2015 Last Minute Reminders for Taxation Law by Atty. Noel Ortega-1

JURISTS BAR REVIEW CENTER Pre-Week Reminders in Taxation Law (With BAR Questions from 2010-2014) Prepared by Atty. Noel M. Ortega ***These notes are meant for sharing. Share and be blessed.***

A. BASIC TAXATION

governmental functions as in matters pertaining to tax exemptions. This is coupled by the growing inability of the legislature to cope directly with the many problems demanding its attention. The growth of society has ramified its activities and created peculiar and sophisticated problems that the legislature cannot be expected reasonably to comprehend. Specialization even in legislation has become necessary. To many of the problems attendant upon present day undertakings, the legislature may not have the competence, let alone the interest and the time, to provide the required direct and efficacious, not to say specific solutions. 8

Explain briefly the concept, purpose and nature of taxation.

What are the characteristics of a sound tax system?

Taxation is the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government.

The three principles that characterize a sound tax system are the principles of fiscal adequacy, theoretical justice and administrative feasibility.

The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal.1

The principle of fiscal adequacy simply means that sources of revenues must be adequate to meet government expenditures. The principle of equality or theoretical justice means that the tax imposed must be proportionate to taxpayer’s ability to pay. The principle of administrative feasibility requires that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer.

Taxation is both an inherent power and a legislative power. The power of taxation is an essential and inherent2 attribute of sovereignty, belonging as a matter of right to every independent government without being expressly granted by the people.3 Explain briefly the theory and basis of taxation.

Does non-observance of administrative feasibility, as a principle of sound tax system, invalidate a tax imposition?

The power to tax is an attribute of sovereignty emanating from necessity.4 Taxation is described as a symbiotic relationship whereby in exchange of the benefits and protection that the citizens get from the government, taxes are paid.5

No, it will not render a tax imposition invalid except to the extent that specific constitutional (or statutory limitations in the case of local taxation) are impaired.9

How are statutory provisions granting tax exemptions or deductions construed? State the basis for the rule.

Tax may be distinguished from license fee as follows:

It is an elementary rule in taxation that exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority—it is the taxpayer’s duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted. 6 The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers.7 State the rationale behind the permissible delegation of legislative powers to specialized agencies like the Secretary of Finance. The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its nondelegation the exception. The reason is the increasing complexity of modern life and many technical fields of 1Napocor

vs. Province of Albay, G.R. No. 87479, 4 June 1990. 2MCQ No. 4, 2012 Bar. 3Pepsi – Cola Bottling Co. of the Philippines, Inc. vs. Municipality of Tanauan, Leyte, G.R. No. L-31156, 27 Feb 1976. 4Phil. Guaranty Co. Inc. vs. Commissioner of Internal Revenue, G.R. No. L22074, 30 April 1965); MCQ No. 3, 2012 Bar. 5CIR vs. Algue, Inc., G.R. No. L-28896, 17 Feb 1988. 6Radio Communications of the Philippines, Inc. (RCPI), vs. Provincial Assessor of South Cotabato, 456 SCRA 1. 7Quezon City vs. ABS-CBN Broadcasting Corporation, 567 SCRA 496.

Distinguish tax from license fee.

Tax Levied for revenue Involves exercise of taxing power Amount is generally not limited Imposed on the right to exercise a privilege as well as to persons and property Enforced contribution assessed by sovereign authority to defray public expenses Failure to pay does not necessarily makes the business illegal

License fee Imposed for regulations Involves an exercise of police power Amount is usually limited to the necessary expenses of regulation Imposed on the right to exercise a privilege

Legal compensation or reward of an officer for specific services Failure to pay makes the act or business illegal

Are toll fees considered taxes? No. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in 8LaSuerteCigar&

Cigarette Factory vs. CA, G.R. No. 125346, November 11, 2014, EN BANC) citing Maceda v. Macaraig, Jr., 274 Phil. 1060 (1991). 9Diaz vs. Secretary.G.R. No. 193007, 19 July 2011.

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the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax.10 Give the sources of tax law. The sources of tax laws are: (a) Constitution; (b) statutes or laws; (c) presidential decrees; (d) revenue regulation; (e) administrative rulings and opinions; (f) judicial decisions; (g) provincial, city, municipal and barangay ordinances; and (h) treaties or international agreements. What is meant by progressive taxation and what is its basis? Taxation is progressive when its rate goes up depending on the resources of the person affected. It is built on the principle of the taxpayer’s ability to pay. What is double taxation? Is it unconstitutional? Double taxation11 means taxing the same property twice when it should be taxed only once, that is, taxing the same person twice by the same jurisdiction for the same thing.12 Double taxation is not expressly forbidden in our Constitution, but the Court has recognized it as obnoxious “where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose.”13 How is the plaintiff in a taxpayer’s suit differentiated from the plaintiff in a citizen’s suit? The plaintiff in a taxpayer’s suit is in a different category from the plaintiff in a citizen's suit – in the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern.14 It has been said that the State can never be in estoppel, and this is particularly true in matters involving taxation. Explain the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel. The underlying basis is the lifeblood theory. Upon taxation depends the Government’s ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affair. This should not hold

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true to government officials with respect to matters not of their own personal concern.15 The cigarette manufacturers contend that for a long time prior to the transactions herein involved, the Collector of Internal Revenue had never subjected their purchases and importations of stemmed leaf tobacco to excise taxes. This prolonged practice allegedly represents the official and authoritative interpretation of the law by the Bureau of Internal Revenue which must be respected. HELD: In Philippine Long Distance Telephone Co. v. Collector of Internal Revenue, the[Supreme Court] has held that this principle is not absolute, and an erroneous implementation by an officer based on a misapprehension of law may be corrected when the true construction is ascertained. x x xProlonged practice of the Bureau of Internal Revenue in not collecting the specific tax on stemmed leaf tobacco cannot validate what is otherwise an erroneous application and enforcement of the law. The government is never estopped from collecting legitimate taxes because of the error committed by its agents.16 B. INCOME TAXATION B.1. Basic Concepts

What is income? Income means all the wealth which flows into the taxpayer other than a mere return on capital. It is gain derived and severed from capital. What are the requisites in order that income may be taxable? For income to be taxable, the following requisites must exist: (a) there must be gain; (b) the gain must be realized or received and (c) the gain must not be excluded by law or treaty fromtaxation. (Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576, 20 January 1999, 301 SCRA 152, 181; BIR vs. CA, G.R. No. 160756, 9 March 2010) When is income considered realized? For income tax purposes, income is realized when the earning process is complete or virtually complete and an exchange has taken place. (Question No. 32, 2011 Bar) What are the sources of income?

15Misael 10Ibid. 11MCQ

No. 1, 2012 Bar; MCQ No. 3, 2013 Bar; MCQ No. 22, 2014 Bar. of Internal Revenue vs. Bank of Commerce, 459 SCRA 638. 13AbakadaGuro Party List vs. Ermita, supra. 14David vs. Macapagal-Arroyo, 489 SCRA 160. 12Commissioner

P. Vera, et al. vs. Jose F. Fernandez, et al., G.R. No. L-31364, March 30, 1979; Atlas Consolidated Mining & Development Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981; La Suerte Sugar & Cigarette Factory vs. CA, G.R. No. 125346, 11 November 2014, EN BANC. 16La Suerte Cigar, supra.

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

In general, the sources of income are the property, activity or service that produced the income. Source of income as a test of taxability of income Under Section 23 of the NIRC, all persons are taxable only on income derived from sources within the Philippines. But resident citizens and domestic corporations are also taxable on income derived from sources outside the Philippines. When is the source of income considered from within the Philippines? In general, for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from property, activity or service within the Philippines. In CIR vs. BOAC (1987), an off-line international carrier maintained a sales agent in the Philippines who sold tickets for flights flown outside the Philippines. The Supreme Court considered the sale of tickets in the Philippines as the activity that produced the income. The test of taxability is the “source”; and the source of an income is that activity which produced the income. Even if the BOAC tickets that were sold covered the “transport of passengers and cargo to and from foreign cities”, it cannot alter the fact that income from the sale of tickets was derived from the Philippines. Thus, BOAC was made liable for revenue derived from the sale of the tickets.

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(a) For interest, it is the RESIDENCE of the payor of such interest; (b) For dividend paid by a domestic corporation, the law treats the same as derived from sources within the Philippines without further qualifications; if paid by a foreign corporation, it is the COMPOSITION OF GROSS INCOME OF THE LAST THREE YEARS; (c) For compensation, it is the PLACE WHERE SERVICES ARE RENDERED; (d) For rental or royalty, it is the PLACE WHERE THE PROPERTY IS LOCATED, or WHERE THE USE OR PRIVILEGE TO USE IS FOUND; (e) For gain from sale of realty, it is the LOCATION OF THE REAL PROPERTY; and (f) For gain from sale of personal property, it is the PLACE OF SALE, except for gain from sale of shares in a domestic corporation where regardless of the place of sale, the income is always treated as income from sources within the Philippines.24 2014 BAR Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star, a nonresident foreign corporation with no property in the Philippines. Under the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hongkong.

What are incomes considered derived from sources within the Philippines?

Is the compensation for the services of Single Star taxable as income from sources within the Philippines? Explain.

Sec. 42(A) of the Tax Code enumerates the items of gross income from sources within the Philippines, namely:

Suggested Answer:

(a) (b)

(c) (d) (e) (f)

Interests17

paid by residents of the Philippines, corporate or otherwise; Dividendspaid by domestic corporations;orforeign corporations18,at least 50% of theirgross income in the last three taxable years coming from sources within the Philippines. Compensation19for services performed in the Philippines; Rentals and royalties20 from properties located in the Philippines; Gains from sale of real properties21 located in the Philippines; and Gains from sale of personal properties 22, the sale taking place in the Philippines. 23

What determines the source of the incomes enumerated in Sec. 42 of the NIRC? Questions 31, 48, 2011 Bar. Questions 21, 31, 48, 2011 Bar. 19 Questions 6 and 7, 2012 Bar; Question XI, 2014 Bar. 20 Question 31, 2011 Bar. 21 Question 31, 2011 Bar. 22 Questions 21, 48, 2011 Bar. 23But when the seller is also the manufacturer, the gain is treated as partly from within and partly from without where place of manufacture is different from place of sale. 17 18

The compensation income received by Single Star came from sources outside the Philippines because the services were performed outside the Philippines. Consequently, it is not taxable in the Philippines because a foreign corporation, like Single Star, is taxable only on incomes derived from sources within the Philippines. (Sections 23 and 42C3, NIRC) Who are the income taxpayers? In general, the income taxpayers are classified into individual, estate, trust and corporation. (Sec. 22A, NIRC) Differentiate global system of taxation from schedular system of taxation. Under the global tax system, the tax treatment is common to all categories of income. Thus, there is no need to classify income. The rate applied is unitary but may be progressive as in individuals or flat as in corporate taxpayers. Under this system, all incomes are reported in one income tax return.

24Subject

to the qualification in case the seller is at the same time the manufacturer. See Note 21.

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Whereas, under the schedular tax system, the tax treatment varies according to the kind or category of the income. There is therefore a need to classify the incomes. Different rates are applied to the different kinds of income. Consequently, a different return is filed for each kind of income subject to the tax.

(b) In the former, deductions and personal or additional exemptions are allowed; in the latter, no such deductions and personal or additional exemptions are allowed; (c) The tax base of the former is computed on the basis of one taxable year; the tax base of the latter is usually computed on a per transaction basis; (d) The former is usually paid at the end of the taxable year; the latter is paid at source (through withholding); (e) In the former, liability for payment rests on the payee; in the latter, liability for payment rests on the payor; (f) In the former, the payee is required to file an income tax return; in the latter, the payee is no longer required to file the return since it is to be made by the payor; (g) Creditable withholding tax is, in certain cases, imposed on incomes subject to ordinary tax; final withholding tax is usually imposed on incomes subject to final tax.

What system of taxation was adopted under the NIRC on income taxation? Under the Philippine tax system, the global system is adopted in ordinary taxation whereas the schedular system is usually found in the application of final taxes. The NIRC adopted a semi-global and semischedular tax system. (MCQ No. 5, 2012 Bar) B.2 Individual Income Taxation Who are the individual income taxpayers? They are the resident citizen, nonresident citizen, OCW and seamen, resident alien (Sec. 24A) and nonresident alien engaged in trade/business or exercise of profession25 in the Philippines (Sec. 25A).

Distinguish final withholding tax from creditable withholding tax. The two may be distinguished as follows:

EXCLUDE non-resident alien NOT engaged in trade/business or exercise of profession in the Philippines (Sec. 25A).

FWT a) The amount of incometax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.26

How are the incomes of individuals taxed? In general, individuals are taxed on the basis of their taxable income, that is, gross income less deduction and personal and additional exemption. This tax is referred to as ordinary income tax or regular income tax. (Sec. 24A and 25A in relation to Sec. 31 and Sec. 32A, NIRC)

b) Liability for payment of the tax rests primarily on the payor as a withholding agent.

By way of exception, final tax, instead of ordinary tax, shall be imposed on certain kinds of passive income. Subject to certain requisites, these are: (a) Interests, royalties, prizes and winnings; (b) Cash or property dividends; (c) Capital gains derived from the sale of shares of stocks; and (d) Capital gains derived from the sale of realty. (Sec. 24B1, 24B2, 24C, 24D1, 25A2 and 25A3, NIRC) Other incomes subject to final tax are: (a) Fringe benefits (Sec. 33, NIRC) and (b) Informer’s reward (Sec. 282, NIRC) Distinguish ordinary tax from final tax. Ordinary tax and final tax are distinguished as follows: (a) In the former, the tax base is taxable income; in the latter, the tax base is the gross income; 25

Question 65, 2011 Bar.

CWT a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. b) Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income. The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

c) The payee is not required to file an income tax return for the particular income.

c) The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended. (Revenue Regulation 2-98, Sec. 2.57A and Sec. 2.57B; CREBA vs. Romulo, 9 March 2010) Explain the purpose/s of the withholding tax system. The purpose of the withholding tax system is threefold: (1) to provide the taxpayer with a convenient way of paying his tax liability; (2) to ensure the collection of

26

Question 10, 2011 Bar.

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tax, and (3) to improve the government’s cashflow.(CREBA vs. Romulo, 9 March 2010)

Income payment to realtors for the sale of realty. (Sec. 79, NIRC and Sec. 2.57.2 of RR No 2-98, as amended)

In case of failure by the withholding agent to perform his duty to withhold and remit tax, is the taxpayer absolved of liability?

What is the proper tax treatment of interest incomes earned by individuals?

[T]he liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. x xx [The taxpayer] remains liable for the payment of tax as [he] shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due.27 What is passive income?28 It is income generated by the taxpayer’s assets. The BIR defines passive income by stating what it is not: “if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is not passive income.”29 Are all passive incomes subject to withholding tax? No. There are only certain kinds of passive income that are subject to final tax and, consequently, to final withholding tax. These are specifically enumerated in various provisions of the NIRC (see Sec. 57A, NIRC). All others are generally considered part of gross income and, consequently, subject to ordinary tax wherein creditable withholding tax is, in particular cases, applicable. Under present regulations, creditable withholding tax is usually applied to income payments not involving passive income. NOTE: From the above, it is clear that not only passive incomes may be subject to withholding tax. Section 57(A) of the NIRC expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. On the other hand, Section 57(B) provides that the Secretary (of Finance) can require a CWT on “income payable to natural or juridical persons, residing in the Philippines.” There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so.30 Give some examples of ordinary incomes subject to CWT. Some notable income payments that are subject to CWT are (1) wages; (2) professional fees, (3) rentals of realty, (4) Income payments to partners of GPPs and (5)

vs. CIR, G.R. No. 170257, 7 September 2011. Question 18, 2011 Bar. 29CREBA vs. Romulo, G.R. No. 160756, 9 March 2010. 30see CREBA vs. Romulo (2010), supra.

As a rule, the interests earned by individuals shall be included in gross income and, thus, subject to regular income tax. This includes interest earned by a resident citizen from sources abroad. By way of exception, interest on bank deposit (or monetary benefit from deposit and from trust funds substitutes or similar arrangements) DERIVED FROM SOURCES WITHIN shall be subject to final tax and, correspondingly, final withholding tax. The rate of tax is 20% for Peso currency deposit account and 7.5% for any foreign currency deposit account. (Sec. 24B1, NIRC) What is meant by 'deposit substitutes'? The term means an alternative form of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits. (Sec. 22Y, NIRC) What determines whether a debt instrument is subject to final tax at 20%? The number of lenders is determinative of whether a debt instrument, such as bonds, should be considered a deposit substitute and consequently subject to the 20% final withholding tax. Thus, when funds are simultaneously obtained from 20 or more lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest income from the bonds. (See BDO v. Republic, G.R. No. 198756, 13 January 2015) 20 or more lender rule and meaning of the phrase "at any one time" The reckoning of “20 or more lenders/investors” is made at any transaction in connection with the purchase or sale of financial assets, such as subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a broker or dealer.31 What is the tax treatment of debt instruments that do not qualify as deposit substitutes under the 1997 National Internal Revenue Code? They are subject to the regular income tax. Instances when the tax on interests from bank deposits is not applicable (a) when derived from sources abroad (the bank is a non-resident), except those earned by resident citizens;

27RCBC 28

31

See BDO v. Republic, G.R. No. 198756, 13 January 2015.

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(b) when earned by non-residents from foreign currency deposit accounts; and (c) when earned from long-term deposit or investment certificate (with a maturity period of not less than five (5) years) The Bureau of Treasury (BOT) issued P35 billion worth of 10-year zero-coupon treasury bonds denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds. The transactions executed for the sale of the PEACe Bonds are: 1. The issuance of the P35 billion Bonds by the BOT to RCBC/CODE-NGO at P10.2 billion; and 2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996 billion.

EXCLUSION and, hence, exempt from tax (Sec. 32B7c, NIRC) (d) when the prize or award is won by an athlete in a local or international sports competition (i.e., the OLYMPICS) sanctioned by a recognized national sports association; This is considered an EXCLUSION and, hence, exempt from tax. (Sec. 32B7d, NIRC) What is capital asset? What is capital gain? The law defines capital asset in the negative, such that, any property not falling under the following enumeration (referred to as ordinary assets) is capital asset: (a) stock in trade or inventoriable asset; (b) property primarily held for sale to customers in the ordinary course of trade or business; (c) depreciable asset; and (d) real property used in trade or business (Sec. 39A, NIRC)

Under the underwriting agreement, the settlement dates for the sale and distribution by RCBC Capital of the PEACe Bonds to various undisclosed investors fell on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. Describe the proper tax treatment of the discount or interest income arising from the treasury bonds. Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substitutes within the meaning of Section 22 (Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be required of any lender/investor had the latter turned around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.32 However, the interest income that may be received by individuals from long-term deposits or investments with a holding period of not less than five (5) years is exempt from the final tax. Instances when the final tax on prize is not applicable (a) when earned from sources abroad, that is, when the competition or contest was held abroad; however, the prize or award received by a resident citizen from sources abroad is still included in gross income subject of ordinary income taxation; (b) when the amount does not exceed Php10,000.00, in which case, the amount is included in gross income and thus, subject to ordinary tax (Sec. 24B1, Sec. 32A, NIRC) (c) when the prize or award is received primarily in recognition of religious, charitable, educational, artistic, literary, or civic achievement PROVIDED (1) the recipient was selected without any action on his part to enter the contest; and (2) he is not required to render substantial future services; This is considered an

32

See BDO v. Republic (2015), supra.

On the other hand, a capital gain is the gain, profit or income realized from a sale or disposition of capital asset. What is the proper tax treatment on capital gain derived from dealings in property? Generally, a capital gain is included in gross income subject of ordinary income taxation (Sec. 32A, NIRC). By way of exceptions, the capital gains derived from the sale of shares of stock issued by a domestic corporation and sale of real property located in the Philippines are subject to final tax. (Sec. 24C, 24D1, 25A3, NIRC) In dealings involving capital assets, are gains to be presumed? No. Gains are not to be presumed from sale or disposition of capital assets. However, in the case of sale or other disposition of real property located in the Philippines and held as capital asset, the gain is presumed and such gain is equivalent to the amount of the zonal value or gross selling price, whichever is higher. (Sec. 24D1, Sec. 25A3, NIRC) What are the tax base and the tax rate of the applicable tax imposable on capital gains? In general, the tax base of the income tax on capital gain is the net capital gain or net income, whereas, the tax rate is the graduated rate of 5%-32%. For capital gain derived from the sale of share of stock in a domestic corporation not traded through the local stock exchange, the tax base is NET CAPITAL GAIN and the tax rate is 5% for the first Php100,000.00 and 10% on any amount in excess thereof. (NOTE: If sale is through the local stock exchange, the applicable tax is the percentage tax, also referred to as the stock transaction tax, under Sec. 127 of the NIRC. The basis is the GSP and the rate is ½ of 1%.33 The payment of this tax is in lieu of income tax.) 33

Question 4, 2011 Bar; Question 10, 2012 Bar.

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

For capital gain presumed to have been realized from the sale of realty, the tax base is FMV or GSP, whichever is higher, and the tax rate is 6%. A dealer in securities sold unlisted shares of stocks of a domestic corporation in 2010 and derived a gain of P1 Million therefrom. Is the gain taxable at 5%/10% capital gains tax based on net capital gain OR at ½ of 1% stock transaction tax based on the gross selling price or fair market value, whichever is higher? (Question 10, 2012 Bar, Adapted) Neither. The 5%/10% capital gains tax is not applicable because the shares are NOT capital assets. Shares of stock, like other securities, would be ordinary assets to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. (China Banking Corp. vs. CA, G.R. No. 125508, July 19, 2000) Likewise, the percentage tax, otherwise known as the stock transaction tax, is not applicable because the seller is a dealer in securities. In addition, the shares sold are unlisted shares. The percentage tax applies on sale, barter or exchange of shares of stock LISTED and TRADED through the local stock exchange OTHER THAN by a dealer in securities. (Sec. 127, NIRC, emphasis supplied.) A resident Filipino citizen (not a dealer in securities) sold shares of stocks of a domestic corporation that are listed and traded in the Philippine Stock Exchange. (Question 13, 2012 Bar) a) The sale is exempt from income tax but subject to the ½ of 1% stock transaction tax; b) The sale is subject to income tax computed at the graduated income tax rates of 5% to 32% on net taxable income; c) The sale is subject to the stock transaction tax and income tax; d) The sale is both exempt from the stock transaction tax and income tax. Explanation: Under Section 127 (D) of the NIRC, any gain derived from the sale, barter, exchange or other disposition of shares of stock subject to the percentage tax of ½ of 1% shall be exempt from the final tax and from the regular individual or corporate income tax. May the liability for the 6% capital gains tax be legally avoided? If in the affirmative, what are the requirements? Yes. The 6% capital gains tax may be legally avoided if the subject matter of the sale is the PRINCIPAL residence and the proceeds are to be used in acquiring or establishing a new principal residence within eighteen (18) calendar months from the date of sale. The seller must inform the Commissioner of his intention to avail of the exemption within 30 days from the date of sale. (Sec. 24D2, NIRC)

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Additionally, the revenue regulations require the 6% capital gains tax to be deposited in an escrow account with an authorized agent bank and shall only be released to the transferor if the proceeds of the sale/disposition have, in fact, been utilized in the acquisition or construction of a new principal residence. (RR No. 17-2003) Instances when the 6% capital gains tax will not apply (a) when the real property is ordinary asset; (b) when the real property, even though classified as capital asset, is not located in the Philippines; (c) when the real property is a principal residence and the seller applies for exemption from the tax; (d) when the real property is sold to the government and the seller exercises the option to be taxed for ordinary tax under Sec. 24A. (contained in the proviso under Sec. 24D1, NIRC) Illustration of (a) above, i.e., when the real property is ordinary asset. (Question 11, 2012 Bar) An individual, who is a real estate dealer, sold a residential lot in Quezon City at a gain of P100,000.00 (selling price of P900,000.00 and cost is P800,000.00). The sale is subject to income tax as follows: a) 6% capital gains tax on the gain; b) 6% capital gains tax on the gross selling price of fair market value, whichever is higher; c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable income; d) 30% income tax on net taxable income. Explanation: It is safe to assume that the property is being held by the seller, a real estate dealer, primarily for sale to customers in the ordinary course of real estate business and, as such, it is ordinary asset. Consequently, the capital gains tax finds no application. Choice (d) is incorrect because the flat rate of 30% applies not to an individual but to a corporate taxpayer. Choice (c) is correct as to the kind of tax (ordinary income tax), rate of tax (graduated rate of 5% to 32% for individuals) and tax base (net taxable income). The source of confusion is the description of the property as RESIDENTIAL and lack of any specification that it is part of the seller’s inventory of saleable goods. If this means that the lot is being used by the seller for residential purposes and NOT being held for sale to customers in the ordinary course of trade or business, then it is properly classified as capital asset. Under such interpretation, the correct answer is choice (b). It is often contracted by parties that the capital gains tax of 6% is to be paid by the buyer. Whose liability is the tax? As far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller’s gain from the sale of the real estate.(see Republic vs. Soriano, G.R. No. 211666, 25 February 2015)

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What is the importance of the classification of assets into ordinary and capital? The importance lies on the application of the rules on (1) holding period, (2) loss limitation and (3) carry-over of the net capital loss. These rules are relevant only to dealings in capital assets. State the rules on holding period, loss limitation and carry-over of net capital loss. Pursuant to the rule on holding period, only fifty percent (50%) of the capital gain, if any, is taxable; or only 50% of the capital loss, is deductible, where the property sold has been held for more than twelve (12) months. If held in the short-term (less than 12 months), one hundred percent (100%) of the gain or loss shall be taxable or deductible, as the case may be. This rule applies to individuals only. (Sec. 39B, NIRC) Under the loss limitation rule, the capital loss shall be deductible only to the extent of the capital gains derived within the taxable year. This rule applies to both individuals and corporations. (Sec. 39C in relation to Sec. 34D4, NIRC) If during the taxable year, there is excess of capital losses over capital gains, the excess (net capital loss) may be carried over to and deducted from capital gains in the succeeding taxable year. The privilege of carry-over of net capital loss is available only to individuals. (Sec. 39D, NIRC) BAR 2011 In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch for P500,000.00. Tonette derives income from the exercise of her profession as a licensed CPA. In October 2009, Tonette sold her diamond ring, bracelet, and necklace for only P1.25 million incurring a loss of P250,000.00. She used the P1.25 million to buy a solo diamond ring in November 2009 which she sold for P1.5 million in September 2010. Tonette had no other transaction in jewelry in 2010. Which among the following describes the tax implications arising from the above transactions? A. Tonette may deduct her 2009 loss only from her 2009 professional income. B. Tonette may carry over and deduct her 2009 loss only from her 2010 gain. C. Tonette may carry over and deduct her 2009 loss from her 2010 professional income as well as from her gain. D. Tonette may not deduct her 2009 loss from both her 2010 professional income and her gain. (No. 39, 2011 Bar Examination)

8

purposes, the jewelries that Tonettesold are treated as capital assets. Consequently, the rules on holding period, loss limitation and carry-over of net capital loss are relevant. In this case, Tonette incurred a net capital loss for the taxable year 2009 in the amount of Php250,000.00 (the excess of capital loss over capital gain of Php0.0). As a professional, Tonette is allowed to claim the different items of deduction under Sec. 34 which includes capital loss (Sec. 34D4). In 2010, Tonette realized a short-term capital gain from the sale of her solo diamond ring in the amount of Php250,000.00. The gain is measured by the excess of the amount realized (Php1.5 million) over the basis for determining gain (cost of acquisition of Php1.25 million) (see Sec. 40A, Sec. 40B, NIRC). Choice (A) is not a correct tax implication because the loss limitation rule forbids an individual from deducting a capital loss from any type of income NOT capital gain. Choice (C) is only partially correct. While the law allows the carry-over of net capital loss incurred in a taxable year to the succeeding taxable year, such net capital loss may be deducted only from capital gain, if any, in such succeeding taxable year pursuant to the loss limitation rule. Choice (D) is likewise incorrect. Clearly, choice (B) is the correct answer. Tonette’s 2009 loss is her net capital loss for the year 2009. Under the privilege of carry-over of net capital loss in Sec. 39D of the NIRC, Tonette may carry over such net capital loss to and applied as a deduction in 2010. However, the deduction shall only be to the extent of the capital gain in 2010 pursuant to the loss limitation rule. Here, Tonette has realized a capital gain of Php250,000.00 in 2010. Are the rules on holding period, loss limitation and carry-over of net capital loss applicable in a sale or disposition of real property (capital asset) located in the Philippines? No. By express exclusion under the law, the holding period is inapplicable to a sale of real property where the 6% capital gains tax applies. In this case, the gain is presumed by law. The loss that may have been actually incurred, if there be any, is not recognized. Consequently, the rules on loss limitation and carry-over of net capital loss also find no application. (See the exception clause in Sec. 24D1, NIRC) NOTE: The holding period rule is also not applicable to a sale of shares of stock in a domestic corporation not traded through the local stock exchange. This is also by express exclusion under the law. (Sec. 24C and allied provisions, NIRC)

Explanation:

Explain the tax treatment on compensation income received by persons who are employed.

The facts disclose that Tonette is a licensed CPA who engaged in sales of jewelry merely on isolated cases. There is no clear showing that she is engaged in the business of buy and sell of jewelry. For income tax

As a rule, compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items, is gross income

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subject to ordinary taxation. (Sec. 32A, Sec. 24A, Sec. 25A1, NIRC) The tax on is collected at source via creditable withholding tax (CWT) pursuant to Sec. 79 of the NIRC. Consequently, it is the employer who is obliged to return the income and pay the tax. If the employee earns purely compensation income and has only one employer, he is qualified for exemption from the requirement of filing the annual income tax returnunder the substituted filing system provided in Sec. 51(A)(2)(b) of the NIRC. Fringe benefits (compensation apart from the basic salary and other allowances) are included in this kind of treatment, EXCEPT those that are paid to or received by non-rank and file employees. Under Sec. 33, a special treatment is accorded to fringe benefits paid to managerial and supervisory employees. The income is subject to FINAL tax and, consequently, to final withholding tax (FWT) under Sec. 57(A). The fringe benefits paid to rank-and-file employees remain taxable compensation income covered by ordinary taxation and CWT. However, the tax on fringe benefits under Sec. 33 does not apply if the fringe benefit is – (1) required by the nature of, or necessary to the trade, business or profession of the employer; or (2) for the convenience or advantage of the employer.34 The tax on fringe benefits, whether received by rankand-file employees or not, does not apply where the benefit qualifies as a de minimisbenefit as defined by the implementing rules. (RR 3-98, as amended; see also RR 52011) Whenever de minimisbenefit paid to an employee exceeds the ceiling provided by the rules, the excess is generally taxable as part of gross compensation income. But such excess may be treated as “Other benefits” under Sec. 32(B)(7)(e)(iv) which is excludible from gross income for as long as the total amount, together with the 13th month pay, does not exceed the ceiling of Php30,000.00 (now Php82,000.00 beginning January 1, 2015). (see RA 10653; RR 3-2015) In any event, the income tax, as well as the withholding tax, cannot apply where the salary or wage is below the statutory minimum wage. (see RA 9504; Sec, 79, NIRC) What is the tax treatment of the distributable net income of a general professional partnership (GPP)? It is ultimately taxed to the partners comprising it. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. (Sec. 26, NIRC; RR 2-2010) BAR 2014

9

A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows: Earnings: (1) Professional/legal fees from various clients (2) Cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm (3) Gains derived from sale of excess computers and laptops Payments: (1) Salaries of office staff (2) Rentals for office space (3) Representation expenses incurred in meetings with clients (A) What are the items in the above mentioned earnings which should be included in the computation of ABC Law Firm’s gross income? Explain. (B) What are the items in the above-mentioned payments which may be considered as deductions from the gross income of ABC Law Firm? Explain. (C) If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence on the part of ABC Law Firm insofar as the payment of income tax is concerned? What, if any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the payment of income tax is concerned? Suggested Answer: (C) The net income of ABC Law Firm will not be taxable since the law firm is a general professional partnership which is exempt from taxes on corporations. Instead, each partner, A, B and C, shall declare as gross income the distributive share, actually or constructively received,in the partnership’s net income. BAR 2013 Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty. Gambino, in accordance with its articles of partnership. In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim, such as purchase of law books, entertainment expenses, car insurance and car depreciation. The BIR disallowed the deductions. Was the BIR correct? Suggested Answer: No. Apart from the expenses claimed by a GPP in determining its net income, the individual partner can

34MCQ

No. X, 2014 Bar.

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still claim the deductions incurred or paid by him that contributed to the earning of the income taxable to him. In the given case, Atty. Gambino can claim the expenses that he incurred as itemized deductions since they appear as ordinary and necessary expenses for the practice of profession and which were not claimed by the GPP in computing its net income or distributable net income during the year. (Sec. 26, NIRC; RR 2-2010) B.3 Corporate Income Taxation How is the term “corporation” defined? Under the NIRC, the term “corporation”35 shall include partnerships, no matter how created or organized, joint stock companies, joint accounts, association, or insurance companies, but does not include: (a) general professional partnership36 – partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business; (b) joint venture formed for the purpose of undertaking construction projects; and (c) joint venture formed for the purpose of engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. (Sec. 22B, NIRC) Who are the corporate taxpayers? They are classified into domestic corporation (DC), resident foreign corporation (RFC) and non-resident foreign corporation (NRFC). What is a resident foreign corporation? Give an example. It is a foreign corporation engaged in trade or business in the Philippines (sec. 22H, NIRC). An example is one organized under the laws of a foreign country that engages in business in Makati City, Philippines. (Question 9, 2012 Bar) How are the corporations taxed? In general, domestic corporations and resident foreign corporations are taxed on their taxable income, i.e. gross income less deductions; or in lieu thereof, the Minimum Corporate Income Tax (MCIT). By way of exceptions, final tax shall be imposed on certain kinds of passive income such as interest on bank deposits, royalties, capital gains from sale of shares of stock and, for domestic corporations, capital gains from sale or disposition of land or building located in the Philippines. (Section 27D1, 27D2, 27D5; Section 28A7a, 28A7c) Question 35, 2011 Bar. Question 15, 2012 Bar; Question IV, 2013 Bar; Question No. XXIV, 2014 Bar. 35 36

10

For non-resident corporations, their incomes from all sources within the Philippines are taxed via the final withholding tax. The rate applied is 30%, except interest on foreign loan (20%), dividend from domestic corporations (15%, subject to condition) and capital gain from sale of sharesof stock in a domestic corporation (5% and 10%). EXCLUDE Non-resident cinematographic film owner, lessor or distributor (Sec. 28B2), Non-resident owner or lessor of vessels chartered by Philippine nationals (Sec. 28B3), and Non-resident owner or lessor of aircraft machineries and other equipment (Sec. 28B4) Give the tax bases and tax rates of the taxes applicable to corporations (exclude NRFC). Type of Income Tax (a) Normal/RegularCorporate Income Tax (DC and RFC) (b) MCIT (DC and RFC) (c) Final Tax (DC and RFC) (d) Improperly Accumulated Earnings Tax (IAET) (DC only)

Tax Base Taxable Income Gross Income Gross income Improperly accumulated taxable income

Tax Rate(s) 30%

2% Various 10%

Are GOCCs, agencies and instrumentalities of the government exempt from income tax? Generally, no.However, under Sec. 27(C) of the NIRC, the following are absolutely exempted from income tax: (a) (b) (c) (d) (e)

SSS GSIS PHIC PCSO Local water districts (R.A. No. 10026)

Aside from the GOCCs, agencies and instrumentalities of the government expressly mentioned in Sec. 27(C), who are the other corporations exempt from income tax? Under Sec. 30 of the NIRC, certain kinds of nonstock and non-profit organizations/institutions are exempt from income tax in respect to income derived by them as such organizations/institutions. However, their income from: (1) property, real or personal, or (2) any of their activities conducted for profit regardless of the disposition made of such income, are still taxable. But a non-stock and non-profit educational institution may be exempt from tax provided that its income, regardless of source, is used actually, directly and exclusively for educational purposes. (see par. 3, Sec. 4, Art. XIV, 1987 Constitution)

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A proprietary educational institution or hospital is not exempted but it enjoys a preferential rate of tax at 10% based on taxable income PROVIDED not more than fifty percent (50%) of its gross income comes from the conduct of unrelated trade, business or other activity (PRE-DOMINANCE TEST). (Sec. 27B, NIRC)

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effective in addressing liquidity problems of the government.39 Instances when the MCIT will not apply (a) during the infant stages of the corporation; the tax shall apply only beginning the fourth taxable year immediately following the taxable year in which such corporation commenced its business operations;

BAR 2013 A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital’s use and not more than 30% of its funds were used for administrative purposes.

(b) when, by authority of the Secretary of Finance, the imposition of the MCIT is suspended upon submission of proof by the applicant corporation that the corporation sustained substantial losses (1) on account of a prolonged labor dispute; or (2) because of “force majeure”; or (3) because of legitimate business reverses;

Is the hospital subject to tax on its income? If it is, at what rate? Suggested Answer:

(c) when the corporation is not subject to normal income tax (tax based on taxable income at the normal rate of 30%), such as (1) a proprietary educational institution or hospital enjoying 10% tax on their taxable income; (2) an FCDU; (3) an OBU; (4) regional operating headquarter of a multinational company (ROH); (5) a firm that is taxed under a special tax regime like an enterprise registered with the PEZA Law (RA No. 7916) or Bases Conversion and Development Act (RA No. 7227).

Yes. Ordinarily a non-stock and non-profit charitable institution is exempt from tax. But by accepting paying patients, the hospital derived an income from an activity conducted for profit and, consequently, such income is subject to tax regardless of how it is disposed of. However, as a proprietary hospital whose dominant income is derived from hospital-related activities, it is entitled to a preferential rate of 10%.37 Is ‘gross income’ for purposes of computing the Minimum Corporate Income Tax (MCIT) the same as ‘gross income’ in computing basic corporate income tax? No. Gross income, as the basis for MCIT, is given a special definition under Section 27(E)(4) of the NIRC of 1997, different from the general one under Section 34 of the same Code. It is more limited than the gross income used in the computation of basic corporate income tax.(CIR v. PAL, G.R. No. 179259, September 25, 2013) What is the rationale behind the MCIT? The MCIT came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of corporations. It was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector.38 What are the perceived advantages of pegging the tax base of the MCIT to a corporation’s gross income? As a tax on gross income, the MCIT prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. It is also simple and

See Sec. 27B, NIRC and CIR vs. St. Luke’s Medical Center, Inc., G.R. Nos. 195909 and 195960, 26 September 2012. 38 CREBA vs. Romulo (2010), supra.

Explain the concept and rationale of the IAET. The IAET equal to 10% of the improperly accumulated taxable income is imposed on corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. The rationale is that if the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. (See Sec. 29, NIRC and Sec. 2, RR No. 2-2001) Who are exempt from IAET? The IAET shall not apply to the following corporations: (a) Banks and other non-bank financial intermediaries; (b) Insurance companies; (c) Publicly-held corporations; (d) Taxable partnerships; (e) General professional partnerships;

37

39

see CREBA vs. Romulo (2010), supra.

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12

(f) Non- taxable joint ventures; and (g) Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local. (Sec. 29, NIRC and Sec. 4, RR No. 2-2001) For covered corporations, how can liability for IAET be avoided? It may be avoided if the corporation has accumulated income for the reasonable needs of the business. By “reasonable needs of the business”, it means the immediate needs of the business40, including reasonably anticipated needs. (Sec. 3, RR No. 2-2001) B.4 Deductions

The deductions are those found in Sec. 34 (items of deduction or optional standard deduction) and in Sec. 35 (personal and additional exemptions) of the NIRC. Special deductions are also provided for insurance companies under Sec. 37 of the NIRC. Who are entitled to deductions? Individuals and corporations subject to the regular income tax are entitled to claim deductions. Those who may avail of the deductions are usually engaged in trade/business or in the exercise of a profession. However, only individuals may claim personal and additional exemptions. compensation

income

earners

claim

Yes, but only premium payments on health and/or hospitalization insurance not to exceed Php2,400.00 per annum (or Php200.00 per month) may be claimed as deduction. All other items of deduction and the optional standard deduction are not available to pure compensation income earners. In addition, however, they may claim personal and additional exemptions under Sec. 35 of the NIRC. What are the different items of deduction? They are: (a) (b) (c) (d) (e) (f)

business expense; interest expense; tax; loss; bad debt; depreciation;

depletion of oil and gas wells and mines; charitable contribution41; research and development; and pension trust

Some income payments, which correspond to expenses of payors, are subject to creditable withholding tax under RR 2-98, as amended. On the part of the payor, what is the effect of the non-withholding or under-withholding of the income payment? The expense, which is recognized as deduction for tax purposes, may be disallowed if such was not subjected to withholding tax. However, a deduction may still be allowed despite non-withholding or underwithholding if at the time of the audit or investigation, the withholding tax is paid. During the audit conducted by the BIR official, it was found that the rental income claimed by the corporation was not subjected to expanded withholding tax. May the claimed rental expense be allowed as deduction from the gross income of the corporation? Yes, provided that the 5% expanded withholding tax is paid by the corporation during the audit.(Question 12, 2012 Bar, Adapted)

What are the deductions recognized under the law?

May pure deductions?

(g) (h) (i) (j)

State the rule on the optional treatment of interest expense. At the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.42(Sec. 34[B][3], NIRC) The interest expense of a domestic corporation on a bank loan in connection with the purchase of a production equipment – a) is not deductible from gross income of the borrower-corporation; b) is deductible from the gross income of the borrower-corporation during the year or it may be capitalized as part of cost of the equipment; c) is deductible only for a period of five years from date of purchase; d) is deductible only if the taxpayer uses the cash method of accounting. (Question 16, 2012 Bar) Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the ALL-EVENTS TEST has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate 41Question

40

Question 15, 2011 Bar.

42Question

III, 2014 Bar. XII, 2014 Bar.

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determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy.43 The "all events test" refers to: a) A person who uses the cash method where all sales have been fully paid by the buyers thereof; b) A person who uses the installment sales method, where the full amount of consideration is paid in full by the buyer thereof within the year of sale; c) A person who uses the accrual method, whereby an expense is deductible for the taxable year in which all the events had occurred which determined the fact of the liability and the amount thereof could be determined with reasonable accuracy; d) A person who uses the completed method, whereby the construction project has been completed during the year the contract was signed. (Question 17, 2012 Bar)

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Under Sec. 36(A)(1) of the NIRC, personal, living and family expenses are non-deductible expenses. Exemptions under Sec. 35 are intended as substitutes for personal and living expenses. They are roughly equivalent to the minimum of subsistence (Madrigal vs. Rafferty, 7 August 1918). Under prevailing law, the amount fixed for personal exemption is Php50,000.00, regardless of the status of the taxpayer (whether single, head of the family or married), and additional exemption in the amount of Php25,000.00 for each qualified dependent up to a maximum of four. Who is a qualified dependent? A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with45 the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

B.5 Exclusions What is the optional standard deduction (OSD) and what are its advantages? The Optional Standard Deduction44 is a privilege available to a citizen, resident alien or corporation subject to the normal income tax to deduct, in lieu of itemized deduction, forty percent (40%) of taxpayer’s gross sales or receipts (in the case of individual) or gross income (in the case of corporation) in the computation of taxable income. The OSD has its advantages. As an alternative to itemized deduction, it provides taxpayers with low itemizable expenses a higher amount of deduction and, thus, more tax savings. Also, its computation is relatively simple and, unlike itemized deduction, the OSD dispenses with the substantiation requirement. This relieves taxpayers of the difficulty of computation usually attendant to itemized deduction as well as the added burden of record-keeping. Important concepts relating to the OSD (a) The OSD is available only to citizens, resident aliens, and corporations subject to the regular income tax (DC and RFC). Before the amendment in RA 9504, corporations were not entitled to OSD. (b) The standard deduction is optional. If the taxpayer does not elect OSD, he is considered as having availed of the itemized deduction. (c) The election for OSD shall be irrevocable for the year in which it is made. (d) Proof is not required. (e) The rate has been increased from 10% to 40% under the amendment in RA 9504. Personal and Additional Exemptions

43

CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007. 34 (L), NIRC.

44Sec.

What is meant by the term “exclusions” and what is its legal effect? The term “exclusions” refers to items that are not included in the determination of gross income because (a) they represent return of capital, or are not income, gain or profit; or (b) they are income, gain or profit that are expressly exempt from income tax under the constitution, tax treaty, Tax Code, or general or special law.46 An item of exclusion reduces the gross income (not net income). What are the requirements in order that retirement benefits received by an employee in the private sector may be exempted from the tax? The answer needs qualification, depending upon whether retirement benefits are received under a BIRapproved retirement plan (R.A. No. 4917) or not (R.A. No. 7641). For retirement benefits received under R.A. No. 7641 to be exempted, the law requires that the retiring official or employee must have rendered services to his employer for at least five (5) years and that he be not less than 60 but not more than 65 years of age at the time of retirement.(Sec. 32B6a, NIRC) On the other hand, retirement benefits received in accordance with a reasonable private benefit plan maintained by the employer (under R.A. No. 4917) are exempted provided that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than 50 years of age at the time of his retirement. This benefit shall be availed of only once.(Sec. 32B6a, NIRC)

45

Question 42, 2011 Bar. Philippine Income Tax, 2010 Edition, p. 150.

46Mamalateo,

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Ma. Isabel Santos was the Human Resource Manager of Servier Philippines, Inc. (Servier) since 1991. In 1998, Santos suffered a sudden attack of “alimentary allergy”. She fell into coma and was confined in the hospital. After a year of medical treatment, evaluation disclosed that she has not recovered mentally and physically. Servier was constrained to terminate the services of Santos effective 31 August 1999.Servier paid disability retirement benefits but withheld a portion for taxation purposes. Under the retirement plan of Servier, employees are barred from claiming additional benefits on top of that provided for in the Plan. Santos was 41 years of age at the time of her termination. Under the circumstances, was the withholding of a portion of the retirement benefits proper? Suggested Answer: Yes. Pursuant to the Tax Code provisions on exclusion, retirement benefits received in accordance with a reasonable private benefit plan maintained by the employer (under R.A. No. 4917) are exempted provided that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than 50 years of age at the time of his retirement. Here, Santos was qualified for disability retirement. At the time of her retirement, she was only 41 years of age; and had been in the service for more or less eight (8) years. As such, the above exclusion is not applicable for failure to comply with the age and length of service requirements. Therefore, Servier cannot be faulted for deducting a portion from Santos’s total retirement benefits for taxation purposes.47

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B.6 Taxation on Estates and Trusts How shall the taxable income of an estate or trust be computed? The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual.(Sec. 61, NIRC) Who is liable for the payment of the tax on income from property held in trust? The income from property held in trust shall be paid by the fiduciary, if the trust instrument is irrevocable (Sec. 60C, NIRC); or the grantor, if the trust instrument is revocable (Sec. 63, NIRC) or that the income is distributed to or held for the benefit of the grantor (Sec. 64, NIRC). BAR 2009 Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. a.

What advice will you give the trustee? Explain.

b.

Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not?

What is “de minimis” benefit48 and how is it treated under the law? It is a facility or privilege furnished to an employee which is of relatively small value and designed to promote contentment, health, efficiency and goodwill of the employee. It is not taxable and, thus, excluded from gross income. (RR 2-98 as amended; see also RR 5-2011) But the excess of the amount of de minimisbenefit paid to an employee over the ceiling provided in the rules may qualify as “other benefits”entitled to exclusion from gross compensation income. Clarification on “other benefits” as one of the exclusions from gross compensation income received by an employee. Together with the 13th month pay, the amount of exclusion is now Php82,000.00 and shall in no case apply to other compensation received by an employee under an employer-employee relationship, such as basic salary and other allowances. Further, it must be emphasized that this exclusion from gross income is not applicable to self-employed individuals and income generated from business. (RR 3-2015)

See Santos vs. Servier Philippines, Inc., G.R. No. 166377, 28 November 2008. 48Question X, 2014 Bar. 47

Suggested Answer: a.

I will advise Miriamthat the yearly rental income distributed annually qualifies as a deduction in computing the net income of the trust. And since net income is zero after such deduction, there is nothing to be paid as annual income tax due from the trust. (Sec. 61A, NIRC)

b.

No. The trust may now have net income determined at the end of each year as a result of accumulating its income instead of distributing the same to the beneficiary. The tax is payable by the trust, as represented by the trustee, on the basis of such net income. (Sec. 61A, NIRC)

In the case of the employee’s trust which forms part of a pension, stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees, wherein contributions are made to the trust by the employer or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, what is the tax treatment of (a) the contributions made to the trust by the employer?

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(b) the retirement benefit paid to the employee under the retirement trust? (c) the income earned by the employee’s retirement funds which are held in trust? (d) the amount actually distributed to anonretiring employee during the year?

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NOTE: The income of the foregoing shall be computed on the basis of the calendar year (fiscal year is not applicable).

Suggested Answer:

How may a corporation recover the overpaid income tax in case the sum total of quarterly tax payments (to include payment through withholding) exceed the total income tax due on the net income for the year?

(a) The contribution made to the pension trust by the employer may be allowed as a deduction against his gross income.(Sec. 34J, NIRC)

The corporation may (1) carry-over the excess credit, or (2) be credited or refunded with the excess amount paid. (Sec. 76, NIRC)

(b) The retirement benefit received by the employee from the retirement fund of the trust shall be excluded in his gross income and, thus, exempted from the withholding tax.(Sec. 32B6a, NIRC)

BAR 2013

(c) The income earned by the retirement funds of private employees held by the trustor in their behalf shall be exempted from income tax.(Sec. 60B, NIRC) (d) The amount actually distributed to the employee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee. (Sec. 60B, NIRC) B.7 Compliance Requirements Who among the following is/are taxable? Who among them is/are required to file an income tax return? (a) minimum wage earner (b) pure compensation income earner whose compensation income exceeds Php60,000.00 (c) general professional partnership Suggested Answer: A minimum wage earner shall be exempt from the payment of the tax on taxable income. Such exemption includes holiday pay, overtime pay, night shift differential pay and hazard pay. Consequently, a minimum wage earner is not required to file an income tax return. (Sec. 24A and 51A2, NIRC as amended by R.A. No. 9504) A pure compensation income earner shall be liable on his taxable compensation income. He is not required to file an income tax return even though his compensation income exceeds Php60,000.00, provided that he is not deriving his compensation income concurrently from two or more employers at any time during the taxable year. (Sec. 24A and 51A2, NIRC as amended by R.A. No. 9504) A general professional partnership is not considered a “corporation” liable for tax on its net income (Sec. 22B, NIRC). The partners themselves, not the partnership, are liable for the payment of income tax in their individual capacity (Sec. 26, NIRC) computed on their respective distributive shares of the partnership profits (Sec. 32A11, NIRC). However, a general professional partnership is required to return its income. (Sec. 55, NIRC)

In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits arising from its over-withholding of income payments. It opted to carry over the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind and applied for a refund of the excess tax credits. Will the claim for refund prosper? Suggested Answer: No. After opting to carry over its excess tax credits, ABC Corp. became barred from recovering such excess income tax through cash refund or tax credit certificate. Under the law, once the option to carry-over has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. (Sec. 76, NIRC) Is there a prescriptive period for the carry-over of excess creditable income tax? No. Unlike Section 69 of the old NIRC, the carryover of excess income tax payments is no longer limited to the succeeding taxable year. Unutilized excess income tax payments may now be carried over to the succeeding taxable years until fully utilized.49 May a corporation who exercised the irrevocable option of carry-over still recover the excess creditable tax in the event of cessation of business operations? Yes. Where the corporation permanently ceases its operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply. Cessante ratione legis, cessat ipse lex.50 C. TRANSFER TAXATION C.1 Estate Tax

Belle Corp. vs. CIR, G.R. No. 181298, 10 January 2011. Systra Philippines, Inc. vs. CIR, G.R. No. 176290, 21 September 2007; Mindanao 1 Geothermal Partnership vs. CIR, CTA Case No. 8093, 26 March 2013. 49 50

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What is meant by transfer in contemplation of death? It refers to the transfer or disposition of property executed during the lifetime of the transferor but whose main consideration is the transferor’s death. A transfer is in contemplation of death where the full or naked ownership of the property is to pass only because of the transferor’s death.51 Under Section 85B of the NIRC, the transfer under the following circumstances is considered a transfer in contemplation of death:The decedent has retained for his life or for any period which does not in fact end before his death – (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom. BAR 2013 Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration a house and lot to his son. He died one year later. In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross estate for estate tax purposes.

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Judicial expenses52 are expenses of administration. Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses “essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it.” In other words, the expenses must be essential to the proper settlement of the estate.53 Expenditures which are not allowed to be deducted Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible.54 Tax is based on the value of property transmitted at the time of predecessor's death. A transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.55 Against whom should the notice of collection be issued to satisfy the delinquent estate tax? In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily and exclusively, the petitioner as heir of the deceased. 56

Is the BIR correct? C.2 Donor’s Tax

Suggested Answer: No. The totality of the circumstances do not sufficiently show any transfer in contemplation of death. The fact that at the time of the sale Mr. Agustin was already old, suffering from incurable disease and that the sale was so close to his death are not conclusive of the sale being made in consideration of death. Besides, the sale was for valuable and sufficient consideration, in which case, there is no more gratuitous transfer that may be subject to estate tax. (Sec. 85B, NIRC) How is the Standard Deduction for estate tax purposes differentiated from the Optional Standard Deduction for income tax purposes? (1) The former is automatic whereas the latter is optional on the part of the taxpayer. (2) The former is a fixed amount of Php1 million whereas the latter is fixed at 40% of the taxpayer’s gross sales or gross receipts (individual) or gross income (corporation). (3) The former is a deduction available to estates of citizens or residents of the Philippines whereas the latter is a deduction available to income taxpayers who are engaged in trade or business or exercise of profession.

The gift tax applies to indirect gifts. Illustrate. In a sale of property for less than an adequate consideration, the difference between the market value and the consideration is deemed a gift made and, thus, taxable. The exception is in the case of sale of real property subject to the capital gains tax of 6%. (see Sec. 100, NIRC) Similarly, a deemed gift made is also recognized in case of renunciation by an heir of his/her share in the inheritance, UNLESS the renunciation is general in character, that is, no one is excluded or less benefitted than the others by such renunciation (see RR 2-2003).57 In case of general renunciation, the portion renounced is transferred automatically to the other co-heirs by virtue of accretion, and the inheritance is not deemed accepted (Article 1050, par. 3, Civil Code). But in case of renunciation by the surviving spouse of the share in the conjugal or absolute community property, there always

52Question

Requirements for expenses to be deductible against gross estate 51

See Ganuelas vs. Cawed, G.R. No. 123968, 24 April 2003.

XIV, 2014 Bar. CIR vs. CA, et al., G.R. No. 123206, March 22, 2000. 54 CIR vs. CA, et al. (2000), supra. 55 Lorenzo vs. Posadas, Jr., G.R. No. 43082, June 18, 1937. 56 Ferdinand R. Marcos II vs. CA, et al., G.R. No. 120880, June 5, 1997. 57Question XV, 2010 Bar. 53

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arise a deemed gift made regardless of whether the renunciation is general or not. (see RR 2-2003)

a) Maria Reyes is subject to donor’s tax in because gross gift is P100,000.00; b) Maria Reyes is exempt from donor’s tax in because gross gift is P100,000.00; c) Maria Reyes is exempt from donor’s tax in only to the extent of P50,000.00; d) Maria Reyes is exempt from donor’s tax in because the donee is minor.

BAR 2013 In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their children. The BIR determined that there was a taxable gift and thus assessed Mrs. Barbera as a donor. Was the BIR correct? Suggested Answer: The BIR was only partially correct. By renouncing her share of the conjugal property, Mrs. Barbera was deemed to have made a donation of property in favor of her children and, thus, she is liable for the gift tax. However, as to her share in the inheritance, Mrs. Barbera is not deemed to have accepted the same in view of the general renunciation and, consequently, there cannot be any donation of property for which she can be made liable for a gift tax. Another illustration of an indirect gift that is taxable. BAR 2013 The spouses Jun and Elvira Sandoval purchased a piece of land for P5,000,000 and included their two (2) minor children as co-purchasers in the Deed of Absolute Sale. The Commissioner of Internal Revenue (CIR) ruled that there was an implied donation and assessed donor’s taxes against the spouses.

2011 2011 2011 2011

What is gift splitting? Is it illegal? It is a device to minimize, if not totally avoid, gift tax liability by spreading the gifts into separate calendar years in order to arrive at lower taxable bases. It is a legally permissible scheme. When is gift splitting, as a method of avoiding or minimizing tax liability, considered relevant? Gift splitting as a tax avoidance scheme is relevant only in cases of gifts made in favor of persons who are not strangers. This is in consequence of the applicability of the graduated rates of tax only to donations intended for relatives (not strangers). Political contribution exempt from donor’s tax. Campaign contributions58 to political candidate, party, or coalition of parties is exempt provided that the reportorial requirements under the Omnibus Election Code, as amended, are complied with. D. VALUE ADDED TAX

Rule on the CIR’s action. (A) The CIR is wrong; a donation must be express; (B) The CIR is wrong; financial capacity is not a requirement for a valid sale; (C) The CIR is correct; the amount involved is huge and ultimately ends up with the children; (D) The CIR is correct; there was animus donandi since the children had no financial capacity to be co-purchasers. How is the gift tax computed? The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year. For donations made in favor of persons who are NOT strangers, the gift tax is zero if the net gift does not exceed Php100,000.00. A graduated rate of 2%-15% tax is then applied for net gifts exceeding such amount. For gifts made in favor of strangers, a 30% tax is imposed on the net gifts. (Sec. 99[A][B], NIRC) BAR 2012 On January 10, 2011, Maria Reyes, single-mother, donated cash in the amount of P50,000.00 to her daughter Cristina, and on December 20, 2011, she donated another P50,000.00 to Cristina. Which statement is correct?

The VAT is both an indirect tax and a tax on consumption. The VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the income tax, which primarily taxes an individual's ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.59 Liability for the tax distinguished from burden of the tax In indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. The amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated 58Question 59

II, 2014 Bar. Contex Corp. vs. CIR, G.R. No. 151135, July 2, 2004.

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differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.60 What is meant by “in the course of trade or business”? The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. (Sec. 105, NIRC; Underscoring supplied.) Commonwealth Management and Services Corporation (COMASERCO) is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the latter to perform collection, consultative and other technical services, including functioning as an internal auditor of Philamlife and its other affiliates. COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without profit. Is COMASERCO liable to pay VAT? Yes, services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. It is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-oncost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.61 BAR 2014 MasarapKumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost. Is the sale of the delivery van by MKI to MGSC subject to VAT? Suggested Answer: Yes. For VAT purposes, a transaction “in the course of trade or business” includes “transactions incidental

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thereto.” In the course of its business, MKI bought and eventually sold the delivery van. Prior to the sale, the motor vehicle was used as part of MKI’s property, plant, and equipment. Therefore, the sale of the delivery van is an incidental transaction made in the course of MKI’s business which should be liable for VAT regardless of the fact that there was no profit realized from the sale (Sec. 105, NIRC).62 Explain the concept of “destination principle”. How is it relevant to the VAT system? As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Under this principle, goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed.63 Is the destination principle, as adopted under the VAT system, absolute? No. The law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, “paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]”. (Sec. 108B2, NIRC) BAR 2013 XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines. XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices account. What are the tax implications of the payment to XYZ Law Offices in terms of VAT [and income taxes]? Suggested Answer: The payment is subject to VAT but at a zero-rate. The zero-rating applies because the services were rendered to a non-resident person who is engaged in business outside the Philippines, the consideration for which was paid for in acceptable foreign currency and accounted for in accordance with the BSP rules.Consequently, the law office is entitled to claim the input tax attributable to such zero-rated sale as a credit against its output tax or, at its option, apply for refund or issuance of a tax credit certificate to the extent that such input tax was not utilized as a credit against output tax. (Sections 108B2, 110A1 and 112, NIRC; See also Accenture, Inc. vs. CIR, G.R. No. 190102, 11 July 2012) See also Mindanao II vs. CIR, G.R. No. 193301 and CIR v. CA, 385 Phil. 875 [2000]. 63 CIR vs. American Express International, Inc., G.R. No. 152609, 29 June 2005. 62

60 61

Contex Corp. vs. CIR (2004), supra. CIR v. CA, 385 Phil. 875 (2000).

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Requisites for the claim for refund or tax credit of input tax To claim refund or tax credit under Section 112 (A), petitioner must comply with the following criteria: (1) the taxpayer is VAT registered; (2) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional input taxes; (5) the input taxes have not been applied against output taxes during and in the succeeding quarters; (6) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated sales under Section 106 (A) (2) (1) and (2); 106 (B); and 108 (B) (1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with BSP rules and regulations; (8) where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (9) the claim is filed within two years after the close of the taxable quarter when such sales were made. (San Roque Power Corp. vs. CIR, G.R. No. 180345, November 25, 2009) BAR 2014 Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as follows: First quarter - April 25, 2012 Second quarter - July 23, 2012 Third quarter - October 25, 2012 Fourth quarter - January 27, 2013 On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the calendar year 2012. After several months of inaction by the BIR on its claim for refund, GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22, 2014.

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of two years from the close of the said quarter, the judicial claim was timely filed within 30 days from the inaction. (See CIR vs. Mindanao II Geothermal Partnership, G.R. No. 191498, 15 January 2014) (B) No. This time the CTA would be correct in denying the claim. However, the denial is not premised upon the filing of the judicial claim beyond the two-year prescriptive period but on the ground that it was prematurely filed, which means non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim. As a rule, the 120-day waiting period is both mandatory and jurisdictional. (see CIR v. San Roque Power Corporation, G.R. No. 187485, 12 February 2013) The withholding of tax under Sec. 114 is now final, no longer creditable. After its amendment by R.A. 9337, the amount withheld under Section 114 is now treated as a final VAT, no longer under the creditable withholding tax system.64

E. REMEDIES

Cite the instances when the Commissioner of Internal Revenue may be authorized to inquire into the bank deposits of a taxpayer. The instances are: (1) for the purpose of determining the gross estate of a decedent and (2) when a taxpayer files an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. (Sec. 6[F], NIRC) The Commissioner of Internal Revenue may NOT inquire into the bank deposits of a taxpayer, except: a) When the taxpayer files a fraudulent return; b) When the taxpayer offers to compromise the assessed tax based on erroneous assessment; c) When the taxpayer offers to compromise the assessed tax based on financial incapacity to pay and he authorizes the Commissioner in writing to look into his bank records; d) When the taxpayer did not file his income tax return for the year. (Question 44, 2012 Bar)

In due time, the CTA denied the tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue Code (NIRC). (A) Is the CTA correct? (B) Assuming that GC filed its claim before the CTA on February 22, 2014, would your answer be the same? Suggested Answer: (A) No. It is settled that under Sec. 112 of the NIRC, it is only the administrative claim that must be filed within the two-year prescriptive period; the judicial claim need not fall within the two-year prescriptive period. What is necessary is that the judicial claim is filed within 30 days either from decision or inaction after the lapse of 120 days from the filing of the administrative claim. In this case, the judicial claim relative to the input VAT for the 1st quarter of 2012 was filed due to inaction of the CIR. Although filed outside

Mandamus not a remedy to compel the Commissioner to impose a tax assessment. Since the office of the Commissioner of Internal Revenue is charged with the administration of revenue laws, which is the primary responsibility of the executive branch of the government, mandamus may not lie against the Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that would be tantamount to a usurpation of executive functions. Such discretionary power vested in the proper executive official, in the absence of CIR vs. Ironcon Builders and Development Corp., G.R. No. 180042, February 8, 2010. 64

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arbitrariness or grave abuse so as to go beyond the statutory authority, is not subject to the contrary judgment or control of others.65 When is an assessment deemed made? Is it void when received by the taxpayer outside of the prescriptive period? The assessment is deemed made when notice to this effect is released, mailed or sent by the Commissioner of Internal Revenue to the taxpayer, and it is not required that the notice be received by the taxpayer within the prescriptive period (3 years).66 On April 15, 2011, the Commissioner of Internal Revenue mailed by registered mail the final assessment notice and the demand letter covering the calendar year 2007 with the QC Post Office. Which statement is correct? a) The assessment notice is void because it was mailed beyond the prescriptive period; b) The assessment notice is void because it was not received by the taxpayer within the three-year period from the date of filing of the tax return; c) The assessment notice is void if the taxpayer can show that the same was received only after one (1) month from date of mailing; d) The assessment notice is valid even if the taxpayer received the same after the three-year period from the date of filing of the tax return. (Question 46, 2012 Bar) Is an assessment based on estimates valid? In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously.67 What must be contained in a notice of assessment?68 The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Section 228 of the NIRC and RR No. 12-99 would be rendered nugatory.69 What is the effect of a notice of assessment that fails to state the factual and legal bases of the assessment? State the rationale of the law. The notice is VOID. Without complying with the unequivocal mandate of first informing the taxpayer of

Meralco Securities Corp. vs. Victorino Savellano, et al., G.R. No. L-36181, October 23, 1982. 66 see Basilan Estates vs. CIR, G.R. No. L-22492, September 5, 1967. 67 Ferdinand R. Marcos II vs. CA, et al., G.R. No. 120880, June 5, 1997. 68Question No. V, 2014 Bar. 69 CIR vs. Enron Subic Power Corp., G.R. No. 166387, January 19, 2009; In this case, the Supreme Court considered the alleged “factual bases” in the advice, preliminary letter and “audit working papers” as insufficient. It explained that there was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice.” 65

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the government's claim, there can be no deprivation of property, because no effective protest can be made. 70 Attached to the PAN is the detailed explanation of the particular provision of law and revenue regulation violated. However, the FAN and demand letter issued to the taxpayer were not accompanied by a written explanation of the legal and factual bases of the deficiency taxes. Is the assessment valid? Yes, there was substantial compliance of the requirement of Section 228 of the NIRC. The PAN with the attached detailed explanation enabled the latter to file an “effective” protest. (see Samar-I Electric Cooperative v. CIR, G.R. No. 193100, 10 December 2014.) The 30-day period for filing an appeal with the Court of Tax Appeals is jurisdictional. The jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same.71 Alternative remedies of a taxpayer in case the Commissioner fails to act on a disputed assessment In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180day period; or 2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other.72 BAR 2014 On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a notice of assessment against Blue Water Industries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency corporate income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the BIR contesting said assessment and demanding that the same be cancelled or set aside.

CIR v. Enron, supra. RCBC vs. CIR, G.R. No. 168498, April 24, 2007. 72 RCBC vs. CIR (2007), supra; see also Lascona Land Co., Inc. vs. CIR, G.R. No. 171251, March 5, 2012. 70 71

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However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the BIR informed BWI that the latter’s letter protest was denied on the ground that the assessment had already become final, executory and demandable. The BIR reasoned that its failure to decide the case within 180 days from filing of the letter protest should have prompted BWI to seek recourse before the Court of Tax Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the 180-day period as mandated by the provisions of the last paragraph of Section 228 of the National Internal Revenue Code (NIRC). Accordingly, BWI’s failure to file a petition for review before the CTA rendered the assessment final, executory and demandable. Is the contention of the BIR correct? Explain. Suggested answer: In case of the inaction of the CIR on the protested assessment, the taxpayer has two options, either: (1) file a petition for review with the CTA within 30 days after the expiration of the 180-day period; or (2) await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within 30 days after the receipt of a copy of such decision. In arguing that the assessment became final and executory by the sole reason that BWI failed to appeal the inaction of the Commissioner within 30 days after the 180-day reglementary period, the BIR, in effect, limited the remedy of BWI, as a taxpayer, under Section 228 of the NIRC to just one, that is - to appeal the inaction of the Commissioner on its protested assessment after the lapse of the 180-day period. This is incorrect.73 The taxpayer received an assessment notice on April 15, 2011 and filed its request for reinvestigation against the assessment on April 30, 2011. Additional documentary evidence in support of its protest was submitted by it on June 30, 2011. If no denial of the protest was received by the taxpayer, when is the last day for the filing of its appeal to the CTA? a) b) c) d)

November 30, 2011; December 30, 2011; January 30, 2012; February 28, 2012. (Question 49, 2012 Bar)

Explanation: From the submission of the supporting documents, a period of 180-days runs within which the CIR may act on the protest. In this case, inaction arose on December 30, 2011. The appeal to the CTA may be made within 30 days thereafter, or until January 30, 2012. Using the same facts in the immediately preceding number, but assuming that the final decision on the disputed assessment was received by the taxpayer on July 30, 2011, when is the last day for filing of the appeal to the CTA? a) August 30, 2011; 73

See Lascona Land Co., Inc. vs. CIR, G.R. No. 171251, March 5, 2012.

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b) September 30, 2011; c) December 30, 2011; d) January 30, 2012. (Question 50, 2012 Bar) "Best evidence obtainable" rule, when applicable The law is specific and clear. The rule on the "best evidence obtainable" applies when a tax report required by law for the purpose of assessment is not available or when the tax report is incomplete or fraudulent. Thus, the persistent failure of the decedent and the taxpayer to present their books of accounts for examination for the taxable years involved left the Commissioner of Internal Revenue no other legal option except to report to the power conferred upon him under Section 16 of the Tax Code.74 What is the “Expenditure Method” as a method used in reconstructing income? A method commonly used by the government is the expenditure method, which is a method of reconstructing a taxpayer's income by deducting the aggregate yearly expenditures from the declared yearly income. The theory of this method is that when the amount of the money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income.75 Purpose of zonal valuation made by the Commissioner of Internal Revenue [T]the same is for the purpose of computing internal revenue taxes.76 Authority of the Commissioner to delegate powers, exception Under Section 7 of the NIRC, the Commissioner is authorized to delegate to his subordinates the powers vested in him except, among others, the power to issue rulings of first impression.77 Taxes are personal to the corporate taxpayer. It cannot be enforced against its officers and stockholders. Taxes being personal to the taxpayer, it can only be enforced against petitioner because the payment of unpaid customs duties and taxes are the personal obligation of the petitioner as a corporate taxpayer, thus, it cannot be imposed on its corporate officers, much so on its individual stockholders, for this will violate the principle that a corporation has personality separate and distinct from the persons constituting it.78

Bonifacia Sy Po vs. CTA, et al., G.R. No. L-81446, August 18, 1988. vs. CA, G.R. No. 197590, November 24, 2014 citing Collector v. Jamir, 114 Phil. 650, 651-652 [1962] 76 Capitol Steel Corp. vs. Phividec Industrial Authority, G.R. No. 169453, December 6, 2006. 77 Secretary of Finance, et al. vs. La Suerte Cigar and Cigarette Factory, et al., G.R. No. 166498 , June 11, 2009. 78 Proton Pilipinas Corp. vs. Republic of the Phil., G.R. No. 165027, October 16, 2006. 74

75BIR

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

Waiver of the statute of limitations not a waiver of the right to invoke the defense of prescription. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription as erroneously held by the Court of Appeals. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal.79 What is the rationale for requiring a written claim for refund to be filed before the Commissioner? A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure.80 No injunction rule applicable even if the tax assessment is disputed. It is clear that the word “tax,” as used in the provision prohibiting injunctions, means a tax even if it is disputed by the taxpayer, for otherwise it would be sufficient to dispute a tax in order to take it out from the provisions of said section, rendering them practically nugatory.81 The BIR legal officers may institute or commence judicial actions but the Solicitor General shall appear for the government in appellate proceedings. The Solicitor General, being the principal law officer and legal defender of the state, its agencies and instrumentalities, is aptly the office that can bring a case on appeal to the Court of Appeals or the Supreme Court. The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which "shall be conducted by legal officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of the Tax Reform Act must not be understood as overturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This pronouncement finds justification in the various laws defining the Office of the Solicitor General, beginning with Act No. 135, which took effect on 16 June 1901, up to the present Administrative Code of 1987.82 Rationale for requiring taxpayer to submit a claim for refund before resorting to courts. Philippine Journalists, Inc. vs. CIR, G.R. No. 162852, December 16, 2004. 80 CIR vs. Rosemarie Acosta, G.R. No. 154068, August 3, 2007. 81 David vs. Ramos, et al., G.R. No. L-4300, October 31, 1951. 82 CIR vs. La Suerte Cigar and Cigarette Factory, G.R. No. 144942, June 28, 2001.

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The law clearly stipulates that after paying the tax, the citizen must submit a claim for refund before resorting to the courts. The idea probably is, first, to afford the collector an opportunity to correct the action of subordinate officers; and second, to notify the Government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure. Previous objections to the tax may not take the place of that claim for refund, because there may be some reason to believe that, in paying, the taxpayer has finally come to realize the validity of the assessment. Anyway, strict compliance with the conditions imposed for the return of revenue corrected is a doctrine consistently applied here and in the United States.83 How is the two-year prescriptive period computed for purposes of the claim for refund? The rule is that the two-year prescriptive period is reckoned from the filing of the final adjusted return. But how should the two-year prescriptive period be computed? Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the same subject matter — the computation of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative Code of 1987, the number of days is irrelevant. There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal periods. Lex posteriori derogat priori.84 Does the withholding agent have a legal right to file a claim for refund? A withholding agent has a legal right to file a claim for refund for two reasons. First, he is considered a “taxpayer” under the NIRC as he is personally liable for the withholding tax as well as for deficiency assessments, surcharges, and penalties, should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law. Second, as an agent of the taxpayer, his authority to file the necessary income tax return and to remit the tax withheld to the government impliedly includes the authority to file a claim for refund and to bring an action for recovery of such claim.85 Is the person upon whom the burden of an indirect tax is shifted the proper party to seek a refund? No. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person

79

Bermejo vs. Collector, G.R. No. L-3029, July 25, 1950. CIR vs. Primetown Property Group, Inc., G.R. No. 162155, August 28, 2007. 85 CIR vs. Smart Communication, Inc., G.R. Nos. 179045-46, August 25, 2010. 83 84

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.86 Instance when BIR rulings have no retroactive effect The rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer.87 F. LOCAL TAXATION and REAL PROPERTY TAXATION F.1 Local Tax What is the nature of the taxing power of the provinces, municipalities and cities? How will the local government units be able to exercise their taxing powers? (2007 Bar) The power of a province, municipality and city to tax is limited to the extent that such power is delegated to it either by the Constitution or by statute. Such power, however, is not inherent for provinces, cities and municipalities as they are not the sovereign; rather, they are mere “territorial and political subdivisions of the Republic of the Philippines”.88 The taxing powers may be exercised by the sanggunianof the local government unit through an appropriate ordinance. (Sec. 132, LGC) For purposes of local taxation (including real property taxes), what may be the significance of the distinction between an agency or instrumentality of the government AND a government owned or controlled corporation (GOCC)? An agency or instrumentality of the national government is exempt from local taxes, fees and charges while a GOCC is not so exempt. In the imposition and collection of the specific taxes enumerated in the LGC, is there still a need for an ordinance to be enacted, or may the appropriate LGU merely rely on the provisions of the LGC? No. Reference to the local tax ordinance is vital, for the power of local government units to impose local taxes is exercised through the appropriate ordinance enacted by the sanggunian, and not by the Local Government Code alone.89 Which LGU has the broadest taxing powers? The cities may be said to have the broadest taxing powers among the LGUs. Under Section 151 of the Local Government Code, cities are authorized to levy the same Silkair (Singapore) Pte, Ltd. v. CIR, G.R. No. 173594, February 6, 2008, 544 SCRA 100, 112. 87 CIR vs. Phil. Health Care Providers, Inc., G.R. No. 168129, April 24, 2007. 88 See Pelizloy Realty Corporation vs. Province of Benguet, G.R. No. 183137, 10 April 2013. 89 see Yamane vs. BA Lepanto Condominium Corporation, G.R. No. 154993, 25 October 2005. 86

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taxes fees and charges as provinces and municipalities. In addition, the rate of taxes that they may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except professional and amusement taxes. Among the different LGUs, who is/are authorized to levy and impose business tax? Only municipalities and cities are granted the power to levy and impose local business tax. (Sec. 143 and 151, LGC) The tax may be imposed on: (b) (c) (d) (e) (f) (g) (h) (i)

Manufacturers Wholesalers Exporters Retailers Contractors90 Banks and other financial institutions Peddlers, and ANY OTHER businesses not specified above

Note: Provinces are authorized to levy specific taxes that affect certain types of businesses.These include the tax on the business of printing and publication, franchise tax, tax on sand, gravel and other quarry resources, amusement tax and tax on delivery trucks or vans. (See Secs. 136 to 141, LGC) BAR 2013 ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? Suggested Answer: No. A “contractor” is one whose activity consists essentially of the sale of all kinds of services for a fee. As the facts would show, ABC Corp. is not actually engaged in business operations but merely derives income from passive investment. Thus, it cannot be made liable for the tax as a contractor or one who sells services for a fee. (Sec. 131h, LGC) May a local government unit impose business tax on persons or entities engaged in the sale of petroleum products given that an excise tax is already imposed on the same under the NIRC? No. [A]tax on a business is distinct from a tax on the article itself, or for that matter, that a business tax is distinct from an excise tax. However, such distinction is immaterial insofar as the latter part of Section 133 (h) is concerned, for the phrase “taxes, fees or charges on petroleum products” does not qualify the kind of taxes, fees or charges that could withstand the absolute 902013

Bar, Question No. III.

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prohibition imposed by the provision...The absence of such a qualification leads to the conclusion that all sorts of taxes on petroleum products, including business taxes, are prohibited by Section 133 (h). Where the law does not distinguish, we should not distinguish.91

except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; (b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes;

Who may impose tax on admission fees of theaters and cinemas? The local government retained the power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%)* of the gross receipts from admission fees under Section 140 thereof. In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the local government before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of the cinematographic films. However, the provision in the Local Tax Code expressly excluding the national government from collecting tax from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other places of amusements was no longer included.92

(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or – controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (d) All real property owned by duly registered cooperatives as provided under R.A. No. 6938; and (e) Machinery and equipment used for pollution control and environmental protection. (Sec. 234, LGC)

* Now 10% under the amendment in R.A. No. 9640.

Beneficial use principle96

Procedure for approval and effectivity of tax ordinances and revenue measures; mandatory public hearings

It is true that said Sec. 234 (a) . . . exempts from real estate taxes real property owned by the Republic, unless the beneficial use of the property is, for consideration, transferred to a taxable person. . . . This exemption, however, must be read in relation with Sec. 133 (o) of the LGC, which prohibits LGUs from imposing taxes or fees of any kind on the national government, its agencies, and instrumentalities . . . Thus read together, the provisions allow the Republic to grant the beneficial use of its property to an agency or instrumentality of the national government. Such grant does not necessarily result in the loss of the tax exemption. The tax exemption the property of the Republic or its instrumentality carries ceases only if, as stated in Sec. 234 (a) of the LGC of 1991, “beneficial use thereof has been granted, for a consideration or otherwise, to a taxable person.” GSIS, as a government instrumentality, is not a taxable juridical person under Sec. 133 (o) of the LGC.97

It is categorical that a public hearing be held prior to the enactment of an ordinance levying taxes, fees, or charges; and that such public hearing be conducted as provided under Section 277 of the Implementing Rules and Regulations of the Local Government Code. 93 May a writ of injunction (or TRO) 94 be issued to enjoin the collection of local taxes? Yes. The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes applies only to national internal revenue taxes, and not to local taxes.95 F.2 Real Property Tax (RPT) Is the real property tax (RPT) a national tax or a local tax? Who is the taxing authority?

MIAA not a GOCC but an instrumentality of the government and, hence, exempt from real property tax

The RPT is a local tax and the repository of taxing power is the province, city or municipality within Metro Manila.

[M]IAA is not a government-owned or controlled corporation but a government instrumentality which is exempt from any kind of tax from the local governments. Indeed, the exercise of the taxing power of local government units is subject to the limitations enumerated in Section 133 of the Local Government Code. Under Section 133 (o) of the Local Government Code, local government units have no power to tax instrumentalities of the national government like the

What are the real properties exempt from real estate tax? (a) Real property owned by the Republic of the Philippines or any of its political subdivisions Petron Corporation vs. Tiangco, G.R. No. 158881, April 16, 2008. CIR vs. SM Prime Holdings, Inc., et al., G.R. No. 183505, February 26, 2010. 93 Ongsuco, et al. vs. Malones, G.R. No. 182065, October 27, 2009. 94Question VII, 2014 Bar. 95 Angeles City vs. Angeles City Electric Corporation, G.R. No. 166134, 29 June 2010. 91 92

96Question

VIII, 2013 Bar. GSIS vs. City Treasurer of Manila, et al., G.R. No. 186242, December 23, 2009. 97

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

MIAA. Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties.98 BAR 2013 Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on the property for his business operations. The Municipal Assessor assessed Mr. Amado for real property taxes on the land and the warehouse. Mr. Amado objected to the assessment, contending that he should not be asked to pay realty taxes on the land since it is municipal property. Was the assessment proper? Suggested Answer: Yes. While the subject property is owned by a political subdivision who is ordinarily not liable for local taxes such as real property tax, the beneficial use was granted to a taxable person. Consequently, the property is no longer exempt from real property tax. (Sec. 234a, LGC) Is Mactan Cebu International Airport Authority (MCIAA) liable for real property taxes on its airport terminal buildings, airfield, runways and taxiways? Suggested Answer: No. In the recent case of MCIAA v. City of LapuLapu, 15 June 2015, the Supreme Court held that MCIAA is an instrumentality of the government; thus, its properties actually, solely and exclusively used for public purposes, consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated, are not subject to real property tax.99 What is the tax base of the real property tax? The tax base is assessed value. It is NOT the zonal value or the fair market value. When is “payment under protest” required? The protest contemplated under Section 252 is required where there is a question as to the reasonableness or correctness of the amount assessed. Hence, if a taxpayer disputes the reasonableness of an increase in a real property tax assessment, he is required to “first pay the tax” under protest. Otherwise, the city or municipal treasurer will not act on his protest.100 By providing that real property not declared and proved as tax-exempt shall be included in the assessment roll, [Section 206 of the Local Government Code of 1991] implies that the local assessor has the Manila International Airport Authority vs. City of Pasay, et al., G.R. No. 163072, April 2, 2009. 99In this case of MCIAA v. Lapu-Lapu, the Court stated that the 2006 case of MIAA v. Paranaque in effect reversed the 1996 case of MCIAA v. Marcos which held that MCIAA is a GOCC, not an instrumentality of the government. 100 NAPOCOR vs. Province of Quezon, et al., G.R. No. 171586, January 25, 2010.

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authority to assess the property for realty taxes, and any subsequent claim for exemption shall be allowed only when sufficient proof has been adduced supporting the claim. Since Napocor was simply questioning the correctness of the assessment, it should have first complied with Section 252, particularly the requirement of payment under protest. Napocor's failure to prove that this requirement has been complied with thus renders its administrative protest under Section 226 of the LGC without any effect. No protest shall be entertained unless the taxpayer first pays the tax.101 BAR 2014 Madam X owns real property in Caloocan City. On July 1, 2014, she received a notice of assessment from the City Assessor, informing her of a deficiency tax on her property. She wants to contest the assessment. (A) What are the administrative remedies available to Madam X in order to contest the assessment and their respective prescriptive periods? (B) May Madam X refuse to pay the deficiency tax assessment during the pendency of her appeal? Suggested Answer: (A) Madam X must first pay the real property tax under protest. Within 30 days from payment of the tax, she may file a protest against the assessment. Should the Madam X find the action on the protest unsatisfactory, she may appeal with the Local Board of Assessment Appeals within 60 days from receipt of the decision on the protest. If she is still unsatisfied after appealing with the Local Board of Assessment Appeals, she may appeal with the Central Board of Assessment Appeals within 30 days from receipt of the Local Board’s decision (Sections 252, 226 and 229, LGC).102 (B) No. The law emphatically directs that the taxpayer/real property owner questioning the assessment should first pay the tax due before his protest can be entertained. As a matter of fact, the words “paid under protest” shall be annotated on the tax receipts. Consequently, only after such payment has been made by the taxpayer may he file a protest in writing. In no case shall the protest be entertained unless the tax due has been paid.103 Is there a distinction between an “erroneous” assessment and an “illegal” assessment? If so, what may be the significance of such distinction? Yes. An erroneous assessment “presupposes that the taxpayer is subject to the tax but is disputing the correctness of the amount assessed.” On the other hand, an assessment is illegal if it was made without authority under the law.

98

NAPOCOR vs. Province of Quezon, et al. (2010), supra. See City of Lapu-Lapu vs. PEZA, G.R. No. 184203 and 187583, 26 November 2014. 103 See Camp John Hay Development Corporation vs. CBAA, G.R. No. 169234, 2 October 2013. 101 102

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The nature of the assessment, whether erroneous or illegal, will determine the proper remedy of a taxpayer. Thus, in case of an erroneous assessment, the taxpayer must exhaust the administrative remedies provided under the Local Government Code before resorting to judicial action – First, pay the real property tax under protest; Second, appeal with the LBAA within 60 days from receipt of an adverse decision on the protest; and

intention to unlade therein. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been granted, or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. (Section 1202 of the TCCP) Importation of goods is deemed terminated: a) When the customs duties are paid, even if the goods remain within the customs premises; b) When the goods are released or withdrawn from the customs house upon payment of the customs duties or with legal permit to withdraw; c) When the goods enter Philippines territory and remain within the customs house within thirty (30) days from date of entry; d) When there is part payment of duties on the imported goods located in the customs area. (Question 71, 2012 Bar)

Third, appeal with the CBAA within 30 days from receipt of the Local Board’s decision. In case of an illegal assessment, the taxpayer may directly resort to judicial action without paying under protest the assessed tax and filing an appeal with the Local and Central Board of Assessment Appeals. (See City of Lapu-Lapu v. PEZA, G.R. Nos. 184203 and G.R. No. 187583, 26 November 2014) In case of “illegal” assessment for RPT, may the taxpayer file a petition for declaratory relief with the RTC? If not, what should be the proper remedy? No. A petition for declaratory relief is not the proper remedy once a notice of assessment was already issued. Instead of a petition for declaratory relief, the taxpayer should directly resort to a judicial action, like a complaint for injunction, the “appropriate ordinary civil action” to enjoin the Province or City from enforcing its demand and collecting the assessed taxes. After all, a declaratory judgment is useless unless the LGU is enjoined from enforcing its demand. Note: A complaint for injunction concerning local taxation is not violative of the so-called “no-injuction rule”. The rule applies only in respect to internal revenue taxes. Who may appeal an assessment for real property taxes? Under Section 226 of the LGC, any owner or person having legal interest in the property may appeal an assessment for real property taxes to the LBAA. Since Section 250 adopts the same language in enumerating who may pay the tax, we equated those who are liable to pay the tax to the same entities who may protest the tax assessment. A person legally burdened with the obligation to pay for the tax imposed on the property has the legal interest in the property and the personality to protest the tax assessment.104

The Bureau of Customs has jurisdiction so long as importation has not ended. In order for an importation to be deemed terminated, the payment of the duties, taxes, fees and other charges of the item brought into the country must be in full. For as long as the importation has not been completed, the imported item remains under the jurisdiction of the BOC.105 What is smuggling?106 This is committed by a person who – (1) fraudulently imports or brings into the Philippines, or assist in doing so, any article contrary to law, or (2) receives, buy, sell, or in any manner facilitate the transportation, concealment, or sale of such article after importation, knowing the same to have been imported contrary to law. (Sec. 3601, TCC) BAR 2013 Mr. Z made an importation which he declared at the Bureau of Customs (BOC) as "Used Truck Replacement Parts". Upon investigation, the container vans contained 15 units of Porsche and Ferrari cars. Characterize Mr. Z's action. (1%) (A) Mr. Z committed smuggling. (B) Mr. Z did not commit smuggling because he submitted his shipment to BOC examination. (C) Mr. Z only made a misdeclaration, but did not commit smuggling. (D) Mr. Z did not commit smuggling because the shipment has not left the customs area.107

G. TARIFF AND CUSTOMS LAW When does terminated?

importation

begin

and

when

is

it

Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with NAPOCOR vs. Province of Quezon, et al., G.R. No. 171586, January 25, 2010. 104

See: Papa v. Mago, G.R. No.L-27360, February 28, 1968, 22 SCRA 865; Viduya v. Berdiago, G.R. No.L-29218, October 29, 1976, 73 SCRA 553. 106Question VI, 2014 Bar. 107 See Rieta v. People, G.R. No. 147817, 12 August 2004. 105

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

May a search, seizure of goods and arrest be made even without a warrant therefor? Under the Tariff and Customs Code, a search, seizure and arrest may be made even without a warrant for purposes of enforcing customs and tariff laws. Without mention of the need to priorly obtain a judicial warrant, the Code specifically allows police authorities to enter, pass through or search any land, enclosure, warehouse, store or building that is not a dwelling house; and also to inspect, search and examine any vessel or aircraft and any trunk, package, box or envelope or any person on board; or to stop and search and examine any vehicle, beast or person suspected of holding or conveying any dutiable or prohibited article introduced into the Philippines contrary to law.108 Who acquires jurisdiction over imported goods when no warrant of seizure or detention (WSD was previously issued?

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The entry, passage free of duty,or final adjustments of duties becomes final and conclusive after the expiration of three (3) years from the date of the final payment of duties, unless the liquidation of the import entry was merely tentative. 2013 BAR On October 15, 2005, ABC Corp. imported 1,000 kilos of steel ingots and paid customs duties and VAT to the Bureau of Customs on the importation. On February 17, 2009, the Bureau of Customs, citing provisions of the Tariff and Customs Code on post-audit, investigated and assessed ABC Corp. for deficiency customs duties [and VAT]. Is the Bureau of Customs correct? Suggested Answer:

The rule is that from the moment imported goods are actually in the possession or control of the Customs authorities, even if no warrant for seizure or detention had previously been issued by the Collector of Customs in connection with the seizure and forfeiture proceedings, the BOC acquires exclusive jurisdiction over such imported goods for the purpose of enforcing the customs laws, subject to appeal to the Court of Tax Appeals whose decisions are appealable to this Court. 109

No. More than 3 years had already elapsed from the entry of and payment of the duties on the imported steel ingots. Since there is no showing that the liquidation of the import entry in 2005 was merely tentative, such liquidation became final and conclusive as of 2008.

What is the rationale of the law granting the Commissioner of Customs the power of automatic review over the decision of the Collector of Customs in protest and seizure cases?

Scope of the of the CTA’s jurisdiction under Section 7 of Republic Act (R.A.) No. 9282

The provision for automatic review by the Commissioner of Customs and the Secretary of Finance of unappealed seizure and protest cases was conceived to protect the government against corrupt and conniving customs collectors.110

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

Without the automatic review by the Commissioner of Customs and the Secretary of Finance, a collector in any of our country's far-flung ports, would have absolute and unbridled discretion to determine whether goods seized by him are locally produced, hence, not dutiable, or of foreign origin, and therefore subject to payment of customs duties and taxes. His decision, unless appealed by the aggrieved party (the owner of the goods), would become final with no one the wiser except himself and the owner of the goods. The owner of the goods cannot be expected to appeal the collector's decision when it is favorable to him. A decision that is favorable to the taxpayer would correspondingly be unfavorable to the Government, but who will appeal the collector's decision in that case? Certainly not the collector. (Ibid.)

H. THE COURT OF TAX APPEALS

Sec. 7. Jurisdiction. — The CTA shall exercise:

1.

Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;

2.

Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;

3.

Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction;

4.

Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees, or other monetary charges, seizure, detention or

Finality of liquidation Rieta v. People, supra. Agriex Co., Ltd. vs. Villanueva, G.R. No. 158150, September 10, 2014 citing Subic Bay Metropolitan Authority v. Rodriguez, G.R. No. 160270, April 23, 2010, 619 SCRA 176. 110 Yaokasin vs. Commissioner of Customs, et. al. G.R. No. 84111, December 22, 1989. 108 109

Pre-Week Reminders in Taxation Law (2015 Bar Review) by Atty. Noel M. Ortega ----------------------------------------------------------------------

release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Laws or other laws administered by the Bureau of Customs; 5.

Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board assessment appeals;

6.

Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code;

7.

Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties; xxx

What cases originating from the Commissioner of Internal Revenue are within the jurisdiction of the CTA? These are (1) cases involving disputed assessments, (2) refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or (3) other matters arising under the NIRC111 or other laws administered by the BIR. (Sec.7[a][1][2], RA 1125, as amended) BAR 2014 The City of Liwliwa assessed local business taxes against Talin Company. Claiming that there is double taxation, Talin Company filed a Complaint for Refund or Recovery of Illegally and/or Erroneously-collected Local Business Tax; Prohibition with Prayer to Issue Temporary Restraining Order and Writ of Preliminary Injunction with the Regional Trial Court (RTC). The RTC denied the application for a Writ of Preliminary Injunction. Since its motion for reconsideration was denied, Talin Company filed a special civil action for certiorari with the Court of Appeals (CA). The government lawyer representing the City of Liwliwa prayed for the dismissal of the petition on the ground that the same should have been filed with the Court of Tax Appeals (CTA). Talin Company, through its lawyer, Atty. Frank, countered that the CTA cannot entertain a petition for certiorari since it is not one of its powers and authorities under existing laws and rules.Decide.

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authority of the CTA to take cognizance of petitions for certiorari questioning interlocutory orders issued by the RTC in a local tax case is included in the powers granted by the Constitution as well as inherent in the exercise of its appellate jurisdiction. (City of Manila vs. Grecia-Cuerdo, G.R. No. 175723, 4 February 2014, EN BANC) May the CTA pass on questions relating to the validity of rules and regulations issued by administrative agencies? Suggested Answer: Yes. The CTA can now rule not only on the propriety of an assessment or tax treatment of a certain transaction, but also on the validity of the revenue regulation or revenue memorandum circular on which the said assessment is based. (see Philam Life v. Secretary of Finance, November 24, 2014) Who has jurisdiction to review BIR Rulings? Suggested Answer: What is involved is the Commissioner’s power under the first paragraph of Sec. 4 of the NIRC – the power to interpret tax laws, and, thus, the ruling is subject to review by the Secretary of Finance. 112 Where does one seek immediate recourse from the adverse ruling of the Secretary of Finance in its exercise of its power of review under Sec. 4? Suggested Answer: The CTA has jurisdiction over the petition as “other matters” arising under the NIRC or other laws administered by the BIR under Sec. 7(a)(1) of RA 1125. Even though the provision suggests that it only covers rulings of the Commissioner, nonetheless, it is sufficient enough to include appeals from the Secretary’s review under Sec. 4 of the NIRC. 113 A complaint for injunction was filed with the RTC praying that the trial court nullify the notice of assessment of real property tax. A direct resort to the RTC was made as no questions of fact were involved. In case the RTC renders a decision, what remedy may the affected party take and before what court? Suggested Answer: The CTA. The party unsatisfied with the decision of the Regional Trial Court shall file an appeal, not a petition for certiorari, before the Court of Tax Appeals, the complaint being a local tax case decided by the Regional Trial Court (see R.A. No. 1125, as amended by R.A. No. 9282, Sec. 7 [a] [3]).114 To GOD be all the glory, honor and power!

Suggested Answer: The petition before the CA should be dismissed as jurisdiction belongs to the CTA. It is now settled that the

* * * GOOD LUCK! * * *

Philam Life v. Secretary of Finance (2014), supra. Philam Life v. Secretary of Finance, supra. 114 See also City of Lapu-Lapu v. PEZA (2014), supra. 112

113See 111

Question 51, 2012 Bar.