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FIFTY (50) CANT MISS POINTERS IN TAX

2017 BAR PREWEEK REMINDERS


by Atty. Noel M. Ortega

********THESE NOTES ARE MEANT FOR SHARING.********


SHARE AND BE BLESSED.

1. Non-observance of a canon of a sound tax system (fiscal adequacy, theoretical


justice and administrative feasibility) does not invalidate a tax imposition unless some aspect of it
is shown to violate the Constitution. (see Diaz v. Secretary [2011])

2. The power to tax is not the power to destroy. The power of taxation should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. (see
Tridharma Marketing Corporation v. CTA [2017], per J. BERSAMIN)

3. Only the RESIDENT CITIZEN (RC) and DOMESTIC CORPORATION (DC)


may be held liable for income tax on incomes coming from sources within and without the
Philippines. The others are taxable on incomes coming from sources within the Philippines only.
(see Sec. 23, NIRC)

4. An income is taxable if its generating source, the PROPERTY, ACTIVITY or


SERVICE, is found in the Philippines (but the RC and DC may be liable even on incomes from
sources outside the Philippines). (see CIR v. BOAC [1987])

5. For the following categories of income, however, the condition(s) for treating them
as incomes from sources WITHIN the Philippines are:

(a) Interest the payor must be a resident of the Philippines (disregard the place of
activity or transaction);
(b) Dividend (i) if paid by DC, always an income from within; (ii) if paid by foreign
corporation (FC), the FCs gross income within the Philippines in the last 3 years
must comprise at least 50% of worldwide income.
(c) Compensation the service must be rendered in the Philippines (disregard
residence of payor);
(d) Rental/Royalty the property must be located in the Philippines/use or privilege to
use in the Philippines;
(e) Gain from sale of personal property (i) if not manufactured by seller, the sale
must be in the Philippines; (ii) if manufactured by seller, the gain is entirely within
if both the activities of manufacture and sale are in the Philippines. If manufacture
is in the Philippines, and sale is outside, or vice versa, the gain is partly from source
within and partly without.
(f) Gain from sale of real property the real property must be located in the Philippines
(disregard place of sale). (see Sec. 42 (A), NIRC)

6. Global vs. Schedular system of taxation. In global, there is a uniform tax treatment
regardless of the category of income; whereas, in schedular, there are different kinds of tax
treatment according to the category of income. The basic income tax adopts the global approach,
while the different provisions on final taxes illustrate the schedular tax treatment.

7. Passive income is NOT exempt from tax. Generally, it is subject to basic income
tax. Certain passive incomes are, however, subject to final taxes.

8. Interest from deposit substitute (20 or more lenders) is subject to final tax.
However, if recipient is an individual, and the maturity period is at least 5 years (long-term), the
interest is EXEMPT; otherwise if corporation, even if long-term, taxable.
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9. Capital gain from sale or disposition of property is not generally subject to final
tax. There are only two kinds of capital gains usually subject to final tax: (a) capital gain from sale
of shares of stock and (b) capital gain from sale of real property.

10. Shares of stock are ordinary assets only in the instance when the seller is a dealer
in securities (China Banking Corporation v. CA [2000]). Thus, if seller is not a dealer in securities,
the shares are capital assets and the tax consequences are:

Capital Gains Tax Stock Transaction Tax


(Final tax) (Percentage tax)
Issuing corporation Domestic corporation (DC) same
Place of sale Outside local stock exchange In the local stock exchange
Tax base Net capital gain Gross selling price or fair market
value, whichever is higher
Tax rate 5% for first P10,000; 10% for 1/2 of 1%
excess
Legal basis Secs. 24C, 25(A)(3), 27(D)(2); Sec. 127
28(A)(7)(C); 28(B)(5)(c)

11. Capital gains tax (CGT) in case of stock transactions applies regardless of the status
or classification of the seller. But, CGT in case of sale or disposition of real property applies only
when the seller is an individual (regardless of classification) or a domestic corporation. No CGT
of 6% when seller is a foreign corporation.

12. In the case of DC, the CGT of 6% applies only when the real property consists of
land and/or building. Thus, capital gain from sale by DC of a machinery, though immobilized, is
not subject to CGT but to regular corporate income tax (RCIT). (see RR 7-2003)

13. The CGT of 6% is applicable even if the sale is involuntary. In case of


expropriation, the government is not required to pay the owner the sum equivalent to the CGT by
way of compensatory damage. The CGT is always the sellers liability. (see Republic v. Sps.
Salvador [2017])

14. As a rule, gains or losses are recognized in exchanges of properties. The exceptions
are the tax-free exchanges pursuant to a merger or consolidation of corporations and exchanges
resulting in acquisition of corporate control. (see Secs. 40[C][1] and 40[C][2], NIRC)

The transfer by a controlling shareholder of property in exchange for additional shares of


the corporation is still considered tax-free exchange. (see CIR v. Filinvest Development
Corporation [2011])

For purposes of the documentary stamp tax (DST), the transfer of a corporations real
property in favor of another corporation pursuant to a plan of merger (tax-free exchange) is not
subject to DST under Sec. 196 of the NIRC. The provision contemplates sales of real property
only. (see CIR v. Pilipinas Shell Petroleum Corporation [2014], per J. Villarama)

15. Benefit/Bonus received by virtue of CBA and productivity incentive scheme not
exceeding Php10,000 annually is de minimis, hence, exempt from tax.

16. Income of non-stock, non-profit educational institution from property or activity


conducted for profit may be exempt from income tax and VAT (as well as local business tax)
provided the school uses such income actually, directly and exclusively for educational purposes.
(see Art. XIV, Sec. 4, par. 3, 1987 Constitution; CIR v. DLSU [2016])
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17. A proprietary non-profit educational institution enjoys tax privileges such as 10%
lower income tax on net income (hence, exempt from MCIT which is paid in lieu of regular income
tax). It is also given the option to deduct capital outlay (generally non-deductible business expense)
for expansion of school facilities either as business expense or depreciation expense. (see Secs.
27(B), 34(A)(2), 34(F) and 36(A)(2)(3), NIRC)

18. Standard deduction in computing net income is to be differentiated from standard


deduction in computing net estate: (a) the former is optional, while the latter is automatic; (b) the
former is fixed at 40% of gross sales/receipts or gross income, while the latter is fixed at P1 million;
(c) the former is in lieu of the items of deduction, while the latter is in addition to the other items
of deduction; (d) the former is relevant to taxpayers engaged in trade, business or exercise of
profession, while the latter is relevant to estates of decedents who are residents or citizens of the
Philippines; and (e) the former is irrevocable once chosen, while the latter is not irrevocable.

19. To be entitled to a deduction, the taxpayer must competently establish the


factual and documentary bases of its claim.

Thus, a taxpayers claim for deduction of business expenses and casualty losses were
denied due to inadequate documentary support. To prove security and janitorial expenses,
management and professional fees, and rental expenses, the taxpayer submitted (a)
withholding tax returns; (b) cash vouchers; (c) lessors certifications; and (d) contracts of lease.
To prove losses from fire and theft, the taxpayer submitted (a) certification from the Bureau
of Fire Protection; (b) certification from the Police Station; (c) accounting entry for the losses;
and (d) list of properties lost. The taxpayer ought to have submitted official receipts from the
service providers to prove the business expenses; and, among others, the sworn declaration
of loss to prove casualty loss. (see Sec. 34(A) and (D), NIRC; H. Tambunting Pawnshop, Inc.
v. CIR [2013], per J. BERSAMIN)

20. Three-fold purpose of the withholding tax system. (1) to provide the taxpayer with
a convenient way of paying his tax liability; (2) to ensure the collection of tax, and (3) to improve
the governments cashflow. (see CREBA v. Executive Secretary [2010])

There are usually two kinds: (a) Final Withholding Tax (FWT) which applies to all income
payments subject to final tax, and (b) Creditable Withholding Tax (CWT) which applies to some
income payments subject to basic income tax.

The withholding tax is used in income taxation and in VAT (FWT of 5% on government
procurement of supplies and services). (see Sec. 114[C], NIRC)

21. In case of overpayment of income tax, the option to carry-over the excess credit
is irrevocable. Thus, the refund claim of a corporation which previously opted for the carry-
over was denied. However, the taxpayer is entitled to apply the amount as tax credit against
income tax in succeeding taxable years until fully utilized, that is, without prescriptive
period. (see CIR v. PL Management International Philippines, Inc. [2011], per J.
BERSAMIN)

22. In applications for refund/tax credit certificate of overpaid income tax, the
submission of succeeding quarterly income tax returns is not indispensable to prove non-
carry over of excess creditable taxes. The annual ITR or any other proof suffices to show
that the excess credits had not been carried over to the subsequent quarters. (see
Winebrenner & Inigo Insurance Brokers, Inc. v. CIR [2015]; see also Republic v. Team
(Phils.) Energy Corporation [2015], per J. BERSAMIN)

23. Liability for estate tax arises when NET (read: not Gross) estate exceeds
P200,000.00; for donors tax, in case the donee is a relative, when total NET gift during the
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calendar year exceeds P100,000.00, otherwise, if donee is a stranger, regardless of the amount of
net gift.

24. In computing NET estate, the debt obligation of the decedent is deductible as a
claim against the estate. Debt condoned PRIOR to death is non-deductible (RR 2-2003); debt
condoned AFTER death is fully deductible (see Dizon v. CTA [2008]).

25. Indirect gift is taxable. Sale for insufficient consideration gives rise to liability for
gift tax under Sec. 100 of the NIRC. It is possible for the seller to incur liability for both income
tax (on gain realized) and gift tax (on the difference between FMV and consideration) arising from
the same transaction.

EXCEPTION: When such sale involves real property where seller is liable for CGT of 6%,
the difference is not a taxable gift; but if the sale is a stock transaction where seller is liable for
CGT of 5%/10%, the liability for gift tax based on the difference cannot be avoided. (see Philam
Life v. Secretary of Finance [2014])

26. Consistent with the destination principle, the purchases of goods and services
destined for consumption within an ECOZONE should be free of VAT; hence, no input VAT
should then be paid on such purchases. With no input VAT paid, there is nothing to be
refunded or credited under Sec. 112 of the NIRC. (see Coral Bay Nickel Corp. v. CIR [2016],
per J. BERSAMIN)

27. Substantiation requirements to be entitled to refund or tax credit under Sec. 112,
NIRC. The claimants duties are two-fold: (a) prove payment of input VAT to supplier; and (b)
prove zero-rated sales to purchasers. The documents required are VAT receipt for sale of services
or lease of property and VAT invoice for sale of goods. The words zero-rated must also be stated
in the VAT receipt or invoice. (see Western Mindanao Power Corporation v. CIR [2012])

The VAT invoice and VAT receipt should not be confused as referring to one and the same
thing; the law did not intend the two to be used alternatively. (see KEPCO v. CIR, 24 November
2010)

In one case, the claim for refund/tax credit was denied because the proof for the zero-
rated sale consisted of secondary evidence like financial statements. (see Luzon Hydro Corp.
v. CIR [2013], per J. BERSAMIN)

In another case, the proof for zero-rated sales of services were sales invoices. The
claim was denied. (see Takenaka Corp.-Philippine Branch v. CIR [2016], per J. BERSAMIN)

In KEPCO (2010), the taxpayer tried to substantiate its input VAT on purchases of goods
with official receipts and on purchases of services with invoices. Claim denied.

28. Two concepts of excise tax. As used in the NIRC, excise taxes refer to taxes
applicable to certain specified goods or articles manufactured or produced in the Philippines
for domestic sale or consumption or for any other disposition and to things imported into the
Philippines. Excise tax is essentially a tax on property. (see Sec. 129, NIRC; Chevron
Philippines, Inc. v. CIR [2016], per J. BERSAMIN)

As used in classifying taxes according to tax base, excise tax is a tax upon the
performance, carrying on, or exercise of some right, privilege, activity, calling or occupation.
Examples are income tax, transfer tax, VAT, percentage tax and documentary stamp tax.

29. The power of the CIR in Sec. 4 of the NIRC are two kinds: (a) power to interpret
the provisions of the tax laws (first paragraph); and (b) power to decide cases involving disputed
assessments, refund of taxes, and other matters arising under the NIRC (second paragraph). The
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former is quasi-legislative function, while the latter is quasi-judicial. The former is subject to
review by the Secretary of Finance, while the latter is subject to exclusive review by the CTA.

A BIR ruling (and other issuances by the CIR) may come under the first paragraph of Sec.
4, hence, subject to review by the Secretary of Finance. Judicial review over such ruling, just like
in the second paragraph, belongs to the CTA. (see BDO v. Republic [2016])

The power to issue a ruling of first impression, or that which reverses, revokes or modifies
a previous one exclusively belongs to the CIR and is non-delegable. (see Sec. 7, NIRC)

30. Requisite of assessment to be valid. The rationale for the requirement of stating in
the notice the factual and legal bases of the assessment is to enable the taxpayer to prepare an
intelligent or effective protest. (see Samar-1 Electric Cooperative v. CIR [2014])

31. In disputed assessment cases, the decision that is appealable to the CTA may not
always be the Formal/Final Decision on Disputed Assessment (FDDA). Examples of implied
denial which are appealable to the CTA are: (a) collection, whether administrative or judicial; (b)
a Final Notice Before Seizure; (c) a letter reiterating previous demand/assessment.

32. The no-injunction rule applies to national internal revenues taxes (Sec. 218, NIRC).
The underlying reason is the lifeblood theory which underscores the policy of least interference to
the collection of taxes upon which the existence of the State depends.

The rule, however, has no counterpart in the Local Government Code concerning local
taxes. Thus, courts may issue writs to restrain local governments from collecting taxes. (see
Angeles City v. Angeles Electric Corporation [2010])

33. The CTA has authority to suspend collection as an exception to the no-
injunction rule. The depositing of money claimed or posting of a bond as a condition
precedent to the issuance of the writ may also be dispensed with when the processes of
collection are in plain violation of the law. (see Sec. 11, RA 1125, as amended; Tridharma
Marketing Corporation v. CTA [2017], per J. BERSAMIN)

34. In case of INACTION, the option of awaiting the decision of the CIR or his
representative applies only in disputed assessment cases. Such option is unavailing in case of
claim for refund or tax credit under Sec. 112, NIRC; or Sec. 229 of the NIRC, when the 2-year
period to file judicial claim is about to expire.

35. There may be an ADMINISTRATIVE appeal to the CIR from the decision, NOT
inaction, by the CIRs authorized representative (like the Regional Director). In case of inaction
on the protest by the CIRs representative, the taxpayer may immediately appeal to the CTA, or
await the decision on the protest. In all cases, a JUDICIAL appeal to the CTA is available in case
of decision or inaction by the CIR or his representative. (see RR 12-99, RR 18-2013; PAGCOR v.
BIR [2016]; Lascona Land Company v. CIR [2012])

36. In Pagcor (2016), the appeal from inaction by the RD was taken to the CTA beyond
the 180+30 day periods. The CTA dismissed the appeal for lack of jurisdiction due to late filing
(beyond the 30-day period of appeal). The SC sustained the dismissal of the appeal but on the
ground of premature filing as there was no decision yet by the RD or the CIR, hence, no cause of
action.

37. The CTA, not the Secretary of Justice, has jurisdiction to review disputed
assessment cases, even if protest is initiated by another agency of the government. RA 1125
prevails over the Revised Administrative Code provisions on settling disputes or
controversies between or among government offices, agencies, and instrumentalities,
including GOCCs. (see CIR v. Secretary of Justice [2016], per J. BERSAMIN)
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38. Tax refund is not synonymous to tax credit. Tax refund contemplates prior payment
of tax; tax credit does not always require prior payment of tax. Transitional input tax equivalent to
2% of the value of beginning inventory of goods, materials, or supplies is an example of a tax
credit that does not require prior payment of tax (VAT). (see Sec. 111, NIRC; Fort Bonifacio
Development Corporation v. CIR [2009])

39. As a rule, the proper party to file a claim for refund is the statutory taxpayer. In the
case of indirect taxes such as the VAT, percentage tax and excise tax, it is the seller who has the
legal personality to file such claim. By way of EXCEPTION, if the law confers an exemption from
both direct or indirect taxes, a claimant is entitled to a tax refund even if it only bears the economic
burden of the applicable tax. (see CIR v. PASAR [2013])

40. The CTA has authority to hear petitions for certiorari under Rule 65. (see City of
Manila v. Grecia-Cuerdo [2014])

The CTA also has contempt powers. (see Sec. 10, RA 1125, as amended; Habawel v.
CTA [2011], per J. BERSAMIN)

41. Significance of the distinction between tax and fee. When the imposition is
primarily regulatory in nature, not primarily for revenue-raising, it is not a tax. If not a tax, then
the procedure outlined in Sec. 187 of the LGC for questioning the validity of the tax ordinance is
not applicable. (see Smart Communications, Inc. v. Municipality of Malvar [2014]).

Also, if one imposition is a tax and the other is not, then the claim of prohibited double
taxation fails. In Ferrer v. Bautista (2015), it was held that the imposition of the garbage fee falls
within the police power to protect public health, safety, and welfare. Not being a tax, there is no
double taxation.

42. DOUBLE TAXATION may be a ground for assailing an assessment (as opposed
to assailing the levy of tax). Essentially, the question relates to the reasonableness of the
assessment.

In Nursery Care Corp. v. Acevedo, 2014, per J. BERSAMIN, the City of Manila
individually assessed the petitioners for taxes either under Section 15 (Tax on Wholesalers,
Distributors or Dealers) or Section 17 (Tax on Retailers) of the Revenue Code of Manila. The
city also imposed additional taxes under Section 21 (Tax on Business Subject to the Excise,
VAT or percentage tax under the NIRC). It was held that the imposition under Section 21
constituted double taxation. Section 21 of the Revenue Code of Manila is based on Sec. 143
(h) of the LGC. Sec. 143 (h) may be imposed only on businesses not otherwise specified in the
preceding paragraphs (a) to (g) of Sec, 143, LGC, such as the tax on wholesalers, distributors
or dealers (par. b) and tax on retailers (par. d).

43. Section 191 of the LGC on the Authority of Local Government Units to Adjust Rates
of Tax Ordinances, provides two limitations: (a) the adjustment is not oftener than once every 5
years, and (b) the adjustment shall not exceed 10% of the rates fixed under the LGC. Section 191
presupposes the presence of the following requirements: (i) there is a tax ordinance that already
imposes a tax in accordance with the provisions of the LGC; and (ii) there is a second tax ordinance
that made adjustment on the tax rate fixed by the first tax ordinance.

In Mindanao Shopping Destination v. Duterte (2017), the assailed ordinance did not violate
the limitation in Section 191 because both elements are not present: first, the old ordinance was
enacted prior to the LGC and the assailed new ordinance was the initial implementation of the
LGC; second, the new assailed tax ordinance introduced a new tax base and tax rate, hence, there
is no adjustment of a tax rate fixed by the first tax ordinance.
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44. For purposes of real property tax (RPT), the taxable properties are not limited to
lands, buildings and improvements only. Machinery and equipment are also taxable. Machinery,
though mobile or not permanently attached, is taxable as long as necessary to the business.

MERALCOs transformers, electric posts, transmission lines, insulators, and electric


meters may qualify as machinery subject to real property tax under the Local Government Code.
(see Meralco v. City Assessor [2015])

45. Beneficial use principle. Property owned by the Republic of the Philippines is
exempted unless beneficial use thereof had been transferred, for consideration or otherwise, to a
taxable person. An agency or instrumentality of the National Government is not a taxable person
under Sec. 133 (o) of the LGC (a GOCC, on the other hand, is not so exempt). Thus, if the user of
property owned by the Republic is an agency or instrumentality of the National Government, the
RPT cannot apply.

46. Provinces, cities or municipalities within Metro Manila may impose an additional
levy for the special education fund at a rate lower than 1%. There are three (3) considerations for
this interpretation: (1) the text of Section 235, which is cast in permissive language; (2) the seminal
purpose of fiscal autonomy; and (3) the jurisprudentially established preference for weighing the
scales in favor of autonomy of local government units. (see Demaala v. COA [2015])

47. Some salient changes under the new Customs Modernization Tariff Act (CMTA).
(a) Shorter 15-day period (previously 30 days) to lodge goods declaration from notice of discharge
of last package; (b) Longer 30-day period (previously 15 days) from notice to claim goods after
payment of taxes and duties; (c) Provisional goods declaration now allowed, may be basis for
release of goods; (d) De minimis threshold value increased to P10,000.00 (previously P10.00); (e)
duty and tax-free balikbayan boxes not exceeding value of P150,000.00 up to three times a year;
(f) increased surcharge penalty for misdeclaration, misclassification and undervaluation; and (g)
heavier penalty for smuggling, and smuggling is now a heinous crime if value of goods exceeds
P200,000,000.00.

48. Two kinds of smuggling. In OUTRIGHT SMUGGLING, goods and articles do not
undergo the processing and clearing procedures at the BOC, and are not declared through
submission of import documents. In TECHNICAL SMUGGLING, goods and articles pass through
the BOC, but the processing and clearing procedures are attended by fraudulent acts (i.e.
misclassification, undervaluation and misdeclaration) in order to evade the payment of correct
taxes, duties, and other charges. (BOC v. Devanadera [2015] EN BANC)

49. Under Section 2530 (a) and (k) of the TCCP, the forfeiture of a vehicle, vessel
or aircraft is anchored on its being used unlawfully in the transport of contraband or
smuggled articles into or from any Philippine port. Consequently, the determination of the
legality of the forfeiture of the M/V Don Martin was necessarily contingent on whether the
customs authorities had validly and properly seized the shipment of 6,500 sacks of rice on
account of the rice being smuggled. Given this logical correlation, the CTA could not be
divested of its jurisdiction to determine the legality of the forfeiture of the rice. (MV Don
Martin Vouy 047 v. Secretary of Finance [2015], per J. BERSAMIN)

50. The Bureau of Customs has exclusive jurisdiction over seizure cases within the
Subic Freeport Zone. It is well settled that the Collector of Customs has exclusive jurisdiction
over seizure and forfeiture proceedings, and regular courts cannot interfere with his exercise
thereof. (see Agriex Co. Ltd v. Villanueva [2014], per J. BERSAMIN)

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SAMPLE QUESTIONS with SUGGESTED ANSWERS


2017 Pre-Week Bar Review Reminders
by Atty. Noel M. Ortega

I.

(A) Explain the nature or meaning of excise tax. (3%)

(B) Give at least three national internal revenue taxes that are classified as excise
taxes. (3%)

Suggested Answers:

(A) As used in the Tax Code, excise taxes refer to taxes applicable to certain specified
goods or articles manufactured or produced in the Philippines for domestic sale or consumption
or for any other disposition and to things imported into the Philippines. (Sec. 129, NIRC)

As used in classifying taxes according to tax base, excise tax is a tax upon the
performance, carrying on, or exercise of some right, privilege, activity, calling or occupation. (see
Petron v. Tiangco [2008])

(B) Examples of national internal revenue taxes that are classified as excise taxes are
income tax, estate tax and donors tax.

II.

Under Article One, Chapter 2, Title One, Book II of the Local Government Code, on Local
Taxation and Fiscal Matters, the provinces were vested with the power to levy the following taxes:
(1) Tax on Transfer of Real Property Ownership; (2) Tax on Business of Printing and Publication;
(3) Franchise Tax; (4) Tax on Sand, Gravel, and Other Quarry Resources; (5) Professional Tax;
(6) Amusement Tax; and (7) Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers
or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products.

(A) May provinces levy taxes, fees and charges outside of those enumerated in the
aforementioned Article One, Chapter 2, Title One, Book II of the Local Government Code?
(3%)

(B) In terms of geographical area, the provinces are usually the largest of all local
government units. Do they also have the broadest taxing powers? (3%)

Suggested Answers:

(A) Yes. Local government units may exercise the power to levy taxes, fees or charges
on any base or subject not otherwise specifically enumerated in the Local Government Code or
taxed under the provisions of the National Internal Revenue Code. (Sec. 186, LGC)

(B) No. It is the city which has the broadest taxing powers. The city may levy the taxes,
fees and charges which the province or municipality may impose. With the exception of
professional and amusement taxes, the city may also exceed the maximum rates allowed for the
province or municipality by not more than 50%. (Sec. 151, LGC)
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III.

Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development
company in the country and in 2010, he was promoted to Vice-President of the company. At the
end of the year, he received Php10,000.00 as productivity incentive bonus.

Is the bonus includible in Mr. Aguirres gross income? Who is required to report the
income and/or pay the tax, if applicable? (6%)

Suggested Answer:

No. The reason is that the law treats a benefit paid under productivity incentive schemes
as de minimis benefit so long as the amount does not exceed Php10,000.00 per year. As de
minimis benefit, the bonus received by Mr. Aguirre is, thus, exempt from tax. Nonetheless, the
payment, although not subject to income tax, is to be reported by the employer who may claim the
same as a deductible business expense. (RR 3-98, as amended by RR 1-2015)

IV.

ABC Colleges is a non-stock and non-profit private educational institution. Its annual
income consists of tuition fees, rentals from the lease of building spaces for restaurant and canteen
operators and revenue from the operation of pay parking lots. All of its income is reserved for the
maintenance, administration and expansion of facilities and other educational purposes.

Is ABC Colleges liable for income tax and Value Added Tax (VAT) on its rental
earnings? (6%)

Suggested Answer:

No, ABC Colleges is exempt from both income tax and VAT on its rental earnings so long
as it can prove that the same are used actually, directly and exclusively for educational purposes.
Such exemption is recognized in favor of non-stock and non-profit educational institutions, like
ABC Colleges, under the Constitution. The exemption, it appears, is available as ABC Colleges
reserves all its incomes, including the rentals, for the maintenance, administration and expansion
of facilities and other educational purposes. (CIR v. DLSU [2016])

V.

Gigi is a doctor by profession who works at a local hospital as a full time employee. Aside
from his salaries and allowances, he received during the year interest income from deposit
substitutes and an inheritance from his deceased father. He is single but has a child with his long-
time live-in partner. Both are chiefly dependent upon his support. In preparing his annual income
tax return, he wants to know how he would maximize his tax savings.

In arriving at Dr. Gigis lowest possible net taxable income, is the choice between the
standard deduction or itemized method of deduction material? How much can Dr. Gigi claim
as personal or additional exemption? (7%)

Suggested Answer:

No, except for premium payments on health and hospitalization insurance, persons earning
purely compensation, like Dr. Gigi, are neither entitled to elect standard deduction nor claim items
of deduction in computing their net income subject to ordinary tax. Such deductions are applicable
only to persons who are engaged in trade, business or exercise of profession. Dr. Gigis net
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income subject to basic tax solely consists of compensation income as his interest income from
deposit substitute is subject to final tax and his inheritance is an exclusion from gross income.
(Sec. 24[B][1], 32[B][3], and 34, NIRC)

However, Dr. Gigi may deduct from his compensation income personal exemption in the
amount of Php50,000.00 and additional exemption of Php25,000.00 for his child. His live-in
partner, even though chiefly dependent upon his support, does not qualify as additional exemption
as this privilege applies only to unmarried children who are not more than 21 years of age and
persons with disability (PWD) who are related to the taxpayer within the fourth degree of
consanguinity or affinity. (Sec. 35, NIRC; RA No. 10754)

VI.

ABC Realty Corp. (ABC) is a domestic corporation engaged in rental business since 2009.
For taxable 2014, the Final Adjustment Return of ABC shows an overpayment of income tax. ABC
opted to carry over the overpaid income tax. In the succeeding years 2015 and 2016, ABC had no
tax payable, as a consequence of which it was unable to utilize its 2014 overpaid income tax as a
tax credit. In 2017, ABC applied for cash refund of the amount but the Commissioner of Internal
Revenue (CIR) denied the claim for the reason that the claim had already prescribed.

Did the CIR act correctly? Explain. (6%)

Suggested Answer:

The CIR correctly denied the refund claim but its justification is erroneous. Prescription
is unavailing since ABC already opted to have its overpaid income tax carried over to the
succeeding quarters or years. Under the law, once the option to carry-over excess creditable
income tax is chosen, it is irrevocable, thereby precluding the taxpayer from recovering the
amount through cash refund or tax credit certificate. Consequently, the CIR may properly deny
the refund claim in this case for the reason that ABC had already opted the carry-over of its excess
creditable income tax. (see CIR v. PL Management International Philippines, Inc. [2011], per
J. BERSAMIN)

VII.

In his lifetime, Mr. A, already old and suffering from incurable disease, donated to his son
a house and lot where they both principally reside. Mr. A died shortly after making the donation.
The house and lot, the only remaining property of Mr. A, was valued Php1 million at the time of
his death.

A BIR official opined that the house and lot should have been reported in the estate tax
return for the reason that it was transferred in contemplation of death.

(A) Is the theory of the BIR official legally tenable? (4%)

(B) Suppose the heir of Mr. A fails to timely object to the inclusion of the house
and lot in gross estate, do you think the estate of Mr. A is liable for the payment of estate
tax? (4%)

Suggested Answer:

(A) Yes. The circumstances show that the donor, Mr. A, remained in possession of the
donated property even after the donation. Such fact reveals the intention of Mr. A to let his
property pass to his son, who is the donee, only upon his death. It stands to reason that the donation
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should be considered a transfer in contemplation of death, thereby, warranting its inclusion in the
gross estate of Mr. A upon his death. (Sec. 85[B], NIRC)

(B) No. The law provides that liability for the payment of estate tax arises only when
the net estate exceeds Php200,000.00. In this case, the gross estate is valued Php1 million only.
After applying a standard deduction of Php1 million, a deduction applicable to estate of citizens
or residents, the net estate left is Php0. (Sec. 84, 86[A][5], NIRC)

VIII.

Patricia has a sister who owns and operates a nursery and kindergarten school. Patricia
has disposable income of Php250,000.00 which she would like to donate to her sister or the school.

If you are the tax consultant of Patricia, how would you advise Patricia if she wants to
save on, or be exempted from, donors tax? (6%)

Suggested Answer:

I would advise Patricia to donate the amount to her sister by splitting the gifts into three
calendar years, wherein each years total net gift does not exceed Php100,000.00. Under the law,
no tax is due on gifts in favor of relatives not exceeding P100,000.00 in each calendar year. Had
the school been a separate corporate person, and provided it is non-stock and non-profit and not
more than 30% of the donation is to be used for administrative purposes, the donation to it would
have been exempt. The facts, however, show that the school is not a corporation, being merely a
proprietorship of Patricias sister. (Sec. 99[A], 101[A][3], NIRC)

IX.

Sen Po Ek Marketing Corp. (Sen Po Ek) was assessed by the BIR for various deficiency
taxes. Sen Po Ek timely protested the assessment. Due to its failure to pay the amount claimed by
the BIR, Sen Po Ek subsequently received notices of distraint and levy of its properties. Without
awaiting the formal decision on its protest, Sen Po Ek immediately appealed before the CTA and
petitioned the court to issue a writ of injunction, claiming that the collection processes begun by
the BIR are in plain violation of the law. It argued that the amount assessed against it are four times
greater than its net worth. It thus asked the court to dispense with the requirement of depositing
the money claimed by the BIR or the posting of a surety bond.

(A) Did Sen Po Ek act correctly in immediately filing an appeal with the CTA
without the formal decision by the BIR on its protest? (3%)

(B) Does the CTA have the discretion of dispensing with the deposit of the amount
claimed by the BIR or the posting of a surety bond as a condition for issuing a writ of
injunction? (3%)

Suggested Answer:

(A) Yes. The notices of distraint and levy of properties may be treated as the decision
equivalent to a denial of Sen Po Eks protest. There being a decision by the Commissioner on a
disputed assessment, an appeal to the CTA is proper.

(B) Yes. Section 11 of R.A. 1125, as amended, indicates that the requirement of the
bond as a condition precedent to suspension of the collection applies only in cases where the
processes by which the collection sought to be made by means thereof are carried out in
consonance with the law, not when the processes are in plain violation of the law that they have
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to be suspended for jeopardizing the interests of the taxpayer. (see Tridharma Marketing
Corporation v. CTA [2017], per J. BERSAMIN; see also Sps. Pacquiao v. CTA [2016])

X.

Mang Gerry opened a small cafeteria in Diliman, Quezon City. His suppliers and customers
are all local residents of Diliman, Quezon City. Since he registered with the BIR as a VAT-
taxpayer, Mang Gerry filed a VAT return wherein he applied a transitional input tax credit.
However, after one year of operations, Mang Gerry had an unutilized transitional input tax credit.

May Mang Gerry successfully ask for the refund or issuance of a tax credit certificate
for his unutilized transitional input taxes? If so, before what office should he file his claim
and within what period? (8%)

Suggested Answer:

No, he may not. The law permits the refund of unutilized creditable input VAT attributable
to zero-rated sales only, to the exclusion of transitional input VAT. Had his excess creditable input
VAT arose from zero-rated sale, not transitional input VAT, Mang Gerry would have been entitled
to apply for the refund or tax credit before the CIR within two years counted from the close of the
taxable quarter when such zero-rated sale was made. (Secs. 111 and 112, NIRC)

XI.

The BIR issued against ABC Corp. a Preliminary Assessment Notice (PAN) with an
attached Summary Report which stated the facts and the laws in support of the assessment. ABC
Corp. ignored the PAN drawing the BIR to issue a Final Assessment Notice (FAN). The FAN was
silent as to the factual and legal bases of the assessment. ABC Corp. protested the assessment
alleging that it was void for failure to state the factual and legal bases. However, the Commissioner
of Internal Revenue failed to take action over the protest. ABC Corp. likewise made no move as a
result of the Commissioners inaction.

Six years later, the BIR sent to ABC Corp. a letter reiterating its previous assessment. The
letter alleged that the assessment had become final and executory for failure of ABC Corp. to
appeal the inaction before the CTA.

(A) Procedurally, may ABC still appeal the case to the CTA? Explain (4%)

(B) On the substantive aspect, did the BIR assessment comply with the
requirements of the law? (4%)

Suggested Answers:

(A) Yes. In case of inaction on disputed assessment, the taxpayer has the option of
awaiting the decision of the CIR. In this case, the letter reiterating the previous assessment may
be taken as an implied denial of the protest. The implied denial constitutes the decision that is
appealable to the CTA. Jurisprudence has it that a taxpayer who chooses to await the decision of
the CIR in case of inaction does not lose the right or standing to question before the court the
correctness or validity of an assessment. (See Lascona Land Company v. CIR [2012])

(B) Yes, there was substantial compliance with the rule that a notice of assessment must
contain the factual and legal basis of the assessment. The failure of the FAN to state the factual
and legal basis did not prevent ABC from intelligently preparing a protest against the assessment
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since the facts and the laws in support of such assessment were attached in the PAN. (see Samar-
1 Electric Cooperative v. CIR [2014])

XII.

A certain taxpayer received from a BIR Regional Director (RD) an assessment for alleged
deficiencies in the withholding of taxes. Claiming exemption, the taxpayer timely filed a protest
addressed to the RD. After the lapse of 180 days, the taxpayer forthwith elevated its protest to the
Commissioner of Internal Revenue (CIR), there being no action taken by the RD. As the CIR also
failed to decide on the protest within 180 days, the taxpayer filed within 30 days thereafter an
appeal before the Court of Tax Appeals (CTA).

Did the CTA acquire jurisdiction over the appeal? (6%)

Suggested Answer:

No. There was no decision by the CIR or the RD, for which reason, there is no cause of
action yet. There being no cause of action, the appeal before the CTA is premature, thus,
dismissible for lack of jurisdiction. For the CTA to acquire jurisdiction then, the taxpayer ought
to have awaited such decision even after the inaction by the RD. It must be stressed that the
administrative appeal to the CIR from the inaction by the RD or any authorized representative of
the CIR is a remedy not authorized by law and, as such, produces no legal effect. (see PAGCOR
v. BIR [2016])

XIII.

(A) In disputed assessment cases, does the filing of an appeal with the CTA have
the effect of suspending the collection of taxes? (4%)

(B) What is the underlying reason for the prohibition of the use of an injunction
to stay the collection of any internal revenue tax? (2%)

Suggested Answer:

(A) No. By express provision of the law, no appeal taken to the CTA from the decision
of the CIR shall suspend the payment, distraint, levy, and/or sale of any property of the taxpayer
for the satisfaction of his tax liability. However, on meritorious grounds, as when the collection
would prejudice the taxpayer or the government, the CTA may issue an injunctive writ against
collection provided the taxpayer must deposit the amount claimed by the BIR or post a bond to be
fixed by the CTA in an amount not exceeding double the amount of liability. (see Sec. 11, RA 1125)

(B) The underlying reason for the no-injunction rule is the lifeblood theory which
underscores the policy of least interference to the collection of taxes upon which the existence of
the State depends.

XIV.

A municipal ordinance seeks to impose a tax on all kinds of transmissions of real property
located within the territorial jurisdiction of the municipality. It appears that a tax ordinance of the
province where the said municipality is located already provides for a similar transfer tax.

If you were to question the validity of the municipal ordinance, what ground(s) are
you going to raise? Before what office would you file your complaint or protest? (6%)

Suggested Answer:
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I would invoke lack of legal authority on the part of municipalities to levy taxes on transfer
of real property, which power is exclusively vested in the provinces and cities only. The complaint
assailing the validity of the ordinance must be lodged before the Office of the Secretary of Justice.
(Sec. 135, 142, and 187, LGC)

XV.

In 2001, Ironworks Builders, Inc. (Ironworks) rendered construction services to Philippine


Air Terminal Co., Inc. (PIATCO), a PEZA-registered entity. On April 11, 2002, Ironworks filed
with the BIR an administrative claim for refund of excess creditable input VAT attributable to
zero-rated sales to PIATCO for all four quarters of 2001. Due to inaction by the BIR, Ironworks
filed a judicial claim with the CTA on March 10, 2003. During trial, Ironworks presented sales
invoices to prove its zero-rated sale of services to PIATCO. The words zero-rated are, however,
not stated in the sales invoices.

(A) Based on the facts stated above, did the CTA acquire jurisdiction over the
judicial claim? (3%)

(B) Are Ironworks evidence, consisting of sales invoices, sufficient to support its
claim for refund of excess input VAT for taxable year 2001? Cite at least two reasons. (3%)

Suggested Answer:

(A) No, the CTA did not acquire jurisdiction over the judicial claim due to the
taxpayers failure to seasonably file the same before the CTA. The inaction after 120 days is
deemed a denial of the claim and, hence, the taxpayer only has 30 days to appeal. Such 30-day
period of appeal is mandatory and jurisdictional. Here, more than 30 days had already elapsed
from the expiration of the 120-day waiting period, thus, the appeal must be dismissed. (Philex
Mining Corporation v. CIR [2013], En Banc)

(B) No, the sales invoices are inadequate to support the refund claim of Ironworks.
First, the law requires VAT official receipts to substantiate zero-rated sales of services. A VAT
invoice is proper only when the claimant is engaged in sale of goods. Second, the words zero-
rated must be stated in the VAT receipt in order to prove the fact of zero-rated transaction. In
this case, the words zero-rated are not found on the face of the sales invoices. (Sec. 113, NIRC;
Western Mindanao Power Corporation v. CIR [2012]; Takenaka Corp.-Philippine Branch v.
CIR [2016], per J. BERSAMIN)

XVI.

What is automatic review in customs seizure and protest cases and what is its
rationale? (3%)

Suggested Answer:

Automatic review instructs that the Collectors decision which is adverse to the government
should be elevated to the Commissioner of Customs for review, and if affirmed, the
Commissioners decision must be elevated further to the Secretary of Finance for another review.
It is intended to protect the interest of the Government in the collection of taxes and customs duties
in seizure and protest cases because without such automatic review, neither the Commissioner of
Customs nor the Secretary of Finance would know about the Collectors decision. The provision
for automatic review by the Commissioner of Customs and the Secretary of Finance of unappealed
seizure and protest cases was conceived to protect the government against corrupt and conniving
customs collectors. (see Yaokasin v. Commissioner of Customs [1989])

******** GOOD LUCK TO ALL BAR CANDIDATES! ********

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