2007 Bar Questions and Suggested Answers (TAXATION LAW)

Taxation Law
I.
(5%)
What is the nature of the taxing power of the
provinces, municipalities and cities !ow
will the local government units "e a"le to
exercise their taxing powers
The taxing power of local governments is not
an inherent power but one delegated under the
Philippine Constitution (1987 Constitution,
rticle !" #anila $lectric Co%, v% Province of
&aguna, '%(% )o% 1*1*+9, #a, +, 1999"
#actan Cebu -nternational irport uthorit, v%
#arcos, '%(% )o% 1.//8., 0eptember 11, 1991"
2asco v% P'C3(, '%(% )o% 1+/947, 5ul, 1+,
.//*6%
II.
(#$%)
The Local %overnment &ode too' effect on
(anuar) #, #**+.
,L-T.s legislative franchise was granted
sometime "efore #**+. Its franchise provides
that ,L-T will onl) pa) /% franchise tax in
lieu of all taxes.
The legislative franchises of 0mart and
%lo"e Telecoms were granted in #**1. Their
legislative franchises state that the) will pa)
onl) 5% franchise tax in lieu of all taxes.
The ,rovince of 2am"oanga del 3orte
passed an ordinance in #**4 that imposes a
local franchise tax on all telecommunication
companies operating within the province.
The tax is 5$% of #% of the gross annual
receipts of the preceding calendar )ear "ased
on the incoming receipts, or receipts reali5ed,
within territorial 6urisdiction.
Is the ordinance valid 7re ,L-T, 0mart
and %lo"e lia"le to pa) franchise taxes
8eason "riefl).
The ordinance is valid as it was passed pursuant
to the powers of provinces and cities to impose
taxes on businesses with franchises under the
&ocal 'overnment Code (&'C6% The &'C,
which too7 effect on 5anuar, 1, 199., withdrew
tax exemptions or incentives previousl,
en8o,ed b, all persons, except certain entities%
(0ection 19*, &'C6
P&9T is liable to pa, the local franchise taxes
because its legislative franchise was granted b,
Congress prior to the passage of the &'C% Thus,
the provision of the &'C withdrawing tax
exemptions or incentives applies to P&9T%
0mart and 'lobe are exempt from the local
franchise taxes imposed b, the province since
their respective legislative franchises were
granted in 1998, or after the enactment of the
&'C% Therefore, with respect to 0mart and
'lobe, the withdrawal of tax exemptions or
incentives under the :'C was superseded b, the
legislative franchise re;uiring pa,ment of the
+< franchise tax in lieu of all taxes%
(P&9T v% Cit, of 9avao, '%(% )o% 14*817,
ugust .., .//1 and #arch .+, .//*6%
III.
(5%)
What 'ind of taxes, fees and charges are
considered as 3ational Internal 8evenue
Taxes under the 3ational Internal 8evenue
&ode (3I8&)
)ational -nternal (evenue Taxes are national
taxes which the 2ureau of -nternal (evenue
shall collect under the )ational -nternal
(evenue Code ()-(C, 0ection .6% These are:
1% -ncome Tax"
.% $state and 9onors Taxes"
*% =alue>dded Tax"
4% 3ther Percentage Taxes"
+% $xcise Taxes"
1% 9ocumentar, 0tamp Tax" and
7% 3ther taxes that ma, be imposed which the
2-( shall collect%
I9.
(#$%)
:;2 &orporation, an export oriented
compan), was a"le to secure a <ureau of
Internal 8evenue (<I8) ruling in (une +$$5
that exempts from tax the importation some
of its raw materials. The ruling is of first
impression, which means the interpretations
made ") the &ommissioner of Internal
8evenue is one without esta"lished
precedents. 0u"se=uentl), however, the <I8
issued another ruling which in effect would
su"6ect to tax such 'ind of importation. :;2
&orporation is concerned that said ruling
ma) have a retroactive effect, which means
that all their importations done "efore the
issuance of the second ruling could "e su"6ect
to tax.
a. What is <I8 ruling
2-( ruling is an administrative interpretation
of the (evenue &aw as applied and
implemented b, the 2ureau% The, can be relied
upon b, taxpa,ers and are valid until otherwise
determined b, the courts or modified or
revo7ed b, a subse;uent ruling or opinion%
The, are accorded great weight and respect, but
not binding on the courts% (Commission v%
&edesma, &>17+/9, 5anuar, */, 197/6%
". What is re=uired to ma'e a <I8 ruling of
first impression a valid one
2-( ruling of first impression, to be a valid
ruling, must be issued within the scope of
authorit, granted to the Commissioner of
-nternal (evenue, and not contravene an, law
or decision of the 0upreme Court% (#ichelle 5%
&huiller v% C-(, '%(% )o% 1+/947, 5ul, 1+,
.//*" 0ec% 7, )-(C6
c. -oes a <I8 ruling have a retroactive effect,
considering the principle that tax exemptions
should "e interpreted strictl) against the
taxpa)er
2-( ruling cannot be given retroactive effect
if it would be pre8udicial to the taxpa,er%
0ection .41 of the )-(C provides for
retroactive effect in the following cases:
1% ?here the taxpa,er deliberatel, mis>states or
omits material facts from his return or an,
document re;uired of him b, the 2ureau of
-nternal (evenue"
.% ?here the facts subse;uentl, gathered b, the
2ureau of -nternal (evenue are materiall,
different from the facts on which the rulings is
based" or
*% ?here the taxpa,er acted in bad faith
(0ection .41, )-(C6%
9.
(#$%)
7<& &orporation sold a real propert) in
>alolos, <ulacan to :;2 &orporation. The
propert) has "een classified as residential
and with a 5onal valuation of ,#, $$$ per
s=uare meter. The capital gains tax was paid
"ased on the 5onal value. The 8evenue
-istrict ?fficer (8-?), however, refused to
issue the &ertificate 7uthori5ing 8egistration
for the reason that "ased on his ocular
inspection the propert) should have a higher
5onal valuation determined ") the
&ommissioner of Internal 8evenue "ecause
the area is alread) a commercial area.
7ccordingl), the 8-? wanted to ma'e a
recomputation of the taxes due ") using the
fair mar'et value appearing in a near")
"an'.s valuation list which is practicall)
dou"le the existing 5onal value. The 8-?
also wanted to assess a donor.s tax on the
difference "etween the selling price "ased on
the 5onal value and the fair mar'et value
appearing in a near") "an'.s valuation list.
a. -oes the 8-? have the authorit) or
discretion to unilaterall) use the fair mar'et
value as the "asis for determining the capital
gains tax and not the 5onal value as
determined ") the &ommissioner of Internal
8evenue 8eason "riefl).
The (93 has no discretion% The onl, value that
can be applied is the @onal value as fixed and
determined b, the Commissioner% (0ection 1A$B,
)-(C6%
". 0hould the difference in the supposed
taxa"le value "e legall) su"6ect to donor.s
tax 8eason "riefl).
2, appl,ing the fixed @onal value, there should
be no difference in the taxable value and the
declared value that might be sub8ect of a
donors tax% Cowever, assuming that such a
difference ma, exist, the variance in price ma,
raise a legal presumption of an intended
donation%
demand gift arises onl, if tax is avoided as a
result of selling propert, at a price lower than
its fair mar7et value% -n a sale sub8ect to 1<
capital gains tax, the tax is alwa,s based on the
gross selling price or fair mar7et value
whichever is higher% This means, therefore, that
the deemed gift provision under the Tax Code
will not appl, because the 1< capital gains tax
can be applied to the higher value%
9I.
(5%)
2 is a @ilipino immigrant living in the Anited
0tates for more than #$ )ears. !e is retired
and he came "ac' to the ,hilippines as a
"ali'"a)an. Bver) time he comes to the
,hilippines, he sta)s here for a"out a month.
!e regularl) receives a pension from his
former emplo)er in the Anited 0tates,
amounting to A0C#, $$$ a month. While in
the ,hilippines, with his pension pa) from his
former emplo)er, he purchased three
condominium units in >a'ati which he is
renting out for ,#5, $$$ a moth each.
a. -oes the A0C#, $$$ pension "ecome
taxa"le "ecause he is now residing in the
,hilippines 8eason "riefl).
lternative nswer:
)o, the D0E1,/// pension is excluded from
gross income because it is received b, a
Filipino resident or non>resident from a foreign
private institution which under 0ection *.(26(16
of the )-(C is excluded from gross income%
lternative nswer:
)o, the D0E1,/// pension is excluded from
gross income because it is derived from sources
outside of the Philippines b, a non>resident
citi@en% Ce ma, onl, be taxed for income from
sources within the Philippines% (0ection 4.AB
A*B in relation to 0ection .*, )-(C6
". Is his purchase of the three condominium
units su"6ect to an) tax 8eason "riefl).
lternative nswer:
Ges, the purchase of the * condominium units is
sub8ect to:
1% 9ocumentar, stamp tax (pa,able b, either
seller or purchaser6 (0ection 191, )-(C6"
.% &ocal transfer tax imposed under the &ocal
'overnment Code (0ec% 1*4, &'C6
*% =alue added tax, if H purchased the units
from real estate developers andIor real estate
lessors" and
4% -ncome tax, either capital gains tax or regular
income tax, depending on whether the
condominium is regarded as a capital asset or
an ordinar, asset of the seller
lternative nswer:
0trictl, spea7ing, purchase is not a taxable
event under the -nternal (evenue Code, except
for the re;uirement of documentar, stamp tax
in the case of real propert,% (0ec% 191, )-(C6
c. Will 2 "e lia"le to pa) income tax on the
,D5,$$$ monthl) income 8eason "riefl).
Ges, H shall be liable to pa, income tax since he
is now a taxpa,er engaged in the business of
leasing real propert, (0ection 4.ABA4B, )-(C6
9II.
(5%)
7ntonia 0antos, /$ )ears old, gainfull)
emplo)ed, is the sister of Bdgardo 0antos.
0he died in an airplane crash. Bdgardo is a
law)er and he negotiated with the airline
compan) and insurance compan) and the)
were a"le to a agree total settlement of ,#$
>illion. This is what 7ntonia would have
earned as some"od) who was gainfull)
emplo)ed. Bdgardo was her onl) heir.
a. Is the ,#$ >illion su"6ect to estate tax
8eason "riefl).
)o, the P1/%/ million does not form part of
ntonias taxable estate% -t is either damages
or compensation arising from the death of
ntonia% (0ec% *.AbBA4B, Chapter =-, )-(C as
amended b, ( 84.46
". 0hould Bdgardo report the ,#$ >illion as
his income "eing 7ntonia.s onl) heir 8eason
"riefl).
)o, the P1/%/ million settlement need not be
reported b, $dgardo since the amount ;ualified
as compensation for personal in8uries which is
excluded from gross income% (0ection *.A2BA4B
of the )-(C6
9III.
(5%)
3utrition &hipp) &orporation gives all its
emplo)ees (ran' and file, supervisors and
managers) one sac' of rice ever) month
valued at ,1$$ per sac'. -uring an audit
investigation made ") the <ureau of Internal
8evenue (<I8), the <I8 assessed the
compan) for failure to withhold the
corresponding withholding tax on the
amount e=uivalent to the one sac' of rice
received ") all the emplo)ees, contending
that the sac' of rice is considered as
additional compensation for the ran' and file
emplo)ees and additional fringe "enefit for
the supervisions and managers. Therefore,
the value of the one sac' of rice ever) month
should "e considered as part of the
compensation of the ran' and file su"6ect to
tax. @or the supervisors and managers, the
emplo)er should "e the one assessed
pursuant to 0ection // (a) of the 3I8&. Is
there a legal "asis for the assessment made
") the <I8 Bxplain )our answer.
)o, the monthl, sac7 of rice not exceeding
P1,///%// for the ran7 and file emplo,ees is a
de minimis benefit not sub8ect to tax% The rice is
a privilege the emplo,er furnishes his
emplo,ees, of relativel, small value, offered to
promote the health, goodwill, contentment or
efficienc, of his emplo,ees% ((evenue
(egulations )o% /.>98, April 17% 1998B" 2-(
(uling )o% /.*>/. A5une .1, .//.B citing
0ection .%78AB, (evenue (egulations )o% .>98
J 0ection **, 1997 T( as implemented b,
(evenue (egulations )o% *>98 as amended6
I:.
(#$%)
We"er 8ealt) &ompan) which owns a threeE
hectare land in 7ntipolo entered into a (oint
9enture 7greement ((97) with ,rime
-evelopment &ompan) for the development
of said parcel of land. We"er 8ealt) as owner
of the land contri"uted the land to the (oint
9enture and ,rime -evelopment agreed to
develop the same into a residential
su"division and construct residential houses
thereon. The) agreed that the) would divide
the lots "etween them.
a. -oes the (97 entered into ") and "etween
We"er and ,rime create a separate taxa"le
entit) Bxplain "riefl).
lternative nswer:
)o, since the arrangement between ?eber
(ealt, Co% and Prime 9evelopment Co% is for
the purpose of understanding a construction
pro8ect, there is no separate taxable entit,
pursuant to 0ection ..A2A of the )-(C%
lternative nswer:
Ges, but onl, for purposes of the =alue dded
Tax, a 8oint venture for the construction pro8ect
resulted in the creation of a separate taxable
entit,% -t is not sub8ect to income tax pursuant to
0ection ..A2A of the )-(C%
". 7re the allocation and distri"ution of the
salea"le lots to We"er and prime su"6ect to
income tax and to expanded withholding
tax Bxplain "riefl).
)o, the allocation of saleable lots to ?eber and
Prime is not sub8ect to income tax and the
expanded withholding tax% There is no income
reali@ed in the distribution of propert,, but
merel, a return of capital%
c. Is the sale ") We"er or ,rime of their
respective shares in the salea"le lots to third
parties su"6ect to income tax and to
expanded withholding tax Bxplain "riefl).
Ges, the sale b, ?eber and Prime of their
respective shares results in the reali@ation of
income sub8ect to income tax and expanded
withholding tax%
:.
(#$%)
3oel 0antos is a ver) "right computer science
graduate. !e was hired ") !ewlett ,ac'ard.
To entice him to accept the offer for
emplo)ment, he was offered the arrangement
that part of is compensation would "e an
insurance polic) with a face value of ,+$
>illion. The parents of 3oel are made the
"eneficiaries of the insurance polic).
a. Will the proceeds of the insurance form
part of the income of the parents of 3oel and
"e su"6ect to income tax 8eason "riefl).
)o, under the law, the proceeds of life insurance
policies paid to the heirs or beneficiaries upon
the death of the insured are excluded from gross
income% (0ec% *.A2BA1B, )-(C6
". &an the compan) deduct from its gross
income the amount of the premium <riefl).
Ges, the premiums paid are deductible business
expenses, provided the emplo,er is not the
beneficiar,% The premiums constitute ordinar,
and necessar, expenses of the compan,%
(0ection *1ABA4B and 0ection *4AB, )-(C6
:I.
(5%)
The &ongregation of the >ar) Immaculate
donated a land a dormitor) "uilding located
along BspaFa 0t. in favor of the 0isters of the
!ol) &ross, a group of nuns operating a free
clinic and high school teaching "asic spiritual
values. Is the donation su"6ect to donor.s
tax 8eason <riefl).
The donation is not sub8ect to donors tax%
'ifts made in favor of educational andIor
charitable or religious institutions shall be
exempt from the donors tax provided that not
more than */< of said gifts shall be used b,
such donee for administration purposes%
(0ection 1/1ABA*B" Commissioner of -nternal
(evenue v% Court of ppeals, Court of Tax
ppeals and teneo de #anila Dniversit,, '%(%
)o% 11+*49, pril 18, 19976%
:II.
(5%)
8emedios, a resident citi5en, died on
3ovem"er #$, +$$G. 0he died leaving three
condominium units in Hue5on &it) valued at
,5 >illion each. 8odolfo was her onl) heir.
!e reported her death on -ecem"er 5, +$$G
and filed the estate tax, he as'ed the
&ommissioner of Internal 8evenue to give
him one )ear to pa) the estate tax due. The
&ommissioner approved the re=uest for
extension of time provided that the estate tax
"e computed on the "asis of the value of the
propert) at the time of pa)ment of the tax.
a. -oes the &ommissioner of Internal
8evenue have the power to extend the
pa)ment of estate tax If so, what are the
re=uirements to allow such extension
Ges, the Commissioner ma, extend the pa,ment
of the tax sub8ect to the following conditions:
1% Timel, pa,ment would impose undue
hardship upon the estate or the heirs"
.% Posting of a bond exceeding double the
amount of the tax ma, be re;uired b, the
Commissioner"
*% The extension shall not exceed . ,ears in
case of extra8udicial settlement of the estate or +
,ears in case of 8udicial settlement% (0ec% 91,
)-(C6
". -oes the condition that the "asis of the
estate tax will "e the value at the time of the
pa)ment have legal "asis 8eason "riefl).
)o% The value of the gross estate shall be
determined at the time of death of the decedent%
(0ections 8+ and 9/ABA1B, )-(C6
:III.
(5%)
7<& &orporation won a tax refund case for
,5$ >illion. Apon execution of the
6udgement and when tr)ing to get the tax
&redit &ertificates (T&&) representing the
refund, the <ureau of Internal 8evenue
(<I8) refused to issue the T&& on the "asis
of the fact that the corporation is under audit
") the <I8 and it has a potential tax lia"ilit).
Is there a valid 6ustification for the <I8 to
withhold the issuance of the T&& Bxplain
)our answer "riefl).
There is no valid 8ustification to withhold the
TCC% 3ffsetting of the amount of TCC against a
potential tax liabilit, is not allowed because
both obligations are not ,et full, li;uidated%
TCC has been determined as to its amount
while the deficienc, tax is ,et to be determined
through the completion of the audit% (Philex
#ining Corporation v% Commissioner of
-nternal (evenue, Court of ppeals, and Court
of Tax ppeals, '%(% )o% 1.+7/4, ugust .8,
19986
)3TC-)' F3&&3?0%