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2010 Taxation Review by Domondon 1

PRIMUS PRE-BAR REVIEW DIVISION


BAR STAR NOTES
TAXATION
VER. 2010.08.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs
Broker, Management Consultant, Professor of Law and Pre-Bar Reviewer)
How to use the BAR STAR NOTES. The BAR STAR NOTES in the form
of questions and answers as well as textual discussion were specially prepared by
Prof. Domondon for the exclusive use of Bar Reviewees who attended the
2010 Wrap-Up Lectures on TAXATION conducted by Primus Information,
Center, Inc., and the Bar Reviewees of various law schools and Review Centers
where he was invited to lecture on Taxation. Included in the presentation are
doctrines contained in Supreme Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is to provide the Bar Reviewee with
a handy review material which serves as memory-joggers for the September 12,
2010 Bar Examinations in Taxation. The author tries to second guess what would be
included in the Bar Exams using statistical analysis. The actual Bar questions may
not be formulated in the same manner as the BAR STAR NOTES. However, the
doctrines tested in the Bar would in all probability be included in these Notes.
If pressed for time, the author suggests that the reader should focus his
attention on the following:

Nice to know

Should know

Must know and master


It is further suggested that the reader should merely browse those without
stars.
The BAR STAR NOTES in TAXATION is the 4 th in the series of Bar
Star Notes the author has prepared for all the eight Bar subjects. The
other Bar Star Notes may be availed of by enrolling in the 2010 Wrap-Up

lectures conducted by PRIMUS INFORMATION CENTER, INC.Please feel free


to call Baby, Tel. No. 816-07-68 or 817-84-49; Leon, Mobile No. 0917-793-6169;
Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479.
WARNING:
These materials are copyrighted and/or based on the writers books on
Taxation and future revisions. It is prohibited to reproduce any part of these Notes
in any form or any means, electronic or mechanical, including photocopying without
the written permission of the author. These materials are authorized for the use
only of PRIMUS Reviewees and others who attended the authors lectures on
Taxation. Unauthorized users shall not be prosecuted but SHALL BE SUBJECT TO
THE LAW OF KARMASUCH THAT THEY WILL NEVER PASS THE BAR OR
WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author.
THE BEST OF LUCK AND ADVANCE CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
1.
State briefly and concisely the nature of taxation. Alternatively,
define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised through the
legislature to impose burdens upon subjects and objects within its jurisdiction for
the purpose of raising revenues to carry out the legitimate objects of government.
2.

What is the nature of the States power to tax ? Explain briefly.


SUGGESTED ANSWER: The nature of the states power to tax is two-fold. It
is both an inherent power and a legislative power.
It is inherent in
nature being an attribute of sovereignty. This is so, because without the taxes, the
states existence would be imperiled. There is thus, no need for a constitutional
grant
for
the
state
to
exercise
this
power.
It is a legislative power because it involves the promulgation of rules.
Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to
whom it should be paid, and when the tax should be paid.
3.
What is the underlying theory of taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of the nation.

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. et al., 158 SCRA 8, 16-17)


4.

Marshall said that, the power to tax involves the power to

destroy. On the other hand, Holmes stated that the power to tax is not
the power to

destroy while the court sits.


Reconcile

the

statements.

In

alternative,

what

statements

are

the

implications

that

flow

from

the

the
above

SUGGESTED

ANSWERS: Marshalls view refers to a valid tax while the Holmes view refers to an
invalid tax.

a.

The imposition of a

valid tax

could not be judicially restrained merely because it would prejudice taxpayers


property.

b.

An illegal tax could be judicially declared

invalid and should not work to prejudice a taxpayers property.


5.
Discuss briefly the basis/bases, or rationale of
taxation.
SUGGESTED ANSWER: a.
Reciprocal duties of protection and support
between the state and its citizens and residents. Also called
symbiotic
relation between the state and its citizens.
b.
Jurisdiction by the state over persons and property within its
territory.
6.
Discuss briefly but comprehensively the objectives or
purposes of taxation.
SUGGESTED ANSWER: The purposes or objectives of taxation are the
following:
a.
The
primary
purpose:
1)
Revenue purpose.
b.
The
secondary
purposes
1)
Sumptuary or regulatory purpose.
2)
Compensatory purpose.
3)
To implement the power of eminent domain.
7.
Distinguish a tax from a license fee.
SUGGESTED
ANSWER: The following are the distinctions:
a.
Purpose: Tax
imposed for revenue while license fee for regulation. Tax for general public

purposes
while
license
fee
for
regulatory
purposes
only.
b.
Basis: Tax imposed under power of taxation while license fee under police
power.
c.
Amount: In taxation, no limit as to amount while license fee limited to
cost of the license and the expenses of police surveillance and
regulation.
d.
Time of payment: Taxes normally paid after commencement of
business while license fee before.
e.
Effect of
payment: Failure to pay a tax does not make the business illegal while failure to
pay license fee makes business illegal.
f.
Surrender: Taxes,
being the lifeblood of the state, cannot be surrendered except for lawful
consideration while a license fee may be surrendered with or without consideration.
(Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et
al., 49 Phil. 924)
8.
How may the power to tax be utilized to carry out the social
justice program of our government ?
SUGGESTED
ANSWER: 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 rich and poor.
(Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., 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, et al., G. R. No. 152675, and companion case, April
28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
9.
Explain the sumptuary purpose of taxation.
SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the
general welfare and to protect the health, safety or morals of the inhabitants. It is in
the joint exercise of the power of taxation and police power where regulatory taxes
are collected.
Taxation may be made the implement of the states police power. The
motivation behind many taxation measures is the implementation of police power
goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of
the Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that
the August 3, 2005 Southern Cross case is the decision on the motion for
reconsideration of the July 8, 2004 Southern Cross decision.
The so-called sin taxes on alcohol and tobacco manufacturers help dissuade
the consumers from excessive intake of these potentially harmful products.
(Southern Cross Cement Corporation v. Cement Manufacturers Association of the

Philippines, et al., G. R. No. 158540, August 3, 2005)


10.
Taxation distinguished from police power. Taxation is
distinguishable from police power as to the means employed to implement these
public goals. Those doctrines that are unique to taxation arose from peculiar
considerations such as those especially punitive effects (Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No.
158540, August 3, 2005) as the power to tax involves the power to destroy and the
belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the
government, their prompt and certain availability is of the essence.
These considerations necessitated the evolution of taxation as a distinct legal
concept from police power. (Ibid.)
11.
How the power of taxation may be used to implement power
of eminent domain. Tax measures are but enforced contributions exacted on pain
of penal sanctions and clearly imposed for public purpose. In most recent years,
the power to tax has indeed become a most effective tool to realize social justice,
public welfare, and the equitable distribution of wealth. (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizens discount may claim the
discounts granted to senior citizens as tax deduction based on the net cost of the
goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount
is granted. Provided, further, That the total amount of the claimed tax deduction
net of value added tax if applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper documentation and to the provisions
of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v.
Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior
Citizens Act of 2003, Sec. 4 (a)]
12. What are the three basic principles of a sound tax system?
Explain each briefly.
SUGGESTED ANSWER:
The canons of a sound tax system, also known as the characteristics or, principles
of a sound tax system, are used as a criteria in order to determine whether a tax
system is able to meet the purposes or objectives of taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.
13. What are the elements or characteristics of a tax ?
ANSWER:
a.
contribution.
b.
Generally payable in money.
c.
Proportionate in character.

SUGGESTED
Enforced

d.
e.
f.
g.
h.

Levied on persons, property or exercise of a right or privilege.


Levied by the state having jurisdiction.
Levied by the legislature.
Levied for a public purpose.
Paid at regular periods or intervals.

14. State the requisites of a valid tax.


SUGGESTED
ANSWER:
a.
A valid tax
should be within the jurisdiction of the taxing authority.
b.
That the assessment and collection of certain kinds (The same as
the inherent limitations of the power of taxation) should be for a public purpose.
c.
The rule of taxation should be uniform.
d.
That either the person or property of taxes guarantees against
injustice to individuals, especially by way or notice and opportunity for hearing be
provided.
e.
The tax must not impinge on the inherent and Constitutional limitations
on
the
power
of
taxation.
15. What
are the classes or kinds of taxes according to the subject matter or
object
?
SUGGESTED
ANSWER:
a.
Personal, poll
or capitalization imposed on all residents, whether citizen or not. Example
Community Tax.
b.
Property Imposed on property.
Example Real property
tax.
c.
Excise imposed upon
the performance of an act, the enjoyment of a privilege or the engaging in an
occupation. Example income tax, estate tax.
16. What are the kinds of taxes classified as to who bears the
burden ? Explain each briefly.
SUGGESTED ANSWER: Based
on the possibility of shifting the incidence of taxation, or as to who shall bear the
burden of taxation, taxes may be classified into:
a.
Direct taxes. Those that are extracted from the very person who, it is
intended or desired, should pay them (Commissioner of Internal Revenue v.
Philippine Long Distance Telephone Company, G. R. No. 140230, December 15,
2005); they are impositions for which a taxpayer is directly liable on the transaction
or business he is engaged in, (Commissioner of Internal Revenue v. Philippine Long
Distance Telephone Company, supra)
which liability cannot be shifted or
transferred to another. Example income tax, estate tax, donors tax, etc.
b.
Indirect taxes are those that are demanded in the first instance,
from, or are paid by, one person in the expectation and intention that he can shift
the burden to (Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, supra) to someone else not as a tax but as part of the
purchase price. (Commissioner, of Internal Revenue v. American Express

International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing
various cases and authorities) Example value added tax (VAT), documentary
stamp tax, excise tax, percentage tax, etc.
17.
Silkair (Singapore) PTE, Ltd., an international carrier, purchased
aviation gas from Petron Corporation, which it uses for its operations. It
now claims for refund or tax credit for the excise taxes it paid claiming that
it is exempt from the payment of excise taxes under the provisions of Sec.
135 of the NIRC of 1997 which provides that petroleum products are exempt
from excise taxes when sold to Exempt entities or agencies covered by tax
treaties, conventions, and other international agreements for their use and
consumption: Provided, however, That the country of said foreign international
carrier or exempt entities or agencies exempts from similar taxes petroleum
products sold to Philippine carriers, entities or agencies
Silkair further anchors its claim on Article 4(2) of the Air Transport
Agreement between the Government of the Republic of the Philippines and
the Government of the Republic of Singapore (Air Transport Agreement
between RP and Singapore) which reads: Fuel, lubricants, spare parts, regular
equipment and aircraft stores introduced into, or taken on board aircraft in the
territory of one Contracting party by, or on behalf of, a designated airline of the
other Contracting Party and intended solely for use in the operation of the agreed
services shall, with the exception of charges corresponding to the service
performed, be exempt from the same customs duties, inspection fees and other
duties or taxes imposed in the territories of the first Contracting Party , even when
these supplies are to be used on the parts of the journey performed over the
territory of the Contracting Party in which they are introduced into or taken on
board. The materials referred to above may be required to be kept under customs
supervision and control.
Silkair likewise argues that it is exempt from indirect taxes because
the Air Transport Agreement between RP and Singapore grants exemption
from the same customs duties, inspection fees and other duties or taxes
imposed in the territory of the first Contracting Party. It invokes Maceda v.
Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld
the claim for tax credit or refund by the National Power Corporation (NPC)
on the ground that the NPC is exempt even from the payment of indirect
taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason out
your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the
following reasons:
a.
The excise tax on aviation fuel is an indirect tax. 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. (Philippine Geothermal, Inc. v. Commissioner of
Internal Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318)
The

NIRC provides that the excise tax should be paid by the manufacturer or producer
before removal of domestic products from place of production. Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund
based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport
Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair
had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue, 127 Phil. 461, 470 (1967)]
b.
Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or
refund by the National Power Corporation (NPC) on the ground that the NPC is
exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone
Company, G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court
clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs.
Macaraig, Jr., the Court held that an exemption from all taxes granted to the
National Power Corporation (NPC) under its charter includes both direct and indirect
taxes.
An exemption from all taxes excludes indirect taxes, unless the exempting
statute, like NPCs charter, is so couched as to include indirect tax from the
exemption. The amendment under Republic Act No. 6395 enumerated the details
covered by NPCs exemption. Subsequently, P.D. 380, made even more specific the
details of the exemption of NPC to cover, among others, both direct and indirect
taxes on all petroleum products used in its operation. Presidential Decree No. 938
[NPCs amended charter] amended the tax exemption by simplifying the same law
in general terms. It succinctly exempts NPC from all forms of taxes, duties, fees
The use of the phrase all forms of taxes demonstrates the intention of the law to
give NPC all the tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2)
of the Air Transport Agreement between RP and Singapore cannot, without a clear
showing of legislative intent, be construed as including indirect taxes. 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)
18. What are the different kinds of
purpose
?
ANSWER:
fiscal or revenue imposed for the purpose of raising
of the government.
b.
imposed primarily for the regulation of useful or
enterprises and secondarily only for the raising of public

taxes classified as to
SUGGESTED
a.
General,
public funds for the service
Special or regulatory
non-useful occupation or
funds.

LIMITATIONS OR RESTRICTIONS ON THE POWER


1.
Purpose for the limitations on the power of taxation.
The inherent and constitutional limitations to the power of taxation are
safeguards which would prevent abuse in the exercise of this otherwise unlimited
and plenary power.
The limitations also serve as a standard to measure the validity of a tax law or
the act of a taxing authority. A violation of the limitations serves to invalidate a tax
law or act in the exercise of the power to tax.
INHERENT LIMITATIONS
1. What are the inherent limitations on the power of taxation ?
SUGGESTED ANSWERS:
a.
Public purpose. The revenues collected from taxation should be
devoted to a public purpose.
b.
No improper delegation of legislative authority to tax. Only the
legislature can exercise the power of taxes unless the same is delegated to some
other governmental body by the constitution or through a law which does not violate
any provision of the constitution.
c.
Territoriality. The taxing power should be exercised only within
territorial boundaries of the taxing authority.
d.
Recognition of government exemptions; and
e.
Observance of the principle of comity. Comity is the respect
accorded by nations to each other because they are equals. On the other hand
taxation is an act of sovereign. Thus, the power should be imposed upon equals out of
respect.
Some authorities include no double taxation.
2.
What are the principles to consider in the determination of
whether tax revenues are devoted for a public purpose ?
SUGGESTED ANSWER:
a.
The tax revenues are for a public purpose if utilized for the benefit
of the community in general. An alternative meaning is that tax proceeds should
be utilized only to attain the objectives of government.
b.
Inequalities resulting from the singling out of one particular class
for taxation or exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is free to
select the subjects of taxation.
BASIS: The lifeblood theory.
c.
An individual taxpayer need not derive direct benefits from
the tax.
REASON: The paramount consideration is the welfare of the greater portion

of the population.
d.
A tax may be imposed, not so much for revenue purposes,
but under police power for the general welfare of the community. This would still be
for a public purpose.
e.
Public purpose continually expanding. Areas formerly left
to private initiative now lose their boundaries and may be undertaken by the
government if it is to meet the increasing social challenges of the times.
f.
Tax revenue must not be used for purely private purposes
or for the exclusive benefit of private persons.
g.
Private persons may be benefited but such benefit should be
merely incidental as its main object is the benefit of the community in general.
h.
Determined at the time of enactment of tax law and not at the
time of implementation.
i.
There is a presumption of public purpose even if the tax law does
not specifically provide for its purpose. (Santos & Co., v. Municipality of
Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the traditional notion of use by the
public but held synonymous with public interest, public benefit, public welfare, and
public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)
3. A law was enacted imposing a tax on manufacturers of coconut
oil, the proceeds of which are to be used exclusively for the protection and
promotion of the coconut industry, namely, to improve the working
conditions in coconut mills and to conduct research on the use of coconut
oil for motor fuel. Some of the manufacturers of coconut oil challenge the
validity of the law, contending that the tax is to be used for a private
purpose, and therefore, the law violates the rule that public revenues shall
not be appropriated for anything but a public purpose. Decide with
reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot be
denied that the coconut industry is one of the major industries supporting the
national economy. It is, therefore, the states concern to make it a strong and
secure source not only of the livelihood of the significant segment of the population,
but also of export earnings, the sustained growth of which is one of the
imperatives of economic growth. (Philippine Coconut Producers Federation, Inc.
(Cocofed v. Presidential Commission on Good Government, 178 SCRA 236, 252)
4.
Requisites for taxpayers, concerned citizens, voters or
legislators to have locus standi to sue.
a.
In general, the case should involve constitutional issues. (David, et
al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3,
2006)
b.
For taxpayers, there must be a showing:
1)
That tax money is being extracted and spent in violation

of specific constitutional protections against abuses of


legislative power.
(Flast v. Cohen, 392 U.S.
83)
2)
That public money is being deflected to any
improper
purpose (Pascual v. Secretary of Public Works, 110
Phil.
33) or a
claim of illegal disbursement of public funds
or that the tax
measure is unconstitutional. (David, supra)
3)
A taxpayer is allowed to sue where there is a
claim
that public funds are illegally disbursed, or that public
money is being deflected
to any improper purpose, or that
there is a wastage of
public funds through
the enforcement of
an invalid or
unconstitutional law. (Abaya v. Ebdane, G.
R.
No. 167919, February
14, 2007; Garcia v. Enriquez, Jr. G.R.
No.
112655 December 9,
1993, Minute Resolution)
A taxpayers suit is properly brought only when there
is
an exercise of the spending or taxing power of
Congress.
(Automotive Industry Workers Alliance
(AIWA),etc., et al., v. Romulo,
etc. ,et
al., G. R. No.
157509,
January 18, 2005 citing Gonzales v.
Narvasa, G.
R. No. 140835, August 14, 2000, 337 SCRA
733,
741)
c.
For voters, there must be a showing of obvious interest in the
validity of the election law in question.
d.
For concerned citizens, there must be a showing that the issues
raised are of transcendental importance which must be settled early.
e.
For legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators. (David, et al., v.
President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
5.
Only those directly affected have locus standi to impugn the
alleged encroachment by the executive department into the legislative
domain of Congress.
a.
Only those who shall be directly affected by such executive
encroachment, such as for example employees who would find themselves subject
to disciplinary powers that may be imposed under the questioned Executive Order
as they have a direct and specific interest in raising the substantive issue therein
(Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al.,
G. R. No. 157509, January 18, 2005) or employees who are going to be demoted,
transferred or otherwise affected by any personnel action subject o the rule on
exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from the
alleged executive encroachment of the legislative function to amend, modify and/or
repeal laws. (Automotive Industry Workers Alliance (AIWA),etc., et al., supra, citing
Gonzales v. Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)
6.
Locus standi being merely a matter of procedure, have been
waived in certain instances where a party who is not personally injured may
be allowed to bring suit. The following are examples of instances where suits have
been brought by parties who have not have been personally injured by the operation

of a law or any other government act but by concerned citizens, taxpayers or voters
who actually sue in the public interest:
a.
Taxpayers suits to question contracts entered into by the national
government or government-owned or controlled corporations allegedly in
contravention of the law.
b.
A taxpayer is allowed to sue where there is a claim that public funds are
illegally disbursed, or that public money is being deflected to any improper purpose,
or that there is a wastage of public funds through the enforcement of an invalid or
unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)
7. The VAT law provides that, the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%) after any of
the following conditions have been satisfied. (i) value-added tax collection
as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or (ii) national government
deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of legislative
power but only of the discretion as to the execution of the law. This is constitutionally
permissible.
Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his
authority. In the above case the Secretary of Finance becomes merely the agent of
the legislative department, to determine and declare the even upon which its
expressed will takes place. The President cannot set aside the findings of the
Secretary of Finance, who is not under the conditions acting as the execute alter ego
or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases citing various cases]]
8. Instances of proper delegation: When taxing power could be
delegated: Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under the
flexible tariff clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under Section 23 (2)
of Article VI of the Constitution.
c. The delegation to the President of the Philippines to enter into
executive agreements, and to ratify treaties which may contain tax exemption
provisions subject to the concurrence by the Senate in the ratification made by the
President.
d.
Delegation to the people at large.
e.
Delegation to administrative bodies [Abakada Guro Party List
(Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005],
which is referred to as subordinate legislation.

In this instance, there is a requirement that the law is complete in all


aspects so what is delegated is merely the implementation of the law or there
exists sufficiently determinate standards to guide the delegate and prevent a total
transference of the taxing power.
9.
Paradigm shift from exclusive Congressional power to
direct grant of taxing power to local legislative bodies. The power to tax is no
longer vested exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the
1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No.
152675, and companion case, April 28, 2004 citing National Power Corporation v. City
of Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, is not regarded as a transfer of general legislative
power, but rather as the grant of authority to prescribe local regulations, according
to immemorial practice, subject, of course, to the interposition of the superior in
cases of necessity. (People v. Vera, 65 Phil. 56)
10.
Taxing power of the local government is limited. The taxing
power of local governments is limited in the sense that Congress can enact
legislation granting tax exemptions.
While the system of local government taxation has changed with the onset of
the 1987 Constitution, the power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the Constitution,
the basic doctrine on local taxation remains essentially the same, the power to
tax is [still] primarily vested in the Congress. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.
162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu
International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996,
261 SCRA 667, 680)
11.
Further amplification by Bernas of the local governments
power to tax. What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that municipal corporations
do not possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these powers. The
power of the legislative authority relative to the fiscal powers of local governments
has been reduced to the authority to impose limitations on municipal powers.
Moreover, these limitations must be consistent with the basic policy of local
autonomy. The important legal effect of Section 5 is thus to reverse the principle
that doubts are resolved against municipal corporations. Henceforth, in interpreting

statutory provisions on municipal fiscal powers, doubts will be resolved in favor of


municipal corporations. It is understood, however, that taxes imposed by local
government must be for a public purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the local unit to pass. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)
12.
Reconciliation of the local governments authority to tax and
the Congressional general taxing power. Congress has the inherent power to
tax, which includes the power to grant tax exemptions. On the other hand, the
power of local governments, such as provinces and cities for example Quezon City,
to tax is prescribed by Section 151 in relation to Section 137 of the LGC which
expressly provides that notwithstanding any exemption granted by any law or other
special law, the City or a province may impose a franchise tax. It must be noted
that Section 137 of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of
Congress to grant tax exemptions over and above the power of the local
governments delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.
162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The legal
effect of the constitutional grant to local governments simply means that in
interpreting statutory provisions on municipal taxing powers, doubts must be
resolved in favor of municipal corporations. [Ibid., referring to Philippine Long
Distance Telephone Company, Inc. (PLDT) vs. City of Davao]
13. General principles of income taxation in the Philippines or
the source rule of income taxation as provided in the NIRC of 1997.
a. A citizen of the Philippines residing therein is taxable on all income
derived from sources withinand 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 anoverseas 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;
d.
An alien individual, whether a resident or not of the Philippines,
is taxable only onincome 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.
(Sec. 23, NIRC of 1997, emphasis supplied)
14.
Juliane a non-resident alien appointed as a commission agent
by a domestic corporation with a sales commission of 10% all sales actually
concluded and collected through her efforts. The local company withheld the
amount of P107,000 from her sales commission and remitted the same to
the BIR.
She filed a claim for refund alleging that her sales commission is not
taxable because the same was a compensation for her services rendered in
Germany and therefore considered as income from sources outside the
Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. 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.
Since the activity of securing the sales were in Germany, then the income did
not originate from sources from within the Philippines. (Commissioner of Internal
Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)
15. Ensite, Ltd.. is a Canadian corporation not doing business in
the Philippines. It holds 40% of the shares of Philippine Stamping Plant,
Inc.,., a Philippine company while the 60% is owned by Fred Corporation, a
Filipino-owned Philippine corporation. Ensite Co. also owns 100% of the
shares of Susanto Co., an Indonesian company which has a duly licensed
Philippine branch. Due to worldwide restructuring of the Ensite Ltd.,.
group, Ensite Ltd.,. decided to sell all its shares in Philippine Stamping
Plant, Inc. and Susanto Co. 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 Ensite Ltds
bank account in the U.S. and that title to the Philippine Stamping Plant,
Inc. and Susanto Co. shall be transferred to General Co., in Toronto
Canada where stock certificates will be delivered. General 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: The payments of the purchase price will be subject to withholding tax.
Considering that all the activities (sales) occurred within the Philippines, the income
is considered as income from within, subject to Philippine income taxation. Ensite,
Ltd. being a foreign corporation is to be taxed on its income derived from sources
within
the
Philippines.

16.Ensite, Ltd. is a Canadian corporation, which has a duly


licensed Philippine branch engage in trading activities in the Philippines.
Ensite, Ltd.. also invested directly in 40% of the shares ofstock of
Philippine Stamping Plant, Inc.., a Philippine corporation. These shares
are booked in the Head Office of Ensite, Ltd.. and are not reflected as
assets of the Philippine branch. In 2009, Philippine Stamping Plant, Inc..
declared dividends to its stockholders. Before remitting the dividends to
Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as to
whether it will subject the remittance to withholding tax. There is no need
to discuss WT rates, if applicable. Focus your discussion on what is the
issue.
SUGGESTED ANSWER:
Philippine Stamping Plant, Inc.. should subject the remittance to withholding tax..
Since Philippine Stamping Plant. is a Philippine corporation, its shares of stock have
obtained a business situs in the Philippines, hence the dividends are considered as
income from within. Ensite. Ltd., being a foreign corporation, should be subject to
tax on its income from within.
17. Philippine Stamping Plant, Inc., a Philippine corporation, has
an executive Larry who is a Filipino citizen. Philippine Stamping Plant,
Inc,. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and
will assign Larry for an indefinite period to work full time for Kuala Lumpur
Manufacturing, Inc.. Larry will bring his family to reside in Malaysia and
will lease out his residence in the Philippines. The salary of Larry will be
shouldered 50% by Philippine Stamping Plant, Inc.. while the other 50%
plus housing, cost of living and educational allowances of Larrys
dependents will be shouldered by Kuala Lumpur Manufacturing, Inc..
Philippine Stamping Plant, Inc.. will credit the 50% of Larrys salary to his
Philippine bank account. Larry will sign the contract of employment in the
Philippines. He will also be receiving rental income for the lease of his
Philippine
residence.
Are these salaries, allowances and rentals subject to Philippine
income tax? Explain briefly.
SUGGESTED
ANSWER: The salaries and allowances of Larry, being derived from labor or
personal services rendered outside of the Philippines is considered as income from
without. Since Larry 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.
18.
Obama Airlines, Inc., a foreign airline company which does
not maintain any flight to and from the Philippines sold air tickets in the
Philippines, through a general sales agent, relating to the carriage of
passengers and cargo between two points, both outside the Philippines.
a.
Is Obama, Inc., subject to income taxes on the sale of the
tickets ?
SUGGESTED ANSWER: Yes. The source of income which is taxable is that
activity which produced the income. The sale of tickets in the Philippines is the
activity that determines whether such income is taxable in the Philippines.

The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The situs of the source of payments is the Philippines. the
flow of wealth proceeded from and occurred, within the Philippine territory, enjoying
the protection accorded by the Philippine Government. In consideration of such
protection, the flow of wealth should share the burden of supporting the
government. [Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are
engaged in or doing business in the Philippines and their income from sales of
passage documents here is income from within the Philippines. Thus, the off-line air
carrier liable for the 32% (now 30%) tax on its taxable income. [South African
Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010
citingCommissioner of Internal Revenue v. British Overseas Airways Corporation
(British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]
b.
Supposing that Obama, Inc., sells tickets outside of the
Philippines for passengers it carry from Gold City, South Africa to the
Philippines but returns to South Africa without any cargo or passengers.
Would it then be subject to any Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to
any income tax because the activity which generated the income (the sale of the
tickets) was performed outside of the Philippines.
It is not subject to the carriers tax based on gross Philippine billings because there
were no lifts that originated from the Philippines. Gross Philippine Billings refers to
the amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the
ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
c.
Would your answer be the same if Obama, Inc. sold tickets
outside of the Philippines for travelers who are going to picked up by Obama,
Inc., planes from the Diosdado Macapagal Intl. Airport at Clark, Angeles,
Pampanga, bound for Nairobi, Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to
the carriers tax based on Gross Philippine Billings. (GPB).
Gross Philippine Billings refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage document. [NIRC of
1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur
from the Philippines, income is included in GPB. (South African Airways v.
Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)
19.
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)
CONSTITUTIONAL LIMITATIONS
1.
Constitutional limitations on the power of taxation . The
general or indirect constitutional limitations as well as the specific or direct
constitutional limitations.
2. The general or indirect constitutional limitations on the power of
taxation are:
a.
Due process clause;
b.
Equal protection clause;
c.
Freedom of the press;
d.
Religious freedom;
e.
No taking of private property without just compensation;
f.
Non-impairment clause;
g.
Law-making process:
1)
Bill should embrace only one subject
expressed
in the title
thereof;
2)
Three (3) readings on three separate days;
3)
Printed copies in final form distributed three
(3) days before
passage.
h.
Presidential power to grant reprieves, commutations and pardons
and remittal of fines and forfeiture after conviction by final judgment.
3.
The specific or direct constitutional limitation.
a.
No imprisonment for non-payment of a poll tax;
b.
Taxation shall be uniform and equitable;
c.
Congress shall evolve a progressive system of taxation;
d.
All appropriation, revenue or tariff bills shall originate exclusively in
the House of Representatives, but the Senate may propose and concur with
amendments;
e. The President shall have the power to veto any particular item or items in
an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items
to which he does not object;
f.
Delegated power of the President to impose tariff rates, import and
export quotas, tonnage and wharfage dues:
1)
Delegation by Congress
2)
through a law
3)
subject to Congressional limits and
restrictions
4)
within the framework of national development program.

g.
Tax exemption of charitable institutions, churches, parsonages and
convents appurtenant thereto, mosques, and all lands, buildings and improvements of
all kinds actually, directly and exclusively used for religious, charitable or educational
purposes;
h.
No tax exemption without the concurrence of majority vote of all
members of Congress;
i.
No use of public money or property for religious purposes except if
priest is assigned to the armed forces, penal institutions, government orphanage or
leprosarium;
j.
Money collected on tax levied for a special purpose to be used only
for such purpose, balance if any, to general funds;
k.
The Supreme Court's power to review judgments or orders of lower
courts in all cases involving the legality of any tax, impose, assessment or toll or the
legality of any penalty imposed in relation to the above;
l.
Authority of local government units to create their own sources of
revenue, to levy taxes, fees and other charges subject to guidelines and limitations
imposed by Congress consistent with the basic policy of local autonomy;
m.
Automatic release of local government's just share in national taxes;
n.
Tax exemption of all revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational
purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative
educational institutions subject to limitations provided by law including restrictions on
dividends and provisions for reinvestment of profits;
p.
Tax exemption of grants, endowments, donations or contributions
used actually, directly and exclusively for educational purposes subject to conditions
prescribed by law.
5.
Equal protection of the law clause is subject to reasonable
classification. If the groupings are characterized by substantial distinctions that
make real differences, one class may be treated and regulated differently from
another. The classification must also be germane to the purpose of the law and must
apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al.,
G.R. No. 127410, January 20, 1999)
6.
Requisites for valid classification. 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,
b.
that it must be germane to the purpose of the law;
c.
that it must not be limited to existing conditions only; and
d.
that it must apply equally to each member of the class.
The standard is satisfied 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., et al., G. R. No. 166715, August 14, 2008]

7.
Equal protection does not demand absolute equality. It
merely requires that all persons shall be treated alike, under like circumstances and
conditions, both as to the privileges conferred and liabilities enforced. (Santos v.
People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal protection
and the person to which she is being compared were indeed similarly situated, i.e.,
that they committed identical acts for which they were charged with the violation of
the same provisions of the NIRC; and that they presented similar arguments and
evidence in their defense - yet, they were treated differently. (Santos, supra)
8.
Tests to determine validity of classification.
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.
The traditional (or rational basis) test.
b.
The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9.
The traditional (or rational basis) test used in order to
determine the validity of classification. The classification is valid if it is
rationally related to a constitutionally permissible state interest.
The complainant must prove that the classification is invidous, wholly
arbitrary, or capricious, otherwise the classification is presumed to be valid.
(Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland, 366
U.S. 420; United States Railroad Retirement Board v. Fritz, 449 U.S. 166)
10.
The strict scrutiny (or compelling interest) test used in
order to determine the validity of the classification. Government regulation
that intentionally discriminates against a suspect class such as racial or ethnic
minorities, is subject to strict scrutiny and considered to violate the equal protection
clause unless found necessary to promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no
alternative, less burdensome means is available to accomplish the state interest.
Thus, it was held that denial of free public education to the children of
illegal aliens imposes an enormous and lasting burden based on a status over which
the children have no control is violative of equal protection because there is no
showing that such denial furthers a substantial state goal. (Plyler v. Doe, 457
U.S. 202)
11.
The intermediate level of scrutiny (or quasi-suspect class)
test used in order to determine the validity of he classification.
Classification based on gender or legitimacy are not suspect, but neither are they
judged by the traditional or rational basis test.

Intentional discriminations against members of a quasi-suspect class


violate equal protection unless they are substantially related to important
government objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but not
widowers, has been held valid for it furthers the state policy of cushioning the
financial impact of spousal loss upon the sex for whom that loss usually imposes a
heavier burden. (Kahn v. Shevin, 416 U.S. 351)
12.
Equality and uniformity of taxation may mean the same as
equal protection. In such a case, the terms would mean that all subjects and
objects of taxation which are similarly situated shall be subject to the same burdens
and granted the same privileges without any discrimination whatsoever.
13.
It is inherent in the power to tax that the State be free to
select the subjects of taxation, and it has been repeatedly held that, "inequalities
which result from a singling out of one particular class of taxation, or exemption,
infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v.
Santos, et al., 277 SCRA 617)
9. Benjie is a law-abiding citizen who pays his real estate taxes
promptly. Due to a series of typhoons and adverse economic conditions,
an ordinance is passed by Soliman City granting a 50% discount for
payment of unpaid real estate taxes for the preceding year and the
condonation of all penalties on fines resulting from the late payment.
Arguing that the ordinance rewards delinquent tax payers and
discriminates against prompt ones, Benjie demands that he be refunded an
amount equivalent to one-half of the real property taxes he paid. The
municipal attorney rendered an opinion that Benjie cannot be reimbursed
because the ordinance did not provide for such reimbursement. Benjie files
suit to declare the ordinance void on the ground that it is a class
legislation. Will his suit prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because there is
no violation of the equal protection suit. There is a valid classification between
those who already paid their taxes and those who have not. Furthermore, the
taxing authority has the prerogative to select the subjects and objects of taxation,
including granting a 50% discount in the payment of unpaid real estate taxes, and
the condonation of all penalties on fines resulting from late payment.
10.
The rewards law to tax collectors does not violate equal
protection. The equal protection clause recognizes a valid classification, that is, a
classification that has a reasonable foundation or rational basis and not arbitrary.
With respect to RA 9335, its expressed public policy is the optimization of the
revenue-generation capability and collection of the BIR and the BOC. Since the
subject of the law is the revenue- generation capability and collection of the BIR
and the BOC, the incentives and/or sanctions provided in the law should logically
pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC

because they have the common distinct primary function of generating revenues for
the national government through the collection of taxes, customs duties, fees and
charges.
Indubitably, such substantial distinction is germane and intimately related to
the purpose of the law. Hence, the classification and treatment accorded to the BIR
and the BOC under RA 9335 fully satisfy the demands of equal protection.
(ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715,
August 14, 2008)
11.
The prosecution of one guilty person while others equally
guilty are not prosecuted, however, is not, by itself, a denial of the equal
protection of the laws. Where the official action purports to be in conformity to
the statutory classification, an erroneous or mistaken performance of the statutory
duty, although a violation of the statute, is not without more a denial of the equal
protection of the laws.
The unlawful administration by officers of a statute fair on its face,
resulting in its unequal application to those who are entitled to be treated alike, is
not a denial of equal protection unless there is shown to be present in it an element
of intentional or purposeful discrimination. This may appear on the face of the
action taken with respect to a particular class or person, or it may only be shown by
extrinsic evidence showing a discriminatory design over another not to be inferred
from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12.
Equal protection should not be used to protect commission
of crime. While all persons accused of crime are to be treated on a basis of
equality before the law, it does not follow that they are to be protected in the
commission of crime. It would be unconscionable, for instance, to excuse a
defendant guilty of murder because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as to
some persons should be converted into a defense for others charged with crime,
the result would be that the trial of the district attorney for nonfeasance would
become an issue in the trial of many persons charged with heinous crimes and the
enforcement of law would suffer a complete breakdown. (Santos v. People, et al, G.
R. No. 173176, August 26, 2008)
13.
Illustration of double taxation in local taxation. there is indeed
double taxation if Coca-Cola is subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same
subject matter the privilege of doing business in the City of Manila; (2) for the
same purpose to make persons conducting business within the City of Manila
contribute to city revenues; (3) by the same taxing authority City of Manila; (4)
within the same taxing jurisdiction within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods per calendar year; and (6) of the same

kind or character a local business tax imposed on gross sales or receipts of the
business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R.
No. 181845, August 4, 2009)
14.
A lawful tax on a new subject, or an increased tax on an old
one, does not interfere with a contract or impairs its obligation, within the
meaning of the constitution. (Tolentino v. Secretary of Finance, et al., and
companion cases, 235 SCRA 630)
15.
The withdrawal of a tax exemption should not be construed
as prohibiting future grants of exemption from all taxes. (Philippine Long
Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867,
August 22, 2001)
16.
Tax exemptions in franchises are always subject to
withdrawal. A legislative franchise is granted with the express condition that it is
subject to amendment, alteration, or repeal. (1987 Constitution, Art. XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through the
exercise of prophetic discernment, fetter the exercise of the taxing power of the
State. For not only are existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of sovereign power is
also read into contracts as a basic postulate of the legal order. The policy of
protecting contracts against impairment presupposes the maintenance of a
government which retains adequate authority to secure the peace and good order
of society. (Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.
155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone Company,
Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001 made the
observation that since Smarts franchise was granted after the effectivity of the Local
Government Code that its tax exemption privilege was reinstated. However,Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 is explicit in its holding that Smart is not entitled to a tax
exemption.
17. When withdrawal of a tax exemption impairs the obligation
of contracts. The Contract Clause has never been thought as a limitation on the
exercise of the States power of taxation save only where a tax exemption has been
granted for a valid consideration. (Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008) citing Tolentino v.
Secretary of Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685) The
author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the
others)

18.
The primary reason for the withdrawal of tax exemption
privileges granted to government owned and controlled corporations and all
other units of government was that such privilege resulted to serious tax base erosion
and distortions in the tax treatment of similarly situated enterprises, hence resulting
in the need for these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due them. (Philippine Ports
Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
19.
National Power Corporation (NPC) is of the insistence that it
is not subject to the payment of franchises taxes imposed by the Province of
Isabela because all of its shares are owned by the Republic of the
Philippines. It is thus, an instrumentality of the National Government which
is exempt from local taxation. As such it is not a private corporation engaged
in business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company,
Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the
authority of the City of Davao, a local government unit, to impose and collect a local
franchise tax because the Local Government Code has withdrawn all tax exemptions
previously enjoyed by all persons and authorized local government units to impose a
tax on business enjoying a franchise tax notwithstanding the grant of tax exemption
to them.
20.
In lieu of all taxes in the franchise of ABS-CBN does not
exempt it from local franchise taxes. It does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the exemption would
include both local, whether municipal, city or provincial, and national tax. Whether
the in lieu of all taxes provision would include exemption from local tax is not
unequivocal.
The right to exemption from local franchise tax must be clearly established
and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. Verily, the uncertainty in the in lieu of all taxes provision
should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is
in fact covered by the exemption so claimed but has failed to do so. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier
case involving another telecommunications company Smart Communications, Inc.
v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The
author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the
others.)
21.

In lieu of all taxes refers to national internal revenue

taxes and not to local taxes. The in lieu of all taxes clause applies only to
national internal revenue taxes and not to local taxes. As appropriately pointed out
in the separate opinion of Justice Antonio T. Carpio in a similar case involving a
demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes,
other than income tax, imposed under the National Internal Revenue Code. The "in
lieu of all taxes" clause does not apply to local taxes. The proviso in the first
paragraph of Section 9 of Smart's franchise states that the grantee shall "continue
to be liable for income taxes payable under Title II of the National Internal Revenue
Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes
paid to the "Commissioner of Internal Revenue or his duly authorized
representative in accordance with the National Internal Revenue Code." Moreover,
the same paragraph declares that the tax returns "shall be subject to audit by the
Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes.
The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under
the National Internal Revenue Code and not to local taxes. Even with respect to
national internal revenue taxes, the "in lieu of all taxes" clause does not apply to
income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to
also apply to local taxes, Congress would have expressly mentioned the exemption
from municipal and provincial taxes. Congress could have used the language in
Section 9(b) of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied,
established or collected by any authority whatsoever, municipal, provincial or
national, from which the grantee is hereby expressly exempted, x x x. (Emphasis
supplied).
However, Congress did not expressly exempt Smart from local taxes.
Congress used the "in lieu of all taxes" clause only in reference to national internal
revenue taxes. The only interpretation, under the rule on strict construction of tax
exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only
to national and not to local taxes.
[Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Philippine Long
Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds
application to all telecommunications companies.
22.
The in lieu of all taxes clause in the franchise of ABS-CBN
has become functus officio with the abolition of the franchise tax on
broadcasting companies with yearly gross receipts exceeding Ten Million
Pesos. The clause in lieu of all taxes does not pertain to VAT or any other tax.
It cannot apply when what is paid is a tax other than a franchise tax. Since the
franchise tax on the broadcasting companies with yearly gross receipts exceeding
ten million pesos has been abolished, the in lieu of all taxes clause has now
become functus officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)

NOTES AND COMMENTS: This is practically the same holding in an earlier


case involving another telecommunications company. Smart Communications, Inc.
v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The
author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the
others.)
23.
Double taxation in its generic sense, this means taxing the
same subject or object twice during the same taxable period. In its particular
sense, it may mean direct duplicate taxation, which is prohibited under the
constitution because it violates the concept of equal protection, uniformity and
equitableness of taxation. Indirect duplicate taxation is not anathematized by the
above constitutional limitations.
24. Elements of direct duplicate taxation:
a.
Same
1)
Subject or object is taxed twice
2)
by the same taxing authority
3)
for the same taxing purpose
4)
during the same taxable period
b.
Taxing all of the subjects or objects for the first time without taxing all of
them for the second time.
If any of the elements are absent then there is indirect duplicate taxation which is not
prohibited by the constitution.
NOTES AND COMMENTS:
a.
Presence of the 2nd element violates the equal protection
clause. If only the 1stelement 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,
The presence of the 2nd element, taxing all of the subjects and objects 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.
25. Double taxation a valid defense against the legality of a tax
measure if the double taxation is direct duplicate taxation, because it would
violate the equal protection clause of the constitution.
26.
When an item of income is taxed in the Philippines and the
same income is taxed in another country, this would be known as
international juridical double taxation which is the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject
matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson
and Son, Inc., et al.,G.R. No. 127105, June 25, 1999)

27. Methods for avoiding double taxation (indirect duplicate


taxation).
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.
28.
Tax credit generally refers to an amount that is subtracted directly
from ones 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)
29.
A tax deduction is defined as a subtraction fro 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)
30.
The petitioners allege that the R-VAT law is constitutional
because the Bicameral Conference Committed has exceeded its authority in
including provisions which were never included in the versions of both the
House and Senate such as inserting the stand-by authority to the President
to increase the VAT from 10% to 12%; deleting entirely the no pass-on
provisions found in both the House and Senate Bills; inserting the provision
imposing a 70% limit on the amount of input tax to be credited against the
output tax; and including the amendments introduced only by Senate Bill No.
1950 regarding other kinds of taxes in addition to the value-added tax.
Thus, there was a violation of the constitutional mandate that revenue bills
shall originate exclusively from the House of Representatives.
Are the contentions of such weight as to constitute grave abuse of
discretion which may invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion because
all the changes and modifications made by the Bicameral Conference Committee
were germane to subjects of the provisions referred to it for reconciliation.
The Bicameral Conference Committee merely exercised the judicially
recognized long-standing legislative practice of giving said conference committee
ample latitude for compromising differences between the Senate and the House.
[Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September

1, 2005 and companion cases]


31.
The VAT while regressive is NOT violative of the mandate to
evolve a progressive system of taxation. Do you agree ? The mandate to
Congress is not to prescribe but to evolve a progressive system of taxation.
Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would
have been prohibited with the proclamation of the constitutional provision. Sales
taxes are also regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G.
R. No. 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary
of Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]
32.
All revenues and assets of non-stock, non-profit educational
institutions that are actually, directly and exclusively used for educational
purposes shall be exempt from taxation.
33.
Revenues and assets of proprietary educational institutions,
including those which are cooperatively owned, may be entitled to
exemptions subject to limitations provided by law including restrictions on
dividends and provisions for reinvestments. There is no law at the present
which grants exemptions, other the exemptions granted to cooperatives.
OTHER CONCEPTS
1.

Distinguish tax from debt.

Basis

TAX

DEBT

based on law

based on contract or
judgment

Failure to Pay

may result in

no imprisonment

imprisonment
Mode of Payment

generally payable in

payable in money,

money

property or service

Assignability

not

assignable

Payment

unless it becomes a

assignable

may be a subject

debt is not subject to


compensation or setoff
Interest

does not draw interest

draws interest if

Authority

Prescription

unless delinquent

stipulated or delayed

imposed by public

can be imposed by

authority

private individuals

Prescriptive periods for

debt under the Civil

tax under NIRC

Code

WARNING: Do not use the above arrangement in answering Bar questions.


2.
Compensation takes place by operation of law, where the local
government and the taxpayer are in their own right reciprocally debtors and creditors
of each other, and that the debts are both due and demandable, in consequence of
Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
3. May there be compensation or set-off between a national tax and a
debt ? Reason out your answer.
SUGGESTED
ANSWER: As a general rule, there could be no compensation or set-off between a
tax
and
a
debt
for
the
following
reasons:
a.
Lifeblood
theory.
b.
Taxes are
not contractual obligations 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)
c.
Taxes cannot be the subject
of compensation because the government and taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
Thus, it is correct to say that the offsetting of a taxpayers tax refund with its
alleged tax deficiency is unavailing under Art. 1279 of the Civil Code. (South
African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February
16, 2010 reiterating Caltex Philippines, Inc. v. Commission on Audit, which applied
Francia v. Intermediate Appellate Court)
4. Exceptions: When set-off or compensation allowed for local
taxes.
a.
Where
both claims already become overdue and demandable as well as fully liquidated.
Compensation takes place by operation of law under Art. 1200 in relation to Arts.
1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443)
b.
Compensation takes place by
operation of law, where the government and the taxpayer are in their own right
reciprocally debtors and creditors of each other, and that the debts are both due
and demandable. This is in consequence of Article 1278 and 1279 of the Civil Code.

(Domingo

v.

Garlitos,

8
SCRA
443)
c.
,The Supreme Court
upheld the validity of a set-off between the taxpayer and the government. In both
cases, the claims of the taxpayers therein were certain and liquidated. The claims
were certain since there were no doubts or disputes as to their refundability. In
fact, the government admitted the fact of over-payment.
(Commissioner of
Internal
Revenue
v.
Esso
Standard
Eastern,
Inc.,
172
SCRA
364)
d.
In case of a tax overpayment, the BIRs
obligation to refund or off-set arises from the moment the tax was paid. REASON:
Solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc
172
SCRA
364)
e.
While judgment should be rendered in favor of Republic for unpaid
taxes, judgment ought at the same time to issue for Sampaguita Pictures
commanding payment to the latter by the Republic of the value of the backpay
certificates which the Republic received. (Republic v. Ericta, 172 SCRA 623)
5. Gilbert obtained a judgment for a sum of money against
the municipality of Camiling. The judgment has become final although
execution has not issued. Upon receiving an assessment for municipal
sales taxes from the Municipal Treasurer, Gilbert executed a partial
assignment 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 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.
Such was the holding in Domingo v. Garlitos, 8 SCRA 443, a case decided by the
Supreme
Court
whose
factual
antecedents
are
similar
to
the
problem.
6.
In
case of doubt, tax laws must be construed strictly against the State and
liberally in favor of the taxpayer because taxes, as burdens which must be
endured by the taxpayer, should not be presumed to go beyond what the law
expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc.,
v. Court of Appeals, et al., 293 SCRA 92, 99)
7.
Interpretation in the imposition of taxes, is not the similar
doctrine as that applied to tax exemptions. The rule in the interpretation of tax
laws is that a statute will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that in case of
doubt, such statutes are to be construed most strongly against the government and
in favor of the subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly import.

[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.


167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322, 330-331
(1997)] As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws. (Ibid., citing CIR v. Philippine American Accident
Insurance Company, Inc.,G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8.
Strict interpretation of tax exemption laws. Taxes are what
civilized people pay for civilized society. They are the lifeblood of the nation. Thus,
statutes granting tax exemptions are construed 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, et
al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing
Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082,
September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered by the exemption so
claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed.,
p. 301)
9.
Rationale for strict interpretation of tax exemption laws.
The basis for the rule on strict construction to statutory provisions granting tax
exemptions or deductions is to minimize differential treatment and foster
impartiality, fairness and equality of treatment among taxpayers. (Quezon City, et
al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He
who claims an exemption from his share of common burden must justify his claim
that the legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they presumed. They
must be expressed in the clearest and most unambiguous language and not left to
mere implications. It has been held that exemptions are never presumed the
burden is on the claimant to establish clearly his right to exemption and cannot be
made out of inference or implications but must be laid beyond reasonable doubt. In
other words, since taxation is the rule and exemption the exception, the intention
to make an exemption ought to be expressed in clear and unambiguous terms.
(Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
10.
Why are tax exemptions are strictly construed against the
taxpayer and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued existence of the
State.
11.
In case of a tax overpayment, where the BIRs obligation to
refund or set-off arises from the moment the tax was paid under the

principle of solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard


Eastern, Inc, 172 SRCA 364)
12.
But note Nestle Phil. v. Court of Appeals, et al., G.R. No.
134114, July 6, 2001 which held that in order for the rule on solutio indebeti to
apply it is an essential condition that the petitioner must first show that its payment
of the customs duties was in excess of what was required by the law at the time the
subject 16 importations of milk and milk products were made. Unless shown
otherwise, the disputable presumption of regularity of performance of duty lies in
favor of the Collector of Customs.
13.
Strict interpretation of a tax refund that partakes of the
nature of a tax does not apply to tax refund based on erroneous payment
or where there is no law that authorizes collection of the tax. There is parity
between tax refund and tax exemption only when the former is based either on a
tax exemption statute or a tax refund statute. (Commissioner of Internal Revenue
v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded principally
on legislative grace but on the legal principle which underlies all quasi-contracts
abhorring a persons unjust enrichment at the expense of another. [Commissioner,
supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat
& Sons v. City of Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the prototypic quasicontract, solutio indebiti,which covers not only mistake in fact but also mistake in
law. (Commissioner, supra citing CIVIL CODE,Arts. 2142, 2154 and 2155)
The Government is not exempt from the application of solutio indebiti.
(Commissioner, supraciting Commissioner of Internal Revenue v. Firemans Fund
Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, 324-325; Ramie
Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government, and the latter has
the duty to refund without any unreasonable delay what it has erroneously
collected. (Commissioner, supra citingCommissioner of Internal Revenue v. Tokyo
Shipping Co., supra at 338) If the State expects its taxpayers to observe fairness
and honesty in paying their taxes, it must hold itself against the same standard in
refunding excess (or erroneous) payments of such taxes. It should not unjustly
enrich itself at the expense of taxpayers. [Commissioner, supra citing AB Leasing
and Finance Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn
citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518
(2000)] And so, given its essence, a claim for tax refund necessitates only
preponderance of evidence for its approbation like in any other ordinary civil case.
(Commissioner, supra)
14.
Tax refunds premised upon a tax exemption strictly
construed, Tax exemption is a result of legislative grace. And he who claims an
exemption from the burden of taxation must justify his claim by showing that the
legislature
intended
to
exempt
him
by
words
too
plain
to
be

mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.


R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated Mining Co. Inc. v.
Commissioner of Internal Revenue and Court of Tax Appeals, 119 Phil. 33, 37
(1963)]
The rule is that tax exemptions must be strictly construed such that the
exemption will not be held to be conferred unless the terms under which it is
granted clearly and distinctly show that such was the intention. [Commissioner,
supra citing Phil. Acetylene Co. v. Commission of Internal Revenue, et al., 127 Phil.
461, 472 (1967); Manila Electric Company v. Vera, G.R. No. L-29987, 22 October
1975, 67 SCRA 351, 357-358; Surigao Consolidated Mining Co. Inc. v.
Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax exemption or
tax refund. In such case, the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless granted in the most explicit and
categorical language. The taxpayer must show that the legislature intended to
exempt him from the tax by words too plain to be mistaken. [Commissioner, supra
with a note to see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732-733;
Philex Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579
(1999); Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil.
891-892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd.,
314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous ruling interpreting a law as
exempting a taxpayer. A reversal of a BIR ruling favorable to a taxpayer would not
necessarily create a perpetual exemption in his favor, for after all the government is
never estopped from collecting taxes because of mistakes or errors on the part of its
agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et
al., 293 SCRA 92, 99)
16.
A tax amnesty is a general pardon or intentional overlooking by
the State of its authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or a tax law.
It partakes of an absolute waiver by the government of its right to collect
what is due it and to give tax evaders who wish to relent a chance to start with a
clean slate. A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.
(Philippine Banking Corporation, etc., v. Commissioner of Internal Revenue, G. R.
No. 170574, January 30, 2009)
17.
The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to

start a clean slate,

and to
b.

give the government a chance to collect

uncollected tax from

tax evaders without having to go


through the tedious process of a tax case.
(Banas, Jr. v. Court
of Appeals, et al.,G.R. No. 102967, February 10, 2000)
18.
Tax amnesty distinguished from tax exemption.
a.
Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes (People v. Castaneda, G.R.
No. L-46881, September 15, 1988) WHILE a tax exemption is an immunity from civil
liability only. It is an immunity or 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 (Castaneda,supra) WHILE tax exemption has prospective application.
19.
Tax avoidance is the use of legally permissible means to reduce
the tax while tax evasion is the use of illegal means to escape the payment of taxes.
20.
Tax evasion connotes the integration of three factors:
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 on
bad faith, willful, 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)
21.
Tax avoidance distinguished from tax evasion.
a.
Tax avoidance is legal while tax evasion is illegal.
b.
The objective of tax avoidance in most instances is merely to reduce
the tax that is due while is tax evasion the object is to entirely escape the payment of
taxes.
c.
Tax evasion warrants the imposition of civil, administrative and
criminal penalties while tax avoidance does not.

22.
Tax sparing is a provision in some tax treaties which provides
that the state of residence allows as credit the amount that would have been paid,
as if no reduction has been made. (Vogel, Klaus on Double Taxation Conventions,
Third Edition, p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?,
Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income is exempt from taxation
in order to encourage foreign investments which may lead to economic
development. If the tax credit method is used, there would be no more tax to
credit since there is no more tax to credit as a result of the tax

exemption. Consequently, when the tax method credit method is applied to these
items of income, such incentives are siphoned off since, in effect, the tax benefits
are cancelled out. (Ibid.) Thus, the need for the tax sparing provision.
NATIONAL INTERNAL REVENUE CODE
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE
1.
Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits
inquiry into bank deposits. As exceptions to Rep. Act No. 1405, the
Commissioner of Internal Revenue is only authorized to inquire into the bank
deposits of:
a.
a decedent to determine his gross estate; and
b.
any taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability. [Sec. 5 (F), NIRC of
1997]
c.
A taxpayer who authorizes the Commissioner to inquire into his bank
deposits.
2.
Purpose of the NIRC of 1997. Revenue generation has
undoubtedly been a major consideration in the passage of the Tax Code.
(Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75,
July
21,
2008)
3.
Purpose of shift
from ad valorem system to specific tax system in taxation of cigarettes.
The shift from the ad valorem system to the specific tax system is likewise meant
to promote fair competition among the players in the industries concerned, to
ensure an equitable distribution of the tax burden and to simplify tax administration
by classifying cigarettes, among others, into high, medium and low-priced based on
their net retail price and accordingly graduating tax rates. (Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21,
2008)
TAX ON INCOME
1.
The Tax Code has included under the term corporation
partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies. [Sec. 24
now Sec. 24 (B) of the NIRC of 1997]
2.
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held
citing Mertens that the term partnership includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by means of which any

business, financial operation, or venture is carried on.


3.
Certain business organizations do not fall under the category of
corporations under the Tax Code, and therefore not subject to tax as
corporations, include:
a.
General professional partnerships;
b.
Joint venture or consortium formed for the purpose of undertaking
construction projects engaging in petroleum, coal, geothermal, and other energy
operations, pursuant to an operation or consortium agreement under a service
contract with the Government. [1st sentence, Sec. 22 (B), BIRC of 1997]
4. Co-heirs who own inherited properties which produce income should
not automatically be considered as partners of an unregistered corporation
subject to income tax for the following reasons:
a. 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 436)
b.
There is no contribution or investment of additional capital to increase or
expand the inherited properties, merely continuing the dedication of the property to
the use to which it had been put by their forebears. (Ibid.)
c.
Persons who contribute property or funds to a common enterprise and agree
to share the gross returns of that enterprise in proportion to their contribution, but
who severally retain the title to their respective contribution, are not thereby rendered
partners. They have no common stock capital, and no community of interest as
principal proprietors in the business itself from which the proceeds were
derived. (Elements of the Law of Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p.
74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
5.
The common ownership of property does not itself create a
partnership between the owners, though they may use it for purpose of making
gains, and they may, without becoming partners, are among themselves as to the
management and use of such property and the application of the proceeds
therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560)
6.
The income from the rental of the house, bought from the
earnings of co-owned properties, shall be treated as the income of an
unregistered partnership to be taxable as a corporation because of the clear
intention of the brothers to join together in a venture for making money out of
rentals.

7.
Income is gain derived and severed from capital, from labor or
from both combined. For example, to tax a stock dividend would be to tax a capital
increase rather than the income. (Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 108576, January 20, 1999)
8.
The term taxable income means the pertinent items of gross
income specified in the Tax Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by the Tax Code or other
special laws. (Sec. 31, NIRC of 1997)
9.
The cancellation and forgiveness of indebtedness may amount
to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the
circumstances.
10.
If an individual performs services for a creditor who, in
consideration thereof, cancels the debt, it is income to the extent of the amount
realized by the debtor as compensation for his services.
11.
An insolvent debtor does not realize taxable income from the
cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA
10th)
12.
The insolvent debtor realizes income resulting from the
cancellation or forgiveness of indebtedness when he becomes solvent.
(Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)
13.
If a creditor merely desires to benefit a debtor and without
any consideration therefor cancels the amount of the debt it is a gift from
the creditor to the debtor and need not be included in the latters income.
14.
If a corporation to which a stockholder is indebted forgives
the debt, the transaction has the effect of payment of a dividend. (Sec. 50,
Rev. Regs. No. 2)
15.
Members of cooperatives not subject to tax on the interest
earned from their deposits with the cooperative. No less than our Constitution
guarantees the protection of cooperatives. Section 15, Article XII of the Constitution
considers cooperatives as instruments for social justice and economic development. At the
same time, Section 10 of Article II of the Constitution declares that it is a policy of the State
to promote social justice in all phases of national development. In relation thereto, Section 2
of Article XIII of the Constitution states that the promotion of social justice shall include the
commitment to create economic opportunities based on freedom of initiative and self-

reliance. Bearing in mind the foregoing provisions, we find that an interpretation exempting
the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of
the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of
our Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v.
Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)
In closing, cooperatives, including their members, deserve a preferential tax
treatment because of the vital role they play in the attainment of economic development and
social justice. Thus, although taxes are the lifeblood of the government, the States power
to tax must give way to foster the creation and growth of cooperatives. To borrow the words
of Justice Isagani A. Cruz: The power of taxation, while indispensable, is not absolute and
may be subordinated to the demands of social justice. (Ibid., citing Commissioner of
Internal Revenue v. American Express International, Inc. (Philippine Branch), 500
Phil. 586 (2005).
16.
The Global system of income taxation is a system employed
where the tax system views indifferently the tax base and generally treats in common
all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA
324, 331)
17. The Schedular system of income taxation is 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)
18. Under the National Internal Revenue Code the global system is
applicable to taxable corporations and the schedular to individuals.
19.
Compensation income is considered as having been earned in
the place where the service was rendered and not considered as sourced from
the place of origin of the money.
20.
Payment for services, other than compensation income, is
considered as having been earned at the place where the activity or service
was performed.
21.
A non-resident alien, who has stayed in the Philippines for
an aggregate period of more than 180 days during any calendar year, shall
be considered as a non-resident alien doing business in the Philippines.
Consequently, he shall be subject to income tax on his income derived from sources
from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal and
additional exemptions subject to the rule on reciprocity.
22.

What are considered as de minimis benefits not subject to

withholding tax on compensation income of both managerial and rank and


file employees ?
SUGGESTED ANSWER:
a.
Monetized unused vacation leave credits of employees not exceeding
ten (10) days during the year;
b.
Medical cash allowance to dependents of employees not exceeding
P750.00 per employee per semester or P125 per month;
c.
Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month
amounting to not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 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 persona 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.
The amount of de minimis benefits conforming to the ceiling herein prescribed
shall not be considered in determining the P30,000 ceiling of other benefits provided
under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the
ceiling prescribed by these regulations, the excess shall be taxable to the employee
receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided,
further, that any amount given by the employer as benefits to its employees, whether
classified as de minimis benefits or fringe benefits, shall constitute as deductible
expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by
Rev. Regs. No. 8-2000]
23.
Income subject to final tax refers to an income collected
through the withholding tax system. The payor of the income withholds the tax
and remits it to the government as a final settlement of the income tax as a final
settlement of the income tax due on said income. The recipient is no longer required
to include the income subjected to a final tax as part of his gross income in his income
tax return.
24. Distinguish exclusions from deductions.
SUGGESTED ANSWER:
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
taxpayers taxable income, due to the following reasons: (1) It is exempted by the

fundamental law; (2) It is exempted by statute; and (3) It does not come within
the definition of income (Sec. 61, Rev. Regs. No. 2) 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.
An example of an exclusion from gross income are life insurance proceeds, and
an example of a deduction are losses.
25. What are excluded from gross income ?
SUGGESTED ANSWER:
a.
Proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured whether in a single sum or otherwise.
b.
Amounts received by the insured as a return of premiums paid by
him under life insurance, endowment or annuity contracts either during the term, or
at maturity of the term mentioned in the contract, or upon surrender of the contract.
c.
Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or Workmens
Compensation Acts as compensation for personal injuries or sickness, plus the
amounts of any damages received on whether by suit or agreement on account of
such injuries or sickness.
e.
Income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines.
f.
Retirement benefits received under Republic Act No. 7641.
Retirement received from reasonable private benefit plan after compliance with
certain conditions. Amounts received for beyond control separation. Foreign social
security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS
benefits.
26.
What are the conditions for excluding retirement
benefits from gross income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or corporate,
in accordance with the employers reasonable private benefit plan approved by the
BIR.
b.
Retiring official or employee
1)
In the service of the same employer for at least ten (10) years;
2)
Not less than fifty (50) years of age at time of retirement;
3)
Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of
1997] The retiring official or employee should not have previously availed of the
privilege under the retirement plan of the same or another employer. [1st par., Sec.

2.78 (B) (1), Rev. Regs. No. 2-98]


27.
What kind of separation (retirement) pay is excluded from
gross income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Any amount received by an official, employee or by his heirs,
b.
From the employer
c.
As a consequence of separation of such official or employee from the
service of the employer because of
1)
Death, sickness or other physical disability; or
2)
For any cause beyond the control of said official or employee [Sec.
32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of
business. [1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
28.
What are the Itemized deductions from gross income and who may
avail of them ?
a. Ordinary and necessary trade, business or professional expenses.
b.
The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayers profession, trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with the taxpayers
profession.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
d. Ordinary losses, losses from casualty, theft or embezzlement; and net
operating losses.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
e.
Bad debts due to the taxpayer, actually ascertained to be worthless

and charged off within the taxable year, connected with profession, trade or business,
not sustained between related parties.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
f.
Depreciation or a reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in trade or
business.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
g.
Depletion or deduction arising from the exhaustion of a non-replaceable
asset, usually a natural resource.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
h. Charitable and other contributions. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and business,
on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
i. Research and development expenditures treated as deferred expenses paid or
incurred by the taxpayer in connection with his trade, business or profession, not
deducted as expenses and chargeable to capital account but not chargeable to
property of a character which is subject to depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are

not allowed to deduct this expense.


j. Contributions to pension trusts. Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged in trade and business, on their
gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
k. Insurance premiums for health and hospitalization. Resident citizens, resident
alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Nonresident citizens and nonresident alien individual engaged
in trade or business in the Philippine on their gross incomes from within may also
deduct these premiums.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on
their gross incomes and from compensation income are allowed to deduct these
premiums. Nonresident citizens on their gross incomes from within may also deduct
this expense. Nonresident alien individuals engaged in trade or business in the
Philippines are allowed to deduct these exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in the Philippines are
not allowed to deduct this expense.
29. Distinguish ordinary expenses from capital expenditures.
SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in
the trade or business of the taxpayer WHILE capital expenditures are those incurred
to improve assets and benefits for more than one taxable year. Ordinary expenses
are usually incurred during a taxable year and benefits such taxable year. Necessary
expenses are those which are appropriate or helpful to the business.
30.
What are the requisites for the deductibility of business
expenses ?
SUGGESTED ANSWER: The following are the requisites for deductibility of
business expenses:
a.
Compliance with the business test:
1)
Must be ordinary and necessary;
2)
Must be paid or incurred within the taxable
year;
3)
Must be paid or incurred in carrying on a trade or business.
4)
Must not be bribes, kickbacks or other illegal
expenditures
b. Compliance with the substantiation test. Proof by evidence or records of
the deductions allowed by law including compliance with the business test.

31.
What are the requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like expenses paid for
legal and auditing services ?
SUGGESTED ANSWER:
a.
the expense must be ordinary and necessary;
b.
it must have been paid or incurred during the taxable year
dependent upon the method of accounting upon the basis of which the net income is
computed.
c.
it must be supported by receipts, records or other pertinent papers.
(Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No.
172231, February 12, 2007)
32.
TMG Corporation is issuing the accrual method of
accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various
services which were billed by these firms only during the following year
2006. Since the bills for legal and auditing services were received only in
2006 and paid in the same year, TMG deducted the same from its 2006
gross income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the
professional and legal fees in the year they were incurred in 2005 and not in 2006
because at the time the services were rendered in 2005, there was already an
obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural
Corporation, G. R. No. 172231, February 12, 2007)
NOTES AND COMMENTS:
a.
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions. (Commissioner of
Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12,
2007)
The two (2) principal accounting methods for recognition of income are the (a)
accrual method; and the (b) cash method.
b.
Recognition of income and expenses under the accrual
method of accounting. Amounts of income accrue where the right to receive them
becomes fixed, where there is created an enforceable liability. Liabilities, are incurred
when fixed and determinable in nature without regard to indeterminacy merely of
time of payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation,
G. R. No. 172231, February 12, 2007)
The accrual of income and expense is permitted when the all-events test has
been met. (Ibid.)
c.
All-events test. This test requires:
1)
fixing of a right to income or liability to pay; and
2)
the availability of the reasonable accurate determination of such
income or liability.
The test does not demand that the amount of such income or liability be
known absolutely, only that a taxpayer has at his disposal the information necessary

to compute the amount with reasonable accuracy.


The all-events test is satisfied where computation remains uncertain; if its
basis is unchangeable, the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly,; it must be determined with reasonable
accuracy implies something less than an exact or completely accurate amount.
The propriety of an accrual must be judged by the fact that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books for the
taxable year. Accrual method of accounting presents largely a question of fact; such
that the taxpayer bears the burden of proof of establishing the accrual of an item of
income or deduction. (Commissioner of Internal Revenue v, Isabela cultural
Corporation,G. R. No. 172231, February 12, 2007)
d.
Under the cash method income is to be construed as income for tax
purposes only upon actual receipt of the cash payment. It is also referred to as the
cash receipts and disbursements method because both the receipt and
disbursements are considered. Thus, income is recognized only upon actual receipt of
the cash payment but no deductions are allowed from the cash income unless actually
disbursed through an actual payment in cash.
33. The fringe benefits tax is a final withholding tax imposed on the
grossed-up monetary value of fringe benefits furnished, granted or paid by the
employer to the employee, except rank and file employees. [1st par., Sec. 2.33 (A),
Rev. Regs. No. 3-98]
34. What is meant by fringe benefit for purposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any
good, service, or other benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees), such as but not limited
to:
a.
Housing;
b.
Expense account;
c.
Vehicle of any kind;
d.
Household personnel, such as maid, driver and others;
e.
Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
f.
Membership fees, dues and other expenses borne by the employer
for the employee in social and athletic clubs or other similar organizations;
g.
Expenses for foreign travel;
h.
Holiday and vacation expenses;
i.
Educational assistance to the employee or his dependents; and
j.
Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st
par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

35.
Fringe benefits that are not subject to the fringe benefits tax:
a.
When the fringe benefit is required by the nature of, or necessary to
the trade, business or profession of the employer; or
b.
When the fringe benefit is for the convenience or advantage of the
employer. [Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c.
Fringe benefits which are authorized and exempted from income tax
under the Tax Code or under any special law;
d.
Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
e.
Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
f.
De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance upon recommendation of the Commissioner
of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs.
No. 3-98]
36. De minimis benefits are facilities and privileges (such as
entertainment, medical services, or so-called courtesy discounts on purchases),
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. [Sec. 2.78,1 (A) (3),
Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
37. Preferred shares are 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. (Revenue Memorandum Circular No. 17-71)
38. Bad debts are those which result from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising
from money lent or from uncollectible amounts of income from goods sold or services
rendered. (Sec. 2.a, Rev. Regs. 5-99)
39. Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a.
Members of the same family. The family of an individual shall
include only his brothers and sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants;
b.
An individual and a corporation more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or indirectly, by or for such
individual;
c.
Two corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for the same

individual;
d.
A grantor and a fiduciary of any trust; or
e.
The fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
f.
A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC
of 1997]
40. What are the requisites for valid deduction of bad debts from
gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which must be
valid and legally demandable;
b. The same must be connected with the taxpayers trade, business or
practice of profession;
c. The same must not be sustained in a transaction entered into between
related parties;
d. The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
e. The debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort exerted by the taxpayer.
[Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs.
No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA
667]
g. Must have been reported as receivables in the income tax return of the
current or prior years. (Sec. 103, Rev. Regs. No. 2)
:
41. What is the tax benefit rule ?
SUGGESTED ANSWER: The 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 taxpayers gross income in the year of such recovery to the extent of
the income tax benefit of said deduction.
NOTES AND COMMENTS:
a.
If in the year the taxpayer claimed deduction of bad debts writtenoff, he realized a reduction of the income tax due from him on account of the said
deduction, his subsequent recovery thereof from his debtor shall be treated as a
receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
b.
If the said taxpayer did not benefit from the deduction of the said
bad debt written-off because it did not result to any reduction of his income tax in the
year of such deduction (i.e. where the result of his business operation was a net loss
even without deduction of the bad debts written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a return of capital, hence, not treated
as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
42.

Depreciation is the gradual diminution in the useful value of

tangible property resulting from ordinary wear and tear and from normal
obsolescence. 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.
43.
The methods of depreciation are the following:
a.
Straight line method;
b.
Declining balance method;
c.
Sum of years digits method; and
d.
Any other method prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue:
1)
Apportionment to units of production;
2)
Hours of productive use;
3)
Revaluation method; and
4)
Sinking fund method.
44.
What are personal and additional exemptions ?
SUGGESTED ANSWER: These are the theoretical persona, living and family
expenses of an individual allowed to be deducted from the gross or net income of an
individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to
be roughly equivalent to the minimum of subsistence, taking into account the
personal status and additional qualified dependents of the taxpayer. They are fixed
amounts in the sense that the amounts have been predetermined by our lawmakers
and until our lawmakers make new adjustments on these personal exemptions, the
amounts allowed to be deducted by a taxpayer are fixed as predetermined by
Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991,
November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil.
414, 418 (1918)]
45. What is the amount allowed as basic personal exemption ?
SUGGESTED ANSWER: There shall be allowed a basic personal exemption
amounting to Fifty thousand pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouse is deriving
gross income, only such spouse shall be allowed the personal exemption. [Sec. 35
(A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev.
Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the
spouses may claim the P50,000.00. Thus, the total familial basic personal
exemption for spouses is P100,000.00.
Furthermore, the distinctions between the concepts of single, married and
head of the family for purpose of availing of the basic personal exemption has
already been eliminated by Rep. Act No. 9504.
45.

What are the amounts of additional exemptions ?

SUGGESTED ANSWER: An individual,


a.
whether single or married,
b.
shall be allowed an additional exemption of Twenty-Five Thousand
Pesos (P25,000.00)
c.
for each qualified dependent child,
d.
provided that the total number of dependents for which additional
exemptions may be claimed
1)
shall not exceed four (4) dependents. [1st par., Sec. 2.79 (I) (1)
(b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and
numbering supplied; Sec. 35 (B), NIRC of 1997 as amended by Rep. Act No. 9504]
NOTES AND COMMENTS:
a.
It is clear that under the amendment, single individuals may now
claim for the additional exemptions. Furthermore, the concept of head of a family
does not find application anymore.
b.
A dependent means
a.
a legitimate, illegitimate or legally adopted child
b.
chiefly dependent upon and living with the taxpayer
c.
if such dependent is
1)
not more than twenty-one (21) years of age,
2)
unmarried and
3)
not gainfully employed or
d.
if such dependent,
1)
regardless of age
2)
is incapable of self-support
3)
because of mental or physical defect. [2nd par., Sec. 2.79 (I) (1)
(b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and
numbering supplied; Sec. 35 (b), NIRC of 1997, as amended by Rep. Act No. 9504]
c.
It is to be noted that under the NIRC of 1997, as amended by Rep.
Act No. 9504, only qualified dependent children are considered for additional
exemptions. Grandparents, parents, as well, as brothers or sisters, and other
collateral relatives are not qualified dependents to be claimed as additional
exemptions.
However, if they are senior citizens they may qualify as additional
exemptions under the Senior Citizens Law but not under the NIRC of 1997, as
amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the National
Internal Revenue Code, as amended, and as such, individual taxpayers caring for
them, be they relatives or not shall be accorded the privileges granted by the Code
insofar as having dependents are concerned. [last par. Sec. 5 (a), Rep. Act No.
7432, as amended by Rep. Act 9257, The Expanded Senior Citizens Act of 2003]
47. Capital assets shall refer to all real properties held by a taxpayer,
whether or not connected with his trade or business, and which are not included
among the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 72003)

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. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and
arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
48.
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)
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.
(last sentence, 3rd par., Sec. 3.b, Rev. Regs. No. 7-2003)
h.
Real property, whether single detached, townhouse, or condominium unit,
not used in trade or business as evidenced by a certification from the Barangay
Chairman or from the head of administration, in case of condominium unit, townhouse
or apartment, and 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. (last par., Sec. 3.b., Rev. Regs. No. 7-2003)
49. Ordinary assets shall refer to all real properties specifically
excluded from the definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would
properly be included in the inventory of a taxpayer if on hand at the close of the
taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or
improvements), of a character which is subject to the allowance for depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev.
Regs. No. 7-2003)

50.. Examples of ordinary assets hence not capital assets:


a.
The machinery and equipment of a manufacturing concern subject
to depreciation;
b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of which
are for rent or for sale;
d.
The wood, paint, varnish, nails, glue, etc. which are the raw
materials of a furniture factory;
e.
Inherited parcels of land of substantial areas located in the heart of
Metro Manila, which were subdivided into smaller lots then sold on installment basis
after introducing comparatively valuable improvements not for the purpose of simply
liquidating the estate but to make them more saleable ; the employment of an
attorney-in-fact for the purpose of developing, managing, administering and selling
the lots; sales made with frequency and continuity; annual sales income from the
sales was considerable; and the heir was not a stranger to the real estate business.
(Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good roads, concrete
gutters, drainage and lighting systems converts the property to an ordinary asset.
The property forms part of the stock in trade of the owner, hence an ordinary asset.
This is so, as the owner is now engaged in the business of subdividing real estate.
(Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672)
51. Tax treatment of real properties that have been transferred.
Real properties classified as capital or ordinary asset in the hands of the
seller/transferor may change their character in the hands of the buyer/transferee.
The classification of such property in the hands of the buyer/transferee shall be
determined in accordance with the following rules:
a. Real property transferred through succession or donation to the heir or donee who
is not engaged in the real estate business with respect to the real property inherited
or donated, and who does not subsequently use such property in trade or business,
shall be considered as a capital asset in the hands of the heir or donee.
b. Real property received as dividend by stockholders who are not engaged in the
real estate business and who not subsequently use such real property in trade or
business shall be treated as capital assets in the hands of the recipient even if the
corporation which declared the real property dividend is engaged in real estate
business.
c. The real property received in an exchange shall be treated as ordinary asset in the
hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in
real estate business to a taxpayer who is engaged in real estate business, or to a
taxpayer who, even if not engaged in real estate business, will use in business the
property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is imposed upon capital gains presumed to have been

realized from the sale, exchange, or other disposition of real property


located in the Philippines, classified as capital assets. [Sec. 24 (D) (1`), NIRC
of 1997] Revenue Regulations No. 7-2003 has defined real property as having the
same meaning attributed to that term under Article 415 of Republic Act No. 386,
otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No. 72003)
53. Transactions covered by the presumed capital gains tax on real
property:
a.
sale,
b.
exchange,
c.
or other disposition, including pacto de retro sales and other forms
of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement
supplied]
d.
Sale, exchange, or other disposition includes taking by the
government through condemnation proceedings. (Gutierrez v. Court of Tax Appeals,
et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861)
54.
In case the mortgagor exercises his right of redemption
within one (1) year from the issuance of the certificate of sale, in a foreclosure of
mortgage sale of real property, no capital gains tax shall be imposed because no
capital gains has been derived by the mortgagor and no sale or transfer of real
property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
55. In case of non-redemption of the property sold upon a foreclosure of
mortgage sale, the presumed capital gains tax shall be imposed, based on the bid
price of the highest bidder but only upon the expiration of the one year period of
redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118,
and shall be paid within thirty (30) days from the expiration of the said one-year
redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
56. The basis for the final presumed capital gains tax of six per
cent (6%) is whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or area as
determined by the Commissioner of Internal Revenue after consultation with
competent appraisers both from the private and public sectors; or
2) the fair market value as shown in the schedule of values of the Provincial and City
Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]
It does not matter whether there was an actual gain or loss because the tax
is a presumed capital gains tax. It is the transaction that is taxed not the gain.
57. Holding period not applied to the taxation of the presumed capital

gains derived from the sale of real property considered as capital assets.
58. The tax liability, of individual taxpayers (not corporate), if any,
on gains from sales or other dispositions of real property, classified as
capital assets, to the government or any of its political subdivisions or agencies or
to government owned or controlled corporations shall be determined, at the option of
the taxpayer, by including the proceeds as part of gross income to be subjected to the
allowable deductions and/or personal and additional exemptions, then to the
schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of
1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1)
in relation to Sec. 6 (E), both of the NIRC of 1997]
59. The seller of the real property, classified as a capital asset, pays
the presumed capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25
(A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec.
25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
60. Excepted from the payment of the presumed capital gains tax
are those presumed to have been realized from the disposition by natural
persons of their principal place of residence
a.
the proceeds of which is fully utilized in acquiring or constructing a
new principal residence;
b.
within eighteen (18) calendar months from the date of sale or
disposition
c.
the BIR Commissioner shall have been duly notified by the taxpayer
within thirty (30) days from the date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption; and
d.
the said tax exemption can only be availed of once every ten (10)
years. [Sec. 24 (D) (2), NIRC of 1997]
61.
MBC was incorporated in 1961 and engaged in commercial
banking operations since 1987. On May 22, 1987, it ceased operations that
year by reason of insolvency and its assets and liabilities were placed under
the charge of a government-appointed receiver. On June 23, 1999, the BSP
authorized MBC to operate as a thrift bank.
In 2000, It filed its tax return for the year 1999 paying the amount of
P33 million computed in accordance with the minimum corporate income tax
(MCIT). It sought the BIRs ruling on whether it is entitled to the four (4)

year grace period for paying on the basis of MCIT reckoned from 1999. BIR
then ruled that cessation of business activities as a result of being placed
under involuntary receivership may be an economic reason for suspending
the imposition of the MCIT.
As a result of the ruling MBC filed an application for refund of the P33
million. Due to the BIRs inaction, MBC filed a petition for review with the
CTA.
The CTA denied the petition on the ground that MBC is not a newly
organized corporation. In a volte facie the BIR now maintains that MBC
should pay the MCIT beginning January 1, 1998 as it did not close its
business operations in 1987 but merely suspended the same. Even if placed
under receivership, the corporate existence was never affected. Thus, it falls
under the category of an existing corporation recommencing its banking
operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the
fourth taxable year immediately following the year in which the corporation
commenced its business operations. [Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of operations of a thrift bank is the date it was
registered with the SEC or the date when the Certificate of Authority to Operate was
issued to it by the Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 495)
Clearly then. MBC is entitled to the grace period of four years from June 23,
1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT
should be applied to it. (Manila Banking Corporation v. Commissioner of Internal
Revenue, G. R. No. 168118, August 26, 2006)
NOTES AND COMMENTS:
a.
The MCIT and when should be imposed and the four (4) year
grace period. A minimum corporate income tax of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations,
when the minimum corporate income tax is greater than the tax computed under
Subsection (A) of this section for the taxable year. [Sec. 27 (E) (1), NIRC of 1997]
b.
Period when a corporation becomes subject to the MCIT. (5)
Specific rules for determining the period when a corporation becomes subject to the
MCIT (minimum corporate income tax) For purposes of the MCIT, the taxable year in which business operations
commenced shall be the year in which the domestic corporation registered with the
Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be
covered by the MCIT beginning January 1, 1998. x x x (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No.
168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No.
4-95 specifically refers to thrift banks.)
c.
Purpose of the four (4) year grace period. The intent of

Congress relative to the MCIT is to grant a four (43) year suspension of tax
payment to newly organized corporations. Corporations still starting their business
operations have to stabilize their venture in order to obtain a stronghold in the
industry. It does not come as a surprise then when many companies reported losses
in their initial years of operations.
Thus, in order to allow new corporations to grow and develop at the initial
stages of their operations, the lawmaking body saw the need to provide a grace
period of four years from their registration before they pay their minimum corporate
income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue,G. R.
No. 168118, August 26, 2006)
ESTATE TAXES
1. In determining the gross estate of a decedent, are his
properties abroad to be included, and more particularly, what constitutes
gross estate ?
SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or a
resident alien.
The gross estate of a Filipino citizen or a resident alien comprises all his
real property, wherever situated; all his personal property, tangible, intangible or
mixed, wherever situated, to the extent of his interest existing therein at the time
of his death.
The gross estate of a non-resident alien comprises all his real property,
situated in the Philippines; all his personal property, tangible, intangible or mixed,
situated in the Philippines, to the extent of his interest existing therein at the time
of his death.
2.
William Smith, an American citizen, was a permanent
resident of the Philippines. He died in San Francisco, California. He left
10,000 shares of San Miguel Corporation, a condominium unit at the
Twin Towers Building at Pasig, Metro Manila and a house and lot in
Miami, Florida.
What assets shall be included in the Estate Tax Return to be filed with
the BIR ?
SUGGESTED ANSWER: All of the assets should be included in the Estate Tax
Return to be filed with the BIR.
Smith, an American citizen and a permanent resident of the Philippines is
considered, for Philippine estate tax purposes, a resident alien. Consequently, the
assets to be included in the Estate Tax Return to be filed with the BIR should be all
property, real or personal, tangible, intangible or mixed, wherever situated, to the
extent of the interest that Smith has at the time of his death. Thus, all of the
properties enumerated in the problem irrespective of where they are situated are
includible in the gross estate of Smith.

3. Proceeds of life insurance includible in a decedents gross


estate.
a.

The decedent takes the insurance policy on his own life


1) The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator irrespective of whether or not the
insured retained the power of revocation, OR
2)
The amounts are receivable by any beneficiary
designated in the policy of insurance as revocable beneficiary.
[Sec. 85 (E), NIRC of 1997]
b.
One, other than the decedent takes the insurance policy on the life
of the decedent
1)
The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator
2)
irrespective of whether or not the insured retained the
power of revocation.
4. Proceeds of life insurance NOT included in a decedents gross
estate.
a.
The decedent takes the insurance policy on his own life, and
b.
the proceeds are receivable by a beneficiary designated as
irrevocable. [Sec. 85 (E), NIRC of 1997)
NOTES AND COMMENTS: The beneficiary must not be the decedents estate,
executor or administrator, because the proceeds are includible as part of gross
estate whether or not the decedent retained the power of revocation. (Ibid.)
c.
Where the insurance was NOT taken by the decedent upon his own
life and the beneficiary is not the decedents estate, his executor or administrator.
4.
Items deductible from the gross estate of a resident or
nonresident Filipino decedent or resident alien decedent:
a.
Expenses, losses, claims, indebtedness and taxes;
b.
Property previously taxed;
c.
Transfers for public use;
d.
The Family Home up to a value not exceeding P1 million;
e.
Standard deduction of P1 million;
f.
Medical expenses not exceeding P500,000.00;
g.
Amount of exempt retirement received by the heirs under Rep. Act
Mo. 4917;
h.
Net share of the surviving spouse in the conjugal partnership.
5.

There is no transfer in contemplation of death if there is no

showing that the transferor retained for his life or for any period which does not in
fact end before his death: (1) the possession or enjoyment of, or the right to the
income from the property, or (2) the right, either alone or in conjunction with any
person, to designate the person who shall possess or enjoy the property or the
income therefrom. [Sec. 85 (B), NIRC of 1997]
6. Vanishing deduction (deduction for property previously
taxed), defined. The deduction allowed from the gross estates of citizens,
resident aliens and nonresident estates for properties which were previously subject
to donors or estate taxes. The deduction is called a vanishing deduction because
the deduction allowed diminishes over a period of five (5) years.
It is also known as a deduction for property previously taxed.
7. Vanishing deduction (property previously taxed) allowed as a
deduction from the gross estate of a Filipino citizen, whether resident or
not, of a resident alien decedent, or of a nonresident alien decedent.
a.
An amount equal to the value specified below of
b.
Any property forming a part of the gross estate situated in the
Philippines
c
Of any person who died within five years prior to the death of
the decedent, or transferred to the decedent by gift within five years prior to his
death,
d.
Where such property can be identified as having been received by
the decedent from the donor by gift, or from such prior decedent by gift, bequest,
devise, or inheritance, or
e.
Which can be identified as having been acquired in exchange for
property so received:
100% of the value if the prior decedent died within one year prior to the death
of the decedent, or if the property was transferred to him by gift within the same
period prior to his death;
80% of the value if the prior decedent died more than one year but not more
than two years prior to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death;
60% of the value if the prior decedent died more than two years but not more
than three yearsprior to the death of the decedent, or if the property was
transferred to him by gift within the same period prior to his death;
40% of the value if the prior decedent died more than three years but not more
than four yearsprior to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death; and
20% of the value if the prior decedent died more than four years but not more
than five yearsprior to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death. [Sec. 86 (A) (2) and (B)
(2), NIRC of 1997, numbering, arrangement and underlining supplied]

8.
The approval of the court sitting in probate, or as a settlement
tribunal over the estate of the deceased is not a mandatory requirement for
the collection of the estate. The probate court is determining issues which are not
against the property of the decedent, or a claim against the estate as such, but is
against the interest or property right which the heir, legatee, devisee, etc. has in the
property formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same
can no longer be contested by means of a disguised protest. (Marcos, II v. Court of
Appeals, et al., 273 SCRA 47)
DONORS TAXES
1.
What is the donors tax rate if the donee is a stranger ?
SUGGESTED ANSWER:
When the donee or beneficiary is a stranger, the tax
payable by the donor shall be 30% of the net gifts.
2.
For purposes of the donors tax who is a stranger ?
SUGGESTED ANSWER: A stranger is a is person who is not a:
a.
Brother, sister (whether by whole or half-blood), spouse, ancestor
and lineal descendant; or
b.
Relative by consanguinity in the collateral line within the fourth
degree of relationship. [Sec. 99 (B), NIRC of 1997]
NOTES AND COMMENTS: All relatives by affinity, irrespective of the degree,
are considered as strangers.
3.
What is the tax base for donations ?
SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. 99
(A), NIRC of 1997]
4.
For purposes of the donors tax, what is meant by net
gifts ?
SUGGESTED ANSWER: The net economic benefit from the transfer that
accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift,
but imposing upon the donee the obligation to pay the mortgage liability, then the
net gift is measured by deducting from the fair market value of the property the
amount of the mortgage assumed. (last par., Sec. 11, Rev. Regs.No.2-2003)
5.
How are gifts of personal property to be valued for donors
tax purposes ?
SUGGESTED ANSWER: The market value of the personal property at the time
of the gift shall be considered the amount of the gift. (Sec. 102, NIRC of 1997)

6.
What is the valuation of donated real property for donors tax
purposes ?
SUGGESTED ANSWER: The real property shall be appraised at its fair market
value as of the time of the gift.
However, the appraised value of the real property at the time of the gift shall
be whichever is the higher of:
a.
the fair market value as determined by the Commissioner of Internal
Revenue (zonal valuation) or
b.
the fair market value as shown in the schedule of values fixed by the
Provincial and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC
of 1997]
7.
A died leaving as his only heirs, his surviving spouse B, and
three minor children, X, Y and Z. Since B does not want to participate in the
distribution of the estate, she renounced her hereditary share in the estate.
a.
Is the renunciation subject to donors tax ? Explain.
SUGGESTED ANSWER: No. The general renunciation by an heir, including
the surviving spouse, as in the case B, of her share in the hereditary estate left by
the decedent is not subject to donors tax. (4thpar., Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by B 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.
b.
Supposing that instead of a general renunciation, B
renounced her hereditary share in As estate to X who is a special child,
would your answer be the same ? Explain.
SUGGESTED ANSWER: My answer would be different. The renunciation in
favor of X would be subject to donors tax.
This is so because the renunciation was specifically and categorically done
in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the
other co-heirs in the hereditary estate. (4thpar., Sec. 11, Rev. Regs. No. 2-2003)
8. Give some donations that are exempt from donors tax.
SUGGESTED ANSWER:
a.
The first P100,000.00 net donation during a calendar year is exempt
from donors tax [Sec. 99 (A), NIRC of 1997] made by a resident or non resident;
b.
The donation by a resident or non-resident of a prize to an athlete in
an international sports tournament held abroad and sanctioned by the national sports
association is exempt from donors tax (Sec. 1, Rep. Act No. 7549)
c.
Political contributions made by a resident or non-resident individual
if registered with the COMELEC irrespective of whether donated to a political party or
individual.
However, the Corporation Code prohibits corporations from making political
contributions. (Corp. Code, Title IV, Sec. 36.9)

d.
Dowries or gifts made on account of marriage and before its
celebration or within one year thereafter by residents who are parents to each of
their legitimate, recognized natural, or adopted children to the extent of the first
ten thousand pesos (P10,000.00);
e.
Gifts made by residents or non-residents 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;
f.
Gifts made by residents or non residents in favor of an educational
and/or charitable, religious, cultural or social welfare corporation, institution,
foundation, 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. [Sec. 101 (A), NIRC
of 1997, numbering and arrangement supplied]
g.
Gifts made by non-resident aliens outside of the Philippines to
Philippine residents are exempt from donors taxes because taxation is basically
territorial. The transaction, which should have been subject to tax was made by nonresident aliens and took place outside of the Philippines.
9. What is the concept of donation or gift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over
numerous calendar years in order to avail of lower donors taxes.
In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first
cousin. The P200,000.00 is the totality of the net gifts for 2008. If he donated
the P200,000.00 in 2008 the first P100,000 would be exempt and the remaining
P50,000.00 would be subject to donors tax
If Leon spreads the P200,000 donation over two (2) calendar years,
donating P100,000.00 on December 30, 2008 and the remaining P100,000.00 on
January 1, 2009 the transaction would be exempt from donors tax. This is so
even if the donation is separated only by two days because the basis is the calendar
year. Leon would be enjoying the exemption for the first P100,000.00 net gifts for
each calendar year.
10.
A, who is engaged in the car buy and sell business sold
to B P7 million Jaguar for only P4 million. The proper VAT on the sale was
paid. If you are the BIR examiner assigned to review the sale, would you
issue a tax assessment on the transaction ? Explain your answer briefly.
SUGGESTED ANSWER: Donors taxes would be due on the insufficiency of
consideration.
Where property, other than real property that has been subjected to the
final capital gains tax, is transferred for less than an adequate and full consideration
in money or moneys worth, then the amount by which the fair market value of the
property at the time of the execution of the Contract to Sell or execution of the
Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the
agreed or actual consideration or selling price shall be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar year. (5th par.,

Sec. 11, Rev. Regs. No. 2-2003)


VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the total questions asked in the Bar
Examination are sourced from VAT and its concepts. This area is probably the most
difficult area to forecast because there are no statistically perceived patterns. The
author has retained the Stars System for VAT. Considering the limited period of
time, the reader is advised to focus on areas marked with stars and just browse the
unmarked areas.
1.
Value-added tax (VAT) is a tax which 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. Nature of VAT. VAT is an indirect tax that may be shifted or passed
on to the buyer, transferee or lessee of the goods, properties or services. As such,
it should be understood not in the context of the person or entity that is primarily,
directly liable for its payment, but in terms of its nature as a tax on consumption.
[Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005 citing various authorities}
VAT is a percentage tax imposed on any person whether or not a franchise
grantee, who in the course of trade or business, sells, barters, exchanges, leases,
goods or properties, renders services. It is also levied on every importation of
goods whether or not in the course of trade or business. The tax base of the VAT is
limited only to the value added to such goods, properties, or services by the seller,
transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the
buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
3.
Effect of exemptions from VAT which is an indirect tax. If a
special law merely exempts a party as a seller from its direct liability for payment of
the VAT, but does not relieve the same party as a purchaser from its indirect burden
of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is
not exempt.
REASON: The VAT is a tax on consumption, the amount of which may be
shifted or passed on by the seller to the purchaser of the goods, properties or
services. [Commissioner of Internal Revenue v. Seagate Technology (Philippines),
G. R. No. 153866, February 11, 2005)
4.
Illustration of effects of exemptions from VAT which is an
indirect tax.
A VAT exempt seller sells to a non-VAT exempt purchaser. The
purchaser is subject to VAT because the VAT is merely added as part of the

purchase price and not as a tax because the burden is merely shifted. The seller is
still exempt because it could pass on the burden of paying the tax to the purchaser.
5.
The VAT is a tax on consumption. Meaning of consumption
as used under the VAT system. Consumption is "the use of a thing in a way that
thereby exhausts it."
Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer's release from
any past or future liability x x x" Unlike goods, services cannot be physically used
in or bound for a specific place when their destination is determined. Instead, there
can only be a "predetermined end of a course" when determining the service
"location or position x x x for legal purposes." [Commissioner of Internal Revenue
v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]
6.
Illustration of the meaning of consumption as used under
the VAT system. For example the services rendered by a local firm to its foreign
client are performed or successfully completed upon its sending to a foreign client
the drafts and bills it has gathered from service establishments here. Its services,
having been performed in the Philippines, are therefore also consumed in the
Philippines. Such facilitation service has no physical existence, yet takes place upon
rendition, and therefore upon consumption, in the Philippines. [Commissioner of
Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365,
June 8, 2007]
Who are liable for the value-added tax.
Any person who, in the course of his trade or business,
1)
Sells, barters, exchanges or leases goods
or
properties, or
2)
renders services, and
b.
any person who imports goods xxx
However, in the case of importation of taxable goods, the importer, whether
an individual or corporation and whether or not made in the course of his trade or
business, shall be liable to VAT xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1,
paraphrasing supplied)
7.
a.

8. Various VAT methods and systems.


a.
Cost deduction method. This is a single-stage tax which is
payable only by the original sellers.
(Abakada Guro Party List (etc.) v. Ermita,
etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) This was
subsequently modified and a mixture of cost deduction method and tax credit
method was used to determine the value-added tax payable. (Ibid.)
b.
Tax credit method. This method relies on invoices, an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid
on its purchases, inputs and imports. [Commissioner of Internal Revenue v.

Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005]


If at the end of a taxable period, the output taxes charged by a seller are
equal to the input taxes passed on by the suppliers, no payment is required. It is
when the output taxes exceed the input taxes that the excess has to be paid.
If however, the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the input taxes result
from zero-rated or effectively zero-rated transactions or from acquisition of capital
goods, any excess over the output taxes shall instead be refunded to the taxpayer
or credited against other internal revenue taxes. (Ibid.)
9.
How the VAT is imposed on the increase in worth, merit or
improvement of the goods or services. The VAT utilizes the concept of the
output and input taxes.
Output VAT less Input VAT = VAT due on the increase in worth, merit or
improvement f the goods or services.
10.
The right to credit the input tax be limited by legislation
because it is a mere creation of law. Prior to the enactment of multi-stage
sales taxation, the sales taxes paid at every level of distribution are not recoverable
from the taxes payable. With the advent of Executive Order No. 273 imposing a
10% multi-stage tax on all sales, it was only then that the crediting of the input tax
paid on purchase or importation of goods and services by VAT-registered persons
against the output tax was established. This continued with the Expanded VAT Law
(R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to
credit input tax as against the output tax is clearly a privilege created by law, a
privilege that also the law can limit. It should be stressed that a person has no
vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs.
Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the motion
for reconsideration)
11.
Output tax is the value-added tax due on the sale or lease
or taxable goods, properties or services by any VAT-registered person.
12.
Input tax is the value-added tax due on or paid by a VATregistered person on importation of good or local purchases of goods or services,
including lease or use of properties, in the course of his trade or business. (Rev.
Regs. No. 4.110-1, 1st par.)
13.
Included in the input tax.
a.
the transitional input tax and
b.
the presumptive input tax xxx.
It includes
c.
input taxes which can be directly attributed to transactions subject

to the VAT plus a ratable portion of any input tax which cannot be directly
attributed to either the taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1st par.,
2nd sentence,. And 2nd par., paraphrasing, arrangement and numbering supplied )
14.
Concept of transitional input tax credits on beginning
inventories. Taxpayers who become VAT-registered persons upon exceeding the
minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily
register even if their turnover does not exceed P1,500,000.00 (except franchise
grantees of radio and television broadcasting whose threshold is P10,000,000.00)
shall be entitled to a transitional input tax on the inventory on hand as of the
effectivity of their VAT registration, on the following:
a.
goods purchased for resale in their present condition;
b.
materials purchased for further processing, but which have not yet
undergone processing;
c.
goods which have been manufactured by the taxpayer;
d.
goods in process for sale; or
e.
goods and supplies for use in the course of the taxpayers trade or
business as a VAT-registered person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1 st
par., arrangement and numbering supplied]
15.
Concept of presumptive input tax credits. Persons or firms
engaged in the processing of sardines, mackerel, and milk, and in manufacturing
refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed
a presumptive input tax, creditable against the output tax, equivalent to four
percent (4%) of the gross value in money of their purchases of primary agricultural
products which are used as inputs to their production.
As used in this paragraph, the term processing shall mean pasteurization,
canning and activities which through physical or chemical process alter the exterior
texture or form or inner substance of a product in such a manner as to prepare it
for special use to which it could not have been put in its original form or condition.
[Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]
16.
The VAT registration fee does NOT violate religious
freedom. The VAT registration fee imposed on non-VAT enterprises which includes
among others, religious sects which sells and distributes religious literature is not
violative of religious freedom, although a fixed amount is not imposed for the
exercise of a privilege but only for the purpose of defraying part of the cost of
registration.
The registration fee is thus more of an administrative fee, one not imposed
on the exercise of a privilege, much less a constitutional right. (Tolentino v.
Secretary of Finance, et al., and companion cases,235 SCRA 630)
17.
Interpretation of the term In the Course of Trade or
Business as used in the VAT system. The term "doing business" or course of
business conveys the idea of business being done, not from time to time, but all

the time. It does not include isolated transactions. (Commissioner of Internal


Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
18.
Pursuant to a government program of privatization,
NDC, a VAT-registered entity created for the purpose of selling real
property, decided to sell to private enterprise all of its shares in its whollyowned subsidiary the National Marine Corporation (NMC). The NDC decided
to sell in one lot its NMC shares and five (5) of its ships, which are 3,700
DWT Tween-Decker, "Kloeckner" type vessels. The vessels were
constructed for the NDC between 1981 and 1984, then initially leased to
Luzon
Stevedoring
Company,
also
its
wholly-owned
subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat
basis, to the NMC.
The NMC shares and the vessels were offered for
public bidding. Among the stipulated terms and conditions for the public
auction was that the winning bidder was to pay "a value added tax of 10%
on the value of the vessels." Magsaysay Lines, Inc., offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong . The bid was approved by the
Committee on Privatization, and a Notice of Award was issued to
Magsaysay Lines.
Is the sale subject to
VAT ?
SUGGESTED ANSWER: No. The term "carrying
on business" does not mean the performance of a single disconnected act, but
means conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time.
"Course of business" is what is usually done in the management of trade or
business.
"Course of business" or "doing business" connotes regularity of
activity. In the instant case, the sale was an isolated transaction.
The sale which
was involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity. It should be
emphasized that the normal VAT-registered activity of NDC is leasing personal
property.
This finding is confirmed by the Revised Charter of the NDC
which bears no indication that the NDC was created for the primary purpose of
selling real property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc.,
et al., G. R. No. 146984, July 28, 2006)
19.
Under the Value Added Tax (VAT), the tax is imposed
on sales, barter, or exchange or goods and services. The VAT is also
imposed
on
certain
transactions
deemed
sales
which
include:
a.
Transfer, use or consumption not in the course of business or properties
originally intended for sale or for use in the course of business. xxx
b.
Distribution or transfer to:
1)
Shareholders or investors as share in the profits of the
VAT- registered person; xxx or

2)
Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty (60)
days following the date such goods were consigned. Consigned goods returned by
the consignee within the 60-day period are not deemed sold.
d.
Retirement from or cessation of business, with respect to all
goods on hand,
1)
whether capital goods, stock-in-trade, supplies or
materials as of the date of such retirement, or cessation,
2)
whether or not the business is continued by the new owner
or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing,
arrangement and numbering supplied]
20.
Transactions considered retirement or cessation of business
deemed sale subject to VAT.
a.
Change of ownership of the business. There is change in the ownership of
the business where a single proprietorship incorporates; or
1)
the proprietor of a single proprietorship sells his entire business.
b.
Dissolution of a partnership and creation of a new partnership
which takes over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4)
paraphrasing, arrangement and numbering supplied]
21.
Sale of or lease of real properties subject to VAT. Sale of real
properties primarily for sale to customers or held for lease in the ordinary course of
trade or business of the seller shall be subject to VAT. (Rev. Regs. No. 16-2005,
Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not subject to VAT. Only real
estate dealers are subject to VAT.
22.
On September 4, 2009, XYZ, Inc., a domestic corporation
engaged in the real estate business, sold a building for P10,000,000.00. Is
the sale subject to the value-added tax (VAT)? If so, how much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross selling price because the
sale was made in the ordinary course of trade of business of X, a domestic
corporation engaged in the real estate business.
23.
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;
b.
Sale of real properties utilized for low-cost housing as defined by
RA No. 7279, otherwise known as the Urban and Development Housing Act of
1992 and other related laws, such as RA No. 7835 and RA No. 8763.
xxx
xxx
xxx
c.
Sale of real properties utilized for socialized housing as defined

under RA No. 7279, and other related laws wherein the price ceiling per unit is
P225,000.00 or as may from time to time be determined by the HUDCC and the
NEDA and other related laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at One Million Five Hundred Thousand
Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings
valued at Two Million Give Hundred Thousand Pesos (P2,500,000.00) and below
where the instrument of sale/transfer/disposition was executed on or after
November 1, 2005, provided, That not later than January 31, 2009 and every three
(3) years thereafter, the amounts stated herein shall be adjusted to its present
value using the Consumer Price Index, as published by the National Statistics Office
(NSO); provided, further, that such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each year.
If two or more adjacent residential lots are sold or disposed in favor of one
buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be
exempt from VAT only if the aggregate value of the lots do not exceed
P1,500,000.00. Adjacent residential lots, although covered by separate titles
and/or separate tax declarations, when sold or disposed of to one and the same
buyer, whether covered by one or separate Deed of Conveyance, shall be presumed
as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing and
numbering supplied]
24.
a.
b.
receipts
c.

VAT on services and lease of properties.


There shall be levied, assessed, and collected,
a value-added tax equivalent to twelve percent (12%) of gross

derived from the sale or exchange of services,


1)
including the use or lease of properties. [NIRC of
1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and numbering
supplied]
25.
Sale or exchange of services, defined. The term sale or
exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, whether in kind or in
cash,
including
those
performed
or
rendered
by
the
following:
a.
construction and service contractors;
b.
stock, real estate, commercial, customs and immigration
brokers;
c.

lessors

of

property,
d.

whether personal or real;


persons
engaged
in
warehousing
services
e.
lessors or distributors of
cinematographic films;
f.
persons engaged in milling,
processing, manufacturing or repacking goods for others;

g.
proprietors, operators or keepers
of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie
houses;
h.
proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
i.
dealers
in
securities;
j.
lending investors;
k.
transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic common
carriers
by
land
relative
to
their
transport
of
goods
or
cargoes;
l.
common carriers by air and sea relative to
their transport of passengers, goods or cargoes from one place in the Philippines to
another
place
in
the
Philippines;
m.
sales of electricity by
generation
companies,
transmission,
and/or
distribution
companies;
n.
franchise
grantees of electric utilities, telephone and telegraph, radio and television
broadcasting and all other franchise grantees except franchise grantees of radio
and/or television broadcasting whose annual gross receipts of the preceding year
do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas
and
water
utilities;
o.
non-life
insurance
companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and
p.
similar services
regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A.
No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1 st par., arrangement and
numbering supplied]
26.
Also included in the phrase sale or exchange of services.
a.
The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
b.
The lease or the use of, or the right to use any industrial,
commercial or scientific equipment;
c.
The supply of scientific, technical, industrial or commercial
knowledge or information;
d.
The supply of any assistance that is ancillary and subsidiary to
and is furnished as a means of enabling the application or enjoyment of any such
property, or right as is mentioned in subparagraph (2) hereof or any such
knowledge or information as is mentioned in subparagraph (3) hereof; or
e.
The supply of services by a non-resident person or his employee in
connection with the use of property or rights belonging to, or the installation or

operation of any brand, machinery or other apparatus purchased from such nonresident person;
f.
The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific, industrial
or commercial undertaking, venture, project of scheme;
g.
The lease of motion picture films, film tapes and discs;
h.
The lease or the use of or the right to use radio, television,
satellite transmission and cable television time. (Rev. Regs. No. 16-2005, Sec.
4.108-2, 2nd par.)
27.
Zero-rated Sales of Goods or Properties. A zero-rated
sale of goods or properties by a sale by a VAT-registered person is a taxable
transaction for VAT purposes but the sale does not result in any output tax.
However, the input tax on the purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with
Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005, 1st par.)
28. Concept of VAT zero-rating. The tax rate is set at zero. When
applied to the tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax, but can claim a
refund or a tax credit certificate for the VAT previously charged by suppliers.
[Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005]
Under a zero-rating scheme, the sale or exchange of a particular service is
completely freed from the VAT, because the seller is entitled to recover, by way of a
refund or as an input tax credit, the tax that is included in the cost of purchases
attributable to the sale or exchange. The tax paid or withheld is not deducted from
the tax base. (Commissioner, of Internal Revenue v. American Express
International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing
various cases)
29.
Situs of taxation of zero-rated VAT services such as facilitating
the collection of receivables from credit card members situated in the
Philippines and payment to service establishments in the Philippines. The
place where the service is rendered determines the jurisdiction to impose the VAT
Performed in the Philippines, the service is necessarily subject to its
jurisdiction for the State necessarily has to have a substantial connection to it in
order to enforce a zero rate. The place of payment is immaterial much less is the
place where the output of the service will be further or ultimately used.
This is so because the law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated service. (Commissioner of
Internal Revenue v. American Express International, Inc. (Philipppine Branch), G.
R. No. 152609, June 29, 2005)

30.
Destination principle under the VAT System. As a general rule,
the VAT system uses the destination principle as a basis for the jurisdictional reach
of the tax.
Goods and services are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.
This is also known as the Cross Border Doctrine.
31.
Exception to the destination principle. The law clearly provides
for an exception to the destination principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the
[BSP]."
32.
Rationale for zero-rating of exports. The Philippine VAT
system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority. [Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
The
Cross
Border
Doctrine
is
also
known
as
the
destination
principle.
Hence, actual or
constructive export of goods and services from the Philippines to a foreign country
must be zero-rated for VAT; while, those destined for use or consumption within the
Philippines shall be imposed the twelve percent (12%) VAT.
33.
Zero-rated sale distinguished from exempt
transactions:
a.
A zero-rated sale is a taxable transaction but does not result in an
output tax WHILE an exempt transaction is not subject to the output tax.
b.
The input tax on the purchases of a VAT registered person who
has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in
an exempt transaction is not entitled to any input tax on his purchases despite the
issuance of a VAT invoice or receipt.
c.
Persons engaged in transactions which are zero rated being
subject to VAT are required to register WHILE registration is optional for VATexempt persons.
34.
Zero-rated sales by VAT-registered persons. The
following sales by VAT-registered persons shall be subject to zero percent (0%)
rate:
a.
Export sales;
b.
Considered export sales under Executive Order No. 224;
c.
Foreign currency denominated sale; and
d.
Sales to persons or entities deemed tax-exempt under special law
or international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2 nd par.,

paraphrasing supplied)
35.
Sale of gold to the Central Bank considered as export sales.
As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is
chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by
the seller, which charges no output VAT but can claim a refund of or a tax credit
certificate for the input VAT previously charged to it by suppliers. (Commissioner of
Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005)
36.
Sales to ecozone, such as PEZA, considered export-sale.
Notably, while an ecozone is geographically within the Philippines, it is deemed a
separate customs territory and is regarded in law as foreign soil. Sales by suppliers
from outside the borders of the ecozone to this separate customs territory are
deemed as exports and treated as export sales. These sales are zero-rated or
subject to a tax rate of zero percent. (Commissioner of Internal Revenue v. Sekisui
Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)
37.
Ecozone, defined. An ECOZONE or a Special Economic Zone
has been described as [S]elected areas with highly developed or which have the
potential to be developed into agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial centers whose metes and bounds
are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any
or all of the following: industrial estates (IEs), export processing zones (EPZs), free
trade zones and tourist/recreational centers.
The national territory of the
Philippines outside of the proclaimed borders of the ECOZONE shall be referred to
as the Customs Territory. [Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
38.
Zero-rated sale of service, defined. A zero-rated sale of
service (by a VAT-registered person) is a taxable transaction for VAT purposes, but
shall not result in any output tax. However, the input tax on purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit
or refund in accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005,
Sec. Sec. 4.108-5 (a), words in italics supplied)
39. Service performed by American Express in facilitating the
collection of receivables from credit card members situated in the
Philippines and payment to service establishments in the Philippines in
behalf of its Hong-Kong based client is subject to VAT but zero-rated. This
is so because it meets all the requirements for VAT imposition, as follows:
a.
It regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a
clearly separate and distinct entity.
b.
Such service is commercial in nature; carried on over a sustained
period of time; on a significant scale with a reasonable degree of frequency; and

not at random, fortuitous, or attenuated.


c.
For this service, it definitely receives consideration in foreign
currency that is accounted for in conformity with law.
d.
It is not an entity exempt under any of our laws or international
agreements. (Commissioner, of
Internal Revenue
v. American
Express
International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005)
40.
While the service performed by American Express is subject
to VAT it is zero-rated, and BIR Revenue Regulations that alter the legal
requirements for zero-rating are ultra vires and invalid. The VAT system
uses the destination principle which posits that the goods and services are taxed
only in the country where they are consumed,
However, the law itself provides for clear exceptions under which the supply
of services shall be zero-rated, among which are the following:
a.
The service is performed in the Philippines;
b.
The services are within the categories provided for under the Tax
Code; and
c.
It is paid for in acceptable foreign currency of the Bangko Sentral
ng Pilipinas.
American Express renders assistance to its foreign clients by receiving the
bills of service establishments located in the country and forwarding them to their
clients abroad. The services are performed or successfully completed upon send to
its foreign clients the drafts and bills it has gathered from service establishments
here, Its services, having been performed in the Philippines are therefore also
consumed in the Philippines. Thus, its services are exempt from the destination
principle and are zero-rated.
The BIR could not change the law. [Commissioner, of Internal Revenue v.
American Express International, Inc. (Philippine Branch), G. R. No. 152609, June
29, 2005]