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Taxation Law

What is the nature of the taxing power of the provinces, municipalities and cities? How
will the local government units be able to exercise their taxingpowers?
The taxing power of local governments is not an inherent power but one delegated under
the Philippine Constitution (1987 Constitution, Article X; Manila Electric Co., v. Province of
Laguna, G.R. No. 131359, May 5, 1999; Mactan Cebu International Airport Authority v.
Marcos, G.R. No. 120082, September 11, 1996; Basco v. PAGCOR, G.R. No. 150947, July 15,
The Local Government Code took effect on January 1, 1992.
PLDT's legislative franchise was granted sometime before 1992. Its franchise provides
that PLDT will only pay 3% franchise tax in lieu of all taxes.
The legislative franchises of Smart and Globe Telecoms were granted in 1998. Their
legislative franchises state that they will pay only 5% franchise tax in lieu of all taxes.
The Province of Zamboanga del Norte passed an ordinance in 1997 that imposes a local
franchise tax on all telecommunication companies operating within the province. The
tax is 50% of 1% of the gross annual receipts of the preceding calendar year based on
the incoming receipts, or receipts realized, within territorial jurisdiction.
Is the ordinance valid? Are PLDT, Smart and Globe liable to pay franchisetaxes? Reason
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 Local Government Code (LGC). The
LGC, which took effect on January 1, 1992, withdrew tax exemptions or incentives
previously enjoyed by all persons, except certain entities. (Section 193, LGC)
PLDT is liable to pay the local franchise taxes because its legislative franchise was granted
by Congress prior to the passage of the LGC. Thus, the provision of the LGC withdrawing tax
exemptions or incentives applies to PLDT.
Smart and Globe are exempt from the local franchise taxes imposed by the province since
their respective legislative franchises were granted in 1998, or after the enactment of the
LGC. Therefore, with respect to Smart and Globe, the withdrawal of tax exemptions or
incentives under the :GC was superseded by the legislative franchise requiring payment of
the 5% franchise tax in lieu of alltaxes. (PLDT v. City of Davao, G.R. No. 143867, August
22, 2001 and March 25, 2003).
What kind of taxes, fees and charges are considered as National Internal
Revenue Taxes under the National Internal Revenue Code (NIRC)?
National Internal Revenue Taxes are national taxes which the Bureau of Internal Revenue

shall collect under the National Internal Revenue Code (NIRC, Section 2). These are:
1. Income Tax;
2. Estate and Donors Taxes;
3. Value-Added Tax;
4. Other Percentage Taxes;
5. Excise Taxes;
6. Documentary Stamp Tax; and
7. Other taxes that may be imposed which the BIR shall collect.
XYZ Corporation, an export oriented company, was able to secure a Bureau of Internal
Revenue (BIR) ruling in June 2005 that exempts from tax the importation some of its
raw materials. The ruling is of first impression, which means the interpretations made
by the Commissioner of Internal Revenue is one without established precedents.
Subsequently, however, the BIR issued another ruling which in effect would subject to
tax such kind of importation. XYZ Corporation is concerned that said ruling may have a
retroactive effect, which means that all their importations done before the issuance of
the second ruling could be subject to tax.
a. What is BIR ruling?
A BIR ruling is an administrative interpretation of the Revenue Law as applied and
implemented by the Bureau. They can be relied upon by taxpayers and are valid until
otherwise determined by the courts or modified or revoked by a subsequent ruling or
opinion. They are accorded great weight and respect, but not binding on the courts.
(Commission v. Ledesma, L-17509, January 30, 1970).
b. What is required to make a BIR ruling of first impression a valid one?
A BIR ruling of first impression, to be a valid ruling, must be issued within the scope of
authority granted to the Commissioner of Internal Revenue, and not contravene any law or
decision of the Supreme Court. (Michelle J. Lhuiller v. CIR, G.R. No. 150947, July 15, 2003;
Sec. 7, NIRC)
c. Does a BIR ruling have a retroactive effect, considering the principle that tax
exemptions should be interpreted strictly against the taxpayer?
A BIR ruling cannot be given retroactive effect if it would be prejudicial to the taxpayer.
Section 246 of the NIRC provides for retroactive effect in the following cases:
1. Where the taxpayer deliberately mis-states or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
2. Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the rulings is based; or
3. Where the taxpayer acted in bad faith (Section 246, NIRC).
ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The
property has been classified as residential and with a zonal valuation of P1, 000 per
square meter. The capital gains tax was paid based on the zonal value. The
Revenue District Officer (RDO), however, refused to issue the Certificate Authorizing
Registration for the reason that based on his ocular inspection the property should have
a higher zonal valuation determined by the Commissioner of Internal Revenue because

the area is already a commercial area. Accordingly, the RDO wanted to make a
recomputation of the taxes due by using the fair market value appearing in a nearby
bank's valuation list which is practically double the existing zonal value. The RDO also
wanted to assess a donor's tax on the difference between the selling price based on the
zonal value and the fair market value appearing in a nearby bank's valuation list.
a. Does the RDO have the authority or discretion to unilaterally use the fair market
value as the basis for determining the capital gains tax and not the zonal value as
determined by the Commissioner of Internal Revenue? Reason briefly.
The RDO has no discretion. The only value that can be applied is the zonal value as fixed
and determined by the Commissioner. (Section 6[E], NIRC).
b. Should the difference in the supposed taxable value be legally subject to donor's tax?
Reason briefly.
By applying the fixed zonal value, there should be no difference in the taxable value and
the declared value that might be subject of a donors tax. However, assuming that such a
difference may exist, the variance in price may raise a legal presumption of an intended
A demand gift arises only if tax is avoided as a result of selling property at a price lower
than its fair market value. In a sale subject to 6% capital gains tax, the tax is always based
on the gross selling price or fair market value whichever is higher. This means, therefore,
that the deemed gift provision under the Tax Code will not apply because the 6% capital
gains tax can be applied to the higher value.
Z is a Filipino immigrant living in the United States for more than 10 years. He is retired
and he came back to the Philippines as a balikbayan. Every time he comes to the
Philippines, he stays here for about a month. He regularly receives a pension from his
former employer in the United States, amounting to US$1, 000 a month. While in the
Philippines, with his pension pay from his former employer, he purchased three
condominium units in Makati which he is renting out for P15, 000 a moth each.
a. Does the US$1, 000 pension become taxable because he is now residing in the
Philippines? Reason briefly.
Alternative Answer:
No, the US$1,000 pension is excluded from gross income because it is received by a Filipino
resident or non-resident from a foreign private institution which under Section 32(B)(6) of
the NIRC is excluded from gross income.
Alternative Answer:
No, the US$1,000 pension is excluded from gross income because it is derived from sources
outside of the Philippines by a non-resident citizen. He may only be taxed for income from
sources within the Philippines. (Section 42[A][3] in relation to Section 23, NIRC)
b. Is his purchase of the three condominium units subject to any tax? Reason briefly.
Alternative Answer:
Yes, the purchase of the 3 condominium units is subject to:
1. Documentary stamp tax (payable by either seller or purchaser) (Section 196, NIRC);
2. Local transfer tax imposed under the Local Government Code (Sec. 134, LGC)
3. Value added tax, if Z purchased the units from real estate developers and/or real estate
lessors; and

4. Income tax, either capital gains tax or regular income tax, depending on whether the
condominium is regarded as a capital asset or an ordinary asset of the seller
Alternative Answer:
Strictly speaking, purchase is not a taxable event under the Internal Revenue Code,
except for the requirement of documentary stamp tax in the case of real property. (Sec.
196, NIRC)
c. Will Z be liable to pay income tax on the P45,000 monthly income? Reason briefly.
Yes, Z shall be liable to pay income tax since he is now a taxpayer engaged in the business
of leasing real property (Section 42[A][4], NIRC)
Antonia Santos, 30 years old, gainfully employed, is the sister of Edgardo Santos. She
died in an airplane crash. Edgardo is a lawyer and he negotiated with the airline
company and insurance company and they were able to a agree total settlement of P10
Million. This is what Antonia would have earned as somebody who was gainfully
employed. Edgardo was her only heir.
a. Is the P10 Million subject to estate tax? Reason briefly.
No, the P10.0 million does not form part of Antonias taxable estate. It is either damages or
compensation arising from the death of Antonia. (Sec. 32[b][4], Chapter VI, NIRC as
amended by RA 8424)
b. Should Edgardo report the P10 Million as his income being Antonia's only heir? Reason
No, the P10.0 million settlement need not be reported by Edgardo since the amount
qualified as compensation for personal injuries which is excluded from gross income.
(Section 32[B][4] of the NIRC)
Nutrition Chippy Corporation gives all its employees (rank and file, supervisors and
managers) one sack of rice every month valued at P800 per sack. During an audit
investigation made by the Bureau of Internal Revenue (BIR), the BIR assessed the
company for failure to withhold the corresponding withholding tax on the amount
equivalent to the one sack of rice received by all the employees, contending that the
sack of rice is considered as additional compensation for the rank and file employees
and additional fringe benefit for the supervisions and managers. Therefore, the value of
the one sack of rice every month should be considered as part of the compensation of
the rank and file subject to tax. For the supervisors and managers, the employer should
be the one assessed pursuant to Section 33 (a) of the NIRC. Is there a legal basis for the
assessment made by the BIR? Explain your answer.
No, the monthly sack of rice not exceeding P1,000.00 for the rank and file employees is a
de minimis benefit not subject to tax. The rice is a privilege the employer furnishes his
employees, of relatively small value, offered to promote the health, goodwill, contentment
or efficiency of his employees. (Revenue Regulations No. 02-98, [April 17. 1998]; BIR Ruling
No. 023-02 [June 21, 2002] citing Section 2.78[A], Revenue Regulations No. 2-98 & Section
33, 1997 TRA as implemented by Revenue Regulations No. 3-98 as amended)

Weber Realty Company which owns a three-hectare land in Antipolo entered into a
Joint Venture Agreement (JVA) with Prime Development Company for the development
of said parcel of land. Weber Realty as owner of the land contributed the land to the
Joint Venture and Prime Development agreed to develop the same into a residential
subdivision and construct residential houses thereon. They agreed that they would
divide the lots between them.
a. Does the JVA entered into by and between Weber and Prime create a separate
taxable entity? Explain briefly.
Alternative Answer:
No, since the arrangement between Weber Realty Co. and Prime Development Co. is for the
purpose of understanding a construction project, there is no separate taxable entity
pursuant to Section 22[B[ of the NIRC.
Alternative Answer:
Yes, but only for purposes of the Value Added Tax, a joint venture for the construction
project resulted in the creation of a separate taxable entity. It is not subject to income tax
pursuant to Section 22[B[ of the NIRC.
b. Are the allocation and distribution of the saleable lots to Weber and prime subject to
income tax and to expanded withholding tax? Explain briefly.
No, the allocation of saleable lots to Weber and Prime is not subject to income tax and the
expanded withholding tax. There is no income realized in the distribution of property, but
merely a return of capital.
c. Is the sale by Weber or Prime of their respective shares in the saleable lots to third
parties subject to income tax and to expanded withholding tax? Explain briefly.
Yes, the sale by Weber and Prime of their respective shares results in the realization of
income subject to income tax and expanded withholding tax.
Noel Santos is a very bright computer science graduate. He was hired by Hewlett
Packard. To entice him to accept the offer for employment, he was offered the
arrangement that part of is compensation would be an insurance policy with a face
value of P20 Million. The parents of Noel are made the beneficiaries of the insurance
a. Will the proceeds of the insurance form part of the income of the parents of Noel and
be subject to income tax? Reason briefly.
No, 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. (Sec. 32[B][1], NIRC)
b. Can the company deduct from its gross income the amount of the premium? Briefly.
Yes, the premiums paid are deductible business expenses, provided the employer is not the
beneficiary. The premiums constitute ordinary and necessary expenses of the company.
(Section 36[A][4] and Section 34[A], NIRC)

The Congregation of the Mary Immaculate donated a land a dormitory building located
along Espaa St. in favor of the Sisters of the Holy Cross, a group of nuns operating a
free clinic and high school teaching basic spiritual values. Is the donation subject to
donor's tax? Reason Briefly.
The donation is not subject to donors tax. Gifts made in favor of educational and/or
charitable or religious institutions shall be exempt from the donors tax provided that not
more than 30% of said gifts shall be used by such donee for administration purposes.
(Section 101[A][3]; Commissioner of Internal Revenue v. Court of Appeals, Court of Tax
Appeals and Ateneo de Manila University, G.R. No. 115349, April 18, 1997).
Remedios, a resident citizen, died on November 10, 2006. She died leaving three
condominium units in Quezon City valued at P5 Million each. Rodolfo was her only heir.
He reported her death on December 5, 2006 and filed the estate tax, he asked the
Commissioner of Internal Revenue to give him one year to pay the estate tax due. The
Commissioner approved the request for extension of time provided that the estate tax
be computed on the basis of the value of the property at the time of payment of the
a. Does the Commissioner of Internal Revenue have the power to extend the payment
of estate tax? If so, what are the requirements to allow such extension?
Yes, the Commissioner may extend the payment of the tax subject to the following
1. Timely payment would impose undue hardship upon the estate or the heirs;
2. Posting of a bond exceeding double the amount of the tax may be required by the
3. The extension shall not exceed 2 years in case of extrajudicial settlement of the estate
or 5 years in case of judicial settlement. (Sec. 91, NIRC)
b. Does the condition that the basis of the estate tax will be the value at the time of
the payment have legal basis? Reason briefly.
No. The value of the gross estate shall be determined at the time of death of the decedent.
(Sections 85 and 90[A][1], NIRC)
ABC Corporation won a tax refund case for P50 Million. Upon execution of the
judgement and when trying to get the tax Credit Certificates (TCC) representing the
refund, the Bureau of Internal Revenue (BIR) refused to issue the TCC on the basis of
the fact that the corporation is under audit by the BIR and it has a potential tax liability.
Is there a valid justification for the BIR to withhold the issuance of the TCC? Explain
your answer briefly.
There is no valid justification to withhold the TCC. Offsetting of the amount of TCC against
a potential tax liability is not allowed because both obligations are not yet fully liquidated.
TCC has been determined as to its amount while the deficiency tax is yet to be determined
through the completion of the audit. (Philex Mining Corporation v. Commissioner of Internal
Revenue, Court of Appeals, and Court of Tax Appeals, G.R. No. 125704, August 28, 1998)