“BAR STAR NOTES” TAXATION VER. 2010.06.12 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 his 2010 Lectures on TAXATION held at the University of the Philippines. 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. WARNING: These materials are copyrighted and/or based on the writer’s 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. Unauthorized users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW OF KARMA SUCH 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.
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“BAR STAR NOTES”
TAXATIONVER. 2010.06.12copyrighted 2010
Prepared by Prof. Abelardo T. Domondon(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM,
DCL (Cand.). Lawyer-CPA-Customs Broker, ManagementConsultant, Professor of Law and Pre-Bar Reviewer)
How to use the “BAR STAR NOTES.” The “BARSTAR NOTES” in the form of questions and answers aswell as textual discussion were specially prepared byProf. Domondon for the exclusive use of Bar Revieweeswho attended his 2010 Lectures on TAXATION held at theUniversity of the Philippines. Included in thepresentation are doctrines contained in Supreme Courtdecisions up to April 2010.
The purpose of the ‘BAR STAR NOTES” is to providethe Bar Reviewee with a handy review material whichserves as “memory-joggers” for the September 12, 2010Bar Examinations in Taxation. The author tries tosecond guess what would be included in the Bar Examsusing statistical analysis. The actual Bar questionsmay not be formulated in the same manner as the “BARSTAR NOTES”. However, the doctrines tested in the Barwould in all probability be included in these Notes.
If pressed for time, the author suggests that thereader should focus his attention on the following:
Nice to know
Should know Must know and masterIt is further suggested that the reader should
merely browse those without stars.
WARNING:
These materials are copyrighted and/or based onthe writer’s books on Taxation and future revisions.It is prohibited to reproduce any part of these Notesin any form or any means, electronic or mechanical,including photocopying without the written permissionof the author. Unauthorized users shall not beprosecuted but SHALL BE SUBJECT TO THE LAW OF KARMASUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD BEUNHAPPY IN LIFE for stealing the intellectualproperty of the author.
THE BEST OF LUCK ANDADVANCE CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
1. State briefly and concisely the natureof taxation. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of thesovereign exercised through the legislature to imposeburdens upon subjects and objects within itsjurisdiction for the purpose of raising revenues tocarry out the legitimate objects of government.
2. What is the nature of the State’s powerto tax ? Explain briefly.
SUGGESTED ANSWER: The nature of the state’s powerto tax is two-fold. It is both an inherent power and alegislative power. It is inherent in naturebeing an attribute of sovereignty. This is so,because without the taxes, the state’s existence wouldbe imperiled. There is thus, no need for aconstitutional grant for the state to exercise thispower.
It is a legislative power because it involves thepromulgation of rules. Taxation is a set of rules,how much is the tax to be paid, who pays the tax, towhom it should be paid, and when the tax should bepaid.
3. What is the underlying theory oftaxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of thenation. Without revenue raised from taxation,the government will not survive, resulting indetriment to society. Without taxes, the governmentwould be paralyzed for lack of motive power toactivate and operate it. (Commissioner of Internal Revenue v.Algue, Inc. et al., 158 SCRA 8, 16-17)
4. Marshall said that, “the power to taxinvolves the power to destroy.” On the otherhand, Holmes stated that “the power to tax isnot the power to destroy while the courtsits.” Reconcile
the statements. Inthe alternative, what are the implications thatflow from the above statements ?
SUGGESTED ANSWERS: Marshall’s view refers toa valid tax while the Holmes’ view refers to aninvalid tax. a. The impositionof a valid tax could not be judicially restrainedmerely because it would prejudice taxpayer’s property.
b. An illegal tax could bejudicially declared invalid and should not workto prejudice a taxpayer’s property.
5. Discuss briefly the basis/bases, orrationale of taxation.
SUGGESTED ANSWER: a. Reciprocalduties of protection and support between the stateand its citizens and residents. Also called“symbiotic relation” between the state and itscitizens.
b. Jurisdiction by the state overpersons and property within its territory.
6. Discuss briefly but comprehensively theobjectives or purposes of taxation.
SUGGESTED ANSWER: The purposes or objectives oftaxation are the following:
a. The primary purpose:1) Revenue purpose.
b. The secondary purposes1) 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
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revenue while license fee for regulation. Tax forgeneral public purposes while license fee forregulatory purposes only.
b. Basis: Tax imposed under power oftaxation while license fee under police power.
c. Amount: Intaxation, no limit as to amount while license feelimited to cost of the license and the expenses ofpolice surveillance and regulation.
d. Time of payment:Taxes normally paid after commencement of businesswhile license fee before. e. Effectof payment: Failure to pay a tax does not make thebusiness illegal while failure to pay license feemakes business illegal. f. Surrender: Taxes,being the lifeblood of the state, cannot besurrendered except for lawful consideration while alicense fee may be surrendered with or withoutconsideration. (Cooley on Taxation, pp. 1137-1138; PacificCommercial Company v. Romualdez, et al., 49 Phil. 924)
8. How may the power to tax be utilized tocarry out the social justice program of ourgovernment ? SUGGESTED ANSWER: Thecompensatory purpose of taxation is to implement thesocial justice provisions of the constitution throughthe progressive system of taxation, which would resultto equal distribution of wealth, etc.
Progressive income taxes alleviate the marginbetween 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 challengesof the times expanded the scope of the state activity,and taxation has become a tool to realize socialjustice and the equitable distribution of wealth,economic progress and the protection of local
industries as well as public welfare and similarobjectives. (Batangas Power Corporation v. Batangas City, et al.,G. R. No. 152675, and companion case, April 28, 2004 citingNational Power Corporation v. City of Cabanatuan, G. R. No. 149110,April 9, 2003)
9. Explain the sumptuary purpose oftaxation.
SUGGESTED ANSWER: The sumptuary purpose oftaxation is to promote the general welfare and toprotect the health, safety or morals of theinhabitants. It is in the joint exercise of the powerof taxation and police power where regulatory taxes arecollected.
Taxation may be made the implement of the state’spolice power. The motivation behind many taxationmeasures is the implementation of police power goals.[Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al., G. R. No. 158540, August 3, 2005) The readershould note that the August 3, 2005 Southern Cross case isthe decision on the motion for reconsideration of theJuly 8, 2004 Southern Cross decision.
The so-called “sin taxes” on alcohol and tobaccomanufacturers help dissuade the consumers fromexcessive intake of these potentially harmful products.(Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al., G. R. No. 158540, August 3, 2005)
10. Taxation distinguished from policepower. Taxation is distinguishable from police poweras to the means employed to implement these publicgoals. Those doctrines that are unique to taxationarose from peculiar considerations such as thoseespecially punitive effects (Southern Cross CementCorporation v. Cement Manufacturers Association of the Philippines, et al.,G. R. No. 158540, August 3, 2005) as the power to taxinvolves the power to destroy and the belief that taxes
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are lifeblood of the state. (Ibid.) taxes being thelifeblood of the government, their prompt and certainavailability is of the essence.”
These considerations necessitated the evolution oftaxation as a distinct legal concept from police power.(Ibid.)
11. How the power of taxation may be used toimplement power of eminent domain. Tax measuresare but ”enforced contributions exacted on pain ofpenal sanctions” and “clearly imposed for publicpurpose.” In most recent years, the power to tax hasindeed become a most effective tool to realize socialjustice, public welfare, and the equitable distributionof wealth. (Commissioner of Internal Revenue v. Central Luzon DrugCorporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizensdiscount may claim the discounts granted to seniorcitizens as tax deduction based on the net cost of thegoods sold or services rendered: Provided, That the costof the discount shall be allowed as deduction fromgross income for the same taxable year that thediscount is granted. Provided, further, That the totalamount of the claimed tax deduction net of value addedtax if applicable, shall be included in their grosssales receipts for tax purposes and shall be subjectto proper documentation and to the provisions of theNational Internal Revenue Code, as amended. [M.E. HoldingCorporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]
12. What are the three basic principlesof a sound tax system? Explain each briefly.
SUGGESTED ANSWER: The canonsof a sound tax system, also known as thecharacteristics 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 objectivesof taxation. They are: a. Fiscal adequacy. b. Administrative feasibility. c. Theoretical justice.
13. What are the elements or characteristicsof a tax ? SUGGESTED ANSWER:
a. Enforced contribution.b. Generally payable in money.c. Proportionate in character.d. Levied on persons, property or exercise of a
right or privilege.e. Levied by the state having jurisdiction.f. Levied by the legislature.g. Levied for a public purpose.h. Paid at regular periods or intervals.
14. State the requisites of a valid tax. SUGGESTED ANSWER:
a. A valid tax should be within the jurisdictionof the taxing authority. b. That the assessment and collectionof certain kinds (The same as the inherent limitationsof the power of taxation) should be for a publicpurpose. c. The rule of taxation should beuniform. d. That either the person orproperty of taxes guarantees against injustice toindividuals, especially by way or notice andopportunity for hearing be provided.
e. The tax must not impinge on the inherentand Constitutional limitations on the power oftaxation.
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15. What arethe classes or kinds of taxes according to thesubject 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 theperformance of an act, the enjoyment of aprivilege or the engaging in an occupation. Example –income tax, estate tax.
16. What are the kinds of taxes classifiedas to who bears the burden ? Explain eachbriefly. SUGGESTED ANSWER: Based onthe possibility of shifting the incidence of taxation,or as to who shall bear the burden of taxation, taxesmay be classified into:
a. Direct taxes. Those that are extracted fromthe very person who, it is intended or desired, shouldpay them (Commissioner of Internal Revenue v. Philippine Long DistanceTelephone Company, G. R. No. 140230, December 15, 2005); theyare impositions for which a taxpayer is directlyliable on the transaction or business he is engagedin, (Commissioner of Internal Revenue v. Philippine Long Distance TelephoneCompany, supra) which liability cannot be shifted ortransferred to another. Example – income tax, estatetax, donor’s tax, etc. b. Indirect taxes are those that are demanded inthe first instance, from, or are paid by, one personin the expectation and intention that he can shift theburden to (Commissioner of Internal Revenue v. Philippine Long DistanceTelephone Company, supra) to someone else not as a tax butas 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 andauthorities) Example – value added tax (VAT),documentary stamp tax, excise tax, percentage tax,etc.
17.Silkair (Singapore) PTE, Ltd., aninternational carrier, purchased aviation gasfrom Petron Corporation, which it uses for itsoperations. It now claims for refund or taxcredit for the excise taxes it paid claiming thatit is exempt from the payment of excise taxesunder the provisions of Sec. 135 of the NIRC of1997 which provides that petroleum products areexempt from excise taxes when sold to “Exemptentities or agencies covered by tax treaties, conventions,and other international agreements for their use andconsumption: Provided, however, That the country of saidforeign international carrier or exempt entities oragencies exempts from similar taxes petroleum products soldto Philippine carriers, entities or agencies”
Silkair further anchors its claim on Article4(2) of the Air Transport Agreement between theGovernment of the Republic of the Philippines andthe Government of the Republic of Singapore (AirTransport Agreement between RP and Singapore)which reads: “Fuel, lubricants, spare parts, regularequipment and aircraft stores introduced into, or taken onboard aircraft in the territory of one Contracting party by,or on behalf of, a designated airline of the otherContracting Party and intended solely for use in theoperation of the agreed services shall, with the exceptionof charges corresponding to the service performed, be exemptfrom the same customs duties, inspection fees and otherduties or taxes imposed in the territories of the firstContracting Party , even when these supplies are to be usedon the parts of the journey performed over the territory of
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the Contracting Party in which they are introduced into ortaken on board. The materials referred to above may berequired to be kept under customs supervision and control.”
Silkair likewise argues that it is exemptfrom indirect taxes because the Air TransportAgreement between RP and Singapore grantsexemption “from the same customs duties,inspection fees and other duties or taxes imposedin the territory of the first Contracting Party.It invokes Maceda v. Macaraig, Jr., G.R. No.88291, May 31, 1991, 197 SCRA 771.which upheldthe claim for tax credit or refund by theNational Power Corporation (NPC) on the groundthat the NPC is exempt even from the payment ofindirect taxes.
Is Silkair entitled to the tax refund orcredit it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to taxrefund or credit for the following reasons:
a. The excise tax on aviation fuel is anindirect tax. The proper party to question, or seek arefund of, an indirect tax is the statutory taxpayer,the person on whom the tax is imposed by law and whopaid the same even if he shifts the burden thereof toanother. (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 bythe manufacturer or producer before removal of domesticproducts from place of production. Thus, PetronCorporation, not Silkair, is the statutory taxpayerwhich is entitled to claim a refund based on Section135 of the NIRC of 1997 and Article 4(2) of the AirTransport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkairthe burden of the tax, the additional amount billed toSilkair for jet fuel is not a tax but part of the price
which Silkair had to pay as a purchaser. [PhilippineAcetylene 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 SCRA771.which upheld the claim for tax credit or refund bythe National Power Corporation (NPC) on the ground thatthe NPC is exempt even from the payment of indirecttaxes.
In Commissioner of Internal Revenue v. Philippine Long DistanceTelephone Company, G.R. No. 140230, December 15, 2005,478 SCRA 61 the Supreme Court clarified the ruling inMaceda v. Macaraig, Jr., viz: It may be so that in Maceda vs.Macaraig, Jr., the Court held that an exemption from “alltaxes” granted to the National Power Corporation (NPC)under its charter includes both direct and indirecttaxes.
An exemption from “all taxes” excludes indirecttaxes, unless the exempting statute, like NPC’scharter, is so couched as to include indirect tax fromthe exemption. The amendment under Republic Act No.6395 enumerated the details covered by NPC’s exemption.Subsequently, P.D. 380, made even more specific thedetails of the exemption of NPC to cover, among others,both direct and indirect taxes on all petroleumproducts used in its operation. Presidential DecreeNo. 938 [NPC’s amended charter] amended the taxexemption 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” oftaxes demonstrates the intention of the law to give NPCall the tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) ofthe NIRC of 1997 and Article 4(2) of the Air TransportAgreement between RP and Singapore cannot, without aclear showing of legislative intent, be construed asincluding indirect taxes. Statutes granting tax
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exemptions must be construed in strictissimi jurisagainst the taxpayer and liberally in favor of thetaxing authority, and if an exemption is found toexist, 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 oftaxes classified as to purpose ?
SUGGESTED ANSWER: a. General, fiscal or revenue – imposed
for the purpose of raising public funds for theservice of the government. b. Specialor regulatory – imposed primarily for the regulation ofuseful or non-useful occupation or enterprises andsecondarily only for the raising of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER
1. Purpose for the limitations on the powerof taxation.The inherent and constitutional limitations to thepower of taxation are safeguards which would preventabuse in the exercise of this otherwise unlimited andplenary power.
The limitations also serve as a standard tomeasure the validity of a tax law or the act of ataxing authority. A violation of the limitationsserves to invalidate a tax law or act in the exerciseof the power to tax.
INHERENT LIMITATIONS
1. What are the inherent limitations onthe power of taxation ?
SUGGESTED ANSWERS:
a. Public purpose. The revenues collected fromtaxation should be devoted to a public purpose.
b. No improper delegation of legislativeauthority to tax. Only the legislature can exercisethe power of taxes unless the same is delegated to someother governmental body by the constitution or througha law which does not violate any provision of theconstitution.
c. Territoriality. The taxing power should beexercised only within territorial boundaries of thetaxing authority.
d. Recognition of government exemptions; and e. Observance of the principle of comity.
Comity is the respect accorded by nations to each otherbecause they are equals. On the other hand taxation isan act of sovereign. Thus, the power should be imposedupon equals out of respect.
Some authorities include no double taxation.
2. What are the principles to considerin the determination of whether tax revenues aredevoted 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 beutilized only to attain the objectives of government.
b. Inequalities resulting from the singling outof one particular class for taxation or exemptioninfringe no constitutional limitation. REASON: It is inherent in the power to taxthat the legislature is free to select the subjects oftaxation. BASIS: The lifeblood theory. c. An individual taxpayer need notderive direct benefits from the tax.
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REASON: The paramount consideration is thewelfare of the greater portion of the population. d. A tax may be imposed, not so muchfor revenue purposes, but under police power for thegeneral welfare of the community. This would still befor a public purpose. e. Public purpose continuallyexpanding. Areas formerly left to private initiativenow lose their boundaries and may be undertaken by thegovernment if it is to meet the increasing socialchallenges of the times. f. Tax revenue must not be used forpurely private purposes or for the exclusive benefitof private persons. g. Private persons may be benefited butsuch benefit should be merely incidental as its mainobject is the benefit of the community in general. h. Determined at the time of enactmentof tax law and not at the time of implementation. i. There is a presumption of publicpurpose even if the tax law does not specificallyprovide for its purpose. (Santos & Co., v. Municipality ofMeycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to thetraditional notion of use by the public but heldsynonymous with public interest, public benefit,public welfare, and public convenience. (Commissioner ofInternal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647,April 16, 2005)
3. A law was enacted imposing a tax onmanufacturers of coconut oil, the proceeds ofwhich are to be used exclusively for theprotection and promotion of the coconutindustry, namely, to improve the workingconditions in coconut mills and to conductresearch on the use of coconut oil for motor
fuel. Some of the manufacturers of coconut oilchallenge the validity of the law, contendingthat the tax is to be used for a privatepurpose, and therefore, the law violates therule that public revenues shall not beappropriated for anything but a public purpose.Decide with reason.
SUGGESTED ANSWER: The levy is for a publicpurpose. It cannot be denied that the coconutindustry is one of the major industries supporting thenational economy. It is, therefore, the state’sconcern to make it a strong and secure source not onlyof the livelihood of the significant segment of thepopulation, but also of export earnings, thesustained growth of which is one of the imperatives ofeconomic growth. (Philippine Coconut Producers Federation, Inc.(Cocofed v. Presidential Commission on Good Government, 178 SCRA 236,252)
4.Requisites for taxpayers, concernedcitizens, voters or legislators to have locusstandi to sue. a. In general, the case should involveconstitutional issues. (David, et al., v. President GloriaMacapagal-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 constitutionalprotections against abuses of legislative power.”(Flast v. Cohen, 392 U.S. 83) 2) That public money is beingdeflected to any improper purpose (Pascual v. Secretary ofPublic Works, 110 Phil. 33) or a claim of illegaldisbursement of public funds or that the tax
measure is unconstitutional. (David, supra)
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3) A taxpayer is allowed to sue where thereis a claim that public funds are illegallydisbursed, or that public money is being
deflected to any improper purpose, or that thereis a wastage of public funds through theenforcement 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 taxpayer’s suit is properly broughtonly when there is an exercise of the spending ortaxing power of Congress. (Automotive Industry WorkersAlliance (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 lawin question.
d. For concerned citizens, there must be ashowing that the issues raised are of transcendentalimportance which must be settled early.
e. For legislators, there must be a claim thatthe official action complained of infringes upon theirprerogatives as legislators. (David, et al., v. President GloriaMacapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
5. Only those directly affected have locusstandi to impugn the alleged encroachment by theexecutive department into the legislative domainof Congress.
a. Only those who shall be directly affected bysuch executive encroachment, such as for exampleemployees who would find themselves subject todisciplinary powers that may be imposed under thequestioned Executive Order as they have a direct andspecific interest in raising the substantive issuetherein (Automotive Industry Workers Alliance (AIWA),etc., et al., v.
Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) oremployees who are going to be demoted, transferred orotherwise affected by any personnel action subject othe rule on exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, canclaim any injury from the alleged executiveencroachment of the legislative function to amend,modify and/or repeal laws. (Automotive Industry WorkersAlliance (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 ofprocedure, have been waived in certain instanceswhere a party who is not personally injured maybe allowed to bring suit. The following areexamples of instances where suits have been brought byparties who have not have been personally injured bythe operation of a law or any other government act butby concerned citizens, taxpayers or voters who actuallysue in the public interest:
a. Taxpayer’s suits to question contractsentered into by the national government or government-owned or controlled corporations allegedly incontravention of the law.
b. A taxpayer is allowed to sue where there is aclaim that public funds are illegally disbursed, orthat public money is being deflected to any improperpurpose, or that there is a wastage of public fundsthrough the enforcement of an invalid orunconstitutional law. (Abaya v. Ebdane, G. R. No. 167919,February 14, 2007)
7. The VAT law provides that, thePresident, upon the recommendation of theSecretary of Finance, shall, effective January 1,2006, raise the rate of value-added tax to twelve
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percent (12%) after any of the followingconditions have been satisfied. “(i) value-addedtax collection as a percentage of Gross DomesticProduct (GDP) of the previous year exceeds twoand four-fifth percent (2 4/5%) or (ii) nationalgovernment deficit as a percentage of GDP of theprevious year exceeds one and one-half percent (1½%).”
Was there an invalid delegation oflegislative power ?
SUGGESTED ANSWER: No. There is no unduedelegation of legislative power but only of thediscretion as to the execution of the law. This isconstitutionally permissible.
Congress does not abdicate its functions or undulydelegate 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 becomesmerely the agent of the legislative department, todetermine and declare the even upon which its expressedwill takes place. The President cannot set aside thefindings of the Secretary of Finance, who is not underthe conditions acting as the execute alter ego orsubordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al.,G. R. No. 168056, September 1, 2005 and companion casesciting various cases]]
8. Instances of proper delegation: Whentaxing power could be delegated: Exceptions tothe rule on non-delegation:
a. Delegation of tariff powers by Congress tothe President under the flexible tariff clause,Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to thePresident under Section 23 (2) of Article VI of theConstitution.
c. The delegation to the President of thePhilippines to enter into executive agreements, and toratify treaties which may contain tax exemptionprovisions subject to the concurrence by the Senate inthe 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 assubordinate legislation. In this instance, there is a requirementthat the law is complete in all aspects so what isdelegated is merely the implementation of the law orthere exists sufficiently determinate standards toguide the delegate and prevent a total transference ofthe taxing power.
9. “Paradigm shift” from exclusiveCongressional power to direct grant of taxingpower to local legislative bodies. The power totax is no longer vested exclusively on Congress; locallegislative bodies are now given direct authority tolevy taxes, fees and other charges pursuant to ArticleX, section 5 of the 1987 Constitution. (Batangas PowerCorporation v. Batangas City, et al. G. R. No. 152675, and companioncase, April 28, 2004 citing National Power Corporation v. City ofCabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, “is not regarded asa transfer of general legislative power, but rather asthe grant of authority to prescribe local regulations,according to immemorial practice, subject, of course,to the interposition of the superior in cases ofnecessity.” (People v. Vera, 65 Phil. 56)
10. Taxing power of the local government islimited. The taxing power of local governments is
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limited in the sense that Congress can enactlegislation granting tax exemptions.
While the system of local government taxation haschanged with the onset of the 1987 Constitution, thepower of local government units to tax is stilllimited.
While the power to tax by local governments maybe exercised by local legislative bodies, no longermerely by virtue of a valid delegation as before, butpursuant to direct authority conferred by Section 5,Article X of the Constitution, the basic doctrine onlocal taxation remains essentially the same, “the powerto 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. BayanTelecommunications, Inc., G.R. No. 162015, March 6, 2006, 484SCRA 169 in turn referring to Mactan Cebu International AirportAuthority, v. Marcos, G.R. No. 120082, September 11, 1996, 261SCRA 667, 680)
11. Further amplification by Bernas of thelocal government’s power to tax. “What is theeffect of Section 5 on the fiscal position ofmunicipal corporations? Section 5 does not change thedoctrine that municipal corporations do not possessinherent powers of taxation. What it does is toconfer municipal corporations a general power to levytaxes and otherwise create sources of revenue. Theyno longer have to wait for a statutory grant of thesepowers. The power of the legislative authorityrelative to the fiscal powers of local governments hasbeen reduced to the authority to impose limitations onmunicipal powers. Moreover, these limitations must be“consistent with the basic policy of local autonomy.”The important legal effect of Section 5 is thus toreverse the principle that doubts are resolved againstmunicipal corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal powers,doubts will be resolved in favor of municipalcorporations. It is understood, however, that taxesimposed by local government must be for a publicpurpose, uniform within a locality, must not beconfiscatory, and must be within the jurisdiction ofthe local unit to pass.” (Quezon City, et al., v. ABS-CBNBroadcasting Corporation, G. R. No. 166408, October 6, 2008citing 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 government’sauthority to tax and the Congressional generaltaxing power. Congress has the inherent power totax, 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 toSection 137 of the LGC which expressly provides thatnotwithstanding any exemption granted by any law orother special law, the City or a province may impose afranchise tax. It must be noted that Section 137 ofthe LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases hassustained the power of Congress to grant taxexemptions over and above the power of the localgovernment’s 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. BayanTelecommunications, Inc., G.R. No. 162015, March 6, 2006, 484SCRA 16)
“Indeed, the grant of taxing powers to localgovernment units under the Constitution and the LGCdoes not affect the power of Congress to grantexemptions to certain persons, pursuant to a declarednational policy. The legal effect of theconstitutional grant to local governments simply means
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that in interpreting statutory provisions on municipaltaxing powers, doubts must be resolved in favor ofmunicipal corporations.” [Ibid., referring to Philippine LongDistance Telephone Company, Inc. (PLDT) vs. City of Davao]
13. General principles of incometaxation in the Philippines or the source ruleof income taxation as provided in the NIRC of1997.
a. A citizen of the Philippines residing thereinis taxable on all income derived from sources withinand without the Philippines;
b. A nonresident citizen is taxable only onincome derived from sources within the Philippines; c. An individual citizen of the Philippineswho is working and deriving income abroad as anoverseas contract worker is taxable only on incomefrom sources within the Philippines: Provided, That aseaman who is a citizen of the Philippines and whoreceives compensation for services rendered abroad asa member of the complement of a vessel engagedexclusively in international trade shall be treated asan overseas contract worker; d. An alien individual, whether a resident ornot of the Philippines, is taxable only on incomederived from sources within the Philippines; e. A domestic corporation is taxable on allincome derived from sources within and without thePhilippines; and f. A foreign corporation, whether engaged ornot in trade or business in the Philippines, istaxable only on income derived from sources within thePhilippines. (Sec. 23, NIRC of 1997, emphasis supplied)
14.Juliane a non-resident alien appointedas a commission agent by a domestic corporation
with a sales commission of 10% all sales actuallyconcluded and collected through her efforts. Thelocal company withheld the amount of P107,000from her sales commission and remitted the sameto the BIR.
She filed a claim for refund alleging thather sales commission is not taxable because thesame was a compensation for her services renderedin Germany and therefore considered as incomefrom sources outside the Philippines.
Is her contention correct ?SUGGESTED ANSWER: Yes. The important factor
which determines the source of income of personalservices is not the residence of the payor, or theplace where the contract for service is entered into,or the place of payment, but the place where theservices were actually performed.
Since the activity of securing the sales were inGermany, then the income did not originate from sourcesfrom within the Philippines. (Commissioner of Internal Revenue v.Baier-Nickel, G. R. No. 153793, August 29, 2006)
15. Ensite, Ltd.. is a Canadiancorporation not doing business in thePhilippines. It holds 40% of the shares ofPhilippine Stamping Plant, Inc.,., a Philippinecompany while the 60% is owned by FredCorporation, a Filipino-owned Philippinecorporation. Ensite Co. also owns 100% of theshares of Susanto Co., an Indonesian companywhich has a duly licensed Philippine branch. Dueto worldwide restructuring of the Ensite Ltd.,.group, Ensite Ltd.,. decided to sell all itsshares in Philippine Stamping Plant, Inc. andSusanto Co. The negotiations for the buy-out
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and the signing of the Agreement of Sale wereall done in the Philippines. The Agreementprovides that the purchase price will be paid toEnsite Ltd’s bank account in the U.S. and thattitle to the Philippine Stamping Plant, Inc.and Susanto Co. shall be transferred to GeneralCo., in Toronto Canada where stock certificateswill be delivered. General Co. seeks youradvice as to whether or not it will subject thepayments of the purchase price to withholdingtax. Explain your advice. SUGGESTEDANSWER: The payments of the purchase price will besubject to withholding tax. Considering that all theactivities (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 itsincome derived from sources within the Philippines.
16.Ensite, Ltd. is a Canadian corporation,
which has a duly licensed Philippine branchengage in trading activities in the Philippines.Ensite, Ltd.. also invested directly in 40% ofthe shares of stock of Philippine StampingPlant, Inc.., a Philippine corporation. Theseshares are booked in the Head Office of Ensite,Ltd.. and are not reflected as assets of thePhilippine branch. In 2009, Philippine StampingPlant, Inc.. declared dividends to itsstockholders. Before remitting the dividends toEnsite Ltd.,., Philippine Stamping Plant, Inc.Co. seeks your advice as to whether it willsubject the remittance to withholding tax.There is no need to discuss WT rates, if
applicable. Focus your discussion on what isthe issue. SUGGESTEDANSWER: Philippine Stamping Plant, Inc.. shouldsubject the remittance to withholding tax.. SincePhilippine Stamping Plant. is a Philippinecorporation, its shares of stock have obtained abusiness situs in the Philippines, hence the dividendsare considered as income from within. Ensite. Ltd.,being a foreign corporation, should be subject to taxon its income from within.
17. Philippine Stamping Plant, Inc., aPhilippine corporation, has an executive Larrywho is a Filipino citizen. Philippine StampingPlant, Inc,. has a subsidiary in Malaysia (KualaLumpur Manufacturing, Inc.) and will assignLarry for an indefinite period to work full timefor Kuala Lumpur Manufacturing, Inc.. Larrywill bring his family to reside in Malaysia andwill lease out his residence in the Philippines.The salary of Larry will be shouldered 50% byPhilippine Stamping Plant, Inc.. while the other50% plus housing, cost of living and educationalallowances of Larry’s dependents will beshouldered by Kuala Lumpur Manufacturing, Inc..Philippine Stamping Plant, Inc.. will credit the50% of Larry’s salary to his Philippine bankaccount. Larry will sign the contract ofemployment in the Philippines. He will also bereceiving rental income for the lease of hisPhilippine residence.
Are these salaries, allowances andrentals subject to Philippine income tax?Explain briefly. SUGGESTEDANSWER: The salaries and allowances of Larry, being
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derived from labor or personal services renderedoutside of the Philippines is considered as incomefrom without. Since Larry is an OCW, then he is to betaxed only on his income derived from within thePhilippines such as the rentals on his Philippineresidence, and not on his income from without.
18.Obama Airlines, Inc., a foreign airlinecompany which does not maintain any flight to andfrom the Philippines sold air tickets in thePhilippines, through a general sales agent,relating to the carriage of passengers and cargobetween two points, both outside the Philippines.
a. Is Obama, Inc., subject to income taxeson the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source of incomewhich is taxable is that “activity” which produced theincome. The ”sale of tickets” in the Philippines isthe activity that determines whether such income istaxable in the Philippines.
The tickets exchanged hands here and payments forfares were also made here in Philippine currency. Thesitus of the source of payments is the Philippines.the flow of wealth proceeded from and occurred, withinthe Philippine territory, enjoying the protectionaccorded by the Philippine Government. In considerationof such protection, the flow of wealth should share theburden of supporting the government. [Commissioner ofInternal Revenue v. British Overseas Airways Corporation (BOAC), 149SCRA 395]
Off-line air carriers having general sales agentsin the Philippines are engaged in or doing business inthe Philippines and their income from sales ofpassage documents here is income from within thePhilippines. Thus, the off-line air carrier liable forthe 32% (now 30%) tax on its taxable income. [SouthAfrican Airways v. Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010 citing Commissioner of Internal Revenue v. BritishOverseas Airways Corporation (British Overseas Airways), No. L-65773-74,April 30, 1987, 149 SCRA 395]
b. Supposing that Obama, Inc., sellstickets outside of the Philippines for passengersit carry from Gold City, South Africa to thePhilippines but returns to South Africa withoutany cargo or passengers. Would it then besubject to any Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to anytax. It is not subject to any income tax because theactivity which generated the income (the sale of thetickets) was performed outside of the Philippines.
It is not subject to the carrier’s tax based ongross Philippine billings because there were no liftsthat originated from the Philippines. “GrossPhilippine Billings” refers to the amount of grossrevenue derived from carriage of persons, excessbaggage, cargo and mail originating from thePhilippines in a continuous and uninterrupted flight,irrespective of the place of sale or issue and theplace 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 fortravelers who are going to picked up by Obama,Inc., planes from the Diosdado Macapagal Intl.Airport at Clark, Angeles, Pampanga, bound forNairobi, Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama,Inc., would be subject to the carrier’s tax based onGross Philippine Billings. (GPB).
“Gross Philippine Billings” refers to the amountof gross revenue derived from carriage of persons,excess baggage, cargo and mail originating from thePhilippines in a continuous and uninterrupted flight,
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irrespective of the place of sale or issue and theplace 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 theuplifts of passengers and cargo occur from thePhilippines, income is included in GPB. (South AfricanAirways v. Commissioner of Internal Revenue, G.R. No. 180356, February16, 2010)
19. No improper delegation of legislativeauthority to tax. The power to tax is inherent inthe State, such power being inherently legislative,based on the principle that taxes are a grant of thepeople who are taxed, and the grant must be made bythe immediate representatives of the people; and wherethe people have laid the power, there it must remainand be exercised. (Commissioner of Internal Revenue v. FortuneTobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS
1. Constitutional limitations on thepower of taxation . The general or indirectconstitutional limitations as well as the specific ordirect constitutional limitations.
2. The general or indirectconstitutional limitations on the power oftaxation 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 andforfeiture after conviction by final judgment.
3. The specific or direct constitutionallimitation.
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 anyparticular item or items in an appropriation, revenue,or tariff bill, but the veto shall not affect the itemor items to which he does not object;
f. Delegated power of the President to imposetariff rates, import and export quotas, tonnage andwharfage dues:
1) Delegation by Congress2) through a law3) subject to Congressional limits and
restrictions4) within the framework of national
development program.g. Tax exemption of charitable institutions,
churches, parsonages and convents appurtenant thereto,
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mosques, and all lands, buildings and improvements ofall kinds actually, directly and exclusively used forreligious, charitable or educational purposes;
h. No tax exemption without the concurrence ofmajority vote of all members of Congress;
i. No use of public money or property forreligious purposes except if priest is assigned to thearmed forces, penal institutions, government orphanageor leprosarium;
j. Money collected on tax levied for a specialpurpose to be used only for such purpose, balance ifany, to general funds;
k. The Supreme Court's power to review judgmentsor orders of lower courts in all cases involving thelegality of any tax, impose, assessment or toll or thelegality of any penalty imposed in relation to theabove;
l. Authority of local government units to createtheir own sources of revenue, to levy taxes, fees andother charges subject to guidelines and limitationsimposed by Congress consistent with the basic policy oflocal autonomy;
m. Automatic release of local government's justshare in national taxes;
n. Tax exemption of all revenues and assets ofnon-stock, non-profit educational institutions usedactually, directly and exclusively for educationalpurposes;
o. Tax exemption of all revenues and assets ofproprietary or cooperative educational institutionssubject to limitations provided by law includingrestrictions on dividends and provisions forreinvestment of profits;
p. Tax exemption of grants, endowments,donations or contributions used actually, directly andexclusively for educational purposes subject toconditions prescribed by law.
5. Equal protection of the law clause issubject to reasonable classification. If thegroupings are characterized by substantial distinctionsthat make real differences, one class may be treatedand regulated differently from another. Theclassification must also be germane to the purpose ofthe law and must apply to all those belonging to thesame class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410,January 20, 1999)
6. Requisites for validclassification. All that is required of a validclassification is that it be reasonable, which meansthat a. the classification should be based onsubstantial distinctions which make for realdifferences,
b. that it must be germane to the purpose of thelaw;
c. that it must not be limited to existingconditions only; and
d. that it must apply equally to each member ofthe class.
The standard is satisfied if the classificationor distinction is based on a reasonable foundation orrational basis and is not palpably arbitrary. [ABAKADAGuro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August14, 2008]
7. Equal protection does not demandabsolute equality. It merely requires that allpersons shall be treated alike, under likecircumstances and conditions, both as to theprivileges conferred and liabilities enforced. (Santos v.People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that the oneinvoking equal protection and the person to which she
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is being compared were indeed similarly situated, i.e.,that they committed identical acts for which they werecharged with the violation of the same provisions ofthe NIRC; and that they presented similar argumentsand evidence in their defense - yet, they were treateddifferently. (Santos, supra)
8. Tests to determine validity ofclassification. The United States Supreme Courthas established different tests to determine thevalidity of a classification and compliance with theequal protection clause. The recognized tests are: a. The traditional (or rational basis)test. b. The strict scrutiny (or compellinginterest) test. c. The intermediate level of scrutiny (orquasi-suspect class) test.
9. The traditional (or rational basis) testused in order to determine the validity ofclassification. The classification is valid if itis rationally related to a constitutionallypermissible state interest.
The complainant must prove that theclassification is “invidous,” “wholly arbitrary,” or”capricious,” otherwise the classification is presumedto be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61;McGowan v. Maryland, 366 U.S. 420; United States Railroad RetirementBoard v. Fritz, 449 U.S. 166)
10. The strict scrutiny (or compellinginterest) test used in order to determine thevalidity of the classification. Governmentregulation 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 foundnecessary to promote a compelling state interest.
A classification is necessary when it is narrowlydrawn so that no alternative, less burdensome means isavailable to accomplish the state interest.
Thus, it was held that denial of free publiceducation to the children of illegal aliens imposes anenormous and lasting burden based on a status overwhich the children have no control is violative ofequal protection because there is no showing that suchdenial furthers a “substantial” state goal. (Plyler v.Doe, 457 U.S. 202)
11. The intermediate level of scrutiny (orquasi-suspect class) test used in order todetermine the validity of he classification.Classification based on gender or legitimacy are not“suspect,” but neither are they judged by thetraditional or rational basis test.
Intentional discriminations against members of aquasi-suspect class violate equal protection unlessthey are substantially related to important governmentobjectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property taxexemption to widows, but not widowers, has been heldvalid for it furthers the state policy of cushioningthe financial impact of spousal loss upon the sex forwhom that loss usually imposes a heavier burden. (Kahnv. Shevin, 416 U.S. 351)
12. Equality and uniformity of taxationmay mean the same as equal protection. In such acase, the terms would mean that all subjects andobjects of taxation which are similarly situated shallbe subject to the same burdens and granted the sameprivileges without any discrimination whatsoever.
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13. It is inherent in the power to taxthat the State be free to select the subjects oftaxation, and it has been repeatedly held that,"inequalities which result from a singling out of oneparticular class of taxation, or exemption, infringe noconstitutional limitation." (Commissioner of Internal Revenue,et al., v. Santos, et al., 277 SCRA 617)
9. Benjie is a law-abiding citizen whopays his real estate taxes promptly. Due to aseries of typhoons and adverse economicconditions, an ordinance is passed by SolimanCity granting a 50% discount for payment ofunpaid real estate taxes for the preceding yearand the condonation of all penalties on finesresulting from the late payment.
Arguing that the ordinance rewardsdelinquent tax payers and discriminates againstprompt ones, Benjie demands that he be refundedan amount equivalent to one-half of the realproperty taxes he paid. The municipal attorneyrendered an opinion that Benjie cannot bereimbursed because the ordinance did not providefor such reimbursement. Benjie files suit todeclare the ordinance void on the ground that itis a class legislation. Will his suit prosper ?Explain your answer briefly.
SUGGESTED ANSWER: No. There is no classlegislation because there is no violation of the equalprotection suit. There is a valid classificationbetween those who already paid their taxes and thosewho have not. Furthermore, the taxing authority hasthe prerogative to select the subjects and objects oftaxation, including granting a 50% discount in thepayment of unpaid real estate taxes, and the
condonation of all penalties on fines resulting fromlate payment.
10. The rewards law to tax collectors doesnot violate equal protection. The equalprotection clause recognizes a valid classification,that is, a classification that has a reasonablefoundation or rational basis and not arbitrary. Withrespect to RA 9335, it’s expressed public policy isthe optimization of the revenue-generation capabilityand collection of the BIR and the BOC. Since thesubject of the law is the revenue- generationcapability and collection of the BIR and the BOC, theincentives and/or sanctions provided in the law shouldlogically pertain to the said agencies. Moreover, thelaw concerns only the BIR and the BOC because theyhave the common distinct primary function ofgenerating revenues for the national governmentthrough the collection of taxes, customs duties, feesand charges.
Indubitably, such substantial distinction isgermane and intimately related to the purpose of thelaw. Hence, the classification and treatment accordedto the BIR and the BOC under RA 9335 fully satisfy thedemands 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 personwhile others equally guilty are not prosecuted,however, is not, by itself, a denial of theequal protection of the laws. Where the officialaction purports to be in conformity to the statutoryclassification, an erroneous or mistaken performanceof the statutory duty, although a violation of thestatute, is not without more a denial of the equalprotection of the laws.
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The unlawful administration by officers of astatute fair on its face, resulting in its unequalapplication to those who are entitled to be treatedalike, is not a denial of equal protection unlessthere is shown to be present in it an element ofintentional or purposeful discrimination. This mayappear on the face of the action taken with respect toa particular class or person, or it may only be shownby extrinsic evidence showing a discriminatory designover another not to be inferred from the actionitself. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12. Equal protection should not be used toprotect commission of crime. While all personsaccused of crime are to be treated on a basis ofequality before the law, it does not follow that theyare to be protected in the commission of crime. Itwould be unconscionable, for instance, to excuse adefendant guilty of murder because others havemurdered with impunity.
Likewise, if the failure of prosecutors toenforce the criminal laws as to some persons should beconverted into a defense for others charged withcrime, the result would be that the trial of thedistrict attorney for nonfeasance would become anissue in the trial of many persons charged withheinous crimes and the enforcement of law would suffera complete breakdown. (Santos v. People, et al, G. R. No. 173176,August 26, 2008)
13. Illustration of double taxation inlocal taxation. there is indeed double taxation ifCoca-Cola is subjected to the taxes under bothSections 14 and 21 of Tax Ordinance No. 7794, sincethese are being imposed: (1) on the same subjectmatter – the privilege of doing business in the City
of Manila; (2) for the same purpose – to make personsconducting business within the City of Manilacontribute to city revenues; (3) by the same taxingauthority – City of Manila; (4) within the sametaxing jurisdiction – within the territorialjurisdiction of the City of Manila; (5) for the sametaxing periods – per calendar year; and (6) of thesame kind or character – a local business tax imposedon gross sales or receipts of the business. (The City ofManila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845,August 4, 2009)
14. A lawful tax on a new subject, or anincreased tax on an old one, does not interferewith a contract or impairs its obligation, withinthe meaning of the constitution. (Tolentino v. Secretary ofFinance, et al., and companion cases, 235 SCRA 630) 15. The withdrawal of a taxexemption should not be construed as prohibitingfuture 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 alwayssubject to withdrawal. A legislative franchise isgranted with the express condition that it is subjectto amendment, alteration, or repeal. (1987 Constitution,Art. XII, Sec. 11)
It is enough to say that the parties to acontract cannot, through the exercise of propheticdiscernment, fetter the exercise of the taxing powerof the State. For not only are existing laws read intocontracts in order to fix obligations as betweenparties, but the reservation of essential attributesof sovereign power is also read into contracts as abasic postulate of the legal order. The policy of
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protecting contracts against impairment presupposesthe maintenance of a government which retains adequateauthority to secure the peace and good order ofsociety. (Smart Communications, Inc. v. The City of Davao, etc., et al., G.R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance TelephoneCompany, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,2001 made the observation that since Smart’s franchise wasgranted after the effectivity of the Local Government Codethat 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 thatSmart is not entitled to a tax exemption.
17. When withdrawal of a tax exemptionimpairs the obligation of contracts. The ContractClause has never been thought as a limitation on theexercise of the State’s power of taxation save onlywhere a tax exemption has been granted for a validconsideration. (Smart Communications, Inc. v. The City of Davao, etc., etal., G. R. No. 155491, September 16, 2008) citing Tolentino v.Secretary of Finance, G. R. No. 115455, August 25, 1994, 235 SCRA630, 685) The author opines that since practically allfranchises granted to telecommunications companies aresimilarly worded that the above doctrine findsapplication to the others)
18. The primary reason for the withdrawalof tax exemption privileges granted to governmentowned and controlled corporations and all otherunits of government was that such privilege resulted toserious tax base erosion and distortions in the taxtreatment of similarly situated enterprises, henceresulting in the need for these entities to share inthe 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 ofthe insistence that it is not subject to thepayment of franchises taxes imposed by theProvince of Isabela because all of its shares areowned by the Republic of the Philippines. It isthus, an instrumentality of the NationalGovernment which is exempt from local taxation.As such it is not a private corporation engagedin “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 theCity of Davao, a local government unit, to impose andcollect a local franchise tax because the LocalGovernment Code has withdrawn all tax exemptionspreviously enjoyed by all persons and authorized localgovernment units to impose a tax on business enjoying afranchise tax notwithstanding the grant of taxexemption to them.
20. “In lieu of all taxes” in the franchiseof ABS-CBN does not exempt it from localfranchise taxes. It does not expressly provide whatkind of taxes ABS-CBN is exempted from. It is notclear whether the exemption would include both local,whether municipal, city or provincial, and nationaltax. Whether the “in lieu of all taxes provision”would include exemption from local tax is notunequivocal.
The right to exemption from local franchise taxmust be clearly established and cannot be made out ofinference or implications but must be laid beyondreasonable doubt. Verily, the uncertainty in the “inlieu of all taxes” provision should be construed
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against ABS-CBN. ABS-CBN has the burden to prove thatit is in fact covered by the exemption so claimed buthas failed to do so. (Quezon City, et al., v. ABS-CBN BroadcastingCorporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the sameholding in an earlier case involving anothertelecommunications company Smart Communications, Inc. v. The City ofDavao, etc., et al., G. R. No. 155491, September 16, 2008. Theauthor opines that since practically all franchises grantedto telecommunications companies are similarly worded thatthe above doctrine finds application to the others.)
21. “In lieu of all taxes” refers tonational internal revenue taxes and not to localtaxes. The “in lieu of all taxes” clause appliesonly to national internal revenue taxes and not tolocal taxes. As appropriately pointed out in theseparate opinion of Justice Antonio T. Carpio in asimilar case involving a demand for exemption fromlocal franchise taxes:
[T]he "in lieu of all taxes" clause in Smart'sfranchise 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 localtaxes. The proviso in the first paragraph of Section 9of Smart's franchise states that the grantee shall"continue to be liable for income taxes payable underTitle II of the National Internal Revenue Code." Also,the second paragraph of Section 9 speaks of taxreturns filed and taxes paid to the "Commissioner ofInternal Revenue or his duly authorized representativein accordance with the National Internal RevenueCode." Moreover, the same paragraph declares that thetax returns "shall be subject to audit by the Bureauof Internal Revenue." Nothing is mentioned in Section9 about local taxes. The clear intent is for the "inlieu of all taxes" clause to apply only to taxes under
the National Internal Revenue Code and not to localtaxes. Even with respect to national internal revenuetaxes, the "in lieu of all taxes" clause does notapply to income tax.
If Congress intended the "in lieu of all taxes"clause in Smart's franchise to also apply to localtaxes, Congress would have expressly mentioned theexemption 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 collectedby any authority whatsoever, municipal, provincial ornational, from which the grantee is hereby expresslyexempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smartfrom local taxes. Congress used the "in lieu of alltaxes" clause only in reference to national internalrevenue taxes. The only interpretation, under the ruleon strict construction of tax exemptions, is that the"in lieu of all taxes" clause in Smart's franchiserefers 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 DistanceTelephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that theabove finds application to all telecommunicationscompanies.
22. The “in lieu of all taxes” clause in thefranchise of ABS-CBN has become functus officiowith the abolition of the franchise tax onbroadcasting companies with yearly grossreceipts exceeding Ten Million Pesos. The clause“in lieu of all taxes” does not pertain to VAT or anyother tax. It cannot apply when what is paid is a taxother than a franchise tax. Since the franchise tax
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on the broadcasting companies with yearly grossreceipts exceeding ten million pesos has beenabolished, the “in lieu of all taxes” clause has nowbecome functus officio, rendered inoperative. (Quezon City, etal., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October6, 2008)
NOTES AND COMMENTS: This is practically the sameholding in an earlier case involving anothertelecommunications company. Smart Communications, Inc. v.The City of Davao, etc., et al., G. R. No. 155491,September 16, 2008. The author opines that sincepractically all franchises granted to telecommunicationscompanies are similarly worded that the above doctrinefinds application to the others.)
23. Double taxation in its genericsense, this means taxing the same subject orobject twice during the same taxable period. Inits particular sense, it may mean direct duplicatetaxation, which is prohibited under the constitutionbecause it violates the concept of equal protection,uniformity and equitableness of taxation. Indirectduplicate taxation is not anathematized by the aboveconstitutional limitations.
24. Elements of direct duplicatetaxation:
a. Same1) Subject or object is taxed twice 2) by the same taxing authority3) for the same taxing purpose4) during the same taxable period
b. Taxing all of the subjects or objectsfor the first time without taxing all of them for thesecond time.
If any of the elements are absent then there isindirect duplicate taxation which is not prohibited bythe constitution.
NOTES AND COMMENTS: a. Presence of the 2 nd element violates the equal
protection clause. If only the 1st element is present,taxing the same subject or object twice, by the same taxingauthority, etc., there is no violation of the equalprotection clause because all subjects and objects that aresimilarly situated are subject to the same burdens andgranted the same privileges without any discriminationwhatsoever,
The presence of the 2nd element, taxing all of thesubjects and objects for the first time, without taxing allfor the second time, results to discrimination amongsubjects and objects that are similarly situated, henceviolative of the equal protection clause.
25. Double taxation a valid defense againstthe legality of a tax measure if the doubletaxation is direct duplicate taxation, because itwould violate the equal protection clause of theconstitution.
26. When an item of income is taxed inthe Philippines and the same income is taxed inanother country, this would be known asinternational juridical double taxation which isthe imposition of comparable taxes in two or morestates on the same taxpayer in respect of the samesubject matter and for identical grounds. (Commissioner ofInternal 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 nationalsfrom local taxation and local nationals from foreigntaxation under the principle of reciprocity.
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b. Tax credits where foreign taxes are allowedas deductions from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction fromgross income.
28. Tax credit generally refers to an amountthat is subtracted directly from one’s total taxliability, an allowance against the tax itself, or adeduction from what is owned.
A tax credit reduces the tax due, including –whenever applicable – the income tax that is determinedafter applying the corresponding tax rates to taxableincome. (Commissioner of Internal Revenue v. Central Luzon DrugCorporation, G. R. No. 159647, April 15, 2005)
29. A tax deduction is defined as a subtractionfro income for tax purposes, or an amount that isallowed by law to reduce income prior to theapplication of the tax rate to compute the amount oftax which is due.
A tax deduction reduces the income that is subjectto tax in order to arrive at taxable income. (Commissionerof 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 BicameralConference Committed has exceeded its authorityin including provisions which were never includedin the versions of both the House and Senate suchas inserting the stand-by authority to thePresident to increase the VAT from 10% to 12%;deleting entirely the no pass-on provisions foundin both the House and Senate Bills; inserting theprovision imposing a 70% limit on the amount ofinput tax to be credited against the output tax;
and including the amendments introduced only bySenate Bill No. 1950 regarding other kinds oftaxes in addition to the value-added tax. Thus,there was a violation of the constitutionalmandate that revenue bills shall originateexclusively from the House of Representatives.
Are the contentions of such weight as toconstitute grave abuse of discretion which mayinvalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuseof discretion because all the changes andmodifications made by the Bicameral ConferenceCommittee were germane to subjects of the provisionsreferred to it for reconciliation.
The Bicameral Conference Committee merelyexercised the judicially recognized long-standinglegislative practice of giving said conferencecommittee ample latitude for compromising differencesbetween the Senate and the House. [Abakada Guro Party List(etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 andcompanion cases]
31. The VAT while regressive is NOTviolative of the mandate to evolve a progressivesystem of taxation. Do you agree ? The mandateto Congress is not to prescribe but to evolve aprogressive system of taxation. Otherwise, sales taxeswhich perhaps are the oldest form of indirect taxes,would have been prohibited with the proclamation of theconstitutional provision. Sales taxes are alsoregressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R.No. 168056, September 1, 2005 and companion cases citingTolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25,1994, 235 SCRA 630]
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32. All revenues and assets of non-stock, non-profit educational institutions thatare actually, directly and exclusively used foreducational purposes shall be exempt fromtaxation.
33. Revenues and assets of proprietaryeducational institutions, including those whichare cooperatively owned, may be entitled toexemptions subject to limitations provided by lawincluding restrictions on dividends andprovisions for reinvestments. There is no law atthe present which grants exemptions, other theexemptions granted to cooperatives.
OTHER CONCEPTS
1. Distinguish tax from debt. TAX DEBT
Basis based on law based on contract or judgment
Failure to Pay
may result in imprisonment
no imprisonment
Mode of Payment
generally payable in money
payable in money, property or service
Assignability
not assignable
assignable
Payment unless it becomes a debt is not subject
may be a subject
to compensation or set-off
Interest does not draw interest unless delinquent
draws interest if stipulated ordelayed
Authority imposed by public authority
can be imposed by private individuals
Prescription
Prescriptive periods for tax under NIRC
debt under the Civil Code
WARNING: Do not use the above arrangement inanswering Bar questions.
2. Compensation takes place by operation oflaw, where the local government and the taxpayer are intheir own right reciprocally debtors and creditors ofeach other, and that the debts are both due anddemandable, in consequence of Articles 1278 and 1279 ofthe Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
3. May there be compensation or set-offbetween a national tax and a debt ? Reason outyour answer. SUGGESTED ANSWER: As ageneral rule, there could be no compensation or set-off between a tax and a debt for the followingreasons:
a. Lifeblood theory. b. Taxes are not contractual
obligations but arise out of a duty to, and are thepositive acts of government, to the making andenforcing of which the personal consent of theindividual taxpayer is not required. (Republic v. MambulaoLumber Co., 4 SCRA 622) c. Taxes
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cannot be the subject of compensation because thegovernment and taxpayer are not mutually creditors anddebtors of each other and a claim for taxes is notsuch a debt, demand, contract or judgment as isallowed to be set-off.
Thus, it is correct to say that the offsettingof a taxpayer’s tax refund with its alleged taxdeficiency is unavailing under Art. 1279 of the CivilCode. (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. IntermediateAppellate Court)
4. Exceptions: When set-off or compensationallowed for local taxes.
a. Where both claims already become overdueand demandable as well as fully liquidated.Compensation takes place by operation of law underArt. 1200 in relation to Arts. 1279 and 1290 all ofthe Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
b. Compensation takes place byoperation of law, where the government and thetaxpayer are in their own right reciprocally debtorsand creditors of each other, and that the debts areboth due and demandable. This is in consequence ofArticle 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 bothcases, the claims of the taxpayers therein werecertain and liquidated. The claims were certain sincethere were no doubts or disputes as to theirrefundability. In fact, the government admitted thefact of over-payment. (Commissioner of Internal Revenuev. Esso Standard Eastern, Inc., 172 SCRA 364) d. Incase of a tax overpayment, the BIR’s obligation to
refund or off-set arises from the moment the tax waspaid. REASON: Solutio indebeti. (Commissioner of Internal Revenue v.Esso Standard Eastern, Inc 172 SCRA 364)
e. While judgmentshould be rendered in favor of Republic for unpaidtaxes, judgment ought at the same time to issue forSampaguita Pictures commanding payment to the latterby the Republic of the value of the backpaycertificates which the Republic received. (Republic v.Ericta, 172 SCRA 623)
5. Gilbert obtained a judgment fora sum of money against the municipality ofCamiling. The judgment has become final althoughexecution has not issued. Upon receiving anassessment for municipal sales taxes from theMunicipal Treasurer, Gilbert executed a partialassignment of his judgment sufficient to coverthe assessment in favor of the Municipality.May the Municipal Treasurer validly accept theassignment? Why?
SUGGESTED ANSWER: Yes. The parties in this caseare mutually debtors and creditors of each other, andsince both of the claims became overdue, demandableand fully liquidated, compensation takes place byoperation of law. Such was the holding in Domingo v.Garlitos, 8 SCRA 443, a case decided by the Supreme Courtwhose factual antecedents are similar to the problem.
6. In case ofdoubt, tax laws must be construed strictlyagainst the State and liberally in favor of thetaxpayer because taxes, as burdens which must beendured by the taxpayer, should not be presumed to gobeyond what the law expressly and clearly declares.
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(Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al.,293 SCRA 92, 99)
7. Interpretation in the imposition oftaxes, is not the similar doctrine as thatapplied to tax exemptions. The rule in theinterpretation of tax laws is that a statute will notbe construed as imposing a tax unless it does soclearly, expressly, and unambiguously. A tax cannotbe imposed without clear and express words for thatpurpose. Accordingly, the general rule of requiringadherence to the letter in construing statutes applieswith peculiar strictness to tax laws and theprovisions of a taxing act are not to be extended byimplication. In answering the question of who issubject to tax statutes, it is basic that in case ofdoubt, such statutes are to be construed most stronglyagainst the government and in favor of the subjects orcitizens because burdens are not to be imposed norpresumed to be imposed beyond what statutes expresslyand clearly import. [Commissioner of Internal Revenue v. FortuneTobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citingCIR v. Court of Appeals, 338 Phil. 322, 330-331 (1997)] Asburdens, taxes should not be unduly exacted norassumed 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 exemptionlaws. Taxes are what civilized people pay forcivilized society. They are the lifeblood of thenation. Thus, statutes granting tax exemptions areconstrued stricissimi juris against the taxpayer andliberally in favor of the taxing authority. A claimof tax exemption must be clearly shown and based onlanguage in law too plain to be mistaken. Otherwisestated, 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 InternationalAirport Authority v. Marcos, G.R. No. 120082, September 11, 1996,261 SCRA 667, 680) The burden of proof rests upon theparty claiming the exemption to prove that it is infact covered by the exemption so claimed. (Quezon City,supra citing Agpalo, R.E., Statutory Construction, 2003 ed.,p. 301)
9. Rationale for strict interpretation oftax exemption laws. The basis for the rule onstrict construction to statutory provisions grantingtax exemptions or deductions is to minimizedifferential 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 exemptionfrom his share of common burden must justify his claimthat the legislature intended to exempt him byunmistakable terms. For exemptions from taxation arenot favored in law, nor are they presumed. They mustbe expressed in the clearest and most unambiguouslanguage and not left to mere implications. It hasbeen held that “exemptions are never presumed theburden is on the claimant to establish clearly hisright to exemption and cannot be made out of inferenceor implications but must be laid beyond reasonabledoubt. In other words, since taxation is the rule andexemption the exception, the intention to make anexemption ought to be expressed in clear andunambiguous terms. (Quezon City, supra citing Agpalo, R.E.,Statutory Construction, 2003 ed., p. 302)
10. Why are tax exemptions are strictlyconstrued against the taxpayer and liberally infavor of the State ?
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SUGGESTED ANSWER: Taxes are necessary for thecontinued existence of the State.
11. In case of a tax overpayment, wherethe BIR’s obligation to refund or set-off arisesfrom the moment the tax was paid under theprinciple of solutio indebeti. (Commissioner of Internal Revenuev. Esso Standard Eastern, Inc, 172 SRCA 364)
12. But note Nestle Phil. v. Court of Appeals, etal., G.R. No. 134114, July 6, 2001 which held that inorder for the rule on solutio indebeti to apply it is anessential condition that the petitioner must first showthat its payment of the customs duties was in excess ofwhat was required by the law at the time the subject 16importations of milk and milk products were made.Unless shown otherwise, the disputable presumption ofregularity of performance of duty lies in favor of theCollector of Customs.
13. Strict interpretation of a tax refundthat partakes of the nature of a tax does notapply to tax refund based on erroneous paymentor where there is no law that authorizescollection of the tax. There is parity between taxrefund and tax exemption only when the former is basedeither on a tax exemption statute or a tax refundstatute. (Commissioner of Internal Revenue v. Fortune TobaccoCorporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand,are not founded principally on legislative grace buton the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment atthe expense of another. [Commissioner, supra citing RamieTextiles, 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 atee the prototypic quasi-contract, solutio indebiti, whichcovers not only mistake in fact but also mistake inlaw. (Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154and 2155)
The Government is not exempt from theapplication of solutio indebiti. (Commissioner, supra citingCommissioner of Internal Revenue v. Fireman’s Fund Insurance Co., G.R.No. L-30644, 9 March 1987, 148 SCRA 315, 324-325; RamieTextiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila,supra)
Indeed, the taxpayer expects fair dealing fromthe Government, and the latter has the duty to refundwithout any unreasonable delay what it has erroneouslycollected. (Commissioner, supra citing Commissioner of InternalRevenue v. Tokyo Shipping Co., supra at 338) If the State expectsits taxpayers to observe fairness and honesty inpaying their taxes, it must hold itself against thesame standard in refunding excess (or erroneous)payments of such taxes. It should not unjustly enrichitself at the expense of taxpayers. [Commissioner, supraciting AB Leasing and Finance Corporation v. Commissioner of InternalRevenue, 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 necessitatesonly preponderance of evidence for its approbationlike in any other ordinary civil case. (Commissioner,supra)
14. Tax refunds premised upon a taxexemption strictly construed, Tax exemption is aresult of legislative grace. And he who claims anexemption from the burden of taxation must justify hisclaim by showing that the legislature intended toexempt 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
27
Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, 119Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictlyconstrued such that the exemption will not be held tobe conferred unless the terms under which it isgranted clearly and distinctly show that such was theintention. [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, 22October 1975, 67 SCRA 351, 357-358; Surigao Consolidated MiningCo. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutesgranting tax exemption or tax refund. In such case,the rule of strict interpretation against the taxpayeris applicable as the claim for refund partakes of thenature of an exemption, a legislative grace, whichcannot be allowed unless granted in the most explicitand categorical language. The taxpayer must show thatthe legislature intended to exempt him from the tax bywords too plain to be mistaken. [Commissioner, supra with anote 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 InternalRevenue, 354 Phil. 891-892 (1998); . Commissioner of InternalRevenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previousruling interpreting a law as exempting ataxpayer. A reversal of a BIR ruling favorable to ataxpayer would not necessarily create a perpetualexemption in his favor, for after all the government isnever estopped from collecting taxes because ofmistakes or errors on the part of its agents. (LincolnPhilippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA92, 99)
16. A tax amnesty is a general pardon orintentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty ofevasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by thegovernment of its right to collect what is due it andto give tax evaders who wish to relent a chance tostart with a clean slate. A tax amnesty, much like atax exemption, is never favored nor presumed in law.The grant of a tax amnesty, similar to a taxexemption, must be construed strictly against thetaxpayer and liberally in favor of the taxingauthority. (Philippine Banking Corporation, etc., v. Commissioner ofInternal 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 taxexemption.
a. Tax amnesty is an immunity from all criminal,civil and administrative liabilities arising fromnonpayment of taxes (People v. Castaneda, G.R. No. L-46881,September 15, 1988) WHILE a tax exemption is animmunity from civil liability only. It is an immunityor privilege, a freedom from a charge or burden towhich others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36NE 365)
b. Tax amnesty applies only to past tax periods,hence of retroactive application (Castaneda, supra) WHILEtax exemption has prospective application.
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19. Tax avoidance is the use of legallypermissible means to reduce the tax while tax evasionis the use of illegal means to escape the payment oftaxes.
20. Tax evasion connotes the integration ofthree factors:
a. The end to be achieved, i.e., the payment ofless than that known by the taxpayer to be legally due,or the non-payment of tax when it is shown that a taxis due;
b. an accompanying state of mind which isdescribed as being “evil” on “bad faith,” “willful,” or”deliberate and not accidental”; and
c. a course of action or failure of action whichis unlawful. (Commissioner of Internal Revenue v. The Estate of BenignoP. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)
21. Tax avoidance distinguished from taxevasion.
a. Tax avoidance is legal while tax evasion isillegal.
b. The objective of tax avoidance in mostinstances is merely to reduce the tax that is due whileis tax evasion the object is to entirely escape thepayment of taxes.
c. Tax evasion warrants the imposition of civil,administrative and criminal penalties while taxavoidance does not.
22. Tax sparing is a provision in some taxtreaties which provides that the state of residenceallows as credit the amount that would have been paid,as if no reduction has been made. (Vogel, Klaus onDouble Taxation Conventions, Third Edition, p.1255 cited inSegarra, Venice H, Tax Treaties: Trick or treat ?,Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particularincome is exempt from taxation in order to encourageforeign investments which may lead to economicdevelopment. If the tax credit method is used, therewould be no more tax to credit since there is no moretax to credit as a result of the tax exemption.Consequently, when the tax method credit method isapplied to these items of income, such incentives aresiphoned off since, in effect, the tax benefits arecancelled out. (Ibid.) Thus, the need for the tax sparingprovision.
NATIONAL INTERNAL REVENUE CODE
ORGANIZATION AND FUNCTIONS OF THE BUREAU OFINTERNAL REVENUE
1. Rep. Act No. 1405, the Bank DepositsSecrecy Law prohibits inquiry into bank deposits.As exceptions to Rep. Act No. 1405, theCommissioner of Internal Revenue is onlyauthorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; andb. any taxpayer who has filed an application for
compromise of his tax liability by reason of financialincapacity to pay his tax liability. [Sec. 5 (F), NIRCof 1997]
c. A taxpayer who authorizes the Commissioner toinquire into his bank deposits.
2. Purpose of the NIRC of 1997. Revenuegeneration has undoubtedly been a majorconsideration in the passage of the Tax Code.(Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.Nos. 167274-75, July 21, 2008)
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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 taxsystem is likewise meant to promote faircompetition among the players in the industriesconcerned, to ensure an equitable distribution of thetax burden and to simplify tax administration byclassifying cigarettes, among others, into high,medium and low-priced based on their net retail priceand accordingly graduating tax rates. (Commissioner ofInternal 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 createdor organized, joint-stock companies, joint accounts(cuentas en participacion), associations, or insurancecompanies. [Sec. 24 now Sec. 24 (B) of the NIRC of1997]
2. In Evangelista v. Collector, 102 Phil. 140, theSupreme Court held citing Mertens that the termpartnership includes a syndicate, group, pool, jointventure or other unincorporated organization, throughor by means of which any business, financial operation,or venture is carried on.
3. Certain business organizations donot fall under the category of “corporations”under the Tax Code, and therefore not subject to taxas corporations, include:
a. General professional partnerships;
b. Joint venture or consortium formed forthe purpose of undertaking construction projectsengaging in petroleum, coal, geothermal, and otherenergy operations, pursuant to an operation orconsortium agreement under a service contract with theGovernment. [1st sentence, Sec. 22 (B), BIRC of 1997]
4. Co-heirs who own inheritedproperties which produce income should notautomatically be considered as partners of anunregistered corporation subject to income taxfor the following reasons:
a. The sharing of gross returns does not ofitself establish a partnership, whether or not thepersons sharing them have a joint or common right orinterest in any property from which the returns arederived. There must be an unmistakable intention toform a partnership or joint venture. (Obillos, Jr. v. Commissionerof Internal Revenue, 139 SCRA 436)
b. There is no contribution or investmentof additional capital to increase or expand theinherited properties, merely continuing the dedicationof the property to the use to which it had been put bytheir forebears. (Ibid.)
c. Persons who contribute property or fundsto a common enterprise and agree to share the grossreturns of that enterprise in proportion to theircontribution, but who severally retain the title totheir respective contribution, are not thereby renderedpartners. They have no common stock capital, and nocommunity of interest as principal proprietors in thebusiness itself from which the proceeds were derived.(Elements of the Law of Partnership by Floyd R. Mechem, 2nd
Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of InternalRevenue, 166 SCRA 560)
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5. The common ownership of propertydoes not itself create a partnership between theowners, though they may use it for purpose of makinggains, and they may, without becoming partners, areamong themselves as to the management and use of suchproperty and the application of the proceedstherefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App.14, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA560)
6. The income from the rental of the house,bought from the earnings of co-owned properties,shall be treated as the income of anunregistered partnership to be taxable as acorporation because of the clear intention of thebrothers to join together in a venture for making moneyout of rentals.
7. Income is gain derived and severed fromcapital, from labor or from both combined. Forexample, to tax a stock dividend would be to tax acapital increase rather than the income. (Commissioner ofInternal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20,1999)
8. The term taxable income means thepertinent items of gross income specified in the TaxCode, less the deductions and/or personal andadditional exemptions, if any, authorized for suchtypes of income by the Tax Code or other special laws.(Sec. 31, NIRC of 1997)
9. The cancellation and forgiveness ofindebtedness may amount to (a) payment of income; (b)gift; or to a (c) capital transaction depending uponthe circumstances.
10. If an individual performs servicesfor a creditor who, in consideration thereof,cancels the debt, it is income to the extent of theamount realized by the debtor as compensation for hisservices.
11. An insolvent debtor does not realizetaxable income from the cancellation orforgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA10th)
12. The insolvent debtor realizes incomeresulting from the cancellation or forgiveness ofindebtedness when he becomes solvent. (LakelandGrocery Co., v. Commissioner 36 BTA (F) 289)
13. If a creditor merely desires tobenefit a debtor and without any considerationtherefor cancels the amount of the debt it is agift from the creditor to the debtor and need notbe included in the latter’s income.
14. If a corporation to which a stockholderis indebted forgives the debt, the transactionhas the effect of payment of a dividend. (Sec.50, Rev. Regs. No. 2)
15. Members of cooperatives not subject to taxon the interest earned from their deposits with thecooperative. No less than our Constitution guaranteesthe protection of cooperatives. Section 15, Article XIIof the Constitution considers cooperatives as instrumentsfor social justice and economic development. At the sametime, Section 10 of Article II of the Constitution
31
declares that it is a policy of the State to promotesocial justice in all phases of national development. Inrelation thereto, Section 2 of Article XIII of theConstitution states that the promotion of social justiceshall include the commitment to create economicopportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, wefind that an interpretation exempting the members ofcooperatives from the imposition of the final tax underSection 24(B)(1) of the NIRC (tax on interest earned bydeposits) is more in keeping with the letter and spiritof our Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)]etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January22, 2010)
In closing, cooperatives, including their members,deserve a preferential tax treatment because of the vitalrole they play in the attainment of economic developmentand social justice. Thus, although taxes are thelifeblood of the government, the State’s power to tax mustgive way to foster the creation and growth ofcooperatives. To borrow the words of Justice Isagani A.Cruz: “The power of taxation, while indispensable, is notabsolute and may be subordinated to the demands of socialjustice.” (Ibid., citing Commissioner of Internal Revenue v. AmericanExpress International, Inc. (Philippine Branch), 500 Phil. 586 (2005).
16. The Global system of income taxationis a system employed where the tax system viewsindifferently the tax base and generally treats incommon all categories of taxable income of theindividual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income taxationis a system employed where the income tax treatmentvaries and is made to depend on the kind or category oftaxable income of the taxpayer. (Tan v. del Rosario, Jr., 237SCRA 324, 331)
18. Under the National Internal Revenue Codethe global system is applicable to taxablecorporations and the schedular to individuals.
19. Compensation income is considered ashaving been earned in the place where the servicewas rendered and not considered as sourced from theplace of origin of the money.
20. Payment for services, other thancompensation income, is considered as having beenearned at the place where the activity orservice was performed.
21. A non-resident alien, who hasstayed in the Philippines for an aggregate periodof more than 180 days during any calendar year,shall be considered as a non-resident alien doingbusiness in the Philippines. Consequently, heshall be subject to income tax on his income derivedfrom sources from within the Philippines. [Sec. 25 (A)(1), NIRC]
He is allowed to avail of the itemized deductionsincluding the personal and additional exemptionssubject to the rule on reciprocity.
22. What are considered as de minimisbenefits not subject to withholding tax oncompensation income of both managerial and rankand file employees ?
SUGGESTED ANSWER:a. Monetized unused vacation leave credits of
employees not exceeding ten (10) days during the year;
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b. Medical cash allowance to dependents ofemployees not exceeding P750.00 per employee persemester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) sack of50-kg. rice per month amounting to not more thanP1,000.00;
d. Uniforms and clothing allowance not exceedingP3,000.00 per annum;
e. Actual yearly medical benefits not exceedingP10,000.00 per annum;
f. Laundry allowance not exceeding P300 permonth;
g. Employees achievement awards, e.g. for lengthof service or safety achievement, which must be in theform of a tangible persona property other than cash orgift certificate, with an annual monetary value notexceeding P10,000.00 received by an employee under anestablished written plan which does not discriminate infavor of highly paid employees;
h. Gifts given during Christmas and majoranniversary celebrations not exceeding P5,000 peremployee per annum;
i. Flowers, fruits, books, or similar itemsgiven to employees under special circumstances, e.g. onaccount of illness, marriage, birth of a baby, etc.;and
j. Daily meal allowance for overtime work notexceeding twenty five percent (25%) of the basicminimum wage.
The amount of de minimis benefits conforming to theceiling herein prescribed shall not be considered indetermining 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 ceilingprescribed by these regulations, the excess shall betaxable to the employee receiving the benefits only ifsuch excess is beyond the P30,000.00 ceiling, provided,
further, that any amount given by the employer asbenefits to its employees, whether classified as deminimis benefits or fringe benefits, shall constitute asdeductible 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” refersto an income collected through the withholdingtax system. The payor of the income withholds thetax and remits it to the government as a finalsettlement of the income tax as a final settlement ofthe income tax due on said income. The recipient is nolonger required to include the income subjected to afinal tax as part of his gross income in his income taxreturn.
24. Distinguish exclusions fromdeductions.
SUGGESTED ANSWER:a. Exclusions from gross income refer to a flow
of wealth to the taxpayer which are not treated as partof gross income for purposes of computing thetaxpayer’s taxable income, due to the followingreasons: (1) It is exempted by the fundamental law;(2) It is exempted by statute; and (3) It does notcome within the definition of income (Sec. 61, Rev.Regs. No. 2) WHILE deductions are the amounts which thelaw allows to be subtracted from gross income in orderto arrive at net income.
b. Exclusions pertain to the computation ofgross income WHILE deductions pertain to thecomputation of net income.
c. Exclusions are something received or earnedby the taxpayer which do not form part of gross income
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WHILE deductions are something spent or paid in earninggross income.
An example of an exclusion from gross income arelife insurance proceeds, and an example of a deductionare 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 theinsured whether in a single sum or otherwise.
b. Amounts received by the insured as a returnof premiums paid by him under life insurance, endowmentor annuity contracts either during the term, or atmaturity of the term mentioned in the contract, or uponsurrender of the contract.
c. Value of property acquired by gift, bequest,devise, or descent.
d. Amounts received, through accident or healthinsurance or Workmen’s Compensation Acts ascompensation for personal injuries or sickness, plusthe amounts of any damages received on whether by suitor agreement on account of such injuries or sickness.
e. Income of any kind to the extent required byany treaty obligation binding upon the Government ofthe Philippines.
f. Retirement benefits received under RepublicAct No. 7641. Retirement received from reasonableprivate benefit plan after compliance with certainconditions. Amounts received for beyond controlseparation. Foreign social security, retirementgratuities, pensions, etc. USVA benefits, SSS benefitsand GSIS benefits.
26. What are the conditions forexcluding retirement benefits from gross income,hence tax-exempt ?
SUGGESTED ANSWER:a. Retirement benefits received under Republic
Act No. 7641 and those received by officials andemployees of private firms, whether individual orcorporate, in accordance with the employer’s reasonableprivate benefit plan approved by the BIR.
b. Retiring official or employee1) 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] Theretiring official or employee should not havepreviously availed of the privilege under theretirement 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 employerc. As a consequence of separation of such
official or employee from the service of the employerbecause of
1) Death, sickness or other physicaldisability; or
2) For any cause beyond the control of saidofficial or employee [Sec. 32 (B) (6) (b), NIRCof 1997], such as retrenchment, redundancy and
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cessation of business. [1st par., Sec. 2.78 (B),(1) (b), Rev. Regs. No. 2-98]
28. What are the Itemized deductionsfrom gross income and who may avail of them ?
a. Ordinary and necessary trade, business orprofessional expenses.
b. The amount of interest paid or incurredwithin a taxable year on indebtedness in connectionwith the taxpayer’s profession, trade or business.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
c. Taxes paid or incurred within the taxableyear in connection with the taxpayer’s profession.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
d. Ordinary losses, losses from casualty,theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
e. Bad debts due to the taxpayer, actuallyascertained to be worthless and charged off within thetaxable year, connected with profession, trade orbusiness, not sustained between related parties.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
f. Depreciation or a reasonable allowancefor the exhaustion, wear and tear (including reasonableallowance for obsolescence) of property used in tradeor business.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens and
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foreign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
g. Depletion or deduction arising from theexhaustion of a non-replaceable asset, usually anatural resource.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
h. Charitable and other contributions.Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
i. Research and development expenditures treatedas deferred expenses paid or incurred by the taxpayerin connection with his trade, business or profession,not deducted as expenses and chargeable to capitalaccount but not chargeable to property of a characterwhich is subject to depreciation or depletion.
Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in tradeand business, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
j. Contributions to pension trusts. Residentcitizens, resident alien individuals and nonresidentalien individuals who are engaged in trade andbusiness, on their gross incomes other fromcompensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trustsmay also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from withinmay also deduct this expense.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
k. Insurance premiums for health andhospitalization. Resident citizens, resident alienindividuals and nonresident alien individuals who areengaged in trade and business, on their gross incomesother from compensation income are allowed to deductthese expenses. Nonresident citizens and nonresidentalien individual engaged in trade or business in thePhilippine on their gross incomes from within may alsodeduct these premiums.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct these premiums.
l. Personal and additional exemptions. Residentcitizens, and resident alien on their gross incomes and
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from compensation income are allowed to deduct thesepremiums. Nonresident citizens on their gross incomesfrom within may also deduct this expense. Nonresidentalien individuals engaged in trade or business in thePhilippines are allowed to deduct these exemptionsunder reciprocity.
Nonresident alien individuals not engaged intrade or business in the Philippines are not allowed todeduct this expense.
29. Distinguish ordinary expenses fromcapital expenditures.
SUGGESTED ANSWER: Ordinary expenses are thosewhich are common to incur in the trade or business ofthe taxpayer WHILE capital expenditures are thoseincurred to improve assets and benefits for more thanone taxable year. Ordinary expenses are usuallyincurred during a taxable year and benefits suchtaxable year. Necessary expenses are those which areappropriate or helpful to the business.
30. What are the requisites for thedeductibility of business expenses ?
SUGGESTED ANSWER: The following are therequisites 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 expendituresb. Compliance with the substantiation test.
Proof by evidence or records of the deductions allowedby law including compliance with the business test.
31. What are the requisites for thedeductibility of ordinary and necessary trade,business, or professional expenses, like expensespaid 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 accountingupon the basis of which the net income is computed.
c. it must be supported by receipts, records orother pertinent papers. (Commissioner of Internal Revenue v,Isabela cultural Corporation, G. R. No. 172231, February 12,2007)
32. TMG Corporation is issuing theaccrual method of accounting. In 2005 XYZ LawFirm and ABC Auditing Firm rendered variousservices which were billed by these firms onlyduring the following year 2006. Since the billsfor legal and auditing services were receivedonly in 2006 and paid in the same year, TMGdeducted 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 theyear they were incurred in 2005 and not in 2006 becauseat the time the services were rendered in 2005, therewas already an obligation to pay them. (Commissioner ofInternal 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 reportincome and deductions. (Commissioner of Internal Revenue v,
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Isabela cultural Corporation, G. R. No. 172231, February 12,2007)
The two (2) principal accounting methods forrecognition of income are the (a) accrual method; andthe (b) cash method.
b. Recognition of income and expenses under theaccrual method of accounting. Amounts of incomeaccrue where the right to receive them becomes fixed,where there is created an enforceable liability.Liabilities, are incurred when fixed and determinablein nature without regard to indeterminacy merely oftime of payment.. (Commissioner of Internal Revenue v, Isabelacultural Corporation, G. R. No. 172231, February 12, 2007)
The accrual of income and expense is permittedwhen 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; and2) the availability of the reasonable
accurate determination of such income orliability.The test does not demand that the amount of such
income or liability be known absolutely, only that ataxpayer has at his disposal the information necessaryto compute the amount with reasonable accuracy.
The all-events test is satisfied where computationremains uncertain; if its basis is unchangeable, thetest is satisfied where a computation may be unknown,but is not as much as unknowable, within the taxableyear. The amount of liability does not have to bedetermined exactly,; it must be determined with“reasonable accuracy” implies something less than anexact or completely accurate amount.
The propriety of an accrual must be judged by thefact that a taxpayer knew, or could reasonably beexpected to have known, at the closing of its books forthe taxable year. Accrual method of accounting
presents largely a question of fact; such that thetaxpayer bears the burden of proof of establishing theaccrual of an item of income or deduction. (Commissionerof Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231,February 12, 2007)
d. Under the cash method income is to beconstrued as income for tax purposes only upon actualreceipt of the cash payment. It is also referred to asthe “cash receipts and disbursements method” becauseboth the receipt and disbursements are considered.Thus, income is recognized only upon actual receipt ofthe cash payment but no deductions are allowed from thecash income unless actually disbursed through an actualpayment in cash.
33. The fringe benefits tax is a finalwithholding tax imposed on the grossed-up monetaryvalue of fringe benefits furnished, granted or paid bythe employer to the employee, except rank and fileemployees. [1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
34. What is meant by “fringe benefit” forpurposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation,fringe benefit means any good, service, or otherbenefit furnished or granted in cash or in kind by anemployer to an individual employee (except rank andfile 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 rateand actual rate granted;
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f. Membership fees, dues and other expensesborne by the employer for the employee in social andathletic clubs or other similar organizations;
g. Expenses for foreign travel;h. Holiday and vacation expenses;i. Educational assistance to the employee or his
dependents; andj. Life or health insurance and other non-life
insurance premiums or similar amounts in excess of whatthe law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec.2.33 (B), Rev. Regs. No. 3-98]
35. Fringe benefits that are notsubject to the fringe benefits tax:
a. When the fringe benefit is required by thenature of, or necessary to the trade, business orprofession of the employer; or
b. When the fringe benefit is for theconvenience 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 andexempted from income tax under the Tax Code or underany special law;
d. Contributions of the employer for the benefitof the employee to retirement, insurance andhospitalization benefit plans;
e. Benefits given to the rank and fileemployees, whether granted under a collectivebargaining agreement or not; and
f. De minimis benefits as defined in the rules andregulations to be promulgated by the Secretary ofFinance upon recommendation of the Commissioner ofInternal Revenue. [1st par., Sec. 32 (C), NIRC of 1997;Sec. 2.33 (C), Rev. Regs. No. 3-98]
36. De minimis benefits arefacilities and privileges (such as entertainment,medical services, or so-called “courtesy discounts” onpurchases), furnished or offered by an employer to hisemployees. They are not considered as compensationsubject to income tax and consequently to withholdingtax, if such facilities are offered or furnished by theemployer 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 capitalregardless of the conditions under which suchshares are issued and dividends or “interests”paid thereon are not allowed as deductions fromthe gross income of corporations. (RevenueMemorandum Circular No. 17-71)
38. Bad debts are those which result fromthe worthlessness or uncollectibility, in whole or inpart, of amounts due the taxpayer by others, arisingfrom money lent or from uncollectible amounts of incomefrom 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 thanfifty percent (50%) in value of the outstanding stockof which is owned, directly or indirectly, by or forsuch individual;
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c. Two corporations more than fifty percent(50%) in value of the outstanding stock of which isowned, directly or indirectly, by or for the sameindividual;
d. A grantor and a fiduciary of any trust; ore. The fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor withrespect to each trust; or
f. A fiduciary of a trust and a beneficiary ofsuch. [Sec. 36 (B), NIRC of 1997]
40. What are the requisites for validdeduction of bad debts from gross income ? SUGGESTED ANSWER:
a. There must be an existing indebtedness due tothe taxpayer which must be valid and legallydemandable; b. The same must be connected with thetaxpayer’s trade, business or practice of profession; c. The same must not be sustained in atransaction entered into between related parties; d. The same must be actually charged off thebooks of accounts of the taxpayer as of the end of thetaxable year; and e. The debt must be actuallyascertained to be worthless and uncollectible duringthe taxable year; f. The debts are uncollectible despitediligent effort exerted by the taxpayer. [Sec. 34 (E)(1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99reiterated in Rev. Regs. No. 25-2002; Philippine RefiningCorporation v. Court of Appeals, et al., 256 SCRA 667] g. Must have been reported as receivables inthe 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” positsthat the recovery of bad debts previously allowed asdeduction in the preceding year or years shall beincluded as part of the taxpayer’s gross income in theyear of such recovery to the extent of the income taxbenefit of said deduction.
NOTES AND COMMENTS:a. If in the year the taxpayer claimed deduction
of bad debts written-off, he realized a reduction ofthe income tax due from him on account of the saiddeduction, his subsequent recovery thereof from hisdebtor shall be treated as a receipt of realizedtaxable income. (Sec. 4, Rev. Regs. 5-99)
b. If the said taxpayer did not benefit from thededuction of the said bad debt written-off because itdid not result to any reduction of his income tax inthe year of such deduction (i.e. where the result ofhis business operation was a net loss even withoutdeduction of the bad debts written-off), then hissubsequent recovery thereof shall be treated as a mererecovery or a return of capital, hence, not treated asreceipt of realized taxable income. (Sec. 4, Rev. Regs.5-99)
42. Depreciation is the gradual diminutionin the useful value of tangible property resulting fromordinary wear and tear and from normal obsolescence.The term is also applied to amortization of the valueof intangible assets the use of which in the trade orbusiness is definitely limited in duration.
43. The methods of depreciation are thefollowing:
a. Straight line method;b. Declining balance method;c. Sum of years digits method; and
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d. Any other method prescribed by the Secretaryof Finance upon the recommendation of the Commissionerof Internal Revenue:
1) Apportionment to units of production;2) Hours of productive use;3) Revaluation method; and4) Sinking fund method.
44. What are personal and additionalexemptions ?
SUGGESTED ANSWER: These are the theoreticalpersona, living and family expenses of an individualallowed to be deducted from the gross or net income ofan individual taxpayer.
These are arbitrary amounts which have beencalculated by our lawmakers to be roughly equivalent tothe minimum of subsistence, taking into account thepersonal status and additional qualified dependents ofthe taxpayer. They are fixed amounts in the sense thatthe amounts have been predetermined by our lawmakersand until our lawmakers make new adjustments on thesepersonal exemptions, the amounts allowed to be deductedby 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 andConcepcion, 38 Phil. 414, 418 (1918)]
45. What is the amount allowed as basicpersonal exemption ?
SUGGESTED ANSWER: There shall be allowed a basicpersonal exemption amounting to Fifty thousand pesos(P50,000) for each individual taxpayer.
In the case of married individuals where only oneof the spouse is deriving gross income, only suchspouse 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. ActNo. 9504 that each of the spouses may claim theP50,000.00. Thus, the total familial basic personalexemption for spouses is P100,000.00.
Furthermore, the distinctions between theconcepts of single, married and head of the family forpurpose of availing of the basic personal exemptionhas already been eliminated by Rep. Act No. 9504.
45. What are the amounts of additionalexemptions ?
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. 2-98as amended by Rev. Regs. No. 10-2008, arrangement andnumbering supplied; Sec. 35 (B), NIRC of 1997 asamended by Rep. Act No. 9504]NOTES AND COMMENTS: a. It is clear that under the amendment, single
individuals may now claim for the additionalexemptions. Furthermore, the concept of head of afamily 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
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1) not more than twenty-one (21) years ofage,
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. 2-98as amended by Rev. Regs. No. 10-2008, arrangement andnumbering supplied; Sec. 35 (b), NIRC of 1997, asamended 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 qualifieddependent children are considered for additionalexemptions. Grandparents, parents, as well, asbrothers or sisters, and other collateral relativesare not qualified dependents to be claimed asadditional exemptions.
However, if they are senior citizens they mayqualify as additional exemptions under the “SeniorCitizens Law” but not under the NIRC of 1997, asamended by Rep. Act No. 9504.
Senior citizen shall be treated as dependentsprovided for in the National Internal Revenue Code, asamended, and as such, individual taxpayers caring forthem, be they relatives or not shall be accorded theprivileges granted by the Code insofar as havingdependents are concerned. [last par. Sec. 5 (a), Rep. ActNo. 7432, as amended by Rep. Act 9257, “The Expanded SeniorCitizens Act of 2003”]
47. Capital assets shall refer to all realproperties held by a taxpayer, whether or not connectedwith his trade or business, and which are not includedamong the real properties considered as ordinaryassets. (Sec. 2.a, Rev. Regs. No. 7-2003)
The term “capital assets” means property held bythe taxpayer (whether or not connected with his tradeor business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or b. Other property of a kind which wouldproperly be included in the inventory of the taxpayerif on hand at the close of the taxable year, or c. Property held by the taxpayerprimarily for sale to customers in the ordinary courseof his trade or business, ord. Property used in the trade or business, of acharacter which is subject to the allowance fordepreciation; or real property used in the trade orbusiness 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 andused as such; d. Automobiles not used in trade andbusiness;
e. Paintings, sculptures, stamp collections,objects of arts which are not used in trade orbusiness;
f. Inherited large tracts of agriculturalland which were subdivided pursuant to the governmentmandate under land reform, then sold to tenants. (Roxasv. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g. “Real property used by an exemptcorporation in its exempt operations, such as acorporation included in the enumeration of Section 30of the Code, shall not be considered used for businesspurposes, and therefore considered as capital asset.”
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(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 orbusiness as evidenced by a certification from theBarangay Chairman or from the head of administration,in case of condominium unit, townhouse or apartment,and as validated from the existing available records ofthe Bureau of Internal Revenue, owned by an individualengaged in business, shall be treated as capitalasset.” (last par., Sec. 3.b., Rev. Regs. No. 7-2003)
49. Ordinary assets shall refer to all realproperties specifically excluded from thedefinition of capital assets, namely:
a. Stock in trade of a taxpayer or other realproperty of a kind which would properly be included inthe inventory of a taxpayer if on hand at the close ofthe taxable year; or b. Real property held by the taxpayerprimarily for sale to customers in the ordinary courseof his trade or business; or c. Real property used in trade orbusiness (i.e. buildings and/or improvements), of acharacter which is subject to the allowance fordepreciation; or
d. Real property used in trade or business ofthe taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)
50.. Examples of ordinary assets hencenot capital assets:
a. The machinery and equipment of amanufacturing concern subject to depreciation; b. The tractors, trailers and trucks of ahauling company;
c. The condominium building owned by a realtycompany 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 substantialareas located in the heart of Metro Manila, which weresubdivided into smaller lots then sold on installmentbasis after introducing comparatively valuableimprovements not for the purpose of simply liquidatingthe estate but to make them more saleable ; theemployment of an attorney-in-fact for the purpose ofdeveloping, managing, administering and selling thelots; sales made with frequency and continuity; annualsales income from the sales was considerable; and theheir was not a stranger to the real estate business.(Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved byintroduction of good roads, concrete gutters, drainageand lighting systems converts the property to anordinary asset. The property forms part of the stockin trade of the owner, hence an ordinary asset. Thisis so, as the owner is now engaged in the business ofsubdividing real estate. (Calasanz v. Commissioner of InternalRevenue, 144 SCRA at p. 672)
51. Tax treatment of real properties thathave been transferred. Real properties classifiedas capital or ordinary asset in the hands of theseller/transferor may change their character in thehands of the buyer/transferee. The classification ofsuch property in the hands of the buyer/transfereeshall be determined in accordance with the followingrules:
a. Real property transferred through successionor donation to the heir or donee who is not engaged inthe real estate business with respect to the realproperty inherited or donated, and who does not
43
subsequently use such property in trade or business,shall be considered as a capital asset in the hands ofthe heir or donee.
b. Real property received as dividend bystockholders who are not engaged in the real estatebusiness and who not subsequently use such realproperty in trade or business shall be treated ascapital assets in the hands of the recipient even ifthe corporation which declared the real propertydividend is engaged in real estate business.
c. The real property received in an exchangeshall be treated as ordinary asset in the hands of thetransferee in the case of a tax-free exchange bytaxpayer not engaged in real estate business to ataxpayer who is engaged in real estate business, or toa taxpayer who, even if not engaged in real estatebusiness, will use in business the property received inthe exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is “imposed upon capitalgains presumed to have been realized from thesale, exchange, or other disposition of realproperty located in the Philippines, classifiedas capital assets.” [Sec. 24 (D) (1`), NIRC of 1997]Revenue Regulations No. 7-2003 has defined realproperty as having “the same meaning attributed to thatterm under Article 415 of Republic Act No. 386,otherwise known as the ‘Civil Code of the Philippines.’ (Sec. 2.c,Rev. Regs. No. 7-2003)
53. Transactions covered by the presumedcapital gains tax on real property: a. sale, b. exchange, c. or other disposition, includingpacto de retro sales and other forms of conditional
sales. [Sec. 24 (D) (1), NIRC of 1997, numbering andarrangement supplied]
d. “ Sale, exchange, or other disposition”includes taking by the government through condemnationproceedings. (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 hisright of redemption within one (1) year from theissuance of the certificate of sale, in a foreclosureof mortgage sale of real property, no capital gains taxshall be imposed because no capital gains has beenderived by the mortgagor and no sale or transfer ofreal property was realized. [Sec. 3 (1), Rev. Regs. No.4-99]
55. In case of non-redemption of theproperty sold upon a foreclosure of mortgage sale,the presumed capital gains tax shall be imposed, basedon the bid price of the highest bidder but only uponthe expiration of the one year period of redemptionprovided for under Sec. 6 of Act No. 3135, as amendedby Act No. 4118, and shall be paid within thirty (30)days from the expiration of the said one-yearredemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
56. The basis for the final presumedcapital gains tax of six per cent (6%) iswhichever is the higher of the a. gross selling price, or b. the current fair market value asdetermined below:
1) the fair market value or realproperties located in each zone or area asdetermined by the Commissioner of InternalRevenue after consultation with competent
44
appraisers both from the private and publicsectors; or
2) the fair market value as shown in theschedule of values of the Provincial and CityAssessors. [Sec. 24 (D) (1) in relation to Sec. 6(E), both of the NIRC of 1997]
It does not matter whether there was an actualgain or loss because the tax is a “presumed” capitalgains tax. It is the transaction that is taxed not thegain.
57. Holding period not applied to thetaxation of the presumed capital gains derived from thesale of real property considered as capital assets.
58. The tax liability, of individualtaxpayers (not corporate), if any, on gains fromsales or other dispositions of real property,classified as capital assets, to the government orany of its political subdivisions or agencies or togovernment owned or controlled corporations shall bedetermined, at the option of the taxpayer, by includingthe proceeds as part of gross income to be subjected tothe allowable deductions and/or personal and additionalexemptions, then to the schedular tax [Sec. 24 (D) (1),in relation to Sec. 24 (A) (1), both of the NIRC of1997] or the final presumed capital gains tax of sixpercent (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 presumedcapital gains tax whether: a. an individual [Sec. 24 (D) (1), NIRC of1997];
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) inrelation to Sec. 24 (D) (1), both of the NIRC of1997]; 4) Nonresident alien not engaged intrade or business in the Philippines [Sec. 25 (B)in relation to Sec. 24 (D) (1), both of the NIRCof 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 tohave been realized from the disposition bynatural persons of their principal place ofresidence
a. the proceeds of which is fully utilized inacquiring or constructing a new principal residence;
b. within eighteen (18) calendar months from thedate of sale or disposition
c. the BIR Commissioner shall have been dulynotified by the taxpayer within thirty (30) days fromthe date of sale or disposition through a prescribedreturn of his intention to avail of the tax exemption;and
d. the said tax exemption can only be availed ofonce every ten (10) years. [Sec. 24 (D) (2), NIRC of1997]
61. MBC was incorporated in 1961 and engagedin commercial banking operations since 1987. OnMay 22, 1987, it ceased operations that year byreason of insolvency and its assets andliabilities were placed under the charge of a
45
government-appointed receiver. On June 23, 1999,the BSP authorized MBC to operate as a thriftbank.
In 2000, It filed its tax return for the year1999 paying the amount of P33 million computed inaccordance with the minimum corporate income tax(MCIT). It sought the BIR’s ruling on whether itis entitled to the four (4) year grace period forpaying on the basis of MCIT reckoned from 1999.BIR then ruled that cessation of businessactivities as a result of being placed underinvoluntary receivership may be an economicreason for suspending the imposition of the MCIT.
As a result of the ruling MBC filed anapplication for refund of the P33 million. Dueto the BIR’s inaction, MBC filed a petition forreview with the CTA.
The CTA denied the petition on the groundthat MBC is not a newly organized corporation.In a volte facie the BIR now maintains that MBCshould pay the MCIT beginning January 1, 1998 asit did not close its business operations in 1987but merely suspended the same. Even if placedunder receivership, the corporate existence wasnever affected. Thus, it falls under thecategory of an existing corporation recommencingits banking operations.
Should the refund be granted ?SUGGESTED ANSWER: Yes. The MCIT shall be imposed
beginning in the fourth taxable year immediatelyfollowing the year in which the corporation commencedits business operations. [Sec. 27 (E) (1), NIRC of1997]
The date of commencement of operations of a thriftbank is the date it was registered with the SEC or thedate when the Certificate of Authority to Operate wasissued to it by the Monetary Board, whichever comeslater. (Sec. 6, Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the grace periodof four years from June 23, 1999 when it was authorizedby the BSP to operate as a thrift bank before the MCITshould 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 corporateincome tax of two percent (2%) of the gross income asof the end of the taxable year, as defined herein, ishereby imposed on a corporation taxable under thisTitle, beginning on the fourth taxable year immediatelyfollowing the year in which such corporation commencedits business operations, when the minimum corporateincome tax is greater than the tax computed underSubsection (A) of this section for the taxable year.”[Sec. 27 (E) (1), NIRC of 1997]
b. Period when a corporation becomes subject tothe MCIT. “(5) Specific rules for determining theperiod when a corporation becomes subject to the MCIT(minimum corporate income tax) -
For purposes of the MCIT, the taxable year inwhich business operations commenced shall be the yearin which the domestic corporation registered with theBureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 andearlier years shall be covered by the MCIT beginningJanuary 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.
46
Regs. No. 9-98 because Rev. Regs. No. 4-95 specificallyrefers to thrift banks.)
c. Purpose of the four (4) year grace period. The intent of Congress relative to the MCIT is to granta four (43) – year suspension of tax payment to newlyorganized corporations. Corporations still startingtheir business operations have to stabilize theirventure in order to obtain a stronghold in theindustry. It does not come as a surprise then when manycompanies reported losses in their initial years ofoperations.
Thus, in order to allow new corporations to growand develop at the initial stages of their operations,the lawmaking body saw the need to provide a graceperiod of four years from their registration beforethey pay their minimum corporate income tax. (ManilaBanking Corporation v. Commissioner of Internal Revenue, G. R. No.168118, August 26, 2006)
ESTATE TAXES
1. In determining the gross estate ofa decedent, are his properties abroad to beincluded, and more particularly, whatconstitutes gross estate ?
SUGGESTED ANSWER: Yes, if the decedent is aFilipino citizen or a resident alien. The gross estate of a Filipino citizen or aresident alien comprises all his real property,wherever situated; all his personal property,tangible, intangible or mixed, wherever situated, tothe extent of his interest existing therein at thetime of his death. The gross estate of a non-resident aliencomprises all his real property, situated in thePhilippines; all his personal property, tangible,
intangible or mixed, situated in the Philippines, tothe extent of his interest existing therein at thetime of his death.
2. William Smith, an Americancitizen, was a permanent resident of thePhilippines. He died in San Francisco,California. He left 10,000 shares of San MiguelCorporation, a condominium unit at the TwinTowers Building at Pasig, Metro Manila and ahouse and lot in Miami, Florida.
What assets shall be included in the EstateTax Return to be filed with the BIR ?
SUGGESTED ANSWER: All of the assets should beincluded in the Estate Tax Return to be filed with theBIR.
Smith, an American citizen and a permanent residentof the Philippines is considered, for Philippineestate tax purposes, a resident alien. Consequently,the assets to be included in the Estate Tax Return tobe filed with the BIR should be all property, real orpersonal, tangible, intangible or mixed, whereversituated, to the extent of the interest that Smith hasat the time of his death. Thus, all of the propertiesenumerated in the problem irrespective of where theyare situated are includible in the gross estate ofSmith.
3. Proceeds of life insurance includiblein a decedent’s gross estate. a. The decedent takes the insurance policyon his own life
1) The amounts are receivable bya) the decedent’s estate,b) his executor, or
47
c) administrator irrespective ofwhether or not the insured retained thepower of revocation, OR
2) The amounts are receivable by anybeneficiary designated in the policy ofinsurance as revocable beneficiary. [Sec.85 (E), NIRC of 1997]
b. One, other than the decedent takes theinsurance policy on the life of the decedent
1) The amounts are receivable bya) the decedent’s estate,b) his executor, orc) administrator
2) irrespective of whether or not theinsured retained the power of revocation.
4. Proceeds of life insurance NOT includedin a decedent’s gross estate. a. The decedent takes the insurance policyon his own life, and b. the proceeds are receivable by abeneficiary designated as irrevocable. [Sec. 85 (E),NIRC of 1997) NOTES AND COMMENTS: The beneficiary must not bethe decedent’s estate, executor or administrator, becausethe proceeds are includible as part of gross estate whetheror not the decedent retained the power of revocation.(Ibid.) c. Where the insurance was NOT taken by thedecedent upon his own life and the beneficiary is notthe decedent’s estate, his executor or administrator.
4. Items deductible from the gross estateof a resident or nonresident Filipino decedent orresident alien decedent:
a. Expenses, losses, claims, indebtedness andtaxes;
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 ofdeath if there is no showing that the transferor“retained for his life or for any period which does notin fact end before his death: (1) the possession orenjoyment of, or the right to the income from theproperty, or (2) the right, either alone or inconjunction with any person, to designate the personwho shall possess or enjoy the property or the incometherefrom.” [Sec. 85 (B), NIRC of 1997]
6. Vanishing deduction (deduction forproperty previously taxed), defined. Thededuction allowed from the gross estates ofcitizens, resident aliens and nonresident estates forproperties which were previously subject to donor’s orestate taxes. The deduction is called a vanishingdeduction because the deduction allowed diminishesover a period of five (5) years. It is also known as a deduction for propertypreviously taxed.
7. Vanishing deduction (propertypreviously taxed) allowed as a deduction fromthe gross estate of a Filipino citizen, whether
48
resident or not, of a resident alien decedent,or of a nonresident alien decedent. a. An amount equal to the valuespecified below of b. Any property forming a part of thegross estate situated in the Philippines c Of any person who died withinfive years prior to the death of the decedent, ortransferred to the decedent by gift within five yearsprior to his death, d. Where such property can be identifiedas having been received by the decedent from the donorby gift, or from such prior decedent by gift, bequest,devise, or inheritance, or e. Which can be identified as havingbeen acquired in exchange for property so received:
100% of the value if the prior decedent diedwithin one year prior to the death of the decedent, orif the property was transferred to him by gift withinthe same period prior to his death;
80% of the value if the prior decedent died morethan one year but not more than two years prior to thedeath of the decedent, or if the property wastransferred to him by gift within the same periodprior to his death;
60% of the value if the prior decedent died morethan two years but not more than three years prior tothe death of the decedent, or if the property wastransferred to him by gift within the same periodprior to his death;
40% of the value if the prior decedent died morethan three years but not more than four years prior tothe death of the decedent, or if the property wastransferred to him by gift within the same periodprior to his death; and
20% of the value if the prior decedent died morethan four years but not more than five years prior to
the death of the decedent, or if the property wastransferred to him by gift within the same periodprior to his death. [Sec. 86 (A) (2) and (B) (2), NIRCof 1997, numbering, arrangement and underlining supplied]
8. The approval of the court sitting inprobate, or as a settlement tribunal over theestate of the deceased is not a mandatoryrequirement for the collection of the estate. Theprobate court is determining issues which are notagainst the property of the decedent, or a claimagainst the estate as such, but is against the interestor property right which the heir, legatee, devisee,etc. has in the property formerly held by the decedent.
The notices of levy were regularly issued withinthe prescriptive period.
The tax assessment having become final, executoryand enforceable, the same can no longer be contested bymeans of a disguised protest. (Marcos, II v. Court of Appeals,et al., 273 SCRA 47)
DONOR’S TAXES
1.What is the donor’s tax rate if thedonee is a stranger ?
SUGGESTED ANSWER: When the donee or beneficiaryis a stranger, the tax payable by the donor shall be30% of the net gifts.
2. For purposes of the donor’s tax whois a stranger ?
SUGGESTED ANSWER: A stranger is a is person whois not a:
a. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
49
b. Relative by consanguinity in the collateralline 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 asstrangers.
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 donor’s tax, what ismeant by “net gifts ?”
SUGGESTED ANSWER: The net economic benefit fromthe transfer that accrues to the donee. Accordingly,if a mortgaged property is transferred as a gift, butimposing upon the donee the obligation to pay themortgage liability, then the net gift is measured bydeducting from the fair market value of the propertythe amount of the mortgage assumed. (last par., Sec.11, Rev. Regs.No.2-2003)
5. How are gifts of personal property to bevalued for donor’s tax purposes ?
SUGGESTED ANSWER: The market value of thepersonal property at the time of the gift shall beconsidered the amount of the gift. (Sec. 102, NIRC of1997)
6. What is the valuation of donated realproperty for donor’s tax purposes ?
SUGGESTED ANSWER: The real property shall beappraised at its fair market value as of the time ofthe gift.
However, the appraised value of the real propertyat the time of the gift shall be whichever is thehigher of:
a. the fair market value as determined by theCommissioner of Internal Revenue (zonal valuation) or
b. the fair market value as shown in theschedule of values fixed by the Provincial and CityAssessors. [Sec. 102, in relation to Sec. 88 (B) both ofthe NIRC of 1997]
7. A died leaving as his only heirs, hissurviving spouse B, and three minor children, X,Y and Z. Since B does not want to participate inthe distribution of the estate, she renounced herhereditary share in the estate.
a. Is the renunciation subject to donor’stax ? Explain.
SUGGESTED ANSWER: No. The general renunciationby an heir, including the surviving spouse, as in thecase B, of her share in the hereditary estate left bythe decedent is not subject to donor’s tax. (4th par.,Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by Bwas not specifically and categorically done in favorof identified heir/s to the exclusion or disadvantageof the other co-heirs in the hereditary estate.
b. Supposing that instead of a generalrenunciation, B renounced her hereditary sharein A’s estate to X who is a special child, wouldyour answer be the same ? Explain.
SUGGESTED ANSWER: My answer would be different.The renunciation in favor of X would be subject todonor’s tax.
This is so because the renunciation wasspecifically and categorically done in favor of X andidentified heir to the exclusion or disadvantage of Yand Z, the other co-heirs in the hereditary estate.(4th par., Sec. 11, Rev. Regs. No. 2-2003)
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8. Give some donations that are exemptfrom donor’s tax.
SUGGESTED ANSWER:a. The first P100,000.00 net donation during a
calendar year is exempt from donor’s tax [Sec. 99 (A),NIRC of 1997] made by a resident or non resident;
b. The donation by a resident or non-resident ofa prize to an athlete in an international sportstournament held abroad and sanctioned by the nationalsports association is exempt from donor’s tax (Sec. 1,Rep. Act No. 7549)
c. Political contributions made by a resident ornon-resident individual if registered with the COMELECirrespective of whether donated to a political party orindividual.
However, the Corporation Code prohibitscorporations from making political contributions.(Corp. Code, Title IV, Sec. 36.9)
d. Dowries or gifts made on account ofmarriage and before its celebration or within one yearthereafter by residents who are parents to each oftheir legitimate, recognized natural, or adoptedchildren to the extent of the first ten thousand pesos(P10,000.00); e. Gifts made by residents or non-residentsto or for the use of the National Government or anyentity created by any of its agencies which is notconducted for profit, or to any politicalsubdivisions of the said Government; f. Gifts made by residents or non residentsin favor of an educational and/or charitable,religious, cultural or social welfare corporation,institution, foundation, trust or philanthropicorganization 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 ofthe Philippines to Philippine residents are exempt fromdonor’s taxes because taxation is basicallyterritorial. The transaction, which should have beensubject to tax was made by non-resident aliens and tookplace outside of the Philippines.
9. What is the concept of donation orgift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift splitting isspreading the gift over numerous calendar years inorder to avail of lower donor’s taxes.
In 2008 Leon was thinking of donating aP200,000.00 to Miklos, his first cousin. TheP200,000.00 is the totality of the net gifts for 2008.If he donated the P200,000.00 in 2008 the firstP100,000 would be exempt and the remaining P50,000.00would be subject to donor’s tax If Leon spreads the P200,000 donation over two(2) calendar years, donating P100,000.00 on December30, 2008 and the remaining P100,000.00 on January 1,2009 the transaction would be exempt from donor’stax. This is so even if the donation is separatedonly by two days because the basis is the calendaryear. Leon would be enjoying the exemption for thefirst P100,000.00 net gifts for each calendar year.
10. A, who is engaged in the car “buyand sell” business sold to B P7 million Jaguarfor only P4 million. The proper VAT on the salewas paid. If you are the BIR examiner assignedto review the sale, would you issue a taxassessment on the transaction ? Explain youranswer briefly.
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SUGGESTED ANSWER: Donor’s taxes would be due onthe insufficiency of consideration.
Where property, other than real property that hasbeen subjected to the final capital gains tax, istransferred for less than an adequate and fullconsideration in money or money’s worth, then theamount by which the fair market value of the propertyat the time of the execution of the Contract to Sellor execution of the Deed of Sale which is not precededby a Contract to Sell exceeded the value of the agreedor actual consideration or selling price shall bedeemed a gift, and shall be included in computing theamount 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 totalquestions asked in the Bar Examination are sourced fromVAT and its concepts. This area is probably the mostdifficult area to forecast because there are nostatistically perceived patterns. The author hasretained the “Stars System” for VAT. Considering thelimited period of time, the reader is advised to focuson areas marked with stars and just browse theunmarked areas.
1. Value-added tax (VAT) is a tax whichis imposed only on the increase in the worth, merit orimportance of goods, properties or services, and noton the total value of the goods or services being soldor rendered.
2. Nature of VAT. VAT is an indirect taxthat 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 thecontext of the person or entity that is primarily,directly liable for its payment, but in terms of itsnature as a tax on consumption. [Commissioner of InternalRevenue v. Seagate Technology (Philippines), G. R. No. 153866, February11, 2005 citing various authorities}
VAT is a percentage tax imposed on any personwhether or not a franchise grantee, who in the courseof trade or business, sells, barters, exchanges,leases, goods or properties, renders services. It isalso levied on every importation of goods whether ornot in the course of trade or business. The tax baseof the VAT is limited only to the value added to suchgoods, properties, or services by the seller,transferor or lessor. Further, the VAT is anindirect 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 whichis an indirect tax. If a special law merely exemptsa party as a seller from its direct liability forpayment of the VAT, but does not relieve the sameparty as a purchaser from its indirect burden of theVAT shifted to it by its VAT-registered suppliers, thepurchase transaction is not exempt.
REASON: The VAT is a tax on consumption, theamount of which may be shifted or passed on by theseller to the purchaser of the goods, properties orservices. [Commissioner of Internal Revenue v. Seagate Technology(Philippines), G. R. No. 153866, February 11, 2005)
4. Illustration of effects of exemptionsfrom VAT which is an indirect tax. A VATexempt seller sells to a non-VAT exempt purchaser.The purchaser is subject to VAT because the VAT ismerely added as part of the purchase price and not as
52
a tax because the burden is merely shifted. Theseller is still exempt because it could pass on theburden of paying the tax to the purchaser.
5. The VAT is a tax on consumption.Meaning of consumption as used under the VATsystem. Consumption is "the use of a thing in a waythat thereby exhausts it."
Applied to services, the term means theperformance or "successful completion of a contractualduty, usually resulting in the performer's releasefrom any past or future liability x x x" Unlikegoods, services cannot be physically used in or boundfor a specific place when their destination isdetermined. Instead, there can only be a"predetermined end of a course" when determining theservice "location or position x x x for legalpurposes." [Commissioner of Internal Revenue v. Placer Dome TechnicalServices (Phils.), Inc. G. R. No. 164365, June 8, 2007]
6. Illustration of the meaning ofconsumption as used under the VAT system. Forexample the services rendered by a local firm to itsforeign client are performed or successfully completedupon its sending to a foreign client the drafts andbills it has gathered from service establishmentshere. Its services, having been performed in thePhilippines, are therefore also consumed in thePhilippines. Such facilitation service has nophysical 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]
7.Who are liable for the value-added tax.a. Any person who, in the course of his trade or
business,
1) Sells, barters, exchanges or leasesgoods 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 orcorporation and whether or not made in the course ofhis trade or business, shall be liable to VAT xxx.(Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasingsupplied)
8.Various VAT methods and systems.a. Cost deduction method. This is a single-
stage tax which is payable only by the originalsellers. (Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.168056, September 1, 2005 and companion cases) This wassubsequently modified and a mixture of “cost deductionmethod” and “tax credit method” was used to determinethe value-added tax payable. (Ibid.)
b. Tax credit method. This method relies oninvoices, an entity can credit against or subtractfrom the VAT charged on its sales or outputs the VATpaid 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 outputtaxes charged by a seller are equal to the input taxespassed on by the suppliers, no payment is required.It is when the output taxes exceed the input taxesthat the excess has to be paid.
If however, the input taxes exceed the outputtaxes, the excess shall be carried over to thesucceeding quarter or quarters. Should the inputtaxes result from zero-rated or effectively zero-ratedtransactions or from acquisition of capital goods, anyexcess over the output taxes shall instead be refunded
53
to the taxpayer or credited against other internalrevenue taxes. (Ibid.)
9. How the VAT is imposed on the increasein worth, merit or improvement of the goods orservices. The VAT utilizes the concept of the outputand input taxes.
Output VAT less Input VAT = VAT due on theincrease in worth, merit or improvement f the goods orservices.
10. The right to credit the input tax belimited by legislation because it is a merecreation of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at everylevel of distribution are not recoverable from thetaxes payable. With the advent of Executive Order No.273 imposing a 10% multi-stage tax on all sales, itwas only then that the crediting of the input tax paidon purchase or importation of goods and services byVAT-registered persons against the output tax wasestablished. 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 againstthe output tax is clearly a privilege created by law,a privilege that also the law can limit. It should bestressed that a person has no vested right instatutory privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and companion cases, onthe motion for reconsideration)
11. Output tax is the value-added tax dueon the sale or lease or taxable goods, properties orservices by any VAT-registered person.
12. Input tax is the value-added tax due onor paid by a VAT-registered person on importation ofgood or local purchases of goods or services,including lease or use of properties, in the course ofhis 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 includesc. input taxes which can be directly attributed
to transactions subject to the VAT plus a ratableportion of any input tax which cannot be directlyattributed 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 taxcredits on beginning inventories. Taxpayers whobecome VAT-registered persons upon exceeding theminimum turnover of P1,500,000.00 in any 12-monthperiod, or who voluntarily register even if theirturnover does not exceed P1,500,000.00 (exceptfranchise grantees of radio and televisionbroadcasting whose threshold is P10,000,000.00) shallbe entitled to a transitional input tax on theinventory on hand as of the effectivity of their VATregistration, on the following:
a. goods purchased for resale in their presentcondition;
b. materials purchased for further processing,but which have not yet undergone processing;
c. goods which have been manufactured by thetaxpayer;
d. goods in process for sale; or
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e. goods and supplies for use in the course ofthe taxpayer’s trade or business as a VAT-registeredperson. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1st
par., arrangement and numbering supplied]
15. Concept of presumptive input taxcredits. Persons or firms engaged in the processingof sardines, mackerel, and milk, and in manufacturingrefined sugar, cooking oil and packed noodle-basedinstant meals, shall be allowed a presumptive inputtax, creditable against the output tax, equivalent tofour percent (4%) of the gross value in money of theirpurchases of primary agricultural products which areused as inputs to their production.
As used in this paragraph, the term processingshall mean pasteurization, canning and activitieswhich through physical or chemical process alter theexterior texture or form or inner substance of aproduct in such a manner as to prepare it for specialuse to which it could not have been put in itsoriginal form or condition. [Rev. Regs. No. 16-2005,Sec.4.111-1, (b)]
16. The VAT registration fee does NOTviolate religious freedom. The VAT registrationfee imposed on non-VAT enterprises which includesamong others, religious sects which sells anddistributes religious literature is not violative ofreligious freedom, although a fixed amount is notimposed for the exercise of a privilege but only forthe purpose of defraying part of the cost ofregistration.
The registration fee is thus more of anadministrative fee, one not imposed on the exercise ofa privilege, much less a constitutional right.(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA630)
17. Interpretation of the term “In theCourse of Trade or Business” as used in the VATsystem. The term "doing business" or “course ofbusiness” conveys the idea of business being done, notfrom time to time, but all the time. It does notinclude isolated transactions. (Commissioner of InternalRevenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28,2006)
18. Pursuant to a government program ofprivatization, NDC, a VAT-registered entitycreated for the purpose of selling realproperty, decided to sell to private enterpriseall of its shares in its wholly-owned subsidiarythe National Marine Corporation (NMC). The NDCdecided to sell in one lot its NMC shares andfive (5) of its ships, which are 3,700 DWTTween-Decker, "Kloeckner" type vessels. Thevessels were constructed for the NDC between1981 and 1984, then initially leased to LuzonStevedoring Company, also its wholly-ownedsubsidiary. Subsequently, the vessels weretransferred and leased, on a bareboat basis, tothe NMC. The NMC shares and the vessels wereoffered for public bidding. Among the stipulatedterms and conditions for the public auction wasthat the winning bidder was to pay "a valueadded tax of 10% on the value of the vessels."Magsaysay Lines, Inc., offered to buy the sharesand the vessels for P168,000,000.00. The bid wasmade by Magsaysay Lines, purportedly for a newcompany still to be formed composed of itself,Baliwag Navigation, Inc., and FIM Limited of the
55
Marden Group based in Hongkong . The bid wasapproved by the Committee on Privatization, anda Notice of Award was issued to Magsaysay Lines.
Is the sale subject toVAT ? SUGGESTEDANSWER: No. The term "carrying on business" does notmean the performance of a single disconnected act, butmeans conducting, prosecuting and continuing businessby performing progressively all the acts normallyincident thereof; while "doing business" conveys theidea of business being done, not from time to time,but all the time. "Course of business" is what isusually done in the management of trade or business.
"Course of business" or "doing business" connotesregularity of activity. In the instant case, the salewas an isolated transaction.
The sale which was involuntary andmade pursuant to the declared policy of Government forprivatization could no longer be repeated or carriedon with regularity. It should be emphasized that thenormal VAT-registered activity of NDC is leasingpersonal property. This finding is confirmedby the Revised Charter of the NDC which bears noindication that the NDC was created for the primarypurpose of selling real property. (Commissioner of InternalRevenue 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 exchangeor goods and services. The VAT is also imposedon certain transactions “deemed sales” whichinclude: a.
Transfer, use or consumption not in thecourse of business or properties originally intendedfor 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; xxxor
2) Creditors in payment of debt orobligationc. Consignment of goods if actual sale is
not made within sixty (60) days following the datesuch goods were consigned. Consigned goods returnedby the consignee within the 60-day period are notdeemed sold.
d. Retirement from or cessation ofbusiness, with respect to all goods on hand,
1) whether capital goods, stock-in-trade,supplies or materials as of the date of suchretirement, or cessation,
2) whether or not the business is continuedby the new owner or successor. xxx [Rev. Regs.No. 16-2005, Sec. 4.106-7, paraphrasing, arrangementand numbering supplied]
20. Transactions considered retirement orcessation of business “deemed sale” subject toVAT.
a. Change of ownership of the business. Thereis change in the ownership of the business where asingle proprietorship incorporates; or
1) the proprietor of a singleproprietorship sells his entire business.
b. Dissolution of a partnership and creation ofa 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 propertiessubject to VAT. Sale of real properties primarilyfor sale to customers or held for lease in the
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ordinary course of trade or business of the sellershall be subject to VAT. (Rev. Regs. No. 16-2005, Sec.4.106-3, 1st par.)
Thus, capital transactions of individuals are notsubject to VAT. Only real estate dealers are subjectto VAT.
22. On September 4, 2009, XYZ, Inc., adomestic corporation engaged in the real estatebusiness, 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 sellingprice because the sale was made in the ordinary courseof trade of business of X, a domestic corporationengaged in the real estate business.
23. The following sales of realproperties are exempt from VAT, namely:
a. Sale of real properties not primarily heldfor sale to customers or held for lease in theordinary course of trade or business;
b. Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwiseknown as the “Urban and Development Housing Act of1992” and other related laws, such as RA No. 7835 andRA No. 8763.
xxx xxx xxxc. Sale of real properties utilized for
socialized housing as defined under RA No. 7279, andother related laws wherein the price ceiling per unitis P225,000.00 or as may from time to time bedetermined by the HUDCC and the NEDA and other relatedlaws.
xxx xxx xxx
d. Sale of residential lot valued at OneMillion Five Hundred Thousand Pesos (P1,500,000.00)and below, or house & lot and other residentialdwellings valued at Two Million Give Hundred ThousandPesos (P2,500,000.00) and below where the instrumentof sale/transfer/disposition was executed on or afterNovember 1, 2005, provided, That not later thanJanuary 31, 2009 and every three (3) years thereafter,the amounts stated herein shall be adjusted to itspresent value using the Consumer Price Index, aspublished by the National Statistics Office (NSO);provided, further, that such adjustment shall bepublished through revenue regulations to be issued notlater than March 31 of each year.
If two or more adjacent residential lots are soldor disposed in favor of one buyer, for the purpose ofutilizing the lots as one residential lot, the saleshall be exempt from VAT only if the aggregate valueof the lots do not exceed P1,500,000.00. Adjacentresidential lots, although covered by separate titlesand/or separate tax declarations, when sold ordisposed of to one and the same buyer, whether coveredby one or separate Deed of Conveyance, shall bepresumed as a sale of one residential lot. [Rev.Regs. No. 4.109-1 (B), (p), paraphrasing andnumbering supplied]
24. VAT on services and lease of properties.a. There shall be levied, assessed, and
collected, b. a value-added tax equivalent to twelve
percent (12%) of gross receipts c. derived from the sale or exchange of
services, 1) including the use or lease of
properties. [NIRC of 1997, Sec. 108 (A), as amended byR.A. No. 9337, arrangement and numbering supplied]
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25. “Sale or exchange of services”, defined.The term “sale or exchange of services” means theperformance of all kinds of services in thePhilippines for others for a fee, remuneration orconsideration, whether in kind or in cash, includingthose performed or rendered by the following:
a. construction andservice contractors; b.
stock, real estate, commercial, customs andimmigration brokers;
c. lessors of property, whetherpersonal or real; d. personsengaged in warehousing services
e. lessors or distributors of cinematographicfilms; f. persons engaged inmilling, processing, manufacturing or repacking goodsfor others;
g. proprietors, operators or keepers of hotels,motels, rest-houses, pension houses, inns, resorts;theaters, and movie houses; h. proprietorsor operators of restaurants, refreshment parlors,cafes and other eating places, including clubs andcaterers; i. dealers insecurities; j.
lending investors; k. transportation contractors on their transport
of goods or cargoes, including persons who transportgoods or cargoes for hire and other domestic commoncarriers by land relative to their transport of goodsor cargoes;
l. common carriers by air and sea relative totheir transport of passengers, goods or cargoes fromone place in the Philippines to another place in thePhilippines;
m. sales of electricity by generation companies,transmission, and/or distribution companies;
n. franchise grantees ofelectric utilities, telephone and telegraph, radio andtelevision broadcasting and all other franchisegrantees except franchise grantees of radio and/ortelevision broadcasting whose annual gross receipts ofthe preceding year do not exceed Ten Million Pesos(P10,000,000.00), and franchise grantees of gas andwater 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 useof 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, 1st par., arrangement and numberingsupplied]
26. Also included in the phrase “sale orexchange of services.
a. The lease or the use of or the right orprivilege to use any copyright, patent, design ormodel, plan, secret formula or process, goodwill,trademark, trade brand or other like property orright;
b. The lease or the use of, or the right touse any industrial, commercial or scientificequipment;
c. The supply of scientific, technical,industrial or commercial knowledge or information;
d. The supply of any assistance that isancillary and subsidiary to and is furnished as ameans of enabling the application or enjoyment of anysuch property, or right as is mentioned insubparagraph (2) hereof or any such knowledge or
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information as is mentioned in subparagraph (3)hereof; or
e. The supply of services by a non-residentperson or his employee in connection with the use ofproperty or rights belonging to, or the installationor operation of any brand, machinery or otherapparatus purchased from such non-resident person;
f. The supply of technical advice, assistanceor services rendered in connection with technicalmanagement or administration of any scientific,industrial or commercial undertaking, venture,project of scheme;
g. The lease of motion picture films, filmtapes and discs;
h. The lease or the use of or the right touse radio, television, satellite transmission andcable television time. (Rev. Regs. No. 16-2005, Sec.4.108-2, 2nd par.)
27. Zero-rated Sales of Goods orProperties. A zero-rated sale of goods orproperties by a sale by a VAT-registered person is ataxable transaction for VAT purposes but the sale doesnot result in any output tax.
However, the input tax on the purchases of goods,properties or services related to such zero-rated saleshall be available as tax credit or refund inaccordance with Rev. Regulations No. 16-2005. (Rev.Regs. No. 16-2005, 1st par.)
28. Concept of VAT zero-rating. The taxrate is set at zero. When applied to the tax base,such rate obviously results in no tax chargeableagainst the purchaser. The seller of suchtransactions charges no output tax, but can claim arefund or a tax credit certificate for the VATpreviously 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 exchangeof a particular service is completely freed from theVAT, because the seller is entitled to recover, by wayof a refund or as an input tax credit, the tax that isincluded in the cost of purchases attributable to thesale or exchange. The tax paid or withheld is notdeducted from the tax base. (Commissioner, of Internal Revenuev. American Express International, Inc. (Philippine Branch), G. R. No.152609, June 29, 2005 citing various cases)
29. Situs of taxation of zero-rated VATservices such as facilitating the collection ofreceivables from credit card members situated inthe Philippines and payment to serviceestablishments in the Philippines. The placewhere the service is rendered determines thejurisdiction to impose the VAT
Performed in the Philippines, the service isnecessarily subject to its jurisdiction for the Statenecessarily has to have a “substantial connection” toit in order to enforce a zero rate. The place ofpayment is immaterial much less is the place wherethe output of the service will be further orultimately used.
This is so because the law neither makes aqualification nor adds a condition in determining thetax situs of a zero-rated service. (Commissioner of InternalRevenue v. American Express International, Inc. (Philipppine Branch), G. R.No. 152609, June 29, 2005)
30. Destination principle under the VATSystem. As a general rule, the VAT system uses thedestination principle as a basis for thejurisdictional reach of the tax.
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Goods and services are taxed only in the countrywhere they are consumed. Thus, exports are zero-rated,while imports are taxed.
This is also known as the “Cross BorderDoctrine.”
31. Exception to the destinationprinciple. The law clearly provides for anexception to the destination principle; that is, for azero percent VAT rate for services that are performedin the Philippines, "paid for in acceptable foreigncurrency and accounted for in accordance with therules and regulations of the [BSP]."
32. Rationale for zero-rating ofexports. The Philippine VAT system adheres to theCross Border Doctrine, according to which, no VATshall be imposed to form part of the cost of goodsdestined for consumption outside of the territorialborder of the taxing authority. [Commissioner of InternalRevenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154,August 9, 2005] The “Cross Border Doctrine” is alsoknown as the destination principle.
Hence, actual or constructive export ofgoods and services from the Philippines to a foreigncountry must be zero-rated for VAT; while, thosedestined for use or consumption within the Philippinesshall be imposed the twelve percent (12%) VAT.
33. Zero-rated sale distinguished fromexempt transactions:
a. A zero-rated sale is a taxable transactionbut does not result in an output tax WHILE an exempttransaction is not subject to the output tax.
b. The input tax on the purchases of a VATregistered person who has zero-rated sales may be
allowed as tax credits or refunded WHILE the seller inan exempt transaction is not entitled to any input taxon his purchases despite the issuance of a VAT invoiceor receipt.
c. Persons engaged in transactions which arezero rated being subject to VAT are required toregister WHILE registration is optional for VAT-exemptpersons.
34. Zero-rated sales by VAT-registeredpersons. The following sales by VAT-registeredpersons 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; andd. Sales to persons or entities deemed tax-
exempt under special law or international agreement.(Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd par.,paraphrasing supplied)
35. Sale of gold to the Central Bankconsidered as export sales. As export sales, thesale of gold to the Central Bank is zero-rated, hence,no tax is chargeable to it as purchaser. Zero ratingis primarily intended to be enjoyed by the seller,which charges no output VAT but can claim a refund ofor a tax credit certificate for the input VATpreviously charged to it by suppliers. (Commissioner ofInternal 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 ecozoneis geographically within the Philippines, it is deemeda separate customs territory and is regarded in law asforeign soil. Sales by suppliers from outside the
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borders of the ecozone to this separate customsterritory are deemed as exports and treated as exportsales. These sales are zero-rated or subject to a taxrate of zero percent. (Commissioner of Internal Revenue v. SekisuiJushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citingvarious authorities)
37. “Ecozone”, defined. An ECOZONE or aSpecial Economic Zone has been described as –
[S]elected areas with highly developed or whichhave the potential to be developed into agro-industrial, industrial, tourist, recreational,commercial, banking, investment and financial centerswhose metes and bounds are fixed or delimited byPresidential Proclamations. An ECOZONE may containany or all of the following: industrial estates (IEs),export processing zones (EPZs), free trade zones andtourist/recreational centers. The nationalterritory of the Philippines outside of the proclaimedborders of the ECOZONE shall be referred to as theCustoms Territory. [Commissioner of Internal Revenue v. ToshibaInformation 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 VATpurposes, but shall not result in any output tax.However, the input tax on purchases of goods,properties or services related to such zero-rated saleshall be available as tax credit or refund inaccordance 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 AmericanExpress in facilitating the collection ofreceivables from credit card members situated in
the Philippines and payment to serviceestablishments in the Philippines in behalf ofits Hong-Kong based client is subject to VAT butzero-rated. This is so because it meets all therequirements for VAT imposition, as follows:
a. It regularly renders in the Philippines theservice of facilitating the collection and payment ofreceivables belonging to a foreign company that is aclearly separate and distinct entity.
b. Such service is commercial in nature; carriedon over a sustained period of time; on a significantscale with a reasonable degree of frequency; and notat random, fortuitous, or attenuated.
c. For this service, it definitely receivesconsideration in foreign currency that is accountedfor in conformity with law.
d. It is not an entity exempt under any of ourlaws or international agreements. (Commissioner, of InternalRevenue v. American Express International, Inc. (Philippine Branch), G. R. No.152609, June 29, 2005)
40. While the service performed by AmericanExpress is subject to VAT it is zero-rated, andBIR Revenue Regulations that alter the legalrequirements for zero-rating are ultra vires andinvalid. The VAT system uses the destinationprinciple which posits that the goods and services aretaxed only in the country where they are consumed,
However, the law itself provides for clearexceptions under which the supply of services shall bezero-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; andc. It is paid for in acceptable foreign currency
of the Bangko Sentral ng Pilipinas.
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American Express renders assistance to itsforeign clients by receiving the bills of serviceestablishments located in the country and forwardingthem to their clients abroad. The services areperformed or successfully completed upon send to itsforeign clients the drafts and bills it has gatheredfrom service establishments here, Its services,having been performed in the Philippines are thereforealso consumed in the Philippines. Thus, its servicesare exempt from the destination principle and arezero-rated.
The BIR could not change the law. [Commissioner, ofInternal Revenue v. American Express International, Inc. (Philippine Branch), G.R. No. 152609, June 29, 2005]
41. A foreign Consortium composed ofBWSC-Denmark, Mitsui Engineering andShipbuilding Ltd., and Mitsui and Co., Ltd.,which entered into a contract with NAPOCOR forthe operation and maintenance of two powerbarges appointed BWSC-Denmark as itscoordination manager. BWSCMI was established asthe subcontractor to perform the actual work inthe Philippines. The Consortium paid BWSCMI inacceptable foreign exchange and accounted for inaccordance with the rules and regulations of theBSP.
Through a February 14, 1995 ruling the BIRdeclared that BWSCMI may choose to register as aVAT persons subject to VAT at zero rate. For1996, it filed the proper VAT returns showingzero rating. On December 29, 1997, believingthat it is covered by Rev. Regs. 5-96, datedFebruary 20, 1996, BWSCMI paid 10% output VAT
for the period April-December 1996, through theVoluntary Assessment Program (VAP).
On January 7, 1999, BWSCMI was able toobtain a Ruling from the BIR reconfirming thatit is subject to VAT at zero-rating. On thisbasis, BWSCMI applied for a refund of the outputVAT it paid.
a. Is BWSCMI subject to the 10% VAT or isit zero rated ?
SUGGESTED ANSWER: Yes. BWSCMI is not zero ratedand is subject to the 10% VAT. It is renderingservice for the Consortium which is not doing businessin the Philippines. Zero-rating finds applicationonly where the recipient of the services are otherpersons doing business outside of the Philippines.BWSCMI provides services to the Consortium which byvirtue of its contract with NAPOCOR is doing businesswithin the Philippines. (Commissioner of Internal Revenue v.Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No.153205, January 22, 2007)
b. Could it obtain a refund of the VAT itpaid through the VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is entitled torefund of the 10% output VAT it paid the based on thenon-retroactivity of the prejudicial revocation of theBIR Rulings which held that it’s services are subjectto 0% VAT and which BWSCMI invoked in applying forrefund of the output VAT. (Commissioner of Internal Revenue v.Burmeister and Wain Scandinavian Contractor Mindanao, Inc., supra)
NOTES AND COMMENTS:a. Do not confuse the BWSCMI case with the
American Express case. American ExpressInternational, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection andpayment of receivables belonging to its non-residentforeign client [American Express International, Inc.
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(Hongkong Branch)], for which it gets paid inacceptable foreign currency inwardly remitted andaccounted for in accordance with BSP rules andregulations. (Commissioner of Internal Revenue v. Burmeister andWain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205,January 22, 2007)42. What are VAT-Exempt transactions ?
SUGGESTED ANSWER: The sale of goods or propertiesand/or services and the use or lease of propertiesthat is b. not subject to VAT (output tax) and c. the seller is not allowed any tax credit
on VAT (input tax) purchases.The person making the exempt sale of goods,
properties or services shall not bill any output taxto his customers because the said transaction is notsubject to VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1(A), arrangement and numbering supplied]
43. VAT-exempt transactionsdistinguished from VAT-exempt entities.
a. An exempttransaction, on the one hand, involves goods orservices which, by their nature, are specificallylisted in and expressly exempted from the VAT underthe Tax Code, without regard to the tax status – VAT-exempt or not – of the party to the transaction.
An exempt party, on the other hand, is aperson or entity granted VAT exemption under the TaxCode, a special law or an international agreement towhich the Philippines is a signatory, and by virtue ofwhich its taxable transactions become exempt from VAT.[Commissioner of Internal Revenue v. Toshiba InformationEquipment (Phils.), Inc., G. R. No. 150154, August 9, 2005]
b. An exempt transaction shall not be thesubject of any billing for output VAT but it shall notalso be allowed any input tax credits WHILE an exempt
party being zero-rated is allowed to claim input taxcredits.
44.Transactions are exempt from VAT.(Subject to the election by a VAT-registered personnot to be subject to the value-added tax), the followingshall be exempt from VAT:
(A) Sale or importation of agricultural andmarine food products in their original state,livestock and poultry of a kind generally used as, oryielding or producing foods for human consumption; andbreeding stock and genetic materials therefor.
Livestock shall include cows, bulls and calves,pigs, sheep, goats and rabbits. Poultry shall includefowls, ducks, geese and turkey, Livestock or poultrydoes not include fighting cocks, race horses, zooanimals and other animals generally considered aspets.
Marine food products shall include fish andcrustaceans, such as, but not limited to, eels, trout,lobster, shrimps, prawns, oysters, mussels and clams.
Meat, fruit, fish, vegetables and otheragricultural and marine food Products classifiedunder this paragraph shall be considered in theiroriginal state even if they have undergone the simpleprocesses of preparation or preservation for themarket, such as freezing, drying, salting, broiling,roasting, smoking or stripping, including those usingadvanced technological means of packaging, such asshrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods. Polishedand/or husked rice, corn grits, raw cane sugar andmolasses, ordinary salt, and copra shall be consideredin their original state.
Sugar whose content of sucrose by weight, in thedry state, has a polarimeter reading of 99.5o andabove are presumed to be refined sugar.
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Cane sugar produced from the following shall bepresumed, for internal revenue purposes, to be refinedsugar:
(1) product of a refining process,(2) products of a sugar refinery, or
(3) product of a production line of asugar mill accredited by the BIR to be producing sugarwith polarimeter reading of 99.5o and above, and forwhich the quedanissued therefor, and verified by theSugar Regulatory Administration, identifies the sameto be of a polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption providedfor under this section.
(B) Sale or importation of fertilizers; seeds,seedlings and fingerlings; fish, prawn, livestock andpoultry feeds, including ingredients, whether locallyproduced or imported, used in the manufacture offinished feeds (except specialty feeds for racehorses, fighting cocks, aquarium fish, zoo animals andother animals generally considered as pets);
“Specialty feeds” refers to non-agriculturalfeeds or food for race horses, fighting cocks,aquarium fish, zoo animals and other animals generallyconsidered as pets.
(C) Importation of personal and household effectsbelonging to the residents of the Philippinesreturning from abroad and nonresident citizens comingto resettle in the Philippines: Provided, That suchgoods are exempt from customs duties under the Tariffand Customs Code of the Philippines;
(D) Importation of professional instruments andimplements, wearing apparel, domestic animals, andpersonal household effects (except any vehicle,vessel, aircraft, machinery, other goods for use inthe manufacture and merchandise of any kind incommercial quantity) belonging to persons coming tosettle in the Philippines, for their own use and not
for sale, barter or exchange, accompanying suchpersons, or arriving within ninety (90) days before orafter their arrival, upon the production of evidencesatisfactory to the Commissioner of Internal Revenue,that such persons are actually coming to settle in thePhilippines and that the change of residence is bonafide;
(E) Services subject to percentage tax underTitle V of the Tax Code, as enumerated below:
(1) Sale or lease of goods or properties orthe performance of services of non-VAT-registered persons, other than the transactionsmentioned in paragraphs (A) to (U) of Sec. 109(1) of the Tax Code, the annual sales and/orreceipts of which does not exceed the amount ofOne Million Five Hundred thousand Pesos(P1,500,000.00), Provided, That not later thanJanuary 31, 2009 and every three (3) yearsthereafter, the amount herein stated shall beadjusted to its present value using the ConsumerPrice Index, as published by the NationalStatistics Office (NSO). (Sec. 116, Tax Code)
(2) Services rendered by domestic commoncarriers by land for the transport of passengersand keepers of garages. (Sec. 117)
(3) Services rendered by internationalair/shipping carriers. (Sec. 118)
(4) Service rendered by franchise granteesof radio and/or television broadcasting whoseannual gross receipts of the preceding year donot exceed Ten Million Pesos (P10,000,000.00)and by franchises of gas and water utilities.(Sec. 119)
(5) Service rendered for overseas dispatchmessage or conversation originating from thePhilippines. (Sc. 120)
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(6) Services rendered by any person, companyor corporation (except purely cooperativecompanies or associations ) doing life insurancebusiness of any sort in the Philippines. (Sec.123)
(7) Services rendered by fire, marine ormiscellaneous insurance agents of foreigninsurance companies. (Sec. 124)
(8) Services of proprietors, lessees oroperators of cockpits, cabarets, night or dayclubs, boxing exhibitions professionalbasketball games, jai-Alai and race tracks.(Sec. 125). and
(9) Receipts on sale, barter or exchange ofshares of stock listed and traded through thelocal stock exchange or through initial publicoffering. (Sec. 127)
(F) Services by agricultural contract growers andmilling for others of palay into rice, corn into gritsand sugar cane into raw sugar;
“Agricultural contract growers” refers to thosepersons producing for others poultry, livestock orother agricultural and marine food products in theiroriginal state.
(G) Medical, dental, hospital and veterinaryservices except those rendered by professionals;
Laboratory services are exempted. If thehospital or clinic operates a pharmacy or drug store,the sale of drugs and medicine is subject to VAT.
(H) Educational services rendered by privateeducational institutions, duly accredited by theDepartment of Education (DEPED), the Commission onHigher Education (CHED), the Technical Education AndSkills Development Authority (TESDA) and thoserendered by government educational institutions;
“Educational services” shall refer to academic,technical or vocational education provided by private
educational institutions duly accredited by the DepED,the CHED and TESDA and those rendered by governmenteducational institutions and it does not includeseminars, in-service training, review classes andother similar services rendered by persons who are notaccredited by the DepED, the CHED and/or the TESDA.
(I) Services rendered by individuals pursuant toan employer-employee relationship;
(J) Services rendered by regional or areaheadquarters established in the Philippines bymultinational corporations which act as supervisory,communications and coordinating centers for theiraffiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income fromthe Philippines;
(K) Transactions which are exempt underinternational agreements to which the Philippines is asignatory or under special laws, except those underPresidential Decree No. 529 – Petroleum ExplorationConcessionaires under the Petroleum Act of 1949; and;
(L) Sales by agricultural cooperatives dulyregistered with the Cooperative Development Authority(CDA) to their members as well as sale of theirproduce, whether in its original state or processedform, to non-members; their importation of direct farminputs, machineries and equipment, including spareparts thereof, to be used directly and exclusively inthe production and/or processing of their produce;
(M) Gross receipts from lending activities bycredit or multi-purpose cooperatives duly registeredand in good standing with the Cooperative DevelopmentAuthority;
(N) Sales by non-agricultural, non-electric andnon-credit cooperatives duly registered with theCooperative Development Authority: Provided, That theshare capital contribution of each member does notexceed Fifteen thousand pesos (P15,000) and regardless
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of the aggregate capital and net surplus ratablydistributed among the members;
Importation by non-agricultural, non-electric andnon-credit cooperatives of machineries and equipment,including spare parts thereof, to be used by them aresubject to VAT.
(O) Export sales by persons who are not VAT-registered;
(P) Sale of real properties not primarily heldfor sale to customers or held for lease in theordinary course of trade or business, or real propertyutilized for low-cost and socialized housing asdefined by Republic Act No. 7279, otherwise known asthe Urban Development and Housing Act of 1992, andother related laws, such as RA No. 7835 and RA No.8765, residential lot valued at One million fivehundred thousand pesos (P 1,500,000) and below, houseand lot, and other residential dwellings valued at Twomillion five hundred thousand pesos (P 2,500,000) andbelow: Provided, That not later than January 31, 2009and every three (3) years thereafter, the amountsherein stated shall be adjusted to their presentvalues using the Consumer Price Index, as published bythe National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthlyrental not exceeding Ten thousand pesos (P 10,000)Provided, That not later than January 31, 2009 andevery three (3) years thereafter, the amount hereinstated shall be adjusted to its present value usingthe Consumer Price Index as published by the NationalStatistics Office (NSO);
(R) Sale, importation, printing or publication ofbooks and any newspaper, magazine, review or bulletinwhich appears at regular intervals with fixed pricesfor subscription and sale and which is not devotedprincipally to the publication of paid advertisements;
(S) Sale, importation or lease of passenger orcargo vessels and aircraft, including engine,equipment and spare parts thereof for domestic orinternational transport operations; Provided, thatthe exemption from VAT on the importation and localpurchase of passenger and/or cargo vessels shall belimited to those of one hundred fifty (150) tons andabove, including engine and spare parts of saidvessels; Provided, further, that the vessels beimported shall comply with the age limit requirement,at the time of acquisition counted from the date ofthe vessel’s original commissioning, as follows: (i)for passenger and/or cargo vessels, the age limit isfifteen years (15) years old, (ii) for tankers, theage limit is ten (10) years old, and (iii) For high-speed passenger cars, the age limit is five (5) yearsold, Provided, finally, that exemption shall besubject to the provisions of section 4 of Republic ActNo. 9295, otherwise known as “The Domestic ShippingDevelopment Act of 2004.”
(T) Importation of fuel, goods and supplies bypersons engaged in international shipping or airtransport operations; Provided, that the said fuel,goods and supplies shall be used exclusively or shallpertain to the transport of goods and/or passengerfrom a port in the Philippines directly to a foreignport without stopping at any other port in thePhilippines; provided, further, that if any portion ofsuch fuel, goods or supplies is used for purposesother than that mentioned in this paragraph, suchportion of fuel, goods and supplies shall be subjectto 10% VAT (now 12%);
(U) Services of banks, non-bank financialintermediaries performing quasi-banking functions, andother non-bank financial intermediaries; and
(V) Sale or lease of goods or properties orthe performance of services other than the
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transactions mentioned in the preceding paragraphs,the gross annual sales and/or receipts do not exceedthe amount of One million five hundred thousand pesos(P1,500,000): Provided, That not later than January31, 2009 and every three (3) years thereafter, theamount herein stated shall be adjusted to its presentvalue using the Consumer Price Index as published bythe National Statistics Office (NSO).
For purposes of the threshold of P1,500,000.00,the husband and wife shall be cnsidered separatetaxpayers. However, the aggregation rule for eachtaxpayer shall apply. For instance, if a profesional,aside from the practice ofhis profession, also derivesrevenue from other lines of business which areotherwise subject to VAT, the same shall be combinedfor purposes of determining whether the threshold hasbeen exceeded. Thus, the VAT-exempt sales shall to beicluded in determining the threshold. [NIRC of 1997,Sec. 109 (1), as amended by R. A. No. 9337; words initalics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B),words in parentheses supplied]
45. Tax to be paid by persons exemptfrom VAT.
a. Any person, whose sales or receipts areexempt under Sec. 109 (1) (V) of the Tax Code,
(V) Sale or lease of goods or properties orthe performance of services other than thetransactions mentioned in the precedingparagraphs, the gross annual sales and/orreceipts do not exceed the amount of One millionfive hundred thousand pesos (P1,500,000):Provided, That not later than January 31, 2009and every three (3) years thereafter, the amountherein stated shall be adjusted to its presentvalue using the Consumer Price Index as
published by the National Statistics Office(NSO), from the payment of VAT and
b. who is not a VAT-registered person c. shall pay a tax equivalent to three percent
(3%) of his gross monthly sales or receipts; Provided, that cooperatives shall be exempt from
the three (3%) gross receipts tax herein imposed.(Rev. Regs. No. 16-2005, Sec. 4.116-1, arrangement,numbering and words in italics supplied)
RETURNS AND WITHHOLDING
1. Income tax returns being publicdocuments, until controverted by competent evidence,are competent evidence, are prima facie correct withrespect to the entries therein. (Ropali Trading v. NLRC, et al.,296 SCRA 309, 317)
2. Individuals required to file an incometax return.
a. Every Filipino citizen residing in thePhilippines;
b. Every Filipino citizen residing outside thePhilippines on his income from sources within thePhilippines;
c. Every alien residing in the Philippines onincome derived from sources within the Philippines; and
d. Every nonresident alien engaged in trade orbusiness or in the exercise of profession in thePhilippines. [Sec. 51 (A) (1), NIRC of 1997]
3. Married individuals who are earningpurely compensation income allowed to fileseparate returns.
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4. Married individuals, whether citizens,resident or non-resident aliens, who do notderive income purely from compensation shall filea consolidated return for the taxable year toinclude the income of both spouses, but where itis impracticable for the spouses to file one return,each spouse may file a separate return of income butthe returns so filed shall be consolidated by theBureau for purposes of verification.” [Section 51 (D)of the NIRC of 1997]
5. Computation of income tax for marriedindividuals whether citizens, resident or non-resident aliens, who do not derive income purelyfrom compensation required file a consolidatedreturn for the taxable year but could not do so.For married individuals, the husband and wife, subjectto no. 2, supra,, shall compute separately theirindividual income tax based on their respective totaltaxable income: Provided, that if any income cannot bedefinitely attributed to or identified as incomeexclusively earned or realized by either of thespouses, the same shall be divided equally between thespouses for the purpose of determining theirrespective taxable income. [2nd to the last par., Sec.24 (A) (2), NIRC of 1997 as amended by Rep. Act No. 9504]
6. Individuals who are not required tofile an income tax return.
a. An individual whose gross income does notexceed his total personal and additional exemptions fordependents, Provided, That a citizen of the Philippinesand any alien individual engaged in business orpractice of profession within the Philippines shallfile an income tax return regardless of the amount ofgross income [Sec. 51 (A) (2), NIRC of 1997]
b. An individual with respect to purecompensation income, derived from such sources withinthe Philippines, the income tax on which has beencorrectly withheld: Provided, That an individualderiving compensation concurrently from two or moreemployers at any time during the taxable year shallfile an income tax return [Sec. 51 (A) (2), NIRC of 1997,as amended by Rep. Act No. 9504, paraphrasing supplied]
c. An individual whose sole income has beensubject to final withholding tax;
d. A minimum wage earner (is a worker in theprivate sector paid the statutory minimum wage, or isan employee in the public sector with compensationincome of not more than the statutory minimum wage inthe non-agricultural sector where he/she is assigned),an individual who is exempt from income tax pursuantto the provisions of the Tax Code and other laws,general or special. [Sec. 51 (A) (2), NIRC of 1997 inrelation to Sec. 22 (HH), both as amended by Rep. Act. 9504]
7. Minimum wage earners are exempt fromincome taxation. That minimum wage earners (is aworker in the private sector paid the statutoryminimum wage, or is an employee in the public sectorwith compensation income of not more than thestatutory minimum wage in the non-agricultural sectorwhere he/she is assigned) shall be exempt from thepayment of income tax on their taxable income: Provided,further, That the holiday pay, overtime pay, night shiftdifferential pay and hazard pay received by suchminimum wage earners shall likewise be exempt fromincome tax. [Sec. 51 (A) (2), NIRC of 1997 in relation toSec. 22 (HH), both as amended by Rep. Act. 9504]
8. An individual who is not required tofile an income tax return may nevertheless be
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required to file an information return. [Sec. 51(A) (3), NIRC of 1997]
9. A corporation files its income taxreturn and pays its income tax four (4) timesduring a single taxable year. Quarterly returnsare required to be filed for the first three quarters,then a final adjustment return is filed covering thetotal taxable income for the whole taxable year, be itcalendar or fiscal.
10. An individual earning from thepractice of his profession or who engages intrade or business files his income tax return andpays his income tax four (4) times during asingle taxable year. Quarterly returns are requiredto be filed for the first three quarters, then anannual income tax return is filed covering the totaltaxable income for the whole of the previous calendaryear.
11. The purpose of the above four (4)times a year requirement is to make availablesufficient funds to meet the budgetaryrequirements, on a quarterly basis thereby increasinggovernment liquidity. It also eases hardships on thepart of individuals who are required to make this fourtime return. Thus, the taxpayer does not have to raiselarge sums of money in order to pay the tax.
12. An individual earning purelycompensation income files only one annual incometax return covering the total taxable compensationincome for the whole of the previous calendar year.
13. Under the withholding tax system,taxes imposed or prescribed by the NIRC of 1997are to be deducted and withheld by the payorsfrom payments made to payees for the former topay directly to the Bureau of Internal Revenue.It is also known as collection of the tax at source.
14. A withholding agent is explicitlymade personally liable under the Tax Code for thepayment of the tax required to be withheld, inorder to compel the withholding agent to withhold thetax under any and all circumstances. In effect, theresponsibility for the collection of the tax as well asthe payment thereof is concentrated upon the personover whom the Government has jurisdiction. (FilipinasSynthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 &124377, October 12, 1999) The system facilitates taxcollection and reduces tax evasion.
15. The two (2) types of withholding atsource are the 1) final withholding tax; and 2)creditable withholding tax.
16. Under the final withholding tax systemthe amount of income tax withheld by thewithholding agent is constituted as a full andfinal payment of the income due from the payee onthe said income. [1st sentence, 1st par., Sec. 2.57 (A),Rev. Regs. No. 2-98]
The liability for payment of the tax restsprimarily on the payor or the withholding agent..Thus, in case of his failure to withhold the tax or incase of under withholding, the deficiency tax shall becollected from the payor withholding agent. The payeeis not required to file an income tax return for theparticular income.
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17. Under the creditable withholding taxsystem, taxes withheld on certain income paymentsare intended to equal or at least approximate thetax due from the payee on the said income. Theincome recipient is still required to file an incometax return and/or pay the difference between the taxwithheld and the tax due on the income. [1st and 2nd
sentences, Sec. 257(B), Rev. Regs. No. 2-98]
18. The two kinds of creditablewithholding taxes are (a) taxes withheld on incomepayments covered by the expanded withholding tax; and(b) taxes withheld on compensation income.
19. Payments to the following are exemptfrom the requirement of withholding or when nowithholding taxes required:
a. National Government and its instrumentalitiesincluding provincial, city, or municipal governments;
b. Persons enjoying exemption from payment ofincome taxes pursuant to the provisions of any law,general or special, such as but not limited to thefollowing:
1) Sales of real property by a corporationwhich is registered with and certified by theHLURB or HUDCC as engaged in socialized housingproject where the selling price of the house andlot or only the lot does not exceed P180,000.00 inMetro Manila and other highly urbanized areas andP150,000.00 in other areas or such adjusted amountof selling price for socialized housing as maylater be determined and adopted by the HLURB;
2) Corporations registered with the Board ofInvestments and enjoying exemptions from incomeunder the Omnibus Investment Code of 1997;
3) Corporations exempt from income taxunder Sec. 30, of the Tax Code, like the SSS,GSIS, the PCSO, etc. However, income paymentsarising from any activity which is conducted forprofit or income derived from real or personalproperty shall be subject to a withholding tax.(Sec. 57.5, Rev. Regs. No. 2-98)
20. For tax amnesty purposes, thewithholding agent is not a taxpayer. He is made topay the tax where he fails to withhold as a penalty andnot because the tax is due from him. (Commissioner ofInternal Revenue v. Court of Appeals, et al., G.R. No. 108576, January20, 1999, the Anscor case)
PENALTIES, INTERESTS AND SURCHARGES
1. Surtaxes or surcharges, also known as thecivil penalties, are the amounts imposed in addition tothe tax required.
They are in the nature of penalties and shall becollected at the same time, in the same manner, and aspart of the tax. [Sec.248 (A), NIRC of 1997]
2. What are the two (2) kinds of civilpenalties ?
SUGGESTED ANSWER:a. the 25% surcharge for late filing or late
payment [Sec. 248 (A), NIRC of 1997] (also known as thedelinquency surcharge), and
b. the 50% willful neglect or fraud surcharge.[Sec. 248 (B), Ibid.]
3. Define deficiency income tax.SUGGESTED ANSWER: Deficiency income tax is the
amount by which the tax imposed under the NIRC of 1997
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exceeds the amount shown as the tax due by the taxpayerupon his return. [Sec. 56 (B) (1), NIRC of 1997]
4. Deficiency interest, defined. Theinterest assessed and collected on any unpaid amount oftax at the rate of 20% per annum or such higher rate asmay be prescribed by regulations, from the dateprescribed for payment until the amount is fully paid.[Sec. 249 (A) (B), NIRC of 1997]
5. Delinquency interest, defined. Theinterest assessed and collected on the unpaid amountuntil fully paid where there is failure on the part ofthe taxpayer to pay the amount die on any returnrequired to be filed; or the amount of the tax due forwhich no return is required; or a deficiency tax, orany surcharge or interest thereon, on the dateappearing in the notice and demand by the Commissionerof Internal Revenue. [Sec.249 (c), NIRC of 1997]
6. After resolving the issues the BIRCommissioner reduced the assessment. Was itproper to impose delinquency interest despite thereduction of the assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the lawis to discourage delay in the payment of taxes due tothe State and in this sense the surcharge and interestcharged are not penal but compensatory in nature – theyare compensation to the State for the delay in payment,or for the concomitant tuse of the funds by thetaxpayer beyond the date he is supposed to have paidthem to the State. (Bank of the Philippine Islands v. Commissioner ofInternal Revenue, G. R. No. 137002, July 27, 2006)
7. Compromise penalty is the amount agreedupon between the taxpayer and the Government to be paidas a penalty in cases of a compromise.
8. As a result of divergent rulings onwhether it is subject to tax or not, the taxpayerwas not able to pay his taxes on time. Imposedsurcharges and interests for such delay, thetaxpayer not invokes good faith with the BIRcountering by saying that good faith is not avalid defense for violation of a special law.Furthermore, the BIR further raises the defensethat the government is not bound by the errors ofits agents. Who is correct ?
SUGGESTED ANSWER: The taxpayer is correct. Thesettled rule is that good faith and honest belief thatone is not subject to tax on the basis of previousinterpretation of government agencies tasked toimplement the tax, are sufficient justification todelete the imposition of surcharges. (Michel J. LhuillierPawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No. 166786,September 11, 2006)
REPUBLIC ACT NO. 1125, CREATING THECOURT OF TAX APPEALS INCLUDING
JURISDICTION OF THE CTA, AS AMENDED
COURT OF TAX APPEALS, IN GENERAL
1. Discuss the role of the judiciary intaxation. SUGGESTED ANSWER: The role of thejudiciary is to be the sympathetic or vigilant courtwhich would check injustices or abuses of the
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legislative and administrative agents of the State intheir exercise of the power of taxation.
2. What is the nature and composition ofthe Court of Tax Appeals ?
SUGGESTED ANSWER: The Court of TaxAppeals is the special tax court created under RepublicAct No. 1125, as amended, and is composed of aPresiding Justice and eight (8) Associate Justices,organized into three (3) divisions.
3. What are the purposes for the creationof the Court of Tax Appeals ?
SUGGESTED ANSWER: a. To prevent delay in the disposition of tax
cases by the then Courts of First Instance (now RTCs),in view of the backlog of civil, criminal, andcadastral cases accumulating in the dockets of suchcourts; and
b. To have a body with special knowledge whichordinary Judges of the then Courts of First Instance(now RTCs), are not likely to possess, thus providingfor an adequate remedy for a speedy determination oftax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)
4. Jurisdiction of the Court of TaxAppeals.
“a. Exclusive appellate jurisdiction to review byappeal, as herein provided:
1. Decisions of the Commissioner of InternalRevenue in cases involving disputed assessments,refunds of internal revenue taxes, fees or othercharges, penalties, in relation thereto, or othermatters arising under the National Internal RevenueCode or other laws administered by the Bureau ofInternal Revenue’; (DIVISION)
2. Inaction by the Commissioner of InternalRevenue in cases involving disputed assessments,refunds or internal revenue taxes, fees or othercharges, penalties in relation thereto, or other matterarising under the National Internal Revenue Code orother laws administered by the Bureau of InternalRevenue, where the National Internal Revenue Codeprovides a specific period of action, in which case theinaction shall be deemed a denial; (The inaction onrefunds in two years from the time tax was paid.Thus, if the prescriptive period of two years is aboutto expire, the taxpayer should interpose a petition forreview with the CTA – DIVISION)
3. Decisions, orders or resolutions of theRegional Trial Courts in local tax cases originallydecided or resolved by them in the exercise of theiroriginal or appellate jurisdiction; (If originalDIVISION; if appellate EN BANC)
4. Decisions of the Commissioner of Customs incases involving liability for customs duties, fees orother money charges, seizure, detention or release ofproperty affected, fines, forfeitures or otherpenalties in relation thereto, or other matters arisingunder the Customs Law or other laws administered by theBureau of Customs; (DIVISION)
5. Decisions of the Central Board of AssessmentAppeals in the exercise of its appellate jurisdictionover cases involving the assessment and taxation ofreal property originally decided by the provincial orcity board of assessment appeals; (EN BANC)
6. Decisions of the Secretary of Finance oncustoms cases elevated to him automatically for reviewfrom decisions of the Commissioner of Customs which areadverse to the Government under Section 2315 of theTariff and Customs Code; (This has reference toforfeiture cases where the decision is to release theseized articles – DIVISION)
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7. Decisions of the Secretary of Trade andIndustry, in case of nonagricultural product, commodityor article, and the Secretary of Agriculture in thecase of agricultural product, commodity or article,involving dumping and countervailing duties underSection 301 and 302, respectively, of the Tariff andCustoms Code, and safeguard measures under Republic ActNo. 8800, where either party may appeal the decision toimpose or not to impose said duties. (DIVISION) b. Jurisdiction over cases involvingcriminal offenses as herein provided:
1. Exclusive original jurisdiction over allcriminal cases arising from violations of the NationalInternal Revenue Code or Tariff and Customs Code andother laws administered by the Bureau of InternalRevenue or the Bureau of Customs: Provided, however, Thatoffenses or felonies mentioned in this paragraph wherethe principal amount of taxes and fees, exclusive ofcharges and penalties claimed, is less than One millionpesos (P1,000,000.00) or where there is no specifiedamount claimed shall be tried by the regular Courts andthe jurisdiction of the CTA shall be appellate. Anyprovision of law or the Rules of Court to the contrarynotwithstanding, the criminal action and thecorresponding civil action for the recovery of civilliability for taxes and penalties shall at all times besimultaneously instituted with, and jointly determinedin the same proceeding by the CTA, the filing of thecriminal action being deemed to necessarily carry withit the filing of the civil action, and no right toreserve the filing of such civil action separately fromthe civil action will be recognized.
2. Exclusive appellate jurisdiction in criminaloffenses:
a) Over appeals from the judgments,resolutions or orders of the Regional Trial Courts in
tax cases originally decided by them, in theirrespective territorial jurisdiction.
b) Over petitions for review of thejudgments, resolutions or orders of the Regional TrialCourts in the exercise of their appellate
jurisdiction over tax cases originally decided bythe Metropolitan Trial Courts, Municipal Trial Courtsand Municipal Circuit Trial Courts in their respectivejurisdiction.
c. Jurisdiction over tax collection cases:1. Exclusive original jurisdiction in tax
collection cases involving final and executoryassessments for taxes, fees, charges and penalties:Provided, however, That collection cases where theprincipal amount of taxes and fees, exclusive ofcharges and penalties, claimed is less than One millionpesos (P1,000,000) shall be tried by the properMunicipal Trial Court, Metropolitan Trial Court andRegional Trial Court.
2. Exclusive appellate jurisdiction in taxcollection cases:
a) Over appeals from judgments,resolutions, or orders of the Regional Trial Courtsin tax collection cases originally decided by them,in their respective territorial jurisdiction.
b) Over petitions for review of thejudgments, resolutions or orders of the Regional TrialCourts in the exercise of their appellate
jurisdiction over tax collection cases originallydecided by the Metropolitan Trial Courts,Municipal Trial Courts and Municipal Circuit TrialCourts, in their respective jurisdiction.” (Sec. 7, R.A. No. 1125, as amended by R. A. No. 9282, emphasis andwords in parentheses supplied)
The petition for review to be filed with theCTA en banc as the mode for appealing adecision, resolution, or order of the CTA
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Division, under Section 18 of Republic Act No.1125, as amended, is not a totally new remedy,unique to the CTA, with a special application oruse therein. To the contrary, the CTA merely adoptsthe procedure for petitions for review and appealslong established and practiced in other Philippinecourts. Accordingly, doctrines, principles, rules,and precedents laid down in jurisprudence by thisCourt as regards petitions for review and appeals incourts of general jurisdiction should likewise bindthe CTA, and it cannot depart therefrom. (Santos v. People,et al, G. R. No. 173176, August 26, 2008)
5. It is the Regional Trial Court thathas jurisdiction to rule upon theconstitutionality of a tax law or a regulationissued by the taxing authorities. Where what isassailed is the validity or constitutionality of alaw, or a rule or regulation issued by theadministrative agency in the performance of its quasi-legislative function, the regular courts havejurisdiction to pass upon the same. The determinationof whether a specific rule or set of rules issued byan administrative agency contravenes the law or theconstitution is within the jurisdiction of the regularcourts.
Indeed, the Constitution vests the power ofjudicial review or the power to declare a law, treaty,international or executive agreement, presidentialdecree, order, instruction, ordinance, or regulationin the courts, including the regional trial courts.This is within the scope of judicial power, whichincludes the authority of the courts to determine inan appropriate action the validity of the acts of thepolitical departments. Judicial power includes theduty of the courts of justice to settle actual
controversies involving rights which are legallydemandable and enforceable, and to determine whetheror not there has been a grave abuse of discretionamounting to lack or excess of jurisdiction on thepart of any branch or instrumentality of theGovernment. (British American Tobacco v. Camacho et al., G. R. No.163583, August 20, 2008 with an intervenor)
NOTES AND COMMENTS: The above doctrine supersedesAsia International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al.,G. R. No. 103445, December 18, 2007 which ruled that itis the Court of Tax Appeals that has jurisdictionrelative to matters involving the constitutionality ofregulations issued by the BIR. The reason was thatthis falls under the concept of decisions of the BIRCommissioner on “other matter” arising under theprovisions of laws administered by the Commission.Issuance of revenue regulations are authorized underthe NIRC.
British American Tobacco reversed Asia InternationalAuctioneers upon the concept of the judiciary’s “expandedpower.”
6. Instances where the Court of TaxAppeals would have jurisdiction even if there isno decision of the Commissioner of Customs:
a. Decisions of the Secretary of Trade andIndustry or the Secretary of Agriculture in anti-dumping and countervailing duty cases are appealable tothe Court of Tax Appeals within thirty (30) days fromreceipt of such decisions.
b. In case of automatic review by the Secretaryof Finance in seizure or forfeiture cases where thevalue of the importation exceeds P5 million or wherethe decision of the Collector of Customs which fully orpartially releases the shipment seized is affirmed bythe Commissioner of Customs.
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c. In case of automatic review by the Secretaryof Finance of a decision of a Collector of Customsacting favorably upon a customs protest.
ASSESSMENT OF INTERNAL REVENUE TAXES
1. Outline of tax remedies of a taxpayerand the government relative to ASSESSMENT ofinternal revenue taxes.
a. The taxpayer files his tax return.b. A Letter of Authority is issued
authorizing BIR examiner to audit or examine the taxreturn and determines whether the full and completetaxes have been paid.
c. If the examiner is satisfied that thetax return is truly reflective of the taxabletransaction and all taxes have been paid, the processends. However, if the examiner is not satisfied thatthe tax return is truly reflective of the taxabletransaction and that the taxes have not been fullypaid, a Notice of Informal Conference is issuedinviting the taxpayer to explain why he should not besubject to additional taxes.
d. If the taxpayer attends the informalconference and the examiner is satisfied with theexplanation of the taxpayer, the process is againended.
If the taxpayer ignores the invitation to theinformal conference, or if the examiner is notsatisfied with taxpayer’s explanation,, and he believesthat proper taxes should be assessed, the Commissionerof Internal Revenue or his duly authorizedrepresentative shall then notify the taxpayer of thefindings in the form of a pre-assessment notice. Thepre-assessment notice requires the taxpayer to explainwithin fifteen (15) days from receipt why no notice of
assessment and letter of demand for additional taxesshould be directed to him.
e. If the Commissioner is satisfied with theexplanation of the taxpayer, then the process is againended.
If the taxpayer ignores the pre-assessment noticeby not responding or his explanations are not acceptedby the Commissioner, then a notice of assessment and aletter of demand is issued.
The notice of assessment must be issued by theCommissioner to the taxpayer within a period of three(3) years from the time the tax return was filed orshould have been filed whichever is the later of thetwo events. Where the taxpayer did not file a taxreturn or where the tax return filed is false orfraudulent, then the Commissioner has a period of ten(10) years from discovery of the failure to file a taxreturn or from discovery of the fraud within which toissue an assessment notice. The running of the aboveprescriptive periods may however be suspended undercertain instances.
The notice of assessment must be issued withinthe prescriptive period and must contain the facts, lawand jurisprudence relied upon by the Commissioner.Otherwise it would not be valid.
f. The taxpayer should then file anadministrative protest by filing a request forreconsideration or reinvestigation within thirty (30)days from receipt of the assessment notice.
The taxpayer could not immediately interpose anappeal to the Court of Tax Appeals because there is nodecision yet of the Commissioner that could be thesubject of a review.
To be valid the administrative protest must befiled within the prescriptive period, must show theerror of the Bureau of Internal Revenue and the correctcomputations supported by a statement of facts, and the
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law and jurisprudence relied upon by the taxpayer.There is no need to pay under protest. If the protestwas not seasonably filed the assessment becomes finaland collectible and the Bureau of Internal Revenuecould use its administrative and judicial remedies incollecting the tax.
g. Within sixty (60) days from filing ofthe protest, all relevant supporting documents shall besubmitted, otherwise the assessment shall become finaland collectible and the BIR could use itsadministrative and judicial remedies to collect thetax.
Once an assessment has become final andcollectible, not even the BIR Commissioner could changethe same. Thus, the taxpayer could not pay the tax,then apply for a refund, and if denied appeal the sameto the Court of Tax Appeals.
h. If the protest is denied in whole or inpart, or is not acted upon within one hundred eighty(180) days from the submission of documents, thetaxpayer adversely affected by the decision or inactionmay appeal to the Court of Tax Appeals within thirty(30) days from receipt of the adverse decision, or fromthe lapse of the one hundred eighty (180-) day period,with an application for the issuance of a writ ofpreliminary injunction to enjoin the BIR fromcollecting the tax subject of the appeal.
If the taxpayer fails to so appeal, the denialof the Commissioner or the inaction of the Commissionerwould result to the notice of assessment becoming finaland collectible and the BIR could then utilize itsadministrative and judicial remedies to collect thetax.
i. A decision of a division of the Courtof Tax Appeals adverse to the taxpayer or thegovernment may be the subject of a motion forreconsideration or new trial, a denial of which is
appealable to the Court of Tax Appeals en banc by meansof a petition for review.
The Court of Tax Appeals, has a period of twelve(12) months from submission of the case for decisionwithin which to decide.
j. If the decision of the Court of TaxAppeals en banc affirms the denial of the protest by theCommissioner or the assessment in case of failure bythe Commissioner to decide the taxpayer must file apetition for review on certiorari with the SupremeCourt within fifteen (15) days from notice of thejudgment on questions of law. An extension of thirty(30) days may for justifiable reasons be granted. Ifthe taxpayer does not so appeal, the decision of theCourt of Tax Appeals would become final and this hasthe effect of making the assessment also final andcollectible. The BIR could then use its administrativeand judicial remedies to collect the tax.
2. The word assessment when used inconnection with taxation, may have more than onemeaning. More commonly the word “assessment” meansthe official valuation of a taxpayer’s property forpurpose of taxation. The above definition of assessmentfinds application under tariff and customs taxation aswell as local government taxation.
For real property taxation, there may be a specialmeaning to the burdens that are imposed upon realproperties that have been benefited by a public worksexpenditure of a local government. It is sometimescalled a special assessment or a special levy.(Commissioner of Internal Revenue v. Pascor Realty and Development Corporation,et al., G.R. No. 128315, June 29, 1999)
For internal revenue taxation assessment as layinga tax. The ultimate purpose of an assessment to such aconnection is to ascertain the amount that eachtaxpayer is to pay. (Ibid.)
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3. An assessment is a notice duly sent tothe taxpayer which is deemed made only when theBIR releases, mails or sends such notice to thetaxpayer. (Commissioner of Internal Revenue v. Pascor Realty andDevelopment Corporation, et al., G.R. No. 128315, June 29, 1999)
4. Self-assessed tax, defined. A tax that thetaxpayer himself assesses or computes and pays to thetaxing authority. It is a tax that self-assessed bythe taxpayer without the intervention of an assessmentby the tax authority to create the tax liability.
The Tax Code follows the pay-as-you-file system oftaxation under which the taxpayer computes his own taxliability, prepares the return, and pays the tax as hefiles the return. The pay-as-you-file system is aself-assessing tax return.
Internal revenue taxes are self-assessing.(Dissent of J. Carpio in Philippine National Oil Company v. Court ofAppeals, et al., G. R. No. 109976, April 26, 2005 and companioncase)
A clear example of a self-assessed tax is theannual income tax, which the taxpayer himself computesand pays without the intervention of any assessment bythe BIR. The annual income tax becomes due and payablewithout need of any prior assessment by the BIR. TheBIR may or may not investigate or audit the annualincome tax return filed by the taxpayer. Thetaxpayer’s liability for the income tax does not dependon whether or not the BIR conducts such subsequentinvestigation or audit.
However, if the taxing authority is first requiredto investigate, and after such investigation to issuethe tax assessment that creates the tax liability, thenthe tax is no longer self-assessed. (Ibid.)
5. Sec. 6 (B) of the NIRC of 1997 allowsthe BIR to make or amend a tax return from hisown knowledge or obtained through testimony orotherwise. Thus, the Commissioner of Internal Revenueinvestigates ”any circumstance which led him to believethat the taxpayer had taxable income larger than thatreported. Necessarily, this inquiry would have to beoutside of the books because they supported the returnas filed. He may take the sworn testimony of thetaxpayer, he may take the testimony of third parties;he may examine and subpoena, if necessary, traders’ andbrokers’ accounts and books and the taxpayer’s books ofaccounts. The Commissioner is not bound to follow anyset of patterns. The existence of unreported incomemay be shown by any particular proof that is availablein the circumstances of the particular situation.(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No.136975, March 31, 2005)
6. General rule: When the Commissioner ofInternal Revenue may rely on estimates. “The ruleis that in the absence of accounting records of ataxpayer, his tax liability may be determined byestimation. The petitioner (Commissioner of InternalRevenue) is not required to compute such taxliabilities with mathematical exactness. Approximationin the calculation of taxes due is justified. To holdotherwise would be tantamount to holding that skillfulconcealment is an invincible barrier to proof.”(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No.136975, March 31, 2005)
“However, the rule does not apply where theestimation is arrived at arbitrarily and capriciously.”(Ibid.)
7. Meaning of "best evidence obtainable"under Sec. 6 (B), NIRC of 1997. This means that
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the original documents must be produced. If itcould not be produced, secondary evidence must beadduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue,CA - G.R. SP No. 47172, September 30, 1998)
8. The following are the general methodsdeveloped by the Bureau of Internal Revenue forreconstructing a taxpayer’s income where therecords do not show the true income or where no returnwas filed or what was filed was a false and fraudulentreturn
(a) Percentage method; (b) Net worth method.; (c) Bank deposit method; (d) Cash expenditure method; (e) Unit and value method; (f) Third party information or access to records
method; (g) Surveillance and assessment method.
(Chapter XIII. Indirect Approach to Investigation,Handbook on Audit Procedures and Techniques – Volume I,pp. 68-74)
9. Third party information or access torecords method. The BIR may require third parties,public or private to supply information to the BIR, andthus, “obtain on a regular basis from any person otherthan the person whose internal revenue tax liability issubject to audit or investigation, or from any officeor officer of the national and local governments,government agencies and instrumentalities including theBangko Sentral ng Pilipinas and government-owned or –controlled corporations, any information such as, butnot limited to, costs and volume of production,receipts or sales and gross incomes of taxpayers, andthe names , addresses, and financial statements ofcorporations, mutual fund companies, insurance
companies, regional operating headquarters ormultinational companies, joint accounts, associations,joint ventures or consortia and registeredpartnerships, and their members; xxx” [Sec. 5 (B), NIRCof 1997)
10. A pre-assessment notice is a lettersent by the Bureau of Internal Revenue to a taxpayerasking him to explain within a period of fifteen (15)days from receipt why he should not be the subject ofan assessment notice. It is part of the due processrights of a taxpayer.
As a general rule, the BIR could not issue anassessment notice without first issuing a pre-assessment notice because it is part of the due processrights of a taxpayer to be given notice in the form ofa pre-assessment notice, and for him to explain why heshould not be the subject of an assessment notice.
11. Instances where a pre-assessmentnotice is not required before a notice ofassessment is sent to the taxpayer.
a. When the finding for any deficiency tax is theresult of mathematical error in the computation of thetax as appearing on the face of the return; or
b. When a discrepancy has been determined betweenthe tax withheld and the amount actually remitted bythe withholding agent; or
c. When a taxpayer opted to claim a refund or taxcredit of excess creditable withholding tax for ataxable period was determined to have carried over andautomatically applied the same amount claimed againstthe estimated tax liabilities for the taxable quarteror quarters of the succeeding table year; or
d. When the excess tax due on excisable articleshas not been paid; or
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e. When an article locally purchased or importedby an exempt person, such as, but not limited tovehicles, capital equipment, machineries and spareparts, has been sold, trade or transferred to non-exempt persons. (Sec. 228, NIRC of 1997)
12. Prescriptive periods for makingassessments of internal revenue taxes.
a. Three (3) years from the last day withinwhich to file a return or when the return was actuallyfiled, whichever is later (Sec. 203, NIRC of 1997). TheCIR has three (3) years from the date of actual filingof the tax return to assess a national internalrevenue tax or to commence court proceedings for thecollection thereof without an assessment. [Bank ofPhilippine Islands (Formerly Far East Bank and Trust Company) v. Commissionerof Internal Revenue, G. R. No. 174942, March 7, 2008]
b. ten years from discovery of the failureto file the tax return or discovery of falsity or fraudin the return [Sec. 222 (a), NIRC of 1997[ ; or
c. within the period agreed upon betweenthe government and the taxpayer where there is a waiverof the prescriptive period for assessment (Sec. 222 (b),NIRC of 1997).
13. Purpose of period of limitations intaxation. For the purpose of safeguarding taxpayersfrom any unreasonable examination, investigation orassessment, our tax law provides a statute oflimitations in the collection of taxes. [Commissioner ofInternal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International TireCo., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No.162852, December 16, 2004], as well as their assessments.
The law prescribing a limitation of actions forthe collection of the income tax is beneficial both tothe Government and to its citizens; to the Government
because tax officers would be obliged to act promptlyin the making of assessment, and to citizens becauseafter the lapse of the period of prescription citizenswould have a feeling of security against unscrupuloustax agents who will always find an excuse to inspectthe books of taxpayers, not to determine the latter’sreal liability, but to take advantage of everyopportunity to molest peaceful, law-abiding citizens.Without such a legal defense taxpayers wouldfurthermore be under obligation to always keep theirbooks and keep them open for inspection subject toharassment by unscrupulous tax agents. The law onprescription being a remedial measure should beinterpreted in a way conducive to bringing about thebeneficent purpose of affording protection to thetaxpayer within the contemplation of the Commissionwhich recommend the approval of the law. [Bank of PhilippineIslands (Formerly Far East Bank and Trust Company) v. Commissioner of InternalRevenue, G. R. No. 174942, March 7, 2008]
This mandate governs the question of prescriptionof the government’s right to assess internal revenuetaxes primarily to safeguard the interests oftaxpayers from unreasonable investigation.Accordingly, the government must assess internalrevenue taxes on time so as not to extend indefinitelythe period of assessment and deprive the taxpayer ofthe assurance that it will no longer be subjected tofurther investigation for taxes after the expirationof reasonable period of time. (Commissioner of InternalRevenue v. FMF Development Corporation, G. R. No. 167765, June 30,2008 citing Philippine Journalists, Inc. v. Commissioner of Internal RevenueG.R. No. 162852, December 16, 2004, 447 SCRA 214, 225)
14. Unreasonable investigation contemplatescases where the period for assessment extendsindefinitely because this deprives the taxpayer ofthe assurance that it will not longer be subjected to
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further investigation for taxes after the expiration ofa reasonable period of time. (Philippine Journalists, Inc. v.Commissioner of Internal Revenue, G. R. No. 162852, December 16,2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)
Laws on prescription should be liberally construedin favor of the taxpayer. Reason: for the purpose ofsafeguarding taxpayers from an unreasonableexamination, investigation or assessment, our tax lawsprovide a statute of limitation on the collection oftaxes. Thus, the law on prescription, being a remedialmeasure, should be liberally construed in order toafford such protection, As a corollary, the exceptionsto the law on prescription should perforce be strictlyconstrued. [Philippine Journalists, Inc. v. Commissioner of Internal Revenue,G. R. No. 162852, December 16, 2004 citing Commissioner ofInternal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby International Tire Co.,Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546]
The prescriptive period was precisely intended togive the taxpayers peace of mind. (Commissioner of InternalRevenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February24, 1999)
15. A “jeopardy assessment” is adelinquency tax assessment which was assessed withoutthe benefit of complete or partial audit by anauthorized revenue officer, who has reason to believethat the assessment and collection of a deficiency taxwill be jeopardized by delay because of the taxpayer’sfailure to comply with the audit and investigationrequirements to present his books of accounts and/orpertinent records, or to substantiate all or any of thedeductions, exemptions, or credits claimed in hisreturn. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of thedoubtful validity of the assessment, hence it may besubject to a compromise. [Sec. 3.1 (a), Rev. Regs. No.6-2000]
16. Requisites for Formal Letter ofDemand and Assessment Notice. The formal letter ofdemand and assessment notice shall be issued by theCommissioner or his duly authorized representative.The letter of demand calling for payment of thetaxpayer’s deficiency tax or taxes shall state thefacts, the law, rules and regulations, orjurisprudence on which the assessment is based,otherwise, the formal letter of demand and assessmentnotice shall be void. The same shall be sent to thetaxpayer only by registered mail or by personaldelivery.
17. What are the requirements forthe validity of a formal letter of demand andassessment notice ?
SUGGESTED ANSWER:a. There must have been previously issued a pre-
assessment notice until excepted;b. It must have been issued prior to the
prescriptive period; andc. The letter of demand calling for payment of
the taxpayer’s deficiency tax or taxes shall state thefacts, the law, rules and regulations, or jurisprudenceon which the assessment is based, otherwise, the formalletter of demand and assessment notice shall be void.(Sec. 3.1.4, Rev. Regs. No. 12-99)
18. What are the reasons for presumption ofcorrectness of assessments ?
SUGGESTED ANSWER: a. Lifeblood theory
b. Presumption of regularity (Commissioner of InternalRevenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005)in the performance of public functions. (Commissioner ofInternal Revenue v. Tuazon, Inc., 173 SCRA 397)
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c. The likelihood that the taxpayer will haveaccess to the relevant information [Commissioner of InternalRevenue, supra citing United States v. Rexach, 482 F.2d 10 (1973). Thecertiorari was denied by the United States Supreme Court onNovember 19, 1973]
d. The desirability of bolstering the record-keeping requirements of the NIRC. (Ibid.)
19. Give instances where prima faciecorrectness of a tax assessment does not apply.
SUGGESTED ANSWER: The “prima facie correctness of atax assessment does not apply upon proof that anassessment is utterly without foundation, meaning it isarbitrary and capricious. Where the BIR has come outwith a “naked assessment” i.e., without any foundationcharacter, the determination of the tax due is withoutrational basis.” [Commissioner of Internal Revenue v. Hantex TradingCo., Inc., G, R. No. 136975, March 31, 2005 citing United States v.Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such asituation, “the determination of the Commissionercontained in a deficiency notice disappears.”[Commissioner of Internal Revenue, supra citing a U.S. Court ofAppeals ruling, in Clark and Clark v. Commissioner of Internal Revenue,266 F. 2d 698 (1959)] “Hence, the determination by theCTA must rest on all the evidence introduced and itsultimate determination must find support in credibleevidence.” [Commissioner of Internal Revenue, supra]
20. What are the instances that suspendsthe running of the prescriptive periods (Statuteof Limitations) within which to make anassessment and the beginning of distraint or levyor of a proceeding in court for the collection,in respect of any tax deficiencies?
SUGGESTED ANSWER:a. When the Commissioner is prohibited from
making the assessment, or beginning distraint, or levy
or proceeding in court and for sixty (60) daysthereafter;
b. When the taxpayer requests for and is granteda reinvestigation by the commissioner;
c. When the taxpayer could not be located in theaddress given by him in the return filed upon which thetax is being assessed or collected;
d. When the warrant of distraint and levy isduly served upon the taxpayer, his authorizedrepresentative, or a member of his household withsufficient discretion, and no property could belocated; and
e. When the taxpayer is out of the Philippines.NOTES AND COMMENTS: The holding in Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 115712, February 25, 1999(Carnation case) that the waiver of the period forassessment must be in writing and have the writtenconsent of the BIR Commissioner is still doctrinalbecause of the provisions of Sec. 223, NIRC of 1997which provides for the suspension of the prescriptiveperiod:
21. Under RMO No. 20-90, whichimplements Sections 203 and 222 (b), thefollowing procedures should be followed for avalid waiver of the prescriptive period for anassessment:
a. The waiver must be in the proper form;b. The waiver shall be signed by the
taxpayer himself or his duly authorizedrepresentative. In the case of a corporation, thewaiver must be signed by any of its responsibleofficials. Soon after the waiver issigned by the taxpayer, the Commissioner of Internal
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Revenue or the revenue official authorized by him, ashereinafter provided, shall sign the waiver indicatingthat the Bureau has accepted and agreed to the waiver.The date of such acceptance by the Bureau should beindicated. Both the date of execution by the taxpayerand date of acceptance by the Bureau should be beforethe expiration of the period of prescription or beforethe lapse of the period agreed upon in case asubsequent agreement is executed. c. Thefollowing revenue officials are authorized to sign thewaiver.
A. In the National Office x x x x 3. Commissioner
For tax cases involving morethan P1M B. In the Regional Offices
1. The Revenue DistrictOfficer with respect to tax cases still pendinginvestigation and the period to assess is aboutto prescribe regardless of amount.
x x x x d. The waiver must be executed in three (3)
copies, the original copy to be attached to the docketof the case, the second copy for the taxpayer and thethird copy for the Office accepting the waiver. Thefact of receipt by the taxpayer of his/her file copyshall be indicated in the original copy.
d. The foregoing proceduresshall be strictly followed. Any revenue officialfound not to have complied with this Order resultingin prescription of the right to assess/collect shallbe administratively dealt with. (Renumbering andemphasis supplied.)
If the above are not followed there is no validwaiver and prescription would run. (Commissioner ofInternal Revenue v. FMF Development Corporation, G. R. No. 167765,June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of
Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA214, 228-229)
22. The procedures in RMO No. 20-90 areNOT merely directory and that the execution of awaiver is a renunciation of a taxpayer’s rightto invoke prescription. RMO No. 20-90 must bestrictly followed. A waiver of the statute oflimitations under the NIRC, to a certain extent being aderogation of the taxpayer’s right to security againstprolonged and unscrupulous investigations, must becarefully and strictly construed. The waiver of thestatute of limitations does not mean that the taxpayerrelinquishes the right to invoke prescriptionunequivocally, particularly where the language of thedocument is equivocal.
Thus a waiver becomes unlimited in time, andinvalid, because it did not specify a definite date,agreed upon between the BIR and the taxpayer, withinwhich the former may assess and collect taxes. It alsowould have no binding effect on the taxpayer if therewas no consent by the Commissioner. On this basis, noimplied consent can be presumed, nor can it becontended that the concurrence to such waiver is a mereformality. (Commissioner of Internal Revenue v. FMF DevelopmentCorporation, G. R. No. 167765, June 30, 2008 citing PhilippineJournalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852,December 16, 2004, 447 SCRA 214, 229 in turn citing Id. at229, citing Commissioner of Internal Revenue v. Court of Appeals, G.R.No. 115712, February 25, 1999, 303 SCRA 614, 620-622.)
23. BIR cannot rely on its invocation ofthe rule that the government cannot be estopped bythe mistakes of its revenue officers in theenforcement of RMO No. 20-90 because the law onprescription should be interpreted in a way conducive tobringing about the beneficent purpose of affording
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protection to the taxpayer within the contemplation ofthe Commission which recommended the approval of thelaw. To the Government, its tax officers are obliged toact promptly in the making of assessment so thattaxpayers, after the lapse of the period ofprescription, would have a feeling of security againstunscrupulous tax agents who will always try to find anexcuse to inspect the books of taxpayers, not todetermine the latter’s real liability, but to takeadvantage of a possible opportunity to harass even law-abiding businessmen. Without such legal defense,taxpayers would be open season to harassment byunscrupulous tax agents. [Commissioner of Internal Revenue v. FMFDevelopment Corporation, G. R. No. 167765, June 30, 2008 citingRepublic of the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960)]
24. The signatures of both theCommissioner and the taxpayer, are required for awaiver of the prescriptive period, thus aunilateral waiver on the part of the taxpayer does notsuspend the prescriptive period. [Commissioner of InternalRevenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999(Carnation case)]
47. The act of requesting a reinvestigationalone does not suspend the running of theprescriptive period. The request forreinvestigation must be granted by the CIR. TheSupreme Court declared that the burden of proof thatthe request for reinvestigation had been actuallygranted shall be on the Commissioner of InternalRevenue. Such grant may be expressed in itscommunications with the taxpayer or implied from theaction of the Commissioner or his authorizedrepresentative in response to the request forreinvestigation. [Bank of Philippine Islands (Formerly Far East Bank
and Trust Company) v. Commissioner of Internal Revenue, G. R. No.174942, March 7, 2008]
PROTESTING INTERNAL REVENUE TAX ASSESSMENTS
1. What is the presumption that flows from ataxpayer’s failure to protest an assessment ?
SUGGESTED ANSWER: “Tax assessments by taxexaminers are presumed correct and made in good faith.The taxpayer has the duty to prove otherwise. In theabsence of proof of any irregularities in theperformance of duties, an assessment duly made by aBureau of Internal Revenue examiner and approved by hissuperior officers will not be disturbed. Allpresumptions are in favor of the correctness of taxassessments.” (Commissioner of Internal Revenue v. Bank of PhilippineIslands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court ofAppeals, G. R. No. L-81446, 18 August 1988, 164 SCRA 524, 530,citations omitted)
2. What are the two ways of protestingan assessment notice for an internal revenuetax ? Alternatively, what are the two types ofprotests ? Explain briefly.
SUGGESTED ANSWER:a. Request for reconsideration which refers to a
plea for re-evaluation of an assessment on the basis ofexisting records without need of additional evidence.It may involve both a question of fact or of law orboth.
b. Request for reinvestigation which refers to aplea for re-evaluation of an assessment on the basis ofnewly-discovered evidence or additional evidence that ataxpayer intends to present in the investigation. Itmay also involve a question of fact or law or both.(Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G.R. No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85)
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3. What is that type of protest thatsuspends the running of the statute oflimitations for the beginning of distraint orlevy or a proceeding in court for collection ?Why ?
SUGGESTED ANSWER: It is that type of protest“when the taxpayer requests for a reinvestigation whichis granted by the Commissioner” (Sec. 223, NIRC of1997), that suspends the running of the statute oflimitations for collection of the tax. (Commissioner ofInternal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146,October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of1997) When a taxpayer demands a reinvestigation, thetime employed in reinvestigation should be deductedfrom the total period of limitation. [Commissioner ofInternal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7SCRA 566, 568-569 (1963)]
Undoubtedly, a reinvestigation, which entails thereception and evaluation of additional evidence, willtake more time than a reconsideration of a taxassessment which will be limited to the evidencealready at hand; this justifies why the former cansuspend the running of the statute of limitations oncollection of the assessed tax, while the lattercannot. (Commissioner of Internal Revenue v. Philippine GlobalCommunication, Inc., G. R. No. 167146, October 31, 2006 citingBank of Philippine Islands v. Commissioner of Internal Revenue, G. R. No.139736, 17 October 2005, 473 SCRA 205, 230-231)
4. What are the requirements for thevalidity of a taxpayer’s protest ?
SUGGESTED ANSWER: a. It must be filed within the reglementary
period of thirty (30) days from receipt of the noticeof assessment.
b. The taxpayer must not only show the errors ofthe Bureau of Internal Revenue but also the correctcomputation through
1) A statement of the facts, the applicablelaw, rules and regulations, or jurisprudence onwhich the taxpayer’s protest is based,
2) If there are several issues involved inthe disputed assessment and the taxpayer fails tostate the facts, the applicable law, rules andregulations, or jurisprudence in support of hisprotest against some of the several issues onwhich the assessment is based, the same shall beconsidered undisputed issue or issues, in whichcase, the taxpayer shall be required to pay thecorresponding deficiency tax or taxes attributablethereto. (Sec. 3.1.5, Rev. Regs. 12-99)c. Within sixty (60) days from filing of the
protest, the taxpayer shall submit all relevantsupporting documents. [4th par., Sec. 228 (e), NIRC of1997]
5. “Relevant supporting documents,”defined. The term “relevant supporting documents”should be understood as those documents necessary tosupport the legal basis in disputing a tax assessmentas determined by the taxpayer. The BIR can only informthe taxpayer to submit additional documents.
The BIR cannot demand what type of supportingdocuments should be submitted. Otherwise, a taxpayerwill be at the mercy of the BIR, which may require theproduction of documents that a taxpayer cannot submit.(Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., G. R.172045-46, June 16, 2009)
JUDICIAL REMEDIES INVOLVING PROTESTEDASSESSMENTS
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1. Acts of BIR Commissioner that may beconsidered as denial of a protest which serve asbasis for appeal to the Court of Tax Appeals.
a. Filing by the BIR of a civil suit forcollection of the deficiency tax is considered a denialof the request for reconsideration. (Commissioner of InternalRevenue v. Union Shipping Corporation, 185 SCRA 547)
b. An indication to the taxpayer by theCommissioner “in clear and unequivocal language” of hisfinal denial not the issuance of the warrant ofdistraint and levy. What is the subject of the appealis the final decision not the warrant of distraint.(Ibid.) c. A BIR demand letter sent to the taxpayerafter his protest of the assessment notice isconsidered as the final decision of the Commissioner onthe protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57SCRA 523)
d. A letter of the BIR Commissioner reiteratingto a taxpayer his previous demand to pay an assessmentis considered a denial of the request forreconsideration or protest and is appealable to theCourt of Tax Appeals. (Commissioner v. Ayala Securities Corporation,70 SCRA 204)
e. Final notice before seizure considered ascommissioner’s decision of taxpayer’s request forreconsideration who received no other response.Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R.No. 135210, July 11, 2001 held that not only is theNotice the only response received: its content andtenor supports the theory that it was the CIR’s finalact regarding the request for reconsideration. Thevery title expressly indicated that it was a final noticeprior to seizure of property. The letter itselfclearly stated that the taxpayer was being given “thisLAST OPPORTUNITY” to pay; otherwise, its propertieswould be subjected to distraint and levy.
2. The taxpayer seasonably protested theassessment issued by the Commissioner of InternalRevenue. During the pendency of the protest theCIR issued a warrant of distraint and levy tocollect the taxes subject of the protest.
As counsel what advice shall you give thetaxpayer. Explain briefly your answer.
SUGGESTED ANSWER: The taxpayer should appeal, byway of a petition for review, to the Court of TaxAppeals not on the ground of the denial of the protestbut on other matter arising under the provisions of theNational Internal Revenue Code. The actual issuance ofa warrant of distraint and levy in certain casescannot be considered a final decision on a disputedassessment.
To be a valid decision on a disputed assessment,the decision of the Commissioner or his duly authorizedrepresentative shall (a) state the facts, theapplicable law, rules and regulations, or jurisprudenceon which such decision is based, otherwise, thedecision shall be void, in which case the same shallnot be considered a decision on the disputedassessment; and (b) that the same is his finaldecision. (Sec. 3.1.6, Rev. Regs. 12-99) Theseconditions are not complied with by the mere issuanceof a warrant of distraint and levy. (Commissioner of InternalRevenue v. Union Shipping Corp., 185 SCRA 547)
Furthermore, a motion for the suspension of thecollection of the tax may be filed together with thepetition for review (Sec. 3, Rule 10, RRCTA effectiveDecember 15, 2005) because the collection of the tax mayjeopardize the interest of the taxpayer.
3. As a general rule, there must always bea decision of the Commissioner of Internal
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Revenue or Commissioner of Customs before theCourt of Tax Appeals, would have jurisdiction.If there is no such decision, the petition would bedismissed for lack of jurisdiction unless the casefalls under any of the following exceptions.
4. Instances where the Court of TaxAppeals would have jurisdiction even if there isno decision yet by the Commissioner of InternalRevenue:
a. Where the Commissioner has not acted on thedisputed assessment after a period of 180 days fromsubmission of complete supporting documents, thetaxpayer has a period of 30 days from the expiration ofthe 180 day period within which to appeal to the Courtof Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997;Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No.135210, July 11, 2001)
b. Where the Commissioner has not acted on anapplication for refund or credit and the two yearperiod from the time of payment is about to expire, thetaxpayer has to file his appeal with the Court of TaxAppeals before the expiration of two years from thetime the tax was paid.
It is disheartening enough to a taxpayer to bekept waiting for an indefinite period for the ruling,.It would make matters more exasperating for thetaxpayer if the doors of justice would be closed forsuch a relief until after the Commissioner, would have,at his personal convenience, given his go signal.(Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No.82618, March 16, 1989, unrep.)
5. The characteristic of a BIR denial of aprotest such as would enable the taxpayer toappeal the same to the Court of Tax Appeals. TheCommissioner of Internal Revenue should always indicate
to the taxpayer in clear and unequivocal languagewhenever his action on an assessment questioned by ataxpayer constitutes his final determination on thedisputed assessment.
On the basis of his statement indubitably showingthat the Commissioner’s communicated action is hisfinal decision on the contested assessment, theaggrieved taxpayer would then be able to take recourseto the tax court at the opportune time. Withoutneedless difficulty, the taxpayer would be able todetermine when his right to appeal to the tax courtaccrues. (Commissioner of Internal Revenue v. Bank of the PhilippinesIslands, G. R. No. 134062, April 17, 2007)
COLLECTION OF INTERNAL REVENUE TAXES
1. General rule: Collection of taxes isimprescriptible. While this may be so, statutes mayprovide for periods of prescription,
2. Why is the collection of taxesimprescriptible ?
SUGGESTED ANSWER:a. As a general rule, revenue laws are not
intended to be liberally construed, and exemptions arenot given retroactive application, considering thattaxes are the lifeblood of the government and inHolmes’ memorable metaphor, the price we pay forcivilization, tax laws must be faithfully and strictlyimplemented. (Commissioner of Internal Revenue v. Acosta, etc.,G. R.No. 154068, August 3, 2007) However, statutes mayprovide for prescriptive periods for the collection ofparticular kinds of taxes.
b. Tax laws, unlike remedial laws, are not to beapplied retroactively. Revenue laws are substantivelaws and their application must not be equated withremedial laws. (Acosta, supra)
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3. What is the prescriptive period forcollecting internal revenue taxes ?
SUGGESTED ANSWER: There are four (4) prescriptiveperiods for the collection of an internal revenue tax:
a. Collection upon a false or fraudulent returnor no return without assessment. In case of a false orfraudulent return with the intent to evade tax or offailure to file a return, “a proceeding in court forthe collection of such tax may be filed withoutassessment, at any time within ten (10) years after thediscovery of the falsity, fraud or omission.” [Sec. 222(a), NIRC of 1997]
b. Collection upon a false or fraudulent returnor no return with assessment. Any internal revenue taxwhich has been assessed (because the return is false orfraudulent with intent to evade tax or of failure tofail a return), within a period of ten (10) years fromdiscovery of the falsity, fraud or omission “may becollected by distraint or levy or by a proceeding incourt within five (5) years following the assessment ofthe tax.” [Sec. 222 (c), in relation to Sec. 222 (a) NIRCof 1997, emphasis supplied]
c. Collection upon an extended assessment. Where a tax has been assessed with the period agreedupon between the Commissioner and the taxpayer inwriting (which should initially be within three (3)years from the time the return was filed or should havebeen filed), or any extensions before the expiration ofthe period agreed upon, the tax “may be collected bydistraint or levy or by a proceeding in court withinthe period agreed upon in writing before the expirationof the five (5) year period. The period so agreed uponmay be extended by subsequent written agreements madebefore the expiration of the period previously agreedupon.” [Sec. 222 (d), in relation to Secs. 222 (b) and203, NIRC of 1997, emphasis supplied]
d. Collection upon a return that is not false orfraudulent, or where the assessment is not an extendedassessment. “Except as provided in Section 222,internal revenue taxes shall be assessed within three(3) years after the last day prescribed by law for thefiling of the return, and no proceeding in courtwithout assessment for the collection of such taxesshall be begun after the expiration of such period;Provided, That in case where a return is filed beyondthe period prescribed by law, the three (3) year periodshall be computed from the day the return was filed.For purposes of this Section, a return filed before thelast day prescribed by law for the filing thereof shallbe considered filed on such last day.” (Sec. 203, NIRCof 1997, emphasis supplied)
When the BIR validly issues an assessment withinthe three (3)-year period, it has another three (3)years within which to collect the tax due bydistraint, levy, or court proceeding. The assessmentof the tax is deemed made and the three (3)-yearperiod for collection of the assessed tax begins torun on the date the assessment notice had beenreleased, mailed or sent to the taxpayer. [Bank ofPhilippine Islands (Formerly Far East Bank and Trust Company) v. Commissionerof Internal Revenue, G. R. No. 174942, March 7, 2008 citingBPI v. Commissioner of Internal Revenue, G.R. No. 139736, 17 October2005, 473 SCRA 205, 222-223]
NOTES AND COMMENTS: a. Both the former Sec. 269, NIRC of 1977 and
Sec.222 of NIRC of 1997 do not refer to a “regularreturn.” It is clear that in enacting Sec. 222,entitled “Exceptions as to the period of limitation ofassessment and collection of taxes,” the NIRC of 1997has eliminated sub-paragraph c of the former Sec. 269of the NIRC, also entitled “Exceptions as to the periodof limitation of assessment and collection of taxes.”Said Sec. 269 (c), reads “Any internal revenue tax
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which has been assessed within the period of limitationabove-prescribed may be collected by distraint or levyor by a proceeding in court within three yearsfollowing the assessment of the tax.”
A perusal of Sec. 222 of the NIRC is clear thatit covers only three scenarios only. 1) No assessmentwas made upon a false or fraudulent return or omissionto file a return; 2) an assessment was made upon afalse or fraudulent return or omission to file areturn; and 3) an extended assessment issued within aperiod agreed upon by the Commissioner and thetaxpayer. The same scenarios are those referred to inthe former Sec. 269 which provided for a prescriptiveperiod for collection of three (3) years.
It is clear therefore that neither Sec. 222 northe former Sec. 269 provide for an instance where theassessment was made upon a “regular return” or one thatis not false or fraudulent, or that there was anagreement to extend the period for assessment.
Resort should therefore be made to the three (3)year period referred to in Sec. 203 of the NIRC of 1997which reads, “Except as provided in Section 222,internal revenue taxes shall be assessed within three(3) years after the last day prescribed by law for thefiling of the return, and no proceeding in courtwithout assessment for the collection of such taxes x xx “ (paraphrasing and emphasis supplied)
4. What is a compromise ?SUGGESTED ANSWER: A compromise is a contract
whereby the parties, by making reciprocal concessions,avoid a litigation or put an end to one alreadycommenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed bythe BIR, if the taxpayer did not agree. A compromisebeing, by its nature, mutual in essence requiresagreement. The payment made under protest could only
signify that there was no agreement that hadeffectively been reached between the parties. (Vda. deSan Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485,September 10, 2001)
5. What tax cases may be the subject ofa compromise ?
SUGGESTED ANSWER: The following cases may, upontaxpayer’s compliance with the basis for compromise, bethe subject matter of compromise settlement:
a. Delinquent accounts; b. Cases under administrative protest after
issuance of the Final Assessment Notice to the taxpayerwhich are still pending in the Regional Offices,Revenue District Offices, Legal Service, Large TaxpayerService (LTS), Collection Service, Enforcement Serviceand other offices in the National Office;
c. Civil tax cases being disputed beforethe courts;
d. Collection cases filed in courts; e. Criminal violations, other than those
already filed in court, or those involving criminal taxfraud. (Sec. 2, Rev. Regs. No. 30-2002)
6. What tax cases could not be thesubject of compromise ?
SUGGESTED ANSWER:a. Withholding tax cases unless the
applicant-taxpayer invokes provisions of law that castdoubt on the taxpayer’s obligation to withhold.;
b. Criminal tax fraud cases, confirmed as suchby the Commissioner of Internal Revenue or his dulyauthorized representative;
c. Criminal violations already filed incourt;
d. Delinquent accounts with duly approvedschedule of installment payments;
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e. Cases where final reports ofreinvestigation or reconsideration have been issuedresulting to reduction in the original assessment andthe taxpayer is agreeable to such decision by signingthe required agreement form for the purpose. On theother hand, other protested cases shall be handled bythe Regional Evaluation Board (REB) or the NationalEvaluation Board (NEB) on a case to case basis;
f. Cases which become final and executoryafter final judgment of a court where compromise isrequested on the ground of doubtful validity of theassessment; and
g. Estate tax cases where compromise isrequested on the ground of financial incapacity of thetaxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
7. When may the Commissioner of InternalRevenue compromise the payment of any internalrevenue tax ? Alternatively, what are thegrounds for a compromise, and what are theamounts for which a compromise may be enteredinto ?
SUGGESTED ANSWER:a. A reasonable doubt as to the validity of
the claim against the taxpayer exists provided that theminimum compromise entered into is equivalent to fortypercent (40%) of the basic tax; or
b. The financial position of the taxpayerdemonstrates a clear inability to pay the assessed taxprovided that the minimum compromise entered into isequivalent to ten percent (10%) of the basic assessedtax
In the above instances the Commissioner is allowedto enter into a compromise only if the basic taxinvolved does not exceed One million pesos(P1,000,000.00), and the settlement offered is not less
than the prescribed percentages. [Sec. 204 (A), NIRC of1997]
In instances where the Commissioner is notauthorized, the compromise shall be subject to theapproval of the Evaluation Board composed of theCommissioner and the four (4) Deputy Commissioners.
8. When is the Commissioner of InternalRevenue authorized to abate or cancel a taxliability ?:
SUGGESTED ANSWER:a. The tax or any portion thereof appears to be
unjustly or excessively assessed; orb. The administration and collection costs
involved do not justify the collection of the amountdue. [Sec. 204 (B), NIRC of 1997]
9. The collection of a tax may not besuspended. Only the Court of Tax Appeals may issue anorder suspending the collection of a tax.
10. As a general rule, “No court shallhave the authority to grant an injunction torestrain the collection of any national internalrevenue tax, fee or charge.” (Sec. 218, NIRC)
“No appeal taken to the CTA from the decision ofthe Commissioner of Internal Revenue or theCommissioner of Customs or the Regional Trial Court,provincial, city or municipal treasurer or theSecretary of Finance, the Secretary of Trade andIndustry and Secretary of Agriculture, as the case maybe shall suspend the payment, levy, distraint, and/orsale of any property of the taxpayer for thesatisfaction of his tax liability as provided byexisting law: Provided, however, That when in theopinion of the Court the collection by the
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aforementioned government agencies may jeopardize theinterest of the Government and/or the taxpayer theCourt at any stage of the proceeding may suspend thesaid collection and require the taxpayer either todeposit the amount claimed or to file a surety bond fornot more than double the amount with the Court.” (Sec.11, Rep. Act No. 1125, as amended by Sec. 9, Rep. Act No.9282 )
The Supreme Court may enjoin the collection oftaxes under its general judicial power but it should beapparent that the source of the power is not statutorybut constitutional.
11. What is the procedure forsuspension of collection of taxes ?
SUGGESTED ANSWER: Where the collection of theamount of the taxpayer’s liability, sought by means ofa demand for payment, by levy, distraint or sale ofproperty of the taxpayer, or by whatever means, asprovided under existing laws, may jeopardize theinterest of the government or the taxpayer, aninterested party may file a motion for the suspensionof the collection of the tax liability (Sec. 1, Rule10, RRCTA effective December 15, 2005) with the Court ofTax Appeals.
The motion for suspension of the collection ofthe tax may be filed together with the petition forreview or with the answer, or in a separate motionfiled by the interested party at any stage of theproceedings. (Sec. 3, Rule 10, RRCTA effective December15, 2005)
REFUND OF INTERNAL REVENUE TAXES
1. What are the grounds for refund orcredit of internal revenue taxes ?
SUGGESTED ANSWER: The grounds for refund orcredit or internal revenue taxes are the following:
a. The tax was illegally collected. There is nolaw that authorizes the collection of the tax.
b. The tax was excessively collected. There isa law that authorizes the collection of a tax but thetax collected was more than what the law allows.
c. The tax was paid through a mistaken beliefthat the taxpayer should pay the tax (solution indebeti)
2. What are the three (3) conditionsfor the grant of a claim for refund of creditablewithholding tax ?
SUGGESTED ANSWER: a. The claim is filed with the Commissioner of
Internal Revenue within the two-year period from thedate of the payment of the tax.
b. It is shown on the return of the recipientthat the income payment received was declared as partof the gross income; and
c. The fact of withholding is established by acopy of a statement duly issued by the payee showingthe amount paid and the amount of tax withheldtherefrom. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals,et al., G. R. No. 155682, March 27, 2007)
NOTES AND COMMENTS: a. Proof of fact of withholding. “Sec. 10.
Claim for tax credit or refund. – (a) Claims for Tax Credit orRefund of Income tax deducted and withheld on incomepayments shall be given due course only when it isshown on the return that the income payment receivedhas been declared as part of the gross income and thefact of withholding is established by a copy of theWithholding Tax Statement duly issued by the payor tothe payee showing the amount paid and the amount of thetax withheld therefrom xxx” (Rev. Regs. No. 6-85, asamended)
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The document which may be accepted as evidence ofthe third condition, that is, the fact of withholding,must emanate from the payor itself, and not merely fromthe payee, and must indicate the name of the payor, theincome payment basis of the tax withheld, the amount ofthe tax withheld and the nature of the tax paid.(Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R.No. 155682, March 27, 2007)
3. What should be established by a taxpayerfor the grant of a tax refund ? Why ?
SUGGESTED ANSWER: A taxpayer needs to establishnot only that the refund is justified under the law,but also the correct amount that should be refunded.
If the latter requisite cannot be ascertained withparticularity, there is cause to deny the refund, orallow it only to the extent of the sum that is actuallyproven as due.
Tax refunds partake of the nature of taxexemptions and are thus construed strictissimi juris againstthe person claiming the exemption. The burden inproving the claim for refund necessarily falls on thetaxpayer. (Far East Bank Trust and Company, etc., v. Commissioner ofInternal Revenue, et al., G. R. No. 138919, May 2, 2006)
4. What is The legal remedy under theNIRC of 1997 at the judicial level with respectto refund or recovery of tax erroneously orillegally collected ?
SUGGESTED ANSWER: Filing of a suit or proceedingwith the Court of Tax Appeals
a. before the expiration of two (2) years fromthe date of payment of the tax regardless of anysupervening cause that may arise after payment (2nd
par., Sec. 229, NIRC of 1997), or
b. within thirty (30) days from receipt of thedenial by the Commissioner of the application forrefund or credit. (Sec. 11, R.A. No. 1125)
5. The two (2) year period and thethirty (30) day period should be applied on awhichever comes first basis. Thus, if the 30 daysis within the 2 years, the 30 days applies, if the 2year period is about to lapse but there is no decisionyet by the Commissioner which would trigger the 30-dayperiod, the taxpayer should file an appeal, despite theabsence of a decision. (Commissioners, etc. v. Court of Tax Appeals,et al., G. R. No. 82618, March 16, 1989, unrep.)
6. Where the taxpayer is a corporationthe two year prescriptive period from “date ofpayment” for refund of income taxes should be thedate when the corporation filed its finaladjustment return not on the date when the taxes werepaid on a quarterly basis. (Philippine Bank of Communications v.Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28,1999)
It is only when the return, covering the wholeyear, is filed that the taxpayer will be able toascertain whether a tax is still due or refund can beclaimed based on the adjusted and audited figures. (Bankof the Philippine Islands v. Commissioner of Internal Revenue, G.R. No.144653, August 28, 2001)
7. What is solutio indebeti as appliedto tax cases ?
SUGGESTED ANSWER: Under the principle of solutioindebiti provided in Art. 2154, Civil Code, “If somethingis received when there is no right to demand it, andit was unduly delivered through mistake, theobligation to return it arises.” The BIR received
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something “when there [was] no right to demand it,”and thus, it has the obligation to return it. [StateLand Investment Corporation v. Commissioner of Internal Revenue, G.R. No. 171956, January 18, 2008citing Citibank, N. A. v. Court ofAppeals and Commissioner of Internal Revenue, G.R. No. 107434,October 10, 1997, 280 SCRA 459, in turn citing RamieTextiles, Inc. v. Mathay, Sr., 89 SCRA 586 (1979)]. It is anancient principle that no one, not even the state,shall enrich oneself at the expense of another.Indeed, simple justice requires the speedy refund ofthe wrongly held taxes. (Ibid.)
56. Whatare the reasons for requiring the filing of anadministrative application for refund or credit withthe BSUGGESTED 8. Why isit necessary to file an administrative claim forrefund with the BIR, before filing a case withthe Court of Tax Appeals ?
a. a. To affordthe Commissioner an opportunity to correct his errorsor that of subordinate officers. (Gonzales v. Court of TaxAppeals, et al., 14 SCRA79)
b. To notify the Government that such taxeshave been questioned and the notice should be borne inmind in estimating the revenue available forexpenditures.
9. As a general rule the filing of anapplication for refund or credit with the Bureau
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of Internal Revenue is an administrativeprecondition before a suit may be filed with theCourt of Tax Appeals ?
SUGGESTEDANSWER:
SUGGESTED ANSWER: Yes. The failure to first file awritten claim for refund or credit is not fatal to apetition for review involving a disputed assessmentwhere an assessment was disputed but the protest was
denied by the Bureau of Internal Revenue. To hold thatthe taxpayer has now lost the right to appeal from theruling on the disputed assessment and require him tofile a claim for a refund of the taxes paid as acondition precedent to his right to appeal, would ineffect require of him to go through a useless andneedless ceremony that would only delay the dispositionof the case, for the Commissioner would certainlydisallow the claim for refund in the same way as hedisallowed the protest against the assessment. Thelaw, should not be interpreted as to result inabsurdities. (vda. de San Agustin., etc., v. Commissioner of Internal Revenue,
G.R. No. 138485, September 10, 2001 citing Roman CatholicArchbishop of Cebu v. Collector of Internal Revenue, 4 SCRA 279) NOTE:Reconciliation between above two numbers (8 and 9). Anapplication for refund or credit under Sec. 229 of theNIRC of 1997 is required where the case filed beforethe CTA is a refund case, which is not premised upon adisputed assessment. There is no need for a priorapplication for refund or credit, if the refund ismerely a consequence of the resolution of the BIR’sdenial of a protested assessment.
Who could applyfor a tax refund or credit ?
10. Who could apply for a refund orcredit ?
SUGGESTED ANSWER: The person who paid the taxmay apply for a refund or credit.
A withholding tax agent may also apply for arefund. In a sense, he is also a taxpayer because thetax may be collected from him if he does not withhold.
11. What is the nature of the taxpayer’sremedy of either to ask for a refund of excesstax payments or to apply the same in payment ofsucceeding taxable periods’ taxes ?
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (nowSec. 76 of the NIRC of 1997) provides that any excessof the total quarterly payments over the actual incometax computed in the adjustment or final corporateincome tax return, shall either (a) be refunded to thecorporation, or (b) may be credited against the
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estimated quarterly income tax liabilities for thequarters of the succeeding taxable year. To ease theadministration of tax collection, these remedies are inthe alternative and the choice of one precludes theother. Since the Bank has chosen the tax creditapproach it cannot anymore avail of the tax refund.(Philippine Bank of Communications v. Commissioner of Internal Revenue,et al., G.R. No. 112024, January 28, 1999)
NOTES AND COMMENTS: a. The choice, is given to the taxpayer,
whether to claim for refund under Sec. 76 or have itsexcess taxes applied as tax credit for the succeedingtaxable year, such election is not final. Priorverification and approval by the Commissioner ofInternal Revenue is required. The availment of theremedy of tax credit is not absolute and mandatory. Itdoes not confer an absolute right on the part of thetaxpayer to avail of the tax credit scheme if it sochooses. Neither does it impose a duty on the part ofthe government to sit back and allow an important facetof tax collection to be at the sole control anddiscretion of the taxpayer. (Paseo Realty & DevelopmentCorporation v. Court of Appeals, et al., G. R. No. 119286, October13, 2004)
12.What is the “irrevocability rule” inclaims for refund and what is the rationalebehind this ?
SUGGESTED ANSWER: A corporation entitled to a taxcredit or refund of the excess estimated quarterlyincome taxes paid has two options: (1) to carry overthe excess credit or (2) to apply for the issuance ofa tax credit certificate or to claim a cash refund. Ifthe option to carry over the excess credit isexercised, the same shall be irrevocable for thattaxable period.
In exercising its option, the corporation mustsignify in its annual corporate adjustment return (bymarking the option box provided in the BIR form) itsintention either to carry over the excess credit or toclaim a refund. To facilitate tax collection, theseremedies are in the alternative and the choice of oneprecludes the other. [Systra Philippines, Inc., v. Commissioner ofInternal Revenue, G. R. No. 176290, September 21, 2007 citingPhilippine Bank of Communications v. Commissioner of Internal Revenue, 361Phil. 916 (1999)]
This is known as the irrevocability rule and isembodied in the last sentence of Section 76 of the TaxCode. The phrase “such option shall be consideredirrevocable for that taxable period” means that theoption to carry over the excess tax credits of aparticular taxable year can no longer be revoked.
The rule prevents a taxpayer from claiming twicethe excess quarterly taxes paid: (1) as automaticcredit against taxes for the taxable quarters of thesucceeding years for which no tax credit certificatehas been issued and (2) as a tax credit either forwhich a tax credit certificate will be issued or whichwill be claimed for cash refund. (Systra Philippines, Inc.,supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUECODE, Seventh Edition, 2000, p. 430)
13.In the year 2000 Systra derived excesstax credits and exercised the option to carrythem over as tax credits for the next taxableyear. However, the tax due for the next taxableyear is lower than excess tax credits. It nowapplies for a refund of the unapplied taxcredits. May its refund be granted ? If therefund is denied, does Systra lose theunapplied tax credits ? Explain briefly youranswer.
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SUGGESTED ANSWER: Systra’s claim for refundshould be denied. Once the carry over option wasmade, actually or constructively, it became foreverirrevocable regardless of whether the excess taxcredits were actually or fully utilized Under Section76 of the Tax Code, a claim for refund of such excesscredits can no longer be made. The excess credits willonly be applied “against income tax due for thetaxable quarters of the succeeding taxable years.”
Despite the denial of its claim for refund,Systra does not lose the unapplied tax credits. Theamount will not be forfeited in favor of thegovernment but will remain in the taxpayer’s account.Petitioner may claim and carry it over in thesucceeding taxable years, creditable against futureincome tax liabilities until fully utilized. (SystraPhilippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290,September 21, 2007 citing Philam Asset Management, Inc. v.Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14December 2005, 477 SCRA 761) Supposing in the above problem that Systrapermanent ceased operations, what happens to theunapplied credits ?
SUGGESTED ANSWER: Where, the corporationpermanently ceases its operations before fullutilization of the tax credits it opted to carry over,it may then be allowed to claim the refund of theremaining tax credits. In such a case, the remainingtax credits can no longer be carried over and theirrevocability rule ceases to apply. Cessante ratione legis,cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v.Commissioner of Internal Revenue, G. R. No. 176290, September21, 2007)
NOTES AND COMMENTS: The holding in State LandInvestment Corporation v. Commissioner of Internal Revenue, G. R.No. 171956, January 18, 2008 that the taxpayer isentitled to a refund because during the succeeding
year there was no tax due against which the excess taxcredits may be applied is not doctrinal. This is sobecause it interpreted the provisions of then Sec. 69of the NIRC, which did not provide for the“irrevocability rule” now contained in Sec. 76 of theNIRC of 1997.
14. A simultaneous filing of the applicationwith the BIR for refund/credit and theinstitution of the court suit with the CTA isallowed. There is no need to wait for a BIR denial.REASONS:
a. The positive requirement of Section 230 NIRC(now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the Commissionerin rendering decision does not extend the peremptoryperiod fixed by the statute;
c. The law fixed the same period two years forfiling a claim for refund with the Commissioner underSec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of1997), and for filing suit in court under Sec. 230,NIRC (now Sec. 229, NIRC of 1997), unlike in protestsof assessments under Sec. 229 (now Sec. 228, NIRC of1997), which fixed the period (thirty days from receiptof decision) for appealing to the court, thus clearlyimplying that the prior decision of the Commissioner isnecessary to take cognizance of the case. (Commissioner ofInternal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No.34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et al.,107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)
15. The grant of a refund is founded on theassumption that the tax return is valid, i.e. thatthe facts stated therein are true and correct.(Commissioner of Internal Revenue v. Court of Tax Appeals, G. R. No.106611, July 21, 1994, 234 SCRA 348) Without the taxreturn it would be virtually impossible to determine
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whether the proper taxes have been assessed and paid.After all, it is axiomatic that a claimant has theburden of proof to establish the factual basis of hisor her claim for tax credit or refund. Tax refunds,like tax exemptions, are construed strictly against thetaxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, etal., G. R. No. 119286, October 13, 2004)
However, in BPI-Family Savings Bank v. Court of Appeals, 386Phil. 719; 326 SCRA 641 (2000), refund was granted,despite the failure to present the tax return, becauseother evidence was presented to prove that the overpaidtaxes were not applied. (Ibid.)
16. Discuss the difference between taxrefund and tax credit..
SUGGESTED ANSWER: There are unmistakable formaland practical differences between the two modes.Formally, a tax refund requires a physical return ofthe sum erroneously paid by the taxpayer, while a taxcredit involves the application of the reimbursableamount against any sum that may be due and collectiblefrom the taxpayer.
On the practical side, the taxpayer to whom thetax is refunded would have the option, among others, toinvest for profit the returned sum, an option notproximately available if the taxpayer chooses insteadto receive a tax credit. (Commissioner of Customs v. PhilippinePhosphate Fertilizer Corporation, G. R. No. 144440, September 1,2004)
NOTES AND COMMENTS: It may be that there is noessential difference between a tax refund and a taxcredit since both are moves of recovering taxeserroneously or illegally paid to the government.(Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R.No. 144440, September 1, 2004)
17. A bank-trustee of employee trusts filedan application for the refund of taxes withheldon the interest incomes of the investments madeof the funds of the employees’ trusts. Insteadof presenting separate accounts for interestincomes made of these investments, the bank-trustee instead presented witness to establishthat it would next to impossible to single outthe specific transactions involving theemployees’ trust funds from the totality of allinterest income from its total investments. Onthe above basis will the application for refundprosper ?
SUGGESTED ANSWER: No. The application forrefund will not prosper.
The bank-trustee needs to establish not only thatthe refund is justified under the law (which is sobecause incomes of employees’ trusts are tax exempt),but also the correct amount that should be refunded.
Tax refunds partake of the nature of taxexemptions and are thus construed strictissimi juris againstthe person or entity claiming the exemption. Theburden in proving the amount to be refundednecessarily falls on the bank-trustee, and there is anapparent failure to do so.
A necessary consequence of the special exemptionenjoyed alone by employees’ trusts would be anecessary segregation in the accounting of suchincome, interest or otherwise, earned from thosetrusts from that earned by the other clients of thebank-trustee. (Far East Bank and Trust Company, etc., v.Commissioner, etc., et al., G.R. No. 138919, May 2, 2006) Theamounts that are the exempt earnings of the employee’strust has not been shown as they have been commingledwith the interest income of the other clients of thebank-trustee.
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18. CTA Circular No. 1-95 clearly requiresthat photocopies of the receipts or invoicesmust be pre-marked and submitted to the CTA toverify the correctness of the summary listingand the CPA certification. CTA Circular No. 1-95,issued on 25 January 1995, reads:
“1. The party who desires to introduce asevidence such voluminous documents must present: (a)Summary containing the total amount/s of the taxaccount or tax paid for the period involved and achronological or numerical list of the numbers, datesand amounts covered by the invoices or receipts; and(b) a Certification of an independent Certified PublicAccountant attesting to the correctness of thecontents of the summary after making an examinationand evaluation of the voluminous receipts andinvoices. Such summary and certification must properlybe identified by a competent witness from theaccounting firm.
2. The method of individual presentation of eachand every receipt or invoice or other documents formarking, identification and comparison with theoriginals thereof need not be done before the Court orthe Commissioner anymore after the introduction of thesummary and CPA certification. It is enough that thereceipts, invoices and other documents covering thesaid accounts or payments must be pre-marked by theparty concerned and submitted to the Court in order tobe made accessible to the adverse party wheneverhe/she desires to check and verify the correctness ofthe summary and CPA certification. However, theoriginals of the said receipts, invoices or documentsshould be ready for verification and comparison incase doubt on the authenticity of the particular
documents presented is raised during the hearing ofthe case.” (Emphasis supplied)
19. Manila Electric Company a grantee of alegislative franchise under Act No. 484, asamended by Republic Act No. 4159 andPresidential Decree No. 551,1[3] had been paying a2% franchise tax based on its gross receipts, inlieu of all other taxes and assessments ofwhatever nature. Upon the effectivity ofExecutive Order No. 72 on February 10, 1987,however, respondent became subject to thepayment of regular corporate income tax.
For the last quarter ending December 31,1987, respondent filed on April 15, 1988 itstentative income tax reflecting a refundableamount of P101,897,741, but only P77,931,812 wasapplied as tax credit for the succeeding taxableyear 1988.
Acting on a yearly routinary Letter ofAuthority No. 0018064 NA dated June 27, 1988issued by petitioner, directing theinvestigation of tax liabilities of respondentfor taxable year 1987, an investigation wasconducted by Revenue Officer Frederick Capitanwhich showed that respondent was liable for “1.deficiency income tax in the amount ofP2,340,902.52; and 2. deficiency franchise taxin the amount of P2,838,335.84.” On April 17, 1989, respondent filed anamended final corporate Income Tax Return endingDecember 31, 1988 reflecting a refundable amountof P107,649,729.1
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Respondent thus filed on March 30, 1990 aletter-claim for refund or credit in the amountof P107,649,729 representing overpaid incometaxes for the years 1987 and 1988.
Petitioner not having acted on its request,respondent filed on April 6, 1990 a judicialclaim for refund or credit with the Court of TaxAppeals.
It is gathered that respondent paid thedeficiency franchise tax in the amount ofP2,838,335.84. It protested the payment of thealleged deficiency income tax and claimed as analternative remedy the deduction thereof fromits claim for refund or credit.
The Court of Tax Appeals granted theP107,649,729 claim for refund, or in thealternative for the BIR to issue a tax credit.Is the Court of Tax Appeals correct ?
SUGGESTED ANSWER: Yes. Section 69 of theNational Internal Revenue Code of 1986, now Sec. 76provides, if the sum of the quarterly tax paymentsmade during a taxable year is not equal to the totaltax due on the entire taxable income of that year asshown in its final adjustment return, the corporationhas the option to either: (a) pay the excess taxstill due, or (b) be refunded the excess amount paid.The returns submitted are “merely pre-audited whichconsist mainly of checking mathematical accuracy ofthe figures in the return.” After such checking, thepurpose of which being to “insure prompt action oncorporate annual income tax returns showing refundableamounts arising from overpaid quarterly income taxes,”(Revenue Memorandum Order No. 32-76 dated June 11,1976) the refund or tax credit is granted.
(Commissioner of Internal Revenue v. Manila Electric Company, G. R.No. 121666, October 10, 2007)
TARIFF AND CUSTOMS LAWS
ORGANIZATION AND FUNCTIONS OF THE BUREAU OFINTERNAL REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin, and whyis it important to know whether importation hasalready begun or not ?
SUGGESTED ANSWER: Importation begins when theconveying vessel or aircraft enters the jurisdiction ofthe Philippines with intention to unlade therein. (Sec.1202, TCCP)
The jurisdiction of the Bureau of Customs toenforce the provisions of the TCCP including seizureand forfeiture also begins from the beginning ofimportation. Thus, the Bureau of Customs obtainsjurisdiction over imported articles only afterimportation has begun.
2. When is importation deemedterminated and why is it important to knowwhether importation has already ended?
SUGGESTED ANSWER: Importation is deemedterminated upon payment of the duties, taxes and othercharges due upon the agencies, or secured to be paid,at the port of entry and the legal permit forwithdrawal shall have been granted.
In case the articles are free of duties, taxes andother charges, until they have legally left thejurisdiction of the customs. (Sec. 1202, TCCP) The
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Bureau of Customs loses jurisdiction to enforce theTCCP and to make seizures and forfeitures afterimportation is deemed terminated.
3. The flexible tariff clause is aprovision in the Tariff and Customs Code, whichimplements the constitutionally delegated power to theCongress to further delegate to the President of thePhilippines, in the interest of national economy,general welfare and/or national security uponrecommendation of the NEDA (a) to increase, reduce orremove existing protective rates of import duty,provided that, the increase should not be higher than100% ad valorem; (b) to establish import quota or toban imports of any commodity, and (c) to imposeadditional duty on all imports not exceeding 10% advalorem, among others.
4. Customs duties defined. Customs duties isthe name given to taxes on the importation andexportation of commodities, the tariff or tax assessedupon merchandise imported from, or exported to, aforeign country. (Nestle Phils. v. Court of Appeals, et al., G.R.No. 134114, July 6, 2001)
5. Special customs duties areadditional import duties imposed on specifickinds of imported articles under certainconditions. The special customs duties under theTariff and Customs Code (TCCP) are the anti-dumpingduty, the countervailing duty, the discriminatory duty,and the marking duty, and under the Safeguard MeasuresAct (SMA) additional tariffs as safeguard measures.
6. The special customs duties are imposedfor the protection of consumers andmanufacturers, as well as Philippine products.
7. Dumping duty is an additional specialduty amounting to the difference between theexport price and the normal value of suchproduct, commodity or article (Sec. 301 (s) (1),TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of1999.”) imposed on the importation of a product,commodity or article of commerce into the Philippinesat less than its normal value when destined fordomestic consumption in the exporting country which iscausing or is threatening to cause material injury to adomestic industry, or materially retarding theestablishment of a domestic industry producing the likeproduct. [Sec. 301 (s) (5), TCC, as amended by Rep. ActNo. 8752, “Anti-Dumping Act of 1999”]
8. When is the anti-dumping dutyimposed ?
SUGGESTED ANSWER: The anti-dumping duty isimposed
a. Where a product, commodity or article ofcommerce is exported into the Philippines at a priceless than its normal value when destined for domesticconsumption in the exporting country,
b. and such exportation is causing or isthreatening to cause material injury to a domesticindustry, or materially retards the establishment of adomestic industry producing the like product. [Sec. 301(a), TCC, as amended by Rep. Act No. 8752, “Anti-DumpingAct of 1999”]
9. Normal value for purposes of imposingthe anti-dumping duty is the comparable price at the
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date of sale of like product, commodity, or article inthe ordinary course of trade when destined forconsumption in the country of export. [Sec. 301 (s) (3), TCC, as amended by Rep. Act No. 8752, “Anti-DumpingAct of 1999”]
10. The imposing authority for the anti-dumping duty is the Secretary of Trade andIndustry in the case of non-agricultural product,commodity, or article or the Secretary ofAgriculture, in the case of agricultural product,commodity or article, after formal investigation andaffirmative finding of the Tariff Commission. [Sec. 301(a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Actof 1999”]
11. Even when all the requirements for theimposition have been fulfilled, the decision onwhether or not to impose a definitive anti-dumping duty remains the prerogative of theTariff Commission. [Sec. 301 (a), TCC, as amended byRep. Act No. 8752, “Anti-Dumping Act of 1999”] Thus, thecabinet secretaries could not contravene therecommendation of the Tariff Commission. They couldnot impose the anti-dumping duty or any special customsduty without the favorable recommendation of the TariffCommission.
12. In the determination of whether toimpose the anti-dumping duty, the TariffCommission, may consider among others, the effectof imposing an anti-dumping duty on the welfareof the consumers and/or the general public, andother related local industries. (Sec. 301 (a), TCC,as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)
13. The amount of anti-dumping dutythat may be imposed is the difference between theexport price and the normal value of suchproduct, commodity or article. (Sec. 301 (s) (1),TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of1999”)
The anti-dumping duty shall be equal to the marginof dumping on such product, commodity or articlethereafter imported to the Philippines under similarcircumstances, in addition to ordinary duties, taxesand charges imposed by law on the imported product,commodity or article.
14. What are countervailing duties andwhen are they imposed ?
SUGGESTED ANSWER: Countervailing duties areadditional customs duties imposed on any product,commodity or article of commerce which is granteddirectly or indirectly by the government in the countryof origin or exportation, any kind or form of specificsubsidy upon the production, manufacture or exportationof such product commodity or article, and theimportation of such subsidized product, commodity, orarticle has caused or threatens to cause materialinjury to a domestic industry or has materiallyretarded the growth or prevents the establishment of adomestic industry. (Sec. 302, TCCP as amended bySection 1, R.A. No. 8751)
15. The imposing authority for thecountervailing duties is the Secretary of Tradeand Industry in the case of non-agriculturalproduct, commodity, or article or the Secretaryof Agriculture, in the case of agriculturalproduct, commodity or article, after formal
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investigation and affirmative finding of the TariffCommission.
Even when all the requirements for the impositionhave been fulfilled, the decision on whether or not toimpose a definitive anti-dumping duty remains theprerogative of the Tariff Commission. (Sec. 301 (a),TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of1999”)
16. The countervailing duty is equivalent tothe value of the specific subsidy.
17. Marking duties are the additionalcustoms duties imposed on foreign articles (or itscontainers if the article itself cannot be marked), notmarked in any official language in the Philippines, ina conspicuous place as legibly, indelibly andpermanently in such manner as to indicate to anultimate purchaser in the Philippines the name of thecountry of origin.
18. The Commissioner of Customs imposes themarking duty.
19. The marking duty is equivalent to fivepercent (5%) ad valorem.
20. A discriminatory duty is a new andadditional customs duty imposed upon articles wholly orin part the growth or product of, or imported in avessel, of any foreign country which imposes, directlyor indirectly, upon the disposition or transportationin transit through or re-exportation from such countryof any article wholly or in part the growth or productof the Philippines, any unreasonable charge, exaction,regulation or limitation which is not equally enforced
upon like articles of every foreign country, ordiscriminates against the commerce of the Philippines,directly or indirectly, by law or administrativeregulation or practice, by or in respect to anycustoms, tonnage, or port duty, fee, charge, exaction,classification, regulation, condition, restriction orprohibition, in such manner as to place the commerce ofthe Philippines at a disadvantage compared with thecommerce of any foreign country.
21. The President of the Philippines imposesthe discriminatory duties.
22. Safeguard measures are emergencymeasures, including tariffs, to protect domesticindustries and producers from increased imports whichinflict or could inflict serious injury on them.
The CTA is vested with jurisdiction to reviewdecisions of the Secretary of Trade and Industryimposing safeguard measures as provided under Rep. ActNo. 8800 the Safeguard Measures Act (SMA). (Southern CrossCement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R.No. 158540, July 8, 2004)
The DTI Secretary cannot impose the safeguardmeasures if the Tariff Commission does not favorablyrecommend its imposition.
23. Imposing authority for safeguardmeasures. The imposing authority for thecountervailing duties is the Secretary of Tradeand Industry in the case of non-agriculturalproduct, commodity, or article or the Secretaryof Agriculture, in the case of agriculturalproduct, commodity or article, after formalinvestigation and affirmative finding of the TariffCommission.
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24. Safeguards measures that may be imposed.Additional tariffs, import quotas or banning ofimports.
25. The basis of dutiable value ofmerchandise that is subject to ad valorem customsduties is the transaction value, which shall be theprice actually paid or payable for the goods when soldfor export to the Philippines, adjusted by addingcertain cost elements to the extent that they areincurred by the buyer but are not included in the priceactually paid or payable for the imported goods, andmay include the following:
a. Cost of containers and packing,b. Insurance, andc. Freight. (Sec. 201, TCC as amended by Sec.
1, Rep. Act No. 9135)
26. The above transaction value is theprimary method of determining dutiable value. Ifthe transaction value of the imported articlecould not be determined using the above, thefollowing alternative methods should be used oneafter the other:
a. Transaction value of identical goodsb. Transaction value of similar goodsc. Deductive methodd. Computed methode. Fallback method
27. How and to whom should claims for refundof customs duties be made ?
SUGGESTED ANSWER: All claims for refund of dutiesshall be made in writing and forwarded to the Collectorof Customs to whom such duties are paid, who upon
receipt of such claim, shall verify the same by therecords of his Office, and if found to be correct andin accordance with law, shall certify the same to theCommissioner of Customs with his recommendationtogether with all necessary papers and documents. Uponreceipt by the Commissioner of such certified claim heshall cause the same to be paid if found correct.(Sec. 1708, TCC)
28. What is mean by the term “entry” inCustoms Law ?
SUGGESTED ANSWER: It has a triple meaning.a. the documents filed at the Customs house;b. the submission and acceptance of the
documents; andc. Customs declaration forms or customs entry
forms required to be accomplished by passengers ofincoming vessels or passenger planes as envisagedunder Sec. 2505 of the TCCP (Failure to declarebaggage). (Jardeleza v. People, G.R. No. 165265, February6, 2006)
29. A flight stewardess arrived fromSingapore. Upon her arrival she was askedwhether she has anything to declare. Sheanswered none, and she submitted her “CustomsBaggage Declaration Form” which she accomplishedand signed with nothing or written on the spacefor items to be declared. When her hanger bagwas examined some pieces of jewelry were foundconcealed within the lining of said bag.
She was then convicted of violating of Sec.3601 of the Tariff and Customs Code for unlawfulimportation which penalizes any person who shallfraudulently import or bring into the Philippinesany article contrary to law.
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She now appeals claiming that lower courterred n convicting her under Sec. 3601 when thefacts alleged both in the information and thoseshown by the prosecution constitute the offenseunder Sec. 2505 “Failure to Declare Baggage,” ofwhich she was acquitted. Is she correct ? SUGGESTED ANSWER: No. Sec. 3601 does not definea crime. It merely provides, inter alia, theadministrative remedies which can be resorted to by theBureau of Customs when seizing dutiable articles foundthe baggage of any person arriving in the Philippineswhich is not included in the accomplished baggagedeclaration submitted to the customs authorities, andthe administrative penalties that such person must payfor the release of such goods if not imported contraryto law.
Such administrative penalties are independent ofthe criminal liability for smuggling that may beimposed under Sec. 3601, and other provisions of theTCC which can only be determined after the appropriatecriminal proceedings, prescinding from the outcome inany administrative case that may have been filed anddisposed of by the customs authorities.
Indeed the second paragraph of Sec. 2505 providesthat nothing shall prevent the bringing of a criminalaction against the offender for smuggling under Section3601. (Jardeleza v. People, G. R. No. 165265, February 6,2006)
30. Payment is not a defense in smuggling. “When upon trial for violation of this section, thedefendant is shown to have possession of the article inquestion, possession shall be deemed sufficientevidence to authorize conviction, unless the defendantshall explain the possession to the satisfaction of thecourt: Provided, however, That payment of the tax due
after apprehension shall not constitute a valid defensein any prosecution under this section.” (last par.,Sec. 3601, TCC)
31. How is smuggling committed ?SUGGESTED ANSWER: Smuggling is committed by any
person who:a. fraudulently imports or brings into the
country any article contrary to law;b. assists in so doing any article contrary to
law; orc. receives, conceals, buys, sells or in any
manner facilitates the transportation, concealment orsale of such goods after importation, knowing the sameto have been imported contrary to law. (Jardeleza v.People, G.R. No. 165265, February 6, 2006 citing Rodriguezv. Court of Appeals, G. R. No. 115218, September 18, 1995,248 SCRA 288, 296)
NOTES AND COMMENTS:a. Importation consists of bringing an article
into the country from the outside. Importation beginswhen the conveying vessel or aircraft enters thejurisdiction of the Philippines with intention tounload therein.
b. When unlawful importation is complete. Inthe absence of a bona fide intent to make entry andpay duties when the prohibited article enters thePhilippine territory. Importation is complete whenthe taxable, dutiable commodity is brought within thelimits of the port of entry. Entry through a customhouse is not the essence of the act. (Jardeleza v. People,G.R. No. 165265, February 6, 2006)
32. The Collector of Customs sitting inseizure and forfeiture proceedings has exclusivejurisdiction to hear and determine all questions
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touching on the seizure and forfeiture ofdutiable goods. RTCs are precluded from assumingcognizance over such matters even throughpetitions of certiorari, prohibition or mandamus.(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081,March 20, 2000)
What is the rationale for this doctrine ?SUGGESTED ANSWER:a. Regional Trial Courts have no
jurisdiction to replevin a property which is subject toseizure and forfeiture proceedings for violation of theTariff and Customs Code otherwise, actions forforfeiture of property for violation of the Customslaws could easily be undermined by the simple device ofreplevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)
b. The doctrine of exclusive customsjurisdiction over customs cases to the exclusion of theRTCs is anchored upon the policy of placing nounnecessary hindrance on the government’s drive, notonly to prevent smuggling and other frauds uponCustoms,
c. but more importantly, to render effective andefficient the collection of import and export dutiesdue the State, which enables the government to carryout the functions it has been instituted to perform.(Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA35, 43)
d. The issuance by regular courts of writs ofpreliminary injunction in seizure and forfeitureproceedings before the Bureau of Customs may arousesuspicion that the issuance or grant was forconsideration other than the strict merits of the case.(Zuno v. Cabredo, 402 SCRA 75 [2003])
e. Under the doctrine of primary jurisdiction,the Bureau of Customs has exclusive administrativejurisdiction to conduct searches, seizures and
forfeitures of contraband without interference from thecourts. It could conduct searches and seizures withoutneed of a judicial warrant except if the search is tobe conducted in a dwelling place.
Where an administrative office has obtained atechnical expertise in a specific subject, even thecourts must defer to this expertise.
NOTES AND COMMENTS: The Bureau of Customs couldsearch and seize articles without need of a judicialwarrant unless the place to be searched is a dwellingplace. In such a case customs requires a judicialwarrant.
33. “A” claiming to be the owner of a vesselwhich is the subject of customs warrant ofseizure and detention sought the intercession ofthe RTC to restrain the Bureau of Customs frominterfering with his property rights over thevessel. Would the suit prosper?
SUGGESTED ANSWER: No. His remedy was not withthe RTC but with the CTA, as issues of ownership ofgoods in the custody of customs officials are withinthe power of the CTA to determine.
The Collector of Customs has exclusivejurisdiction over seizure and forfeiture proceedingsand trial courts are precluded from assumingcognizance over such matters even through petitionsfor certiorari, prohibition or mandamus. (Commissionerof Customs v. Court of Appeals, et al., G. R. Nos. 111202-05,January 31, 2006)
34. The customs authorities do not haveto prove to the satisfaction of the court thatthe articles on board a vessel were imported fromabroad or are intended to be shipped abroadbefore they may exercise the power to effect
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customs searches, seizures, or arrests providedby law and continue with the administrativehearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R.No. 138081, March 20, 2000)
35. The Tariff and Customs Code allows theBureau of Customs to resort to the administrativeremedy of seizure, such as by enforcing the taxlien on the imported article when the importedarticles could be found and be subject to seizureand forfeiture.
36. The Tariff and Customs Code allows theBureau of Customs to resort to the judicialremedy of filing an action in court when theimported articles could not anymore be found.
37. Section 2301 of the TCCP states thatseized articles may not be released under bondif there is prima facie evidence of fraud in theirimportation. Commissioner of Customs v. Court of Tax Appeals, etal., G. R. No. 171516-17, February 13, 2009
Section 2301. Warrant for Detention of Property-Cash Bond. –Upon making any seizure, the Commissioner shall issuea warrant for the detention of the property; and ifthe owner or importer desires to secure the release ofthe property for legitimate use, the Collector shall,with the approval of the Commissioner of Customs,surrender it upon the filing of a cash bond, in anamount fixed by him, conditioned upon the payment ofthe appraised value of the article and/or any fine,expenses and costs which may be adjudged in the case:Provided, That such importation shall not be releasedunder any bond when there is prima facie evidence offraud in the importation of the article: Provided,
further, That articles the importation of which isprohibited by law shall not be released under anycircumstances whatsoever: Provided, finally, That nothingin this section shall be construed as relieving theowner or importer from any criminal liability whichmay arise from any violation of law committed inconnection with the importation of the article.(emphasis supplied)
38. Instances where there is no right ofredemption of seized and forfeited articles:
a. There is fraud;b. The importation is absolutely prohibited, orc. The release of the property would be contrary
to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.126634, January 25, 1999)
39. In Aznar v. Court of Tax Appeals, 58 SCRA 519,reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA298, the Supreme Court clarified that the fraudcontemplated by law must be actual and notconstructive. It must be intentional, consisting ofdeception, willfully and deliberately done or resortedto in order to induce another to give up some right.
40. Requisites for forfeiture ofimported goods:
a. Wrongful making by the owner, importer,exporter or consignee of any declaration or affidavit,or the wrongful making or delivery by the same personof any invoice, letter or paper – all touching on theimportation or exportation of merchandise.
b. the falsity of such declaration, affidavit,invoice, letter or paper; and
c. an intention on the part of theimporter/consignee to evade the payment of the duties
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due. (Republic, etc., v. The Court of Appeals, et al., G.R. No.139050, October 2, 2001)
41. On January 7, 1989, the vessel M/V ”StarAce, ”coming from Singapore laden with cargo,entered the Port of San Fernando, La Union forneeded repairs. When the Bureau of Customs laterbecame suspicious that the vessel’s real purposein docking was to smuggle cargo into the country,seizure proceedings were instituted andsubsequently two Warrants of Seizure andDetention were issued for the vessel and itscargo.
Cesar does not own the vessel or any of itscargo but claimed a preferred maritime lien.Cesar then brought several cases in the RTC toenforce his lien. Would these suits prosper ?
SUGGESTED ANSWER: No. The Bureau of Customshaving first obtained possession of the vessel and itsgoods has obtained jurisdiction to the exclusion of thetrial courts.
When Cesar has impleaded the vessel as a defendantto enforce his alleged maritime lien, in the RTC, hebrought an action in rem under the Code of Commerce underwhich the vessel may be attached and sold.
However, the basic operative fact is the actual orconstructive possession of the res by the tribunalempowered by law to conduct the proceedings. Thismeans that to acquire jurisdiction over the vessel, asa defendant, the trial court must have obtained eitheractual or constructive possession over it. Neither wasaccomplished by the RTC as the vessel was already inthe possession of the Bureau of Customs. (Commissionerof Customs v. Court of Appeals, et al., G. R. Nos. 111202-05,January 31, 2006)
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the Bureau ofCustoms is in the nature of a proceeding in rem , i.e.directed against the res or imported goods and entails adetermination of the legality of their importation. Inthis proceeding, it is in legal contemplation theproperty itself which commits the violation and istreated as the offender, without reference whatsoeverto the character or conduct of the owner.
The issue is limited to whether the imported goodsshould be forfeited and disposed of in accordance withlaw for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.126634, January 25, 1999)
Forfeiture of seized goods in the Bureau ofCustoms is a proceeding against the goods and notagainst the owner. (Asian Terminals, Inc. v. Bautista-Ricafort,G .R. No. 166901, October 27, 2006 citing Transglobe)
42. The Collector of Customs upon probablecause that the articles are imported or exported,or are attempted to be imported or exported, inviolation of the tariff and customs laws shallissue a warrant of seizure. (Sec. 6, Title III, CAONo. 9-93)
If the search and seizure is to be conducted in adwelling place, then a search warrant should be issuedby the regular courts not the Bureau of Customs.
There may be instances where no warrants issued bythe Bureau of Customs or the regular courts isrequired, as in search and seizures of motor vehiclesand vessels.
43. Smuggled goods seized by virtue of acourt warrant should be surrendered to the courtthat issued the warrant and not to the Bureau ofCustoms because the goods are in custodia legis.
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44. Decisions of the Commissioner ofCustoms “in cases involving liability forcustoms duties, fees or other money charges”that must be appealed to the Court of TaxAppeals Division within thirty (30) days fromreceipt specifically refer to his decisions onadministrative tax protest cases, as stated in Section 2402 ofthe Tariff and Customs Code of the Philippines (TCCP):
Section 2402. Review by Court of TaxAppeals. – The party aggrieved by a rulingof the Commissioner in any matter broughtbefore him upon protest or by his actionor ruling in any case of seizure mayappeal to the Court of Tax Appeals, in themanner and within the period prescribed bylaw and regulations.
Unless an appeal is made to the Court of TaxAppeals in the manner and within the periodprescribed by laws and regulations, the action orruling of the Commissioner shall be final andconclusive. [Emphasis supplied.] (Pilipinas Shell PetroleumCorporation v. Commissioner of Customs, G. R. No. 176380, June 18,2009)
45. Administrative tax protest under theTariff and Customs Code (TCCP). A tax protestcase, under the TCCP, involves a protest of theliquidation of import entries. (Pilipinas Shell PetroleumCorporation v. Commissioner of Customs, G. R. No. 176380, June 18,2009) 46. Liquidation, defined. A liquidation isthe final computation and ascertainment by the
collector of the duties on imported merchandise, basedon official reports as to the quantity, character, andvalue thereof, and the collector’s own finding as tothe applicable rate of duty; it is akin to anassessment of internal revenue taxes under theNational Internal Revenue Code where the tax liabilityof the taxpayer is definitely determined. (Pilipinas ShellPetroleum Corporation v. Commissioner of Customs, G. R. No. 176380,June 18, 2009)
47. The following letters of demand cannot be considered as a liquidation or anassessment of Shell’s import tax liabilitiesthat can be the subject of an administrative taxprotest proceeding before the Commissioner ofCustoms whose decision is appealable to theCourt of Tax Appeals:
a. the One Stop Shop Inter-Agency Tax Credit andDuty Drawback Center (the Center) November 3 letter,signed by the Secretary of Finance, informing it ofthe cancellation of the Tax Credit Certificates(TCCs);
b. the Commissioner of Customs’ November 19letter requiring Shell to replace the amountequivalent to the amount of the cancelled TCCs used byShell; and
c. the Commissioner of Customs’ collectionletters, issued through Deputy Commissioner Atty.Valera, formally demanding the amount covered by thecancelled TCCs.
None of these letters, however, can be consideredas a liquidation or an assessment of Shell’s importtax liabilities that can be the subject of anadministrative tax protest proceeding before therespondent whose decision is appealable to the CTA.Shell’s import tax liabilities had long been computed
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and ascertained in the original assessments, and Shellpaid these liabilities using the TCCs transferred toit as payment.
It is even an error to consider the letters as a“reassessment” because they refer to the same taxliabilities on the same importations covered by theoriginal assessments. The letters merely reissued theoriginal assessments that were previously settled byShell with the use of the TCCs. However, on accountof the cancellation of the TCCs, the tax liabilitiesof Shell under the original assessments wereconsidered unpaid; hence, the letters and the actionsfor collection.
When Shell went to the CTA, the issues it raisedin its petition were all related to the fact and efficacyof the payments made, specifically the genuineness ofthe TCCs; the absence of due process in theenforcement of the decision to cancel the TCCs; thefacts surrounding the fraud in originally securing theTCCs; and the application of estoppel. These arepayment and collection issues, not tax protest issueswithin the CTA’s jurisdiction to rule upon.
Shell never protested the original assessmentsof its tax liabilities and in fact settled them usingthe TCCs. These original assessments, therefore, havebecome final, incontestable, and beyond any subsequentprotest proceeding, administrative or judicial, torule upon.
To be very precise, Shell’s petition before theCTA principally questioned the validity of thecancellation of the TCCs – a decision that was madenot by the Commissioner of Customs, but by the Center.As the CTA has no jurisdiction over decisions of theCenter, Shell’s remedy against the cancellation shouldhave been a certiorari petition before the regularcourts, not a tax protest case before the CTA.
Records do not show that Shell ever availed of thisremedy.
Alternatively, as held in Shell v. Republic of thePhilippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701,the appropriate forum for Shell under thecircumstances of this case should be at the collectioncases before the RTC where Shell can put up the factof its payment as a defense. (Pilipinas Shell PetroleumCorporation v. Commissioner of Customs, G. R. No. 176380, June18, 2009)
48. A case becomes ripe for filing withthe Regional Trial Court (RTC), as a collectionmatter after the finality of the Commissioner ofCustoms assessment. (Pilipinas Shell Petroleum Corporation v.Commissioner of Customs, G. R. No. 176380, June 18, 2009 citingShell v. Republic of the Philippines, G.R. No. 161953, March 6, 2008,547 SCRA 701)
The assessment has long been final, and thisrecognition of finality removes all perceived hindrances,based on this case, to the continuation of thecollection suits.
A suit for the collection of internal revenuetaxes, where the assessment has already become finaland executory, the action to collect is akin to anaction to enforce the judgment. No inquiry can be madetherein as to the merits of the
In light of the conclusion that the present casedoes not involve a decision of the Commissioner ofCustoms on a matter brought to him as a tax protest,Atty. Valera’s lack of authority to issue thecollection letters and to institute the collectionsuits is irrelevant. For this same reason, theinjunction against Atty. Valera cannot be invoked toenjoin the collection of unpaid taxes due from Shell.
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(Pilipinas Shell Petroleum Corporation v. Commissioner of Customs,supra)
LOCAL GOVERNMENT TAXATION
1. The fundamental principles of localtaxation are:
a. Uniformity;b. Taxes, fees, charges and other impositions
shall be equitable and based on ability to pay, forpublic purposes, not unjust, excessive, oppressive orconfiscatory, not contrary to law, public policy,national economic policy or in restraint of trade;
c. The levy and collection shall not be let toany private person;
d. Inures solely to the local government unitlevying the tax;
e. The progressivity principle must be observed.
2. A law which deprives local governmentunits of their power to tax would beunconstitutional. The constitution has delegated tolocal governments the power to levy taxes, fees andother charges. This constitutional delegation may onlybe removed by a constitutional amendment.
3. Under the now prevailing Constitution,where there is neither a grant nor prohibition bystatute, the taxing power of local governmentsmust be deemed to exist although Congress mayprovide statutory limitations and guidelines inorder to safeguard the viability and self-sufficiencyof local government units by directly granting themgeneral and broad tax powers. (City Government of San Pablo,Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
4. The Local Government Code explicitlyauthorizes provinces and cities, notwithstanding“any exemption granted by any law or otherspecial law” to impose a tax on businessesenjoying a franchise. Indicative of the legislativeintent to carry out the constitutional mandate ofvesting broad tax powers to local government units, theLocal Government Code has withdrawn tax exemptions orincentives theretofore enjoyed by certain entities. (CityGovernment of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No.127708, March 25, 1999)
5. 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, alocal government unit, to impose and collect a localfranchise tax because the Local Government haswithdrawn all tax exemptions previously enjoyed by allpersons and authorized local government units to imposea tax on business enjoying a franchise taxnotwithstanding the grant of tax exemption to them.
6. Explain the concept of the “paradigmshift” in local government taxation.
SUGGESTED ANSWER: “Paradigm shift” from exclusiveCongressional power to direct grant of taxing power tolocal legislative bodies. The power to tax is nolonger vested exclusively on Congress; locallegislative bodies are now given direct authority tolevy taxes, fees and other charges pursuant to ArticleX, section 5 of the 1987 Constitution. (Batangas PowerCorporation v. Batangas City, et al. G. R. No. 152675, andcompanion case, April 28, 2004 citing National PowerCorporation v. City of Cabanatuan, G. R. No. 149110, April 9,2003)
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7. The fundamental law did not intend thedirect grant to local government units to beabsolute and unconditional, the constitutionalobjective obviously is to ensure that, while localgovernment units are being strengthened and made moreautonomous, the legislature must still see to it that:
a. the taxpayer will not be over-burdened orsaddled with multiple and unreasonable impositions;
b. each local government unit will have its fairshare of available resources;
c. the resources of the national government willbe unduly disturbed; and
d. local taxation will be fair, uniform andjust. (Manila Electric Company v. Province of Laguna, et al., G.R. No.131359, May 5, 1999)
8. Taxing power of the local government islimited. The taxing power of local governments islimited in the sense that Congress can enactlegislation granting tax exemptions.
While the system of local government taxation haschanged with the onset of the 1987 Constitution, thepower of local government units to tax is stilllimited.
While the power to tax by local governments maybe exercised by local legislative bodies, no longermerely be virtue of a valid delegation as before, butpursuant to direct authority conferred by Section 5,Article X of the Constitution, the basic doctrine onlocal taxation remains essentially the same, “the powerto 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. BayanTelecommunications, Inc., G.R. No. 162015, March 6, 2006, 484SCRA 169 in turn referring to Mactan Cebu International Airport
Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261SCRA 667, 680)
9. Further amplification by Bernas of thelocal government’s power to tax. “What is theeffect of Section 5 on the fiscal position ofmunicipal corporations? Section 5 does not change thedoctrine that municipal corporations do not possessinherent powers of taxation. What it does is toconfer municipal corporations a general power to levytaxes and otherwise create sources of revenue. Theyno longer have to wait for a statutory grant of thesepowers. The power of the legislative authorityrelative to the fiscal powers of local governments hasbeen reduced to the authority to impose limitations onmunicipal powers. Moreover, these limitations must be“consistent with the basic policy of local autonomy.”The important legal effect of Section 5 is thus toreverse the principle that doubts are resolved againstmunicipal corporations. Henceforth, in interpretingstatutory provisions on municipal fiscal powers,doubts will be resolved in favor of municipalcorporations. It is understood, however, that taxesimposed by local government must be for a publicpurpose, uniform within a locality, must not beconfiscatory, and must be within the jurisdiction ofthe local unit to pass.” (Quezon City, et al., v. ABS-CBNBroadcasting Corporation, G. R. No. 166408, October 6, 2008citing City Government of Quezon City, et al. v. Bayan Telecommunications,Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)
10. Reconciliation of the local government’sauthority to tax and the Congressional generaltaxing power. Congress has the inherent power to tax,which includes the power to grant tax exemptions. On theother hand, the power of local governments, such asprovinces and cities for example Quezon City, to tax is
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prescribed by Section 151 in relation to Section 137 of theLGC which expressly provides that notwithstanding anyexemption granted by any law or other special law, the Cityor a province may impose a franchise tax. It must be notedthat Section 137 of the LGC does not prohibit grant offuture exemptions.
The Supreme Court in a series of cases hassustained the power of Congress to grant taxexemptions over and above the power of the localgovernment’s 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. BayanTelecommunications, Inc., G.R. No. 162015, March 6, 2006, 484SCRA 16)
“Indeed, the grant of taxing powers to localgovernment units under the Constitution and the LGCdoes not affect the power of Congress to grantexemptions to certain persons, pursuant to a declarednational policy. The legal effect of theconstitutional grant to local governments simply meansthat in interpreting statutory provisions on municipaltaxing powers, doubts must be resolved in favor ofmunicipal corporations.” [Ibid., referring to PhilippineLong Distance Telephone Company, Inc. (PLDT) vs. City of Davao]
11. Professional tax may be imposed bya province or city but not by a municipality orbarangay.
a. Transaction taxed: Exercise or practice ofprofession requiring government licensure examination.
b. Tax rate: In Accordance with a taxingordinance which should not exceed P300.00.
c. Tax base: Reasonable classification by thesanggunian.
d. Exception: Payment to one province or cityno longer subject to any other national or local tax,license or fee for the practice of such profession in
any part of the Philippine professionals exclusivelyemployed in the government.
e. Date of payment: or on before January 31 orengaging in the profession.
f. Place of payment: Province or city where theprofessional practices his profession or where hemaintains his principal office in case he practices hisprofession in several places.
12. Requirements: Any individual orcorporation employing a person subject to professionaltax shall require payment by that person of the tax onhis profession before employment and annuallythereafter. Any person subject to the professional taxshall write in deeds, receipts, prescriptions, reports,books of account, plans and designs, surveys and maps,as the case may be, the number of the official receiptissued to him. Exemption: Professionals exclusively employed in the government shall be exempt from payment. (Sec. 139, LGC) NOTE: For the purpose of collecting the tax, theprovincial or city treasurer or his duly authorizedrepresentative shall require from such professionalstheir current annual registration cards issued bycompetent authority before accepting payment of theirprofessional tax for the current year. The PRC shalllikewise require the professionals presentation ofproof of payment before registration of professionalsor renewal of their licenses. (last par., Art. 228,Rules and Regulations Implementing the Local GovernmentCode of 1991)
13. Who are the professionals who, ifthey are in practice of their profession, aresubject to professional tax ?
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SUGGESTED ANSWER: The professionals subject tothe professional tax are only those who have passedthe bar examinations, or any board or otherexaminations conducted by the Professional RegulationCommission (PRC). for example, a lawyer who is also aCertified Public Accountant (CPA) must pay theprofessional tax imposed on lawyers and that fixed forCPAs, if he is to practice both professions. [Sec. 238(f), Rule XXX, Rules and Regulations Implementing theLocal Government Code of 1991]
14. X City issued a notice of assessmentagainst ABC Condominium Corporation for unpaidbusiness taxes. The Condominium Corporation is aduly constituted condominium corporation inaccordance with the Condominium Act which ownsand holds title to the common and limited commonareas of the condominium. Its membershipcomprises the unit owners and is authorized underits By-Laws to collect regular assessments fromits members for operating expenses, capitalexpenditures on the common areas and otherspecial assessments as provided for in the MasterDeed with ?Declaration of Restrictions of theCondominium.
ABC Condominium Corporation insists that theX City Revenue Code and the Local Government Codedo not contain provisions upon which theassessment could be based. Resolve thecontroversy.
SUGGESTED ANSWER: ABC is correct. Condominiumcorporations are generally exempt from local businesstaxation under the Local Government Code, irrespectiveof any local ordinance that seeks to declare otherwise.
X City, is authorized under the Local GovernmentCode, to impose a tax on business, which is definedunder the Code as ”trade or commercial activityregularly engaged in as a means of livelihood or with aview to profit.” By its very nature a condominiumcorporation is not engaged in business, and any profitthat it derives is merely incidental, hence it may notbe subject to business taxes. (Yamane , etc. v. BA LepantoCondominium Corporation, G. R. No. 154993, October 25,2005)
15. Authority of Local Government Units(LGUs) such as the City of Manila to imposebusiness taxes. Section 143 of the LGC, is the verysource of the power of municipalities and cities toimpose a local business tax, and to which any localbusiness tax imposed by cities or municipalities suchas the City of Manila must conform. It is apparentfrom a perusal thereof that when a municipality orcity has already imposed a business tax onmanufacturers, etc. of liquors, distilled spirits,wines, and any other article of commerce, pursuant toSection 143(a) of the LGC, said municipality or citymay no longer subject the same manufacturers, etc. to abusiness tax under Section 143(h) of the same Code.Section 143(h) may be imposed only on businesses thatare subject to excise tax, VAT, or percentage taxunder the NIRC, and that are “not otherwise specifiedin preceding paragraphs.” In the same way, businessessuch as respondent’s, already subject to a localbusiness tax under Section 14 of Tax Ordinance No.7794 [which is based on Section 143(a) of the LGC],can no longer be made liable for local business taxunder Section 21 of the same Tax Ordinance [which isbased on Section 143(h) of the LGC]. (The City of Manila, et
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al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845,August 4, 2009)
REAL PROPERTY TAXATION
1. The fundamental principles of realproperty taxation are:
a. Appraisal at current and fair market value;b. Classification for assessment on the basis of
actual use;c. Assessment on the basis of uniform
classification;d. Appraisal, assessment, levy and collection
shall not be let to a private person;e. Appraisal and assessment shall be equitable.NOTES AND COMMENTS: Real properties shall be
appraised at the current and fair market valueprevailing in the locality where the property issituated and classified for assessment purposes on thebasis of its actual use. (Allied Banking Corporation, etc., v.Quezon City Government, et al., G. R. No. 154126, October 11, 2005)
2. The reasonable market value isdetermined by the assessor in the form of aschedule of fair market values.
The schedule is then enacted by the localsanggunian.
3. Fair market value is the price at whicha property may be sold by a seller who is notcompelled to sell and bought by a buyer who isnot compelled to buy, taking into consideration alluses to which the property is adopted and might inreason be applied.
The criterion established by the statutecontemplates a hypothetical sale. Hence, the buyersneed not be actual and existing purchasers. (AlliedBanking Corporation, etc., v. Quezon City Government, et al., G. R. No.154126, October 11, 2005 )
NOTES AND COMMENTS: In fixing the value of realproperty, assessors have to consider all thecircumstances and elements of value and must exerciseprudent discretion in reaching conclusions. (AlliedBanking Corporation, etc., v. Quezon City Government, et al., G. R. No.154126, October 11, 2005)
Preparation of fair market values:a. The city or municipal assessor shall prepare
a schedule of fair market values for the differentclasses of real property situated in their respectiveLocal Government Units for the enactment of anordinance by the sanggunian concerned; and
b. The schedule of fair market values shall bepublished in a newspaper of general circulation in theprovince, city or municipality concerned or the postingin the provincial capitol or other places as requiredby law. (Lopez v. City of Manila, et al., G.R. No. 127139,February 19, 1999)
Proposed fair market values of real property in alocal government unit as well as the ordinancecontaining the schedule must be published in full forthree (3) consecutive days in a newspaper of localcirculation, where available, within ten (10) days ofits approval, and posted in at lease two (2) prominentplaces in the provincial capitol, city, municipal orbarangay hall for a minimum of three (3) consecutiveweeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172,March 25, 1999)
4. Approaches in estimating the fair marketvalue of real property for real property taxpurposes ?
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a. Sales Analysis Approach. The sales pricepaid in actual market transactions is considered bytaking into account valid sales data accumulated fromamong the Registrar of Deeds, notaries public,appraisers, brokers, dealers, bank officials, andvarious sources stated under the Local Government Code.
b. Income Capitalization Approach. The value ofan income-producing property is no more than the returnderived from it. An analysis of the income produced isnecessary in order to estimate the sum which might beinvested in the purchase of the property.
c. Reproduction cost approach is a formalapproach used exclusively n appraising man-madeimprovements such as buildings and other structures,based on such data as materials and labor costs toreproduce a new replica of the improvement.
The assessor uses any or all of these approachesin analyzing the data gathered to arrive at theestimated fair market value to be included in theordinance containing the schedule of fair marketvalues. (Allied Banking Corporation, etc., v. Quezon City Government,et al., G. R. No. 154126, October 11, 2005 citing LocalAssessment Regulations No. 1-92)
5. An ordinance whereby the “parcels ofland sold, ceded, transferred and conveyed forremuneratory consideration after the effectivityof this revision shall be subject to real estatetax based on the actual amount reflected in thedeed of conveyance or the current approved zonalvaluation of the Bureau of Internal Revenueprevailing at the time of sale, cession, transferand conveyance, whichever is higher, as evidencedby the certificate of payment of the capitalgains tax issued therefore” is INVALID being
contrary to public policy and for restraining trade forthe following reasons:
a. It mandates an exclusive rule in determiningthe fair market value and departs from the establishedprocedures such as the sales analysis approach, theincome capitalization approach and the reproductionapproach provided under the rules implementing thestatute. It unduly interferes with the dutiesstatutorily placed upon the local assessor bycompletely dispensing with his analysis and discretionwhich the Local Government Code and the regulationsrequire to be exercised. An ordinance that contravenesany statute is ultra vires and void.
b. The “consideration approach” in the ordinanceis illegal since “the appraisal, assessment, levy andcollection of real property tax shall not be let to anyprivate person”, it will also completely destroy thefundamental principle in real property taxation – thatreal property shall be classified, valued and assessedon the basis of its actual use regardless of wherelocated, whoever owns it, and whoever uses it.Allowing the parties to a private sale to dictate thefair market value of the property will dispense withthe distinctions of actual use stated in the LocalGovernment Code and in the regulations.
c. The invalidity is not cured by the prhase“whichever is higher” because an integral part of thatsystem still permits valuing real property in disregardof its “actual use.”
d. The ordinance would result to real propertyassessments more than once every three (3) years andthat is not the congressional intent as shown in theprovisions of the Local Government Code and theregulations. Consequently, the real property taxburden should not be interpreted to include thosebeyond what the Code or the regulations expresslyclearly state.
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e. The proviso would provide a chilling effecton real property owners or administrators to enterfreely into contracts reflecting the increasing valueof real properties in accordance with prevailing marketconditions.
While the Local Government Code provides that theassessment of real property shall not be increased onceevery three (3) years, the questioned proviso subjectsthe property to a higher assessment every time a salestransaction is made. Real property owners wouldtherefore postpone sales until after the lapse of thethree (3) year period, or if they do so within the saidperiod they shall be compelled to dispose of theproperty at a price not exceeding the last priorconveyance in order to avoid a higher tax assessment.
In the above two scenarios real property ownersare effectively prevented from obtaining the best pricepossible for their properties and unduly hampers theequitable distribution of wealth. (Allied Banking Corporation,etc., v. Quezon City Government, et al., G. R. No. 154126, October 11,2005)
6. Examples of personal property underthe civil law that may be considered as realproperty for purposes of taxes. Personal propertyunder the civil law may be considered as real propertyfor purposes of taxes where the property is essentialto the conduct of the business.
a. Underground tanks are essential to theconduct of the business of a gasoline station withoutwhich it would not be operational. (Caltex Phils., Inc. v. CentralBoard of Assessment Appeals, et al., 114 SCRA 296)
b. Light Rail Transit (LRT) improvements such asbuildings, carriageways, passenger terminals stations,and similar structures do not form part of the publicroads since the former are constructed over the latterin such a way that the flow of vehicular traffic would
not be impaired. The carriageways and terminals servea function different from the public roads.Furthermore, they are not open to use by the generalpublic hence not exempt from real property taxes.
Even granting that the national government ownsthe carriageways and terminal stations, the property isnot exempt because their beneficial use has beengranted to LRTA a taxable entity. (Light Rail Transit Authority v.Central Board of Assessment Appeals, et al., G. R. No. 127316, October12, 2000)
c. Barges on which were mounted gas turbinepower plants designated to generate electrical power,the fuel oil barges which supplied fuel oil to thepower plant barges, and the accessory equipment mountedon the barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Codeprovides that “[d]ocks and structures which, thoughfloating, are intended by their nature and object toremain at a fixed place on a river, lake or coast” areconsidered immovable property by destination beingintended by the owner for an industry or work whichmay be carried on in a building or on a piece of landand which tend directly to meet the needs of saidindustry or work. (FELS Energy, Inc., v. Province of Batangas, G. R.No. 168557, February 16, 2007 and companion case)
7. Unpaid realty taxes attach to theproperty and is chargeable against the person whohad actual or beneficial use and possession of itregardless of whether or not he is the owner. Toimpose the real property tax on the subsequent ownerwhich was neither the owner not the beneficial user ofthe property during the designated periods would notonly be contrary to law but also unjust.
Consequently, MERALCO the former owner/user ofthe property was required to pay the tax instead of the
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new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No.114231, May 18, 2001)
NOTES AND COMMENTS: The above May 18, 2001decision was set aside by the Supreme Court when itgranted the petitioner’s second motion forreconsideration on June 29, 2004. The author submitsthat the above ruling in the May 18, 2001 decision isstill valid, not on the basis of the May 18, 2001decision but in the light of pronouncements of theSupreme Court in other cases. Thus, do not cite thedoctrine as emanating from the May 18, 2001 decision.
8. Secretary of Justice can takecognizance of a case involving theconstitutionality or legality of tax ordinanceswhere there are factual issues involved. (Figuerres v.Court of Appeals, et al., G.R. No. 119172, March 25, 1999)
Taxpayer files appeal to the Secretary ofJustice, within 30 days from effectivity thereof.In case the Secretary decides the appeal, a period alsoof 30 days is allowed for an aggrieved party to go tocourt. But if the Secretary does not act thereon,after the lapse of 60 days, a party could already seekrelief in court within 30 days from the lapse of the 60day period.
These three separate periods are clearly given forcompliance as a prerequisite before seeking redress ina competent court. Such statutory periods are set toprevent delays as well as enhance the orderly andspeedy discharge of judicial functions. For thisreason the courts construe these provisions of statutesas mandatory. (Reyes, et al., v. Court of Appeals, et al., G.R. No.118233, December 10, 1999)
9. Public hearings are mandatory prior toapproval of tax ordinance, but this still requires
the taxpayer to adduce evidence to show that no publichearings ever took place. (Reyes, et al., v. Court of Appeals, et al.,G.R. No. 118233, December 10, 1999) Public hearings arerequired to be conducted prior to the enactment of anordinance imposing real property taxes. (Figuerres v. Court ofAppeals, et al., G.R. No. 119172, March 25, 1999)
10. The concurrent and simultaneousremedies afforded local government units inenforcing collection of real property taxes:
a. Distraint of personal property;b. Sale of delinquent real property, andc. Collection of real property tax through
ordinary court action.
11. Notice and publication, as well asthe legal requirements for a tax delinquencysale, are mandatory, and the failure to complytherewith can invalidate the sale. The prescribednotices must be sent to comply with the requirements ofdue process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v.Honorable Sayo, 290 SCRA 223,236)
12. The reason behind the noticerequirement is that tax sales are administrativeproceedings which are in personam in nature. (Puzonv. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)
13. FELS Energy, Inc., had a contract tosupply NPC with the electricity generated byFELS’ power barges. The contract also statedthat NPC shall be responsible for all real estatetaxes and assessments. FELS then received anassessment of real property taxes on its powerbarges from the Provincial Assessor of Batangas.
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If filed a motion for reconsideration with theProvincial Assessor.
a. Upon denial, FELS elevated the matter tothe Local Board of Assessment Appeals (LBAA),where it raised the following issues:
1) Since NPC is tax-exempt then FEL’sshould also be tax-exempt because of itscontract with NPC.
2) The power barges are not realproperty subject to real property taxes.b. Upon the other hand the Local Treasurer
insists that the assessment has attained a stateof finality hence the appeal to the LBAA shouldbe dismissed.
Rule on the conflicting contentions.SUGGESTED ANSWER: a. All the contentions of FELS are without
merit:1) NPC is not the owner of the power barges
nor the operator of the power barges. The taxexemption privilege granted to NPC cannot beextended to FELS. the covenant is between NPCand FELs and does not bind a third person notprivy to the contract such as the Province ofBatangas.
2) The Supreme Court of New York inConsolidated Edison Company of New York, Inc., et al., v. The Cityof New York, et al., 80 Misc. 2d 1065 (1975) cited in FELSEnergy, Inc., v. Province of Batangas, G. R. No. 168557,February 16, 2007 and companion case, held thatbarges on which were mounted gas turbine powerplants designated to generate electrical power,the fuel oil barges which supplied fuel oil to thepower plant barges, and the accessory equipmentmounted on the barges were subject to realproperty taxes.
Moreover, Article 415(9) of the Civil Codeprovides that “[d]ocks and structures which,though floating, are intended by their nature andobject to remain at a fixed place on a river, lakeor coast” are considered immovable property bydestination being intended by the owner for anindustry or work which may be carried on in abuilding or on a piece of land and which tenddirectly to meet the needs of said industry orwork.b. The Treasurer is correct. The procedure do
not allow a motion for reconsideration to be filed withthe Provincial Assessor.
To allow the procedure would indeed invitecorruption in the system of appraisal and assessment.it conveniently courts a graft-prone situation wherevalues of real property ay be initially setunreasonably high, and then subsequently reduced uponthe request of a property owner. In the latterinstance, allusions of possible cover, illicit trade-off cannot be avoided, and in fact can convenientlytake place. Such occasion for mischief must beprevented and excised from our system. (FELS Energy, Inc., v.Province of Batangas, G. R. No. 168557, February 16, 2007 andcompanion case)
14. A special levy or special assessmentis an imposition by a province, a city, amunicipality within the Metropolitan Manila Area,a municipality or a barangay upon real propertyspecially benefited by a public works expenditure ofthe LGU to recover not more than 60% of suchexpenditure.
15. If the ground for the protest isvalidity of the real property tax ordinance andnot the unreasonableness of the amount collected the
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tax must be paid under protest, and the issue oflegality may be raised to the proper courts oncertiorari without need of exhausting administrativeremedies.
16. If the ground for the protest isunreasonableness of the amounts collected thereis need to pay under protest and administrativeremedies must be resorted to before recourse to theproper courts.
17. Procedure for refund of real propertytaxes based on unreasonableness or excessivenessof amounts collected.
a. Payment under protest at the time of paymentor within thirty (30) days thereafter, protest beinglodged to the provincial, city or in the case of amunicipality within the Metro Manila Area the municipaltreasurer.
b. The treasurer has a period of sixty (60) daysfrom receipt of the protest within to decide.
c. Within thirty (30) days from receipt oftreasurer’s decision or if the treasurer does notdecide, within thirty (30) days from the expiration ofthe sixty (60) period for the treasurer to decide, thetaxpayer should file an appeal with the Local Board ofAssessment Appeals.
d. The Local Board of Assessment Appeals has 120days from receipt of the appeal within which to decide.
e. The adverse decision of the Local Board ofAssessment Appeals should be appealed within thirty(30) days from receipt to the Central Board ofAssessment Appeals.
f. The adverse decision of the Central Board ofAssessment Appeals shall be appealed to the Court ofTax Appeals (En Banc) by means of a petition for review
within thirty (30) days from receipt of the adversedecision.
g. The decision of the CTA may be the subject ofa motion for reconsideration or new trial after whichan appeal may be interposed by means of a petition forreview on certiorari directed to the Supreme Court onpure questions of law within a period of fifteen (15)days from receipt extendible for a period of thirty(30) days.
18. The entitlement to a tax refund does notnecessarily call for the automatic payment of thesum claimed. The amount of the claim being a factualmatter, it must still be proven in the normal courseand in accordance with the administrative procedure forobtaining a refund of real property taxes, as providedunder the Local Government Code. (Allied Banking Corporation,etc., v. Quezon City Government, et al., G. R. No. 154126, September 15,2006)
NOTES AND COMMENTS: In the above Allied Banking case,the Supreme Court provided for the starting date ofcomputing the two-year prescriptive period within whichto file the claim with the Treasurer, which is fromfinality of the Decision. The procedure to be followedis that shown below.
19. Procedure for refund of realproperty taxes based on validity of the taxmeasure or solutio indebeti.
a. Payment under protest not required, claimmust be directed to the local treasurer, within two (2)years from the date the taxpayer is entitled to suchreduction or readjustment, who must decide withinsixty (60) days from receipt.
b. The denial by the local treasurer of theprotest would fall within the Regional Trial Court’soriginal jurisdiction, the review being the initial
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judicial cognizance of the matter. Despite thelanguage of Section 195 of the Local Government Codewhich states that the remedy of the taxpayer whoseprotest is denied by the local treasurer is “to appealwith the court of competent jurisdiction,” labelingthe said review as an exercise of appellatejurisdiction is inappropriate since the denial of theprotest is not the judgment or order of a lower court,but of a local government official. (Yamane , etc. v. BALepanto Condominium Corporation, G. R. No. 154993, October25, 2005)
c. The decision of the Regional Trial Courtshould be appealed by means of a petition for reviewdirected to the Court of Tax Appeals (Division).
d. The decision of the Court of Tax Appeals(Division) may be the subject of a review by the Courtof Tax Appeals (en banc).
e. The decision of the Court of Tax Appeals (enbanc) may be the subject of a petition for review oncertiorari on pure questions of law directed to theSupreme Court.
20. Charitable institutions, churchesand parsonages or convents appurtenant thereto,mosques, non-profit cemeteries, and all lands,buildings and improvements that are actually,directly and exclusively used for religious,charitable or educational purposes are exemptfrom taxation. [Sec.28 (3) Article VI, 1987Constitution]
21. The constitutional tax exemptionsrefer only to real property that are actually,directly and exclusively used for religious, charitableor educational purposes, and that the onlyconstitutionally recognized exemption from taxation of
revenues are those earned by non-profit, non-stockeducational institutions which are actually, directlyand exclusively used for educational purposes.(Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA83)
The constitutional tax exemption covers propertytaxes only. What is exempted is not the institutionitself, those exempted from real estate taxes arelands, buildings and improvements actually, directlyand exclusively used for religious, charitable oreducational purposes. (Lung Center of the Philippines v. QuezonCity, et al., etc., G. R. No. 144104, June 29, 2004)
22. The 1935 Constitution stated thatthe lands, buildings, and improvements are “usedexclusively” but the present Constitutionrequires that the lands, buildings andimprovements are “actually, directly andexclusively used.” The change should not be ignored.Reliance on past decisions would have sufficed were thewords “actually” as well as :directly” are not added.There must be proof therefore of the actual and directuse to be exempt from taxation. (Lung Center of the Philippinesv. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
23. The “actual, direct and exclusiveuse” of the property for charitable purposes isthe direct and immediate and actual applicationof the property itself to the purposes for which thecharitable institution is organized. It is not the useof the income from the real property that isdeterminative of whether the property is used for tax-exempt purposes.
If real property is used for one or morecommercial purposes, it is not exclusively used for theexempted purpose but is subject to taxation,. The
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words “dominant use” or “principal use” cannot besubstituted for the words “used exclusively” withoutdoing violence to the Constitution and the law. Solelyis synonymous with exclusively. (Lung Center of the Philippinesv. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
24. Portions of the land of a charitableinstitution, such as a hospital, leased toprivate entities as well as those parts of thehospital leased to private individuals are notexempt from real property taxes. On the otherhand, the portion of the land occupied by the hospitaland portions of the hospital used for its patients,whether paying or non-paying, are exempt from realproperty taxes. (Lung Center of the Philippines v. Quezon City, et al.,etc., G. R. No. 144104, June 29, 2004)
25. As a general principle, a charitableinstitution does not lose its character as suchand its exemption from taxes simply because itderives income from paying patients, whether out-patient, or confined in the hospital, or receivessubsidies from the government. So long as themoney received is devoted or used altogether to thecharitable object which it is intended to achieve; andno money inures to the private benefit of the personsmanaging or operating the institution. (Lung Center of thePhilippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
26. Property that are exempt from thepayment of real property tax under the LocalGovernment Code.
a. Real property owned by the Republic of thePhilippines or any of its political subdivisions exceptwhen the beneficial use thereof has been granted to ataxable person for a consideration or otherwise;
b. Charitable institutions, churches, parsonagesor convents appurtenant thereto, mosques, non-profit orreligious cemeteries, and all lands, buildings andimprovements actually, directly and exclusively usedfor religious, charitable and educational purposes;
c. Machineries and equipment, actually, directlyand exclusively used by local water districts; andgovernment owned and controlled corporations engaged inthe supply and distribution of water and generation andtransmission of electric power;
d. Real property owned by duly registeredcooperatives;
e. Machinery and equipment used for pollutioncontrol and environmental protection.
27. Manila International AirportAuthority (MIAA) it is not a government owned orcontrolled corporation but an instrumentality ofthe government that is exempt from taxation.
It is not a stock corporation because itscapital is not divided into shares, neither is it anon-stock corporation because there are no members.It is instead an instrumentality of the governmentupon which the local governments are not allowed tolevy taxes, fees or other charges.
An instrumentality “refers to any agency of theNational Government, not integrated within thedepartment framework vested with special functions orjurisdiction by law, endowed with some if not allcorporate powers, administering special funds, andenjoying operational autonomy, usually through acharter. This term includes regulatory agencieschartered institutions and government-owned orcontrolled corporations.” [Sec. 2 (10), IntroductoryProvisions, Administrative Code of 1987] It is aninstrumentality exercising not only governmental butalso corporate powers. It exercises governmental
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powers of eminent domain, police power authority, andlevying of fees and charges.
Finally, the airport lands and buildings areproperty owned by the government that are devoted topublic use and are properties of the public domain.(Manila International Airport Authority v. City of Pasay, et al., G. R. No.163072, April 2, 2009)
28. A telecommunications company was grantedby Congress on July 20, 1992, after theeffectivity of the Local Government Code onJanuary 1, 1992, a legislative franchise withtax exemption privileges which partly reads,“The grantee, its successors or assigns shall beliable to pay the same taxes on their realestate, buildings and personal property,exclusive of this franchise, as other persons orcorporations are now or hereafter may berequired by law to pay.” This provision existedin the company’s franchise prior to theeffectivity of the Local Government Code. A Citythen enacted an ordinance in 1993 imposing areal property on all real properties locatedwithin the city limits, and withdrawing all taxexemptions previously granted. Among propertiescovered are those owned by the company fromwhich the City is now collecting P43 million.The properties of the company were thenscheduled by the City for sale at publicauction.
The company then filed a petition for theissuance of a writ of prohibition claimingexemption under its legislative franchise. TheCity defended its position raising thefollowing:
a. There was no exhaustion ofadministrative remedies because the mattershould have first been filed before the LocalBoard of Assessment Appeals;
b. The company’s properties are exempt fromtax under its franchise.
Resolve the issues raised.SUGGESTED ANSWERS:a. There is no need to exhaust administrative
remedies as the appeal to the LBAA is not a speedy andadequate remedy within the law. This is so becausethe properties are already scheduled for auction sale.
Furthermore one of the recognized exceptions tothe rule on exhaustion is that if the issue is purelylegal in character which is so in this case.
b. The properties are exempt from taxation. Thegrant of taxing powers to local governments under theConstitution and the Local Government Code does notaffect the power of Congress to grant tax exemptions.
The term “exclusive of this franchise” isinterpreted to mean properties actually, directly andexclusively used in the radio or telecommunicationsbusiness. The subsequent piece of legislation whichreiterated the phrase “exclusive of this franchise”found in the previous tax exemption grant to thecompany is an express and real intention on the partof Congress to once against remove from the LGC’sdelegated taxing power, all of the company’sproperties that are actually, directly and exclusivelyused in the pursuit of its franchise. (The CityGovernment of Quezon City, et al., v. Bayan Telecommunications, Inc.,G. R. No. 162015, March 6, 2006)
29. The owner operator of a BOT and notthe ultimate owner is subject to real propertytaxes. Consistent with the BOT concept and as
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implemented, BPPC – the owner-manager-operator of theproject – is the actual user of its machineries andequipment. BPPC’s ownership and use of themachineries and equipment are actual, direct, andimmediate, while NAPOCOR’s is contingent and, at thisstage of the BOT Agreement, not sufficient to supportits claim for tax exemption. (National Power Corporation v.Central Board of Assessment Appeals, et al., G, R. No. 171470, January30, 2009)
ADVANCE CONGRATULATIONS ANDSEE YOU IN COURT
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