [NIRC of 1997, Sec. 40 (C), paraphrasing supplied)

Passive investment income

89
 ***
1. What is the manner of taxation of any peso
currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and
similar arrangements derived from sources within the
Philippines ?
SUGGESTED ANSWER: A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from
any peso currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements derived from sources within the Philippines. [NIRC of
1997, Sec. 24 (B) (1)]

**2.
What is the tax treatment of interest income of a
domestic commercial bank derived from a peso loan to a
domestic corporation in 2021 ?
SUGGESTED ANSWER: It shall be subject to 30% corporate
income tax rate bcause the interest income is derived from the regulat
business of a domestic commercial bank.

**3.State with reasons the tax treatment of the

following in the preparation of annual income tax returns:
a. interest earned from the peso deposits with
BDO Bank, a domestic commercial bank.
SUGGESTED ANSWER: The interests earned on peso
deposits with BDO Bank should not be reported in the income tax
returns because they are subject to a final tax.
b. Interest on deposits with a local offshore
banking unit of a foreign bank.
SUGGESTED ANSWER: The interests on deposits with a local
offshore banking unit of a foreign bank is not to be reported in the tax
returns.
If the interest was paid to a resident Filipino citizen or alien, it is
not to be reported because a final tax is collected upon such interest.
Upon the other hand, if the interest was paid to a non-resident,
whether individuals or corporations, no report in the income tax return
shall be made because it is exempt from income tax. [NIRC of 1997, Sec.
28 (A) (4), last sentence]

**4.What is the tax treatment of dividends on life

insurance received during a taxable year ? Explain your
answer briefly.

90
 SUGGESTED ANSWER: The dividends on life insurance do
not fall under taxable income.
Such dividends are not dividends, in the accepted and ordinary
sense of the word, but represent an excess premium or surcharge
paid by the policy holder, and then returned to him, without interest,
less the costs attendant on collection and administration and various
other deductions. (Commissioner of Internal Revenue v. The Insular Life
Assurance Company, Ltd., CA-G.R. SP No. 46516, September 29, 1998)
Such dividends are strictly speaking, not profits as in the case
of an ordinary corporation, but really constitute a return to the policy
holder of the amount he has been overcharged for his insurance.
(Ibid.)

**
5. MIGGY Corp. secured an income tax holiday for
5 years as a pioneer industry. On the fourth year of the tax
holiday, MIGGY Corp. declared and paid cash dividends to
its stockholders, all of whom are individuals. Are the
dividends taxable ?
SUGGESTED ANSWER: Yes. The dividends are taxable
because the tax exemption of MIGGY Corp. does not extend to its
stockholders. (Sunio v. NLRC, G.R. No. L-57767, January 31, 1984)

***6.
BARAKO, Inc. a domestic corporation enjoyed
a particularly profitable year in 2020. In June 2021, its
Board of Directors approved the distribution of cash
dividends to its stockholders. BARAKO, Inc. has individual
and corporate stockholders. What is the tax treatment of
the cash dividends received from BARAKO, Inc. by the
following stockholders.
a) American citizen.
SUGGESTED ANSWER: A final withholding tax for ten percent
(10%) shall be imposed upon the cash dividends actually or
constructively received from BARAKO, Inc. a domestic corporation if
the American citizen is a resident alien. [NIRC of 1997, Sec. 24 (B)(2), as
retained by the TRAIN]
b) Resident Filipino citizen.
SUGGESTED ANSWER: They are subject to a final tax of ten
percent (10%) on the gross amount of the dividends. [Ibid,]
c) Non-resident alien engaged in trade or
business.
SUGGESTED ANSWER: A final withholding tax of twenty
percent (20%) shall be imposed upon the cash dividends actually or
constructively received by a non-resident alien engaged in trade or

91
business from BARAKO, Inc., a domestic corporation. [NIRC of 1997,
Sec. 25 (A)(2)]
d) Non-resident alien not engaged in trade or
business.
SUGGESTED ANSWER: A final withholding tax equal to
twenty-five percent (25%) of the entire income received from all
sources within the Philippines, including the cash dividends received
from BARAKO, Inc. [NIRC of 1997, Sec. 25 (B)]
e) Domestic corporation.
SUGGESTED ANSWER: Dividends received by a domestic
corporation from another domestic corporation, such as BARAKO, Inc.
shall not be subject to tax. [NIRC of 1997, Sec. 27 (D)(4)]
f) Non-resident foreign corporation.
SUGGESTED ANSWER: Dividends received by a non-resident
foreign corporation from a domestic corporation are generally subject
to an income tax of 30% to be withheld at source. [NIRC of 1997, Sec. 28
(B)(1), as amended by Rep. Act No. 9337]
However, a final withholding tax of fifteen percent (15%) is
imposed on the amount of cash dividends received from a domestic
corporation like BARAKO, Inc. If the country in which the non-resident
foreign corporation is domiciled would allow as tax credit against the
tax due from it, taxes deemed paid in the Philippines of 15%
representing the difference between the 30% regular income tax rate
and the 15% preferential rate. [NIRC of 1997, Sec. 28 (B)(5)(b),as amended by
Rep. Act No. 9337]
NOTE NOT PART OF THE ANSWER: In all of the above instances
the cash dividends are not reportable in the income tax return because they
are either exempt or subjected to a final tax.

*7. On 03 January 2020, Randy, a Filipino citizen

residing in the Philippines, purchased one hundred (10)
shares in the capital stock of ABC Corporation, a domestic
corporation. On 03 January 2022, ABC Corporation
declared, out of the profits of the company earned after 01
January 2020, a hundred percent (100%) stock dividends
on all stockholders of record as of 31 December 2021 as a
result of which Randy’s holding in ABC Corporation
became two hundred (200) shares.
Are the stock dividends received by Randy subject to
income tax ? Explain.
SUGGESTED ANSWER: The stock dividend declared under
the circumstances obtaining in the problem may or may not be the
subject of income taxation.

92
 As a general rule, stock dividend representing the transfer of
surplus to capital account shall not be subject to tax. [NIRC of 1997, Sec.
73 (B), 1st sentence]
Where stock dividends are given as returns on investment, the
dividends are subject to tax when the distribution results in changes in
the in the proportionate interest of the stockholder. (Rev. Regs. No. 2, Sec.
252)
It appears in the problem that the stock dividends were given
only to stockholders of record as of 31 December 2020. If all the
stockholders are stockholders as of said date, then there would be no
proportionate change in ownership, hence not taxable. If not all are
stockholders of record as of 31 December 2020, then the declaration
of the stock dividends would result in disproportionate change in
ownership. In such a case, the stock dividend declaration would be
taxable.

*
8. XYZ Corp. was dissolved and liquidating
dividends were declared and paid to the stockholders.
What tax consequence follows ?
SUGGESTED ANSWER: The stockholders should declare
their gain from their investment and pay income tax at the ordinary
rates.

Exclusions from gross income

*1.What are excluded from gross income under the

National Internal Revenue Code of 1997 (NIRC of 1997) ?
SUGGESTED ANSWER:
a. Life Insurance proceeds.
b. Amount received by insured as return of premium.
c. Gifts, bequest and devises.
d. Compensation for injuries or sickness.
e. Income exempt under treaty.
f. Retirement benefits, pensions; gratuities, etc.
g. Miscellaneous Items:
1) Income derived by foreign government.
2) Income derived by the government or its
political subdivisions.
3) Prizes and awards.
4) Prizes and awards in sports competitions.
th
5) 13 month pay and other benefits.
6) GSIS, SSS, Medicare and other
contributions.

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 7) Gains from the sale of bonds, debentures or
other certificate of indebtedness.
8) Gains from redemption of shares in mutual
fund. [NIRC of 1997, Sec. 32 (B)]
The above are the recognized substantive
exclusions from gross income. Provisions of special laws
may recognize other exclusions from gross income.

**2.Differentiate “Exclusion from Gross Income”

from “Deductions from Gross Income”. Give an example of
each.
SUGGESTED ANSWER: “Exclusions from Gross Income” are
distinguished from “Deductions from Gross Income” in the following
manner:
a. Exclusions from gross income refer to a flow of wealth to
the taxpayer which are not treated as part of gross income for
purposes of computing the 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 (RR
No. 2, Sec. 61), while deductions are the amounts which the law
allows to be subtracted from gross income in order to arrive at
net income.
b. Exclusions pertain to the computation of gross income,
while deductions pertain to the computation of net income.
c. Exclusions are something received or earned by the
taxpayer which do not form part of gross income, while deductions are
something spent or paid in earning gross income.
Example of an exclusion from gross income: Life insurance
proceeds.
Example of a deduction: Ordinary and necessary expenses.

*3. Salvador took out a life insurance policy for

P1,000,000.00 naming his wife as beneficiary. Under the
terms of the policy, the insurer will pay Salvador the
amount of P1,000,000.00 after the 20th year of the policy,
and his beneficiaries, should he die before that date.
Salvador outlived the policy and received P1,000,000.00.
The premiums paid on the policy was P250,000.00. Is the
P1,000,000.00 received by Salvador subject to tax? Explain
your answer.

94
 SUGGESTED ANSWER: No. Not all of the P1,000,000.00 is
subject to tax. The amount of P250,000.00 is not subject to tax
because it is the amount received by A, as a return of the premiums
paid by him under a life insurance contract at the maturity of the term
mentioned in the contract. [NIRC of 1997, Sec. 32 (B) (2)] The premiums
returned are not income but return of capital. They represent earnings
which were previously taxed.
On the other hand, the amount of P750,000.00 is subject to tax
because it represents income being interest or earnings of the
premium and not return of capital. (Ibid.)

**4. Policarpio, while relaxing in his living room

watching the Lotto draw on TV, saw and heard that he just
won P100 million in the 6/55 draw. With full expectancy of
receiving the P100 million, he went to the PCSO to get his
prize. He got the surprise of his life when he was told that
he shall get only about P80 million. He asked why, and he
was told that taxes were deducted from his prize winnings.
Feeling bad about the whole thing, he called you up
through his cellphone to seek your advice What would you
tell him ?
SUGGESTED ANSWER: I would tell him to get the P80 million
because Lotto winnings are now taxable under the TRAIN law. [NIRC of
1997, Sec. 24 (B) (1), as amended by the TRAIN]

**5. Mr. X received income and you were asked to

prepare his income tax return. Is he required to include as
part of gross income proceeds from his winnings from the
gambling casino ? Give your reasons.
SUGGESTED ANSWER: No. If the winnings exceeded
P10,000.00 and was subject to the final tax of 20%. [NIRC of 1997, Sec.
24 (B) (1), as amended by the TRAIN]
ALTERNATIVE ANSWER: Yes. If the winnings was less than
P10,000.00. (Ibid.)

***
6. Vynette, a Filipino national, worked with the
LEB Group of Companies, Inc. (LEB), and was seconded to
various LEB-affiliated corporations:
a. from 2003 to 2008 as Vice President of LEB
Land Holdings, Inc.,

95
 b. from 2008 to 2011 as Vice President of LEB
Bank;
c. from 2011 to 2015 as COO of LEB Airlines
Inc.;
d. from 2015 to 2021 as CEO of LEB Energy
Corporation, where Vynette served as CEO for seven
years until her retirement last December 12, 2021
upon reaching the compulsory retirement age of 60
years.
All the corporations mentioned are majority-owned in
common by the de la Cruz family and covered by a BIR-
qualified multiemployer-employee retirement plan (MEE
RP), under which the employees may be moved around
within the controlled group (i.e., from one LEB subsidiary
or affiliate to another) without loss of seniority rights or
break in the tenure. Vynette was well-loved by her
employer and colleagues, so upon retirement, and on her
last day in office, LEB gave her a Land Rover SUV worth
PhP8 million as a surprise, with a streamer that reads:
“You’ll be missed. Good luck, Ma-am Vynette.”
(a) Are the retirement benefits paid to Vynette
pursuant to the MEE RP taxable ?
SUGGESTED ANSWER: No. The retirement benefits paid to
Vynette pursuant to the MEERP are not taxable because they are
excluded from gross income for purposes of determining income
subject to tax.
This is so, because the retirement benefits were received by
Vynette, an official of LEB a corporate private firm, in accordance with
the MEERP which is a reasonable private benefit plan maintained by
his employer. Furthermore, Vynette the retiring official or employee is
considered as been in the service of same employer for at least ten
(10) years because of the MEERP provision that service with one
affiliate is considered part of service with LEB. So also, Vynette is not
less than fifty (50) years of age at time of retirement because she was
already 60, and there is no showing that she previously enjoyed tax-
free retirement benefits. [NIRC of 1997, Sec. 32 (B) (6) (a)]
The Land Rover SUV is not part of Ms. Vynette’s retirement
package but should be considered as a donation made by LEB as an
act of pure liberality. Since this is a donation, it is not income on the
part of Ms. Vynette but subject to the payment of donor’s tax by LEB.

96
 ***
7. Are moral damages awarded a litigant for
mental anguish an account of a libelous article written
about him taxable as income or not ? Why ?
SUGGESTED ANSWER: Yes. Moral damages arising from
libel or slander, breach of contracts are not excluded from gross
income and are part of taxable income.
Such kinds of damages are separate and different from the
moral damages received on account of sickness and personal injuries.
The express provision of law requires that the damages must be
received “on account of such injuries or sickness” referring to personal
physical injuries or sickness, and from no other. [NIRC of 1997, Sec. 32 (B)
(4)]
ALTERNATIVE ANSWER: Yes. The moral damages that are
awarded a litigant for mental anguish an account of a libelous article
written about him are taxable as income. Mental anguish is not
physical injuries, therefore moral damages awarded due to moral
anguish are not excluded from income.
Amounts received as compensation for personal injuries plus
the amounts of any damages received on account of such injuries are
excluded from taxable income if the personal injuries are physical in
character.
Exclusions from taxable income are considered as exemptions
from taxation, hence to be interpreted in strictissimi juris against the
taxpayer. The words “personal injuries” should be given a restrictive
meaning to refer only to physical injuries. This interpretation finds its
basis in the provision of law which refers to “Accident or Health
Insurance or under Workmen’s Compensation Acts,” both of which
refers to “personal injuries or sickness.” [NIRC of 1997, Sec. 32 (B) (4)] This
could only mean, physical injuries.

***8. JR was a passenger of an airline that crashed.

He survived the accident but sustained serious physical
injuries which required hospitalization for 3 months.
Following negotiations with the airline and its insurer, an
agreement was reached under the terms of which JR was
paid the following amounts: P500,000.00 for his
hospitalization; P250,000.00 as moral damages; and
P300,000.00 for loss of income during the period of his
treatment and recuperation. In addition, JR received from
his employer the amount of P200,000.00 representing the
cash equivalent of his earned vacation and sick leaves.

97
 Which, if any, of the amounts he received are subject
to income tax ? Explain.
SUGGESTED ANSWER: The only amount received by JR that
may be subject to income tax is the portion of the P200,000.00 which
exceeds the monetized equivalent of ten (10) days unutilized vacation
and sick leave credits. [Rev. Regs. No. 3-98, Sec. 2.78.1 (A), 2nd sentence as
amended by Rev. Regs. No. 10-2000] The portion equivalent of the
monetized equivalent that does not exceed ten (10) days unutilized
vacation and sick leave credits are non-taxable de minimis benefits.
The other amounts represent amounts of damages received as
compensation for JR’s injuries as a result of an accident, the plane
crash. The express provision of law requires that, to be excluded from
gross income, the damages must be received on account of personal
injuries [NIRC of 1997, Sec. 32 (B) (4)], referring to physical injuries
Consequently, such amounts are excluded from gross income
and not be subject to income taxation. (Ibid.)

**9. Mr. Manny, a citizen and resident of the

Philippines, is a professional boxer. In a professional
boxing match held in 2021, he won prize money in United
States in the amount of (US) dollars, 5 million.
The US already imposed and withheld income taxes
from Mr. Manny’s prize money. May his prize money
qualify as an exclusion from his gross income ? Why ?
SUGGESTED ANSWER: No. The prize money is not excluded
from gross income.
This is so because Mr. A is a professional athelete and the law
excluding from gross income all prizes and awards granted to athletes
in local and international sports competitions, whether held in the
Philippines or abroad requires sanctions by national sports
associations for boxing. [NIRC of 1997, Sec. 32 (B) (7) (d)]
The sports association that sanctions professional boxing fights
in the U.S. is not the Philippine national sports association for boxing
but the different state commissions for boxing.
Finally, the Philippine national sports association for boxing
only governs amateur athletes.The exclusion finds application only to
amateur athletes in order to promote excellence in sports activities.

“Income from whatever source derived”

98
 **
1. What is meant by “Income from whatever
source derived” as a component of gross income for
purposes of income taxation ?
SUGGESTED ANSWER: “Income from whatever source
derived” refers to all income not expressly excluded or exempted from
the class of taxable income, irrespective of the voluntary or involuntary
action of the taxpayer in producing the income. (Gutierrez v. Collector of
Internal Revenue, CTA Case No. 65, August 31, 1965)
The source of the income may be legal or illegal.
They include the following:
a. Condonation or forgiveness of indebtedness in certain
instances.
b. Recovery of written-off debts, or refund of tax payments.
Under the so-called “tax benefit” rule where there is recovery of
written-off debts, or refund of tax payments.
c. Taxable illegal income.

*2. What is meant by the “tax benefit rule”?

SUGGESTED ANSWER: The “tax benefit rule” or “the
equitable tax benefit rule,” posits that the “recovery of bad debts
previously allowed as deduction in the preceding year or years shall
be included as part of the taxpayer’s gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.”
[NIRC of 1997, Sec. 34 (E) (1); Rev. Regs. 5-99, Sec. 4, 1st sentence)
a. Illustrate the application of the tax benefit rule.
SUGGESTED ANSWER: Bad debts that were deducted in a
prior year, if paid during the current year are “recaptured” and
reported as part of the current year’s income.

**3.In 2019, your client was assessed by the BIR

P750,000.00 in deficiency business taxes which it paid
despite its belief that the assessment was erroneous.
Upon payment, it applied for a refund. So also, it deducted
the amount of P750,000.00 as taxes paid in its ITR filed for
2019. This resulted to lower income taxes paid for 2019.
In 2021, the BIR realized its mistake in issuing the
P750,000.00 assessment and granted your client’s
application for refund.
a. Your client now consults you and asks how you
are going to treat the P750,000.00 refund it received in its
2021 ITR. Explain your answer.

99
 SUGGESTED ANSWER: The P750,000.00 refund is subject to
tax. I would advise my client to report the P750,000.00 refund as
miscellaneous income which is a part of its gross income for the 2021.
My advice is based on the application of the concept of the tax
benefit rule. In 2019 when my client claimed deduction of the
P750,000.00 taxes paid, it realized a tax benefit in the form of the
reduction of the income tax due from it on account of the said
deduction.
It’s subsequent recovery thereof from a refund of the
P750,000.00 from the government in 2021 shall be treated as a
receipt of realized taxable income for the year 2021.
a. Supposing under the same above set of facts
except that in 2019 your client was not able to deduct the
amount of P750,000.00 because it already suffered a net
operating loss even without such deduction.
Would your advice of treating the P750,000.00 refund
it received as a receipt of realized taxable income for the
year 2021 being taxable still hold water ? Explain your
answer.
SUGGESTED ANSWER: No more. My answer is not the same
because this time the P750,000.00 that is received is not subject to
income taxation.
My client did not benefit from P750,000.00 tax paid because the
result of his business operation was a net loss even without deduction
of the taxes paid. The P750,000.00 tax paid did not help in reducing
my client’s income tax liability for 2019.
Its subsequent recovery in 2021 of the P750,000.00 shall be
treated as a mere recovery or a return of capital, hence, not treated as
receipt of realized taxable income. There is no need for my client to
report it in the ITR.
NOTE NOT PART OF THE ANSWER: The above discussion on the
“tax benefit” rule finds application whether the tax is a national or local tax so
as it is allowed as a deduction from gross income.

**
4. Explain whether income from illegal gambling,
such as jueteng, masiao, etc., or from the commission of
crimes such malversation, estafa, theft, robbery, etc., is
taxable or non-taxable ?
SUGGESTED ANSWER: Such income are taxable. Income
from illegal gambling, such as jueteng, masiao, etc., or from the
commission of a crimes such malversation, estafa, theft, robbery, etc.,
is taxable. This so because these income fall within the classification
of “income from whatever source derived” [NIRC of 1997, Sec. 32 (A)],

100
hence taxable. All receipts whether legal or illegal fall under the broad
category of “income from whatever source derived.”
The phrase “income from whatever source derived,” is so broad
that it includes all income not expressly excluded or exempted from
the class of taxable income, irrespective of the voluntary or involuntary
action of the taxpayer in producing the income. (Gutierrez v. Collector of
Internal Revenue, CTA Case No. 65, August 31, 1965)
NOTE NOT PART OF THE ANSWER: The author submits that the
above also finds application in the case of erroneous receipts of payments.
(Javier v. Commissioner, G.R. 78953, July 31, 1991, 199 SCRA 824)

Deductions from gross income

1. In general, what are the deductions from gross

income allowed under the National Internal Revenue Code
?
SUGGESTED ANSWER: The allowable deductions are the
a) Optional standard deduction. [NIRC of 1997, Sec. 34 (L),
as amended by the TRAIN]
b) Itemized deductions. [Ibid., Sec. 34 (A) to (K), as amended by
the TRAIN]
1) Ordinary and necessary expenses
2) Interest
3) Taxes
4) Losses
5) Bad Debts
6) Depreciation
7) Depletion of Oil and Gas Wells and Mines
8) Charitable and Other Contributions
9) Research and Development
10) Pension Trusts
c) Extraordinary deductions.
1) Those allowed to insurance companies. (Ibid., Sec.
37)
2) Deductions allowed to estates and trusts availing
of itemized deductions of income currently distributed to
beneficiaries. (Ibid., Sec. 61)
3) Losses from wash sales of stocks or securities.
(Ibid., Sec. 38)
4) Certain capital losses but only from capital gains.
(Ibid., Sec. 39)
5) Deductions allowed to private educational
institutions. [Ibid., Sec. 34 (A) (2)]
NOTE NOT PART OF THE ANSWER: No more personal and
additional exemptions for individuals. Starting January 1, 2018, the TRAIN

101
has expressly repealed NIRC Sec. 35 entitled, Allowance of Personal
Exemption for Individual Taxpayer.
No more exemptions for estates and trusts. The TRAIN has also
expressly repealed NIRC Sec. 62 entitled, Exemption Allowed to Estates and
Trusts.
Rationale for the repeal of NIRC Secs. 35 and 62, The TRAIN has
adopted a minimum income tax base of P250,000.00 for individuals, estates
and trusts. Furthermore, the tax rates were also reduced.
Not deductible are personal, living or family expenses. [NIRC
of 1997, Sec. 36 (A) (1)]

**2.State the essential conditions which must be

satisfied in order that an expense may be validly
considered deductible for income tax purposes ?
SUGGESTED ANSWER: The conditions that must be
complied with in order that an expense must be considered deductible
for income tax purposes:
a. There must be a specific provision of law allowing the
deductions, since deductions do not exist by implication. (Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, L-26911, January 27, 1981)
b. The requirements for deductibility of the expense
must be met.
1) It must be paid or incurred within the taxable
year.
2) The expense must be ordinary and necessary.
3) It must meet the business test rule and be paid or
incurred in carrying on a trade or business.
4) The substantiation rule must be complied through
substantially proving by evidence or records the deductions
claimed under the law. Otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction. (Esso
Standard Eastern, Inc. v. Commissioner of Internal Revenue, 175 SCRA 149)
5) The business expense must not be an
illegal expenditure, such as bribes, kickbacks, for immoral
purposes, etc.
c. There must be proof of entitlement to the deductions.
(Paper Industries Corporation of the Philippines v. Court of Appeals, et al., 250 SCRA
434)
d. The deductions must not have been waived. (Rev. Regs.
No. 2, Sec. 76)
e. The withholding and payment of the tax required must be
shown. [NIRC of 1997, Sec. 34 (K), Secs. 58 and 81]

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 **
3. Atty. Jerome, a practicing lawyer, owns a car
which he uses exclusively in his law practice. He also
spends for the driver’s salary, gasoline, oil, and
maintenance. In the taxable year in question, he had the
upholstery done and the body repainted which would last
for 3 years. He also pays a monthly rental on his office
space that he uses as his law office. While on his way to
court to attend a hearing, his attache case, with some
cash were stolen from his car. His bad luck continued
when his wallet was stolen while he was unwinding in a
disco bar.
He deducted all these expenses, supported by
receipts, in his annual income tax return.
Enumerate which of these expenses are allowable as
deductions and which are not. Explain.
SUGGESTED ANSWER: Atty. Jerome is allowed to deduct all
of the expenses except the value of the loss of his wallet and the cost
of the upholstery and the body repaint which maybe included in the
cost of his car to be depreciated.
The office rent is fully deductible because it is payment for the
continued use or possession of property for the exercise of the Atty.
Jerome’s profession. There is no showing that he is paying the office
rent with the end in view of taking title to the office.
The value of the loss of the wallet is not allowed to be deducted
because it is a loss that is not connected with Atty. Jerome’s exercise
of his profession. The cost of the upholstery and the body repaint are
not allowed to be deducted in full because they are capital
expenditures which prolong the life of an asset (the car). [NIRC of 1997,
Sec. 36 (A) (3)]

**4.Peter is the Vice-President for Sales of Golden

Dragon Realty Conglomerate, Inc. (Golden Dragon). A
group of five (5) foreign investors visited the country for
possible investment in the condominium units and
subdivision lots of Golden Dragon. After a tour of the
properties for sale, the investors were wined and dined by
Peter at the posh Conrad’s Hotel at the cost of P150,000.00.
Afterward the investors were brought to a party in a vidoke
club which cost the company P200,000.00 for food and
drinks, and the amount of P80,000.00 as tips for business
promotion officers. Expenses at Conrad’s Hotel and the

103
videoke club were receipted and submitted to support the
deduction for representation and entertainment expenses.
Decide if all the representation and entertainment expenses
claimed by Golden Dragon are deductible. Explain.
SUGGESTED ANSWER: Not all of the representation and
entertainment expenses claimed by Golden Dragon are deductible.
Only those that are reasonable in amount and nature should be
deductible. It should be noted that the total expenses is P430,000.00
for the five (5) investors or P86,000.00 each.
I would allow only a deduction in such amounts as are
reasonable under the circmstances but in no case shall all deductions
for representation and entertainment expenses, including those above
enumerated, exceed 0.50% of net sales. [NIRC of 1997, Sec. 34 (A) (1) (iv);
Rev. Regs. 10-2002]

*5. Pursuant to the National Internal Revenue Code

for interest to be deductible, what are the requirements to
be met ? Explain.
SUGGESTED ANSWER: In general, subject to certain
limitations, the following are the requisites for the deductibility of
interest expense from gross income:
a. There must be an indebtedness.
b. There should be an interest expense paid or
incurred upon such indebtedness.
c. The indebtedness must be that of the taxpayer.
d. The indebtedness must be connected with the
taxpayer’s trade, business or exercise of profession.
e. The interest expense must have been paid or
incurred during the taxable year.
f. The interest must have been stipulated in writing.
g. The interest must be legally due.
h. The interest payment arrangement must not be
between related taxpayers.
i. The interest must not be incurred to finance
petroleum operations.
j. In case of interest incurred to acquire property
used in trade, business or exercise of profession, the same was
not treated as a capital expenditure. (Rev. Regs. 13-2000, Sec. 3,
paraphrasing, arrangement and numbering supplied)
k. The amount deducted must be within the limits
provided by law.

104
 **6. Give the requisites for the deductibility of a
loss.
SUGGESTED ANSWER: A loss may be deductible if the
general and specific requisites for its deductibility are met.
a. There must be compliance with the general
requisites for deductibility as applied to losses:
1) There must be a specific provision of law
allowing the deductions, since deductions do not exist by
implication. (Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, L-26911, January
27, 1981)
2) There must be proof of entitlement to the
deductions. (Paper Industries Corporation of the Philippines v. Court
of Appeals, 250 SCRA 434)
3) The deductions must not have been waived.
(Rev. Regs. No. 2, Sec. 76)
b. The specific requirements for deductibility of
losses must be met:
1) They must be ordinary losses that are
incurred by a taxable entity as a result of its day to day
operations conducted for profit or otherwise, or casualty
losses.
2) They must have been losses that are
actually sustained during the taxable year.
3) They must not have been compensated for
by insurance or other forms of indemnity.
4) If they are casualty losses, they are of
property connected with trade, business, or profession
and the lose arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.
5) They must not have been claimed as a
deduction for estate tax purposes in the estate tax return.
[NIRC of 1997, Sec. 34 (D) (1), (a), 1st par., paraphrasing supplied]

*7.A is a travelling salesman working full time for

Nu Skin Products. He receives a monthly salary plus 3%
commission on his sales in a Southern province where he
is based. He regularly uses his own car to maximize his
visits even to far flung areas. One fine day, a group of
militants seized his car. He was notified the following day
by the police that the marines and militants had a bloody
encounter and his car was completely destroyed after a
grenade hit it.

105
 A wants for file a claim for casualty loss. Explain the
legal basis for your tax advice.
SUGGESTED ANSWER: I would advise A not to claim for
casualty loss because it would be disallowed.
A earns from gross compensation only. He is not allowed to
deduct any items including losses.

*8.What is meant by “depreciation” as used in the

Tax Code ?
SUGGESTED ANSWER: Depreciation as used in the Tax Code
is the reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in
the trade or business. [NIRC of 1997, Sec. 34 (F) (1)]
The term is also applied to amortization of the value of
intangible assets, the use of which in the trade or business is definitely
limited in duration. (Basilan Estates, Inc. v. Commissioner of Internal Revenue, 21
SCRA 17) Example: Incorporation expenses.

**9.On the part of the contributor, are contributions

to a candidate in an election allowed as a deduction from
gross income ?
SUGGESTED ANSWER: No. The political contributions are not
considered as ordinary expenses which would help earn the income,
nor are they considered charitable and other contributions.
One of the requirements for deductibility is a specific provision
of law which recognizes such deduction. While it is true that such a
donation is exempt from the donor’s tax, it does not necessarily follow
that there is authority to deduct the same from gross income for
income tax purposes.

**10. Years ago, Gabriel bought a parcel of land in

Mataas na Kahoy, Batangas for only PhP65,000. He
donated the land to his son, Thomas, in 1983 when the
property had a fair market value of PhP75,000, and paid the
corresponding donor’s tax.
Thomas, in turn, sold the property in 2004 to Eleanne
for PhP 6.5 million and paid the capital gains tax,
documentary stamp tax, local transfer tax, and other fees
and charges. Eleanne, in turn, donated the land to
Calabarzon School last August 30, 2021 to be used as the
site for additional classrooms. No donor’s tax was paid,

106
because Eleanne claimed that the donation was exempt
from taxation. At the time of the donation to Calabarzon
School, the land had a fair market value of PhP 65 million.
How much in deduction from gross income may
Eleanne claim on account of the said donation?
SUGGESTED ANSWER: Eleanne may claim a deduction from
her gross income an amount not in excess of ten percent (10%) of her
taxable income derived from trade, business or profession as
computed prior to the deduction of the value of the donation made to
Calabarzon School, if Calabarzon School is a non-profit non-stock
educational institution and other charitable contributions that may
have been made by Eleanne [NIRC of 1997, Sec. 34 (H)] after compliance
with the substantiation requirements.

*11.Hidilyn, an amateur swimmer, won in a

swimming competition sponsored by the Kalayaan
Swimmers, a sports association duly accredited by the
Philippine Swimming Association. Hidilyn received the
amount of P500,000.00 as her prize which was donated by
Robinson Land Corporation. Could Robinson Land
Corporation deduct the P500,000.00 from its gross income
? Decide. .
SUGGESTED ANSWER: Yes. The amount is fully deductible if
the Philipppine Swimming Association is duly accredited with the
Philippine Olympic Committee. [Rep. Act No. 7549, Sec. 1]

**
12. Harold, a Filipino citizen and a professional
golfer, filed his income tax return for 2020 claiming
optional standard deductions (OSD). Realizing that he has
enough documents to substantiate his profession-
connected expenses, he now plans to file an amended tax
return for 2020, in order to claim itemized deductions, since
no audit has been commenced by the BIR on the return he
previously filed. Will Harold be allowed to amend his
return ? Why or why not ?
SUGGESTED ANSWER: No more. Once the election to avail
of OSD is signified in the return, it shall be irrevocable for the taxable
year for which the return is made. This means that a taxpayer who
initially filed a return availing OSD is precluded from amending said
return in order to shift to the itemized deductions.” (Rev. Regs. No. 16-
2008, Sec. 7, 1st and 2nd sentences, 1st par.)

107
 * 13. In 2021, the Commissioner of Internal Revenue
assessed against a manufacturing corporation the amount
of P1,000,000 as deficiency income tax. The deficiency was
brought about by the disallowance of items claimed by the
corporation as deductible business expenses for the
taxable year. These were a) expenses paid to an
advertising firm in order to create a favorable image for the
corporation; and b) litigation expenses incurred in defense
of a title to corporate property.
The corporation argued that they were ordinary and
necessary business expenses incurred during the taxable
year in carrying out its business and were, therefore,
deductible. The Commissioner of Internal Revenue
contended otherwise.
Resolve the controversy, giving reasons.
SUGGESTED ANSWER: Public relations fees for enhancing
the image of the corporation are in the nature of capital expenditures
(Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, L-26911, January 27, 1981), hence not deductible as business
expenses. This is so because the enhanced image of the corporation
benefits numerous taxable periods.
The litigation expenses incurred in defense of a title to
corporate property are not properly deductible as ordinary and
necessary expenses because they constitute part of the cost of the
property. (Rev. Regs. No. 2, Sec. 120; Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, supra)

*14.Jayjay is a very bright computer science

graduate. He was hired by Hewlett Packard. To entice him
to accept the offer for employment, he was offered the
arrangement that part of is compensation would be an
insurance policy with a face value of P20 Million. Ebeng,
Jayjay’s mother, made the beneficiary of the insurance
policy.
Can the company deduct from its gross income the
amount of the premium ? Reason briefly.
SUGGESTED ANSWER: Yes. It is deductible being a
legitimate business expense and Hewlett Packard, the employer is not
the beneficiary under the policy. [NIRC of 1997, Sec. 36 (A) (4)] It is a
deductible legitimate business expense because the taking of the
insurance policy is part of Jayjay’s compensation package.

108
 *
15. ABC Co., a Philippine corporation, issued
preferred shares of stock with the following features:
a. Non-voting.
b. Preferred and cumulative dividends at the rate
of 10% per annum, whether or not in any period the amount
is covered by earnings or projects.
c. In the event of dissolution of the issuer, holders
of preferred stock shall be paid in full or ratably as the
assets of the issuer may permit before any distribution
shall be made to common stockholders.
d. The issuer has the option to redeem the
preferred stock.
ABC Co. declared dividends on the preferred stock
and claimed the dividends as interests deductible from its
gross income for income tax purposes. The BIR
disallowed the deduction. ABC Co. maintains that the
preferred shares with their features are really debt and
therefore the dividends are really interests. Decide.
SUGGESTED ANSWER: The dividends are not interests
considered as deductible expense.
Preferred shares are not loans but considered capital
regardless of the conditions under which such shares are issued and
dividends or “interests” paid thereon are not allowed as deductions
from the gross income of Corporations. (Rev. Regs. No. 2, Sec. 78, par.3;
Rev. Memo. Circ. No. 17-71)
Stated otherwise, the preferred shares are not considered as
indebtedness because they do not help earn the income from which
they are deductible.

**20. Roberto was the Customs Broker of Logistics

Co., Inc. (LOGINC). He invited the Head of the Electronics
Section of the Port of Manila, Bureau of Customs to lunch
at the Manila Hotel to discuss the early release of
electronic imports of LOGINC’s clients. At breakfast the
following day, Roberto met a prospective capitalist
interested to enter into a joint venture with LOGINC for the
construction of a Container Yard/Container Freight
Stations (CY/CFS) in Batangas City.

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 Roberto incurred expenses for the lunch and
breakfast meetings he had with the Bureau of Customs
official and the prospective capitalist, respectively. The
expenses were duly supported by official receipts issued in
his name. At month’s end, he requested the reimbursement
of his expenses, and LOGINC granted his request.
Can LOGINC claim an allowable deduction for the
expenses incurred by Roberto? Explain your answer.
SUGGESTED ANSWER: The expenses incurred for treating to
lunch the Bureau of Customs official for the purpose of discussing the
release of LOGINC’s clients electronic imports may be considered as
a bribe and not deductible as an expense. It is highly irregular to
discuss the subject over lunch instead at the office of the Bureau of
Customs official. Thus, such expense is not deductible.
Also not deductible are the expenses for treating the
prospective capitalist to breakfast because they were not incurred for
the purpose of earning income but for the purpose of raising capital.

Income tax on individuals

**
1. 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 P1,000,000.00. 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.
SUGGESTED ANSWER: Only the amount of P30,000,000.00
won in the slot machine is subject to income taxes because it is
considered “income from whatever source derived” [NIRC of 1997, Sec. 32
(A)], hence taxable.
The phrase “income from whatever source derived,” is so
broad that it includes all income not expressly excluded or exempted
from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income. (Gutierrez v.
Collector of Internal Revenue, CTA Case No. 65, August 31, 1965) This includes
winnings from gambling such as those derived from the slot machine.

110
 Upon the other hand, the amount of P1,000,000.00 given by the
Philippine Government is not subject to income taxation because it is
excluded from gross income. It is a gift or donation which is not
considered as income subject to tax because it is excluded from gross
income.
Finally, the Lotto prize of P5,000.00 is not subject to income
tax because it is below P10,000.00. [NIRC of 1997, Sec. 24 (B) (1), as
amended by the TRAIN]
The above conclusion finds application whether Mr. D is a
resident or non-resident Filipino citizen.
NOTES NOT PART OF THE ANSWER:
a. It is error on the part of some quarters to claim that the
P30,000,000.00 is not subject to income tax because the final tax was already
withheld, Withheld taxes are nothing more than the advance payment of tax
at source, in this case the income tax due on the earnings.
b. Others likewise erroneously submit that the P1,000,000.00
given by the Philippine Government, through the Philippine Olympic
Committee, is taxable income because there is no specific provision of law
that exempts it from income taxation. The author insists on his interpretation
that this is a gift or donation that is excluded from income taxation.

*2. X, a multinational corporation doing business

in the Philippines donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the
Philippines.
Assuming the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, what are
the tax implications ? Explain. (1996)
SUGGESTED ANSWER: The value of the shares shall be
taxable as compensation income because it was paid as a result of
employer-employee relationship.
It is apparent that the intention of X is to compensate, Mr. Y its
employee, for services rendered because the shares of stock would
not have been given if Mr. Y was not an employee.

*
3. Mr. Barrios is a non-resident alien based in
California, U.S.A. During the calendar year 2021, he came to
the Philippines several times and stayed in the country for
an aggregated period of more than 180 days. How will Mr.
Barrios be taxed on his income derived from sources within
the Philippines and from abroad ?
SUGGESTED ANSWER: Mr. Barrios having stayed in the
Philippines for more than 180 days is considered as a non-resident

111
alien engaged in trade or business in the Philippines. As such, he
should be subject to taxation in the same manner as an individual
citizen or resident alien on his taxable income received from all sources
within the Philippines. [NIRC of 1997, Sec. 25 (A) (1)]

Income taxation of corporations

*1. Define or explain the meaning of corporation for

income tax purposes.
SUGGESTED ANSWER: The term corporation shall
a. include:
1) partnerships, no matter how created organized,
2) joint stock companies,
3) joint accounts (cuentas en participacion),
4) associations or insurance companies.
b. but does not include:
1) general professional partnerships and
2) a joint venture or consortium formed
a) for purpose of undertaking construction
projects or
b) engaging in
(1) petroleum,
(2) coal,
(3) geothermal, and
(4) other energy operations, pursuant to
(a) an operation or consortium
agreement
(b) under a service contract with
the Government.” [NIRC of 1997, Sec. 22 (B), 1st
sentence, arrangement and numbering supplied]

**2. What is the rationale of the law in imposing

what is known as the Minimum Corporate income tax on
Domestic and Resident Foreign Corporations ?
SUGGESTED ANSWER: “The imposition of the Minimum
Corporate Income Tax (MCIT) is designed to forestall the prevailing
practice of corporations of over claiming deductions in order to reduce
their income tax payments. The filing of income tax returns showing a
tax loss every year goes against the business motive which impelled
the stockholders to form the corporation. This is the reason why
domestic corporations (and resident foreign corporations) after the
recovery period of four years from the time they commence business
operations, they become liable to the MCIT whenever this tax imposed

112
at 2% of gross income exceeds the normal corporate income tax
imposed on net income.” (Sponsorship Speech, Chairman of Senate Ways and
Means Committee)

**3. Is a corporation which is exempted from the

minimum corporate income tax automatically exempted
from the regular corporate income tax ? Explain and
illustrate your answer.
SUGGESTED ANSWER: No. A corporation exempted from the
minimum corporate income tax is not automatically exempted from
the regular corporate income tax.
The minimum corporate income tax merely substitutes for the
regular corporate income tax. This is evident from the fact that the 2%
minimum corporate income tax is imposed whenever such tax is
greater than the regular corporate income tax of 30% based on the
income subject to tax.
Thus, an exemption from the minimum corporate income tax
does not mean automatic exemption from the regular income tax.
For example, the corporation’s income tax labillity as computed
using the minimum corporate income tax method is lower than its
income tax liability using the regular or normal rate the corporation is
exempted from the payment of the minimum corporate income tax but
it must pay the regular or normal income tax.

**4. Distinguish regular corporate or normal

income tax from the minimum corporate income tax.
SUGGESTED ANSWER: The distinctions between regular
corporate or normal income tax and the minimum corporate income
tax are the following:
a. As to taxpayer: The regular corporate or normal income
tax applies to all corporate taxpayers while the minimum corporate
income tax applies only to domestic corporations and resident foreign
corporations.
b. As to tax rate: The regular corporate or normal income
tax is 30% while the minimum corporate income tax is 2%.
c. As to tax base: The regular corporate income tax is
based on the net taxable income while the minimum corporate income
tax is based on gross income.
d. As to period of applicability: The regular corporate
income tax is applicable once the corporation commenced its
business operation while the minimum corporate income tax is
applicable beginning on the fourth taxable year following the
commencement of business operation.

113
 e. As to imposition: The minimum corporate income tax is
imposed whenever it is greater than the regular corporate income tax
of the corporation. (NIRC of 1997, Sec. 27(A) and (E); Rev. Regs. No. 9-
98)

**
5. KKK Corp. secured its Certificate of
Incorporation from the Securities and Exchange
Commission on June 3, 2020. It commenced business
operation on August 12, 2020. In April 2021, Ms. J, an
employee of KKK Corp. in charge of preparing the annual
income tax return of the corporation for 2020, got confused
on whether she should prepare payent for the regular
corporate income tax or the minimum corporate income
tax.
As Ms. J’s supervisor, what will be your advice ?
(2015, paraphrasing and dates supplied supplied)
SUGGESTED ANSWER: As Ms. J’s supervisor, I will advise
that KKK Corp. should prepare payment for the regular corporate
income tax and not the minimum corporate income tax. Under the
Tax Code, minimum corporate income tax is only applicable beginning
on the fourth taxable year following the commencement of business
operation. [NIRC of 1997, Sec 27 (E) (1)]
Since KKK Corp. only commenced business operation on
August 12, 2020, or less than one (1) year following the
commencement of its business operation, the minimum corporate
income tax is not applicable.

**6. RAMITECH, a corporation not engaged in the

realty business, bought a piece of land in 2020 which it
sold to another corporation one year later. It realized a net
profit of P1,000,000.00. What income tax rate would it be
subject to and why ? (1988, date supplied)
SUGGESTED ANSWER: Assuming that RAMITECH is a
domestic corporation, it shall be subject to the 6% presumed capital
gains tax. There is no showing in the problem that the piece of land is
used in its trade or business, hence it is classified as a capital asset.
The tax is a final tax.
NOTE NOT PART OF THE ANSWER: The author further opines that
disposition by domestic corporations of real property other than “land and/or
buildings” are not subject to the 6% presumed capital gains tax. This is in
according with the doctrine of inclusio unius est exclusio alterius (the inclusion
of one is the excousion of the others). The inclusion of the phrase ““land
and/or buildings” excludes all other kinds of real property. NIRC of 1997, Sec.

114
27 (D) (5) This is unlike the case of citizens and resident aliens where the 6%
presumed capital gains tax is applicable to dispostion of “real property.” [NIRC
of 1997, Sec. 24 (D)]
Furthermore, foreign corporations, whether residents or non-residents,
are no subject to this kind of tax.

***7.What is the “immediacy test” ? Explain briefly.

SUGGESTED ANSWER: This is a test that has been
developed under Amercian jurisprudence in order to determine the
“reasonable needs” of the business in order to justify an accumulation
of earnings and not subject the accumulation to the improperly
accumulated earnings tax of ten percent (10%) of the improperly
accumulated taxable income. [NIRC, Sec. 29 (A), Rev. Regs. No. 2-2001, Sec.
3, 1st par.)
The term “reasonable needs of the business” meanS the
immediate needs of the business, including reasonably anticipated
needs. (Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
ALTERNATIVE ANSWER: It is a test to determine whether the
accumulated earnings are to be subject to the improperl accumulated
earnings tax of ten percent (10%) of the improperly accumulated
taxable income. [NIRC, Sec. 29 (A), Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
“An accumulation of earnings, profits or profits (including
undistributed earnings or profits of prior years) is unreasonable if it is
not necessary for the purpose of the business, considering all the
circumstances of the case. To determine the ‘reasonable needs of the
business’ in order to justify an accumulation of earnings, these
Regulations hereby adhere to the so-called “Immediacy Test” under
American jurisprudence as adopted in this jurisdiction. Accordingly,
the term ‘reasonable needs of the business’ are hereby construed to
mean the immediate needs of the business, including reasonably
anticipated needs. In either case, the corporation should be able to
prove an immediate need for the accumulation of the earnings and
profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be
deemed to be not for the reasonable needs of the business, and the
penalty tax shall apply.”
The tax is ten percent (10%) of the improperly accumulated
taxable income. [NIRC of 1997, Sec. 29 (A), Rev. Regs. No. 2-2001, Sec. 3, 1st
par.)

***
8. In 2019, AMORSECO, Inc.’s net profit before
tax was P35 million while its operating expenses was P31
million. In 2020, its net profit before tax was P40 million and

115
its operating expenses was P38 million. It did not declare
dividends for 2019 and 2020. And it has no proposed
capital expenditures for 2020 and the immediate future. It
has a paid-up capital of P20 million each for years ended
2019 and 2020.
May AMORSECO be subject to the improperly
accumulated tax on its retained profits for 2019 and 2020 ?
SUGGESTED ANSWER: Yes, since the accumulation is not
reasonably necessary for the immediate needs of the business.
AMORSECO’s paid-up capital is only P20 million but it has an
accumulation of earnings or profits (including undistributed earnings or
profits of prior years) of more than 100% of such paid-up capital.
It is evident that the accumulation is unreasonable because it is
not necessary for the purpose of the business, considering the
immediate needs of the business, including reasonably anticipated
needs. The facts of the problem do not show a direct correlation of
anticipated needs to such accumulation of profits. Thus the
accumulation made by AMORSECO is deemed not for the reasonable
needs of the business.
AMORSECO is subject to the ten percent (10%) tax on the
improperly accumulated earnings tax for the years 2019 and 2020.
(Rev. Regs. No. 2-2001, Sec. 3, 1st par.)

9. To what domestic corporations is the concept of

Improperly Accumulated Income Tax ( IAET) not applicable ?
SUGGESTED ANSWER: The IAET shall not apply to the
following corporations:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations [NIRC of 1997, Sec. 29 (B), (2)
arrangement and numbering supplied];
d. Taxable partnerships;
e. General professional partnerships;
f. Non- taxable joint ventures; and
g. Enterprises duly registered with the Philippine Economic
Zone Authority (PEZA) under R.A. 7916, and enterprises registered
pursuant to the Bases Conversion and Development Act of 1992
under R.A. 7227, as well as other enterprises duly registered under
special economic zones declared by law which enjoy payment of
special tax rate on their registered operations or activities in lieu of
other taxes, national or local. (Rev. Regs. No. 2-2001,, Sec. 4, 1st par.)

*
10. Kria, Inc., a Korean corporation engaged in the
business of manufacturing electric vehicles, established a

116
branch office in the Philippines in 2014. The Philippine
branch constructed a manufacturing plant in Kabuyao,
Laguna, and the construction lasted three (3) years.
Commercial operations in the Laguna plant began in 2018.
In just two (2) years of operation, the Philippine
branch had remittable profits in an amount exceeding 175%
of its capital. However, the head office in Korea instructed
the branch not to remit the profits to the Korean head office
until instructed otherwise. The branch chief finance officer
is concerned that the BIR might hold the Philippine branch
liable for the 10% improperly accumulated earnings tax
(IAET) for permitting its profits to accumulate beyond
reasonable business needs.
Is it subject to 15% branch profit remittance tax
(BPRT)? (2018, dates supplied)
SUGGESTED ANSWER: No. The branch profits remittance tax
of fifteen (15%) which is imposed on any profit remitted by a branch to
its head office “which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component”. [NIRC of 1997, Sec. 28 (A) (5), 1st sentence]
No tax is due until actual remittance is made. No such
remittance took place because of the instructions from the head office.
The phrase “which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component” [NIRC of 1997, Sec. 28 (A) (5), 1st sentence] provides the basis for
computing the amount of the tax to be paid when the actual remittance
is to be made and does not determine whether or not Kria, Inc. is
subject to the tax.

***11. Sometime in 1976 the Phillippines entered

into a Convention with Canada for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income.
On April 24, 2000, Air Canada a "foreign corporation
organized and existing under the laws of Canada” was
granted an authority to operate as an offline carrier by the
Civil Aeronautics Board, subject to certain conditions,
which authority would expire on April 24, 2005. As an off-
line carrier, Air Canada does not have flights originating
from or coming to the Philippines and does not operate any
airplane [in] the Philippines.

117
 On July 1, 1999, Air Canada engaged the services of
Aerotel Ltd., Corp. (Aerotel) as its general sales agent in
the Philippines. Aerotel sells Air Canada’s passage
documents in the Philippines.
For the period ranging from the third quarter of 2000
to the second quarter of 2002, Air Canada, through Aerotel,
filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount
of ₱5,185,676.77, detailed as follows:
1âw phi1

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

3rd Qtr 2000 November 29, 2000 P 395,165.00

Annual ITR 2000 April 16, 2001 381,893.59

1st Qtr 2001 May 30, 2001 522,465.39

2nd Qtr 2001 August 29, 2001 1,033,423.34

3rd Qtr 2001 November 29, 2001 765,021.28

Annual ITR 2001 April 15, 2002 328,193.93

1st Qtr 2002 May 30, 2002 594,850.13

2nd Qtr 2002 August 29, 2002 1,164,664.11

1
TOTAL P 5,185,676.77

On November 28, 2002, Air Canada filed a written

claim for refund of alleged erroneously paid income taxes
amounting to ₱5,185,676.77 before the Bureau of Internal
Revenue. It found basis from the revised definition of
Gross Philippine Billings under the 1997 National Internal
Revenue Code
a. How shall Air Canada be subject to income
taxation ?
SUGGESTED ANSWER: Air Canada is subject to the regular
income tax rate of 32% (now 30%) tax on its taxable income because
it is a resident foreign corporation for income tax purposes. Air
Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf.
It is a resident foreign corporation doing business in the
Philippines imposed 32% (now 30% under Rep. Act No. 9337) on
income subject to tax subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the

118
Philippines-Canada Tax Treaty, Air Canada may only be imposed a
maximum tax of 1 1/2% of its gross revenues earned from the sale of
its tickets in the Philippines. (Air Canada v. Commissioner of Internal Revenue,
G.R. No. 169507, January 11, 2016, words in parentheses supplied)
The correct interpretation of provisions which imposes the 2
½% Gross Philippine Billings and that which imposes the 32% (now
30%) tax rate is that: international air carriers maintaining] flights to
and from the Philippines shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings while international air carriers that do not
have flights to and from the Philippines but nonetheless earn income
from other activities in the country like sale of airline tickets will be
taxed at the rate of 32% (now 30%) of such taxable income. (Ibid.)
While Air Canada is taxable as a resident foreign corporation
subject to 32% (now 30%) on its taxable income from sale of airline
tickets in the Philippines, it could only be taxed at a maximum of 1
1/2% of gross revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to Canada as a “foreign
corporation organized and existing under the laws of Canada.” (Ibid.)
b. Rule on the application for refund.
SUGGESTED ANSWER: Refund denied.
The P5,185,676.77 Gross Philippine Billings tax paid by Air
Canada was computed at the rate of 1 ½% of its gross revenues
amounting to P345,711,806.08 from the third quarter of 2000 to the
second quarter of 2002. It is quite apparent that the tax imposable
under Section 28(A)(l) of the 1997 National Internal Revenue Code
[32% of taxable income, that is, gross income less deductions, now
30%] will exceed the maximum ceiling of 1 ½% of gross revenues as
decreed in Article VIII of the Republic of the Philippines-Canada Tax
Treaty. Hence, no refund is forthcoming. (Air Canada v. Commissioner of
Internal Revenue, G.R. No. 169507, January 11, 2016)

Taxation of educational institutions, hospitals

and non-stock non-profit religious charitable and
other similar institutions

**1. University of Bigain is a proprietary

educational institution. In 2020, despite the pandemic it
was able to declare dividends to its stockholders. It’s
earnings were delived solely from the tuition fees it
collected from its students. It collected and received the
following:
(1) Tuition fees

119
 (2) Dormitory fees from dormitories
maintained outside its campus
(3) Rentals from canteen concessionaires
(4) Interest from money-market placements of
the tuition fees
(5) Interests from its deposits of the peso
tuition fees
(6) Capital gains from the sale of McJolli
shares of stock of not traded in the stock exchange
(7) Interest derived from its US Dolllar deposit
under the Expanded Foreign Currency Deposit
System
(8) Capital gains from the sale of a parcel of
landit bought for investment purposes.
(9) Fees to answer for breakage of laboratory
equipment
(10) Fees collected for the school newspaper.
a. Which among the following receipts are
exempted from income taxation ?
SUGGESTED ANSWER: None. All of the above cited income
shall be subject to income taxation because University of Bigain is a
proprietary educational institution. It is exempt from taxation on its
income only in accordance with law, and up to the present, there is no
law that grants income tax exemption.
b. If your answer to the first question is in the
negative, how are the above receipts subject to taxation ?
SUGGESTED ANSWER: University of Bigain is a proprietary
educational institution because it is a private school maintained and
administered by private individuals or groups with an issued permit to
operate from the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA) in
accordance with existing laws and regulations.” [NIRC of 1997, Sec. 27
rd
(B), 3 sentence]
As such it shall pay a tax of ten percent (10%) on its taxable
income except on its passive income [items no. (4) up to (8))],
provided that if the gross income from unrelated trade, business or
other activity (such as items no. (2) and (3)] exceeds fifty percent
(50%) of the total gross income derived by University of Bigain from all
sources, the regular or normal income tax of thirty percent (30%) shall
be imposed on the entire taxable income. [NIRC of 1997, Sec. 27 (B), 3rd
sentence, in relation to Sec. 27 (A) and (D)]

120
 *
2. A group of philantrophists organized a non-
stock, non-profit hospital for charitable purposes to
provide medical services to the poor. The hospital also
accepted paying patients although none of its income
accrued to any private individual; all income were plowed
back for the hospital’s use and not more than 30% of its
funds were used for administrative purposes.
Is the hospital subject to tax on its income? If it is, at
what rate? (2013)
SUGGESTED ANSWER: Yes. The hospital is subject to tax at
the rate of ten percent (10%) on its taxable income except those
on certain passive income provided that if the gross income from
unrelated trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such hospital from all sources the
regular or normal income tax of thirty percent (30%) shall be imposed
on its entire taxable income. [NIRC of 1997, Sec. 27 (B), 3rd sentence, in
relation to Sec. 27 (A) and (D)]
Thus, the income derived by the hospital from its paying
patients, even if not distributed to its members, is considered as
taxable income. (CIR v. St Luke’s Medical Center, Inc., G.R. Nos. 195909 &
195960, September 26, 2012)

***3. La Sallian Educational Innovators Foundation,

Inc. (De La Salle-St. Benilde) is a non-stock, non-profit
domestic corporation duly organized and existing under
the laws of the Philippines. On June 17, 2005, The
Commissioner of Internal Revenue (CIR) issued two (2)
Assessment Notices with demand letters against De La
Salle-St. Benilde for deficiency income tax in the amount of
P122,414,521.70, inclusive of interest
To contest the deficiency taxes assessed, De La
Salle-St. Benilde filed a Protest or Request for
Reconsideration to the CIR on July 20, 2005. Despite the
submission of all documents in support of the protest the
CIR did not act on it. De La Salle-St. Benilde then filed a
Petition for Review before the Special First Division of the
CTA Division through registered mail on April 17, 2006, the
last day of filing the appeal. However, it was only able to
pay the docket and other legal fees nine days after or on
April 26, 2006.

121
 The CIR alleged that the De La Salle-St. Benilde has
already lost its tax-exempt status, making it liable to
deficiency income tax. It may be a non-stock entity but it is
definitely a profit-oriented organization wherein majority of
its revenue-operating activities are generating huge
amount of profit amounting to P643 million that it earned
from expensive tuition fees collected from its students.
Furthermore, the taxpayer's Ruling for exemption from the
BIR was obtained in 1988, hence, all Rulings issued before
the implementations or RA No. 8424 or CTRP was repealed,
thereby, requiring the taxpayer to apply for a new Revenue
Ruling for exemption taking consideration of its income
earning activities.
a. Has De La Salle-St. Benilde lost its tax-exempt
status under the 1987 Constitution ?
SUGGESTED ANSWER: No because the 1987 Constitution
expressly exempts all revenues and assets of non-stock, non-profit
educational institutions from taxes provided that they are actually,
directly and exclusively used for educational purposes. (La Sallian
Educational Innovators (etc.), Inc. v. Commissioner of Internal Revenue, G.R. No.
202792, February 27, 2019 citing 1987 Constitution, Article XIV)
“(T)he constitutionally mandated tax privilege granted to non-
stock non-profit educational institutions plays an important role in
promoting quality and affordable education in the country.” (Ibid.) “The
tax exemption was seen as beneficial to students who may otherwise
be charged unreasonable tuition fees if not for the tax exemption
extended to all revenues and assets of non-stock, non-profit
educational institutions.” (Ibid.)
Where a previous BIR Ruling was issued declaring a
Foundation as a non-stock, non-profit educational institution exempt
from taxes there is no need to secure a new BIR Ruling to claim its
exemption after amendment of the Tax Code considering that the BIR
Ruling was never revoked, and the primary purpose of petitioner
Foundation remained the same.” (Ibid.) “The tax exemption expressly
granted by the 1987 Constitution, the supreme law of the land, cannot
be set aside by any statute, especially by a mere technicality in
procedure.” (Ibid.)
Finally, earning profits does not change the character of non-
profit institution. “The Constitution does not require that the revenues
and income must have also been earned from educational activities or
activities related to the purposes of an educational institution. The
phrase ‘all revenues’ is unqualified by any reference to the source of
revenues.” (Ibid.) “Every responsible organization must be so run as to,
at least insure its existence, by operating within the limits of its own

122
resources, especially its regular income. In other words, it should
always strive, whenever possible, to have a surplus.” (Ibid.)
b. Is the belated payment of the docketing fee
sufficient ground to dismiss De La Salle-St. Benilde’s
petition ? Why ?
SUGGESTED ANSWER: No.
The general rule is that a petition for review is perfected by
timely filing it and paying the requisite docket fees and other lawful
fees. However, there are exceptions to the stringent requirement as to
call for a relaxation of the application of the rules, such as:
(1) most persuasive and weighty reasons;
(2) to relieve a litigant from an injustice not commensurate
with his failure to comply with the prescribed procedure;
(3) good faith of the defaulting party by immediately paying
within a reasonable time from the time of the default;
(4) the existence of special or compelling circumstances;
(5) the merits of the case;
(6) a cause not entirely attributable to the fault or negligence
of the party favored by the suspension of the rules;
(7) a lack of any showing that the review sought is merely
frivolous and dilatory;
(8) the other party will not be unjustly prejudiced thereby;
(9) fraud, accident, mistake or excusable negligence without
appellant's fault;
(10) peculiar legal and equitable circumstances attendant to
each case;
(11) in the name of substantial justice and fair play;
(12) importance of the issues involved; and
(13) exercise of sound discretion by the judge guided by all
the attendant circumstances. Concomitant to a liberal interpretation of
the rules of procedure should be an effort on the part of the party
invoking liberality to adequately explain his failure to abide by the
rules.” (La Sallian Educational Innovators (etc.), Inc. v. Commissioner of Internal
Revenue, G.R. No. 202792, February 27, 2019)
In other words, while procedural rules are important in the
administration of justice, they may be excused for the most persuasive
and meritorious reasons in order to relieve a litigant of an injustice that
is not commensurate with the degree of his thoughtlessness in not
complying with the procedure prescribed. (Ibid.)
To reiterate, De La Salle-St. Benilde was able to establish that it
is a tax exempt entity under the 1987 Constitution. It has timely filed
its Protest to the tax deficiency assessment. It was also able to
actually pay the full amount of the required docket and legal fees in
the amount of P861,178.34, but it was nine (9) days late. Evidently, it
immediately paid the docket and legal fees upon the CTA's

123
assessment of the proper amount which showed petitioner's good
faith. (Ibid.)
Moreover, the issue involved in this case is no less than the tax
assessment over a non-stock, non-profit educational institution, which
the 1987 Constitution mandated to be tax exempt. Otherwise stated,
what is at stake is the opportunity for the proper and just determination
of De La Salle-St. Benilde's status as a tax-exempt entity under the
1987 Constitution, and a deprivation of a substantial amount of
property. (Ibid.)
Taking into account the importance of the issues raised in the
petition filed before the CTA Division, what De La Salle-St. Benilde
stands to lose, and considering the merits of said petition, it should not
be dismissed solely based on the technicality of belated payment of
the docketing fee to better sercve the ends of justice. (Ibid.)

***4. Under Article XIV, Section 4 (3) of the 1987

Philippine Constitution, all revenues and assets of non-
stock, non-profit educational institutions, used actually,
directly and exclusively for educational purposes, are
exempt from taxes and duties. Are income derived from
dormitories, canteens and bookstores, as well as interest
income on bank deposits and yields from deposit
substitutes automatically exempt from taxation ? Explain.
SUGGESTED ANSWER: Yes. “The Constitution does not
require that the revenues and income must have also been earned
from educational activities or activities related to the purposes of an
educational institution. The phrase ‘all revenues’ is unqualified by any
reference to the source of revenues.” (La Sallian Educational Innovators (etc.),
Inc. v. Commissioner of Internal Revenue, G.R. No. 202792, February 27, 2019 citing
1987 Constitution, Article XIV)
So long as the revenues and income are actually, directly and
exclusively used for educational purposes they are exempt
irrespective of the source.
ALTERNATIVE ANSWER: No. because there are conditions
that are required to be complied with.
a. Conditions for tax exemption of income generated by a
school operated canteen/book-store.
1) Owner-operator must be a non-stock, non-profit
private educational institution.
2) Such canteen/bookstore must be located within
the school premises. (There are some who dispute this condition in the
light of the provisions of the 1987 Constitution that does not make a distinction
with regard to the origin of the funds, so long as they are actually, directly and
exclusively used for educational purposes. Refer to La Sallian Educational

124
 Innovators (etc.), Inc. v. Commissioner of Internal Revenue, G.R. No. 202792,
February 27, 2019 citing 1987 Constitution, Article XIV)
3) Owned and operated by the private educational
institution as an ancillary activity. (Finance Dept. Order No. 137-
87, as amended, Sec. 2.2)
4) The income must be actually, directly and
exclusively used for educational purposes.
b. Conditions for tax exemption of passive income earned
by educational institutions.
1) The educational, institution must be non-stock,
non-profit.
2) Inclusion in their annual information return and
duly audited financial statements.
3) Certification from depository banks as to the
amount of interest income earned from passive investments not
subject to the 20% final withholding tax.
4) Certification of actual utilization of said income.
5) Board resolution on proposed project to be
funded out of the money deposited in banks or placed in money
market placements. (Finance Department Order No. 149-95, November
24, 1995)

***5. CMI School, Inc., a non-stock, non-profit

corporation, donated its three parcels of idle land situated
in the Municipality of Cuyapo, Nueva Ecija to SLC
University, another non-stock, non-profit corporation, in
recognition of the latter’s contribution to and participation
in the spiritual and educational development of the former.
If SLC University later sells the three parcels of idle
land to Puregold Supermarket, Inc., a stock corporation,
will SLC University be liable for capital gains tax? Explain
your answer. (2017, paraphrasing supplied)
SUGGESTED ANSWER: No. “The Constitution does not
require that the revenues and income must have also been earned
from educational activities or activities related to the purposes of an
educational institution. The phrase ‘all revenues’ is unqualified by any
reference to the source of revenues.” (La Sallian Educational Innovators (etc.),
Inc. v. Commissioner of Internal Revenue, G.R. No. 202792, February 27, 2019 citing
1987 Constitution, Article XIV)
The sale by SLC University to Puregold Supermarket, Inc. is
not subject to capital gains tax if the proceeds are actually, directly
and exclusively used for educational purposes.

125
 ***6. Disciples of Jesus, Inc. (DOJI) is a non-stock,
non-profit religious organization which owns a large parcel
of land in a mountainous area in Cuenca, Batangas.
DOJI has devoted 1/2 of the land for various uses: a
church with a cemetery exclusive for deceased priests and
nuns, a school providing K to 12 education, and a hospital
which admits both paying and charity patients. The
remaining 1/2 portion has remained idle.
The DOJI Council of Elders (the counterpart of a
Board of Trustees) decided to lease the remaining 1/2
portion to a real estate developer which constructed a
forest sanctuary/resort over the property.
Since the rental income from the lease of the property
was substantial, the DOJI decided to use the amount to
finance (1) the medical expenses of the charity patients in
the DOJI Hospital and (2) the purchase of books and other
educational materials for the students of the DOJI School.
Is DOJI’s income from the rental fees subject to
income tax?
SUGGESTED ANSWER: Yes. Notwithstanding that DOJI is a
non-stock, non-profit religious organization, is generally not to be
taxed in respect to income received by it as such, its of income of
whatever kind and character from its activities conducted for profit
regardless of the disposition of such income shall be subject to
income tax. [NIRC of 1997, Sec. 30, last par., in relation to Sec. 30, par. (E)]
NOTE NOT PART OF THE ANSWER: Take note of the difference
between non-profit, non-stock educational instutions and other corporations
under Sec. 30. The exemption from income taxation of non-profit, non-stock
educational institutions is constitutionally granted and does not emanate from
the NIRC, Sc. 30, so they are not subject to the limitations under the last
par.of Sec. 30.

Taxation of general partnerships

*“E” died in December 2018 leaving to his three (3)

sons “A”, “B” and “C” an apartment building. They
decided not to partition the property and just divided the
rentals among themselves for the year 2018.
In 2020, “A”, “B” and “C” did not divide the income
from the apartment building; instead they invested the
same in the purchase of a house to be rented out. What is

126
the status of their enterprise for income tax purposes for
the year 2020 ? Explain your answer. (1972, dates and
paraphrasing supplied)
SUGGESTED ANSWER: A business partnership, taxable as a
corporation, was formed as a result of the purchase of a house, to be
rented out.
There was an umistakable intention to form a partnership
through contribution of the rental incomes from their common
properties for the purpose of earning a profit to be deivided among
themselves. There is continuity of the income stream through the
regular rentals to be received from the house that was purchased. (Ona
v. Commissioner, 45 SCRA 74)

Taxation of general professional partnerships

(GPPs), in general

**
1. What is a general professional partnership
(GPP) ? Are the incomes of a GPP subject to tax ? Why ?
SUGGESTED ANSWER: A general professional partnership, is
one formed by persons for the sole purpose of exercising their
common profession no part of the income of which is derived from
engaging in any trade or business. [NIRC of 1997, Sec. 22 (B), 2nd sentence]
A general professional partnership as such shall not be subject
to income taxes. (Ibid., Sec. 26, 1st sentence) This is regardless of whether
they are registered as such general professional partnerships with the
Securities and Exchange Commission (SEC).
A general professional partnership is deemed to be no more
than a mechanism or flow-through entity in the generation of income
by, and the ultimate distribution of income to, respectively, each of the
individual partners. (Tan v. Del Rosario, Jr. and Companion case, 237 SCRA 324,
335)
NOTE NOT PART OF THE ANSWER: While a general professional
partnership as such is not a taxable entity and therefore not subject to income
taxes, the member professionals are to be subject to income taxes on their
share in the distributive net income of such general professional partnership.

**2. XYZ Law Offices, a law partnership in the

Philippines and a VAT-registered taxpayer, received a
query by e-mail from Gainsburg Corporation, a corporation
organized under the laws of Delaware, but the e-mail came
from California where Gainsburg has an office. Gainsburg
has no office in the Philippines and does no business in
the Philippines.

127
 XYZ Law Offices rendered its opinion on the query
and billed Gainsburg US$1,000 for the opinion. Gainsburg
remitted its payment through Citibank which converted the
remitted US$1,000 to pesos and deposited the converted
amount in the XYZ Law Offices account. What are the tax
implications of the payment to XYZ Law Offices in terms of
xxx xxx Income Tax? (2013)
SUGGESTED ANSWER: The payment to XYZ Law Offices by
Gainsburg Corporation is not subject to income tax in the Philippines
as income of a general professional partnership.
While the above statement is correct, the payment received by
XYZ Law Offices for services rendered to Gainsburg, is considered as
income derived from sources without the Philippines, which is taxable
as the income of the partners of XYZ Law Offices.
For income tax purposes, payment of Gainsburg is going to be
included as part of XYZ Law Offices’ gross income. From its total
gross income derived within and without the Philippines, it has to
compute its net income in the same manner as a corporation. The net
income of the partnership whether distributed or not will be declared
by the partners as part of their gross income who are to pay the
income tax thereon in their individual capacity. (NIRC, Sec. 26)

** 3. A, B, and C, all lawyers, formed a partnership

called ABC Law Firm so they can practice their profession
as lawyers. For the year 2020, ABC Law Firm received
earnings and paid expenses among which are as follows:
Earnings:
(1) Professional legal fees from various
clients
(2) Cash prize received from a religious
society in recognition of exemplary
service of ABC Law Firm
(3) Gains derived from sale of excess
computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred
in meeting with clients
(A) What are the items in the above-mentioned
earnings which should be included in the computation of

128
ABC Law Firm’s gross income ? Explain. (2014, dates and
paraphrasing supplied)
SUGGESTED ANSWER: The items in the above mentioned
earnings that should be included in the computation of ABC Law
Firm’s gross income are all those shown under the heading
“Earnings,” which include the following:
(1) Professional legal fees from various clients.
(2) Cash prize received from a religious society in
recognition of exemplary service of ABC Law Firm.
The foregoing items (1) and (2) should be included as part of
ABC Law Firm’s gross income because they are considered as
compensation derived from rendering legal services. [NIRC of 1997, Sec.
22 (A) (1).
(3) Gains derived from sale of excess computers and
laptops are also included because the excess computers and laptaps
are used in the rendition by ABC Law of Firm of legal services. The
gains derived sale being incidental to the rendition of legal services,
although isolated in character, must be included as part of the gross
income of ABC Law Firm. (Applying by analogy RMC No. 15-2011, and
Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue, G.R. Nos.
193301 and 194637, March 11, 2013) The gains should be included in gross
income because they may be considered as gains derived from
dealings in property. [NIRC of 1997, Sec. 32 (A), (3)]
(B) What are the items in the above-mentioned
payments which may be considered as deductions from
the gross income of ABC Law Firm ? Explain. (2014, dates
and paraphrasing supplied)
SUGGESTED ANSWER: The items in the above mentioned
payments which may be considered as deductions from the gross
income of ABC Law Firm are all those shown under the heading
“Payments:”, which include the following:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meeting with clients
This is so, because ABC Law Firm is a general professional
partnership whose net income shall be computed in the same manner
as a corporation. (NIRC of 1997, Sec. 26, 2nd par.)
The net income of a corporation is determined by deducting
from its gross income all ordinary and necessary expenses that are
incurred or paid in earining the income. The items of payment
described in the problem are considered as ordinary and necessary
expenses.
While this may be so, there is need to comply with requisites of
deductibility such as the limitation on the deductibility of the
representation expenses to the extent of 1.00 percent (1%) of net

129
revenue (i.e., gross revenue less discounts). [Rev. Regs. No. 10-2002, Sec.
5 which implements NIRC of 1997, Sec. 34 (A) (1) (a) (iv)]
(C) If ABC Law Firm earns net income in 2020, what,
if any, is the tax consequence on the part of ABC Law Firm
insofar as the payment of income tax is concerned ? What,
if any, is the tax consequence on the part of A, B, and C as
individual partners, insofar as the payment of income tax is
concerned ? (2014, dates and paraphrasing supplied)
SUGGESTED ANSWER: ABC Law Firm is not subject to pay
income tax as it is a general professional partnership formed by A, B,
and C “for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business” [NIRC of 1997, Sec. 22 (B), last sentence in relation to Sec. 26, 1 st
sentence]
ABC Law Firm is not subject to income tax because it is
deemed to be no more than a mechanism or flow-through entity in the
generation of income by, and the ultimate distribution of income to,
respectively, each of the individual partners. (Tan v. Del Rosario, Jr. et al.,
and Companion case, 237 SCRA 324, 335)
“Clearly, a general professional partnership shall not be
subject to income tax xxx.” (RMC No. 2-2012,3rd par., 1st sentence, paraphrasing
supplied)
A, B, and C, as partners of ABC Law Firm, shall each “report as
gross income his distributive share, actually or constructively received,
in the net income of the partnership” (NIRC of 1997, Sec. 26, last par.,
paraphrasing supplied), and they shall then “be subject to income tax in
their separate and individual capacities.” (RMC No. 2-2012, 3rd par., 1st
sentence, paraphrasing supplied)

Taxation of co-ownerships

**
1. Rosa Arroyo died in 2020. Her heirs executed a
project of partition of her estate which was approved by the
Court. However, Rosa’s estate was not actually distributed
among the heirs but remained under the management of
their father (widower-spouse) who used the properties in
business and so their value increased yearly. The profits
were credited on the books of account of the common fund
to the heirs in proportion to their respective hereditary
shares. The heirs allowed their father to continue using
their shares for his ventures, although they paid income
taxes on their respective shares of the profits of their
common business. Is there a partnership here subject to

130
corporate income tax under the Tax Code ? Why ? (1975,
date supplied)
SUGGESTED ANSWER: No. There was no partnership
formed subject to the corporate income tax , when her widower-
spouse and her heirs did not partition the estate they inherited from
Rosa. However, when the heirs allowed their father (the widower
spouse) to continue using their shares for his ventures, resulting in a
common business, there was formed a partnership.
Co-heirs who own properties which produce income should not
automatically be considered partners of an unregistered partnership,
or a corporation, within the purview of the income tax law. To hold
otherwise, would subject the income of all co-ownership of inherited
properties to the tax on corporations resulting in oppressive taxation
and confirm the dictum that the power to tax involves the power to
destroy. This eventuality should be obviated.
Article 1769 (3) of the Civil Code provides that “the sharing of
gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in
any property from which the returns are derived.” There must be an
unmistakable intention to form a partnership or joint venture. (Obillos, Jr.
v. Commissioner of Internal Revenue, 139 SCRA 440) Such is not present in the
instant case.
For tax purposes when the heirs allowed their father (the
widower-spouse) to continue using their shares for his ventures,
resulting in a common business there was in fact, a contribution of the
incomes of the heirs to a common fund for the purpose of dividing the
rentals earned among themselves. Thus, a partnership was formed
subjecting them to corporate income tax rates. (Ona v. Commissioner, 45
SCRA 74)

**2. Noel Langit and his brother, Jovy, bought a

parcel of land which they registered in their names as pro
indiviso owners (Parcel A). Subsequently, they formed a
partnership, duly registered with the Securities and
Exchange Commission, which bought another parcel of
land (Parcel B). Both parcels of land were sold, realizing a
net profit of P1,000,000.00 for Parcel A and P500,000.00 for
Parcel B.
a. The BIR claims that the sale of Parcel A should
be taxed as a sale by an unregistered partnership. Is the
BIR correct ? (1994)

131
 SUGGESTED ANSWER: No. The brothers have not formed a
partnership subject to corporate tax rates. Mere sharing of gross
returns does not of itself establish a partnership. [CCP, Art. 1769 (3)]
There must be an unmistakable intention to form a partnership
or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 440)
There is no showing that the joint purchase was for the purpose of
earning profits to be divided among them.
b. The BIR also claims that the sale of Parcel B
should be taxed as a sale by a corporation. Is the BIR
correct ? (1994)
SUGGESTED ANSWER: Yes, because Parcel B was bought
after the brothers have formed a taxable partnership. Registration of
the partnership with the SEC is a manifest showing of the bother’s
intention to engage in business together and divide the profits.

Taxation of joint ventures and consortia

*Weber Realty Company which owns a three hectare

land in Antipolo entered into a Joint Venture Agreement
(JVA) with Prime Development Company for the
development of said parcel of land. Weber Realty as owner
of the land contributed the land to the Joint Venture and
Prime Development agreed to develop the same into a
residential subdivision and construct residential houses
thereon. They agreed that they would divide the lots
between them. Does the JVA entered into by and between
Weber and Prime create a separate taxable entity? Explain
briefly. (2007)
SUGGESTED ANSWER: Yes. In order that a JVA should not
be taxable as a corporation and considered as a separate taxable
entity and it must involve the pooling of resources between licensed
local contractors; that is, licensed as general contractor by the
Philippine Contractors Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI). (Rev. Reg. No. 10-2012, Section 3)
In the problem, Weber Realty is not a contractor but the owner
of the land which contributed land to the Joint Venture. While it is
implied that Prime Development is engaged in the construction
business, there is no showing that it is a licensed general contractor
by the PCAB/DTI.
Thus, Weber Realty and Prime Development should be taxable
as if the JVA between them is a corporation with a separate taxable
personality.

132
 Withholding tax

*
1. Explain the concept of the withholding tax
system or “taxation at source”. What is the rationale
behind it ?
SUGGESTED ANSWER: The concept of the withholding
system or “taxation at source” refers to the deduction made by a
payor, as an agent of the government, from paymentrs of income to a
payee of the estimated taxes to be paid by the payee.
The basic rationale is to facilate the collection of taxes and to
prevent tax evasion.
ALTERNATIVE ANSWER: The concept of “taxation at
source,” refers to the requirement that taxes imposed or prescribed by
the National Internal Revenue Code (NIRC) are to be deducted and
withheld by the payor-corporations and/or persons from payments
made to payees-corporations and/or persons for the former to pay the
same directly to the Bureau of Internal Revenue (BIR). Thus, the
taxes are collected practically at the time the transaction is made or
when the taxable act occurs. It is also known as the “withholding tax
system.”
The following are considered as the rationale behind the
concept of “taxation at source”:
a. To provide the taxpayer a convenient manner to
meet his probable income tax liability.
b. To ensure the collection of the income tax which
could otherwise be lost or substantially reduced through failure
to file the corresponding returns.
c. To improve the government’s cash flow
[Confederation for Unity, Recognition and Advancement of Government
Employees (COURAGE), v. Commissioner, etc., G.R. No. 213446, and
companion cases, July 03, 2018] to enable it to meet its obligations as
they fall due.
d. To minimize tax evasion, thus resulting in a more
efficient tax collection system.
“This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means
and remedies.”

** 2. Argus Corp. is listed as a top 1,000 Philippine

corporation by the Bureau of Internal Revenue. It secured
a loan from Minotaur Bank with a 6% per annum interest.
All interest payments made by Argus Corp. to Minotaur

133
Bank is subject to a 2% creditable withholding tax. At the
same time, Argus Corp. has a trust deposit with Minotaur
Bank in the amount of P100,000,000.00, which earns 2%
interest per annum, but is subject to a 20% final
withholding tax on the interest income received by Argus
Corp.
(a) Who are the withholding agents in the case of:
1) The 20% final withholding tax. Explain.
SUGGESTED ANSWER: The withholding agent for the
20% final withholding tax is Minotaur Bank for the reason that
the withholding agent is the person that has control of the
funds.
2) The 2% creditable withholding tax ? Explain.
SUGGESTED ANSWER: The withholding agent for the
2% creditable withholding tax is Argus Corp, because it is the
payor of the fund.

3. What are the kinds of withholding taxes ?

SUGGESTED ANSWER: The kinds of withholding taxes are:
a. Final withholding tax at source. [NIRC, Sec. 57 (A)]
b. Creditable withholding tax at source. [Ibid., Sec. 57 (B)]
1) Expanded withholding tax
c. Withholding tax on compensation

**4. Is the prize of one million pesos awarded by

the Readers’ Digest subject to withholding of final tax ?
Who is responsible for withholding the tax ? What are the
liabilities for failure to withhold such tax ?
SUGGESTED ANSWER: Yes. Prizes and other winnings are
subject to withholding of final taxes.
The payor is responsible for withholding the tax.
Any payor required to withhold taxes and who willfully fails to
withhold shall be subject to the criminal penalties of fine and
imprisonment and upon conviction to a penalty equal to the total
amount of the tax not withheld. (NIRC of 1997, Sec. 251 and 254)

*5. What are the liabilities for failure to withhold a

tax?
SUGGESTED ANSWER: The liabilities for failure to withhold a
tax include the administrative penalty and criminal penalty in the form
of both deprivation of liberty (imprisonment) and pecuniary in the form
of a fine.

134
 The liablities that may be imposed for failure to withhold a tax is
dependent upon whether the withholding tax agent is
a. a natural person or individual,
b. a corporation, or
c. the government.
a. Liabilities of a person (natural or juridical) for
failure as withholding agent to withhold the required tax. Any
person required to withhold any tax required to be withheld by
the NIRC of 1997,
1) shall in addition to the criminal penalties of
fine and imprisonment provided for under Sec. 255 of the
NIRC of 1997,
2) be liable upon conviction to a penalty equal
to the total amount of the tax not withheld, or not
accounted for and remitted. (NIRC of 1997, Sec. 251,
paraphrasing supplied)
Any person required under the NIRC of 1997 to withhold
shall upon conviction be punished by a penalty equal to the
total amount of the tax not withheld (NIRC of 1997, Sec. 251) and a
fine of not less than Php10,000.00 and suffer imprisonment of
not less than one (1) year but not more than ten (10) years.
(Ibid., Sec. 255, 1st par.)
b. Penal liability of corporations to fines. Any
corporation, association or general co-partnership liable for any
of the acts or omissions penalized under the NIRC of 1997, in
addition to the penalties imposed herein upon the responsible
corporate officers, partners, or employees shall, upon
conviction for each act or omission, be punished by a fine of not
less P50,000) but not more than P100,000. (NIRC of 1997, Sec.
256, paraphrasing supplied)
c. Personal liability of government employee if the
withholding agent is the Government. If the withholding agent
is the Government or any of its agencies, political subdivisions
or instrumentalities, or a government-owned or -controlled
corporation, the employee thereof responsible for the
withholding and remittance of the tax shall be personally liable
for the deficiency taxes. [NIRC of 1997, Sec. 247 (b)]

Individual income tax returns and payment

*** 1. Who should file individual income tax returns

in the Philippines ?
SUGGESTED ANSWER:

135
 a. A citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippine
shall file an income tax return, regardless of the amount of gross
income. [NIRC of 1997, Sec. 51 (A) (2) (a), as amended by the TRAIN]
b. An individual deriving compensation concurrently from
two or more employers at any time during the taxable year shall file an
income tax return. [Ibid., Sec. 51 (A) (2) (b)]

***2. Omar Hassan is a Malaysian who first arrived

in the Philippines in 2017 as a member of the Malaysian
sports contingent that participated in the Southeast Asian
Games (SEAG). After his stint, he returned to Malaysia, but
shuttles between here and the Malaysia regularly up to the
present. He does not stay longer than thirty (30) days in
the Philippines in any given year. He is presently
employed as consultant with an European company
situated at the Bonifacio Global City (BGC). For the year
2020, he earned US$10,650.00 in consultation fees.
Sometime in 2021, the District Revenue Office of the
Bureau of Internal Revenue served him a notice informing
him that he did not file his income tax return for the year
2020 and directing him to file said return in 10 days. He
refused to file any return claiming that he is not a resident
alien and is therefore not required to file any income tax
return. Is Hassan’s claim correct ?
SUGGESTED ANSWER: No. Hassan’s claim is not correct.
He is an alien individual engaged in business or practice of profession
within the Philippines who is required to file an income tax return,
regardless of the amount of gross income. [NIRC of 1997, Sec. 51 (A) (2)
(a), as amended by the TRAIN]

***3. In 2021, Camille worked part time as a waitress

in a restaurant in Maginhawa Street from 8:00 a.m. to 4:00
p.m. and then as a cashier in a 24-hour convenience store
in her neighborhood. The total income of Camille from the
two employers does not exceed P250,000.00. Was she
required to file an income tax return next April ? Explain
your answer.
SUGGESTED ANSWER: Yes. An individual deriving
compensation income concurrently from two or more employers at any
time during the taxable year is required to file an income tax return.

136
 This is irrespective of the amount of income
[NIRC of 1997, Sec. 51 (A) (2)]
earned from the two employers.

***4. Is a resident alien required to file an income

tax return in the Philippines ?
SUGGESTED ANSWER: Yes. A resident alien is required to
file an income tax return only on income derived from from sources
within the Philippines [NIRC of 1997, Sec. 51 (A) (4) (c)] which exceeds
P250,000.00.

5. Bian a resident Filipino is a government

employee and also as a self-employed wedding
photographer. What should she file with the Bureau of
Internal Revenue ?
SUGGESTED ANSWER: Bian being a resident Filipino
individual subject to income tax who is receiving self-employment
income, whether it constitutes the sole source of his income or in
combination with salaries, wages and other fixed or determinable
income, shall make and file a declaration of his estimated income for
the current taxable year on or before May 15 of the same taxable
year.” [NIRC of 1997, Sec. 74 (A), 1st sentence, as amended by the TRAIN]
Would your answer be the same if Bian is a non-
resident Filipino or a non-resident alien ? Explain your
answer.
SUGGESTED ANSWER: No more. “Non-resident Filipino
citizens, with respect to income from without the Philippines, and non-
resident aliens not engaged in trade or business in the Philippines, are
not required to render a declaration of estimated income tax.” [NIRC of
1997, Sec. 74 (A) 3rd sentence, paraphrasing supplied]

6. The Philippine internal revenue service has

adopted the “pay as you go” system of paying internal
revenue taxes. This means that as a general rule, taxes are
paid at the time the appropriate tax returns are filed. There
are however certain instances when the law specifically
allows the payment of taxes in installments.
When may taxes be paid in installments when there
are no specific provisions of law allowing for the payment
by installments ?
SUGGESTED ANSWER: As a general rule, “When a tax due is
in excess of Two thousand pesos (P2,000), the taxpayer other than a
corporation, may elect to pay the tax in two (2) equal installments, in
which case, the first installment shall be paid at the time the return is

137
filed and the second installment on or before October 15 following the
close of the calendar year, if any installment is not paid on or before
the date fixed for its payment, the whole amount of the tax unpaid
becomes due and payable together with the delinquency penalties.”
[NIRC of 1997, Sec. 56 (A) (2), as amended by the TRAIN]

*7.
H, husband, and W, wife; Filipinos with four (4)
minor children, are both employed in the Philippines. Due
to their desire to save on income tax, should they file
separate returns? Explain your answer.
SUGGESTED ANSWER: Yes. They should file separate
returns. Combining the compensation income of H and W would bring
them to a high tax bracket. Filing separate returns would place them
within a lower tax bracket which results to lower taxes.

**8. Who are the individuals that are NOT required

to file an income tax return ?
SUGGESTED ANSWER: The following individuals are not
required to file an income tax return:
a. “An individual whose taxable income does not exceed
Two hundred fifty thousand pesos (₱250,000) under Section
24(A)(2)(a): Provided, That a citizen of the Philippines and any alien
individual engaged in business or practice of profession within the
Philippines shall file an income tax return, regardless of the amount of
gross income.” [NIRC of 1997, sec. 51 (2) (a), as amended by theTRAIN)
Sec. 24 (A) (2) (a) refers to the Tax Schedule Effective January
1, 2018 until December 31, 2022 on the Taxable Income of
Individuals.
b. “An individual with respect to pure compensation income,
as defined in Section 32 (A)(1), derived from sources within the
Philippines, the income tax on which has been correctly withheld
under the provisions of Section 79 of this Code: Provided, That an
individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax
return.” [NIRC of 1997, sec. 51 (2) (b), as amended by the TRAIN]
Sec. 32 (A) (1) states, “Compensation for services in whatever
form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items.”
c. An individual whose sole income has been subjected to
final withholding tax pursuant to Section 57(A) of this Code; and [Ibid.,
Sec. 51 (2) (c)]
d. An individual who is exempt from income tax pursuant to
the provisions of this Code and other laws, general or special.” [Ibid.,
sec. 51 (2)[Ibid, (d)]

138
 “The foregoing notwithstanding, any individual not required to
file an income tax return may nevertheless be required to file an
information return pursuant to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.”
[Ibid., sec. 51 (3)]
e. In case of substituted filing. “Individual 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.” (NIRC of
1997, Sec. 51-A, as inserted by the TRAIN)

***9.Policarpio, who is married with four (4) minor

dependent children, works as a driver in a government
office which pays him P16,000.00 monthly. He asks you
whether he is still required to file an income tax return
What will your answer be? Why?
SUGGESTED ANSWER: A is not required anymore to
file an income tax return because his taxable income does not
exceed Two hundred fifty thousand pesos (P250,000). [NIRC of
1997, Sec. 51 (A) (2) (a), as amended by the TRAIN]

***
10. Who are NOT required to file Income Tax
Returns (ITRs) because they are allowed to avail of the
system of Substituted Filing of Income Tax Returns ?
SUGGESTED ANSWER: “Individual 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.” [NIRC of
1997, Sec. 51-A, as inserted by the TRAIN. This is a new provision]
In Lieu of BIR Form No. 1700, the Annual Information Return of
Income Taxes Withheld on Compensation and Final Withholding
Taxes (BIR Form No. 1604-CF) (hard copy) filed by their respective
employers, duly stamped “received” by the BIR, shall be tantamount to
the substituted filing of income tax returns by said employees.” (Rev.
st
Regs. Nos. 2-98 as amended by Rev. Regs. No. 3-2002, Sec. 2.83.4, 1 par.)

139
 ***11. Who are the employees that are NOT qualified
for substituted filing and still required to file an Income Tax
Return (BIR Form No. 1700) ?
SUGGESTED ANSWER: The following individuals, however
are not qualified for substituted filing and therefore, still required to file
BIR Form No. 1700 in accordance with existing regulations:
a. Individuals deriving compensation from two or more
employees concurrently or successively at anytime during the taxable
year.
b. Employees deriving compensation income, regardless of
the amount, whether from a single or several employers during the
calendar year, the income tax of which has not been withheld correctly
(i.e. tax due is not equal to the tax withheld) resulting to collectible or
refundable return.
c. Employees whose monthly gross compensation income
does not exceed Five Thousand Pesos (P5,000.00) or the statutory
minimum wage, whichever is higher, and opted for non-withholding of
tax on said income.
d. Individuals deriving other non-business, non-profession-
related income in addition to compensation income not otherwise
subject to a final tax.
e. Individuals receiving purely compensation income from a
single employer, although the income tax of which has been correctly
withheld, but whose spouse falls under Section 2.83.4 (A), (B), (C)
and (D) of these regulations.
f. Non-resident aliens engaged in trade or business in the
Philippines deriving purely compensation income or compensation, or
compensation income and other non-business, non-profession-related
income.
In case of married individuals who are still required to file
returns under existing provisions of the law, i.e. in those instances not
covered by the substituted filing of returns, only one return for the
taxable year shall be filed by either spouse to cover the income of the
spouses, which return shall be signed by the husband and the wife
unless it is physically impossible to do so, in which case signature of
one of the spouses would suffice. (Rev. Regs. No 2-98, as amended by Rev.
Regs. No. 3-2002, Sec. 2.83.4, 2nd and 3rd pars.)

***
12. On April 30, 2021, Psalmir was among those
retrenched as a production manager of ABS-CBN which
issued to him a Certificate of Withholding Tax on
Compensation (BIR Form No. 2316), which showed that the

140
tax withheld from his compensation was equal to his
income tax due for the period from January 2021 to April
30, 2021.
A month after his retrenchment, Psalmir put up his
own studio and started producing film commercials for
advertising companies. He was able to earn a meager
income from his films commercials but did not keep record
of his production expenses.
Is Psalmir qualified for substituted filing for taxable
year 2021? Explain your answer.
SUGGESTED ANSWER: No. Psalmir is not entitled to
substituted filing because he did not receive 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).
Specifically, Psalmir is not qualified for substituted filing and still
required to file an Income Tax Return (BIR Form No. 1700) because
he is an individual who derived other non-profession-related income in
addition to compensation income not otherwise subject to a final tax.
(Rev. Regs. No 2-98, as amended by Rev. Regs. No. 3-2002, Sec. 2.83.4, 2nd and 3rd
pars.)

***13.
Atty. Aaron Barrios is employed as the Chief
Operating Officer of ABC Company receiving an annual
compensation of P10,000,000.00, while Mr. Elmer Lusung is
a security guard in the same company earning an annual
compensation of P20,000.00. Both of them source their
income only from their employment with ABC Company.
(a) At the end of the year, is Atty. Barrios
personally required to file an annual income tax return ?
Explain.
SUGGESTED ANSWER: No. Since Atty. Barrios is receiving
compensation income only from a single employer, ABC Company,
during the taxable period, he is qualified for substituted filing provided
the employer has withheld the correct income taxes on income paid to
and received by Atty. Barrios.
(b) How about Mr. Lusung ? Is he personally
required to file an annual income tax return ? Explain.
SUGGESTED ANSWER: No. Mr. Lusung is not personally
required to file an annual income tax return for the reason that his total
annual compensation income is P240,000.00 which is below the

141
threshold of taxable annual income of P250,000.00. Thus, Mr. Lusung
is not required to file an income tax return. [NIRC of 1997, sec. 51 (A) (2) (a)]

*14. Give the due dates for the filing of the annual
income tax returns (ITRs) of individuals and where should
the ITRs be filed ?
SUGGESTED ANSWER: The return of any individual shall be
filed on or before the fifteenth (15th) day of April of each year covering
income for the preceding taxable year. [NIRC of 1997, Sec. 51 (C),
renumbered]
The BIR Commissioner may, in meritorious cases, grant a
reasonable extension of time for filing returns of income. (NIRC of 1997,
Sec. 53, paraphrasing supplied)
Except in cases where the Commissioner otherwise permits,
the return shall be filed with an authorized agent bank, Revenue
District Officer, Collection Agent or duly authorized Treasurer of the
city or municipality in which such person has his legal residence or
principal place of business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with the Office of the
Commissioner. [NIRC of 1997, Sec. 51 (B)]

*
15. Spouses Rizaldy and Gabrielle Salvador, both
resident citizens, acquired during their marriage a
residential house and lot located in Baguio City, which is
being leased to a tenant for a monthly rental of
P100,000.00. Mr. Rizaldy Salvador is the President of RS
Corporation and he receives P50,000.00 salary per month.
The spouses have only one (1) minor child. In late June
2021, he was immediately brought to the hospital because
of a heart attack and he was pronounced dead on June 30,
2021. With no liabilities, the estate of the late Pablo
Gonzales was settled extrajudicially in late 2021.
a) Is Mr. Rizaldy Salvador required to file income
tax return for 2021 ? If so, how much income must he
declare for the year ?
SUGGESTED ANSWER: Yes. Mr. Rizaldy Salvador is
required to file an income tax return for the period January 1 to June
30, 2021.
This would be one-half of the six months rentals as his share in
the conjugal partnership or P300,000.00 and his six (6) months salary
or an equivalent of P300,000.00 or a total of P600,000.00.

142
 b) Is Mrs. Gabrielle Salvador required to file
income tax return for 2021? If so, how much income must
she declare for the year ? Explain your answer.
SUGGESTED ANSWER: Yes, because she had income in
2021. The income that she should declare should be her share in the
rentals which is P600,000.00 for the year corresponding to her share
in the conjugal partnership gains.
c) Is the Estate of the late Rizaldy Salvador
required to file income tax return for 2021? If so, how much
income must it declare for the year ? .Explain your answer.
SUGGESTED ANSWER: Yes. Since the estate was settled
in 2021, then the estate had income in 2021 for the period July 1,
2021 up to December 31, 2021. This income is represented by the
income that Mr. Salvador would have earned as his conjugal share in
the rentals which is P300,000.00.

Corporate income tax returns

*1. How often does a domestic corporation file

income tax return for income earned during a single
taxable year.
SUGGESTED ANSWER: Four (4) times a year. A quarterly
summary declaration is filed for each of the first three (3) quarters
followed by a final adjustment return, for the whole year including the
last quarter.
What is the reason for such procedure ?
SUGGESTED ANSWER: This is in order to provide the
government with sufficient cash flow to meet its obligations as they fall
due.

**
2. When is the deadline for the filing of a
corporation’s final adjustment return for a calendar year ?
How about for a fiscal year ?
SUGGESTED ANSWER: A calendar year corporate tax return
is filed not later than April 15 of the year following the year when the
income was earned while a fiscal year corporate tax return is filed on
th th
or before the 15 day of the fourth (4 ) month from the close of the
fiscal year.

iii. VALUE-ADDED TAX

Nature and characteristics of value-added tax

143
 1. Why is the tax called value-added ?
SUGGESTED ANSWER: The tax is a tax on value-added
because it is imposed only on the increase in the worth, merit or
importance of goods, properties or services, and not on the total value
of the goods or services being sold or rendered.

*
2. Discuss the meaning and scope of value-
added tax (VAT).
SUGGESTED ANSWER: The value-added tax is a uniform tax
ranging, at present, from 0 percent to 12 percent [now under the
Reformed Value-Added Tax (RVAT)] levied on every importation of
goods, whether or not in the course of trade or business, or imposed
on each sale, barter, exchange or lease of goods or properties on
each rendition of services in the course of trade or business as they
pass along the production and distribution chain, the tax being limited
only to the value added to such goods, properties or services by the
seller, transferor or lessor. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), 451 SCRA 132 citing various cases, percentages supplied]

*3. What are the characteristics of the Value-Added

Tax ?
SUGGESTED ANSWER: The characteristics of the Value-
Added Tax are the following:
a. It is an indirect tax.
b. It is a tax on consumption.
c. It is a percentage tax.
d. It is a regressive tax.
The above characteristics of the Value-Added Tax are
sometimes referred to as the nature of the Value-Added Tax.

*4. What is tax pyramiding ? What is its basis in law

?
SUGGESTED ANSWER: Tax pyramiding is the practice of
imposing a tax upon another tax. It is a situation where some or all of
the stages of distribution of goods or services are taxed, with the
accumulation borne by the final consumer.
There is tax pyramiding when sales taxes are applied to both
inputs and outputs, thus shifting the tax burden to the ultimate
consumer. [R. G. Holcombe, Taxing Services, 30 Fla. St. U.L. Review Rev. 467
(1996)]
It has no basis in law because It has been rejected, since 1922,
by the Supreme Court, the legislature and our tax authorities. It is

144
prohibited as a taxpayer cannot be compelled to pay a tax on the tax
itself. (People of the Philippines v. Sandiganbayan, etc., G. R. No. 152532, August
16, 2005)
Thus, it violates the principle of uniformity and neutrality in
taxation. (R.G. Holcombe, supra)

5. What is the nature or characteristic of VAT as a

consumption tax ?
SUGGESTED ANSWER: VAT is ultimately a tax on
consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage.
It is the end user of consumer goods or services which
ultimately shoulders the tax, as the liability therefrom is passed on to
the end users by the providers of these goods or services who in turn
may credit their own VAT liability (or input VAT) from the VAT
payments they receive from the final consumer (or output VAT). The
final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several
acts of consumption.
The VAT system assures fiscal adequacy through the collection
of taxes one very level of consumption, yet assuages the
manufacturers or providers of goods and services by enabling them to
pass on their respective VAT liabilities to the next link of the chain until
finally the end consumer shoulders the entire tax liability. (Commissioner
of Internal Revenue v. Magsaysay Lines, Inc., G. R. No. 146984, July 28, 2006)

*
6. Masarap Kumain, Inc. (MKI) is a Value-Added
Tax (VAT)-registered company which has been engaged in
the catering business for the past 10 years. It has invested
a substantial portion of its capital on flat wares, table
linens, plates, chairs, catering equipment, and delivery
vans. MKI sold its first delivery van, already 10 years old
and idle. to Magpapala Gravel and Sand Corp. (MGSC), a
corporation engaged in the business of buying and selling
gravel and sand. The selling price of the delivery van was
way below its acquisition cost. Is the sale of the delivery
van by MKI to MGSC subject to VAT? (2014)
SUGGESTED ANSWER: Yes. The sale of the delivery van by
MKI to MGSC is subject to VAT.
MKI is a VAT-registered company engaged in ‘in the course of
trade or business’ catering which means the regular conduct or pursuit
of a commercial or an economic activity, including transactions
incidental thereto (NIRC of 1997, Sec. 105, 3rd par.;(Rev. Regs. No. 16-2005,
st
Sec. 4.105-3, 1 par.) which are subject to VAT.

145
 The delivery van being used in MKI’s trade or business of
catering is part of its assets. The sale of a fully depreciated asset (the
delivery van) that has been used in business is subject to VAT as an
incidental transaction, although such sale may be considered isolated.
(Mindanao 11 Geothermal Partnership v. CIR, G.R. Nos. 193301, 194637, March 11,
2013)

*7. Is the sale of tractors and other agricultural

implements by AgriMasin, Inc. to local farmers subject to
VAT ? If so, at what rate ? Why ?
SUGGESTED ANSWER: Yes. It is subject to VAT at 12%.
VAT is imposed and collected on every sale, barter or
exchange, or transactions “deemed sale” of taxable goods or
properties at the rate of 12% of the gross selling price or gross value
in money of the goods or properties sold, bartered, or exchanged, or
deemed sold in the Philippines. (Rev. Regs. No. 16-2005, Sec. 4.106-1, in
relation to RMC No. 7-2006)

Effectively zero-rated sale of goods and properties

*
1. What is meant by the term “effectively zero-
rated sale of goods and properties” ?
SUGGESTED ANSWER: The term “effectively zero-rated sale
of goods and properties” shall refer to the local sale of goods and
properties by a VAT-registered person to a person or entity who was
granted indirect tax exemption under special laws or international
agreement.
Transactions which, although not involving actual export, are
considered as “constructive export” shall be entitled to the benefit of
zero-rating, such as
a. local sales of goods and properties to persons or entities
covered such as
1) sales to export-oriented enterprises,
2) sale of goods supplies, equipment and fuel to
persons engaged in international shipping or international air
transport operations,
3) Foreign Currency Denominated Sale, and
4) Sales to Tax-Exempt Persons or Entities. (Rev.
st
Regs. No. 16-2005, Sec. 4.106-6, 1 par., paraphrasing supplied)

**
2. Team Energy is principally engaged in the
business of power generation and the subsequent sale
thereof to the National Power Corporation (NPC) under a

146
Build, Operate, Transfer Scheme. It is is also registered
with the BIR as a VAT taxpayer. BIR granted it an Effective
Zero-Rate for the supply of electricity to the NPC for the
period January 1, 2005 to December 31, 2005.
It then filed with the BIR its Quarterly VAT Returns for
the first three quarters of 2005 on April 25, 2005, July 26,
2005, and October 25, 2005, respectively. It also filed its
Monthly VAT Declaration for the month of October 2005 on
November 21, 2005, which was subsequently amended on
May 24, 2006.
On December 20, 2006, Team Energy filed an
administrative claim for cash refund or issuance of tax
credit certificate corresponding to the input VAT reported
in its Quarterly VAT Returns for the first three quarters of
2005 and Monthly VAT Declaration for October 2005 in the
amount of P80 million plus.
Due to the BIR’s inaction on its claim, Team Energy
filed a Petition for Review before the CTA in Division which
in its July 13, 2010 Decision ordered the BIR to refund or, in
the alternative, issue a tax credit certificate in the amount
of P79 million plus. Subsequently,the CTA Division
reversed itself upon a motion for reconsideration filed by
the BIR. The En Banc then reinstated the Division’s July
13. 2010.
Rule on the Commissioner of Internal Revenue’s
(CIR’s) contention that the CTA en banc erred in not
requring Team Energy to secure a Certificate of
Compliance (COC) from the Energy Regulatory
Commission (ERC) because of the requirement under
Section 13 of the NPC Charter which the Team Energy to
qualify as a "generation company" under the EPIRA before
its sale of services to NPC may be subject to VAT zero-
rating.
SUGGESTED ANSWER: The CIR’s contention is bereft of
merit.
The Supreme Court “rejected the contention of the CIR that
Team Energy is not entitled to tax refund or tax credit because it
cannot qualify for VAT zero-rating for its failure to submit its ERC
Registration and COC required under the EPIRA considering that
Team Energy's refund claim is premised on Section 108(B)(3) of the
1997 NIRC, in relation to NPC's charter, the requirements under the
EPIRA are inapplicable.

147
 To qualify its electricity sale to NPC as zero-rated, Team
Energy needs only to show that it is a VAT-registered entity and that it
has complied with the invoicing requirements under the 1997 NIRC, in
conjunction with Revenue Regulations. (Commissioner of Internal Revenue v.
Team Energy, etc., G.R. No. 230412, March 27, 2019)
Effective zero-rating is not intended as a benefit to the person
legally liable to pay the tax, such as Team Energy but to relieve
certain exempt entities, such as the NPC, from the burden of indirect
tax so as to encourage the development of particular industries.
Effective zero-rating was intended to relieve the exempt entity from
being burdened with the indirect tax which is or which will be shifted to
it had there been no exemption. In this case, Team Energy is being
exempted from paying VAT on its purchases to relieve NPC of the
burden of additional costs that Team Energy may shift to NPC by
adding to the cost of the electricity sold to the latter. (Ibid.)

3. Illustrate the concept that zero-rating is not for

the benefit of the person legally liable for the tax but for the
benefit of the person to whom the indirect tax is to be
passed on.
SUGGESTED ANSWER: The Supreme Court emphasized that
effective zero-rating is not intended as a benefit to the person legally
liable to pay the tax, such as San Roque Power Corporation, but to
relieve certain exempt entities, such as the NPC, from the burden of
indirect tax so as to encourage the development of particular
industries. Before, as well as after, the adoption of the VAT, certain
special laws were enacted for the benefit of various entities and
international agreements were entered into by the Philippines with
foreign governments and institutions exempting sale of goods or
supply of services from indirect taxes at the level of their suppliers.
Effective zero-rating was intended to relieve the exempt entity
from being burdened with the indirect tax which is or which will be
shifted to it had there been no exemption. In this case, San Roque
Power Corporation is being exempted from paying VAT on its
purchases to relieve NPC of the burden of additional costs that
petitioner may shift to NPC by adding to the cost of the electricity sold
to the latter. (San Roque Power Corporation v. Commissioner of Internal Revenue,
G.R. No. 180345, November 25, 2009)

Who are subject to VAT

***1.
The National Power Corporation (NPC) bought
manufactured products from SIMPLEX Corp. (SC) for which
SC passed on the VAT to NPC. NPC claims it should not

148
pay the VAT because it is exempt from the payment of all
taxes under its Charter. How would you decide this case ?
SUGGESTED ANSWER: The contention of NPC is without
merit. The tax is due from SC, who is not exempt, because it is a
sales tax. NPC’s tax exemption does not flow to SC who must show a
specific provision of law under which it is exempt.
Furthermore, an exemption from “all taxes” excludes indirect
taxes, unless the exempting statute, like NPC’s charter, is so couched
as to include indirect tax from the exemption. Statutes granting tax
exemptions must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority, and if an exemption is
found to exist, it must not be enlarged by construction. (Silkair (Singapore)
PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008)
ALTERNATIVE ANSWER: NPC is correct in contending that it
should not pay the tax. The Latin maxim, Ubi lex non distinguit nec
nos distinguere debemos (Where the law does not distinguish we
should not distinguish) finds application.
It is apparent that NPC’s exemption is from payment “of all
taxes.” An exemption from “all taxes” excludes indirect taxes. Hence,
NPC’s exemption covers both direct and indirect taxes. (Maceda v.
Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771)

***2. As an incentive for investors, a law was

passed giving newly established companies in certain
economic zones exemption from all taxes, duties, fees,
imposts and other charges for a period of three years.
ABC Corp. was organized and was granted such incentive.
In the course of business, ABC Corp. purchased
mechanical equipment from XYZ Inc. Normally, the sale is
subject to VAT.
XYZ, Inc. claims, however, that since it sold the
equipment to ABC Corp. which is tax exempt, XYZ should
not be liable to pay the VAT. Is this claim tenable ?
SUGGESTED ANSWER: No. Tax exemptions are to be strictly
construed against the taxpayer. Since XYZ, Inc.. has not shown a
specific law under which it could claim exemption, then such claim of
exemption should be denied.
ALTERNATIVE ANSWER: VAT is a tax on the seller and not
on the buyer, hence the buyer’s exemption does not flow to the seller.
The rule that VATs are indirect taxes, the economic burden of
which may be shifted to the buyer is of no moment. It is still the seller
who is subject to the tax and not the buyer. (Phil. Acetylene v.
Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967)

149
 Assuming arguendo that XYZ had to and did pay the
VAT. ABC Corp. later found out, however, that XYZ merely
shifted or passed on to ABC the amount of the VAT by
increasing the purchase price. ABC Corp. now claims for a
refund from the Bureau of Internal Revenue in an amount
corresponding to the tax passed on to it since it is tax
exempt. Is the claim of ABC Corp. meritorious?
SUGGESTED ANSWER: No. ABC has nothing to claim
because it was not the one that paid the tax but XYZ. Shifting of the
economic burden of the tax by the seller XYZ to the buyer ABC is of
no moment.
It is still the seller who paid the tax and not the buyer. (Phil.
Acetylene v. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967)

***3. The World Health Organization’s (WHO’s)

“assets, income and other properties shall be: a) exempt
from all direct and indirect taxes.” (“Host Agreement”
between the United Nations and the Philippine
Government, Sec. 11) Astro Construction, Inc. (ACI) was
hired to construct the WHO Center in Manila. Upon
completion of the building, the BIR assessed a 12% VAT on
the gross receipts of ACI derived from the construction of
the WHO building. WHO contends that the 12% VAT is not a
direct tax nor an indirect tax on it but a tax that is primarily
due from the contractor and is therefore covered by the
Host Agreement. The BIR argues that the VAT is deemed
an indirect tax as ACI can shift the tax burden to it. Is the
BIR correct ? Explain.
SUGGESTED ANSWER: No. The BIR is not correct.
While it is true that the VAT is an indirect tax, It is clear from the
agreement that WHO is “exempt from all direct and indirect taxes.”
Since the 12% VAT is an indirect tax whose burden was shifted by
PCC to WHO then it is evident that the BIR is not correct. (CIR v. John
Gotamco & Sons, Inc., 148 SCRA 36 [1987])
To allow the shifting of the burden to WHO would negate its
exemption and in violation of the international agreement entered into
by the Philippines.

***
4. Thomas’ primary source of income is his
employment managing a poultry farm. He earns extra from
the land he inherited from his parents, and which land he

150
has been leasing to a private, non-stock, non-profit school
since 2017.
Last January, the school offered to buy the land
from Thomas for an amount equivalent to its zonal value
plus 15% of such zonal value. Thomas agreed but required
the school to pay, in addition to the purchase price, the
12% VAT. The school refused Thomas’ proposal to pass on
the VAT contending that it was an entity exempt from such
tax. Moreover, it said that Thomas was not regularly
engaged in the real estate business and, therefore, was not
subject to VAT. Consequently, Thomas should not charge
any VAT to the school.
a. Is the school’s contention correct ?
SUGGESTED ANSWER: The contention of the school is
partially correct.
Of possible merit is the contention that Tjomas was not
regularly engaged in the real estate business and thus is not subject
to VAT. While continuity of the lease agreement from 2006 to the
present could characterize Thomas as a lessor of property regularly
engaged in the real estate business (NIRC of 1997, Sec. 108 (A) , 2nd par)
there is no showing that the gross annual rentals received by Thomas
exceeds P3 million [Ibid., Sec. 109 (BB)] which would make him subject
to VAT.
Finally, Thomas does not appear to be a VAT-registered
person. Hence, there is no VAT to be paid by Thomas that could be
passed on to the school.
As a result of the foregoing there is no need to discuss whether
or not the school is exempt from the VAT.
Finally, granting arguendo that Thomas is a VAT-registered
person and he has paid the VAT and passed on the same to the
school it’s contention that Thomas could not pass on to it the because
it is exempt from VAT is without merit. The school is not exempt from
VAT but its transactions. [NIRC of 1997, Sec. 109 (H) as reiterated by the TRAIN]
An exempt transaction differs from a VAT exempt party.
“The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services.” (NIRC OF 1997, Sec. 105, 2nd par.) Thus,
Thomas may pass on the VAT, if any, to the school.
b. Will your answer be the same if Thomas signed
up as VAT-registered person only in 2021 ?
SUGGESTED ANSWER: Yes but only partially.
Thomas shall be then be subject to VAT after his registration as
such a person. He could pass on to the school the VAT that he paid.

151
 *
5. KONSTRUCT, Inc., is a VAT-registered
enterprise engaged in the general construction business.
PACKARD Co. Ltd. contracts the services of KONSTRUCT,
Inc. to construct PACKARD Co. Ltd.’s factory building
located in the Camelray Techno Park, a special economic
zone. PACKARD Co. Ltd. is registered with the the
Philippine Economic Zone Authority (PEZA) as an ecozone
export enterprise, and, as such, enjoys income tax holiday
pursuant to the Special Economic Zone Act of 1995.
KONSTRUCT, Inc., files an application with the
Bureau of lnternal Revenue (BIR) for the VAT zero-rating of
its sale of services to PACKARD Co. Ltd. However, the BIR
denies KONSTRUCT, lnc.’s application on the ground that
PACKARD Co. Ltd. already enjoys income tax holiday.
Is the BIR correct in denying KONSTRUCT, lnc.’s
application? Explain your answer.
SUGGESTED ANSWER: No. The fact that PACKARD Co.
Ltd. already enjoys income tax holiday is not a valid ground for
denying KONSTRUCT, Inc.’s application for VAT zero-rating of its sale
of services to PACKARD Co. Ltd..
Services rendered to persons or entitities whose exemption
under special laws subjects the supply of such services to zero
percent (0%) rate. [NIRC of 1997, Sec. 108 (B) (3)]
“PEZA shall manage and operate the ECOZONES as a
separate customs territory; thus, creating the fiction that the
ECOZONE is a foreign territory. As a result, sales made by a supplier
in the Customs Territory to a purchaser in the ECOZONE shall be
treated as an exportation from the Customs Territory.” (Coral Bay Nickel
Corporation v. Commissioner of Internal Revenue, G.R. No. 190506, June 13, 2016)
All sales of goods, properties, and services made by a VAT-
registered supplier from the Customs Territory, such as KONSTRUCT,
Inc. to an ECOZONE enterprise like PACKARD Co. Ltd, shall be
subject to VAT, at zero percent (0%) rate, regardless of the tatter's
type or class of PEZA registration; and, thus, affirming the nature of a
PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.
(Ibid.)

*6.
The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association dues and
membership fees collected by condominium corporations
from its member condominium-unit owners. The RMC’s

152
validity is challenged before the Supreme Court (SC) by the
condominium corporations. The Solicitor General, counsel
for BIR, claims that association dues, membership fees,
and other assessment/charges collected by a
condominium corporations are subject to VAT since they
constitute income payments or compensation for the
beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium
corporations argues that such dues and fees are merely
held in trust by the condominium corporations exclusively
for their members and used solely for administrative
expenses in implementing the condominium corporations’
purposes. Accordingly, the condominium corporations do
not actually render services for a fee subject to VAT.
Whose argument is correct? Decide.
SUGGESTED ANSWER: The argument of the condominium
corporations’ lawyer is correct.
The provisions of the NIRC are clear in describing the
characteristics of a person who is subject to VAT, as any person who,
in the course of his trade or business, renders services. (NIRC of 1997,
Sec. 105, 1st par., paraphrasing supplied)
To be “in the course of trade or business” means ”trade or
commercial activity regularly engaged in as a means of livelihood or
with a view to profit.” (Yamane , etc. v. BA Lepanto Condominium Corporation, G.
R. No. 154993, October 25, 2005) By its very nature a condominium
corporation is not engaged in business, and any profit that it derives is
merely incidental. (Ibid.)
The money paid by the unit owners are pooled together to be
spent exclusively for the purpose of maintaining and preserving the
condominium building and the common areas which they themselves
own and possess.

VAT on real estate transactions

***
1. What real estate transactions are not subject
to the Value-Added Tax (VAT) ?
SUGGESTED ANSWER: The following sales of real properties
are exempt from VAT, namely:
a. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business,

153
 b. real property utilized for low-cost and socialized housing
as defined by Republic Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws,
c. residential lot valued at One million five hundred
thousand pesos (P 1,500,000) and below,
d. house and lot, and other residential dwellings valued at
Two million five hundred thousand pesos (P2,500,000) and below:
Provided, That beginnning January 1, 2021, the VAT exemption
shall only apply to sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, sale of real property utilized for socialized housing as
defined by Republic Act No. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than Two million
pesos (P2,000,000): Provided, further, That every three (3) years
thereafter, the amount herein stated shall be adjusted to its present
value using the Consumer Price Index, as published by the Philippine
Statistics Authority (PSA).” [NIRC of 1997, Sec. 109 (P) as amended by the
TRAIN, paraphrasing supplied ]

**
2. Romina Quinajon is engaged in the business of
leasing out several residential apartment units she owns.
The monthly rental for each unit ranges from P10,000.00 to
P12,000.00. Her gross rental income for one year is
P4,000,000.00. She consults you on whether it is
necessary for her to register as a VAT taxpayer. What legal
advice will you give her, and why ?
SUGGESTED ANSWER: She is not required to register as a
VAT taxpayer.
Her transactions of leasing residential units for an amount not
exceeding P15,000.00 per unit per month is exempt from the VAT.
The total gross rental income of P4,000,000.00, which exceeds
the P3,000,000.00 threshold does not matter because such threshold
applies only non-exempt sale or lease of goods or properties or the
performance of services. [NIRC of 1997, Sec. 109 (BB) as added by the TRAIN]

***3. On September 17, 2021, Data Realty, Inc., a

real-estate corporation duly organized and existing under
Philippine law, sold to Jenny Vera a condominium unit at
Freedom Residences in Malabon City with an area of 32.31
square meters for a contract price of P4,213,000. The
condominium unit had a zonal value amounting to
P2,877,000 and fair market value amounting to P550,000.

154
 a. Is the transaction subject to value-added tax and
documentary stamp tax? Explain your answer. (2017, date
supplied)
SUGGESTED ANSWER: Yes. The sale is subject to both the
value-added tax and documentary stamp tax.
Data Realty is a real estate dealer which includes any person
engaged in the business of buying, developing, selling, exchanging
real properties as principal and holding itself out as a full or part-time
dealer in real estate. (Rev. Regs. No. 16-2005, Section 4.106-3, 12th par.) It
sold the condominium unit which is primarily held for sale to
customers hence subject to VAT.
The contract price of P4,213,000.00, which is the highest value
compared with the zonal value, and the fair market value, is the
amount used for internal revenue purposes. Since, it is above the
threshold value of P3 million, then the sale is subject to VAT.
Since, Data Realty, Inc. is the seller, it is liable for the
documentary stamp tax which is a tax on the sales transaction.
The above however, does not include the sale of parking lots
which may or may not be included in the sale of condominium units.
The sale of parking lots in a condominium is a separate and distinct
transaction and is not covered by the rules on threshold amount not
being a residential lot, house and lot or a residential dwelling, thus,
should be subject to VAT regardless of amount of selling price. (Rev.
Regs. No. 16-2005, Sec. 4.106.3, last par., as added by Rev. Regs. No. 13-2012)
b. Would your answer be the same if the property
was sold by a bank in a foreclosure sale? Explain your
answer.
SUGGESTED ANSWER: Yes. The sale of foreclosed real
property is not considered as part of the services rendered by a bank
to its client-borrowers because it sells the foreclosed property for
purposes of collecting. The sale benefits the bank and therefore
subject to VAT.
The foreclosure sale is not part of the service rendered by the
bank to its borrower-clients which is not subject to VAT but to
percentage tax. [NIRC of 1997, Sec. 109 (U), as amended by Rep. Act No. 9337,
and renumbered by the TRAIN as Sec. 109 (V)]

***
4. Klaus, Inc., a domestic, VAT-registered
corporation engaged in the land transportation business,
owns a house and lot along Katipunan St., Quezon City.
This property is being used by Klaus, lnc.'s president and
single largest shareholder, Atty. Krimson, as his residence.
No business activity transpires there except for the
company's Christmas party which is held there every

155
December. Atty. Krimson recently grew tired of the long
commute from Katipunan to his office in Makati City and
caused the company to sell the house and lot. The sale was
recorded in the books of Klaus, Inc. as investment in real
property.
a. Is the sale of the said property subject to VAT ?
(2018)
SUGGESTED ANSWER: No. Klaus, Inc., is engaged in the
transportation business and the house and lot is not part of “Goods or
properties” the sale, barter or exchange of which may be subject to
VAT which include real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or business. [NIRC of
1997, Sec. 106 (A) (1)], 1st par.; Rev. Regs. No. 16-2005, Sec. 4.106-2]
Klaus, Inc., is not holding the house and lot primarily for sale to
customers or held for lease in the ordinary course of trade or business
because it is being used by its President as his residence.
ALTERNATIVE ANSWER: Yes. The sale of residential
properties such as the property of Klaus, Inc., being used by Atty.
Krimson as his residence is subject to VAT if the gross selling price
exceeded P3,199,200.00 and the sale notarization was after January
1, 2012.
The sale of residential lot with gross selling price exceeding
P1,919,500.00, residential house and lot or other residential dwellings
with gross selling price exceeding P3,199,200.00, where the
instrument of sale (whether the instrument is nominated as a deed of
absolute sale, deed of conditional sale or otherwise) is executed and
notarized on or after January 1, 2012 and shall be subject to twelve
percent (12%) output VAT. (Rev. Regs. No. 16-2005, Section 4.106-3, 3rd par.,
as amended by Rev. Regs. No. 16-2011, and further amended by Rev. Regs. No. 3-
2012)
NOTE NOT PART OF THE ANSWER: The author suggests that for
purposes of answering a Bar examination question with similar statement of
facts as the foregoing question, that the examinee should discuss both the
SUGGESTED and ALTERNATIVE ANSWERS. While this may be so there
must be an indication that the SUGGESTED ANSWER is the primary choice
for the answer. Without this indication the examinee has no answer.

*5.In June 2016, DDD Corp., a domestic

corporation engaged in the business of leasing real
properties in the Philippines, entered into a lease
agreement of a residential house and lot with EEE, Inc., a
non-resident foreign corporation. The residential house
and lot will be used by officials of EEE, Inc. during the visit
to the Philippines. The lease agreement was signed by

156
representatives from DDD Corp. and EEE, Inc. in
Singapore. DDD Corp. did not subject the said lease to
VAT believing that it was not a domestic service contract.
Was DDD Corp. correct? Explain. (2015)
SUGGESTED ANSWER: No. DDD Corp. is not correct.
The lease of properties shall be subject to VAT irrespective of
the place where the contract of lease was executed if the property is
leased or used in the Philippines. [NIRC of 1997, Sec. 108 (A) 4th par.]
Since, the leased residential house and lot is located and used
in the Philippines it is subject to VAT despite the fact that the lease
agreement was signed in Singapore.

Exempt from VAT

**
1. What transactions in agricultural and marine
products are VAT exempt ?
SUGGESTED ANSWER: Sale or importation of
a. agricultural and marine food products in their original
state,
b. livestock and poultry of
1) a kind generally used as, or yielding or producing
foods for human consumption;
2) and breeding stock and genetic materials therefor.
[NIRC of 1997, Sec. 109 (1) (A), 1st par.as amended by Rep. Act No. 9337,
reiterated by the TRAIN, arrangement and numbering supplied]

**
2. Is the sale of fresh vegetables and fish by Aling
Toneng at her pwesto in the Pamilihang Bayan ng San
Jose, Batangas subject to VAT ?
SUGGESTED ANSWER: No. The sale of agricultural
and marine products are VAT exempt. [NIRC of 1997, Sec. 109 (1)
st
(A), 1 par.as amended by Rep. Act No. 9337, reiterated by the TRAIN]

**3.Is the sale of orchids by a flower shop in

Dangwa, Sampaloc, Manila which raises its flowers in
Benguet subject to VAT ?
SUGGESTED ANSWER: Yes. It is subject to the 12% VAT
because flowers are non-food agricultural items. Only agricultural
food items are exempted from VAT. [NIRC of 1997, Sec. 109 (1) (A), as
amended by Rep. Act No. 9337, reiterated by the TRAIN)

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 ** 4. On August 3, 2012, the Bureau of Internal
Revenue (BIR) issued RMC No. 35-2012, entitled "Clarifying
the Taxability of Clubs Organized and Operated Exclusively
for Pleasure, Recreation, and Other Non-Profit
Purposes," which was addressed to all revenue officials,
employees, and others concerned for their guidance
regarding among others the Valued Added Tax (VAT)
liability of the said recreational clubs.
RMC No. 35-2012 provides that "the gross receipts of
recreational clubs including but not limited to membership
fees, assessment dues, rental income, and service fees
are subject to VAT." As basis, the BIR relied on Section
105, Chapter I, Title IV of the 1997 NIRC, which states that
even a nonstock, nonprofit private organization or
government entity is liable to pay VAT on the sale of goods
or services.
Is the imposition of VAT under RMC No. 35-2012 valid
?
SUGGESTED ANSWER: No. The Supreme Court declared
invalid “the BIR's interpretation in RMC No. 35-2012 that membership
fees, assessment dues, and the like are part of ‘the gross receipts of
recreational clubs’ that are ‘subject to VAT.” [Association of NonProfit Clubs,
Inc. (ANPC), etc., v. Bureau of Internal Revenue (BIR), etc., G.R. No. 228539, 26 June
2019]
“It is a basic principle that before a transaction is imposed
VAT, a sale, barter or exchange of goods or properties, or sale of a
service is required.” (Ibid.) “This is true even if such sale is on a cost-
reimbursement basis.” (Ibid.) ,
Membership fees, assessment dues, and the like are not
subject to VAT because in collecting such fees, the club is not selling
its service to the members. Conversely, the members are not buying
services from the club when dues are paid; hence, there is no
economic or commercial activity to speak of as these dues are
devoted for the operations/maintenance of the facilities of the
organization. As such, there could be no “sale, barter or exchange of
goods or properties, or sale of a service" to speak of, which would
then be subject to VAT under the 1997 NIRC. (Ibid.)

**
5. In lieu of VAT what tax is due upon persons
exempt from VAT ?
SUGGESTED ANSWER:
a. Any person,

158
 b. whose sales or receipts are exempt under the NIRC of
1997 from the payment of value-added tax
1) and who is not a VAT-registered person
c. shall pay a tax equivalent to three percent (3%) of his
gross monthly sales or receipt:
d. Provided, that cooperatives shall be exempt from the
three percent (3%) gross receipts tax herein imposed. [NIRC of 1997,
Sec. 116, as amended by the TRAIN, arrangement and numbering supplied]
If VAT-registered the percentage tax is not paid and VAT shall
be collected.

Refund or tax credits for VAT

***
1. Explain the procedure for claiming refunds or
tax credits of input Value Added Tax (VAT) for zero-rated or
effectively zero-rated sales under Sec. 112 of the National
Internal Revenue Code (NIRC) from the filing of an
application with the Commissioner of Internal Revenue
(CIR) up to the Supreme Court.
SUGGESTED ANSWER:
a. An administrative claim for refund of or issuance of tax
credit for unutilized excess input VAT must be filed with the CIR within
two (2) years counted from the last day of the quarter when the
relevant zero-rated sale was made [NIRC of 1997, Sec. 112 (A)] pertaining
to the input Value Added Tax (VAT) regardless of whether said tax
was paid or not. (Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,
565 SCRA 154)
b. The claim for refund must be accompanied with a
statement under oath that all documents to support the claim has
been submitted at the time of filing of the claim for refund. (RMC 54-14)
c. The CIR shall within ninety (90) days from the date of
submission of complete documents to support the application filed
VAT-registered person on his zero-rated or effectively zero rated sale
to decide the matter. [Ibid., Sec. 112 (C), 1st par., as amended by the TRAIN, in
relation to Sec. 112 (A), to reduce the period from 120 days to 90 days.]
d. In case of full or partial denial of the claim for tax refund
or tax credit, or the failure on the part of the CIR to act on the
application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the ninety (90) day period, appeal
the decision or the unacted claim with the Court of Tax Appeals (CTA)
division [Ibid., Sec. 112 (C), 2nd par., as amended by the TRAIN]
As a general rule, the case would be dismissed, for premature
filing, if recourse was made to the CTA division without waiting for the

159
expiration of the 90-day period within which the CIR should render his
decision. The 90-day period took effect only on January 1, 2018.
Before that date the period was 120 days.
e. The adverse decision of the CTA division may be the
subject of a motion for reconsideration or new trial within fifteen (15)
days from receipt of the adverse decision, filed with the same division
that rendered the decision
f. The adverse decision of the CTA division on the motion
for reconsideration or new trial, shall the the subject of a petition for
review filed within fifteen (15) days from receipt of the decision filed
with the CTA en banc.
g. The adverse decision of the CTA en banc shall, within
fifteen (15) days from receipt be the subject of a petition for review on
certiorari filed with the Supreme Court. The period may be extended
to thirty (30) days upon payment of the requisite docketing fee.

*** 2. Tiktok Inc. (TI) filed its quarterly tax returns for
the calendar year 2019 as follows:
First quarter – April 25, 2019
Second quarter – July 23, 2019
Third quarter – October 25, 2019
Fourth quarter – January 27, 2020
On December 22, 2020, TI filed with the Bureau of
Internal Revenue (BIR) an administrative claim for refund of
its unutilized input Value-Added Tax (VAT) for the calendar
year 2019. After several months of inaction by the
Commissioner of Internal Revenue (CIR) on its claim for
refund, Tiktok, Inc, decided to elevate its claim directly to
the Court of Tax Appeals (CTA) on April 22, 2021. In due
time, the CTA denied the tax refund relative to the input
VAT of TI for the first quarter of 2019, reasoning that the
claim was filed beyond the two-year period prescribed
under Section 112 (A) of the National Internal Revenue
Code (NIRC).
(A) Is the CTA correct ?
SUGGESTED ANSWER: No. The CTA is not correct.
The phrase “within two (2) years” prescribed under Section 112
(A) of the NIRC refers to applications for administrative refund/credit
filed with the CIR and not to appeals made to the CTA.
Applying the two-year period to judicial claims would render
nugatory Section 112 (C) of the NIRC of 1997, as amended by the
TRAIN which already provides for a specific 90-day period within

160
which a taxpayer should appeal to the CTA the decision or inaction of
the CIR.
The 90 period within which the CIR must decide is counted from
December 22, 2020 and ends on March 29, 2021. The BIR’s inaction
after 90 days or on March 29, 2021 is a deemed an adverse decision
on the claim, appealable to the CTA within 30 days from the lapse of
the 90-day period or not later than April 28, 2021.
TI has 30 days from March 29, 2021 or until April 28, 2021
within which to appeal to the CTA. The April 22, 2021 claim with the
CTA was seasonably filed.
(B) Assuming that TI filed its claim before the CTA
on February 22, 2021, would your answer be the same ?
SUGGESTED ANSWER: No. This time the CTA was correct in
denying the claim for refund.
The claim made before the CTA on February 22, 2021 is
premature. The 90 period within which the CIR must decide is counted
from December 22, 2020 and ends on March 29, 2021.
As of February 22, 2021 there is as yet no decision subject to
appeal because the 90-day period for the CIR to act on the claim for
refund has not yet lapsed.

iv. DONOR’s TAX

**
1. What transfers of property are
considered subject to the donor’s tax ?
SUGGESTED ANSWER: The following are transfers of
property subject to donors tax:
a. Act of liberality on the part of the donor;
b. inter vivos in its effect;
c. gratuitous disposal of property; or for less than adequate
consideration
d. in favor of another
e. who accepts it
f. without any legal compulsion to give. (CCP, Art. 725,
arrangement and numbering supplied) Stated otherwise, there is no legal
obligation to give.
The above are also known as the requisites of a valid donation
subject to donor’s tax.

***2. What transfers of property are

considered subject to the donor’s tax ?
SUGGESTED ANSWER: Where property, other than real
property, other than real property that has been subjected to the final

161
capital gains tax, is transferred for less than an 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 the purpose of imposing the donor’s tax , be
deemed a gift, and shall be included in computing the amount of gifts
made during the calendar year.
A sale, exchange, or other transfer of property made in the
ordinary course of business (a transaction which is a bona fide, at
arm’s length, and free from any donative intent), will be considered as
made for an adequate and full consideration in money or money’s
worth [NIRC of 1997, Sec. 100, as amended by the TRAIN] and not subject to
donor’s tax.

***3.Enumerate gifts which are not subject to

donor’s taxes.
SUGGESTED ANSWER: The following gifts are not subject to
donor’s taxes:
a. Total gifts NOT in excess of Two hundred fifty thousand
pesos (P250,000) exempt gift made during the calendar year. [NIRC of
1997, Sec. 99 (A), as amended by the TRAIN]
b. Any contribution in cash or in kind to any candidate,
political party or coalition of parties for campaign purposes shall be
exempted under the Election Code, as amended. [Ibid., Sec. 99 (B), as
amended by the TRAIN]
c. 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. [Ibid., Sec.
101 (A) (1), as amended by the TRAIN, and Sec. 101 (B) (1)]
d. Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthropic organization or
research institution or organization: Provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for
administration purposes. [Ibid,, Sec. 101 (A) (2), as amended by the TRAIN, and
Sec. 101 (B) (2), paraphrasing supplied]
e. Donations of intangibles subject to reciprocity.
f. Donations for athlete’s prizes and awards.
g. Donations under special laws.
h. Donations under international agreements.
Author’s observation. The reader should distinguish between those
donations that are not covered under the NIRC of 1997 and those that are
exempt under the provisions of the said law. Donations that are not covered
under the NIRC of 1997 are not subject to donor’s taxes. These were
discussed under Situs of Taxation, supra.

162
 **4. Can you name one kind of gift that is exempt
from donor’s tax which is extendible to both residents and
non-residents or non-citizens of the Philippines? Include
qualifications, if any.
SUGGESTED ANSWER: A gift made in favor of an educational
and/or charitable, religious, cultural or social welfare organization or
research institution or organization. [NIRC of 1997, Sec.. 101 (A) (3) and (B)
(2)]
The qualification for said gift to be exempt from donor’s tax is
that not more than thirty per centum (30%) of said gifts shall be used
by the donee for administration purposes. (Ibid.)
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 subdivisions of the said Government [NIRC
of 1997, Sec. 101 (A), (2), and (B) (1)] are exempted from donor’s tax
whether made by residents and non-residents or non-citizens of the
Philippines.

**5.Monforte, Inc. holds a proprietary share of

Boracay Timeshares, Inc. It assigned without any
consideration this share to Bian, one of its foreign
consultants, to enable her to use its facilities for the
duration of her stay in the Philippines. Bian signed a
Declaration of Trust where she acknowledged that the
share is owned by Monforte, Inc. and where she promised
to transfer the same to whoever will succeed her as
consultant. When Bian’s contract with Monforte, Inc.
expired, she left the Philippines and assigned for free the
share to Camille, her successor in office. What tax, if any
can be imposed by the BIR on the transaction ?
SUGGESTED ANSWER: The tax to be imposed on the value
of the “right to use the facilities” is the fringe tax to be imposed on the
employer.
The assignments are not gratuitous, hence not subject to
donor’s taxes. The value of the right to avail of the privileges
attendant to the Boracay Time Shares, Inc., proprietary share which is
due to Bian’s merits or services as a computer consultant is a fringe
benefit taxable to the employer. [NIRC of 1997, Sec. 33 (B) (6)]
The same holds true with respect to the transfer of the shares
to Camille.

163
 **
6. The spouses Jun and Romina Sampaga
purchased a piece of land for P5,000,000 and included their
two (2) minor children as co-purchasers in the Deed of
Absolute Sale. The Commissioner of Internal Revenue
(CIR) ruled that there was an implied donation and
assessed donor’s taxes against the spouses. Rule on the
CIR’s action.
SUGGESTED ANSWER: The CIR is correct. There was
animus donandi (intent to donate) since the children had no financial
capacity to be co-purchasers. (Spouses Evono v. Department of Finance, CTA
EB Case No. 705, June 4, 2012)
NOTE NOT PART OF THE ANSWER: The above answer should be
distinguished from a sale for insufficient consideration. There was full
consideration paid for the property but it is considered a donation to the
children because the complete absence of consideration makes the giving a
pure act of liberality. This is a characteristic of a donation.

***7. Raniel sold to Omar, his brother-in-law, his lot

with a market value of P1,000,000 for P600,000.00. Raniel’s
cost in the lot is P100,000.00. B is financially capable of
buying the lot.
Raniel also owns Bedaneo Co., which has a fast
growing business. Raniel sold some of his shares of stock
in Bedaneo Co., to his key executives in Bedaneo Co.
These executives are not related to Raniel. The selling
price is P3,000,000, market value of P5,000,000. Raniel’s
cost in the shares sold is P1,000,000. Raniel’s purpose in
selling the shares is to enable his key executives to acquire
a proprietary interest in the business and have a personal
stake in the business.
Explain if the above transactions are subject to
donor’s tax.
SUGGESTED ANSWER: Yes. All the transactions are subject
to donor’s tax except the lot if the 6% capital gains tax was fully paid.
[NIRC of 1997, Sec. 100, as amended by the TRAIN
The transfers were all made for less than an adequate and full
consideration in money’s worth hence, the excess of the fair market
value of the property over the actual value of the consideration shall
be subject to donor’s tax.

**8. Don Pancrasio, Filipino, married, and resident

of Pasig City, died intestate on November 15, 2021. He was

164
survived by his wife, Amelia and three children: Psalmir,
Darylle and Aexandra.
a. If Psalmir, one of the compulsory heirs,
renounces his share in the inheritance in favor of the other
co-heirs, is there any tax implication of Psalmir’s
renunciation ? What about the other coheirs ?
SUGGESTED ANSWER: There is no tax implication with
regard to X’s renunciation. There is a general renunciation because
there is no specific identification in favor of a specified person.
General renunciation by the compulsory heir of his share in the
hereditary estate left by the decedent is not subject to donor’s tax,
unless specifically and categorically done in favor of identified heir/s to
the exclusion or disadvantage of the other co-heirs in the hereditary
estate. [Rev. Regs. No. 2-2003, Sec. 11, 4th par.]
There is no tax implication with regard to the other coheirs
because they are not the ones required to pay the estate taxes but the
administrator of the estate of Don Pancrasio. There would a tax
implication for the other co-heirs if there is no administrator because
their share in the estate taxes would increase in the proportion of the
increase in their shares resulting from the renunciation.
b. Amelia renounced her inheritance and her share
of the conjugal property in favor of their children. The BIR
determined that there was a taxable gift and thus assessed
Amelia as a donor.
Was the BIR correct ?
SUGGESTED ANSWER: No. The BIR is only partially correct.
The renunciation by Amelia, the surviving spouse, of her share
in the conjugal partnership after the dissolution of the marriage,
resulting from the death of Don Pancrasio, in favor of her children
who are the heirs of the deceased spouse is subject to donor’s tax .
[Rev. Regs. No. 2-2003, Sec. 11, 4th par.]
This is so, because the transfer that resulted from the
renunciation of her share in the conjugal property was without
consideration.
The BIR is wrong with regard to Amelia’s renunciation of her
share in the inheritance left by the late Don Pancrasio. There was a
general renunciation by Amelia, the surviving spouse, of her share in
the hereditary estate left by the decedent which is is not subject to
donor’s tax, because it was not specifically and categorically done in
favor of identified heir/s to the exclusion or disadvantage of the other
co-heirs in the hereditary estate. (Rev. Regs. No. 2-2003, Sec. 11, 4th par.)

165
 **
9. San Pascual Medical School, Inc. (SPMSI), a
non-stock, non-profit corporation, donated its three parcels
of idle land situated in the Municipality of San Jose,
Batangas to San Jose University (SJU), another non-stock,
non-profit corporation, duly accredited with the
Commission on Higher Education (CHED), in recognition of
the latter’s contribution to and participation in the spiritual
and educational development of the former.
a. Is San Pascual Medical School, Inc. (SPMSI),
liable for the payment of donor’s tax ?
SUGGESTED ANSWER: No. Exempt from donor’s tax are
gifts in favor of an educational institution, such as SJU. There is no
showing in the problem that not more than thirty percent (30%) of said
gifts shall be used by SJU for administration purposes.
SPMSI is exempt from the payment of the donor’s tax because
SJU is a non-stock, non-profit educational university, incorporated as a
non-stock entity, paying no dividends, governed by trustees who receive
no compensation, and devoting all its income, whether students’ fees or
gifts, donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation. [NIRC of 1997, Sec. 101 (A) (2) as amended by the
TRAIN]
b. If San Jose University (SJU) donates the three
parcels of idle land in favor of the Municipality of San Jose,
Batangas, will SJU be liable for donor’s tax ? Explain your
answer.
SUGGESTED ANSWER: No. Exempt from donor’s tax are
gifts made to or for the use of any political subdivisions of the said
National Government such as the Muncipality of San Jose, Batangas .
[NIRC of 1997, Sec. 101 (A), (1), and (B) (1), as amended by the TRAIN]

**10. Spouses Jerome and Lily de la Cruz, both

Filipino citizens are the owners of a small residential house
and lot in Lipa City. After the recent wedding of their son,
Mark, to Annie, the spouses donated said real property to
them. At the time of donation, the real property has a fair
market value of P1 million.
a. Are Mark and Annie subject to income tax for
the value of the real property donated to them ? Explain.
SUGGESTED ANSWER: No. The giving was a pure act of
liberality that is considered as a gift and excluded from gross income
hence not subject to income tax.

166
 b. Are Jerome and Lily subject to donor’s tax ? If
so, how much is the taxable gift of each spouse and what
rate shall be applied to the gift ? Explain.
SUGGESTED ANSWER: Yes. The total value of the donation
is P1million which if divided between the spouses Jerome and Lily,
would result to a donation worth P500,000.00 for each of them.
If they would donate the P500,000.00 equally between Mark
and Lily, both Jerome and Lily would have an gift of P250,000.00
each for their donation to Mark because the first P250,000.00 net
donation is exempt from donor’s tax. After deducting the first
P250,000.00 the balance of P250,000.00 shall be subject to the 6%
donor’s tax.
Assuming that the donation given to Mark and Annie were given
during the same calendar year, then the total donation of P500,000.00
made to Annie (P250,000.00 each from Jerome and Lily) would not
anymore be subject to the first P250,000.00 exemption because the
spouses already availed of the same when they made the donation of
Mark.
Consequently, the Jerome and Lily shall pay the 6% donor’s tax
on their donation of P250,000.00 each they made to Annie.

***10. Atty. Aaron is a candidate in the upcoming

2022 Senatorial elections. Mr. Rodrigo, believing in the
sincerity and ability of Atty. Aaron to introduce much
needed reforms in the country, contributed in December
2021, P500,000.00 in cash to the campaign chest of Atty.
Aaron. In addition during the same period, Mr. Rodrigo
purchased tarpaulins, t-shirts, umbrellas, caps and other
campaign materials that he also donated to Atty. Aaron for
use in his campaign.
a. Is the contribution of cash and campaign
materials subject to donor’s tax ?
SUGGESTED ANSWER: No. The contribution of cash and
campaign materials is considered a donation that is not subject to
donor’s tax.
“Any contribution in cash or in kind to any candidate, political
party or coalition of parties for campaign purposes shall be governed
by the Election Code, as amended.” [NIRC of 1997, Sec. 99 (B), as amended
by the TRAIN]
The exemption applies only if reported to the COMELEC. “Any
provision of law to the contrary notwithstanding, any contribution in
cash or in kind to any candidate or political party or coalition of parties
for campaign purposes, duly reported to the Commission (on

167
Elections), shall not be subject to the payment of any gift tax.” [Rep. Act
No. 7166, Sec. 13, last par., words in parentheses supplied]
b. Would you answer be the same if in addition to
Mr. Rodrigo donation of P500,000.00, he also donated
P750,000.00 to Atty. Aaron’s political party ?
SUGGESTED ANSWER: Yes, for reasons please refer to the
answer to question no. a.
c. Are the amounts of the donations made by Mr.
Rodrigo to Atty. Aaron and his political party allowed as
deductions from Mr. Rodrigo’s 2021 gross income derived
from his business in order to arrive at his income subject
to tax ? Explain.
SUGGESTED ANSWER: No. Exempt donations for campaign
purposes are not deductible from gross income for income tax
purposes because such amounts did not help earn the income.
Furthermore, they are not among those which are considered as
charitable and other contributions, which are allowable deductions.
d. Would your answers still be the same, if instead
of Mr. Rodrigo it was his corporation that made the
donation ?
SUGGESTED ANSWER: No more for my answers to
questions to a and b, but still the same for the answer to question c.
Corporations are not allowed to make donations for partisan
political activities including for political campaign purposes. The tax
exemption provided for by the Election Code should be construed
strictly against the taxpayers. Corporations are prohibited from
making political contributions.
No corporation, domestic or foreign, shall give donations in aid of
any political party or candidate or for purposes of partisan political
activity. [Corp. Code, Title IV, Sec. 36.9]

**11.
Hidylin, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup Boxing Council, a
sports association duly accredited by the Philippine
Boxing Association. Hidylin received the amount of
P500,000.00 as her prize donated by Robinson Land
Corporation. The BIR tried to collect donor’s tax from
Robinson Corporation, which tax Robinson Land
Corporation refuses to pay.
Decide.
SUGGESTED ANSWER: Robinson Land Corporation is
exempt from the payment of donor’s taxes. It is apparent that the

168
competition was sanctioned by the appropriate national sports
association. [Rep. Act No. 7549, Sec. 1]

***12. On December 25, 2021, Alexandra Baldago

wanted to give to her “ajijada”, the daughter of her best
friend Annie Buenaobra a gift of P500,000.00 for
Christmas. She consulted Atty. Mica Reyes on the taxes
she would have to pay on the P500,000.00 gift. You are
Atty. Reyes, what advice should you give ?
SUGGESTED ANSWER: I would advise Alexandra to split the
gift by giving P250,000.00 on December 25, 2021 (Christmas Day)
and the other P250,000.00 on January 6, 2022 (Three Kings).
In this manner Alexandra does not have to pay any donor’s tax,
because the donations, made during each of the calendar years, 2021
and 2022, not exceeding Two hundred fifty thousand pesos
(P250,000) are exempt gifts [NIRC of 1997, Sec. 99, as amended by the TRAIN]
Would Atty. Reyes’ answer be the same despite the
fact that Alexandra Baldago’s “ajijada” is not even related
to her whether by affinity or consanguinity ?
SUGGESTED ANSWER: Yes. The special rate of 30% for
donations to strangers was eliminated by the TRAIN. The rate is now
6% in excess of the first P250,000.00 for donations made during the
calendar year.

**13. Mr. Harold Marciano, an Australian citizen

and a resident of Geelong, Victoria, Australia, sends a gift
check of $20,000 to his future Filipino daughter-in-law who
is to be married to his only son in the Philippines.
a. Is the donation by Mr. Marciano subject to tax?
Explain.
SUGGESTED ANSWER: No, because the giving of the gift
took place outside of the Philippines. This is evident from the fact that
the gift check was sent to, and not given personally in, the Philippines.
It is of no moment that Mr. Marciano’s donation does not fall within
the gifts made by a non-resident exempt from donor’s tax.
b. What is the tax consequence, if any, to the
donee (the future Filipino daughter-in-law of Mr. Marciano)
?
SUGGESTED ANSWER: None. The donee (the future
Filipino daughter-in-law of Mr. Marciano) is not required to report the
$20,000.00 as income because the gifts are excluded from gross
income and exempt from income taxes.

169
 The income from such gift shall, however, be included by
the donee in her gross income. [NIRC of 1997, Sec. 32 (B) (3)]

v. REMEDIES (JURISDICTION OF COURTS,

PRESCRIPTION, REMEDIES AGAINST
ASSESSMENT NOTICES)
METROPOLITAN TRIAL COURTS, MUNICIPAL TRIAL
COURTS, MUNICIPAL CIRCUIT TRIAL COURTS

What criminal cases fall within the exclusive original

jurisdiction of the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts ?
SUGGESTED ANSWER: Jurisdiction over violations of criminal
offenses arising from violations of the National Internal Revenue Code
or Tariff and Customs Code (now Customs Modernization and Tariff
Act) and other laws administered by the Bureau of Internal Revenue
or the Bureau of Customs where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is no specified amount
claimed and the imposable penalty is not exceeding six (6) years
imprisonment shall be tried by the Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial Courts. [Rep. Act No. 1125, Sec.
7.b (1), as amended by Rep. Act No. 9282, in relation to B.P. Blg. 129, Sec.
32 (2), as amended by Rep. Act No. 7691]

REGIONAL TRIAL COURT

1. What criminal cases fall within the exclusive

original jurisdiction of the Regional Trial Courts ?
SUGGESTED ANSWER: Jurisdiction over violations of criminal
offenses arising from violations of the National Internal Revenue Code
or Tariff and Customs Code (now Customs Modernization and Tariff
Act) and other laws administered by the Bureau of Internal Revenue
or the Bureau of Customs where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is no specified amount
claimed and the imposable penalty is more than six (6) years
imprisonment shall be tried by the Regional Courts. [Rep. Act No. 1125,
Sec. 7.b (1), as amended by Rep. Act No. 9282, in relation to B.P. Blg. 129, Sec. 20,
and Sec. 32 (2), as amended by Rep. Act No. 7691]

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 2. What tax collection cases fall within the
exclusive original jurisdiction of Regional Trial Courts ?
SUGGESTED ANSWER: Civil actions for tax collection
where the principal amount of taxes and fees, exclusive of charges
and penalties claimed exceeds Three hundred thousand pesos
(P300,000.00), or in Metro Manila where the amount of the demand
exceeds Four hundred thousand pesos (P400,000.00), provided that
the amount claimed is less than One million pesos (P1,000,000.00).
(B.P .Blg. 129, Sec. 19, as amended by R.A. No. 7691 in relation to R.A. No.
7691, Sec. 5, and R.A. No. 1125, Sec. 7, as amended by R.A. No. 9282)
Author’s observation. Tax collection cases that are below the
threshold amounts of P300,000.00 and P400,000.00 fall within the jurisdiction
of the Municipal Trial Courts, the Municipal Trial Courts in Cities, the Municipal
Circuit Trial Courts, or the Metropolitan Trial Courts. Where the amount is P1
million or more, exclusive original jurisdiction is vested with the Court of Tax
Appeals division.

COURT OF TAX APPEALS, IN DIVISIONS

**1. What comprises the exclusive or appellate

jurisdiction of the Court of Tax Appeals (CTA) in divisions
?
SUGGESTED ANSWER: “The Court in Divisions shall
exercise:
(a) Exclusive original or appellate jurisdiction to review by
appeal the following:
(1) Decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue
in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal
Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code or
other applicable law provides a specific period for action:
Provided, that in case of disputed assessments, the inaction of
the Commissioner of Internal Revenue within the one hundred
eighty day-period under Section 228 of the National Internal
Revenue Code shall be deemed a denial for purposes of
allowing the taxpayer to appeal his case to the Court and does
not necessarily constitute a formal decision of the

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 Commissioner of Internal Revenue on the tax case; Provided,
further, that should the taxpayer opt to await the final decision
of the Commissioner of Internal Revenue on the disputed
assessments beyond the one hundred eighty day period above
mentioned, the taxpayer may appeal such final decision to the
Court under Section 3(a), Rule 8 of these Rules; and Provided,
still further, that in the case of claims for refund of taxes
erroneously or illegally collected, the taxpayer must file a
petition for review with the Court prior to the expiration of the
two-year period under Section 229 of the National Internal
Revenue Code;
(3) Decisions, resolutions or orders of the Regional
Trial Courts in local tax cases decided or resolved by them in
the exercise of their original jurisdiction;
(4) Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees or other money
charges, seizure, detention or release of property affected,
fines, forfeitures of other penalties in relation thereto, or other
matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
(5) Decisions of the Secretary of Finance on customs
cases elevated to him automatically for review from decisions of
the Commissioner of Customs adverse to the Government
under Section 2315 of the Tariff and Customs Code (now Secs.
1127 & 1128, Customs Modernization and Tariff Act); and
(6) Decisions of the Secretary of Trade and Industry,
in the case of nonagricultural product, commodity or article, and
the Secretary of Agriculture, in the case of agricultural product,
commodity or article, involving dumping and countervailing
duties under Section 301 and 302, respectively, of the Tariff
and Customs Code (now Secs. 711 & 713, Customs
Modernization and Tariff Act), and safeguard measures under
Republic Act No. 8800, where either party may appeal the
decision to impose or not to impose said duties;” (RRCTA, Rule 4,
Sec. 3, words in parenthesis supplied)

**2.What is the exclusive original jurisdiction of

Court of Tax Appeals, in divisions, over collection of taxes
?
SUGGESTED ANSWER: The Court in Divisions shall exercise
“Original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties, where
the principal amount of taxes and fees, exclusive of charges and
penalties, claimed is one million pesos or more” [A.M. No. 05-11-07-CTA,
November 22, 2005, RRCTA, Rule 4, Sec. 3 (c) (1)]

172
 *3. A taxpayer received on 15 January 2021, an
assessment for an internal revenue tax deficiency. On 10
February 2021, the taxpayer forthwith filed a petition for
review with the Court of Tax Appeals. Could the Tax Court
entertain the petition ?
SUGGESTED ANSWER: No. The Court of Tax Appeals has
jurisdiction only over decisions of the Commissioner of Internal
Revenue, or in certain cases his inaction, involving disputed
assessments.
There is no decision yet that could be the subject of review by
the Court of Tax Appeals.

**4. Quezon City issued a notice of assessment

against Mondejar, Inc. for deficiency real property taxes for
the taxable years 2017 to 2020 in the amount of PhP 20
million. Mondejar paid the taxes under protest and
instituted a complaint entitled “Recovery of Illegally and/or
Erroneously-Collected Local Business Tax, Prohibition
with Prayer to Issue TRO and Writ of Preliminary
Injunction” with the RTC of Quezon City.
The RTC denied the application for TRO. Its motion
for reconsideration having been denied as well, Mondejar
filed a petition for certiorari with the Court of Appeals (CA)
assailing the denial of the TRO.
Will the petition prosper ?
SUGGESTED ANSWER: No because the Court of Appeals
has no jurisdiction. The petition should have been filed with the Court
of Tax Appeals (CTA).
It was once held that the CTA has certiorari powers over the
issue of grave abuse of discretion on the part of the RTC in issuing an
interlocutory order in cases falling within the exclusive jurisdiction of
the tax court, as this is inherent to its exercise of appellate jurisdiction.
(City of Manila v. Hon. Grecia-Cuerdo, G.R. No. 175723, Feb. 4, 2014)

**5. Does the Court of Tax Appeals (CTA) have

jurisdiction over tax cases that raise constitutional issues
? Explain.

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 SUGGESTED ANSWER: Yes, the CTA has exclusive
jurisdiction over tax cases that raise constitutional issues.
“The Court of Tax Appeals has undoubted jurisdiction to pass
upon the constitutionality or validity of a tax law or regulation when
raised by the taxpayer as a defense in disputing or contesting an
assessment or claiming a refund. It is only in the lawful exercise of its
power to pass upon all matters brought before it, as sanctioned by
Section 7 of Republic Act No. 1125, as amended.
The CTA may likewise take cognizance of cases directly
challenging the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum
circulars, rulings. (Banco de Oro, etc. v. Republic of the Philippines, G.R. No.
198756, August 16, 2016)

**6.
What procedural remedy is available in order to
raise constitutional issues before the Court of Tax Appeals
(CTA) ? Explain.
SUGGESTED ANSWER: Prohibition may be filed to question
the constitutionality of a law.
“Generally, the office of prohibition is to prevent the unlawful
and oppressive exercise of authority and is directed against
proceedings that are done without or in excess of jurisdiction, or with
grave abuse of discretion, there being no appeal or other plain,
speedy, and adequate remedy in the ordinary course of law. It is the
remedy to prevent inferior courts, corporations, boards, or persons
from usurping or exercising a jurisdiction or power with which they
have not been vested by law.” (Southern Luzon Drug Corporation v. The
Department of Social Welfare and Development, G.R. No. 199669, April 25, 2017)
“This is, however, not the lone office of an action for
prohibition.” There was an instance where “prohibition was also
recognized as a proper remedy to prohibit or nullify acts of executive
officials that amount to usurpation of legislative authority.” (Ibid.)

7. Explain and illustrate the meaning of the Court

of Tax Appeals’ (CTA’s) jurisdiction over “other matters.”
SUGGESTED ANSWER: The jurisdiction of the CTA is not
limited only to cases which involve decisions or inactions of the CIR
on matters relating to assessments or refunds but also includes other
cases arising from the NIRC or related laws administered by the BIR.
(Commissioner of Internal Revenue v. Lancaster Philippines, Inc., G.R. No. 183408,
July 12, 2017)
It was once held that the question of whether or not to impose
a deficiency tax assessment comes within the purview of the phrase
“other matters arising under the National Internal Revenue Code.”
(Ibid.)

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 8. When may a decision on interpleader be
appealed to the Court of Tax ppeals (CTA) ?
SUGGSTED ANSWER: “That the case filed before the RTC
was in the mode of a special civil action for interpleader does not
detract from its nature as a local tax case, involving as it does the
application of the rules on situs on the payment of local business
taxes.
There is no need to distinguish it from other local tax cases
‘considering that the law expressly confers on the CTA, the tribunal
with the specialized competence over tax and tariff matters, the role of
judicial review over local tax cases without mention of any other court
that may exercise such power.’” (The City of Makati v. The Municipality of
Bakun, G.R. No. 225226, July 07, 2020)

**9. First E-Bank filed with the Regional Trial Court

(RTC), a petition for declaratory relief seeking to declare as
invalid Revenue Memorandum Circular No. 65-2012 (RMC
No. 65-2012) entitled “Clarifying the Taxability of
Association Dues, Membership Fees and Other
Assessments/Charges Collected by Condominium
Corporations. The RTC took cognizance and declared as
invalid RMC No. 65-2012 for it purportedly expanded the
law, created an additional tax burden on condominium
corporations, and was issued without the requisite notice
and hearing,
a. Was the trial court correct when it resolved the
petition for declaratory relief ?
SUGGESTED ANSWER: No. A petition for declaratory relief is
not the proper remedy to seek the invalidation of a Revenue
Memorandum Circular. (In the Matter of declaratory relief on the invalidity of BIR
Revenue Memorandum Circular No. 65-2-12. “ClarIfying the taxability of association
dues, membership fees and other assessments/charges collected by condominium
corporations”, G.R. No. 215801, January 15, 2020) Certiorari or prohibition, not
declaratory relief, is the proper remedy to assail the validity or
constitutionality of executive issuances. (Ibid.)
One of the requisites for declaratory relief is that it must be filed
before any breach or violation of an obligation. Thus, there is no actual
case involved in a Petition for Declaratory Relief. It cannot, therefore,
be the proper vehicle to invoke the judicial review powers to declare a
statute unconstitutional.
It is elementary that before the Supreme Court can rule on a
constitutional issue, there must first be a justiciable controversy. A

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justiciable controversy refers to an existing case or controversy that is
appropriate or ripe for judicial determination, not one that is
conjectural or merely anticipatory. (Ibid.)
b. If the trial court was not correct when it resolved
the petition for declaratory relief, should it dismiss the
petition ?
SUGGESTED ANSWER: No. The case “has far-reaching
implications and raises questions that need to be resolved for the
public good; or if the assailed act or acts of executive officials are
alleged to have usurped legislative authority.” (In the Matter of
declaratory relief on the invalidity of BIR Revenue Memorandum Circular No.
65-2-12. “ClarIfying the taxability of association dues, membership fees and
other assessments/charges collected by condominium corporations”, G.R. No.
215801, January 15, 2020)

**10. Since a petition for declaratory relief is not the

proper procedural remedy to raise constitutional issues are
there any instances when petition for declaratory relief may
be treated as one for prohibition ? If so give examples.
SUGGESTED ANSWER: Yes, if the case has far-reaching
implications and raises questions that need to be resolved for the
public good; or if the assailed act or acts of executive officials are
alleged to have usurped legislative authority.” (In the Matter of declaratory
relief on the invalidity of BIR Revenue Memorandum Circular No. 65-2-12. “ClarIfying
the taxability of association dues, membership fees and other assessments/charges
collected by condominium corporations”, G.R. No. 215801, January 15, 2020)
a. A petition for declaratory relief on the subject of VAT was
treated as one for prohibition. This is so because “the imposition of
VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the
tollways everyday, but more so on the government’s effort to raise
revenue for funding various projects and for reducing budgetary
deficits.” (Ibid.)
b. A petition for declaratory relief seeking to declare as
invalid Revenue Memorandum Circular No. 65-2012 (RMC No. 65-
2012) entitled ”Clarifying the Taxability of Association Dues,
Membership Fees and Other Assessments/Charges Collected by
Condominium Corporations was treated as one for prohibition. This is
so because “RMC No. 65-2012 has far-reaching ramifications among
condominium corporations which have proliferated throughout the
country. For numerous Filipino families, professionals, and students
have, for quite sometime now, opted for condominium living as their
new way of life. The matter of whether indeed the contributions of unit
owners solely intended for maintenance and upkeep of the common
areas of the condominium building are taxable is imbued with public

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interest. Suffice it to state that taxes, being the lifeblood of the
government, occupy a high place in the hierarchy of State priorities,
hence, all questions pertaining to their validity must be promptly
addressed with the least procedural obstruction.” (Ibid.)

**
11. Harold, a taxpayer, received a tax deficiency
assessment of P1.2 Million from the BIR demanding
payment within 10 days, otherwise, it would collect through
summary remedies. The taxpayer requested for a
reconsideration stating the grounds therefor. Instead of
resolving the request for reconsideration, the BIR sent a
Final Notice Before Seizure to Harold.
May this action of the Commissioner of Internal
Revenue (CIR) be deemed a denial of Harold’s request for
reconsideration to entitle him to appeal to the Court of Tax
Appeals (CTA) ? Decide with reasons.
SUGGESTED ANSWER: Yes. Not only is the Notice the only
response received: its content and tenor supports the theory that it
was the CIR’s final act regarding the request for reconsideration. The
very title expressly indicated that it was a final notice prior to seizure of
property. (Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R.
No. 135210, July 11, 2001)

12. After filing an information for violation of Section

254 of the National Internal Revenue Code (Attempt to
Evade or Defeat Tax) with the CTA, the Public Prosecutor
manifested that the People is reserving the right to file the
corresponding civil action for the recovery of the civil
liability for taxes. As counsel for the accused, comment on
the People’s manifestation. (2015)
SUGGESTED ANSWER: The manifestation is not proper.
No right to reserve the filing of such civil action separately from
the criminal action shall be recognized. [Republic Act No. 9282, Sec. 7(b)(1);
RRCTA, Rule 9, Sec. 11, last sentence; Judy Anne Santos v. People, G.R. No. 173176,
August 26, 2008, 563 SCRA 341]
In cases within the jurisdiction of the Court of Tax Appeals, the
criminal action and the corresponding civil action for the recovery of
the civil liability for taxes and penalties shall be deemed jointly
instituted in the same proceeding. The filing of the criminal action
shall necessarily carry with it the filing of the civil action. (RRCTA, Rule
9, Sec. 11, 1st two sentences)

Court of Tax Appeals, en banc

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 **1. What constitutes the jurisdiction of the CTA en
banc ?
SUGGESTED ANSWER: “The Court en banc shall exercise
exclusive appellate jurisdiction to review by appeal the following:
(a) Decisions or resolutions on motions for reconsideration
or new trial of the Court in Divisions in the exercise of its exclusive
appellate jurisdiction over:
(1) Cases arising from administrative agencies -
Bureau of Internal Revenue, Bureau of Customs, Department of
Finance, Department of Trade and Industry, Department of
Agriculture;
(2) Local tax cases decided by the Regional Trial
Courts in the exercise of their original jurisdiction; and
(3) Tax collection cases decided by the Regional Trial
Courts in the exercise of their original jurisdiction involving final
and executory assessments for taxes, fees, charges and
penalties, where the principal amount of taxes and penalties
claimed is less than one million pesos;
(b) Decisions, resolutions or orders of the Regional Trial
Courts in local tax cases decided or resolved by them in the exercise
of their appellate jurisdiction;
(c) Decisions, resolutions or orders of the Regional Trial
Courts in tax collection cases decided or resolved by them in the
exercise of their appellate jurisdiction;
(d) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in Division in the exercise of
its exclusive original jurisdiction over tax collection cases;
(e) Decisions of the Central Board of Assessment Appeals
(CBAA) in the exercise of its appellate jurisdiction over cases involving
the assessment and taxation of real property originally decided by the
provincial or city board of assessment appeals;
(f) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in Division in the exercise of
its exclusive original jurisdiction over cases involving criminal offenses
arising from violations of the National Internal Revenue Code or the
Tariff and Customs Code (now Customs Modernization and Tariff Act),
and other laws administered by the Bureau of Internal Revenue or
Bureau of Customs. [Rep. Act No. 1125, Sec. 7 (a), as amended by Rep. Act No.
9282; A.M. No. 05-11-07-CTA, November 22, 2005, RRCTA, Rule 4, Sec. 2,
arrangement, numbering and words in parenthesis supplied]
NOTE NOT PART OF THE ANSWER: The CTA en banc’s jurisdiction
is limited only to an appellated review

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 2. How are appeals to the Court of Tax Appeals en
banc taken ?
SUGGESTED ANSWER:
a. “An appeal to the Court en banc in criminal cases
decided by the Court in Division shall be taken by filing a petition for
review as provided in Rule 43 of the Rules of Court within fifteen days
from receipt of a copy of the decision or resolution appealed from. The
Court may, for good cause, extend the time for filing of the petition for
review for an additional period not exceeding fifteen days.” [RRCTA, Rule
9, Sec. 9 (b)]
b. “An appeal to the Court in criminal cases decided by the
Regional Trial Courts in the exercise of their appellate jurisdiction shall
be taken by filing a petition for review as provided in Rule 43 of the
Rules of Court within fifteen days from receipt of a copy of the
decision or final order appealed from. The Court en banc shall act on
the appeal.” [RRCTA, Rule 9, Sec. 9 (c)]
c. An appeal from a decision or resolution of the Court of
Tax Appeals in Division on a motion for reconsideration or new trial
shall be taken to the Court of Tax Appeals en banc by filing before it a
petition for review as provided in Rule 43 of the Rules of Court.”
[RRCTA, Rule 8, Sec. 4 (b)]
To standardize the appeal periods provided in the Rules and to
afford litigants fair opportunity to appeal their cases, it is deemed
practical to allow a fresh period of 15 days within which to file the
notice of appeal in the Regional Trial Court, counted from receipt of
the order dismissing a motion for a new trial or motion for
reconsideration.” [Domingo Neypes v. Court of Appeals, et al., 469 SCRA 633
(2005)]

Supreme Court

1. What is the exclusive review jurisdiction of the

Supreme Court over decisions of the Court of Tax Appeals
(en banc) in tax collection cases ?
SUGGESTED ANSWER: “A party adversely affected by a
decision or ruling of the CTA en banc may file with the Supreme Court
a verified petition for review on certiorari pursuant to Rule 45 of the
1997 Rules of Civil Procedure.” (R.A. No. 1125, Sec. 19, as amended by R.A.
No. 9282)

PRESCRIPTION

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 **1.
Taxes are generally imprescriptible; statutes,
however, may provide otherwise. State the rules that have
been adopted on this score by The National Internal
Revenue Code (NIRC).
SUGGESTED ANSWER: There are three rules on prescription
under the NIRC: one for assessment, the other for collection, and
finally on refund.
The prescriptive period for assessment is three (3) years
computed from the time the tax return was filed or should be filed
whichever is the later. However, where there is no return filed or what
was filed was a false and fraudulent return, then the prescriptive
period is ten (10) years computed from the discovery of the falsity or
of the fraud, or of the failure to file the tax return. The taxpayer and
the BIR may also agree on a date when the assessment may be
made, with the taxpayer waiving the prescriptive period of three years
referred to above.
The prescriptive period for collecting internal revenue taxes is
three (3) years from the issuance of an assessment notice. Where the
return is false or fraudulent, or no return was filed, the deficiency taxes
may be collected even without an assessment within ten (10) years
from discovery of the falsity, fraud or failure to file the tax return. If
there is an assessment made upon a false or fraudulent return, or no
return was filed, then the prescriptive period is five (5) from issuance
of an assessment notice. This is the same period for the payment of
an assessment issued within the period agreed upon between the BIR
and the taxpayer.
Lastly, the prescriptive period for a refund is within two (2) years
from payment of the tax sought to be refunded.

**
2. State the instances where the general three (3)
year period for assessment does not apply.
SUGGESTED ANSWER: The following are the instances
where an assessment could be made despite the lapse of three (3)
years from the time the return was filed or should have been filed
whichever is the later:
a. In case of a false or fraudulent return to evade the
payment of a tax. At anytime within ten (10) years after the discovery
of the falsity or fraud. [NIRC of 1997, Sec. 222 (a)]
b. In case of failure to file a return. At anytime within ten
(10) years after the discovery of the omission to file a return. (Ibid.)

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 c. If before the expiration of the three (3) year period for the
assessment of the tax, there is an agreement in writing between the
taxpayer and the BIR Commissioner.
The period agreed upon which may be extended by subsequent
written agreements made before the period previously agreed upon.
[Ibid., Sec. 222 (b)] The assessment issued in this instance is known as
an “extended assessment”.
NOTE NOT PART OF THE ANSWER: Do not confuse the above
instances with the instances where the prescriptive periods are suspended or
do not run.
The provisions of the Civil Code on prescription does not apply to tax
cases because the NIRC of 1997 being a special law takes precedence over a
general law, the Civil Code. Furthermore, the provisions of the Tax Code,
were crafted to ensure expeditious collection of tax money to ensure the
continuous delivery of government services.

**
3. What events suspend the running of statute of
limitations for assessment and collection of internal
revenue taxes under the provisions of the National Internal
Revenue Code (NIRC of 1997) ?
SUGGESTED ANSWER: The running of the Statute of
Limitations provided in the NIRC of 1997 on the making of
assessment and the beginning of distraint or levy a proceeding in
court for collection, in respect of any deficiency, shall be suspended
a. for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty (60) days thereafter;
b. when the taxpayer requests for a reinvestigation which is
granted by the Commissioner;
c. when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed or
collected.
Where the summons to the taxpayer-defendant was not served
because the defendant could not be located. The period within which
the defendant’s whereabouts are not known suspends the running of
the prescriptive period. (Republic v. Philips, CA-G.R. No. 66236, November 20,
1983)
d. when the warrant of distraint or levy is duly served upon
the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located;
e. and when the taxpayer is out of the Philippines. (NIRC of
1997, Sec. 223, arrangement, numbering, and paraphrasing supplied)
NOTE NOT PART OF THE ANSWER: In all of the above instances,
the BIR is effectively given extended periods within which to assess or collect
the intetrnal revenue taxes. These instances are favorable to the BIR.

181
 What about the instances when the running of the
prescriptive period are not suspended ?
a. If the taxpayer informs the Commissioner of any change
in address, the running of the Statute of Limitations will not be
suspended. (NIRC of 1997, Sec. 223)
b. Where an information return indicated therein the
taxpayer’s new address as its “present address”, the same falls short
of the legal requirement for the suspension of the prescriptive period.
The law clearly states that the prescriptive period will not be
suspended only “if the taxpayer informs the Commissioner of any
change in address.” (Afisco Insurance Corporation v. Court of Appeals, et al.,
G.R. No. 112675, January 25, 1999)
c. If the defendants whereabouts are known, the
prescriptive period is not suspended.
NOTE NOT PART OF THE ANSWER: The above events are
favorable to the taxpayer because the prescriptive periods continue to run and
are not extended. So the BIR could not anymore assess or collect.

**4. What constitutes a valid waiver of the statute of

limitations for the assessment and collection of taxes?
Explain your answer.
SUGGESTED ANSWER: The following constitutes a valid
waiver of the statute of limitations for the assessment and collection of
taxes:
a. The agreement to waive must have been entered before
the expiration of the three (3) year period for the assessment of the
tax. [NIRC of 1997, Sec. 222 (b); Cordero v. Gonda, 18 SCRA 331]
b. The waiver must be in the proper form prescribed by RMO
20- 90. The phrase "but not after __________ 20 __", which indicates
the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription, should be filled up.
(Commissioner of Internal Revenue v. Systems Technology Institute, Inc., G.R. No.
220835, July 26, 2017)
c. The waiver must be for a definite period beyond the
ordinary prescriptive periods for assessment and collection. The
period agreed upon can still be extended by a subsequent written
agreement, provided that it is executed prior to the expiration of the
first period agreed upon. (Bank of Philippine Islands v. Commissioner of Internal
Revenue, G. R. No. 139736, October 17, 2005)
d. The waiver must be signed by the taxpayer himself or his
duly authorized representative. In the case of a corporation, the waiver
must be signed by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such delegation
should be in writing and duly notarized. (Commissioner of Internal Revenue v.
Systems Technology Institute, Inc., G.R. No. 220835, July 26, 2017)

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 e. The Commissioner of Internal Revenue (CIR) or the
revenue official authorized by him must sign the waiver indicating that
the BIR has accepted and agreed to the waiver. The date of such
acceptance by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by him must
make sure that the waiver is in the prescribed form, duly notarized,
and executed by the taxpayer or his duly authorized representative.
(Ibid.)
Thus, neither implied consent can be presumed nor can it be
contended that the waiver required under the Tax Code is one which
is unilateral nor can it be said that concurrence to such an agreement
is a mere formality because it is the very signatures of both the CIR
and the taxpayer which give birth to such a valid agreement.
(Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 115712, February 25,
1999)
f. Both the date of execution by the taxpayer and date of
acceptance by the Bureau should be before the expiration of the
period of prescription or before the lapse of the period agreed upon in
case a subsequent agreement is executed. (Commissioner of Internal
Revenue v. Systems Technology Institute, Inc., G.R. No. 220835, July 26, 2017)
g. The waiver must be executed in three copies, the original
copy to be attached to the docket of the case, the second copy for the
taxpayer and the third copy for the Office accepting the waiver. The
fact of receipt by the taxpayer of his/her file copy must be indicated in
the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement. (Ibid.)

*
5. What should the BIR do when the prescriptive
period for the assessment of a tax deficiency is about to
prescribe but the taxpayer has not yet complied with the
BIR requirements for the production of books of accounts
and other records to substantiate the claimed deductions,
exemptions or credits?
SUGGESTED ANSWER: The BIR should issue a jeopardy
assessment coupled with a letter of demand.
When as in this case the BIR has reason to believe that the
assessment and collection of a deficiency tax will be jeopardized by
delay because of the taxpayer’s failure to comply with the audit and
investigation requirements to present his books of accounts and/or
pertinent records, or to substantiate all or any of the deductions,
exemptions, or credits claimed in his return.

**
6. “X” Corporation filed its income tax returns in
January, 2016 for its income for the year 2015. In October,

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2018, March, 2019 and May, 2019, “X” through its
authorized representative signed three (3) separate waivers
of the “Statute of Limitations under the NIRC.” The waivers
were not signed by the BIR Commissioner or his agents.
In 2021, the BIR issued letters of demand,
accompanied by assessment notices asking the
corporation to pay the deficiency internal revenue taxes for
its income for the year 2015. “X” disputed the assessment
and requested a reinvestigation. The BIR Commissioner
denied the protest. “X” appealed to the Court of Tax
Appeals on the ground of prescription.
Has the BIR’s right to assess already prescribed ?
SUGGESTED ANSWER: Yes. The BIR’s right to assess has
already prescribed. The waivers being unilateral in character are not
valid waivers. (Commissioner of Internal Revenue v. Court of Appeals, G.R. No.
115712, February 25, 1999)
The waivers are invalid because they were not signed by the
BIR Commissioner or his agents. Furthermore, there is no showing in
the problem that the waivers (1) were executed with the notarized
written authority of the taxpayer's representative to sign the waiver on
its behalf; (2) indication of the date of acceptance; and (3) the fact of
receipt by the taxpayer of its file copy was indicated in the original
copies of the waivers.” (Commissioner of Internal Revenue v. Systems
Technology Institute, Inc., G.R. No. 220835, July 26, 2017)
Clearly, the defects in the waivers resulted to the non-extension
of the period to assess or collect taxes, and made the assessments
issued by the BIR beyond the three-year prescriptive period void.
[Commissioner of Internal Revenue v. Kudos Metal Corporation 634 Phil. 314 (2010)]

*
7. “X”, a taxpayer, received his notice of
assessment from the BIR on May 5, 2013 requiring him to
pay a deficiency tax of P50,000.00 within thirty 30 days
from notice. On May 28, 2014 “X” ask for and was granted
a reinvestigation. The reinvestigation was terminated on
June 18, 2020, with the Commissioner of Internal Revenue
maintaining the original assessment of P10,000.00. Having
defaulted in payment “X” was sued, today April 26, 2021 in
the Court (RTC) of Pangasinan for the collection of the
deficiency tax. “X” pleads prescription. Will the
government suit prosper? Reasons. (1976, amount and dates
supplied)
SUGGESTED ANSWER: No. The RTC of Pangasinan has no
jurisdiction to entertain the case considering that the amount of the tax

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is only P50,000.00. Since the RTC is outside Metro Manila, it would
have jurisdiction only if the basic tax is P300,000.00 or over but does
not reach P1 million.

***
8. Mr. Dimagiba inherited from his father, who
died on June 10, 2014, several pieces of real property in
Batangas province. The estate tax return was filed and the
estate tax due in the amount of P250,000.00 was paid on
December 06, 2014. The Tax Fraud Division of the BIR
investigated the case on the basis of confidential
information given by Mr. Dimaano on January 06, 2018 that
the return filed by Mr. Dimagiba was fraudulent and that he
failed to declare all properties left by his father with intent
to evade payment of the correct tax. As a result, a
deficiency estate tax assessment for P1,250,000.00,
inclusive of 50% surcharge for fraud, interest and penalty,
was issued against him on January 10, 2021. Mr. Dimagiba
protested the assessment on the ground of prescription.
Decide Mr. Dimagiba’s protest.
SUGGESTED ANSWER: Denied. The return filed on
December 6, 2014 was a false and fraudulent return. This is evident
from the fact as shown in the problem that a fraud surcharge was
imposed. Since the fraud was discovered only on January 06, 2018,
the BIR has a period of ten (10) years from said discovery or until
January 07, 2029 within which to assess. Thus, the assessment
notice that was issued on January 10, 2021 was issued within the
prescriptive period.
NOTE NOT PART OF THE ANSWER: If confronted with a similar problem,
check if there is imposed a fraud penalty. If there is none, then the appropriate
prescriptive period is three (3) years from the time the return was filed or should have
been filed whichever is later. This is so because the BIR itself recognized that the
return is not false or fraudulent, when it did not impose the fraud surcharge

***
9. On April 14, 2018, Mr. Castor de Castro filed
his income tax returns for 2017 and paid the income tax
due per return. After investigation, the Regional Revenue
Director having jurisdiction of the case, issued a letter of
assessment on April 5, 2018, which was released, mailed
and received by Mr. de Castro on the same day. On March
31, 2021, a Warrant of Distraint and Levy to enforce
collection of the assessment was served on Mr. de Castro
who protested such action of the revenue official, alleging

185
that the assessment is not valid because more than 3 years
had elapsed from April 5, 2018, the date when he received
the assessment in question and therefore, the right of the
government to assess the deficiency income tax of
P30,000.00 had already prescribed, pursuant to Section 203
of the Revenue Code. Is the contention of Mr. de Castro
tenable?
SUGGESTED ANSWER: No. The reckoning point for
the tolling of the prescriptive period of three (3) years for the
assessment of the tax is the date of filing the income tax return or the
date when the return should have been filed whichever is the later of
the two.
Since the return for 2017 was filed on April 14, 2018, then the
government has three (3) years from April 15, 2018 or until April 16,
2021 within which to make an assessment.
The assessment issued on April 5, 2021 was seasonably
made because it was within the aforesaid three (3) year period.

***10. Mangyan Co., a Philippine corporation filed

its 2017 Income Tax Return (ITR) on April 15, 2018 showing
a net loss. Since there was no tax investigation being
conducted by the BIR, on November 10, 2018, Mangyan
Co., amended its 2019 ITR to show more losses. After a tax
investigation, the BIR disallowed certain deductions
claimed by Mangyan Co., putting it, in a net income
position. As a result, on August 5, 2021, the BIR issued a
deficiency income assessment against Mangyan Co. It
protested the assessment on the ground of prescription.
Decide.
SUGGESTED ANSWER: Mangyan Co.’s protest should be
denied.
The right of the BIR to issue an assessment has not yet
prescribed. Since the return was amended, the three year prescriptive
period started to run on November 10, 2018, the date when the
amended return was filed. This is so because there is no showing in
the problem that A Co. is subject to tax investigation, so it could still
amend its tax return. The BIR has up to November 11, 2021 within
which to issue the assessment notice. Thus, the issuance of the
assessment on August 5, 2021 was within the three (3) year
prescriptive period.

186
 *** 11. DOMINIC Corporation filed its quarterly
income tax return for the first quarter of 2019 and paid an
income tax of P500,000.00 on May 15, 2019. In the
subsequent quarters, DOMINIC suffered losses so that on
April 15, 2020 it declared a net loss of P1,000,000.00 in its
annual income tax return. After failing to get a refund,
DOMINIC filed on June 1, 2021 a case with the Court of Tax
Appeals to recover the P500,000.00 in taxes paid on May
15, 2019.
Is the action to recover the taxes filed timely ?
SUGGESTED ANSWER: Yes. DOMINIC Corporation is
deemed to have paid the P500,000.00 as of April 15, 2020 and not as
of May 15, 2019, the actual payment.
This is so, because a corporation is considered to be paying its
tax as of the end of the taxable year inasmuch as the quarterly
payments are considered only as installments.
Consequently , the prescriptive period of two years from the
payment of the tax should start to run on April 15, 2020. Since the
Court of Tax Appeals case was filed on June 1, 2021, it was filed
within the prescriptive period.

***12. XYZ Corporation files its income tax return

on a calendar year basis.
For the first quarter of 2019, It paid on 30 May 2019 its
quarterly income tax in the amount of P3.0 million. On 20
August 2019, it paid the second quarterly income tax in
the amount of P5.0 million. The third quarter resulted in a
net loss, and no tax was paid. For the fourth and final
return for 2019 the company reported a net loss for the
year, and the taxpayer indicated in the income tax return
that it opted to claim a refund of the quarterly income tax
payments.
On 10 January 2020, the corporation filed with the
Bureau of internal Revenue a written claim for the refund of
P3.5 million.
BIR failed to act on the claim for refund; hence, on 02
March 2021, the corporation filed a petition for review with
the Court of Tax Appeals on its claim for refund of the
overpayment of its 2019 quarterly income tax. BIR, in its
answer to the petition, alleged that the claim for refund was
filed beyond the reglementary period.

187
 Did the claim for refund prescribe ?
SUGGESTED ANSWER: No. The tax is considered as having
been paid on 10 January 2020, the date when the income tax return
was filed. The income tax return was deemed filed on 10 January
2020, the date when the written claim for refund was made because
the written claim for refund is made by ticking the appropriate box in
the income tax return.
Thus, it has a period of two years from that date or until 11
January 2022 within which to file its petition with the Court of Tax
Appeals. The petition filed on 02 March 2021 was seasonably filed.

***13. WEBGAMES Corporation is a wholly

owned subsidiary of WEBGAMES, Inc., California USA.
Starting December 15, 2018, WEBGAMES Corporation paid
annual royalties to WEBGAMES, Inc., for the use of the
latter’s software, for which the former, as withholding
agent of the government, withheld and remitted to the BIR
the 15% final tax based on the gross royalty payments.
The withholding tax return was filed and the tax remitted to
the BIR on January 10, of the following year. On April 10,
2021, WEBGAMES Corporation filed a written claim for tax
credit with the BIR, arising from erroneously paid income
taxes covering the years 2018 and 2019. The following day,
WEBGAMES Corporation filed a petition for review with the
Court of Tax Appeals involving the tax credit claim for 2018
and 2019.
As a lawyer handling the case, would you raise the
defense of prescription in your answer to the claim for tax
credit ? Explain.
SUGGESTED ANSWER: Yes.
A claim for the refund of withholding taxes should be filed within
th
two years computed from the 25 day after the close of each calendar
quarter. Since the 2018 royalties were withheld and remitted on
January 10, 2019, the two prescriptive period should be counted from
th
the 25 day of the close of the quarter or 25 days from March 31,
2019 or until April 1, 2021.
Since the claim for tax credit was filed only on April 10, 2021
and the petition for review only on April 11, 2021, then prescription
has set in for the tax withheld and remitted on January 10, 2019.

***14. May the collection of taxes be barred by

prescription ? Explain your answer.

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 SUGGESTED ANSWER: Yes. The collection of taxes may be
barred by prescription.
The prescriptive period for collecting internal revenue taxes is
three (3) years from the issuance of an assessment notice.
Where the return is false or fraudulent, or no return was filed,
the deficiency taxes may be collected even without an assessment
within ten (10) years from discovery of the falsity, fraud or failure to file
the tax return.
If there is an assessment made upon a false or fraudulent
return, or no return was filed, then the prescriptive period is five (5)
years from issuance of an assessment notice. This is the same period
for the payment of an assessment issued within the period agreed
upon between the BIR and the taxpayer.
Collection of taxes undertaken by the BIR beyond the periods
above stated would be barred by prescription.

***15. In connection with the income tax return for

2014 filed by Darylle , an assessment was made in January
2020. Darylle asked for a reinvestigation, which was
granted. After reinvestigation, another assessment was
made by the Commissioner of Internal Revenue on June 1,
2020. Has the period of collection of the income tax due
from Darylle for the year 2014 expired ? Explain your
answer.
SUGGESTED ANSWER: Yes. The period of collection of the
income due from Darylle for the year 2014 has expired.
The Bureau of Internal Revenue has a period of three (3) years
from the filing of the income tax return, or when it should have been
filed to make an assessment.
The income tax return was for the 2014 income so it should
have been filed not later than April 15, 2015. Since, there is no
showing that the return filed by Darylle was made beyond April
15, 2015 and that there exists fraud, then the BIR has only up to
April 16, 2018 within which to make the assessment. The assessment
made in January 2020 was therefore made out of time. Taxes could
not be collected on a prescribed assessment.
NOTE NOT PART OF THE ANSWER: The examinee should be
careful in answering problems similar to the above problem which lack factual
basis. There was no showing when the return was filed, neither was there a
showing whether the return was fraudulent. Finally, the question refers to
collection, not assessment. Assumptions should be made upon which your
answer should be based.

189
 ** 16. In January 2017, additional taxes as due and
payable in the sum of P50,000.00 and P25,000.00 were
assessed Annie and Bian, respectively. In March 2019,
Annie requested that he be furnished a copy of the detailed
computation of his alleged tax liability, while Bian moved
for a reinvestigation which was granted by the
Commissioner. The reinvestigation of Bian was terminated
in January 2020, reiterating the assessment of P25,000.00
of which Bian was duly informed. In January 2020, Annie
was finally furnished with the details requested for. In
2021, the government levied on the properties of Annie and
Bian to answer for their tax liabilities mentioned above.
Was the levy on the properties of Annie and Bian valid and
proper ? Discuss.
SUGGESTED ANSWER: No. The levy on the properties
of Annie and Bian was not proper because the right of the
government to collect was already lost through prescription.
In March 2019 when Annie requested for a copy of the
detailed computation and Bian moved for a reinvestigation, the
January 2017 assessment was already final and collectible.
This is so, because Annie and Bian did not seasonably
dispute the assessment within 30 days from receipt. Even if
there is no showing of the date when Annie and Bian received
the assessments in January 2017, it could be presumed as
having been furnished by the BIR to them within a reasonable
period of time from January 2017.
In view of the foregoing, the government has a
period of only three (3) years from the time the assessment
notice was issued in January, 2017. This is so because there is
no showing that the return filed was false or fraudulent, or that
there is a waiver of the prescriptive period by either Annie or
Bian. Presupposing that the assessment became final in
February 2017 for failure on the part of Annie and Bian to
seasonably dispute the same, then the government had only
three (3) years from in January, 2017 up to February, 2020
within which to collect.
Since the government was collecting through levy in
2021, then it has lost its right to do so because of prescription.
The levy was therefore not valid and is improper.
NOTE NOT PART OF THE ANSWER: This is another vague
question. The answer was dependent on a lot of assumptions because there

190
was no showing when Annie and Bian actually received the assessment
notice.
17. What is the prescriptive period for violations of
the penal provisions of the Tax Code ?
SUGGESTED ANSWER: All violations of any provision of Tax
Code shall prescribe after five (5) years. (NIRC of 1997, Sec. 281, 1st par.)
a. When does the prescriptive period start to run ?
SUGGESTED ANSWER: Prescription shall begin to run from
the day of the commission of the violation of the law, and if the same
be not known at the time, from the discovery thereof and the institution
of judicial proceedings for its investigation and punishment. (NIRC of
1997, Sec. 281, 2nd par.)
b. When is an offense considered as discovered ?
SUGGESTED ANSWER: An offense under the Tax Code is
considered discovered only after the manner of commission and the
nature and extent of fraud has been definitely ascertained. (RMC No.
101-90)
This occurs when the BIR renders its final decision and requires
the taxpayer to pay the deficiency tax.
c. When is the prescriptive period interrupted ?
SUGGESTED ANSWER: The prescription shall be interrupted
when proceedings are instituted against the guilty persons and shall
begin to run again if the proceedings are dismissed for reasons not
constituting jeopardy. (NIRC of 1997, Sec. 281, 3rd par.)
“The institution of the criminal action shall interrupt the running
of the period of prescription.” (RRCTA, Rule 9, Sec. 2, 2nd par.)
d. When does prescription not run ?
SUGGESTED ANSWER: The term of prescription shall not run
when the offender is absent from the Philippines. (NIRC of 1997, Sec. 281,
3rd par.)

REMEDIES AGAINST ASSESSMENT NOTICES

***Outline of the Taxpayer’s and Government’s

Administrative and Judicial Remedies Relative to
Assessments of Internal Revenue Taxes.
SUGGESTED ANSWER: Procedural due process in tax
assessment is met if the following outline is observed:
DISPUTED ASSESSMENT
1. Revenue District Officer (RDO) or a higher BIR
authorized officer. Issues a Letter of Authority (LA)
authorizing the examiner to inspect the taxpayer’s books of
accounts, other accounting records, and documents that may
be pertinent in determining whether the taxpayer has paid the

191
correct taxes and has complied with all the requirements for
recording financial transactions, keeping books of accounting,
and others promulgated by the Bureau of Internal Revenue to
ensure determination of the correct taxes due from the
taxpayer.
The examination should be made within the
reglementary period for the issuance of an assessment notice.
2. Revenue Officer
a) Audits or examines the taxpayer’s records.
b) Issues a Notice of informal Conference to
the taxpayer in order to discuss the Examiner’s findings.
c) States in his report whether or not there
are violations of the compliance requirements, whether
there are tax deficiencies, the deficiency taxes, fines and
penalties due from the taxpayer. The report shall also
state whether the taxpayer agrees with his findings that
the taxpayer is liable for deficiency taxes, fines and
penalties.
1) If the taxpayer agrees, he pays the
tax.
2) If the taxpayer does not agree with
the Revenue Officer’s submitted report of
investigation, he does not pay.
3. Assessment Division (Revenue Regional
Office) or Commissioner of Internal Revenue or his duly
authorized representative.
a) Reviews and evaluates the finding of the
Revenue Officer.
1) If he finds no sufficient basis, the
case is dismissed.
2) Determines that there exists sufficient
basis to assess the taxpayer for any deficiency
tax, fines and penalties,
3) Issues to the taxpayer, at least by
registered mail, a Preliminary Assessment Notice
(PAN) for the proposed assessment (NIRC of 1997,
Sec. 228; Rev. Regs. 12-99, Sec. 3.1.2) unless the case
within the exceptions where there is no need to
issue a PAN in which case there is immediately
issued a formal letter of demand (FLD) and a final
assessment notice (FAN).
4) Taxpayer responds within fifteen (15)
days from receipt of the PAN why no taxes, fines
and penalties should be assessed against him.

192
 5) If the taxpayer fails to respond within
fifteen (15) days from date of receipt of the PAN, he
shall be considered in default. (Rev. Regs. 12-99, Sec.
3.1.2)
b) If the Commissioner accepts the taxpayer's
explanations to the PAN, then the proceedings are ended,
and the case is closed.
c) If the taxpayer’s response is not
acceptable or he is in default because of failure to respond
to the PAN, or there is no need to issue a PAN, then a
formal letter of demand (FLD) and a final assessment
notice (FAN) shall cause to be issued by the
Commissioner or his duly authorized representative calling
for payment of the taxpayer’s deficiency tax liability,
inclusive of the applicable penalties. (Rev. Regs. 12-99, Secs.
3.1.2, 3.1.4)
4. Taxpayer
a) Does not do anything within thirty (30) days from
receipt of the FLD/FAN
1) the assessment becomes final, executory,
demandable and not appealable to the Court of Tax
Appeals (Rev. Regs. 12-99, Sec. 3.1.5, 4th par.); and
2) the BIR could avail of its administrative or
judicial remedies to collect the tax.
b) Administratively protests or disputes the
assessment by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the notice
of assessment. (NIRC of 1997, Sec. 228, 4th par.; Rev. Regs. 12-99, Sec.
3.1.5, 1st par.)
1) Within sixty (60) from filing of the protest
(request for reinvestigation), all relevant supporting
documents shall be submitted. (Ibid.)
2) If the documents are not seasonably
submitted, the assessment shall become final, executory,
demandable, not appealable to the Court of Tax Appeals
(Ibid.), and the BIR could avail of its administrative or
judicial remedies to collect the tax.
5. Commissioner acts on the administrative protest
(request for reinvestigation) within one hundred eighty (180) days from
receipt of the relevant supporting documents. If the protest is a
request for reconsideration, the Commissioner acts on the same
within one hundred eighty (180) days from filing of the request for
reconsideration.
a) The BIR Commissioner grants the protest (request
for reinvestigation or request for reconsideration), the case is
dismissed.

193
 b) The BIR Commissioner denies the administrative
protest (request for reinvestigation or request for
reconsideration) or dispute, or
c) The BIR Commissioner does not act on the
administrative protest (request for reinvestigation within 180
days from submission of the complete supporting documents or
if it’s a request for reconsideration within 180 days from filing of
the protest) or dispute.
6. Taxpayer
a) Receives the BIR Commissioner's denial of his
administrative protest (whether request for reinvestigation or
reconsideration) or dispute
1) within thirty (30) days from receipt of the
denial, appeals the decision of the BIR Commissioner to
the Court of Tax Appeals in division by means of a
petition for review coupled with a motion for the
issuance of an order suspending the collection of the tax
pending resolution of the petition.
2) If the taxpayer does not seasonably
interpose an appeal, the decision of the BIR
Commissioner denying his administrative protest
(whether request for reinvestigation or request for
reconsideration), or dispute, the assessment becomes
final, executory, demandable (Rev. Regs. 12-99, Sec. 3.1.5, 5th
par.), and not anymore appealable to the Court of Tax
Appeals. The BIR could then avail of its administrative or
judicial remedies to collect the tax.
3) A denial by the Commissioner’s duly
authorized representative may be elevated to the
Commissioner within thirty (30) days from receipt of the
final decision by the representative.
b) Learns of the inaction by the BIR Commissioner
or his duly authorized representative on his administrative
protest or dispute within 180 days from submission of the
required documents to support the dispute (if a request for
reinvestigation) of within 180 days from filing of the request for
reconsideration;
1) Within thirty (30) days from the lapse of 180
days from the taxpayer's submission of all the relevant
supporting documents (if a request for reinvestigation) or
from the lapse of 180 days from filing of the request for
reconsideration,
(a) must interpose an appeal to the Court
of Tax Appeals division by means of a petition for
review coupled with a motion for the issuance of an

194
 order suspending the collection of the pending the
resolution of the petition. Otherwise, the
assessment shall become final, executory, and
demandable (Rev. Regs. 12-99, Sec. 3.1.5, 7th par; Rep. Act
No.1125, Sec. 7, as amended by Rep. Act No.9282), and not
appealable to the Court of Tax Appeals. The BIR
could then avail of its administrative or judicial
remedies to collect the tax.
(b) If the Commssioner does not act
within the 180 period described above, the taxpayer
may decide to wait for a denial by the BIR and
when the denial is received, the taxpayer would
have thirty (30) days from receipt of the denial
within which to appeal to the Court of Tax Appeals
division. Failing to so appeal, the denial would
attain a state of finality and the BIR could then avail
of its administrative or judicial remedies to collect
the tax.
7. The Court of Tax Appeals
a) The Court of Tax Appeals division has a
period of twelve (12) months from the time the case is
submitted for decision within which to decide. (Rep. Act No.
1125, Sec. 13, as amended by Rep. Act. No. 9282)
b) The CTA division grants the petition or
reverses the decision of the BIR Commissioner in which
case the Commissioner may, within fifteen (15) days
from receipt, files a motion for reconsideration or new
trial with the same division. If the BIR does not do
anything, the grant of the petition results to dismissal of
the case against the taxpayer.
c) The CTA division dismisses the petition or
affirms the decision of the BIR Commissioner in which
case the taxpayer may, within fifteen (15) days from
receipt, files a motion for reconsideration or new trial
with the same division. If the taxpayer does not do
anything, the dismissal of the petition results to a case
against the taxpayer attaining a state of finality and BIR
could now resort to its administrative or judicial remedies
to collect the tax.
d) The party adversely affected by the decision
of a Division of the Court of Tax Appeals may file one
motion for reconsideration or new trial with the same
division. A denial of the motion for reconsideration or new
trial may be the subject of a petition for review filed with
the Court of Tax Appeals, en banc.

195
 If the decision of the CTA division is not
seasonably questioned by the party adversely affected by
the decision of the Court of Tax Appeals, the decision
lapses into finality. The assessment then becomes final,
executory and demandable or of no force and effect
depending upon the nature of Court of Tax Appeals
division’s decision.
e) The Court of Tax Appeals division may
grant or deny the motion for reconsideration or new trial.
f) The party adversely affected by the
decision of the Court of Tax Appeals division on the
motion for reconsideration or new trial has a period of
fifteen (15) days from receipt within which to interpose a
petition for review with Court of Tax Appeals en banc.
The party adversely affected by the decision of the
Court of Tax Appeals en banc, may then file a verified
petition for review on certiorari with the Supreme Court.
The petition shall be filed and served, with full
payment of the docket and other lawful fees and the
deposit for costs within fifteen (15) days from receipt of
the adverse judgment. Before the expiration of the
reglementary period, the Supreme Court may for
justifiable reasons grant an extension of thirty (30) days
only within which to file the petition. (ROC, Rule 45, Sec. 2)
8. The Supreme Court
a) Grants the petition and reverses the
decision of the Court of Tax Appeals, or
b) Dismisses the petition or affirms the
decision of the Court of Tax Appeals.
c) A motion for reconsideration may be
posed after which the Supreme Court decision becomes
final.
UNDISPUTED ASSESSMENT
1. The Commissioner of Internal Revenue files
an ordinary action for the collection of the tax before a regular
trial court or the CTA), depending upon the jurisdictional
amount.
2. Court that has jurisdiction.
a) Municipal or Metropolitan Trial Court. If
the basic amount of the tax to be collected (except
interests, and surcharges) is P300,000.00 or less, then
the case should be filed before the proper Municipal or
Metropolitan Trial Court outside of Metropolitan Manila or
if the court is in Metropolitan Manila area, then the

196
 jurisdictional amount is P400,000.00 or less. (The Rule on
Summary Procedure may find application)
1) The decision of the Municipal or
Metropolitan Trial Court shall be the subject of a
notice of appeal directed to the Regional Trial
Court.
2) The decision of the Regional Trial
Court in aid of its appellate jurisdiction shall be the
subject of a petition for review directed to the
Court of Tax Appeals, en banc.
3) The decision of the CTA en banc is
the subject of a motion for reconsideration or new
trial after which the matter is elevated to the
Supreme Court on a pure question of law on a
petition for review on certiorari under Rule 45.
b) Regional Trial Court. If the basic
amount of the tax to be collected (except interests,
and surcharges) is more than P300,000.00 but
less than P1,000,000.00, the case should be filed
before the proper Regional Trial Court outside of
Metropolitan Manila or if the court is in
Metropolitan Manila area, then the jurisdictional
amount is P400,000.00 or more but less than
P1,000,000.00.
1) The decision of the Regional
Trial Court shall be the subject of one
motion for reconsideration or new trial,
thence of a petition for review directed to a
Court of Tax Appeals division.
2) The decision of the Court of
Tax Appeals division shall be the subject of
a motion for reconsideration or motion for
new trial directed to the same Court of Tax
Appeals division that rendered the decision.
3) The resolution of the CTA
division on the subject of a motion for
reconsideration or new trial is the subject of
a petition for review directed to the Court of
Tax Appeals en banc after which the matter
is elevated to the Supreme Court on a pure
question of law on a petition for review on
certiorari under Rule 45.
Author’s Observation. The above process should be mastered
because it is a rich source of Bar problems.

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 ***
1. What remedies are available to a taxpayer
who considers himself aggrieved in connection with the
assessment and collection of internal revenue taxes ?
SUGGESTED ANSWER: When the taxpayer receives a
preliminary assessment notice he must, within fifteen (15) days from
receipt of the same reply to the Bureau of Internal Revenue explaining
why he should not be the subject of a final letter of demand and a final
assessment notice.
If the reply is not accepted by the Bureau of Internal Revenue,
the taxpayer receives a final letter of demand and a final assessment
notice for deficiency taxes, he must protest the same, either through a
motion for reconsideration or reinvestigation, within a period of thirty
(30) days from receipt of such notice.
If the taxpayer files a motion for reconsideration, there is no need
for him to submit supporting documents. However, if he files a motion
for reinvestigation, he must within a period of sixty (60) days from filing
of the protest, submit the complete supporting documents. If he does
not comply with this requirement, the taxpayer would be considered as
not having filed the protest and the BIR could then collect the tax
using its administrative or judicial remedies.
If the taxpayer fails to file a protest the assessment becomes
final, executory and collectible. It could not be the subject of an
appeal and the BIR could then collect the tax using its administrative
or judicial remedies.
If the BIR denies the taxpayer’s protest, or if the BIR does not
resolve the protest within a period of 180 days from submission of the
motion for reconsideration or in the case of a motion for
reinvestigation, within a period of 180 days from submission of the
complete supporting documents, then the taxpayer has a period of
thirty (30) days from receipt of the denial, or expiration of the 180 day
period, within which to appeal to the Court of Tax Appeals division by
filing a petition for review under Rule 42 of the Rules of Court, with an
application for the issuance of an order suspending the collection of
the tax.
If the Commissioner has not acted upon the protest despite the
expiration of the 180 day period the taxpayer has the option to wait for
the decision of the Commissioner after which the taxpayer has a
period of thirty (30) days from receipt of the decision within which to
appeal to the Court of Tax Appeals division by filing a petition for
review under Rule 42 of the Rules of Court, with an application for the
issuance of an order suspending the collection of the tax.
If the taxpayer fails to file a petition for review under Rule 42 of
the Rules of Court with the Court of Tax Appeals division within thirty
(30) days from receipt of the denial of the protest (dispute) of the final

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letter of demand (FLD) and the final assessment notice (FAN), the
same shall become final, executory and demandable. (Rev. Regs. No.
12-99, Sec. 3.1.4, 9th par., as amended by Rev. Regs. No. 18-2013)
The Bureau of Internal Revenue could then utilize its
administrative or judicial remedies for collecting the tax.
If the Division’s decision is unfavorable to the taxpayer, he
could then file a motion for reconsideration or new trial with the
Division within 15 days from notice. The Division’s unfavorable action
on the motion for new trial or reconsideration may be the subject of a
petition for review under Rule 43 of the Rules of Court filed within
fifteen (15) days with the Court of Tax Appeals en banc. The adverse
decision or ruling of the Court of Tax Appeals en banc is appealable to
the Supreme Court through a verified petition for review on certiorari
under Rule 45 of the Rules of Court within a period of 15 days from
receipt of the Court of Tax Appeals’ adverse decision, which period is
extendible for 30 days.
If the assessment notice has become final, executory and
collectible and the BIR files a collection suit in court, the taxpayer may
use affirmative defenses such as prescription, res judicata, payment,
etc. but not the negative defenses which are deemed waived for
failure to raise the same in the administrative proceedings. Estoppel
could not be raised as a defense because the government is not
estopped by the acts of its agents.
Whether the BIR intends to collect the taxes judicially or
administratively, the taxpayer may try to enter into a compromise in
order to obtain a reduction of the taxes being demanded.

*
2. The BIR issued in 2021 a final assessment
notice and demand letter against Lebmo Corporation
covering deficiency income tax for the year 2020 in the
amount of P10 Million. Lebmo Corporation earlier
requested the advice of a lawyer on whether or not it
should file a request for reconsideration or a request for
reinvestigation. The lawyer said it does not matter whether
the protest filed against the assessment is a request for
reconsideration or a request for reinvestigation, because it
has the same consequences or implications.
a. What are the differences between a request for
reconsideration and a request for reinvestigation ?
SUGGESTED ANSWER: The differences between a request
for reconsideration as a mode of protest and a request for
reinvestigation also as a mode of protest are the following:

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 1) A request for reconsideration does not suspend the
running of the prescriptive period for collection of taxes while a
request for reinvestigation suspends the running of the prescriptive
period.
2) A request for reconsideration does not require the
presentation of newly discovered or additional evidence while a
request for reinvestigation requires it.
3) The period of 60 days for submission of the relevant
supporting documents does not find application to a request for
reconsideration while such period is applied to a request for
reinvestigation.
4) The failure of the Commissioner of Internal Revenue to
act on the request for reconsideration after a period of 180 days from
the filing thereof authorizes the taxpayer to file a petition for review
with the Court of Tax Appeals within a period of thirty (30) days from
the expiration of such 180 day period while for a request for
reinvestigation, the period is the expiration of the 180 day period from
the submission of the complete supporting documents.
b. Do you agree with the advice of the lawyer?
Explain your answer.
SUGGESTED ANSWER: No, in view of the foregoing
differences between a request for reconsideration and a request for
reinvestigation.

**3. On July 31, 2021, Esperanza received a

preliminary assessment notice (PAN) from the BIR
demanding that she pays P180,000.00 deficiency income
taxes on her 2019 income. How many days from July 31,
2021 should Esperanza respond to the notice ?
SUGGESTED ANSWER: 15 days from receipt of the PAN or
July 31, 2021 or until August 15, 2021.
What is the effect of the failure to respond ?
SUGGESTED ANSWER: If Esperanza fails to respond within
fifteen (15) days from date of receipt of the PAN, she shall be
considered in default, in which case, a Final Assessment Notice
(FAN) coupled with a Formal Letter of Demand (FLD) shall be issued
calling for payment of her deficiency tax liability, inclusive of the
applicable penalties. (Rev. Regs. No. 12-99, Sec. 3.1.1 2nd par., as amended by
Rev. Regs. No. 18-2013)

**
4. A taxpayer received on 15 January 2021, an
assessment for an internal revenue tax deficiency. the
taxpayer instead of questioning the assessment he

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received on 15 January 2021, paid on 01 March 2021, the
“deficiency tax” assessed. The taxpayer requested a
refund from the Commissioner by submitting a written
claim on 01 March 2021. It was denied. The taxpayer, on
15 March 2021, filed a petition for review with the Court of
Tax Appeals. Could the petition still be entertained ?
SUGGESTED ANSWER: No. The petition could not be
entertained anymore.
When the taxpayer paid the tax assessed on 01 March 2021,
the assessment he received on 15 January 2021 has already attained
a state of finality for failure to seasonably protest the same within a
period of thirty (30) days from receipt of the assessment notice.
An assessment that has already become final, executory and
demandable for failure to appeal the same within the reglementary
period of thirty (30) days from receipt of the assessment notice, could
not be paid, apply for a refund and then if denied appeal the denial to
the Tax Court. The Tax Court can no longer amend, modify, much
less set aside such final assessment. (Adez Realty v. Inc. v. Court of Appeals,
212 SCRA 623)
The taxpayer would be doing indirectly, what he could not do
directly, that is open an assessment that has become final.
This would be disadvantageous to the government and be
violative of the life blood doctrine because the reopening might result
to lower taxes or at the very least, results to delay in collection of
taxes upon which the government depends for the continued
performance of its functions.
On the other hand, a reopening that would result to increasing
the tax would violate the taxpayer’s right to due process.

***5. Mr. Roderick Relleve, a taxpayer, received an

assessment notice from the BIR on February 9, 2021. The
following day, he filed a protest, in the form of a request for
reinvestigation, against the assessment and submitted all
relevant documents in support of the protest. On
September 11, 2021, Mr. Relleve, apprehensive because he
had not yet received notice of a decision by the
Commissioner on his protest, sought your advice.
What remedy or remedies are available to the
taxpayer ?
SUGGESTED ANSWER: The remaining remedy available to
Mr. Relleve is to wait for the decision of the Commissioner on the
protest he filed. If his protest is denied, he would have a period of

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thirty (30) days from receipt of the denial within which to interpose a
petition for review with the Court of Tax Appeals Division.
The Commissioner has a period of 180 days from the
submission of the relevant documents on February 10, 2021 or until
August 11, 2021, after which Mr. Relleve has the option of either filing
a petition for review with the Court of Tax Appeals within a period of
30 days from the expiration of the 180 day period or until September
9, 2021 or he could choose to wait for the decision on the protest. In
case of a denial of Mr. Relleve’s protest, he may file the petition for
review with the Court of Tax Appeals within a period of thirty (30) days
from receipt of the decision. (Rev. Regs. No. 12-99, Sec. 3.1.4, 8th par. as
amended by Rev. Regs. No. 18-2013)
The 180-day period lapsed on August 11, 2021, thus Mr.
Relleve has only 30 days from August 11, 2021, or until September 9,
2018 within which to file a petition for review with the Court of Tax
Appeals in divisions. Since, it is already September 11, 2021, then
Mr. Relleve could not anymore avail of the remedy of appeal.
He has to await the decision of the Commissioner on his protest
before he could appeal to the Court of Tax Appeals, in divisions.
*
5. In February 2021, pursuant to a Letter of
Authority (LOA) issued by the Regional Director, Mr. “A”
was assessed deficiency income taxes by the BIR for the
year 2020. He paid the deficiency. In the August 2021, Mr.
Abcede received another LOA for the same year 2020, this
time from the National Investigation Division, on the
ground that Mr. “A”’s 2020 return was fraudulent.
Mr. “A” contested the LA on the ground that he can
only be investigated once in a taxable year. Decide.
SUGGESTED ANSWER: Mr. “A” is not correct.
For income tax purposes, the examination and inspection of Mr.
“A’s tax records shall be made only once in a taxable year, except in
case of fraud as determined by the Commissioner. (NIRC of 1997, Sec.
235, 1st par.)
Mr. “A”’s 2020 return was fraudulent hence, it could be the
subject of another investigation.
a. Aside from fraud, are there any other instances
when the books of accounts and accounting records shall
be subject to examination and inspection for income tax
purposes may be made by internal revenue officers more
thanonce in a taxable year ? Discuss.
SUGGESTED ANSWER: Yes, in the following instances:
1) The taxpayer requests for reinvestigation.

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 2) Verification of compliance with withholding tax laws and
regulations.
3) Verification of capital gains tax liabilities. and
4) In the exercise of the Commissioner's power to obtain
information from other persons in which case, another or separate
examination and inspection may be made. (NIRC of 1997, Sec. 235, 1st par.,
arrangement, paraphrasing, and numbering supplied)

*
6. What methods may be utilized by the
Commissioner of Internal Revenue to determine the correct
taxable income of the taxpayer if the latter’s record or
methods of accounting are not reflective of his true income
?
SUGGESTED ANSWER: Where the records or methods of
accounting of the taxpayer does not reflect his correct taxable income,
the Commissioner of Internal Revenue is allowed to use reasonable
methods in determining the income. The reasonable methods are
referred to as the “Constructive Methods of Income Determination”
(also known as the “Indirect Methods of Income Determination”), or
the “Best Evidence Obtainable Rules”.
Some of the specific methods under the “Constructive Methods
of Income Determination” (also known as the “Indirect Methods of
Income Determination”), or the “Best Evidence Obtainable Rules”
may include the following:
a. Net worth method. The net worth method of determining
income is a method of reconstructing income which is based on the
theory that if the taxpayer’s net worth has increased in a given year in
an amount larger than his reported income, he has understated his
income for the year. The net worth on a fixed starting date is
compared with the net worth on a fixed ending date. Any increase in
net worth is presumed to be income not declared for tax purposes.
b. Cash expenditure method. Where during a taxable
year, a taxpayer incurs expenditures, the source of which could not
be explained (such as from gifts, donations, income subject to final
taxes, disposal of previously paid, excluded or tax exempt income), the
amount of expenditures is presumed to be income for the taxable year
subject to income tax. (Collector v. Jamir, 4 SCRA 718)
This is a method which assumes that the excess of a taxpayer’s
expenditures during the taxable period over his reported income for
that period is taxable to the extent not disproved otherwise.
c. Percentage method.
d. Bank deposit method.
e. Unit and value method.
f. Third party information or access to records method.

203
 g. Inventory method.
h. Surveillance and assessment method.
The above methods are not exclusive in character because
there may be such methods used in the opinion of the BIR
Commissioner which clearly reflects the income.

***7. When are the instances where a final

assessment notice (FAN) coupled with a formal letter of
demand (FLD) and may be issued even without preliminary
assessment notice (PAN) ? Othrwise stated, when shall a
PAN not a requirement before issuance of a FAN/FLD ?
SUGGESTED ANSWER: The following are the instances:
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return filed by the taxpayer; or
b. When a discrepancy has been determined between the
tax withheld and the amount actually remitted by the withholding
agent; or
c. When a taxpayer who has 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
d. When the excise tax due on excisable articles has not been
paid; or
e. 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. (NIRC of 1997; Sec. 228)
In the above-cited instances, a FLD/FAN shall be issued
outright. (Rev. Regs. No. 12-99, Sec. 3.1.2, last sentence as amended by Rev. Regs.
No. 18-2013)

*8. Federico Matibag, a Filipino citizen residing in

San Jose, Batangas, owns a vacation house and lot in San
Francisco, California, U.S.A., which he acquired in 2010 for
P15 million. On January 10, 2020, he sold said real
property to Efren Limbo, another Filipino citizen residing in
Mandaluyong City, for P20 million. On February 9, 2020,
Matibag filed the capital gains tax return and paid P1.2
million representing 6% capital gains tax. Since Matibag
did not derive any ordinary income, no income tax return
was filed by him for 2020. After the tax audit conducted

204
in 2021, the BIR officer assessed Matibag for deficiency
income tax computed as follows: P5 million (P20 million
less P15 million) x 35% = P1.75 million, without the capital
gains being allowed as tax credit. Matibag consulted a real
estate broker who said that the P1.2 million capital gains
tax should be credited from the P1.75 million deficiency
income tax.
If you were hired by Matibag as his tax consultant,
what advice would you give him to protect his interest?
Explain.
SUGGESTED ANSWER: I would advise him to protest the
assessment within a period of thirty (30) days from receipt on the
ground that the assessment is invalid for the following reasons:
a. His right to due process was violated because no pre-
assessment notice was made before the issuance of the assessment.
b. The assessment is erroneous and he should show what
is the correct computation. The income tax rate for individuals is not is
a progressive rate with a top rate of 35% on amounts of income
subject to tax exceeding P8 Million.
Since it is apparent that the gain should be subject to ordinary
income taxation, I would likewise advise him to file an application for
refund of the capital gains taxes he paid. He should file a suit for
recovery of the tax within two years from the payment of the tax if his
application for refund is not acted upon or if it is denied.

**9. Car Manufacturing Corporation manufactures

motor vehicles and is almost at the point of insolvency. It
had no more cash and all it has are unsold automobiles. It
received an assessment from the BIR for deficiency income
taxes. It wants to pay but due to lack of cash, it seeks
permission to pay in kind with automobiles.
Should the BIR grant the requested permission ?
SUGGESTED ANSWER: No. The BIR should not grant
permission to pay in kind because such act goes against the very
concept of taxes of being pecuniary burdens.
Giving permission would violate a principle of a sound tax
system which is administrative feasibility. There may be difficulties in
collecting the tax because of issues of valuation of the property to be
paid as taxes may arise.
Instead, the BIR should issue the proper assessment notice
with a demand to pay. In case of failue by the taxpayer to pay, it
should then exercise its lien over the automobiles or subject the same
to distraint, and sell them at a public auction and apply the proceeds

205
to the tax delinquency. If the proceeds are not sufficient, then, further
distraint or levy should be exercised.
ALTERNATIVE ANSWER: Yes. The BIR should grant
permission to pay in kind because there is no law, rule nor principle in
taxation that requires that deficiency taxes should only be paid in
cash. Furthermore, the lifeblood doctrine mandates the collection of
taxes in the most expeditious manner possible whether in cash or in
kind.

* 10.
Is an assessment necessary before a taxpayer
may be prosecuted for willfully attempting in any manner to
evade or defeat any tax imposed by the Internal Revenue
Code ?
SUGGESTED ANSWER: No, because of the following reasons
which distinguish a criminal charge from an assessment:
a. Criminal charge need only be supported by a prima facie
showing of failure to file a required return while the fact of failure to file
a return need not be proven by an assessment.
b. Before an assessment is issued, there is, by practice a
pre-assessment notice sent to the taxpayer while such is not so with a
criminal charge.
c. A criminal complaint is instituted not to demand payment,
but to penalize the taxpayer for violation of the Tax Code while the
purpose of the issuance of an assessment is to collect the tax .
(Commissioner of Internal Revenue, v. Pascor Realty and Development Corporation, G.
R. No. 128315, June 29, 1999)

*11.
Is initiation by the BIR of criminal prosecution
an assessment notice ? Why ?
SUGGESTED ANSWER: No. The initiation by the BIR of
criminal prosecution is not an assessment notice because of the
following reasons:
a. To consider the initiation of criminal prosecution as a
disputed assessment would render nugatory the requirement set by
the Supreme Court regarding final decisions of the Commissioner of
Internal Revenue. (Cargo Lane Realty Development Corporation, v. Vinzons-
Chato, etc., CA-G.R. SP No. 47950, March 19, 1999)
b. An affidavit-report of BIR examiner showing
computation of tax liabilities, and recommending the issuance of a
notice of assessment, is not an assessment itself which is the subject
of a motion for reconsideration/investigation or protest by the
taxpayer. This is so, because it was not sent to the taxpayer, and
does not demand payment of the tax within a certain period of time.
An assessment is deemed made only when the BIR releases, mails or

206
sends such notice to the taxpayer. (Commissioner of Internal Revenue v.
Pascor Realty and Development Corporation, G.R. No. 128315, June 29, 1999)

**
12. What are the requisites of a valid assessment ?
Explain.
SUGGESTED ANSWER:
a. The investigation that resulted to the assessment must have
been authorized by a Letter of Authority.
b. It must have been preceded by a Notice of Informal
Conference, which actually took place, issued by a properly
authorized revenue officer.
c. It must have been issued within the prescriptive period
for the issuance of assessment notices.
d. As a general rule, it may be issued only after a pre-
assessment notice has been served upon the taxpayer.
The constitutional requirement for due process also finds
application in the field of taxation, especially in the matter of issuance
of a deficiency tax assessment.
The requirement of due process for the validity of a formal letter
of demand (FLD) or a final assessment notice (FAN) is complied with
by furnishing a pre-assessment notice to the taxpayer advising him
that proper taxes are being assessed. (Rev. Regs. No. 12-99, Sec. 3.1.1, 1st
par., as amended by Rev. Regs. No. 18-2013)
e. It shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the
assessment shall be void. (Rev. Regs. No. 12-99, Sec. 3.1.3, 2nd sentence, as
amended by Rev. Regs. No. 18-2013)
f. The taxpayer must have personally received the
assessment notice [Estate of the late Juliana Diez vda. De Gabriel v.
Commissioner of Internal Revenue, 421 SCRA 266 (2004)] or a tax
agent/practitioner, who is appointed by the taxpayer. (Rev. Regs. No. 12-
99, Sec. 3.1.6, last par., as amended by Rev. Regs. No. 18-2013)

**13. Distinguish a false return from a fraudulent

return.
SUGGESTED ANSWER: The distinctions between a false
return and a fraudulent return are the following:
a. A false return is merely a deviation from the truth whether
intentional or not due to mistake, carelessness or ignorance while a
fraudulent return implies intentional or deceitful entry with intent to
evade the taxes due. (Commissioner of Internal Revenue v. Philippine Daily
Inquirer, G.R. No. 213943, March 22, 2017)
b. A false return is not subject to the 50% fraud penalty
while a fraudulent return is subject to the 50% fraud penalty.

207
 c. A false return does not subject the taxpayer to criminal
penalties while a fraudulent return may subject the taxpayer to
criminal penalties.
In short, a false return is not the same as a fraudulent return.
NOTE NOT PART OF THE ANSWER: The similarity in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax,
(3) failure to file a return, is that the tax may be assessed, or a proceeding in
court for the collection of such tax may be begun without assessmeμt, at any
time within ten years after the discovery of the (1) falsity, (2) fraud, (3)
omission. (Commissioner of Internal Revenue v. Philippine Daily Inquirer, G.R. No.
213943, March 22, 2017)

***14. What constitutes prima facie evidence of a

fraudulent return to justify the imposition of a 50%
surcharge on the deficiency tax due from a taxpayer ?
Explain.
SUGGESTED ANSWER: The following constitutes prima facie
evidence of a fraudulent return.
a. A substantial underdeclaration of taxable sales,
receipts, or income, or a substantial overstatement of deductions, as
determined by the Commissioner of Internal Revenue pursuant to
rules and regulations to be promulgated by the Secretary of Finance.
b. Failure to report sales, receipts, or income in an amount
exceeding thirty percent (30%) of that declared per tax return
constitutes substantial underdeclaration of sales, receipts, or income.
c. A claim of deductions in an amount exceeding thirty
percent (30%) of actual deductions constitutes overstatement of
deductions. [NIRC of 1997, Sec. 248 (B); Rev. Regs. No. 12-99, Sec. 4.2.1,
arrangement and numbering supplied]
d. There is prima facie evidence of a fraudulent return when
the taxpayer has willfully and knowingly filed it with the intent to evade
a part or all of the tax legally due from him. (Ungab v. Cusi, 97 SCRA 877)
e. There appears a design to mislead or deceive on the part
of the taxpayer, or at least culpable negligence. A mistake, not
culpable in respect of its value would not constitute a false return.
(Words and Phrases, Vol. 16, page 173)
NOTE NOT PART OF THE ANSWER: As a general rulel a false return
is not subject to the 50% penalty surcharge UNLESS the falsity is willfully
made. [NIRC of 1997, Sec. 248 (B)]

*** 15. Businessman Jorell Francisco filed an

income tax return for 2020 showing business net income of
P350,000.00 on which he paid an income tax of P61,000.00.
After filing the return, he realized that he forgot to include

208
an item of business income in 2019 for P50,000.00. Being
an honest taxpayer he included this income in his return
for 2020 and paid the corresponding income tax thereon.
In the examination of his 2020 return the BIR
examiner found that Jorell Francisco failed to report this
item of P50,000.00 and assessed him a deficiency income
tax on this item, plus a 50% fraud surcharge.
a. Is the examiner correct? Explain.
SUGGESTED ANSWER: The examiner is partially correct.
The examiner is correct with respect to the deficiency
income tax. This is so, because the amount due under the Tax
Code exceeds the tax reported by the taxpayer in his return. [NIRC of
1997, Sec. 56 (B) (1)]
However, the examiner erred in imposing the 50% fraud
surcharge as it is evident that the taxpayer committed a mistake.
Mere mistake cannot be considered fraudulent intent. There is no
showing of intentional fraud (Aznar v. CTA, 103 Phil. 1167) because the
taxpayer “rectified” the mistake during the next taxable year.
b. If you were the lawyer of Jorell Francisco,
what would you have advised your client before he
included in his 2020 return the amount of P50,000.00 as
2020 income to avoid the fraud surcharge ? Explain.
SUGGESTED ANSWER: I would have advised him to show
that there was no intent to induce the government to give up its right to
collect the tax, and the failure to include the P50,000.00 was not
tainted with deception willfully or and deliberately done. (Aznar, supra)
c. Considering that Jorell Francisco had already
been assessed a deficiency income tax for 2014 for his
failure to report the P50,000.00 income, what would you
advise him to do to avoid the penalties for tax delinquency
? Explain.
SUGGESTED ANSWER: He should immediately pay in
order not to be subject to the penalties for delinquency.
d. What would you advise Jorell Francisco to do
with regard to the income tax he paid for the P50,000.00 in
his 2020 return? In case your remedy fails, what is your
other recourse ? Explain.
SUGGESTED ANSWER: I would advise him to request that
the same be credited to the 2020 income, or be refunded on the
ground that there was a mistake in reporting it under the 2020 income.
If this fails, I would advise him to appeal to the Court of Tax Appeals
division. If the decision of the division is adverse, I would advise him

209
to file a motion for reconsideration or new trial and if still unavailing to
the CTA en banc and ultimately to the Supreme Court.

**16. Aaron was preparing his income tax return

and had some doubt on whether a commission he earned
should be declared for the current year or for the
succeeding year. He sought the opinion of his lawyer who
advised him to report the commission in the succeeding
year. He heeded his lawyer’s advice and reported the
commission in the succeeding year. The lawyer’s advice
turned out to be wrong; in Mr. Aaron’s petition against the
BIR assessment, the court ruled against Mr. Aaron.
Is Mr. Aaron guilty of fraud ?
SUGGESTED ANSWER: No. A is not guilty of fraud as he
simply followed the advice of his lawyer.
Fraud in relation to filing income tax return is actual not
constructive. It must amount to intentional wrong doing with the sole
object of which is to avoid the tax. A mere mistake cannot be
considered as fraudulent intent.
There was mere mistake as Mr. Aaron did not deliberately
escape the payment of the tax. This is evident as he merely
postponed the payment of the tax from one period to another. There
was at the most what is referred to as a false return, not a fraudulent
return.

END OF THE PRE-WEEK NOTES

The Best of Luck for the Bar. Advance

Congratulations and see you at the Oath Taking.

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