2016 LAST MINUTE TIPS IN TAX LAW

By: Enrique V. dela Cruz, Jr.

Q: The City of Cebu passed a tax ordinance in 1993 which require

proprietors, lessees or operators of theatres, cinemas, concert halls,
circuses, boxing stadia, and other places of amusement, to pay an
amusement tax equivalent to thirty percent (30%) of the gross receipts
of admission fees to the Office of the City Treasurer of Cebu City.
Almost a decade later, or on June 7, 2002, Congress passed RA 9167,
creating the Film Development Council of the Philippines (FDCP).
Under Sections 13 and 14 of RA 9167, ALL amusement taxes levied by
covered cities and municipalities shall be given by proprietors,
operators or lessees of theatres and cinemas to FDCP, which shall then
reward said amount to the producers of graded films. Is this
constitutional?

A: NO. What RA 9167 seeks to accomplish is the segregation of the

amusement taxes raised and collected by Cebu City and its subsequent
transfer to FDCP. This arrangement cannot be classified as a tax
exemption but is a confiscatory measure where the national
government extracts money from the local government's coffers and
transfers it to FDCP, a private agency, which in turn, will award the
money to private persons, the film producers, for having produced
graded films.

Secs. 13 and 14 of RA 9167 are contrary to the basic policy in local

autonomy that all taxes, fees, and charges imposed by the LGUs shall
accrue exclusively to them, as articulated in Article X, Sec. 5 of the
1987 Constitution. This edict, according to the court, is a limitation
upon the rule-making power of Congress when it provides guidelines
and limitations on the local government unit's (LGU's) power of
taxation. Therefore, when Congress passed this "limitation," it went
beyond its legislative authority, rendering the questioned provisions
unconstitutional. [FDCP v. Colon Heritage Council, G.R. No.
203754. June 16, 2015, Velasco J.]

Q. Is MERALCO liable for real property tax on its transformers,

electric posts (or poles), transmission lines, insulators, and electric
meters?

A: YES. The transformers, electric posts, transmission lines,

insulators, and electric meters of MERALCO are no longer exempted
from real property tax and may qualify as "machinery" subject to real
property tax under the Local Government Code.

While the Local Government Code still does not provide for a
specific definition of "real property," Sections 199 (o) and 232 of the
said Code, respectively, gives an extensive definition of what
constitutes "machinery" and unequivocally subjects such machinery to
real property tax. The Court reiterates that the machinery subject to

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
1|Page
real property tax under the Local Government Code "may or may not be
attached, permanently or temporarily to the real property;" and the
physical facilities for production, installations, and appurtenant service
facilities, those which are mobile, self-powered or self-propelled, or are
not permanently attached must (a) be actually, directly, and exclusively
used to meet the needs of the particular industry, business, or activity;
and (2) by their very nature and purpose, be designed for, or necessary
for manufacturing, mining, logging, commercial, industrial, or
agricultural purposes. [MERALCO v. City Assessor of Lucena City,
G.R. No. 166102. August 5, 2015.]

Q: What entities are exempt from local taxes under the Local
Government Code?
A:
Section 193. Withdrawal of Tax Exemption Privileges. Unless
otherwise provided in this Code, tax exemptions or incentives granted
to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.

Section 234. Exemptions from Real Property Tax. The following

are exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use thereof
has been granted, for consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, nonprofit or religious cemeteries and all
lands, buildings, and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly
and exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and

environmental protection.

Except as provided herein, any exemption from payment of real

property tax previously granted to, or presently enjoyed by, all persons,
whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of
this Code.

Q: Association of Benevola de Cebu, Inc. is a non-stock, non-profit

organization which is the owner of Chong Hua Hospital (CHH). The
association constructed the CHH Medical Arts Center (CHHMAC). A
Certificate of Occupancy was issued to the center with a classification

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
2|Page
of "Commercial Clinic." The city assessor assessed the CHHMAC
building as "commercial" at the assessment level for commercial
buildings, and not for special assessment currently imposed for CHH
and its other separate buildingsthe CHH's Dietary and Records
Departments. The association filed with the LBAA for reconsideration,
asserting that CHHMAC is part of CHH and ought to be imposed the
same special assessment level that of CHH. The LBAA ruled in favor of
the association stating that it is of public knowledge that hospitals have
plenty of spaces leased out to medical practitioners, which is both an
accepted and desirable fact; thus, respondent's claim is not disputed
that such is a must for a tertiary hospital like CHH which decision was
affirmed by the CBAA. Likewise, the CA affirmed the same that the
CHHMAC is part and parcel of CHH since the facilities and utilities of
CHHMAC are necessary for the CHH to achieve its purpose.

Is the medical arts center built by the hospital to house its doctors a
commercial establishment for tax purposes?

A: NO. We so hold that CHHMAC is an integral part of CHH. It is

undisputed that the doctors and medical specialists holding clinics in
CHHMAC are those duly accredited by CHH, that is, they are consultants
of the hospital and the ones who can treat CHH's patients confined in it.
This fact alone takes away CHHMAC from being categorized as
"commercial" since a tertiary hospital like CHH is required by law to
have a pool of physicians who comprises the required medical
departments in various medical fields. The CHHMAC facility, while
seemingly not indispensable to the operations of CHH, is definitely
incidental to and reasonably necessary for the operations of the
hospital.

Given the foregoing arguments, we fail to see any reason why the
CHHMAC building should be classified as "commercial" as it is not
operated primarily for profit but as an integral part of CHH. The
CHHMAC, with operations being devoted for the benefit of the CHH's
patients, should be accorded the special assessment. In this regard, we
point with approbation the appellate court's application of Sec. 216 in
relation with Sec. 215 of the Local Government Code on the proper
classification of the subject CHHMAC building as "special" and not
"commercial. [CITY ASSESSOR OF CEBU CITY v. ASSOCIATION OF
BENEVOLA DE CEBU, INC. G.R. No. 152904, June 8, 2007,
Velasco, Jr., J.]

Q: R.A. 6260 was enacted creating the Coconut Investment

Company (CIC) to administer the Coconut Investment Fund (CIF),
which, under Section 8 thereof, a levy was to be sourced on the sale of
copra. Charged with the duty of collecting and administering the Fund
was Philippine Coconut Administration (PCA). Like COCOFED with which
it had a legal linkage, the PCA, by statutory provisions scattered in
different coco levy decrees, had its share of the coco levy. And per
Cojuangcos own admission, PCA paid, out of the CCSF, the entire
acquisition price for the 72.2% option shares. The list of FUB
stockholders included Cojuangco with 14,440 shares and PCA with

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
3|Page
129,955 shares. It would appear later that, pursuant to the stipulation
on maintaining Cojuangcos equity position in the bank, PCA would
cede to him 10% of its subscriptions to (a) the authorized but unissued
shares of FUB and (b) the increase in FUBs capital stock. Do the coco
levy funds partake of the nature of taxes?

A: YES. The coconut levy funds were exacted for a special public
purpose. Consequently, any use or transfer of the funds that directly
benefits private individuals should be invalidated. Taxation is done not
merely to raise revenues to support the government, but also to
provide means for the rehabilitation and the stabilization of a
threatened industry, which is so affected with public interest as to be
within the police power of the State.

Even if the money is allocated for a special purpose and raised by

special means, it is still public in character. 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 a significant segment of the
population, but also of export earnings the sustained growth of which is
one of the imperatives of economic stability. The coconut levy funds
were sourced from forced exactions decreed under P.D. Nos. 232, 276
and 582, among others, with the end-goal of developing the entire
coconut industry. [EDUARDO M. COJUANGCO, JR. v. REPUBLIC OF
THE PHILIPPINES, G.R. No. 180705, November 27, 2012,
Velasco, Jr., J.]

Q: Do LGUs have an inherent power to tax?

A: NO. LGUs have no inherent power to tax except to the

extent that such power might be delegated to them either by
the basic law or by the statute. Under the 1987 Constitution, where
there is neither a grant nor a prohibition by statute, the tax power must
be deemed to exist although Congress may provide statutory
limitations and guidelines. Every LGU is now empowered and
authorized to create its own sources of revenue and to levy taxes, fees,
and charges which shall accrue exclusively to the local government unit
as well as to apply its resources and assets for productive,
developmental, or welfare purposes, in the exercise or furtherance of
their governmental or proprietary powers and functions.(Ferrer v.
Bautista, G.R. No. 210551, June 30, 2015)

Q: Can taxation be used as a tool to implement the police power of an

LGU?
A:
YES. Police power, which flows from the recognition that salus populi
est suprema lex (the welfare of the people is the supreme law), is the
plenary power vested in the legislature to make statutes and
ordinances to promote the health, morals, peace, education, good order
or safety and general welfare of the people.

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
4|Page
Property rights of individuals may be subjected to restraints and
burdens in order to fulfill the objectives of the government in the
exercise of police power. In this jurisdiction, it is well-entrenched
that taxation may be made the implement of the states police
power.(Ferrer v. Bautista, G.R. No. 210551, June 30, 2015)

Clearly, the SHT charged by the Quezon City Government is a tax which
is within its power to impose. The collections made accrue to its
socialized housing programs and projects. The tax is not a pure
exercise of taxing power or merely to raise revenue; it is levied
with a regulatory purpose. The levy is primarily in the exercise
of the police power for the general welfare of the entire city. It is
greatly imbued with public interest. Removing slum areas in Quezon
City is not only beneficial to the underprivileged and homeless
constituents but advantageous to the real property owners as well.
(Ferrer v. Bautista, G.R. No. 210551, June 30, 2015)

Q: As an enterprise located within Clark Special Economic Zone

(CSEZ) and registered with the Clark Development" Corporation (CDC),
Puregold had been issued Certificate of Tax Exemption pursuant to Sec.
5 of EO 80, extending to business enterprises operating within the
CSEZ all the incentives granted to enterprises within the Subic Special
Economic Zone (SSEZ) under RA 7227. In Coconut Oil Refiners v. Torres,
however, the Supreme Court annulled the adverted Sec. 5 of EO 80.
The BIR then issued a Preliminary Assessment Notice regarding unpaid
VAT and excise tax on wines, liquors and tobacco products imported by
Puregold. The latter protested the assessment.

Pending the resolution of Puregold's protest, Congress enacted RA

9399, which provides that availment of the tax amnesty relieves the
qualified taxpayers of any civil, criminal and/or administrative liabilities
arising from, or incident to, nonpayment of taxes, duties and other
charges. Puregold availed itself of the tax amnesty. However, it still
received a formal letter of demand from the BIR for the payment of the
deficiency VAT and excise taxes on its importations. Is Puregold entitled
to avail of the benefits of the tax amnesty law?

A: YES. RA 9399 covers all applicable tax and duty liabilities,

inclusive of fines, penalties, interests and other additions thereto.
Consequently, the government, through the enactment of RA 9399, has
expressed its intention to waive its right to collect taxes, which in this
case is the tax imposed under Sec. 131 (A) of the 1997 NIRC, subject to
the condition that Puregold has complied with the requirements
provided therein.

A tax amnesty, by nature, is designed to be a general grant of

clemency and the only exceptions are those specifically
mentioned.

Clearly, the only exclusions that RA 9399 and its implementing rules
mention are those taxes on goods that are taken out of the special
economic zone. Yet, the petitioner herself admits that the assessment

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
5|Page
against Puregold does not involve such goods, but only those that were
imported by Puregold into the CSEZ.

If Congress intended Sec. 131 of the 1997 NIRC to be an exception to

the general grant of amnesty given under RA 9399, it could have easily
so provided in either the law itself, or even the implementing rules. In
implementing tax amnesty laws, the CIR cannot now insert an
exception where there is none under the law. And this Court cannot
sanction such action.

It is a basic precept of statutory construction that the express mention

of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius.
Hence, not being excepted, the taxes imposed under Sec. 131 (A) of the
1997 NIRC must be regarded as coming within the purview of the
general amnesty granted by RA 9399, expressed in the maxim:
exceptio firmat regulam in casibus non exceptis. [COMMISSIONER OF
INTERNAL REVENUE v. PUREGOLD DUTY FREE, INC. G.R. No.
202789, June 22, 2015, Velasco, Jr., J.]

Q: A series of bond-trading activity DBank was uncovered by the BIR

for the taxable year 2014. It resulted in the DBank losing more than
P700 million which bank officials claimed were done to avoid further
losses. Evidence shows the presence of 28 transactions made between
Jan. 29 and March 3, 2014, involving 20- and 25-year fixed rate
treasury notes (FXTNs) issued by the Philippine government totaling
P14.3 billion.
Every single sale during this period was made to a single counterparty,
FMIC, the investment banking arm of the MBank group.

The securities were then bought back by DBank on the very same day
they were sold, with many transactions suffering millions of pesos in
losses. The same government securities series were purchased on the
same day at the same price under DBanks hold-to-maturity account
when these were sold at a loss. When the series of trades were
completed, the DBank had booked actual losses of P717 million. Is the
actual losses of P717 Million deductible as losses?

A: No. Wash sales are not deductible. In the case of any loss claimed
to have been sustained from any sale or other disposition of shares of
stock or securities where it appears that within a period beginning 30
days before the date of such sale or disposition and ending 30 days
after such date, the taxpayer has acquired (by purchase or by exchange
upon which the entire amount of gain or loss was recognized by law), or
has entered into a contact or option so to acquire, substantially
identical stock or securities, then no deduction for the loss shall be
allowed under Section 34 of the Tax Code unless the claim is made by a
dealer in stock or securities and with respect to a transaction made in
the ordinary course of the business of such dealer.

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
6|Page
Q: A Filipina Caregiver recently won in Israels first X-Factor singing
contest. The prize includes an undisclosed amount of cash, a record
contract and other properties. A BIR Senior Official stated that as an
OFW, the Filipina OFW Caregiver is exempted from paying income tax
under Revenue Regulations No. 5-2001. The privilege, however, is
limited to OFWs registered with OWWA of the DOLE. If Israel subjected
the awards to more than 32 percent final withholding tax, then she will
not pay a single centavo to the BIR which deducts a maximum of 32
percent income tax. Israel is one of the 38 countries with separate
bilateral tax treaty agreement with the Philippines. Under the accord,
income tax paid by Filipinos to a treaty partner can be deducted when
they file their tax returns here. The same privilege is also granted to
foreigners earning income here, thus avoiding double taxation. OFW
Representatives and other sectors said that they will file a bill in
Congress to make winnings tax- exempt for bringing joy and pride to
millions of overseas Filipino workers.

a. Is the BIR Senior Official correct?

A: No. Par. E, Section 22 of the Tax Code defines the status of the
Filipina Caregiver as a Nonresident Citizen who works and derives
income from abroad and whose employment thereat requires her to be
physically present abroad most of the time during the taxable year.
Even if she is not registered as an OFW, the fact remains that her status
as an Individual Taxpayer is a Nonresident Citizen and under Par. B,
Section 23 of the Tax Code, she is only taxed from sources within the
Philippines. Since the prizes and awards from Israel X-Factor is sourced
outside the Philippines, it is not taxable.

b. Assuming that the Filipina Caregivers contest was held here, is it

considered regular income subject to the graduated rates of 5-32% or
is it subject to passive income taxes?

A: The only way that these prizes will be considered part of regular
income subject to graduated rates of 5-32% is when the prizes totaled
only P10,000 and below. If the prize is more than P10,000, it will be
subjected to 20% Final Withholding Tax.

Q: International Chess Grandmaster GM Antonio, a resident citizen,

won the 1st Pambansa Millennium Chess Grand Prix sanctioned by the
Philippine Chess Federation (PCF), a sports association recognized by
the Philippine Sports Commission (PSC) but not recognized by the
Philippine Olympic Committee (POC). During the awarding
ceremonies, PCF withheld 20% of P1M champion's prize. GM Antonio
refused to accept the reduced prize not only because the PCF
announced during the start of the sports competition that the
champion's purse would be tax-free (a practice by promoters of events
to shoulder the taxes in behalf of the winner), but also because of the
existence of R.A. 7549, which exempts all prizes and awards granted to
athletes in local and international sports competitions and tournaments
from the payment of income tax. Is the practice of a tax-free prize
allowed by the Tax Code?

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
7|Page
A: No. Except for prizes and awards in recognition of certain
achievements and prizes in sports competition which is excluded from
gross income, the Tax Code does not support this type of exemption.
The law is clear that as a general rule, prizes (except the amount of
P10,000 and less which is included as part of regular income) is subject
to 20% final withholding tax.

b. Is the PCF right in withholding 20% on the champions prize?

A: Yes. While the Tax Code exempts prizes and awards granted to
athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their
national sports associations, the provisions of R.A. No. 7549 requires
that the national sports association concerned must be accredited by
the Philippine Olympic Committee. Since GM Antonio won in the
Millenium Chess Grand Prix sanctioned by the PCF, a sports association
recognized by the PSC but not accredited by the POC, it follows then
that his champion's prize of P1 Million is not tax-exempt. From the
provisions of R.A. No. 7549, it is clear that the law intended to extend
the benefit of tax exemption to athletes in sports events played in the
Olympic Games, thus the need for accreditation with the POC.
Therefore, PCF is right to withhold the 20% on the prize of GM Antonio
as a resident citizen.

Q: A, B & C won the raffles in PSR (a short messages system (SMS)

or text-based raffle project of the government undertaken by the
PAGCOR in support of the BIR's efforts to plug leakages in the tax
collection system).

a. A is a resident citizen and a sole proprietor doing business in the

Philippines. He is questioning the 20% withholding tax on his prize won
from PSR. It is his contention that winnings from PSR raffle is exempt
from taxation as Lotto winnings. Is he right?

A: No. The Tax Code provides that a final tax at the rate of 20% is
hereby imposed upon other winnings (except Philippine Charity
Sweepstakes and Lotto winnings), derived from sources within the
Philippines. The word Lotto above implies Philippine Lotto Draw
produced by the PCSO. "Winnings" refer to Philippine Charity
Sweepstakes winnings and Philippine Charity Lotto winnings. PSR is not
lotto winnings. Moreover, prizes in PSR is subject to the provision on
prizes (except amounting to P10,000 and less) subject to 20%.

b. B is a resident citizen and an employee in a corporation in the

Philippines. He is questioning the 20% withholding tax on his prize won
from PSR. It is his contention that winnings from PSR raffle is exempt
from taxation as it is the intent of the law to exempt from income
taxation winnings operated by exempt GOCCs in furtherance of
government programs and projects. Is he right?

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
8|Page
A: No. Prizes in PSR is subject to the provision on prizes (except
amounting to P10,000 and less) subject to 20%. While the liability for
payment of the tax rests primarily on the payor as withholding agent,
the tax on prizes and winnings is imposed on the winner although the
responsibility for the withholding of such tax is entrusted by law upon
the payor.
In this case, even if the grantor is an exempt GOCC, its exemption does
not extend to the recipient of the prize or any realizable income except
in case of express legislation to such effect.

c. C is a domestic corporation and also contends that since passive

income from prizes are only applicable to individuals, corporations are
exempt from such taxes. Is the corporation right?

A: No. It is the established rule in statutory construction not to

extend the provision of a statute by implication beyond the clear import
of the language employed, or to enlarge their scope as to include
matters not specifically pointed out. The fact that the passive income
for prizes is not imposed on corporation does not mean that it is an
exemption. There is no exemption by implication. The 20% final tax for
prizes and winnings is not applicable to a corporation since this is not
included among the income subject to the 20% final tax of a
corporation under Section 27(D)(1) of the Tax Code of 1997.
Consequently, if the prize be won or awarded to a private corporation,
the prize or winning shall be subject to the 32% corporate income tax.

Q: Are government-owned and controlled corporations exempt from

income taxes?

A: As a general rule, all corporations, agencies, or instrumentalities

owned or controlled by the Government (except GSIS, SSS, PHIC, the
local water districts and PCSO which are exempt from income taxes),
shall pay such rate of tax upon their taxable income as are imposed by
the Tax Code upon corporations or associations engaged in similar
business, industry, or activity.

Q: SLMC is a non-stock, non-profit corporation that is operated

exclusively for charitable/social welfare purposes. For purposes of the
Tax Code, it was given a certificate of tax exemption as an non-profit
hospital exempt under Section 30 of the Tax Code. It does not
distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. If SLMC engaged in
profit-making activities, accepting paying patients for a profit, what are
the tax consequences of such undertaking?

A: In CIR vs. SLMC, GR No. 195909, September 26, 2012, the

Supreme Court stated that finds that if a non-profit, non-stock hospital
is not "operated exclusively" for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned, it does not
lose its tax exemption if it earns income from its for-profit activities.

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
9|Page
Such income from for-profit activities, under the last paragraph
ofSection 30, is however, subject to income tax, at the preferential 10%
rate pursuant to Section 27 (B) ofthe Tax Code as it remains a
proprietary non-profit hospital under Section 27 (B) of the NIRC as long
as it does not distribute any of its profits to its members and such
profits are reinvested pursuant to its corporate purposes.

Q: The BIR issued Notices of Assessments against Traders Royal

Bank (TRB) for deficiency tax due on unpaid Documentary Stamp Taxes
(DST) for Trust Indenture Agreements it had with its clients. The BIR
posits that the Agreements were deposits subject to DST, while TRB
proffers that the Agreements were trusts exempt from DST.

What is a documentary stamp tax?

Answer: The documentary stamp tax is an excise tax levied on

documents, instruments, loan agreements and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, rights, or
property incident thereto. The amount of tax is either fixed or based on
the par or face value of the document or instrument.

Who are required to pay DST?

Answer: The tax is paid by the person making, signing, issuing,

accepting or transferring the documents. However, whenever one party
to the taxable document enjoys exemption from the tax, the other
party thereto who is not exempt shall be the one directly liable for the
tax.

What is the effect of non-payment of DST?

Answer: Failure to stamp a taxable document shall not invalidate the

same. However, it shall not be recorded (i.e. in the Registry of Deeds)
or admitted or used as evidence in any court until the requisite stamp is
affixed thereto and cancelled. Furthermore, no notary or other officer
authorized to administer oaths shall add his jurat or acknowledgment to
the document unless the proper documentary stamp is affixed thereto
and cancelled.

Are Trust Indenture Agreements subject to DST? (10%)

Answer: Trust Indenture Agreements are similar to certificates of

deposit because said Agreements also stated expected rates of return
of the investment or for the use of the amounts of deposits/trust funds
for a certain period.

Thus, Trust Indenture Agreements between TRB and its clients were
simple loans governed by Article 1980 of the Civil Code. The trust
funds, being generic, could not be segregated from the other
funds/deposits held by TRB. While TRB had the obligation to return the
equivalent amount deposited, it had no obligation to return or deliver
the same money deposited. Legal title to the trust funds was

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
10 | P a g e
vested/transmitted to TRB upon perfection of the trust agreement. It
then followed that TRB could make use of the funds/deposits for its
banking operations, such as to pay interest on deposits, to pay
withdrawals and dispose of the amount borrowed for any purpose such
as investing the funds/deposits into a profitable venture. Thus, Trust
Indenture Agreements may be considered as "loan agreements" or
"debt instruments" subject to DST under Sections 173 and 179 of the
NIRC of 1997, as amended. [CIR v.Traders Royal Bank, G.R. No.
167134. March 18, 2015]

Q: On 19 April 1989, China Banking Corporation (CBC) received an

assessment notice from the BIR for deficiency DST based on its SWAP
(sales of foreign exchange) transactions for the years 1982 to 1986.
On 8 May 1989, CBC filed a protest with the BIR requesting the
reinvestigation and/or reconsideration of the assessment for lack of
legal or factual bases. Almost twelve years later, the BIR, in a letter
dated 6 December 2001, denied the protest. On 18 January 2002, CBC
filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed
an Answer with a demand for CBC to pay the assessed DST. It was only
when the case ultimately reached the Supreme Court that the issue of
prescription was brought up. The BIR contends that the running of the
prescriptive period is suspended upon the filing of the request for
reinvestigation.

Is the BIR correct?

Can prescription be raised for the first time on appeal or petition
for review with the Supreme Court?

Answer: NO. The right of the BIR to collect the assessed DST is
barred by prescription. To recall, the Bureau of Internal Revenue (BIR)
issued the assessment for deficiency DST on 19 April 1989, when the
applicable rule was Section 319(c) of the NIRC of 1977, as amended.

In that provision, the time limit for the government to collect the
assessed tax is set at three years, to be reckoned from the date when
the BIR mails/releases/sends the assessment notice to the taxpayer.
Assuming therefore that 19 April 1989 is the reckoning date, the BIR
had three years to collect the assessed DST. However, the records of
this case show that there was neither a warrant of distraint or levy
served on CBC's properties nor a collection case filed in court by the BIR
within the three-year period. Thus, the attempt to collect the tax was
made way beyond the three-year prescriptive period.

The fact that the taxpayer in this case may have requested a
reinvestigation did not toll the running of the three-year prescriptive
period. Section 320 of the 1977 Tax Code request for reinvestigation
alone will not suspend the statute of limitations. Two things must
concur: there must be a request for reinvestigation and the CIR must
have granted it. In the present case, there is no showing from the
records that the CIR ever granted the request for reinvestigation filed
by CBC. That being the case, it cannot be said that the running of the

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
11 | P a g e
three-year prescriptive period was effectively suspended. If the
pleadings or the evidence on record show that the claim is barred by
prescription, the court is mandated to dismiss the claim even if
prescription is not raised as a defense. [China Banking Corporation
v. CIR, Feb. 4, 2015]

Q: X, an employee of ABC Corporation died. ABC Corporation gave

Xs widow an amount equivalent to Xs salary for one year. Is the
amount considered taxable income to the widow? Why?

Answer: No. The amount received by the widow from the decedents
employer may either be a gift or a separation benefit on account of
death. Both are exclusions from gross income pursuant to provision of
Section 28(b) of the Tax Code.

Q: A, an employee of the Court of appeals, retired upon reaching the

compulsory age of 65 years. Upon compulsory retirement, A received
the money value of his accumulated leave credits in the amount of
P500,000.00. Is said amount subject to tax? Explain

A: No. The commutation of leave of credits more commonly known

as terminal leave pay, i.e., the cash equivalent of accumulated vacation
and sick leave credits given to an officer or employee who retires, or
separated from the service through no fault of his own, is exempt from
income tax. (BIR ruling 238-91 dated November 8, 1991;
Commissioner vs. CA and Efren Castaneda, GR No. 96016,
October 17, 1991).

Q: Distinguish a VAT invoice form a VAT receipt.

Answer: Under the law, a VAT invoice is necessary for every sale,
barter or exchange of goods or properties while a VAT official receipt
properly pertains to every lease of goods or properties, and for every
sale, barter or exchange of services

In other words, the VAT invoice is the sellers best proof of the
sale of the goods or services to the buyer while the VAT receipt is the
buyers best evidence of the payment of goods or services received
from the seller. Even though VAT invoices and receipts are normally
issued by the supplier/seller alone, the said invoices and receipts, taken
collectively, are necessary to substantiate the actual amount or
quantity of goods sold and their selling price (proof of transaction), and
the best means to prove the input VAT payments (proof of payment).
Hence, VAT invoice and VAT receipt should not be confused as referring
to one and the same thing. Certainly, neither does the law intend the
two to be used alternatively. (KEPCO v. CIR, November 24, 2010)

Q: Mr. Adrian is an executive of a big business corporation aside

from his salary, his employer provides him with the following benefits:

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
12 | P a g e
free use of a residential house in an exclusive subdivision, free use of a
limousine and membership in a country club where he can entertain
customers of the corporation. Which of these benefits, if any, must Mr.
Adrian report as income? Explain.

Answer: Mr. Adrian must report the imputed rental value of the house
and limousine as income. If the rental value exceeds the personal
needs of Mr. Adrian because he is expected to provide accommodation
in said house for company guests or the car is used partly for business
purpose, then Mr. Adrian is entitled only to a ratable rental value of the
house and limousine as exclusion from gross income and only a
reasonable amount should be reported as income. This is because the
free housing and use of the limousine are given partly for the
convenience and benefit of the employer (Collector vs. Henderson).

Q: Capt. Canuto is a member of the armed Forces of the Philippines.

Aside from his pay as a captain, the government gives him free
uniforms, free living quarters in whatever military camp he is assigned,
and free meal inside the camp. Are these benefits income to Capt.
Canuto? Explain.

Answer: No, the free uniforms, free living quarters and the free
meals inside the camp are not income to Capt. Canuto because these
are facilities or privileges furnished by the employer for the employers
convenience which are necessary incidents to proper performance of
the military personnels duties.

Q: Mr. Infante was hit by a wayward bus while on his way to work.
He survived but had to pay P400,000.00 for his hospitalization. He was
unable to work for six months which meant that he did not receive his
usual salary of P10,000.00 a month or a total of P60,000.00. He sued
the bus company and was able to obtain a final judgment awarding him
P400,000.00 as reimbursement for his hospitalization. P60,000 for the
salaries he failed to receive while hospitalized, P200,000 as moral
damages for his pain and suffering, and P100,000 as exemplary
damages. How much should he report as income?

A: None. The P200,000 moral and exemplary damages are

compensation for injuries sustained by Mr. Infante. The P400,000.00
reimbursement for the hospitalization expenses and the P60,000.00 for
salaries he failed to receive are amounts of any damages received
whether by suit or agreement on account of such injuries. Section
28(b)(5) of the Tax Code specifically excludes these amounts from the
gross income of the individual injured. (Section 28(b).NIRC and Sec. 63
Rev. Reg. No.2)

Q: The Bureau of Treasury issued P35 billion worth of 10-year zero-

coupon treasury bonds on October 18, 2001 (denominated as the
Poverty Eradication and Alleviation Certificates or the PEACe Bonds by

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
13 | P a g e
the Caucus of Development NGO Networks). Eight (8) commercial
banks bought PEACe bonds from RCBC/CODE-NGO.

On October 7, 2011, the Commissioner of Internal Revenue issued BIR

Ruling No. 370-2011 (2011 BIR Ruling), declaring that the PEACe
Bonds being deposit substitutes are subject to the 20% final
withholding tax. Pursuant to this ruling, the Secretary of Finance
directed the Bureau of Treasury to withhold a 20% final tax from the
face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.

The eight (8) banks (petitioners) assailed the BIR Rulings arguing that
the Government cannot impair the efficacy of the [Bonds] by arbitrarily,
oppressively and unreasonably imposing the withholding of 20% FWT
upon the [Bonds] a mere eleven (11) days before maturity and after
several, consistent categorical declarations that such bonds are exempt
from the 20% FWT, without violating due process and the
constitutional principle on non-impairment of contracts.
Petitioners aver that at the time they purchased the Bonds, they had
the right to expect that they would receive the full face value of the
Bonds upon maturity. They insist that the PEACe Bonds are not deposit
substitutes as defined under Section 22(Y) of the 1997 National Internal
Revenue Code because there was only one lender (RCBC) to whom the
Bureau of Treasury issued the Bonds. Decide.

Answer: The PEACe bonds are not deposit substitutes. The BIR
erroneously ruled that all treasury bonds, regardless of the number of
purchasers/lenders at the time of issuance are considered deposit
substitutes. This interpretation completely disregarded the 20 or more
lender rule added by Congress in the 1997 Tax Code. It also created a
distinction for government debt instruments as against those issued by
private corporations when there was none in the tax law.

Under the National Internal Revenue Code (NIRC), monetary benefits

from deposit substitutes are subject to a 20% final withholding
tax. The Code also defines deposit substitutes as an alternative form
of obtaining funds from the publicother than deposits, through the
issuance, endorsement or acceptance of debt instruments for the
borrowers own accounts.

Congress specifically defined public to mean twenty (20) or more

individual or corporate leaders at any one time. Hence, the number of
lenders is determinative of whether a debt instrument should be
considered a deposit substitute and consequently subject to 20% final
withholding tax.

Here, at the time of original issuance, the PEACe bonds are not deemed
deposit substitutes within the meaning of Section 22 (Y) of the 1997 Tax
Code, since there is only one lender RCBC on behalf of CODE NGO
to whom the bonds were issued. (Banco De Oro et al., v. CIR, G.R.
No. 198756, January 13, 2015)

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
14 | P a g e
Q: The City of Manila enacted an ordinance imposing business tax
on the gross receipts of transportation contractors, persons engaged in
the transportation of passengers or freight by hire, and common
carriers. Is this a valid tax ordinance?

Answer: NO. It is already well-settled that although the power to tax

is inherent in the State, the same is not true for the LGUs to whom the
power must be delegated by Congress and must be exercised within the
guidelines and limitations that Congress may provide.

Here, the City of Manila cannot enact an ordinance imposing

business tax on the gross receipts of transportation contractors,
persons engaged in the transportation of passengers or freight by hire,
and common carriers by air, land, or water, because this is expressly
prohibited under Section 133(j) of the LGC.

Thus, the tax ordinance is null and void for being beyond the
power of the City of Manila and its public officials to enact, approve,
and implement under the LGC. [City of Manila, Hon. Alfredo S.
Lim, as Mayor of the City of Manila, et al. vs. Hon. Angel Valera
Colet, as Presiding Judge, Regional Trial Court of Manila (Br. 43),
et al., G.R. No. 120051, December 10, 2014, J. Leonardo-De
Castro]

Q: What is the 120 + 30 rule on a claim of refund or tax credit?

Answer: The CIR has 120 days from the date of submission of
complete documents in support of the administrative claim within which
to decide whether to grant a refund or issue a tax credit certificate. In
case of failure on the part of the CIR to act on the application within the
120-day period prescribed by law, the taxpayer has only has 30 days
after the expiration of the 120-day period to appeal the unacted claim
with the CTA. [NIPPON EXPRESS (PHILIPPINES) CORP. vs. CIR, G.R.
No. 185666, February 04, 2015, J. Perez]

Q: The City of Lapu-Lapu issued a notice of assessment for unpaid

rel property taxes on lands and buildings owned by PEZA and its
registered businesses within its territory. It argued that the PEZA law
can only exempt these entities from national taxes (income) and not
from local taxes like the RPT. It also argued that PEZA is a GOCC, and
is therefore taxable on its real properties. Is the city correct? Explain.

Answer: NO. Being an instrumentality of the national government,

the PEZA cannot be taxed by local government units. Although a body
corporate vested with some corporate powers, the PEZA is not a
government-owned or controlled corporation taxable for real property
taxes.

The PEZAs predecessor, the EPZA, was declared non-profit in

character with all its revenues devoted for its development,
improvement, and maintenance. Consistent with this non-profit

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
15 | P a g e
character, the EPZA was explicitly declared exempt from real property
taxes under its charter. Even the PEZAs lands and buildings whose
beneficial use have been granted to other persons may not be taxed
with real property taxes. The PEZA may only lease its lands and
buildings to PEZA-registered economic zone enterprises and entities.
These PEZA-registered enterprises and entities, which operate within
economic zones, are not subject to real property taxes. [CITY OF
LAPU-LAPU vs. PEZA; G.R. No. 184203, November 26, 2014, J.
Leonen]

Q: The Filipinas Hospital for Crippled Children is a charitable

organization. X visited the hospital, on his birthday, as was his custom.
He gave P100,000.00 to the hospital and P5,000.00 to a crippled girl
whom he particularly pitied. A crippled son of X is in the hospital as of
its patients. X wants to exclude both the P100,000.00 and the
P5,000.00 from his gross income. Discuss. (5%)

Answer: a) The P100,000.00 donation may properly be deducted

from Xs gross income, but not the P5,000.00 donated to the crippled
girl, as charitable and other contributions that may be deducted from
taxable income do not contemplate those given to individuals. While it
may be that Xs son is a patient in the hospital, it cannot be said that
part of its net income inures to the benefit of X as to be disallowed as a
deduction from taxable income.

b) Assuming X is a self-employed individuals, he may not deduct

the donations made because under Sec. 29 of the NIRC as amended by
RA 7496 better known as SNITS, only contribution to the government or
to an accredited relief organization for the rehabilitation of calamity
stricken areas declared by the President may be deducted for income
tax purposes. Clearly, the donees do not qualify as relief organizations.

Assuming X is receiving purely compensation income, he can only

deduct from gross compensation income personal exemption, additional
personal exemption and special additional exemption. (Section 29, NIRC
as amended).

Q: Mr. Felix dela Cruz, a bachelor resident citizen, suffered from a

heart attack while on a business trip to the USA. He died intestate on
June 15, 2000 in New York City, leaving behind real properties situated
in New York; his family home in Makati City; shares of stocks in San
Miguel Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no known debts at
the time of his death. As the sole heir and appointed Administrator,
how would you determine the gross estate of the decedent? What
deductions may be claimed by the estate and when and where shall
the return be filed and estate tax paid?

Answer: The gross estate shall be determined by including the value

at the time of his death all of the properties mentioned to the extent of

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
16 | P a g e
the interest he had at the time of his death because he is a Filipino
citizen. (Sec. 85A, NIRC of 1997)
With respect to the life insurance proceeds, the amount includible
in the gross estate for Philippine tax purposes would be to the extent of
the amount receivable by the estate of the deceased, his executor, or
administrator, under policies taken out by decedent upon his own life,
irrespective of whether or not the insured retained the power of
revocation, or to the extent of the amount receivable by any beneficiary
designated in the policy of insurance, except when it is expressly
stipulated that the designation of the beneficiary is irrevocable. (Sec.
85E NIRC of 1997)

The deductions that may be claimed by the estate are:

1. The actual funeral expenses or in an amount equal to five percent of

the gross estate, whichever is lower, but in no case to exceed
P200,000 (Sec. 86A(1) NIRC of 1997)
2. The judicial expenses in the testate or intestate proceedings (Sec.
86A(1) NIRC of 1997)
3. That value of the decedents family home located in Valle Verde
Pasig City in an amount not exceeding one million pesos, and upon
presentation of a certification of the barangay captain of the locality
that the same have been the decedents family home. (Sec. 86A(4)
NIRC of 1997)
4. The standard deduction of P1,000,000. (Sec. 86A(5) NIRC of 1997)
5. Medical expenses incurred within one year from death in an amount
not exceeding P500,000. (Sec. 86A(6) NIRC of 1997)

The estate tax return shall be filed within six (6) months from the
decedents death (Sec. 90 (B) NIRC of 1997), provided that the CIR shall
have authority to grant in meritorious cases, a reasonable extension
not exceeding thirty (30) days for filing the return. (Sec. 90C NIRC of
1997)

Except in cases where the CIR otherwise permits, the estate tax
return shall be filed with an authorized agent bank, or Revenue District
Officer, Collection Officer, or duly authorized Treasure of Pasig City, the
City in which the decedent was domiciled at the time of his death. (Sec.
90(D) NIRC of 1997)

Q: Are contributions to a candidate in an election subject to donors

tax? On the part of the contributor, is it allowable as a deduction from
the gross income? Explain.

Answer: No, provided the recipient candidate had compiled with

requirement fro filing of returns of contributions with the Commission of
Elections as required under the Omnibus Election Code.

(a.) The contributor is not allowed to deduct the contributions

because the said expenses is not directly attributable to the
development, management, operations and/or conduct of a trade,
business or profession (Sec. 34 (A)(1)(a), NIRC). Furthermore, if the

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
17 | P a g e
candidate is an incumbent government official or employee, it may
even be considered as a bribe or a kickback (Sec. 34 (A)(1)(c), NIRC).

Q: Under the Tariff and Customs code, what are:

a.) dumping duties

b.) countervailing duties
c.) marking duties
d.) discriminatory duties

Answers:

a.) Dumping duties are special duties imposed by the Secretary of

Finance upon recommendation of the Tariff Commission when ot is
found that the price of the imported articles is deliberately or
continually fixed at less than the fair market value or cost of production,
and the importation would cause or likely cause an injury to local
industries engaged in the manufacture or production of the same or
similar articles or prevent their establishment.

b.) Countervailing duties are special duties imposed by the

Secretary of Finance upon prior investigation and report of the Tariff
Commission to offset an excise or inland revenue tax upon articles of
the same class manufactured at home or subsidies to foreign producers
or manufacturers by their respective governments.

c.) Marking duties are special duties equivalent to 5% ad valorem

imposed on articles not properly marked. These are collected by the
Commissioner of Customs except when the improperly marked articles
are exported or destroyed under customs supervision and prior to final
liquidation of the corresponding entry. These duties are designed to
prevent possible deception of the customers.

d.) Discriminatory duties are special duties collected in an amount

not exceeding 100% ad valorem, imposed by the President of the
Philippines against goods of a foreign country which discriminates
against Philippine commerce or against goods coming from the
Philippines and shipped to a foreign country.

Q: What is smuggling?
A:
Sec. 3601. Unlawful Importation. Any person who shall fraudulently
import or bring into the Philippines, or assist in so doing, any article,
contrary to law, or shall receive, conceal, buy, sell, or in any manner
facilitate the transportation, concealment, or sale of such article after
importation, knowing the same to have been imported contrary to law,
shall be guilty of smuggling.

The last paragraph of said provision reads:

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
18 | P a g e
When, upon trial for violation of this section, the defendant is shown to
have had possession of the article in question, possession shall be
deemed sufficient evidence to authorize conviction unless the
defendant shall explain the possession to the satisfaction of the court:
Provided, however, That payment of the tax due after
apprehension shall not constitute a valid defense in any
prosecution under this section.

Elements of Smuggling:

Smuggling is thus committed by any person who (1) fraudulently

imports or brings into the Philippines or assists in importing or bringing
into the Philippines any article, contrary to law, or (2) receives,
conceals, buys, sells or in any manner facilitates the transportation,
concealment, or sale of such article after importation, knowing the
same to have been imported contrary to law. [Salvador v. People, G.R.
No. 146706. July 15, 2005.]

Importation commences when the carrying vessel or aircraft enters the

jurisdiction of the Philippines with intention to unload and is deemed
terminated upon payment of the duties, taxes and other charges due
upon the articles and the legal permit for withdrawal has been issued,
or where the articles are duty-free, once the articles have left the
jurisdiction of the customs.

Q: Can customs officers validly conduct customs searches and

seizure without any warrant?
A: YES. Law enforcers who are tasked to effect the
enforcement of the customs and tariff laws are authorized to
search and seize, without a search warrant, any article, cargo
or other movable property when there is reasonable cause to
suspect that the said items have been introduced into the
Philippines in violation of the tariff and customs law. They may
likewise conduct a warrantless search of any vehicle or person
suspected of holding or conveying the said articles, as in the case at
bar. [Salvador v. People, G.R. No. 146706. July 15, 2005.]

In short, the law clearly recognizes the power of the State to foil
any fraudulent schemes resorted to by importers who evade payment
of customs duties. The Government's policy to combat the serious
malady of smuggling cannot be reduced to futility and impotence on
the ground that dutiable articles on which the duty has not been paid
are entitled to the same Constitutional protection as an individual's
private papers and effects. [Salvador v. People, G.R. No. 146706. July
15, 2005.]

2016 Last Minute Tips in Civil Law by Atty. Enrique V. dela Cruz, Jr.
19 | P a g e