SR Taxation Law Tips - 2016- Edited

The Sigma Rho Fraternity TAXATION LAW TIPS – 2016 GENERAL PRINCIPLES 1. What are the Inherent Limitations to Taxation?  Taxation is for a public purpose.  Taxation is inherently legislative.  Taxation is territorial. - Taxation may be exercised only within the territorial jurisdiction of the taxing authority (61 Am. Jur. 88).  Taxation is subject to international comity. - This is a limitation which is founded on reciprocity designed to maintain a harmonious and productive relationships among the various states. 2. Are intangible assets subject to depreciation? General Rule: NO Exception: When it has a definite life or limited duration of use (Basilan Estates, Inc. v. Commission, G.R. No. L-22492, September 5, 1967). NOTE: Goodwill has no definite life. 3. How is an international air carrier taxed? If an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 30% of such income. (South African Airways v. CIR, G.R. No. 180356, February 16, 2010) 4. Gross Philippine Billing (R.A. 10378) For purposes of International Air Carrier, GROSS PHIL. BILLINGS refer to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of the place of sale or issue, and the place of payment of the ticket or passage document. Gross Phil. billings for purposes of International Shipping means gross revenue whether from passenger, cargo or mail originating from the Phils. up to final destination, regardless of the place of sale or payments of the passage or freight documents. INCOME TAXATION 1. What is the tax implication of the improvement introduced by the lessee which will belong to the lessor after the term of the lease? The improvement is considered rental in kind. The lessor is given the option to treat the improvement as Pre-paid rent or Postpaid rent. 1

BAR OPERATIONS HEAD: TAXATION LAW HEAD:

DODOT RAMOS ‘14|RHETT GAERLAN ’14 GAB SOLLANO ‘13

The Sigma Rho Fraternity TAXATION LAW TIPS – 2016 3. Filipino residing in San Juan had a house in California. He sold it to his neighbor. What is the tax consequence? Sale is taxable because the taxpayer is taxable from sources within and without the PH. However, the sale is not subject to Capital Gains Tax because it is not within the PH and is not held as a capital asset. The gain will just be another returnable income the must be declared in the ITR. 4. Double Taxation – Resident; Non-Resident Situation: In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? Caruso has the option either to claim the amount of income tax withheld in U.S. as a deduction from his gross income in the Philippines, or to claim it as a tax credit (Sec. 34(C) (1) (b), NIRC). Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the difference in treatment for Philippine income tax purposes. NO. The income from abroad of a non-resident citizen is exempt from the Philippine income tax; hence, there is no international double taxation on said income (Sec. 23, NIRC). ESTATE AND DONORS TAXATION 1. Taxable Transfers: 1. Transfers in contemplation of death (3 year presumption repealed by PD1705, 8/1/80) 2. Transfer with retention or reservation of certain rights. 3. Revocable transfer. 4. Transfers of property under general power of appointment. 5. Transfers for insufficient consideration. 2. Allowable Deductions: 1. Expenses, losses, indebtedness and taxes: 2. Transfer for public purposes 3. Vanishing Deductions (Property previously taxed) Requisites of Vanishing Deductions: a. Present decedent must have died within five (5) years from the date of death of prior decedent or date of gift. 2

BAR OPERATIONS HEAD: TAXATION LAW HEAD:

DODOT RAMOS ‘14|RHETT GAERLAN ’14 GAB SOLLANO ‘13

The Sigma Rho Fraternity TAXATION LAW TIPS – 2016 b. The property with respect to which deduction is claimed must have formed part of the gross estate situated in the Philippines of the prior decedent or taxable gift of the donor. c. The property must be identified as the same property received from the prior decedent or donor or the one in exchange therefore. d. The estate taxes on the gift must have been finally determined and paid. e. No vanishing deduction on the property was allowed to the prior estate.

VALUE-ADDED TAXATION 1. Is the sale of a Nissan Patrol vehicle of a Geothermal Power Plant subject to VAT? YES. Even if the sale of the Nissan Patrol is said to be an isolated transaction, it does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code (NIRC) would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT. (Mindanao II Geothermal Partnership v. CIR, G.R. No. 193301, Mar. 11, 2013). 2. Rules on Prescriptive Periods for claiming refund or Credit of Input VAT: A. Two-Year Prescriptive Period: 1. It is only the administrative claim that must be filed within the two-year prescriptive period. 2. The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when the relevant sales were made. 3. The only other rule is the Atlas ruling, which applied only from June 8, 2007 to September 12, 2008. Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized input VAT payments should be counted from the date of filing of the VAT return and payment of the tax. B. 120+30 Day Period (Re: Appeal from the CIR): 1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty (30) days after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty (30) days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. 2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR. 3. As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. 3

BAR OPERATIONS HEAD: TAXATION LAW HEAD:

DODOT RAMOS ‘14|RHETT GAERLAN ’14 GAB SOLLANO ‘13

The Sigma Rho Fraternity TAXATION LAW TIPS – 2016 4. As an exception to the general rule, premature filing is allowed only if filed between December 10, 2003 and October 5, 2010, when BIR Ruling No. DA-489-03 was still in force. 5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force.(CIR v. Mindanao II Geothermal Partnership, G.R. No. 191498 Jan. 15, 2014) REMEDIES 2. Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? Explain. NO. As a general rule, a deficiency tax assessment is not a bar to a claim for tax refund or tax credit. It is logically appropriate; however, that if the deficiency tax assessment is already final, the Commissioner should not grant the claim unless the taxpayer pays the deficiency. Likewise, no tax refund or tax credit will be granted as long as there is a pending tax deficiency tax assessment for the same taxable period. To award a tax refund or tax credit despite the existence of deficiency assessment for the same taxable period is an absurdity and a polarity in conceptual effects. In order to avoid multiplicity of suits, it is logically necessary and legally appropriate that the issue of deficiency tax assessment be resolved jointly with the taxpayer’s claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable. (CIR v CA, Citytrust Banking Corp. and CTA, 234 SCRA 348 [1994]) 3. Government Remedies of Seizure The issuance of a warrant of seizure and detention by the Collector of Customs for goods released contrary to law, as when there is underpayment of taxes and duties, is his primary and exclusive jurisdiction and precludes the judge of regular courts from taking cognizance of the Collector could not be a basis of a prosecution for the usurpation of judicial functions (Commissioner v. Navarro, 77 SCRA 264 [1977]). 5. What is an assessment notice? What are the requisites of a valid assessment? Explain. An assessment notice is a formal notice to the taxpayer stating that the amount thereon is due as a tax and containing a demand for the payment thereof. (Alhambra Cigar and Cigarette Mfg. Co. v. Collector 105 PR 1337 [1989]; CIR v. Pascor Realty and Development Corp., 309 SCRA 402 [1999]). To be valid, the taxpayer must be informed in writing of the law and the facts on which the assessment is made. (Section 228, NIRC). 6. What legal defense(s) can you raise against the assessment? Explain. Question the validity of the assessment because of the failure to send the demand letter which contains a statement of the law and the facts upon which the assessment is based. If an assessment notice is sent without informing the taxpayer in writing about the fact on which the assessment is made, the assessment is void. (Section 228, NIRC; Azucena T. Reyes v. CIR, 480 SCRA 332 [2006]). 7. Standing to File a Claim for Refund 4

BAR OPERATIONS HEAD: TAXATION LAW HEAD:

DODOT RAMOS ‘14|RHETT GAERLAN ’14 GAB SOLLANO ‘13

The Sigma Rho Fraternity TAXATION LAW TIPS – 2016 Only the person legally liable to pay the tax can file the judicial claim for refund. The person to whom the tax is passed on as part of the purchase price has no personality to file the judicial claim under Section 229. CIR vs San Roque Power Corporation (GR No. 187845 [2013]) 8. Forms of Protest: What are the differences between a request for reconsideration and a request for reinvestigation? 1. Request for Reconsideration — plea for evaluation of assessment on the basis of existing records without need of presentation of additional evidence. It does not suspend the period to collect the deficiency tax. 2. Request for Reinvestigation — plea for re-evaluation on the basis of newly discovered evidence which are to be introduced for examination for the first time. It suspends the prescriptive period to collect. 11. Review Powers of the Secretary of Finance over the interpretations of the Commissioner of Internal Revenue The power to interpret the provision of the NIRC and other tax laws shall be under the exclusive and original jurisdiction of the CIR, subject to review by the Secretary of Finance. DOF Order 7-02 added that the Secretary of Finance may review the rulings of the CIR motu proprio. 12. Characteristics of Special Assessment 1. It is levied only on land 2. It is based solely on the benefits derived by the owners of the land 3. It does not result to personal liability of the person assessed 13. Notwithstanding any contrary provision of RA 1405 and other general or special laws, the CIR is authorized to inquire into the bank deposits of: 1. A decedent to determine his gross estate 2. Any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability 14. May the Collector of Customs declare the imported car forfeited in favor of the government? Explain. YES. The collector of customs may declare forfeiture on imported goods which are undervalued or entered and valued through fraudulent means or device to the prejudice of the Government. Since the undervaluation is more than 30% of the actual value of the vehicle, it gives rise to prima facie evidence of fraud which subjects the vehicle to forfeiture. (Section 2530, TCC). 16. The CIR may abate or cancel the tax liability when: 5

BAR OPERATIONS HEAD: TAXATION LAW HEAD:

DODOT RAMOS ‘14|RHETT GAERLAN ’14 GAB SOLLANO ‘13

The Sigma Rho Fraternity TAXATION LAW TIPS – 2016 1. The administration and collection costs involved do not justify the collection of the amount due. 2. The tax or any portion thereof appears to be unjustly or excessively assessed. 17. The CIR may compromise the payment of any internal revenue tax when: 1. A reasonable doubt as to the validity of the claim against the taxpayer exists. 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. 18. Does the CTA have jurisdiction over petitions for certiorari assailing interlocutory orders issued by the RTC in local tax cases filed before it? YES. The 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 v. Grecia-Cuerdo, G.R. No. 175723, Feb. 4, 2014) 19. What is the rule on waiver of the 3 year prescriptive period to asses taxes? General Rule: when a waiver does not comply with the requisites for its validity specified under RMO No. 20-90 and RDAO 01-05, it is invalid and ineffective to extend the prescriptive period to assess taxes. Exception: When BIR’s negligence in the performance of its duties was so gross that it amounted to malice and bad faith. If the taxpayer, on the one hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance with its rules. In this case, the BIR was so lax such that it seemed that it consented to the mistakes in the Waivers. (CIR v. Next Mobile Inc., G.R. No. 212825, December 7, 2015)

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BAR OPERATIONS HEAD: TAXATION LAW HEAD:

DODOT RAMOS ‘14|RHETT GAERLAN ’14 GAB SOLLANO ‘13