TAX (Domondon)

“BAR STAR NOTES”

TAXATION VER. 2010.06.12 copyrighted 2010

Prepared by Prof. Abelardo T. Domondon (AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law and Pre-Bar Reviewer)

How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of questions and answers as well as textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar Reviewees who attended his 2010 Lectures on TAXATION held at the University of the Philippines. Included in the presentation are doctrines contained in Supreme Court decisions up to April 2010. The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material which serves as “memoryjoggers” for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guess what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in the same manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all probability be included in these Notes.

These materials are copyrighted and/or based on the writer’s books on Taxation and future revisions. It is prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, including photocopying without the written permission of the author. Unauthorized users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author.

THE BEST OF LUCK AND ADVANCE CONGRATULATIONS

TAXATION GENERAL PRINCIPLES OF TAXATION TAXATION, IN GENERAL 1. State briefly and concisely the nature of taxation. Alternatively, define taxation. SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.

2. What is the nature of the State’s power to tax ? Explain briefly.

If pressed for time, the author suggests that the reader should focus his attention on the following: Nice to know Should know Must know and master It is further suggested that the reader should merely browse those without stars.

SUGGESTED ANSWER: The nature of the state’s power to tax is two-fold. It is both an inherent power and a legislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without the taxes, the state’s existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise this power. It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax should be paid.

WARNING:

3. briefly.

What is the underlying theory of taxation ? Explain

2 SUGGESTED ANSWER: lifeblood of the nation.

Taxes are the Without revenue

raised from taxation, the government will not survive,

resulting

Without

taxes,

in

the

detriment government

to

society.

would

be

paralyzed for lack of motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17)

4.

Marshall said that, “the power

to tax involves the power to destroy.” On the other hand, Holmes stated that “the power to

tax is not the power

to

destroy while the court sits.”

Reconcile the statements. In

flow from the above statements ? SUGGESTED ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view refers to an invalid tax.

imposition of a

The

valid tax could not be judicially

restrained merely because it would prejudice taxpayer’s property.

property.

5. Discuss briefly the basis/bases, or rationale of taxation. SUGGESTED ANSWER: a. Reciprocal duties of protection and support between the state and its citizens and residents. Also called “symbiotic relation” between the state and its citizens. b. Jurisdiction by the state over persons and property within its territory.

6. Discuss comprehensively the purposes of taxation.

briefly but objectives or

SUGGESTED ANSWER: The purposes or objectives of taxation are the following: a.

The primary purpose: 1)

Revenue purpose. b. The purposes 1) Sumptuary or purpose. Compensatory purpose. 3) To the power of eminent domain.

secondary regulatory 2) implement

the

alternative, what are the implications that

a.

and should not work to prejudice a taxpayer’s

b.

An

illegal tax could be judicially declared invalid

7. Distinguish a tax from license fee. SUGGESTED

a

ANSWER: The following are the distinctions: a. Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public purposes while license fee for regulatory purposes only. b. Basis: Tax imposed under power of taxation while license fee under police power. c. Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the expenses of police surveillance and regulation. d. Time of payment: Taxes normally paid after commencement of business while license fee before. e. Effect of payment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes business illegal. f. Surrender: Taxes, being the lifeblood of

3 the state, cannot be surrendered except for lawful consideration while a license fee may be surrendered with or without consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)

8. How may the power to tax be utilized to carry out the social justice program of our government ? SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc. Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

Explain purpose of taxation. 9.

the

sumptuary

SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected. Taxation may be made the implement of the state’s police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3,

2005 Southern Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision. The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

10. Taxation distinguished from police power. Taxation is distinguishable from police power as to the means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and certain availability is of the essence.” These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.)

11. How the power of taxation may be used to implement power of eminent domain. Tax measures are but ”enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public purpose.” In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]

12. What are the three basic principles of a sound tax system? Explain each briefly. SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics or, principles of a sound tax system, are used as a criteria in order to

4 determine whether a tax system is able to meet the purposes or objectives of taxation. They are: a. Fiscal adequacy. b. Administrative feasibility. c. Theoretical justice.

13. What are the elements or characteristics of a tax ? SUGGESTED ANSWER: a. Enforced contribution. b. Generally payable in money. c. Proportionate in character. d. Levied on persons, property or exercise of a right or privilege. e. Levied by the state having jurisdiction. f. Levied by the legislature. g. Levied for a public purpose. h. Paid at regular periods or intervals.

14. State the requisites of a valid tax.

SUGGESTED ANSWER:

a. A valid tax should be within the jurisdiction of the taxing authority. b. That the assessment and collection of certain kinds (The same as the inherent limitations of the power of taxation) should be for a public purpose. c. The rule of taxation should be uniform. d. That either the person or property of taxes guarantees against injustice to individuals, especially by way or notice and opportunity for hearing be provided. e. The tax must not impinge on the inherent and Constitutional limitations on the power of taxation.

15. What are the classes or kinds of taxes according to the subject matter or object ? SUGGESTED ANSWER: a. Personal, poll or capitalization – imposed on all residents, whether citizen or not. Example – Community Tax. b. Property - Imposed on property. Example – Real property tax. c. performance

of

Excise – imposed upon the an act, the enjoyment of a

privilege or the engaging in an occupation. Example – income tax, estate tax.

16. What are the kinds of taxes classified as to who bears the burden ? Explain each briefly. SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into: a. Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay them (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December 15, 2005); they are impositions for

which a taxpayer is directly liable on the transaction or business he is engaged in, (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which

liability cannot be shifted or transferred to another. Example – income tax, estate tax, donor’s tax, etc. b. Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) to someone else not

as a tax but as part of the purchase price. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities) Example – value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.

17. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from Petron Corporation, which it uses for its operations. It now claims for refund or tax credit for the excise taxes it paid claiming that it is exempt from the payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997 which provides that petroleum products are exempt from excise taxes when sold to “Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies”

5

Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads: “Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. The materials referred to above may be required to be kept under customs supervision and control.”

Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption “from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer. SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons: a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317318) The NIRC provides that the excise tax

should be paid by the manufacturer or producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the

NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]

b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from “all taxes” granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. An exemption from “all taxes” excludes indirect taxes, unless the exempting statute, like NPC’s charter, is so couched as to include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated the details covered by NPC’s exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPC’s amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from “all forms of taxes, duties, fees…” The use of the phrase “all forms” of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008)

18. What are

6

the different kinds of taxes classified as to purpose ? SUGGESTED ANSWER: a. General, fiscal or revenue – imposed for the purpose of raising public funds for the service of the government. b. Special or regulatory – imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raising of public funds.

LIMITATIONS OR RESTRICTIONS ON THE POWER 1. Purpose for the limitations on the power of taxation. The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax.

INHERENT LIMITATIONS 1. What are the inherent limitations on the power of taxation ? SUGGESTED ANSWERS: a. Public purpose. The revenues collected from taxation should be devoted to a public purpose. b. No improper delegation of legislative authority to tax. Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. c. Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority. d. Recognition of government exemptions; and e. Observance of the principle of comity. Comity is the respect accorded by nations to each other because they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon equals out of respect. Some authorities include no double taxation.

2. What are the principles to consider in the determination of whether tax revenues are devoted for a public purpose ? SUGGESTED ANSWER: a. The tax revenues are for a public purpose if utilized for the benefit of the community in general. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. b. Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation. BASIS: The lifeblood theory. c. An individual taxpayer need not derive direct benefits from the tax. REASON: The paramount consideration is the welfare of the greater portion of the population. d. A tax may be imposed, not so much for revenue purposes, but under police power for the general welfare of the community. This would still be for a public purpose. e. Public purpose continually expanding. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times. f. Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons. g. Private persons may be benefited but such benefit should be merely incidental as its main object is the benefit of the community in general. h. Determined at the time of enactment of tax law and not at the time of implementation. i. There is a presumption of public purpose even if the tax law does not specifically provide for its purpose. (Santos & Co., v. Municipality of Meycauayan, et al., 94 Phil. 1047)

j. Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience . (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

3. A law was enacted imposing a tax on manufacturers of coconut oil, the

7

proceeds of which are to be used exclusively for the protection and promotion of the coconut industry, namely, to improve the working conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. Some of the manufacturers of coconut oil challenge the validity of the law, contending that the tax is to be used for a private purpose, and therefore, the law violates the rule that public revenues shall not be appropriated for anything but a public purpose. Decide with reason. SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. It is, therefore, the state’s concern to make it a strong and secure source not only of the livelihood of the significant segment of the population, but also of export earnings, the sustained growth of which is one of the imperatives of economic growth. (Philippine Coconut Producers Federation, Inc. (Cocofed v. Presidential Commission on Good Government, 178 SCRA 236, 252)

4. Requisites for taxpayers, concerned citizens, voters or legislators to have locus standi to sue. a.In general, the case should involve constitutional issues. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

b. showing:

For taxpayers, there must be a

1) That tax money is “being extracted and spent in violation of specific constitutional protections against abuses of legislative power.” (Flast v. Cohen, 392 U.S.

83)

2) That public money is being deflected to any improper purpose (Pascual v. Secretary of Public Works, 110 Phil. 33) or a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. (David, supra) 3) A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or

unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 December 9, 1993, Minute Resolution) A taxpayer’s suit is properly brought only when there is an exercise of the spending or taxing power of Congress. (Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005 citing Gonzales v. Narvasa, G. R. No. 140835, August 14, 2000, 337 SCRA 733, 741)

c. For voters, there must be a showing of obvious interest in the validity of the election law in question. d. For concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled early. e. For legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators. (David, et al., v. President Gloria MacapagalArroyo, etc., et al., G. R. No. 171396, May 3, 2006)

5. Only those directly affected have locus standi to impugn the alleged encroachment by the executive department into the legislative domain of Congress. a. Only those who shall be directly affected by such executive encroachment, such as for example employees who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive Order as they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or employees who are going to be demoted, transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative remedies. b. Moreover, and if at all, only Congress, can claim any injury from the alleged executive encroachment of the legislative function to amend, modify and/or repeal laws. (Automotive Industry Workers Alliance (AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)

8

6. Locus standi being merely a matter of procedure, have been waived in certain instances where a party who is not personally injured may be allowed to bring suit. The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest: a. Taxpayer’s suits to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law. b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

7. The VAT law provides that, the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%) after any of the following conditions have been satisfied. “(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).” Was there an invalid delegation of legislative power ? SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare the even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. . [Abakada Guro Party List

(etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various cases]]

8. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on nondelegation: a. Delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2), Article VI of the Constitution. b. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution. c. The delegation to the President of the Philippines to enter into executive agreements, and to ratify treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President. d. Delegation to the people at large. e. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005], which is referred to as subordinate legislation. In this instance, there is a requirement that the law is complete in all aspects so what is delegated is merely the implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total transference of the taxing power.

9. “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

Local government legislation, “is not regarded as a transfer of general legislative power, but rather as the grant of authority to prescribe local regulations, according to immemorial practice, subject, of course, to the interposition of the superior in cases of necessity.” (People v. Vera, 65 Phil. 56)

9

10. Taxing power of the local government is limited. The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. While the power to tax by local governments may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, “the power to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)

11. Further amplification by Bernas of the local government’s power to tax. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

12. Reconciliation of the local government’s authority to tax and the Congressional general taxing power. Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

“Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.” [Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao]

13. General principles of income taxation in the Philippines or the source rule of income taxation as provided in the NIRC of 1997. a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; b. A nonresident citizen is taxable only on income derived from sources within the Philippines; c. An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a

10 member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; e. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)

14. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission of 10% all sales actually concluded and collected through her efforts. The local company withheld the amount of P107,000 from her sales commission and remitted the same to the BIR. She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Is her contention correct ? SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually performed. Since the activity of securing the sales were in Germany, then the income did not originate from sources from within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)

15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines. It holds 40% of the shares of Philippine Stamping Plant, Inc.,., a Philippine company while the 60% is owned by Fred Corporation, a Filipinoowned Philippine corporation. Ensite Co. also owns 100% of the shares of Susanto Co., an Indonesian company

which has a duly licensed Philippine branch. Due to worldwide restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in Philippine Stamping Plant, Inc. and Susanto Co. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The Agreement provides that the purchase price will be paid to Ensite Ltd’s bank account in the U.S. and that title to the Philippine Stamping Plant, Inc. and Susanto Co. shall be transferred to General Co., in Toronto Canada where stock certificates will be delivered. General Co. seeks your advice as to whether or not it will subject the payments of the purchase price to withholding tax. Explain your advice. SUGGESTED ANSWER: The payments of the purchase price will be subject to withholding tax. Considering that all the activities (sales) occurred within the Philippines, the income is considered as income from within, subject to Philippine income taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from sources within the Philippines.

16. Ensite, Ltd. is a Canadian corporation, which has a duly licensed Philippine branch engage in trading activities in the Philippines. Ensite, Ltd.. also invested directly in 40% of the shares of stock of Philippine Stamping Plant, Inc.., a Philippine corporation. These shares are booked in the Head Office of Ensite, Ltd.. and are not reflected as assets of the Philippine branch. In 2009, Philippine Stamping Plant, Inc.. declared dividends to its stockholders. Before remitting the dividends to Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as to whether it will subject the remittance to withholding tax. There is no need to discuss WT rates, if applicable. Focus your discussion on what is the issue. SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. should subject the remittance to withholding tax.. Since

11 Philippine Stamping Plant. is a Philippine corporation, its shares of stock have obtained a business situs in the Philippines, hence the dividends are considered as income from within. Ensite. Ltd., being a foreign corporation, should be subject to tax on its income from within.

17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive Larry who is a Filipino citizen. Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and will assign Larry for an indefinite period to work full time for Kuala Lumpur Manufacturing, Inc.. Larry will bring his family to reside in Malaysia and will lease out his residence in the Philippines. The salary of Larry will be shouldered 50% by Philippine Stamping Plant, Inc.. while the other 50% plus housing, cost of living and educational allowances of Larry’s dependents will be shouldered by Kuala Lumpur Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the 50% of Larry’s salary to his Philippine bank account. Larry will sign the contract of employment in the Philippines. He will also be receiving rental income for the lease of his Philippine residence. Are these salaries, allowances and rentals subject to Philippine income tax? Explain briefly. SUGGESTED ANSWER: The salaries and allowances of Larry, being derived from labor or personal services rendered outside of the Philippines is considered as income from without. Since Larry is an OCW, then he is to be taxed only on his income derived from within the Philippines such as the rentals on his Philippine residence, and not on his income from without.

18. Obama Airlines, Inc., a foreign airline company which does not maintain any flight to and from the Philippines sold air tickets in the Philippines, through a general sales agent, relating to the carriage of passengers and cargo between two points, both outside the Philippines. a. Is Obama, Inc., subject to income taxes on the sale of the tickets ?

SUGGESTED ANSWER: Yes. The source of income which is taxable is that “activity” which produced the income. The ”sale of tickets” in the Philippines is the activity that determines whether such income is taxable in the Philippines. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. [Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395] Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and their income from sales of passage documents here is income from within the Philippines. Thus, the offline air carrier liable for the 32% (now 30%) tax on its taxable income. [South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 citing Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]

b. Supposing that Obama, Inc., sells tickets outside of the Philippines for passengers it carry from Gold City, South Africa to the Philippines but returns to South Africa without any cargo or passengers. Would it then be subject to any Philippine tax on such sales ? SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax because the activity which generated the income (the sale of the tickets) was performed outside of the Philippines. It is not subject to the carrier’s tax based on gross Philippine billings because there were no lifts that originated from the Philippines. “Gross Philippine Billings” refers 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.” [NIRC of 1997, Sec. 28(A)(3)(a)]

c. Would your answer be the same if Obama, Inc. sold tickets outside of the Philippines for travelers who are

12

going to picked up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound for Nairobi, Kenya ? Reason out your answer. SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the carrier’s tax based on Gross Philippine Billings. (GPB). “Gross Philippine Billings” refers 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.” [NIRC of 1997, Sec. 28(A)(3)(a)] The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the Philippines, income is included in GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)

19. No improper delegation of legislative authority to tax. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

CONSTITUTIONAL LIMITATIONS 1. Constitutional limitations on the power of taxation . The general or indirect constitutional limitations as well as the specific or direct constitutional limitations.

2. The general or indirect constitutional limitations on the power of taxation are: a. Due process clause; b. Equal protection clause; c. Freedom of the press; d. Religious freedom; e. No taking of private property without just compensation; f. Non-impairment clause; g. Law-making process: 1) Bill should embrace only one subject expressed in the title thereof;

2) Three (3) readings on three separate days; 3) Printed copies in final form distributed three (3) days before passage. h. Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture after conviction by final judgment.

3. The specific constitutional limitation.

or

direct

a. No imprisonment for non-payment of a poll tax; b. Taxation shall be uniform and equitable; c. Congress shall evolve a progressive system of taxation; d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose and concur with amendments; e. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object; f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage and wharfage dues: 1) Delegation by Congress 2) through a law 3) subject to Congressional limits and restrictions 4) within the framework of national development program. g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious, charitable or educational purposes; h. No tax exemption without the concurrence of majority vote of all members of Congress; i. No use of public money or property for religious purposes except if priest is assigned to the armed forces, penal institutions, government orphanage or leprosarium; j. Money collected on tax levied for a special purpose to be used only for such purpose, balance if any, to general funds; k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above;

13 l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy; m. Automatic release of local government's just share in national taxes; n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes; o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits; p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes subject to conditions prescribed by law.

5. Equal protection of the law clause is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

6. Requisites for valid classification. All that is required of a valid classification is that it be reasonable, which means that a. the classification should be based on substantial distinctions which make for real differences, b. that it must be germane to the purpose of the law; c. that it must not be limited to existing conditions only; and d. that it must apply equally to each member of the class. The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

7. Equal protection does not demand absolute equality. It merely requires that all persons shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities

enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense - yet, they were treated differently. (Santos, supra)

8. Tests to determine validity of classification. The United States Supreme Court has established different tests to determine the validity of a classification and compliance with the equal protection clause. The recognized tests are: a. The traditional (or rational basis) test. b. The strict scrutiny (or compelling interest) test. c. The intermediate level of scrutiny (or quasi-suspect class) test.

9. The traditional (or rational basis) test used in order to determine the validity of classification. The classification is valid if it is rationally related to a constitutionally permissible state interest. The complainant must prove that the classification is “invidous,” “wholly arbitrary,” or ”capricious,” otherwise the classification is presumed to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland, 366 U.S. 420; United States Railroad Retirement Board v. Fritz, 449 U.S. 166)

10. The strict scrutiny (or compelling interest) test used in order to determine the validity of the classification. Government regulation that intentionally discriminates against a “suspect class” such as racial or ethnic minorities, is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a compelling state interest. A classification is necessary when it is narrowly drawn so that no alternative, less burdensome means is available to accomplish the state interest. Thus, it was held that denial of free public education to the children of illegal aliens imposes an enormous and lasting burden based on a status over which the children have no control is violative of equal protection because

14 there is no showing that such denial furthers a “substantial” state goal. (Plyler v. Doe, 457 U.S. 202)

11. The intermediate level of scrutiny (or quasi-suspect class) test used in order to determine the validity of he classification. Classification based on gender or legitimacy are not “suspect,” but neither are they judged by the traditional or rational basis test. Intentional discriminations against members of a quasi-suspect class violate equal protection unless they are substantially related to important government objectives. (Craig v. Boren, 429 U.S. 190) Thus, a state law granting a property tax exemption to widows, but not widowers, has been held valid for it furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)

12. Equality and uniformity of taxation may mean the same as equal protection. In such a case, the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever.

13. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that, "inequalities which result from a singling out of one particular class of taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)

9. Benjie is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and adverse economic conditions, an ordinance is passed by Soliman City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment. Arguing that the ordinance rewards delinquent tax payers and discriminates against prompt ones, Benjie demands that he be refunded an amount equivalent to one-half of the real

property taxes he paid. The municipal attorney rendered an opinion that Benjie cannot be reimbursed because the ordinance did not provide for such reimbursement. Benjie files suit to declare the ordinance void on the ground that it is a class legislation. Will his suit prosper ? Explain your answer briefly. SUGGESTED ANSWER: No. There is no class legislation because there is no violation of the equal protection suit. There is a valid classification between those who already paid their taxes and those who have not. Furthermore, the taxing authority has the prerogative to select the subjects and objects of taxation, including granting a 50% discount in the payment of unpaid real estate taxes, and the condonation of all penalties on fines resulting from late payment.

10. The rewards law to tax collectors does not violate equal protection. The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. With respect to RA 9335, it’s expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes, customs duties, fees and charges. Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)

11. The prosecution of one guilty person while others equally guilty are not prosecuted, however, is not, by itself, a denial of the equal protection of the laws. Where the official action purports to be in conformity to the statutory classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute,

15 is not without more a denial of the equal protection of the laws. The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. This may appear on the face of the action taken with respect to a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

12. Equal protection should not be used to protect commission of crime. While all persons accused of crime are to be treated on a basis of equality before the law, it does not follow that they are to be protected in the commission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because others have murdered with impunity. Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

13. Illustration of double taxation in local taxation. there is indeed double taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority – City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009)

14. A lawful tax on a new subject, or an increased tax on an old one, does not interfere with a contract or impairs its obligation, within the meaning of the constitution. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)

15. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

16. Tax exemptions in franchises are always subject to withdrawal. A legislative franchise is granted with the express condition that it is subject to amendment, alteration, or repeal. (1987 Constitution, Art. XII, Sec. 11)

It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. (Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008) NOTES AND COMMENTS: Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001 made the observation that since Smart’s franchise was granted after the effectivity of the Local Government Code that its tax exemption privilege was reinstated. However, Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 is explicit in its holding that Smart is not entitled to a tax exemption.

17. When withdrawal of a tax exemption impairs the obligation of contracts. The Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration. (Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G. R. No. 115455, August 25, 1994, 235

16 The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others) SCRA 630, 685)

18. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)

19. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. It is thus, an instrumentality of the National Government which is exempt from local taxation. As such it is not a private corporation engaged in “business enjoying franchise” Is such contention meritorious ? SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them.

20. “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it from local franchise taxes. It does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. Whether the “in lieu of all taxes provision” would include exemption from local tax is not unequivocal.

The right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the “in lieu of all taxes” provision should be construed against ABSCBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.)

21. “In lieu of all taxes” refers to national internal revenue taxes and not to local taxes. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used the

17 language in Section 9(b) of Clavecilla's old franchise, as follows: x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x x.

equitableness of taxation. Indirect duplicate taxation is not anathematized by the above constitutional limitations.

24. Elements of direct duplicate taxation: a.

(Emphasis supplied).

However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)] NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications companies.

22. The “in lieu of all taxes” clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos. The clause “in lieu of all taxes” does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the “in lieu of all taxes” clause has now become functus officio, rendered inoperative. (Quezon City, et al., v. ABSCBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.)

23. Double taxation in its generic sense, this means taxing the same subject or object twice during the same taxable period. In its particular sense, it may mean direct duplicate taxation, which is prohibited under the constitution because it violates the concept of equal protection, uniformity and

Same 1) Subject or object is taxed

twice 2) 3) 4)

by the same taxing authority for the same taxing purpose during the same taxable

period b. Taxing all of the subjects or objects for the first time without taxing all of them for the second time. If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution. NOTES AND COMMENTS: a. Presence of the 2nd element violates the equal protection clause. If only the 1st element is present, taxing the same subject or object twice, by the same taxing authority, etc., there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the same burdens and granted the same privileges without any discrimination whatsoever, The presence of the 2 nd element, taxing all of the subjects and objects for the first time, without taxing all for the second time, results to discrimination among subjects and objects that are similarly situated, hence violative of the equal protection clause.

25. Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate taxation, because it would violate the equal protection clause of the constitution.

26. When an item of income is taxed in the Philippines and the same income is taxed in another country, this would be known as international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)

27. Methods for avoiding double taxation (indirect duplicate taxation). a. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity.

18 b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid. c. Allowing foreign taxes as a deduction from gross income.

28. Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an allowance against the tax itself, or a deduction from what is owned. A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

29. A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

30. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has exceeded its authority in including provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%; deleting entirely the no pass-on provisions found in both the House and Senate Bills; inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax. Thus, there was a violation of the constitutional mandate that revenue bills shall originate exclusively from the House of Representatives. Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ? Explain briefly.

SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation. The Bicameral Conference Committee merely exercised the judicially recognized longstanding legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases]

31. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of taxation. Do you agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of the constitutional provision. Sales taxes are also regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]

32. All revenues and assets of non-stock, non-profit educational institutions that are actually, directly and exclusively used for educational purposes shall be exempt from taxation. 33. Revenues and assets of proprietary educational institutions, including those which are cooperatively owned, may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestments. There is no law at the present which grants exemptions, other the exemptions granted to cooperatives.

OTHER CONCEPTS 1. Distinguish tax from debt. TAX

DEBT

Basis

based on law

based on contract o judgment

Failure to Pay

may result in

no imprisonment

19 imprisonment Mode of Payment

generally payable in money

payable in money, property or service

Assignability

not

assignable

Payment

unless it becomes a debt is not subject to compensation or setoff

assignable

may be a subject

Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 reiterating Caltex Philippines,

Inc. v. Commission on Audit, which applied Francia v. Intermediate Appellate Court)

4. Exceptions: When set-off or compensation allowed for local taxes.

a. Where both claims already become overdue and demandable as well as fully Interest does not draw interest draws interest if liquidated. Compensation takes place by unless delinquent stipulated or delayed operation of law under Art. 1200 in relation to Authority imposed by public can be imposed by Arts. 1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443) authority private individuals b. Compensation takes place Prescription Prescriptive periods debt under the Civil by operation of law, where the government and for tax under NIRC Code the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both due and demandable. This is in WARNING: Do not use the above consequence of Article 1278 and 1279 of the arrangement in answering Bar questions. Civil Code. (Domingo v. Garlitos, 8 SCRA 443) c. 2. Compensation takes place by ,The Supreme Court upheld the validity of operation of law, where the local government and a set-off between the taxpayer and the the taxpayer are in their own right reciprocally government. In both cases, the claims of the debtors and creditors of each other, and that the taxpayers therein were certain and liquidated. debts are both due and demandable, in The claims were certain since there were no consequence of Articles 1278 and 1279 of the doubts or disputes as to their refundability. In Civil Code. (Domingo v. Garlitos, 8 SCRA 443) fact, the government admitted the fact of overpayment. (Commissioner of Internal 3. May there be compensation or

set-off between a national tax and a debt ? Reason out your answer. SUGGESTED ANSWER: As a general rule, there could be no compensation or set-off between a tax and a debt for the following reasons: a. Lifeblood theory. b. Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of government, to the making and enforcing of which the personal consent of the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA 622)

c. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Thus, it is correct to say that the offsetting of a taxpayer’s tax refund with its alleged tax deficiency is unavailing under Art. 1279 of the Civil Code. (South African Airways v.

Revenue 364)

v. Esso Standard Eastern, Inc., 172 SCRA

d. In case of a tax overpayment, the BIR’s obligation to refund or off-set arises from the moment the tax was paid. REASON: Solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc 172 SCRA 364)

e. While judgment should be rendered in favor of Republic for unpaid taxes, judgment ought at the same time to issue for Sampaguita Pictures commanding payment to the latter by the Republic of the value of the backpay certificates which the Republic received. (Republic v. Ericta, 172 SCRA 623)

5. Gilbert obtained a judgment for a sum of money against the municipality of Camiling. The judgment has become final although execution has not issued. Upon receiving an assessment for municipal sales taxes from the Municipal Treasurer, Gilbert executed a partial assignment of his judgment sufficient to cover the

20

assessment in favor of the Municipality. May the Municipal Treasurer validly accept the assignment? Why? SUGGESTED ANSWER: Yes. The parties in this case are mutually debtors and creditors of each other, and since both of the claims became overdue, demandable and fully liquidated, compensation takes place by operation of law. Such was the holding in Domingo v. Garlitos, 8 SCRA 443, a case decided by the Supreme Court whose factual antecedents are similar to the problem.

6. In case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

7. Interpretation in the imposition of taxes, is not the similar doctrine as that applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322, 330-331 (1997)] As burdens, taxes should not be

unduly exacted nor assumed beyond the plain meaning of the tax laws. (Ibid., citing CIR v. Philippine American Accident Insurance Company, Inc., G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8. Strict interpretation of tax exemption laws. Taxes are what civilized

people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon the

party claiming the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)

9. Rationale for strict interpretation of tax exemption laws. 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. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He who claims an

exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that “exemptions are never presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)

10. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State ? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.

11. In case of a tax overpayment, where the BIR’s obligation to refund or set-off arises from the moment the tax

21

was paid under the principle of solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)

12. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which held that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs.

13. Strict interpretation of a tax refund that partakes of the nature of a tax does not apply to tax refund based on erroneous payment or where there is no law that authorizes collection of the tax. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil. 985 (1963)]

The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in fact but also mistake in law. (Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154 and 2155)

The Government is not exempt from the application of solutio indebiti. (Commissioner, supra citing Commissioner of Internal Revenue v. Fireman’s Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)

Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously collected. (Commissioner, supra citing Commissioner of Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its

taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should

not unjustly enrich itself at the expense of taxpayers. [Commissioner, supra citing AB Leasing and Finance Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And so, given its essence, a

claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case. (Commissioner, supra)

14. Tax refunds premised upon a tax exemption strictly construed, Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, 119 Phil. 33, 37 (1963)]

The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention. [Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]

A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. [Commissioner, supra with a note to see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732733; Philex Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999); Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]

15. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer. A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his

22 favor, for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

16. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. (Philippine Banking Corporation, etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)

17.

The purpose of tax amnesty is

to a. give tax evaders who wish to relent a chance to start a clean slate, and to b. give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10, 2000)

18. Tax amnesty from tax exemption.

distinguished

a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from nonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax exemption is an immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365) b. Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda, supra) WHILE tax exemption has prospective application.

19. Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes.

20. Tax evasion connotes the integration of three factors: a. The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; b. an accompanying state of mind which is described as being “evil” on “bad faith,” “willful,” or ”deliberate and not accidental”; and c. a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)

21. Tax avoidance distinguished from tax evasion. a. Tax avoidance is legal while tax evasion is illegal. b. The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion the object is to entirely escape the payment of taxes. c. Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax avoidance does not.

22. Tax sparing is a provision in some tax treaties which provides that the state of residence allows as credit the amount that would have been paid, as if no reduction has been made. (Vogel, Klaus on Double Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5)

There may be instances where a particular income is exempt from taxation in order to encourage foreign investments which may lead to economic development. If the tax credit method is used, there would be no more tax to credit since there is no more tax to credit as a result of the tax exemption. Consequently, when the tax method credit method is applied to these items of income, such incentives are siphoned off since, in effect, the tax benefits are cancelled out. (Ibid.) Thus, the need for the tax sparing provision.

NATIONAL INTERNAL REVENUE CODE ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE 1. Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry

23

into bank deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue is only authorized to inquire into the bank deposits of:

3. Certain business organizations do not fall under the category of “corporations” under the Tax Code, and therefore not subject to tax as

a. a decedent to determine his gross estate; and b. any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997] c. A taxpayer who authorizes the Commissioner to inquire into his bank deposits.

corporations, include: a. General professional partnerships; b. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or consortium agreement under a service contract with the Government. [1 st sentence, Sec. 22 (B), BIRC of 1997]

2. Purpose of the NIRC of 1997. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

3. Purpose of shift from ad valorem system to specific tax system in taxation of cigarettes. The shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the players in the industries concerned, to ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes, among others, into high, medium and low-priced based on their net retail price and accordingly graduating tax rates. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

TAX ON INCOME 1. The Tax Code has included under the term “corporation” partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997] 2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.

4. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)

b. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had been put by their forebears. (Ibid.) c. Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock capital, and no community of interest as principal proprietors in the business itself from which the proceeds were derived. (Elements of the Law of Partnership by Floyd R. Mechem, 2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)

5. The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among themselves as to the management and use of such property and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v.

24 Commissioner of Internal Revenue, 166 SCRA 560)

creditor to the debtor and need not be included in the latter’s income.

6. The income from the rental of the house, bought from the earnings of co-owned properties, shall be treated as the income of an unregistered partnership

14. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2)

to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals.

7. Income is gain derived and severed from capital, from labor or from both combined. For example, to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999) 8. The term taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997) 9. The cancellation and forgiveness of indebtedness may amount to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the circumstances.

10. If an individual performs services for a creditor who, in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services.

11. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th)

12. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)

13. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the

15. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. No less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and selfreliance. Bearing in mind the foregoing provisions, we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)

In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: “The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice.” (Ibid., citing Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), 500 Phil. 586 (2005).

16. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

17. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to

25 depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

18. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals. 19. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money.

20. Payment for services, other than compensation income, is considered as having been earned at the place where the activity or service was performed. 21. A non-resident alien, who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year, shall be considered as a non-resident alien doing business in the Philippines. Consequently, he shall be subject to income tax on his income derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC] He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity.

22. What are considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER: a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year; b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00; d. Uniforms and clothing allowance not exceeding P3,000.00 per annum; e. Actual yearly medical benefits not exceeding P10,000.00 per annum;

f. Laundry allowance not exceeding P300 per month; g. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible persona property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees; h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; i. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 82000]

23. Income subject to “final tax” refers to an income collected through the withholding tax system. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. 24. Distinguish exclusions from deductions. SUGGESTED ANSWER: a. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is exempted by the

26 fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. b. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. c. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. An example of an exclusion from gross income are life insurance proceeds, and an example of a deduction are losses.

25. What are excluded from gross income ? SUGGESTED ANSWER: a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. b. Amounts received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term, or at maturity of the term mentioned in the contract, or upon surrender of the contract. c. Value of property acquired by gift, bequest, devise, or descent. d. Amounts received, through accident or health insurance or Workmen’s Compensation Acts as compensation for personal injuries or sickness, plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. e. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. f. Retirement benefits received under Republic Act No. 7641. Retirement received from reasonable private benefit plan after compliance with certain conditions. Amounts received for beyond control separation. Foreign social security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS benefits.

26. What are the conditions for excluding retirement benefits from gross income, hence tax-exempt ? SUGGESTED ANSWER: a. Retirement benefits received under Republic Act No. 7641 and those received by

officials and employees of private firms, whether individual or corporate, in accordance with the employer’s reasonable private benefit plan approved by the BIR. b. Retiring official or employee 1) In the service of the same employer for at least ten (10) years; 2) Not less than fifty (50) years of age at time of retirement; 3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. [1 st par., Sec. 2.78 (B) (1), Rev. Regs. No. 298]

27. What kind of separation (retirement) pay is excluded from gross income, hence tax-exempt ? SUGGESTED ANSWER: a. Any amount received by an official, employee or by his heirs, b. From the employer c. As a consequence of separation of such official or employee from the service of the employer because of 1) Death, sickness or other physical disability; or 2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of business. [1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]

28. What are the Itemized deductions from gross income and who may avail of them ? a. Ordinary and necessary trade, business or professional expenses. b. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.

27 Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. c. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within the taxable year, connected with profession, trade or business, not sustained between related parties. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business.

Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a natural resource. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. h. Charitable and other contributions. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. i. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.

28 Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. k. Insurance premiums for health and hospitalization. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. l. Personal and additional exemptions. Resident citizens, and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. Nonresident citizens on their gross incomes from within may also deduct this expense. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.

29. Distinguish ordinary expenses from capital expenditures. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. Necessary expenses are those which are appropriate or helpful to the business.

30. What are the requisites for the deductibility of business expenses ? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: a. Compliance with the business test: 1) Must be ordinary and necessary; 2) Must be paid or incurred within the taxable year; 3) Must be paid or incurred in carrying on a trade or business. 4) Must not be bribes, kickbacks or other illegal expenditures b. Compliance with the substantiation test. Proof by evidence or records of the deductions allowed by law including compliance with the business test.

31. What are the requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services ? SUGGESTED ANSWER: a. the expense must be ordinary and necessary; b. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. c. it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)

32. TMG Corporation is issuing the accrual method of accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. Since the bills for legal and auditing services were received only in 2006 and paid in the same year, TMG deducted the same from its 2006 gross income. The BIR disallowed the deduction ? Who is correct, TMG or BIR ? Explain. SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legal fees in the year they were

29 incurred in 2005 and not in 2006 because at the time the services were rendered in 2005, there was already an obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007) NOTES AND COMMENTS: a. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) The two (2) principal accounting methods for recognition of income are the (a) accrual method; and the (b) cash method. b. Recognition of income and expenses under the accrual method of accounting. Amounts of income accrue where the right to receive them becomes fixed, where there is created an enforceable liability. Liabilities, are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) The accrual of income and expense is permitted when the all-events test has been met. (Ibid.) c. All-events test. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of such income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain; if its basis is unchangeable, the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly,; it must be determined with “reasonable accuracy” implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the fact that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of

income or deduction. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) d. Under the cash method income is to be construed as income for tax purposes only upon actual receipt of the cash payment. It is also referred to as the “cash receipts and disbursements method” because both the receipt and disbursements are considered. Thus, income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash.

33. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished, granted or paid by the employer to the employee, except rank and file employees. [1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]

34. What is meant by “fringe benefit” for purposes of taxation ? SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees), such as but not limited to: a. Housing; b. Expense account; c. Vehicle of any kind; d. Household personnel, such as maid, driver and others; e. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; g. Expenses for foreign travel; h. Holiday and vacation expenses; i. Educational assistance to the employee or his dependents; and j. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

35. Fringe benefits that are not subject to the fringe benefits tax: a. When the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer; or

30 b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98] c. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law; d. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; e. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and f. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]

facilities

36. De minimis benefits are and privileges (such as

entertainment, medical services, or so-called “courtesy discounts” on purchases), furnished or offered by an employer to his employees. They are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]

37. Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income of corporations. (Revenue Memorandum Circular No. 17-71)

38. Bad debts are those which result from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99) 39. Who are related parties ? SUGGESTED ANSWER: The following are related parties: a. Members of the same family. The family of an individual shall include only his brothers and sisters (whether by the whole or

half-blood), spouse, ancestors, and lineal descendants; b. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual; d. A grantor and a fiduciary of any trust; or e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]

40. What are the requisites for valid deduction of bad debts from gross income ? SUGGESTED ANSWER: a. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; b. The same must be connected with the taxpayer’s trade, business or practice of profession; c. The same must not be sustained in a transaction entered into between related parties; d. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and e. The debt must be actually ascertained to be worthless and uncollectible during the taxable year; f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 599 reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA 667] g. Must have been reported as receivables in the income tax return of the current or prior years. (Sec. 103, Rev. Regs. No. 2) :

41. What is the “tax benefit” rule ? SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. NOTES AND COMMENTS:

31 a. If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

b. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

42.

Depreciation

is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration.

43. The methods of depreciation are the following: a. Straight line method; b. Declining balance method; c. Sum of years digits method; and d. Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1) Apportionment to units of production; 2) Hours of productive use; 3) Revaluation method; and 4) Sinking fund method.

predetermined by Congress.

[Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)]

45. What is the amount allowed as basic personal exemption ? SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer. In the case of married individuals where only one of the spouse is deriving gross income, only such spouse shall be allowed the personal exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008]

NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the spouses may claim the P50,000.00. Thus, the total familial basic personal exemption for spouses is P100,000.00. Furthermore, the distinctions between the concepts of single, married and head of the family for purpose of availing of the basic personal exemption has already been eliminated by Rep. Act No. 9504.

45. What are the amounts of additional exemptions ?

and

SUGGESTED ANSWER: “An individual, a. whether single or married, b. shall be allowed an additional exemption of Twenty-Five Thousand Pesos (P25,000.00) c. for each qualified dependent child, d. provided that the total number of dependents for which additional exemptions may be claimed 1) shall not exceed four (4) dependents.” [1st par., Sec. 2.79 (I) (1) (b),

SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as

NOTES AND COMMENTS: a. It is clear that under the amendment, single individuals may now claim for the additional exemptions. Furthermore, the concept of head of a family does not find application anymore. b. “A dependent means a. a legitimate, illegitimate or legally adopted child b. chiefly dependent upon and living with the taxpayer c. if such dependent is

44. What are additional exemptions ?

personal

Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as amended by Rep. Act No. 9504]

32 1) not more than twenty-one (21) years of age, 2) unmarried and 3) not gainfully employed or d. if such dependent, 1) regardless of age 2) is incapable of self-support 3) because of mental or physical defect.” [2nd par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997, as amended by Rep. Act No. 9504]

c. It is to be noted that under the NIRC of 1997, as amended by Rep. Act No. 9504, only qualified dependent children are considered for additional exemptions. Grandparents, parents, as well, as brothers or sisters, and other collateral relatives are not qualified dependents to be claimed as additional exemptions. However, if they are senior citizens they may qualify as additional exemptions under the “Senior Citizens Law” but not under the NIRC of 1997, as amended by Rep. Act No. 9504. Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code, as amended, and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. [last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act 9257, “The Expanded Senior Citizens Act of 2003”]

47. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003)

The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE: a. Stock in trade of the taxpayer, or b. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or c. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or d. Property used in the trade or business, of a character which is subject to the allowance for depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of

1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]

48.

Examples of capital assets: a. Stock and securities held by taxpayers other than dealers in securities; b. Jewelry not used for trade and business; c. Residential houses and lands owned and used as such; d. Automobiles not used in trade and business; e. Paintings, sculptures, stamp collections, objects of arts which are not used in trade or business; f. Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968) g. “Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore considered as capital asset.” (last sentence, 3rd par., Sec. 3.b, Rev. Regs. No. 7-2003) h. “Real property, whether single detached, townhouse, or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset.” (last par., Sec. 3.b., Rev. Regs. No. 7-2003) 49. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets, namely: a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year; or b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c. Real property used in trade or business (i.e. buildings and/or improvements), of a character which is subject to the allowance for depreciation; or d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)

33

50.. Examples of ordinary assets hence not capital assets: a. The machinery and equipment of a manufacturing concern subject to depreciation; b. The tractors, trailers and trucks of a hauling company; c. The condominium building owned by a realty company the units of which are for rent or for sale; d. The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture factory; e. Inherited parcels of land of substantial areas located in the heart of Metro Manila, which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable ; the employment of an attorney-in-fact for the purpose of developing, managing, administering and selling the lots; sales made with frequency and continuity; annual sales income from the sales was considerable; and the heir was not a stranger to the real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170) f. Inherited agricultural property improved by introduction of good roads, concrete gutters, drainage and lighting systems converts the property to an ordinary asset. The property forms part of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is now engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672)

51. Tax treatment of real properties that have been transferred. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: a. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. b. Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be

treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. c. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)

52. The tax is “imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets.” Revenue Regulations No. 7-2003 has defined real property as having “the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the ‘Civil Code of the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003) [Sec. 24 (D) (1`), NIRC of 1997]

53. Transactions covered by the presumed capital gains tax on real property: a. sale, b. exchange, c. or other disposition, including pacto de retro sales and other forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied] d. “ Sale, exchange, or other disposition” includes taking by the government through condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861)

54. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]

55. In case of non-redemption of the property sold upon a foreclosure of mortgage sale, the presumed capital gains tax shall be imposed, based on the bid price of the highest bidder but only upon the expiration of the

34 one year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]

56. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a. gross selling price, or b. the current fair market value as determined below: 1) the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors; or 2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]

It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. It is the transaction that is taxed not the gain.

57. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. 58. The tax liability, of individual taxpayers (not corporate), if any, on gains from sales or other dispositions of real property, classified as capital assets, to the government or any of its political subdivisions or agencies or to government owned or controlled corporations shall be determined, at the option of the taxpayer, by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions, then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]

59. The seller of the real property, classified as a capital asset, pays the presumed capital gains tax whether: a. an individual [Sec. 24 (D) (1), NIRC of 1997];

1) Citizen, whether resident or not [Ibid.]; 2) Resident alien [Ibid.]; 3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; 4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; b. an estate or trust (Ibid.); c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]

60. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence a. the proceeds of which is fully utilized in acquiring or constructing a new principal residence; b. within eighteen (18) calendar months from the date of sale or disposition c. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and d. the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D) (2), NIRC of 1997]

61. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. On May 22, 1987, it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. On June 23, 1999, the BSP authorized MBC to operate as a thrift bank. In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). It sought the BIR’s ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership

35

may be an economic reason for suspending the imposition of the MCIT. As a result of the ruling MBC filed an application for refund of the P33 million. Due to the BIR’s inaction, MBC filed a petition for review with the CTA. The CTA denied the petition on the ground that MBC is not a newly organized corporation. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1, 1998 as it did not close its business operations in 1987 but merely suspended the same. Even if placed under receivership, the corporate existence was never affected. Thus, it falls under the category of an existing corporation recommencing its banking operations. Should the refund be granted ? SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. [Sec. 27 (E) (1), NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 4-95) Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006) NOTES AND COMMENTS: a. The MCIT and when should be imposed and the four (4) year grace period. “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year.” [Sec. 27 (E) (1), NIRC of 1997] b. Period when a corporation becomes subject to the MCIT. “(5) Specific rules for determining the period when a

corporation becomes subject to the MCIT (minimum corporate income tax) For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. x x x” (Rev. Regs. No. 9-98) Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically refers to thrift banks.) c. Purpose of the four (4) year grace period. The intent of Congress relative to the MCIT is to grant a four (43) – year suspension of tax payment to newly organized corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many companies reported losses in their initial years of operations. Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)

ESTATE TAXES 1. In determining the gross estate of a decedent, are his properties abroad to be included, and more particularly, what constitutes gross estate ? SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or a resident alien. The gross estate of a Filipino citizen or a resident alien comprises all his real property, wherever situated; all his personal property, tangible, intangible or mixed, wherever situated, to the extent of his interest existing therein at the time of his death. The gross estate of a non-resident alien comprises all his real property, situated in the Philippines; all his personal property, tangible, intangible or mixed, situated in the Philippines, to the extent of his interest existing therein at the time of his death.

36

2. William Smith, an American citizen, was a permanent resident of the Philippines. He died in San Francisco, California. He left 10,000 shares of San Miguel Corporation, a condominium unit at the Twin Towers Building at Pasig, Metro Manila and a house and lot in Miami, Florida. What assets shall be included in the Estate Tax Return to be filed with the BIR ? SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be filed with the BIR. Smith, an American citizen and a permanent resident of the Philippines is considered, for Philippine estate tax purposes, a resident alien. Consequently, the assets to be included in the Estate Tax Return to be filed with the BIR should be all property, real or personal, tangible, intangible or mixed, wherever situated, to the extent of the interest that Smith has at the time of his death. Thus, all of the properties enumerated in the problem irrespective of where they are situated are includible in the gross estate of Smith.

3. Proceeds of life insurance includible in a decedent’s gross estate. a. The decedent takes the insurance policy on his own life 1) The amounts are receivable by a) the decedent’s estate, b) his executor, or c) administrator irrespective of whether or not the insured retained the power of revocation, OR 2) The amounts are receivable by any beneficiary designated in the policy of insurance as revocable beneficiary. [Sec. 85 (E), NIRC of 1997]

b. One, other than the decedent takes the insurance policy on the life of the decedent 1) The amounts are receivable by a) the decedent’s estate, b) his executor, or c) administrator 2) irrespective of whether or not the insured retained the power of revocation.

4. Proceeds of life insurance NOT included in a decedent’s gross estate. a. The decedent takes the insurance policy on his own life, and b. the proceeds are receivable by a beneficiary designated as irrevocable . [Sec. 85 (E), NIRC of 1997) NOTES AND COMMENTS: The beneficiary must not be the decedent’s estate, executor or administrator, because the proceeds are includible as part of gross estate whether or not the decedent retained the power of revocation. (Ibid.)

c. Where the insurance was NOT taken by the decedent upon his own life and the beneficiary is not the decedent’s estate, his executor or administrator.

4. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien decedent: a. Expenses, losses, claims, indebtedness and taxes; b. Property previously taxed; c. Transfers for public use; d. The Family Home up to a value not exceeding P1 million; e. Standard deduction of P1 million; f. Medical expenses not exceeding P500,000.00; g. Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917; h. Net share of the surviving spouse in the conjugal partnership.

5. There is no transfer in contemplation of death if there is no showing that the transferor “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.” [Sec. 85 (B), NIRC of 1997]

6. Vanishing deduction (deduction for property previously taxed), defined. The deduction allowed from the gross estates of citizens, resident aliens and nonresident estates for properties which were previously subject to donor’s or estate taxes. The deduction is called a vanishing deduction

37 because the deduction allowed diminishes over a period of five (5) years. It is also known as a deduction for property previously taxed.

7. Vanishing deduction (property previously taxed) allowed as a deduction from the gross estate of a Filipino citizen, whether resident or not, of a resident alien decedent, or of a nonresident alien decedent. a. An amount equal to the value specified below of b. Any property forming a part of the gross estate situated in the Philippines c Of any person who died within five years prior to the death of the decedent, or transferred to the decedent by gift within five years prior to his death, d. Where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance, or e. Which can be identified as having been acquired in exchange for property so received: 100% of the value if the prior decedent died within one year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 80% of the value if the prior decedent died more than one year but not more than two years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 60% of the value if the prior decedent died more than two years but not more than three years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 40% of the value if the prior decedent died more than three years but not more than four years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and 20% of the value if the prior decedent died more than four years but not more than five years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering, arrangement and underlining supplied]

8. The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. The notices of levy were regularly issued within the prescriptive period. The tax assessment having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)

DONOR’S TAXES 1. What is the donor’s tax rate if the donee is a stranger ? SUGGESTED ANSWER: When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts.

2. For purposes of the donor’s tax who is a stranger ? SUGGESTED ANSWER: A stranger is a is person who is not a: a. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or b. Relative by consanguinity in the collateral line within the fourth degree of relationship.” [Sec. 99 (B), NIRC of 1997] NOTES AND COMMENTS: All relatives by affinity, irrespective of the degree, are considered as strangers.

3. What is the tax base for donations ? SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. 99 (A), NIRC of 1997]

4. For purposes of the donor’s tax, what is meant by “net gifts ?” SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the

38 mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed.

5. How are gifts of personal property to be valued for donor’s tax purposes ?

SUGGESTED ANSWER: My answer would be different. The renunciation in favor of X would be subject to donor’s tax. This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4th par., Sec. 11, Rev. Regs.

SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered the amount of the gift. (Sec. 102, NIRC of 1997)

8. Give some donations that are exempt from donor’s tax.

(last par., Sec. 11, Rev. Regs.No.2-2003)

6. What is the valuation of donated real property for donor’s tax purposes ? SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift. However, the appraised value of the real property at the time of the gift shall be whichever is the higher of: a. the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or b. the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997]

7. A died leaving as his only heirs, his surviving spouse B, and three minor children, X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced her hereditary share in the estate. a. Is the renunciation subject to donor’s tax ? Explain. SUGGESTED ANSWER: No. The general renunciation by an heir, including the surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is not subject to donor’s tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003) This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other coheirs in the hereditary estate.

b. Supposing that instead of a general renunciation, B renounced her hereditary share in A’s estate to X who is a special child, would your answer be the same ? Explain.

No. 2-2003)

SUGGESTED ANSWER: a. The first P100,000.00 net donation during a calendar year is exempt from donor’s tax [Sec. 99 (A), NIRC of 1997] made by a resident or non resident; b. The donation by a resident or nonresident of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donor’s tax (Sec. 1, Rep. Act No. 7549) c. Political contributions made by a resident or non-resident individual if registered with the COMELEC irrespective of whether donated to a political party or individual. However, the Corporation Code prohibits corporations from making political contributions. (Corp. Code, Title IV, Sec. 36.9) d. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by residents who are parents to each of their legitimate, recognized natural, or adopted children to the extent of the first ten thousand pesos (P10,000.00); e. Gifts made by residents or nonresidents to or for the use of the National Government or any entity created by any of its

agencies which is not conducted for profit, or to any political subdivisions of the said Government; f. Gifts made by residents or non residents in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. [Sec. 101 (A), NIRC of 1997, numbering and arrangement supplied] g. Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from donor’s taxes because taxation is basically territorial. The transaction, which should have been subject to tax was made by

39 non-resident aliens and took place outside of the Philippines.

9. What is the concept of donation or gift splitting ? Illustrate. SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in order to avail of lower donor’s taxes. In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first cousin. The P200,000.00 is the totality of the net gifts for 2008. If he donated the P200,000.00 in 2008 the first P100,000 would be exempt and the remaining P50,000.00 would be subject to donor’s tax If Leon spreads the P200,000 donation over two (2) calendar years, donating P100,000.00 on December 30, 2008 and the remaining P100,000.00 on January 1, 2009 the transaction would be exempt from donor’s tax. This is so even if the donation is separated only by two days because the basis is the calendar year. Leon would be enjoying the exemption for the first P100,000.00 net gifts for each calendar year.

10. A, who is engaged in the car “buy and sell” business sold to B P7 million Jaguar for only P4 million. The proper VAT on the sale was paid. If you are the BIR examiner assigned to review the sale, would you issue a tax assessment on the transaction ? Explain your answer briefly. SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of consideration. Where property, other than real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. (5th par., Sec. 11, Rev. Regs. No. 2-2003)

VALUE-ADDED TAXES (VAT)

WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are sourced from VAT and its concepts. This area is probably the most difficult area to forecast because there are no statistically perceived patterns. The author has retained the “Stars System” for VAT. Considering the limited period of time, the reader is advised to focus on areas marked with stars and just browse the unmarked areas. 1. Value-added tax (VAT) is a tax which is imposed only on the increase in the worth, merit or importance of goods, properties or services, and not on the total value of the goods or services being sold or rendered. 2. Nature of VAT. VAT is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. As such, it should be understood not in the context of the person or entity that is primarily, directly liable for its payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various authorities}

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)

3. Effect of exemptions from VAT which is an indirect tax. If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VATregistered suppliers, the purchase transaction is not exempt. REASON: The VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005)

40 b.

4. Illustration of effects of exemptions from VAT which is an indirect tax. A VAT exempt seller sells to a non-VAT exempt purchaser. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser .

any person who imports goods xxx However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to VAT xxx . (Rev. Regs. No. 162005,Sec. 4.105-1, paraphrasing supplied)

8. Various systems.

VAT

methods

and

5. The VAT is a tax on consumption. Meaning of consumption as used under the VAT system. Consumption is "the use of a thing in a way that

a. Cost deduction method. This is a single-stage tax which is payable only by the original sellers. (Abakada Guro Party List (etc.)

thereby exhausts it." Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability x x x" Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes."

modified and a mixture of “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. (Ibid.) b. Tax credit method. This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005] If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes.

[Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]

6. Illustration of the meaning of consumption as used under the VAT system. For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. Such facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. [Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]

7. Who are liable for the valueadded tax. a. Any person who, in the course of his trade or business, 1) Sells, barters, exchanges or leases goods or properties, or 2) renders services, and

v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) This was subsequently

(Ibid.)

9. How the VAT is imposed on the increase in worth, merit or improvement of the goods or services. The VAT utilizes the concept of the output and input taxes. Output VAT less Input VAT = VAT due on the increase in worth, merit or improvement f the goods or services.

10. The right to credit the input tax be limited by legislation because it is a mere creation of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are

41 not recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that a person has no vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs.

b. materials purchased for further processing, but which have not yet undergone processing; c. goods which have been manufactured by the taxpayer; d. goods in process for sale; or e. goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person. [Rev. Regs. No. 16-2005,

Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the motion for reconsideration)

processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this paragraph, the term processing shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition.

11. Output tax is the value-added tax due on the sale or lease or taxable goods, properties or services by any VAT-registered person. 12. Input tax is the value-added tax due on or paid by a VAT-registered person on importation of good or local purchases of goods or services, including lease or use of properties, in the course of his trade or business. (Rev. Regs. No. 4.110-1, 1st par.)

13.

Included in the input tax.

a. the transitional input tax and b. the presumptive input tax xxx. It includes c. input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1st par., 2nd sentence,. And 2nd par., paraphrasing, arrangement and numbering supplied )

14. Concept of transitional input tax credits on beginning inventories. Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily register even if their turnover does not exceed P1,500,000.00 (except franchise grantees of radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on the following: a. goods purchased for resale in their present condition;

Sec.4.111-1, (a), 1st par., arrangement and numbering supplied]

15. Concept of presumptive input tax credits. Persons or firms engaged in the

[Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]

16. The VAT registration fee does NOT violate religious freedom. The VAT registration fee imposed on non-VAT enterprises which includes among others, religious sects which sells and distributes religious literature is not violative of religious freedom, although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. The registration fee is thus more of an administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)

17. Interpretation of the term “In the Course of Trade or Business” as used in the VAT system. The term "doing business" or “course of business” conveys the idea of business being done, not from time to time, but all the time. It does not include isolated transactions. (Commissioner of Internal Revenue v.

42 Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)

18. Pursuant to a government program of privatization, NDC, a VATregistered entity created for the purpose of selling real property, decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC. The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." Magsaysay Lines, Inc., offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong . The bid was approved by the Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines. Is the sale subject to VAT ? SUGGESTED ANSWER: No. The term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. "Course of business" is what is usually done in the management of trade or business. "Course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale

which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)

19. Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or exchange or goods and services. The VAT is also imposed on certain transactions “deemed sales” which include: a. Transfer, use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. xxx b.

Distribution or transfer to: 1) Shareholders or investors as share in the profits of the VAT- registered person; xxx or 2) Creditors in payment of debt or obligation c. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold. d. Retirement from or cessation of business, with respect to all goods on hand, 1) whether capital goods, stockin-trade, supplies or materials as of the date of such retirement, or cessation, 2) whether or not the business is continued by the new owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing, arrangement and numbering supplied]

20. Transactions considered retirement or cessation of business “deemed sale” subject to VAT. a. Change of ownership of the business. There is change in the ownership of the business where a single proprietorship incorporates; or 1) the proprietor of a single proprietorship sells his entire business.

43 b. Dissolution of a partnership and creation of a new partnership which takes over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied]

21. Sale of or lease of real properties subject to VAT. Sale of real properties primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.)

Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers are subject to VAT.

22. On September 4, 2009, XYZ, Inc., a domestic corporation engaged in the real estate business, sold a building for P10,000,000.00. Is the sale subject to the value-added tax (VAT)? If so, how much? Explain. SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X, a domestic corporation engaged in the real estate business.

23. The following sales of real properties are exempt from VAT, namely: a. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; b. Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the “Urban and Development Housing Act of 1992” and other related laws, such as RA No. 7835 and RA No. 8763. xxx xxx xxx c. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. xxx xxx xxx d. Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or

after November 1, 2005, provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed of to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied]

24. VAT on services and lease of properties. a. There shall be levied, assessed, and collected, b. a value-added tax equivalent to twelve percent (12%) of gross receipts c. derived from the sale or exchange of services, 1) including the use or lease of properties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and numbering supplied]

25. “Sale or exchange of services”, defined. The term “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: a. construction and service contractors; b. stock, real estate, commercial, customs and immigration brokers; c. lessors of property, whether personal or real; d. persons engaged in warehousing services e. lessors or distributors of cinematographic films; f. persons engaged in milling, processing, manufacturing or repacking goods for others;

44 g. proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie houses; h. proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; i. dealers in securities; j. lending investors; k. transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; l. common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; m. sales of electricity by generation companies, transmission, and/or distribution companies; n. franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water utilities; o. non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and p. similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1st par., arrangement and numbering supplied]

26. Also included in the phrase “sale or exchange of services. a. The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; b. The lease or the use of, or the right to use any industrial, commercial or scientific equipment;

c. The supply of scientific, technical, industrial or commercial knowledge or information; d. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in subparagraph (3) hereof; or e. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person; f. The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project of scheme; g. The lease of motion picture films, film tapes and discs; h. The lease or the use of or the right to use radio, television, satellite transmission and cable television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2nd par.)

27. Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. However, the input tax on the purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005, 1st par.)

28.

Concept of VAT zero-rating.

The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005] Under a zero-rating scheme, the sale or exchange of a particular service is completely freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit, the tax that is included in the cost of purchases attributable to the sale or exchange. The tax paid or withheld is not deducted from the

45 tax base.

(Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases)

29. Situs of taxation of zero-rated VAT services such as facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines. The place where the service is rendered determines the jurisdiction to impose the VAT Performed in the Philippines, the service is necessarily subject to its jurisdiction for the State necessarily has to have a “substantial connection” to it in order to enforce a zero rate. The place of payment is immaterial much less is the place where the output of the service will be further or ultimately used. This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. (Commissioner of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005)

30. Destination principle under the VAT System. As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. This is also known as the “Cross Border Doctrine.”

31. Exception to the destination principle. 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]."

32. Rationale for zero-rating of exports. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross Border

Doctrine” is also known as the destination principle. Hence, actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT.

33. Zero-rated sale distinguished from exempt transactions: a. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax. b. The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. c. Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons.

34. Zero-rated sales by VATregistered persons. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: a. Export sales; b. Considered export sales under Executive Order No. 224; c. Foreign currency denominated sale; and d. Sales to persons or entities deemed tax-exempt under special law or international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd par., paraphrasing supplied)

35. Sale of gold to the Central Bank considered as export sales. As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by the seller, which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers. (Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005)

36. Sales to ecozone, such as PEZA, considered export-sale. Notably, while an ecozone is geographically within the

46 Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero percent. (Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)

37. “Ecozone”, defined. An ECOZONE or a Special Economic Zone has been described as – [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers. The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]

38. Zero-rated sale of service, defined. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regs. No. 162005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics supplied)

39. Service performed by American Express in facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT but zerorated. This is so because it meets all the requirements for VAT imposition, as follows: a. It regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity.

b. Such service is commercial in nature; carried on over a sustained period of time; on a significant scale with a reasonable degree of frequency; and not at random, fortuitous, or attenuated. c. For this service, it definitely receives consideration in foreign currency that is accounted for in conformity with law. d. It is not an entity exempt under any of our laws or international agreements . (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005)

40. While the service performed by American Express is subject to VAT it is zero-rated, and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and invalid. The VAT system uses the destination principle which posits that the goods and services are taxed only in the country where they are consumed, However, the law itself provides for clear exceptions under which the supply of services shall be zero-rated, among which are the following: a. The service is performed in the Philippines; b. The services are within the categories provided for under the Tax Code; and c. It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas. American Express renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to their clients abroad. The services are performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here, Its services, having been performed in the Philippines are therefore also consumed in the Philippines. Thus, its services are exempt from the destination principle and are zero-rated. The BIR could not change the law. [Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005]

41. A foreign Consortium composed of BWSC-Denmark, Mitsui Engineering and Shipbuilding Ltd., and Mitsui and Co., Ltd., which entered into a contract with NAPOCOR for the

47

operation and maintenance of two power barges appointed BWSC-Denmark as its coordination manager. BWSCMI was established as the subcontractor to perform the actual work in the Philippines. The Consortium paid BWSCMI in acceptable foreign exchange and accounted for in accordance with the rules and regulations of the BSP. Through a February 14, 1995 ruling the BIR declared that BWSCMI may choose to register as a VAT persons subject to VAT at zero rate. For 1996, it filed the proper VAT returns showing zero rating. On December 29, 1997, believing that it is covered by Rev. Regs. 5-96, dated February 20, 1996, BWSCMI paid 10% output VAT for the period AprilDecember 1996, through the Voluntary Assessment Program (VAP). On January 7, 1999, BWSCMI was able to obtain a Ruling from the BIR reconfirming that it is subject to VAT at zero-rating. On this basis, BWSCMI applied for a refund of the output VAT it paid. a. Is BWSCMI subject to the 10% VAT or is it zero rated ? SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is subject to the 10% VAT. It is rendering service for the Consortium which is not doing business in the Philippines. Zerorating finds application only where the recipient of the services are other persons doing business outside of the Philippines. BWSCMI provides services to the Consortium which by virtue of its contract with NAPOCOR is doing business within the Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007)

b. Could it obtain a refund of the VAT it paid through the VAP ? Explain. SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the 10% output VAT it paid the based on the non-retroactivity of the prejudicial revocation of the BIR Rulings which held that it’s services are subject to 0% VAT and which BWSCMI invoked in applying for refund of the output VAT. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., supra)

NOTES AND COMMENTS:

a. Do not confuse the BWSCMI case with the American Express case. American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007)

42. What are VAT-Exempt transactions ? SUGGESTED ANSWER: The sale of goods or properties and/or services and the use or lease of properties that is b. not subject to VAT (output tax) and c. the seller is not allowed any tax credit on VAT (input tax) purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT . [Rev. Regs. No. 16-2005, Sec. 4.109-1 numbering supplied]

(A),

arrangement

and

43. VAT-exempt transactions distinguished from VAT-exempt entities. a. An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status – VAT-exempt or not – of the party to the transaction. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005]

b. An exempt transaction shall not be the subject of any billing for output VAT but it shall not also be allowed any input tax credits WHILE an exempt party being zero-rated is allowed to claim input tax credits.

44. Transactions are exempt from VAT. (Subject to the election by a VAT-registered

48 person not to be subject to the value-added tax), the following shall be exempt from VAT: (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey, Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams. Meat, fruit, fish, vegetables and other agricultural and marine food Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state. Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5o and above are presumed to be refined sugar. Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar: (1) product of a refining process, (2) products of a sugar refinery, or (3) product of a production line of a sugar mill accredited by the BIR to be producing sugar with polarimeter reading of 99.5o and above, and for which the quedanissued therefor, and verified by the Sugar Regulatory Administration, identifies the same to be of a polarimeter reading of 99.5o and above. Bagasse is not included in the exemption provided for under this section. (B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished

feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); “Specialty feeds” refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets. (C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; (D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; (E) Services subject to percentage tax under Title V of the Tax Code, as enumerated below: (1) Sale or lease of goods or properties or the performance of services of non-VAT-registered persons, other than the transactions mentioned in paragraphs (A) to (U) of Sec. 109 (1) of the Tax Code, the annual sales and/or receipts of which does not exceed the amount of One Million Five Hundred thousand Pesos (P1,500,000.00), Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO). (Sec. 116, Tax Code) (2) Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages. (Sec. 117) (3) Services rendered by international air/shipping carriers. (Sec. 118)

49 (4) Service rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) and by franchises of gas and water utilities. (Sec. 119) (5) Service rendered for overseas dispatch message or conversation originating from the Philippines. (Sc. 120) (6) Services rendered by any person, company or corporation (except purely cooperative companies or associations ) doing life insurance business of any sort in the Philippines. (Sec. 123) (7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies. (Sec. 124) (8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions professional basketball games, jai-Alai and race tracks. (Sec. 125). and (9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering. (Sec. 127) (F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; “Agricultural contract growers” refers to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state. (G) Medical, dental, hospital and veterinary services except those rendered by professionals; Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. (H) Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical Education And Skills Development Authority (TESDA) and those rendered by government educational institutions; “Educational services” shall refer to academic, technical or vocational education provided by private educational institutions duly

accredited by the DepED, the CHED and TESDA and those rendered by government educational institutions and it does not include seminars, inservice training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA. (I) Services rendered by individuals pursuant to an employer-employee relationship; (J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529 – Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and; (L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members as well as sale of their produce, whether in its original state or processed form, to nonmembers; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; (M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority; (N) Sales by non-agricultural, nonelectric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members; Importation by non-agricultural, nonelectric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. (O) Export sales by persons who are not VAT-registered; (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279,

50 otherwise known as the Urban Development and Housing Act of 1992, and other related laws, such as RA No. 7835 and RA No. 8765, residential lot valued at One million five hundred thousand pesos (P 1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P 2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); (Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000) Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); (R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; (S) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of one hundred fifty (150) tons and above, including engine and spare parts of said vessels; Provided, further, that the vessels be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessel’s original commissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is fifteen years (15) years old, (ii) for tankers, the age limit is ten (10) years old, and (iii) For highspeed passenger cars, the age limit is five (5) years old, Provided, finally, that exemption shall be subject to the provisions of section 4 of Republic Act No. 9295, otherwise known as “The Domestic Shipping Development Act of 2004.” (T) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without

stopping at any other port in the Philippines; provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT (now 12%); (U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and

(V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO). For purposes of the threshold of P1,500,000.00, the husband and wife shall be cnsidered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a profesional, aside from the practice ofhis profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall to be icluded in determining the threshold. [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied]

45. Tax to be paid by persons exempt from VAT. a. Any person, whose sales or receipts are exempt under Sec. 109 (1) (V) of the Tax Code, (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics

51 Office (NSO), from the payment of VAT and b. who is not a VAT-registered person c. shall pay a tax equivalent to three percent (3%) of his gross monthly sales or receipts; Provided, that cooperatives shall be exempt from the three (3%) gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1, arrangement, numbering and words in italics supplied)

RETURNS AND

WITHHOLDING

1. Income tax returns being public documents, until controverted by competent evidence, are competent evidence, are prima facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317)

2. Individuals required to file an income tax return. a. Every Filipino citizen residing in the Philippines; b. Every Filipino citizen residing outside the Philippines on his income from sources within the Philippines; c. Every alien residing in the Philippines on income derived from sources within the Philippines; and d. Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC of 1997]

3. Married individuals who are earning purely compensation income allowed to file separate returns. 4. Married individuals, whether citizens, resident or non-resident aliens, who do not derive income purely from compensation shall file a consolidated return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification.” [Section 51 (D) of the NIRC of 1997]

5. Computation of income tax for married individuals whether citizens, resident or non-resident aliens, who do

not derive income purely from compensation required file a consolidated return for the taxable year but could not do so. For married individuals, the husband and wife, subject to no. 2, supra,, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. [2nd to the last par., Sec. 24 (A) (2), NIRC of 1997 as amended by Rep. Act No. 9504]

6. Individuals who are required to file an income tax return.

not

a. An individual whose gross income does not exceed his total personal and additional exemptions for dependents, Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return regardless of the amount of gross income [Sec. 51 (A) (2), NIRC of 1997]

b. An individual with respect to pure compensation income, derived from such sources within the Philippines, the income tax on which has been correctly withheld: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return [Sec. 51 (A) (2), NIRC of 1997, as amended by Rep. Act No. 9504, paraphrasing supplied]

c. An individual whose sole income has been subject to final withholding tax; d. A minimum wage earner (is a worker in the private sector paid the statutory minimum wage, or is an employee in the public sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned), an individual who is exempt from income tax pursuant to the provisions of the Tax Code and other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended by Rep. Act. 9504]

7. Minimum wage earners are exempt from income taxation. That minimum wage earners (is a worker in the private sector paid the statutory minimum wage, or is an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned) shall be

52 exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended by Rep. Act. 9504]

8. An individual who is not required to file an income tax return may nevertheless be required to file an information return. [Sec. 51 (A) (3), NIRC of 1997]

9. A corporation files its income tax return and pays its income tax four (4) times during a single taxable year.

Revenue. It is also known as collection of the tax at source.

14. A withholding agent is explicitly made personally liable under the Tax Code for the payment of the tax required to be withheld, in order to compel the withholding agent to withhold the tax under any and all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999) The system facilitates tax

collection and reduces tax evasion.

Quarterly returns are required to be filed for the first three quarters, then a final adjustment return is filed covering the total taxable income for the whole taxable year, be it calendar or fiscal.

15. The two (2) types of withholding at source are the 1) final withholding tax; and 2) creditable withholding tax.

10. An individual earning from the practice of his profession or who engages in trade or business files his income tax return and pays his income tax four (4) times during a single taxable year .

16. Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income due from the payee on the said income. [1st sentence, 1st par., Sec. 2.57 (A),

Quarterly returns are required to be filed for the first three quarters, then an annual income tax return is filed covering the total taxable income for the whole of the previous calendar year.

11. The purpose of the above four (4) times a year requirement is to make available sufficient funds to meet the budgetary requirements, on a quarterly basis thereby increasing government liquidity. It also eases hardships on the part of individuals who are required to make this four time return. Thus, the taxpayer does not have to raise large sums of money in order to pay the tax.

12. An individual earning purely compensation income files only one annual income tax return covering the total taxable compensation income for the whole of the previous calendar year.

13. Under the withholding tax system, taxes imposed or prescribed by the NIRC of 1997 are to be deducted and withheld by the payors from payments made to payees for the former to pay directly to the Bureau of Internal

Rev. Regs. No. 2-98]

The liability for payment of the tax rests primarily on the payor or the withholding agent.. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor withholding agent. The payee is not required to file an income tax return for the particular income.

17. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due from the payee on the said income. The income recipient is still required to file an income tax return and/or pay the difference between the tax withheld and the tax due on the income . [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]

18. The two kinds of creditable withholding taxes are (a) taxes withheld on income payments covered by the expanded withholding tax; and (b) taxes withheld on compensation income.

53

19. Payments to the following are exempt from the requirement of withholding or when no withholding taxes required: a. National Government and its instrumentalities including provincial, city, or municipal governments; b. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: 1) Sales of real property by a corporation which is registered with and certified by the HLURB or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000.00 in Metro Manila and other highly urbanized areas and P150,000.00 in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB; 2) Corporations registered with the Board of Investments and enjoying exemptions from income under the Omnibus Investment Code of 1997; 3) Corporations exempt from income tax under Sec. 30, of the Tax Code, like the SSS, GSIS, the PCSO, etc. However, income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)

20. For tax amnesty purposes, the withholding agent is not a taxpayer. He is made to pay the tax where he fails to withhold as a penalty and not because the tax is due from him. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor case)

PENALTIES, INTERESTS AND SURCHARGES 1. Surtaxes or surcharges, also known as the civil penalties, are the amounts imposed in addition to the tax required. They are in the nature of penalties and shall be collected at the same time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of 1997]

2. What are the two (2) kinds of civil penalties ? SUGGESTED ANSWER: a. the 25% surcharge for late filing or late payment [Sec. 248 (A), NIRC of 1997] (also known as the delinquency surcharge), and b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.]

3.

Define deficiency income tax.

SUGGESTED ANSWER: Deficiency income tax is the amount by which the tax imposed under the NIRC of 1997 exceeds the amount shown as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of 1997]

4.

Deficiency interest, defined.

The interest assessed and collected on any unpaid amount of tax at the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]

5. Delinquency interest, defined. The interest assessed and collected on the unpaid amount until fully paid where there is failure on the part of the taxpayer to pay the amount die on any return required to be filed; or the amount of the tax due for which no return is required; or a deficiency tax, or any surcharge or interest thereon, on the date appearing in the notice and demand by the Commissioner of Internal Revenue. [Sec.249 (c), NIRC of 1997] 6. After resolving the issues the BIR Commissioner reduced the assessment. Was it proper to impose delinquency interest despite the reduction of the assessment ? Why ? SUGGESTED ANSWER: Yes. The intention of the law is to discourage delay in the payment of taxes due to the State and in this sense the surcharge and interest charged are not penal but compensatory in nature – they are compensation to the State for the delay in payment, or for the concomitant tuse of the funds by the taxpayer beyond the date he is supposed to have paid them to the State. (Bank of the Philippine Islands v. Commissioner of Revenue, G. R. No. 137002, July 27, 2006)

Internal

7. Compromise penalty is the amount agreed upon between the taxpayer and

54 the Government to be paid as a penalty in cases of a compromise.

8. As a result of divergent rulings on whether it is subject to tax or not, the taxpayer was not able to pay his taxes on time. Imposed surcharges and interests for such delay, the taxpayer not invokes good faith with the BIR countering by saying that good faith is not a valid defense for violation of a special law. Furthermore, the BIR further raises the defense that the government is not bound by the errors of its agents. Who is correct ? SUGGESTED ANSWER: The taxpayer is correct. The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax, are sufficient justification to delete the imposition of surcharges. (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No. 166786, September 11, 2006)

REPUBLIC ACT NO. 1125, CREATING THE COURT OF TAX APPEALS INCLUDING JURISDICTION OF THE CTA, AS AMENDED COURT OF GENERAL

TAX

APPEALS,

IN

1. Discuss the role of judiciary in taxation. SUGGESTED

the

ANSWER: The role of the judiciary is to be the sympathetic or vigilant court which would check injustices or abuses of the legislative and administrative agents of the State in their exercise of the power of taxation.

2. What is the nature and composition of the Court of Tax Appeals ? SUGGESTED ANSWER: The Court of Tax Appeals is the special tax court created under Republic Act No. 1125, as amended, and is composed of a Presiding Justice and eight (8) Associate Justices, organized into three (3) divisions.

3. What are the purposes for the creation of the Court of Tax Appeals ? SUGGESTED ANSWER: a. To prevent delay in the disposition of tax cases by the then Courts of First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and b. To have a body with special knowledge which ordinary Judges of the then Courts of First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)

4. Appeals.

Jurisdiction of the Court of Tax

“a. Exclusive appellate jurisdiction to review by appeal, as herein provided: 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’; (DIVISION) 2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds or internal revenue taxes, fees or other charges, penalties in relation thereto, or other matter 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; (The inaction on refunds in two years from the time tax was paid. Thus, if the prescriptive period of two years is about to expire, the taxpayer should interpose a petition for review with the CTA – DIVISION) 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; (If original DIVISION; if appellate EN BANC) 4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or

55 other laws administered by the Bureau of Customs; (DIVISION) 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 of assessment appeals; (EN BANC) 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; (This has reference to forfeiture cases where the decision is to release the seized articles – DIVISION) 7. Decisions of the Secretary of Trade and Industry, in 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. (DIVISION) b. Jurisdiction over cases involving criminal offenses as herein provided: 1. Exclusive original jurisdiction over all criminal cases arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties claimed, is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the civil action will be recognized. 2. Exclusive appellate jurisdiction in criminal offenses: a) Over appeals from the judgments, resolutions or orders of the Regional

Trial Courts in tax cases originally decided by them, in their respective territorial jurisdiction. b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. c. Jurisdiction over tax collection cases: 1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court. 2. Exclusive appellate jurisdiction in tax collection cases: a) Over appeals from judgments, resolutions, or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.” (Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282, emphasis and words in parentheses supplied)

The petition for review to be filed with the CTA en banc as the mode for appealing a decision, resolution, or order of the CTA Division, under Section 18 of Republic Act No. 1125, as amended, is not a totally new remedy, unique to the CTA, with a special application or use therein. To the contrary, the CTA merely adopts the procedure for petitions for review and appeals long established and practiced in other Philippine courts. Accordingly, doctrines, principles, rules, and precedents laid down in jurisprudence by this Court as regards petitions for review and appeals in courts of general jurisdiction should likewise bind the CTA, and it cannot depart therefrom. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

56

5. It is the Regional Trial Court that has jurisdiction to rule upon the constitutionality of a tax law or a regulation issued by the taxing authorities. Where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function, the regular courts have jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of judicial power, which includes the authority of the courts to determine in an appropriate action the validity of the acts of the political departments. Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. (British American Tobacco v. Camacho et al., G. R. No. 163583, August 20, 2008 with an intervenor)

NOTES AND COMMENTS: The above doctrine supersedes Asia International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007 which ruled that it is the Court of Tax Appeals that has jurisdiction relative to matters involving the constitutionality of regulations issued by the BIR. The reason was that this falls under the concept of decisions of the BIR Commissioner on “other matter” arising under the provisions of laws administered by the Commission. Issuance of revenue regulations are authorized under the NIRC. British American Tobacco reversed Asia International Auctioneers upon the concept of the judiciary’s “expanded power.”

6. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision of the Commissioner of Customs: a. Decisions of the Secretary of Trade and Industry or the Secretary of Agriculture in

anti-dumping and countervailing duty cases are appealable to the Court of Tax Appeals within thirty (30) days from receipt of such decisions. b. In case of automatic review by the Secretary of Finance in seizure or forfeiture cases where the value of the importation exceeds P5 million or where the decision of the Collector of Customs which fully or partially releases the shipment seized is affirmed by the Commissioner of Customs. c. In case of automatic review by the Secretary of Finance of a decision of a Collector of Customs acting favorably upon a customs protest.

ASSESSMENT OF REVENUE TAXES

INTERNAL

1. Outline of tax remedies of a taxpayer and the government relative to ASSESSMENT of internal revenue taxes. a. The taxpayer files his tax return. b. A Letter of Authority is issued authorizing BIR examiner to audit or examine the tax return and determines whether the full and complete taxes have been paid. c. If the examiner is satisfied that the tax return is truly reflective of the taxable transaction and all taxes have been paid, the process ends. However, if the examiner is not satisfied that the tax return is truly reflective of the taxable transaction and that the taxes have not been fully paid, a Notice of Informal Conference is issued inviting the taxpayer to explain why he should not be subject to additional taxes. d. If the taxpayer attends the informal conference and the examiner is satisfied with the explanation of the taxpayer, the process is again ended. If the taxpayer ignores the invitation to the informal conference, or if the examiner is not satisfied with taxpayer’s explanation,, and he believes that proper taxes should be assessed, the Commissioner of Internal Revenue or his duly authorized representative shall then notify the taxpayer of the findings in the form of a preassessment notice. The pre-assessment notice requires the taxpayer to explain within fifteen (15) days from receipt why no notice of assessment and letter of demand for additional taxes should be directed to him. e. If the Commissioner is satisfied with the explanation of the taxpayer, then the process is again ended.

57 If the taxpayer ignores the preassessment notice by not responding or his explanations are not accepted by the Commissioner, then a notice of assessment and a letter of demand is issued. The notice of assessment must be issued by the Commissioner to the taxpayer within a period of three (3) years from the time the tax return was filed or should have been filed whichever is the later of the two events. Where the taxpayer did not file a tax return or where the tax return filed is false or fraudulent, then the Commissioner has a period of ten (10) years from discovery of the failure to file a tax return or from discovery of the fraud within which to issue an assessment notice. The running of the above prescriptive periods may however be suspended under certain instances. The notice of assessment must be issued within the prescriptive period and must contain the facts, law and jurisprudence relied upon by the Commissioner. Otherwise it would not be valid. f. The taxpayer should then file an administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment notice. The taxpayer could not immediately interpose an appeal to the Court of Tax Appeals because there is no decision yet of the Commissioner that could be the subject of a review. To be valid the administrative protest must be filed within the prescriptive period, must show the error of the Bureau of Internal Revenue and the correct computations supported by a statement of facts, and the law and jurisprudence relied upon by the taxpayer. There is no need to pay under protest. If the protest was not seasonably filed the assessment becomes final and collectible and the Bureau of Internal Revenue could use its administrative and judicial remedies in collecting the tax. g. Within sixty (60) days from filing of the protest, all relevant supporting documents shall be submitted, otherwise the assessment shall become final and collectible and the BIR could use its administrative and judicial remedies to collect the tax. Once an assessment has become final and collectible, not even the BIR Commissioner could change the same. Thus, the taxpayer could not pay the tax, then apply for a refund, and if denied appeal the same to the Court of Tax Appeals.

h. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from the submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the adverse decision, or from the lapse of the one hundred eighty (180-) day period, with an application for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal. If the taxpayer fails to so appeal, the denial of the Commissioner or the inaction of the Commissioner would result to the notice of assessment becoming final and collectible and the BIR could then utilize its administrative and judicial remedies to collect the tax. i. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. The Court of Tax Appeals, has a period of twelve (12) months from submission of the case for decision within which to decide. j. If the decision of the Court of Tax Appeals en banc affirms the denial of the protest by the Commissioner or the assessment in case of failure by the Commissioner to decide the taxpayer must file a petition for review on certiorari with the Supreme Court within fifteen (15) days from notice of the judgment on questions of law. An extension of thirty (30) days may for justifiable reasons be granted. If the taxpayer does not so appeal, the decision of the Court of Tax Appeals would become final and this has the effect of making the assessment also final and collectible. The BIR could then use its administrative and judicial remedies to collect the tax.

2. The word assessment when used in connection with taxation, may have more than one meaning. More commonly the word “assessment” means the official valuation of a taxpayer’s property for purpose of taxation. The above definition of assessment finds application under tariff and customs taxation as well as local government taxation. For real property taxation, there may be a special meaning to the burdens that are imposed upon real properties that have been benefited by a public works expenditure of a local government. It is sometimes called a

58 special

assessment

or

a

special

levy.

(Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

For internal revenue taxation assessment as laying a tax. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. (Ibid.)

3. An assessment is a notice duly sent to the taxpayer which is deemed made only when the BIR releases, mails or sends such notice to the taxpayer. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

4. Self-assessed tax, defined. A tax that the taxpayer himself assesses or computes and pays to the taxing authority. It is a tax that self-assessed by the taxpayer without the intervention of an assessment by the tax authority to create the tax liability. The Tax Code follows the pay-as-you-file system of taxation under which the taxpayer computes his own tax liability, prepares the return, and pays the tax as he files the return. The payas-you-file system is a self-assessing tax return. Internal revenue taxes are self-assessing. (Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case)

A clear example of a self-assessed tax is the annual income tax, which the taxpayer himself computes and pays without the intervention of any assessment by the BIR. The annual income tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or may not investigate or audit the annual income tax return filed by the taxpayer. The taxpayer’s liability for the income tax does not depend on whether or not the BIR conducts such subsequent investigation or audit. However, if the taxing authority is first required to investigate, and after such investigation to issue the tax assessment that creates the tax liability, then the tax is no longer self-assessed. (Ibid.)

5. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make or amend a tax return from his own knowledge or obtained through testimony or otherwise. Thus, the Commissioner of Internal Revenue investigates ”any circumstance which led him to

believe that the taxpayer had taxable income larger than that reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer, he may take the testimony of third parties; he may examine and subpoena, if necessary, traders’ and brokers’ accounts and books and the taxpayer’s books of accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any particular proof that is available in the circumstances of the particular situation. (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005)

6. General rule: When the Commissioner of Internal Revenue may rely on estimates. “The rule is that in the absence of accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner (Commissioner of Internal Revenue) is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof.” (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005)

“However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.” (Ibid.)

7. Meaning of "best evidence obtainable" under Sec. 6 (B), NIRC of 1997. This means that the original documents must be produced. If it could not be produced, secondary evidence must be adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No. 47172, September 30, 1998)

8. The following are the general methods developed by the Bureau of Internal Revenue for reconstructing a taxpayer’s income where the records do not show the true income or where no return was filed or what was filed was a false and fraudulent return (a) Percentage method; (b) Net worth method.; (c) Bank deposit method; (d) Cash expenditure method; (e) Unit and value method; (f) Third party information or access to records method;

59 (g) Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

9. Third party information or access to records method. The BIR may require third parties, public or private to supply information to the BIR, and thus, “obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities including the Bangko Sentral ng Pilipinas and government-owned or –controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names , addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters or multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members; xxx” [Sec. 5 (B), NIRC of 1997)

10.

A pre-assessment notice is a

letter sent by the Bureau of Internal Revenue to a taxpayer asking him to explain within a period of fifteen (15) days from receipt why he should not be the subject of an assessment notice. It is part of the due process rights of a taxpayer. As a general rule, the BIR could not issue an assessment notice without first issuing a preassessment notice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-assessment notice, and for him to explain why he should not be the subject of an assessment notice.

11. Instances where a preassessment notice is not required before a notice of assessment is sent to the taxpayer. a. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or b. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or c. When a taxpayer opted to claim a refund or tax credit of excess creditable

withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding table year; or d. When the excess tax due on excisable articles has not been paid; or e. When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, trade or transferred to non-exempt persons. (Sec. 228, NIRC of 1997)

12. Prescriptive periods for making assessments of internal revenue taxes. a. Three (3) years from the last day within which to file a return or when the return was actually filed, whichever is later (Sec. 203, NIRC of 1997). The CIR has three (3) years from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without an assessment. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]

b. ten years from discovery of the failure to file the tax return or discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997 [ ; or c. within the period agreed upon between the government and the taxpayer where there is a waiver of the prescriptive period for assessment (Sec. 222 (b), NIRC of 1997).

13. Purpose of period of limitations in taxation. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004], as well as their assessments.

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would

60 have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]

This mandate governs the question of prescription of the government’s right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.

(Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 225)

14. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will not longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)

Laws on prescription should be liberally construed in favor of the taxpayer. Reason: for the purpose of safeguarding taxpayers from an unreasonable examination, investigation or assessment, our tax laws provide a statute of limitation on the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection, As a corollary, the exceptions to the law on prescription should perforce be strictly construed. [Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852,

December 16, 2004 citing Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546]

The prescriptive period was precisely intended to give the taxpayers peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)

15. A “jeopardy assessment” is a delinquency tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000) Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000] 16. Requisites for Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery.

17. What are the requirements for the validity of a formal letter of demand and assessment notice ? SUGGESTED ANSWER: a. There must have been previously issued a pre-assessment notice until excepted; b. It must have been issued prior to the prescriptive period; and c. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99)

61

18. What are the reasons for presumption of correctness of assessments ? SUGGESTED ANSWER: a. Lifeblood theory b. Presumption of

regularity

(Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the performance of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA 397)

have

c. The likelihood that the taxpayer will access to the relevant information

[Commissioner of Internal Revenue, supra citing United States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United States Supreme Court on November 19, 1973]

d. The desirability of bolstering the record-keeping requirements of the NIRC. (Ibid.)

19. Give instances where prima facie correctness of a tax assessment does not apply. SUGGESTED ANSWER: The “prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a “naked assessment” i.e., without any foundation character, the determination of the tax due is without rational basis.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a

situation, “the determination of the Commissioner contained in a deficiency notice disappears.” [Commissioner of Internal Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] “Hence, the determination by the CTA

must rest on all the evidence introduced and its ultimate determination must find support in credible evidence.” [Commissioner of Internal Revenue, supra]

20. What are the instances that suspends the running of the prescriptive periods (Statute of Limitations) within which to make an assessment and the beginning of distraint or levy or of a proceeding in court for the collection, in respect of any tax deficiencies? SUGGESTED ANSWER: a. When the Commissioner is prohibited from making the assessment, or beginning distraint, or levy or proceeding in court and for sixty (60) days thereafter;

b. When the taxpayer requests for and is granted a reinvestigation by the commissioner; c. When the taxpayer could not be located in the address given by him in the return filed upon which the tax is being assessed or collected; d. When the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and e. When the taxpayer is out of the Philippines. NOTES AND COMMENTS: The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) that the waiver of the period for assessment must be in writing and have the written consent of the BIR Commissioner is still doctrinal because of the provisions of Sec. 223, NIRC of 1997 which provides for the suspension of the prescriptive period:

21. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the following procedures should be followed for a valid waiver of the prescriptive period for an assessment: a. The waiver must be in the proper form; b. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed. c. The following revenue officials are authorized to sign the waiver. A. In the National Office

62 xxxx 3. Commissioner involving more than P1M In the Regional Offices

For tax cases B.

1. The Revenue District Officer with respect to tax cases still pending investigation and the period to assess is about to prescribe regardless of amount. xxxx d. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy. d. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. (Renumbering and emphasis supplied.) If the above are not followed there is no valid waiver and prescription would run. (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 228-229)

22. The procedures in RMO No. 20-90 are NOT merely directory and that the execution of a waiver is a renunciation of a taxpayer’s right to invoke prescription. RMO No. 20-90 must be strictly followed. A waiver of the statute of limitations under the NIRC, to a certain extent being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed. The waiver of the statute of limitations does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of the document is equivocal. Thus a waiver becomes unlimited in time, and invalid, because it did not specify a definite date, agreed upon between the BIR and the taxpayer, within which the former may assess and collect taxes. It also would have no binding effect on the taxpayer if there was no consent by the Commissioner. On this basis, no implied consent

can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality. (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 229 in turn citing Id. at 229, citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 115712, February 25, 1999, 303 SCRA 614, 620-622.)

23. BIR cannot rely on its invocation of the rule that the government cannot be estopped by the mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law. To the Government, its tax officers are obliged to act promptly in the making of assessment so that taxpayers, after the lapse of the period of prescription, would have a feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of a possible opportunity to harass even law-abiding businessmen. Without such legal defense, taxpayers would be open season to harassment by unscrupulous tax agents. [Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Republic of the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960)]

24. The signatures of both the Commissioner and the taxpayer, are required for a waiver of the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not suspend the prescriptive period. [Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)]

47. The act of requesting a reinvestigation alone does not suspend the running of the prescriptive period. The request for reinvestigation must be granted by the CIR. The Supreme Court declared that the burden of proof that the request for reinvestigation had been actually granted shall be on the Commissioner of Internal Revenue. Such grant may be expressed in its communications with the taxpayer or implied from the action of the Commissioner or his

63 authorized representative in response to the request for reinvestigation. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]

PROTESTING INTERNAL REVENUE TAX ASSESSMENTS 1. What is the presumption that flows from a taxpayer’s failure to protest an assessment ? SUGGESTED ANSWER: “Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.” (Commissioner of Internal Revenue v. Bank of Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G. R. No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted)

2. What are the two ways of protesting an assessment notice for an internal revenue tax ? Alternatively, what are the two types of protests ? Explain briefly. SUGGESTED ANSWER: a. Request for reconsideration which refers to a plea for re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. b. Request for reinvestigation which refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85)

3. What is that type of protest that suspends the running of the statute of limitations for the beginning of distraint or levy or a proceeding in court for collection ? Why ? SUGGESTED ANSWER: It is that type of protest “when the taxpayer requests for a

reinvestigation which is granted by the Commissioner” (Sec. 223, NIRC of 1997), that suspends the running of the statute of limitations for collection of the tax. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of 1997) When a taxpayer

demands a reinvestigation, the time employed in reinvestigation should be deducted from the total period of limitation. [Commissioner of Internal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]

Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Bank of Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231)

4. What are the requirements for the validity of a taxpayer’s protest ? SUGGESTED ANSWER: a. It must be filed within the reglementary period of thirty (30) days from receipt of the notice of assessment. b. The taxpayer must not only show the errors of the Bureau of Internal Revenue but also the correct computation through 1) A statement of the facts, the applicable law, rules and regulations, or jurisprudence on which the taxpayer’s protest is based, 2) If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. (Sec. 3.1.5, Rev. Regs. 12-99) c. Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents. [4th par., Sec. 228 (e), NIRC of 1997]

64

5. “Relevant supporting documents,” defined. The term “relevant supporting documents” should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. (Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., G. R. 172045-46, June 16, 2009)

JUDICIAL REMEDIES INVOLVING PROTESTED ASSESSMENTS 1. Acts of BIR Commissioner that may be considered as denial of a protest which serve as basis for appeal to the Court of Tax Appeals. a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)

b. An indication to the taxpayer by the Commissioner “in clear and unequivocal language” of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the appeal is the final decision not the warrant of distraint. (Ibid.) c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)

d. A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)

e. Final notice before seizure considered as commissioner’s decision of taxpayer’s request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only response received: its content and tenor supports the theory that it was

the CIR’s final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that the taxpayer was being given “this LAST OPPORTUNITY” to pay; otherwise, its properties would be subjected to distraint and levy.

2. The taxpayer seasonably protested the assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxes subject of the protest. As counsel what advice shall you give the taxpayer. Explain briefly your answer. SUGGESTED ANSWER: The taxpayer should appeal, by way of a petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but on other matter arising under the provisions of the National Internal Revenue Code. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered a final decision on a disputed assessment. To be a valid decision on a disputed assessment, the decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not complied with by the mere issuance of a warrant of distraint and levy. (Commissioner of Internal Revenue v. Union Shipping Corp., 185 SCRA 547)

Furthermore, a motion for the suspension of the collection of the tax may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) because the collection of the tax may jeopardize the interest of the taxpayer.

3. As a general rule, there must always be a decision of the Commissioner of Internal Revenue or Commissioner of Customs before the Court of Tax Appeals, would have jurisdiction. If there is no such decision, the petition would be dismissed for lack of jurisdiction

65 unless the case falls under any of the following exceptions.

4. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision yet by the Commissioner of Internal Revenue: a. Where the Commissioner has not acted on the disputed assessment after a period of 180 days from submission of complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)

b. Where the Commissioner has not acted on an application for refund or credit and the two year period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid. It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after the Commissioner, would have, at his personal convenience, given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.)

5. The characteristic of a BIR denial of a protest such as would enable the taxpayer to appeal the same to the Court of Tax Appeals. The Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment. On the basis of his statement indubitably showing that the Commissioner’s communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. (Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007)

COLLECTION OF REVENUE TAXES

INTERNAL

1. General rule: Collection of taxes is imprescriptible. While this may be so, statutes prescription,

may

provide

for

periods

of

2. Why is the collection of taxes imprescriptible ? SUGGESTED ANSWER: a. As a general rule, revenue laws are not intended to be liberally construed, and exemptions are not given retroactive application, considering that taxes are the lifeblood of the government and in Holmes’ memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. (Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutes may provide for prescriptive periods for the collection of particular kinds of taxes.

b. Tax laws, unlike remedial laws, are not to be applied retroactively. Revenue laws are substantive laws and their application must not be equated with remedial laws. (Acosta, supra)

3. What is the prescriptive period for collecting internal revenue taxes ? SUGGESTED ANSWER: There are four (4) prescriptive periods for the collection of an internal revenue tax: a. Collection upon a false or fraudulent return or no return without assessment. In case of a false or fraudulent return with the intent to evade tax or of failure to file a return, “a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission.” [Sec. 222 (a), NIRC of 1997]

b. Collection upon a false or fraudulent return or no return with assessment. Any internal revenue tax which has been assessed (because the return is false or fraudulent with intent to evade tax or of failure to fail a return), within a period of ten (10) years from discovery of the falsity, fraud or omission “may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax.” [Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied]

c. Collection upon an extended assessment. Where a tax has been assessed with the period agreed upon between the Commissioner and the taxpayer in writing (which should initially be within three (3) years from the time the return was filed or should have been

66 filed), or any extensions before the expiration of the period agreed upon, the tax “may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon.” [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis supplied]

d. Collection upon a return that is not false or fraudulent, or where the assessment is not an extended assessment. “Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period; Provided, That in case where a return is filed beyond the period prescribed by law, the three (3) year period shall be computed from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered filed on such last day.” (Sec. 203, NIRC of 1997, emphasis supplied)

When the BIR validly issues an assessment within the three (3)-year period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R. No. 139736, 17 October 2005, 473 SCRA 205, 222-223]

NOTES AND COMMENTS: a. Both the former Sec. 269, NIRC of 1977 and Sec.222 of NIRC of 1997 do not refer to a “regular return.” It is clear that in enacting Sec. 222, entitled “Exceptions as to the period of limitation of assessment and collection of taxes,” the NIRC of 1997 has eliminated sub-paragraph c of the former Sec. 269 of the NIRC, also entitled “Exceptions as to the period of limitation of assessment and collection of taxes.” Said Sec. 269 (c), reads “Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.”

A perusal of Sec. 222 of the NIRC is clear that it covers only three scenarios only. 1) No assessment was made upon a false or fraudulent return or omission to file a return; 2) an assessment was made upon a false or fraudulent return or omission to file a return; and 3) an extended assessment issued within a period agreed upon by the Commissioner and the taxpayer. The same scenarios are those referred to in the former Sec. 269 which provided for a prescriptive period for collection of three (3) years. It is clear therefore that neither Sec. 222 nor the former Sec. 269 provide for an instance where the assessment was made upon a “regular return” or one that is not false or fraudulent, or that there was an agreement to extend the period for assessment. Resort should therefore be made to the three (3) year period referred to in Sec. 203 of the NIRC of 1997 which reads, “Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes x x x “ (paraphrasing and emphasis supplied)

4. What is a compromise ? SUGGESTED ANSWER: A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code)

A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001)

5. What tax cases may be the subject of a compromise ? SUGGESTED ANSWER: The following cases may, upon taxpayer’s compliance with the basis for compromise, be the subject matter of compromise settlement: a. Delinquent accounts; b. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection

67 Service, Enforcement Service and other offices in the National Office; c. Civil tax cases being disputed before the courts; d. Collection cases filed in courts; e. Criminal violations, other than those already filed in court, or those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)

6. What tax cases could not be the subject of compromise ? SUGGESTED ANSWER: a. Withholding tax cases unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold.; b. Criminal tax fraud cases, confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative; c. Criminal violations already filed in court; d. Delinquent accounts with duly approved schedule of installment payments; e. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis; f. Cases which become final and executory after final judgment of a court where compromise is requested on the ground of doubtful validity of the assessment; and g. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)

7. When may the Commissioner of Internal Revenue compromise the payment of any internal revenue tax ? Alternatively, what are the grounds for a compromise, and what are the amounts for which a compromise may be entered into ? SUGGESTED ANSWER: a. A reasonable doubt as to the validity of the claim against the taxpayer exists provided that the minimum compromise entered into is equivalent to forty percent (40%) of the basic tax; or b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed

tax provided that the minimum compromise entered into is equivalent to ten percent (10%) of the basic assessed tax In the above instances the Commissioner is allowed to enter into a compromise only if the basic tax involved does not exceed One million pesos (P1,000,000.00), and the settlement offered is not less than the prescribed percentages. [Sec. 204 (A), NIRC of 1997] In instances where the Commissioner is not authorized, the compromise shall be subject to the approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy Commissioners.

8. When is the Commissioner of Internal Revenue authorized to abate or cancel a tax liability ?: SUGGESTED ANSWER: a. The tax or any portion thereof appears to be unjustly or excessively assessed; or b. The administration and collection costs involved do not justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997]

9. The collection of a tax may not be suspended. Only the Court of Tax Appeals may issue an order suspending the collection of a tax.

10. As a general rule, “No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge.” (Sec. 218, NIRC) “No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.” (Sec. 11, Rep. Act No. 1125, as amended by Sec. 9, Rep. Act No. 9282 )

68 The Supreme Court may enjoin the collection of taxes under its general judicial power but it should be apparent that the source of the power is not statutory but constitutional.

11. What is the procedure for suspension of collection of taxes ? SUGGESTED ANSWER: Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals. The motion for suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005)

REFUND OF INTERNAL REVENUE TAXES 1. What are the grounds for refund or credit of internal revenue taxes ? SUGGESTED ANSWER: The grounds for refund or credit or internal revenue taxes are the following: a. The tax was illegally collected. There is no law that authorizes the collection of the tax. b. The tax was excessively collected. There is a law that authorizes the collection of a tax but the tax collected was more than what the law allows. c. The tax was paid through a mistaken belief that the taxpayer should pay the tax (solution indebeti)

2. What are the three (3) conditions for the grant of a claim for refund of creditable withholding tax ? SUGGESTED ANSWER: a. The claim is filed with the Commissioner of Internal Revenue within the twoyear period from the date of the payment of the tax.

b. It is shown on the return of the recipient that the income payment received was declared as part of the gross income; and c. The fact of withholding is established by a copy of a statement duly issued by the payee showing the amount paid and the amount of tax withheld therefrom. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007)

NOTES AND COMMENTS: a. Proof of fact of withholding. “Sec. 10. Claim for tax credit or refund. – (a) Claims for Tax Credit or Refund of Income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received has been declared as part of the gross income and the fact of withholding is established by a copy of the Withholding Tax Statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld therefrom xxx” (Rev. Regs. No. 6-85, as amended) The document which may be accepted as evidence of the third condition, that is, the fact of withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007)

3. What should be established by a taxpayer for the grant of a tax refund ? Why ? SUGGESTED ANSWER: A taxpayer needs to establish not only that the refund is justified under the law, but also the correct amount that should be refunded. If the latter requisite cannot be ascertained with particularity, there is cause to deny the refund, or allow it only to the extent of the sum that is actually proven as due. Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the person claiming the exemption. The burden in proving the claim for refund necessarily falls on the taxpayer. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006)

4. What is The legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected ?

69 SUGGESTED ANSWER: Filing of a suit or proceeding with the Court of Tax Appeals a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause that may arise after payment (2nd par., Sec. 229, NIRC of 1997), or b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125)

5. The two (2) year period and the thirty (30) day period should be applied on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.)

89 SCRA 586 (1979)]. It is an ancient principle that no one, not even the state, shall enrich oneself at the expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes. (Ibid.)

56. What are the reasons for requiring the filing of an administrative application for refund or credit with the

8. Why is it necessary to file an administrative claim for refund with the BIR, before filing a case with the Court of Tax Appeals ? BSUGGESTED

6. Where the taxpayer is a corporation the two year prescriptive period from “date of payment” for refund of income taxes should be the date when the corporation filed its final adjustment return not on the date when the taxes were paid on a quarterly basis.

(Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)

It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)

a.

a. To afford the Commissioner an opportunity to correct his errors or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA79)

7. What is solutio indebeti as applied to tax cases ? SUGGESTED ANSWER: Under the principle of solutio indebiti provided in Art. 2154, Civil Code, “If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.” The BIR received something “when there [was] no right to demand it,” and thus, it has the obligation to return it. [State Land Investment Corporation v. Commissioner of Internal Revenue, G. R. No. 171956, January 18, 2008citing Citibank, N. A. v. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 107434, October 10, 1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v. Mathay, Sr.,

b. To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue

70 available for expenditures.

SUGGESTED ANSWER: Yes. The failure to first file a written claim for refund or credit is not fatal to a petition for review involving a disputed assessment where an assessment was disputed but the protest was

denied by the Bureau of Internal Revenue. To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed assessment and require him to file a claim for a refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Commissioner would certainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to result in absurdities. (vda. de San Agustin., etc., v.

9. As a general rule the filing of an application for refund or credit with the Bureau of Internal Revenue is an administrative precondition before a suit may be filed with the Court of Tax Appeals ?

SUGGESTED ANSWER:

Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector of Internal Revenue, 4 SCRA 279)

NOTE: Reconciliation between above two numbers (8 and 9). An application for refund or credit under Sec. 229 of the NIRC of 1997 is required where the case filed before the CTA is a refund case, which is not premised upon a disputed assessment. There is no need for a prior application for refund or credit, if the refund is merely a consequence of the resolution of the BIR’s denial of a protested assessment.

71

Who could apply for a tax refund or credit ?

10. Who could apply for a refund or credit ? SUGGESTED ANSWER: The person who paid the tax may apply for a refund or credit. A withholding tax agent may also apply for a refund. In a sense, he is also a taxpayer because the tax may be collected from him if he does not withhold.

11. What is the nature of the taxpayer’s remedy of either to ask for a refund of excess tax payments or to apply the same in payment of succeeding taxable periods’ taxes ? SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative and the choice of one precludes the other. Since the Bank has chosen the tax credit approach it cannot anymore avail of the tax refund. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999) NOTES AND COMMENTS: a. The choice, is given to the taxpayer, whether to claim for refund under Sec. 76 or have its excess taxes applied as tax credit for the succeeding taxable year, such election is not final. Prior verification and approval by the Commissioner of Internal Revenue is required. The availment of the remedy of tax credit is not absolute and mandatory. It does not confer an absolute right on the part of the taxpayer to avail of the tax credit scheme if it so chooses. Neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)

12. What is the “irrevocability rule” in claims for refund and what is the rationale behind this ? SUGGESTED ANSWER: A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. [Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)]

This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The phrase “such option shall be considered irrevocable for that taxable period” means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund. (Systra Philippines, Inc., supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE CODE, Seventh Edition, 2000, p. 430)

13. In the year 2000 Systra derived excess tax credits and exercised the option to carry them over as tax credits for the next taxable year. However, the tax due for the next taxable year is lower than excess tax credits. It now applies for a refund of the unapplied tax credits. May its refund be granted ? If the refund is denied, does Systra lose the unapplied tax credits ? Explain briefly your answer. SUGGESTED ANSWER: Systra’s claim for refund should be denied. Once the carry

72 over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized Under Section 76 of the Tax Code, a claim for refund of such excess credits can no longer be made. The excess credits will only be applied “against income tax due for the taxable quarters of the succeeding taxable years.” Despite the denial of its claim for refund, Systra does not lose the unapplied tax credits. The amount will not be forfeited in favor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. (Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761)

Supposing in the above problem that Systra permanent ceased operations, what happens to the unapplied credits ? SUGGESTED ANSWER: 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. (Footnote no. 23, Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007) NOTES AND COMMENTS: The holding in State Land Investment Corporation v. Commissioner of Internal Revenue, G. R. No. 171956, January 18, 2008 that the taxpayer is entitled to a refund because during the succeeding year there was no tax due against which the excess tax credits may be applied is not doctrinal. This is so because it interpreted the provisions of then Sec. 69 of the NIRC, which did not provide for the “irrevocability rule” now contained in Sec. 76 of the NIRC of 1997.

14. A simultaneous filing of the application with the BIR for refund/credit and the institution of the court suit with the CTA is allowed. There is no need to wait for a BIR denial. REASONS: a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997); b. The doctrine that delay of the Commissioner in rendering decision does not extend the peremptory period fixed by the statute;

c. The law fixed the same period two years for filing a claim for refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period (thirty days from receipt of decision) for appealing to the court, thus clearly implying that the prior decision of the Commissioner is necessary to take cognizance of the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)

15. The grant of a refund is founded on the assumption that the tax return is valid, i.e. that the facts stated therein are true and correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would be virtually impossible to determine whether the proper taxes have been assessed and paid. After all, it is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)

However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil. 719; 326 SCRA 641 (2000), refund was granted, despite the failure to present the tax return, because other evidence was presented to prove that the overpaid taxes were not applied. (Ibid.)

16. Discuss the difference between tax refund and tax credit.. SUGGESTED ANSWER: There are unmistakable formal and practical differences between the two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer. On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. (Commissioner of Customs v. Philippine Phosphate

73 Fertilizer Corporation, G. R. No. 144440, September 1, 2004)

NOTES AND COMMENTS: It may be that there is no essential difference between a tax refund and a tax credit since both are moves of recovering taxes erroneously or illegally paid to the government. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)

17. A bank-trustee of employee trusts filed an application for the refund of taxes withheld on the interest incomes of the investments made of the funds of the employees’ trusts. Instead of presenting separate accounts for interest incomes made of these investments, the bank-trustee instead presented witness to establish that it would next to impossible to single out the specific transactions involving the employees’ trust funds from the totality of all interest income from its total investments. On the above basis will the application for refund prosper ? SUGGESTED ANSWER: No. The application for refund will not prosper. The bank-trustee needs to establish not only that the refund is justified under the law (which is so because incomes of employees’ trusts are tax exempt), but also the correct amount that should be refunded. Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the person or entity claiming the exemption. The burden in proving the amount to be refunded necessarily falls on the banktrustee, and there is an apparent failure to do so. A necessary consequence of the special exemption enjoyed alone by employees’ trusts would be a necessary segregation in the accounting of such income, interest or otherwise, earned from those trusts from that earned by the other clients of the bank-trustee. (Far East Bank and Trust Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2, 2006) The amounts that are the exempt earnings of the employee’s trust has not been shown as they have been commingled with the interest income of the other clients of the bank-trustee.

18. CTA Circular No. 1-95 clearly requires that photocopies of the receipts or invoices must be pre-marked and submitted to the CTA to verify the

correctness of the summary listing and the CPA certification. CTA Circular No. 1-95, issued on 25 January 1995, reads: “1. The party who desires to introduce as evidence such voluminous documents must present: (a) Summary containing the total amount/s of the tax account or tax paid for the period involved and a chronological or numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination and evaluation of the voluminous receipts and invoices. Such summary and certification must properly be identified by a competent witness from the accounting firm. 2. The method of individual presentation of each and every receipt or invoice or other documents for marking, identification and comparison with the originals thereof need not be done before the Court or the Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices and other documents covering the said accounts or payments must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party whenever he/she desires to check and verify the correctness of the summary and CPA certification. However, the originals of the said receipts, invoices or documents should be ready for verification and comparison in case doubt on the authenticity of the particular documents presented is raised during the hearing of the case.” (Emphasis supplied)

19. Manila Electric Company a grantee of a legislative franchise under Act No. 484, as amended by Republic Act No. 4159 and Presidential Decree No. 551,1[3] had been paying a 2% franchise tax based on its gross receipts, in lieu of all other taxes and assessments of whatever nature. Upon the effectivity of Executive Order No. 72 on February 10, 1987, however, respondent became subject to the payment of regular corporate income tax. For the last quarter ending December 31, 1987, respondent filed on April 15, 1988 its tentative income tax 1

74

reflecting a refundable amount of P101,897,741, but only P77,931,812 was applied as tax credit for the succeeding taxable year 1988. Acting on a yearly routinary Letter of Authority No. 0018064 NA dated June 27, 1988 issued by petitioner, directing the investigation of tax liabilities of respondent for taxable year 1987, an investigation was conducted by Revenue Officer Frederick Capitan which showed that respondent was liable for “1. deficiency income tax in the amount of P2,340,902.52; and 2. deficiency franchise tax in the amount of P2,838,335.84.” On April 17, 1989, respondent filed an amended final corporate Income Tax Return ending December 31, 1988 reflecting a refundable amount of P107,649,729. Respondent thus filed on March 30, 1990 a letter-claim for refund or credit in the amount of P107,649,729 representing overpaid income taxes for the years 1987 and 1988. Petitioner not having acted on its request, respondent filed on April 6, 1990 a judicial claim for refund or credit with the Court of Tax Appeals. It is gathered that respondent paid the deficiency franchise tax in the amount of P2,838,335.84. It protested the payment of the alleged deficiency income tax and claimed as an alternative remedy the deduction thereof from its claim for refund or credit. The Court of Tax Appeals granted the P107,649,729 claim for refund, or in the alternative for the BIR to issue a tax credit. Is the Court of Tax Appeals correct ? SUGGESTED ANSWER: Yes. Section 69 of the National Internal Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly tax payments made during a taxable year is not equal to the total tax due on the entire taxable income of that year as shown in its final adjustment return, the corporation has the option to either: (a) pay the excess tax still due, or (b) be refunded the excess amount paid. The returns submitted are “merely pre-audited which

consist mainly of checking mathematical accuracy of the figures in the return.” After such checking, the purpose of which being to “insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes,” (Revenue Memorandum Order No. 32-76 dated June 11, 1976) the refund or tax credit is granted. (Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007)

TARIFF AND CUSTOMS LAWS ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE TARIFF AND CUSTOMS CODE 1. When does importation begin, and why is it important to know whether importation has already begun or not ? SUGGESTED ANSWER: Importation begins when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. (Sec. 1202, TCCP) The jurisdiction of the Bureau of Customs to enforce the provisions of the TCCP including seizure and forfeiture also begins from the beginning of importation. Thus, the Bureau of Customs obtains jurisdiction over imported articles only after importation has begun.

2. When is importation deemed terminated and why is it important to know whether importation has already ended? SUGGESTED ANSWER: Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted. In case the articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP) The Bureau of Customs loses jurisdiction to enforce the TCCP and to make seizures and forfeitures after importation is deemed terminated.

3. The flexible tariff clause is a provision in the Tariff and Customs Code,

75 which implements the constitutionally delegated power to the Congress to further delegate to the President of the Philippines, in the interest of national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others.

4.

Customs

duties

defined.

Customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

5. Special customs duties are additional import duties imposed on specific kinds of imported articles under certain conditions. The special customs duties under the Tariff and Customs Code (TCCP) are the anti-dumping duty, the countervailing duty, the discriminatory duty, and the marking duty, and under the Safeguard Measures Act (SMA) additional tariffs as safeguard measures.

6. The special customs duties are imposed for the protection of consumers and manufacturers, as well as Philippine products. 7. Dumping duty is an additional special duty amounting to the difference between the export price and the normal value of such product, commodity or article (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999.”) imposed

on the importation of a product, commodity or article of commerce into the Philippines at less than its normal value when destined for domestic consumption in the exporting country which is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

8. When is the anti-dumping duty imposed ?

SUGGESTED ANSWER: The antidumping duty is imposed a. Where a product, commodity or article of commerce is exported into the Philippines at a price less than its normal value when destined for domestic consumption in the exporting country, b. and such exportation is causing or is threatening to cause material injury to a domestic industry, or materially retards the establishment of a domestic industry producing the like product. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

9. Normal value for purposes of imposing the anti-dumping duty is the comparable price at the date of sale of like product, commodity, or article in the ordinary course of trade when destined for consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

10. The imposing authority for the anti-dumping duty is the Secretary of Trade and Industry in the case of nonagricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “AntiDumping Act of 1999”]

11. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”] Thus,

the cabinet secretaries could not contravene the recommendation of the Tariff Commission. They could not impose the anti-dumping duty or any special customs duty without the favorable recommendation of the Tariff Commission.

12. In the determination of whether to impose the anti-dumping duty, the Tariff Commission, may consider among others, the effect of imposing an antidumping duty on the welfare of the consumers and/or the general public, and other related local industries. (Sec. 301 (a),

76 TCC, as amended by Rep. Act No. 8752, “AntiDumping Act of 1999”)

13. The amount of anti-dumping duty that may be imposed is the difference between the export price and the normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)

The anti-dumping duty shall be equal to the margin of dumping on such product, commodity or article thereafter imported to the Philippines under similar circumstances, in addition to ordinary duties, taxes and charges imposed by law on the imported product, commodity or article.

14. What are countervailing duties and when are they imposed ? SUGGESTED ANSWER: Countervailing duties are additional customs duties imposed on any product, commodity or article of commerce which is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product commodity or article, and the importation of such subsidized product, commodity, or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as amended by Section 1, R.A. No. 8751)

15. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of nonagricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)

16. The countervailing duty is equivalent to the value of the specific subsidy.

17. Marking duties are the additional customs duties imposed on foreign articles (or its containers if the article itself cannot be marked), not marked in any official language in the Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin. 18. The Commissioner of Customs imposes the marking duty. 19. The marking duty is equivalent to five percent (5%) ad valorem. 20. A discriminatory duty is a new and additional customs duty imposed upon articles wholly or in part the growth or product of, or imported in a vessel, of any foreign country which imposes, directly or indirectly, upon the disposition or transportation in transit through or re-exportation from such country of any article wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction, regulation or limitation which is not equally enforced upon like articles of every foreign country, or discriminates against the commerce of the Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition, in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. 21. The President of the Philippines imposes the discriminatory duties. 22. Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them. The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)

The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition.

77

23. Imposing authority for safeguard measures. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission.

24. Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports.

25. The basis of dutiable value of merchandise that is subject to ad valorem customs duties is the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding certain cost elements to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, and may include the following: a. Cost of containers and packing, b. Insurance, and c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135)

26. The above transaction value is the primary method of determining dutiable value. If the transaction value of the imported article could not be determined using the above, the following alternative methods should be used one after the other: a. b. c. d. e.

Transaction value of identical goods Transaction value of similar goods Deductive method Computed method Fallback method

27. How and to whom should claims for refund of customs duties be made ? SUGGESTED ANSWER: All claims for refund of duties shall be made in writing and forwarded to the Collector of Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same by the records of his Office, and if found to be correct and in

accordance with law, shall certify the same to the Commissioner of Customs with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct. (Sec. 1708, TCC)

28. What is mean by the term “entry” in Customs Law ? SUGGESTED ANSWER: It has a triple meaning. a. the documents filed at the Customs house; b. the submission and acceptance of the documents; and c. Customs declaration forms or customs entry forms required to be accomplished by passengers of incoming vessels or passenger planes as envisaged under Sec. 2505 of the TCCP (Failure to declare baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

29. A flight stewardess arrived from Singapore. Upon her arrival she was asked whether she has anything to declare. She answered none, and she submitted her “Customs Baggage Declaration Form” which she accomplished and signed with nothing or written on the space for items to be declared. When her hanger bag was examined some pieces of jewelry were found concealed within the lining of said bag. She was then convicted of violating of Sec. 3601 of the Tariff and Customs Code for unlawful importation which penalizes any person who shall fraudulently import or bring into the Philippines any article contrary to law. She now appeals claiming that lower court erred n convicting her under Sec. 3601 when the facts alleged both in the information and those shown by the prosecution constitute the offense under Sec. 2505 “Failure to Declare Baggage,” of which she was acquitted. Is she correct ? SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It merely provides, inter alia, the administrative remedies which can be

78 resorted to by the Bureau of Customs when seizing dutiable articles found the baggage of any person arriving in the Philippines which is not included in the accomplished baggage declaration submitted to the customs authorities, and the administrative penalties that such person must pay for the release of such goods if not imported contrary to law. Such administrative penalties are independent of the criminal liability for smuggling that may be imposed under Sec. 3601, and other provisions of the TCC which can only be determined after the appropriate criminal proceedings, prescinding from the outcome in any administrative case that may have been filed and disposed of by the customs authorities. Indeed the second paragraph of Sec. 2505 provides that nothing shall prevent the bringing of a criminal action against the offender for smuggling under Section 3601. (Jardeleza v. People, G. R. No. 165265, February 6, 2006)

aircraft enters the jurisdiction of the Philippines with intention to unload therein. b. When unlawful importation is complete. In the absence of a bona fide intent to make entry and pay duties when the prohibited article enters the Philippine territory. Importation is complete when the taxable, dutiable commodity is brought within the limits of the port of entry. Entry through a custom house is not the essence of the act. (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

30. Payment is not a defense in smuggling. “When upon trial for violation of this

Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

section, the defendant is shown to have possession of the article in question, possession shall be deemed sufficient evidence to authorize conviction, unless the defendant shall explain the possession to the satisfaction of the court: Provided, however, That payment of the tax due after apprehension shall not constitute a valid defense in any prosecution under this section.” (last par., Sec. 3601, TCC)

31. How committed ?

is

smuggling

SUGGESTED ANSWER: Smuggling is committed by any person who: a. fraudulently imports or brings into the country any article contrary to law; b. assists in so doing any article contrary to law; or c. receives, conceals, buys, sells or in any manner facilitates the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law. (Jardeleza v. People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296) NOTES AND COMMENTS: a. Importation consists of bringing an article into the country from the outside. Importation begins when the conveying vessel or

32. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus. (The Bureau of What doctrine ?

is

the

rationale

for

this

SUGGESTED ANSWER: a. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455) b. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored upon the policy of placing no unnecessary hindrance on the government’s drive, not only to prevent smuggling and other frauds upon Customs, c. but more importantly, to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43) d. The issuance by regular courts of writs of preliminary injunction in seizure and forfeiture proceedings before the Bureau of Customs may arouse suspicion that the issuance or grant was for consideration other than the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])

79 e. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to be conducted in a dwelling place. Where an administrative office has obtained a technical expertise in a specific subject, even the courts must defer to this expertise. NOTES AND COMMENTS: The Bureau of Customs could search and seize articles without need of a judicial warrant unless the place to be searched is a dwelling place. In such a case customs requires a judicial warrant.

33. “A” claiming to be the owner of a vessel which is the subject of customs warrant of seizure and detention sought the intercession of the RTC to restrain the Bureau of Customs from interfering with his property rights over the vessel. Would the suit prosper? SUGGESTED ANSWER: No. His remedy was not with the RTC but with the CTA, as issues of ownership of goods in the custody of customs officials are within the power of the CTA to determine. The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and trial courts are precluded from assuming cognizance over such matters even through petitions for certiorari, prohibition or mandamus. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)

34. The customs authorities do not have to prove to the satisfaction of the court that the articles on board a vessel were imported from abroad or are intended to be shipped abroad before they may exercise the power to effect customs searches, seizures, or arrests provided by law and continue with the administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

35. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as

by enforcing the tax lien on the imported article when the imported articles could be found and be subject to seizure and forfeiture. 36. The Tariff and Customs Code allows the Bureau of Customs to resort to the judicial remedy of filing an action in court when the imported articles could not anymore be found. 37. Section 2301 of the TCCP states that seized articles may not be released under bond if there is prima facie evidence of fraud in their importation. Commissioner of Customs v. Court of Tax Appeals, et al., G. R. No. 17151617, February 13, 2009 Section 2301. Warrant for Detention of Property-Cash Bond. – Upon making any seizure, the Commissioner shall issue a warrant for the detention of the property; and if the owner or importer desires to secure the release of the property for legitimate use, the Collector shall, with the approval of the Commissioner of Customs, surrender it upon the filing of a cash bond, in an amount fixed by him, conditioned upon the payment of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the case: Provided, That such importation shall not be released under any bond when there is prima facie evidence of fraud in the importation of the article: Provided, further, That articles the importation of which is prohibited by law shall not be released under any circumstances whatsoever: Provided, finally, That nothing in this section shall be construed as relieving the owner or importer from any criminal liability which may arise from any violation of law committed in connection with the importation of the article. (emphasis supplied)

38. Instances where there is no right of redemption of seized and forfeited articles: a. There is fraud; b. The importation is absolutely prohibited, or c. The release of the property would be contrary to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999)

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39. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law must be actual and not constructive. It must be intentional, consisting of deception, willfully and deliberately done or resorted to in order to induce another to give up some right.

40. Requisites for forfeiture of imported goods: a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper – all touching on the importation or exportation of merchandise. b. the falsity of such declaration, affidavit, invoice, letter or paper; and c. an intention on the part of the importer/consignee to evade the payment of the duties due. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001)

41. On January 7, 1989, the vessel M/V ”Star Ace, ”coming from Singapore laden with cargo, entered the Port of San Fernando, La Union for needed repairs. When the Bureau of Customs later became suspicious that the vessel’s real purpose in docking was to smuggle cargo into the country, seizure proceedings were instituted and subsequently two Warrants of Seizure and Detention were issued for the vessel and its cargo. Cesar does not own the vessel or any of its cargo but claimed a preferred maritime lien. Cesar then brought several cases in the RTC to enforce his lien. Would these suits prosper ? SUGGESTED ANSWER: No. The Bureau of Customs having first obtained possession of the vessel and its goods has obtained jurisdiction to the exclusion of the trial courts. When Cesar has impleaded the vessel as a defendant to enforce his alleged maritime lien, in the RTC, he brought an action in rem under the Code of Commerce under which the vessel may be attached and sold. However, the basic operative fact is the actual or constructive possession of the res by the tribunal empowered by law to conduct the

proceedings. This means that to acquire jurisdiction over the vessel, as a defendant, the trial court must have obtained either actual or constructive possession over it. Neither was accomplished by the RTC as the vessel was already in the possession of the Bureau of Customs. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006) NOTES AND COMMENTS: a. Forfeiture of seized goods in the Bureau of Customs is in the nature of a proceeding in rem, i.e. directed against the res or imported goods and entails a determination of the legality of their importation. In this proceeding, it is in legal contemplation the property itself which commits the violation and is treated as the offender, without reference whatsoever to the character or conduct of the owner. The issue is limited to whether the imported goods should be forfeited and disposed of in accordance with law for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999) Forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods and not against the owner. (Asian Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing Transglobe)

42. The Collector of Customs upon probable cause that the articles are imported or exported, or are attempted to be imported or exported, in violation of the tariff and customs laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93) If the search and seizure is to be conducted in a dwelling place, then a search warrant should be issued by the regular courts not the Bureau of Customs. There may be instances where no warrants issued by the Bureau of Customs or the regular courts is required, as in search and seizures of motor vehicles and vessels.

43. Smuggled goods seized by virtue of a court warrant should be surrendered to the court that issued the warrant and not to the Bureau of Customs because the goods are in custodia legis.

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44. Decisions of the Commissioner of Customs “in cases involving liability for customs duties, fees or other money charges” that must be appealed to the Court of Tax Appeals Division within thirty (30) days from receipt specifically refer to his decisions on administrative tax protest cases, as stated in Section 2402 of the Tariff and Customs Code of the Philippines (TCCP): Section 2402. Review by Court of Tax Appeals. – The party aggrieved by a ruling of the Commissioner in any matter brought before him upon protest or by his action or ruling in any case of seizure may appeal to the Court of Tax Appeals, in the manner and within the period prescribed by law and regulations. Unless an appeal is made to the Court of Tax Appeals in the manner and within the period prescribed by laws and regulations, the action or ruling of the Commissioner shall be final and conclusive. [Emphasis supplied.] (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

45. Administrative tax protest under the Tariff and Customs Code (TCCP). A tax protest case, under the TCCP, involves a protest of the liquidation of import entries. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

46. Liquidation, defined. A liquidation is the final computation and ascertainment by the collector of the duties on imported merchandise, based on official reports as to the quantity, character, and value thereof, and the collector’s own finding as to the applicable rate of duty; it is akin to an assessment of internal revenue taxes under the National Internal Revenue Code where the tax liability of the taxpayer is definitely determined. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

47. The following letters of demand can not be considered as a liquidation or an assessment of Shell’s import tax liabilities that can be the subject of an administrative tax protest proceeding before the Commissioner of Customs whose decision is appealable to the Court of Tax Appeals: a. the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (the Center) November 3 letter, signed by the Secretary of Finance, informing it of the cancellation of the Tax Credit Certificates (TCCs); b. the Commissioner of Customs’ November 19 letter requiring Shell to replace the amount equivalent to the amount of the cancelled TCCs used by Shell; and c. the Commissioner of Customs’ collection letters, issued through Deputy Commissioner Atty. Valera, formally demanding the amount covered by the cancelled TCCs. None of these letters, however, can be considered as a liquidation or an assessment of Shell’s import tax liabilities that can be the subject of an administrative tax protest proceeding before the respondent whose decision is appealable to the CTA. Shell’s import tax liabilities had long been computed and ascertained in the original assessments, and Shell paid these liabilities using the TCCs transferred to it as payment. It is even an error to consider the letters as a “reassessment” because they refer to the same tax liabilities on the same importations covered by the original assessments. The letters merely reissued the original assessments that were previously settled by Shell with the use of the TCCs. However, on account of the cancellation of the TCCs, the tax liabilities of Shell under the original assessments were considered unpaid; hence, the letters and the actions for collection. When Shell went to the CTA, the issues it raised in its petition were all related to the fact and efficacy of the payments made, specifically the genuineness of the TCCs; the absence of due process in the enforcement of the decision to cancel the TCCs; the facts surrounding the fraud in originally securing the TCCs; and the application of estoppel. These are payment and collection issues, not tax protest issues within the CTA’s jurisdiction to rule upon. Shell never protested the original assessments of its tax liabilities and in fact

82 settled them using the TCCs. These original assessments, therefore, have become final, incontestable, and beyond any subsequent protest proceeding, administrative or judicial, to rule upon. To be very precise, Shell’s petition before the CTA principally questioned the validity of the cancellation of the TCCs – a decision that was made not by the Commissioner of Customs, but by the Center. As the CTA has no jurisdiction over decisions of the Center, Shell’s remedy against the cancellation should have been a certiorari petition before the regular courts, not a tax protest case before the CTA. Records do not show that Shell ever availed of this remedy. Alternatively, as held in Shell v. Republic of the Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701, the appropriate forum for Shell under the circumstances of this case should be at the collection cases before the RTC where Shell can put up the fact of its payment as a defense. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

48. A case becomes ripe for filing with the Regional Trial Court (RTC), as a collection matter after the finality of the Commissioner of Customs assessment. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009 citing Shell v. Republic of the Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701)

The assessment has long been final, and this recognition of finality removes all perceived hindrances, based on this case, to the continuation of the collection suits. A suit for the collection of internal revenue taxes, where the assessment has already become final and executory, the action to collect is akin to an action to enforce the judgment. No inquiry can be made therein as to the merits of the In light of the conclusion that the present case does not involve a decision of the Commissioner of Customs on a matter brought to him as a tax protest, Atty. Valera’s lack of authority to issue the collection letters and to institute the collection suits is irrelevant. For this same reason, the injunction against Atty. Valera cannot be invoked to enjoin the collection of unpaid taxes due from Shell. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, supra)

LOCAL GOVERNMENT TAXATION 1. The fundamental principles of local taxation are: a. Uniformity; b. Taxes, fees, charges and other impositions shall be equitable and based on ability to pay, for public purposes, not unjust, excessive, oppressive or confiscatory, not contrary to law, public policy, national economic policy or in restraint of trade; c. The levy and collection shall not be let to any private person; d. Inures solely to the local government unit levying the tax; e. The progressivity principle must be observed.

2. A law which deprives local government units of their power to tax would be unconstitutional. The constitution has delegated to local governments the power to levy taxes, fees and other charges. This constitutional delegation may only be removed by a constitutional amendment.

3. Under the now prevailing Constitution, where there is neither a grant nor prohibition by statute, the taxing power of local governments must be deemed to exist although Congress may provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

4. The Local Government Code explicitly authorizes provinces and cities, notwithstanding “any exemption granted by any law or other special law” to impose a tax on businesses enjoying a franchise. Indicative of the legislative intent to carry out the constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by certain entities. (City Government of San Pablo,

83 Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

5. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them.

6. Explain the concept of the “paradigm shift” in local government taxation. SUGGESTED ANSWER: “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

7. The fundamental law did not intend the direct grant to local government units to be absolute and unconditional, the constitutional objective obviously is to ensure that, while local government units are being strengthened and made more autonomous, the legislature must still see to it that: a. the taxpayer will not be overburdened or saddled with multiple and unreasonable impositions; b. each local government unit will have its fair share of available resources; c. the resources of the national government will be unduly disturbed; and d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)

8. Taxing power of the local government is limited. The taxing power of local governments is limited in the sense that

Congress can enact legislation granting tax exemptions. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. While the power to tax by local governments may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, “the power to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)

9. Further amplification by Bernas of the local government’s power to tax. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

84

10. Reconciliation of the local government’s authority to tax and the Congressional general taxing power. Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions.

The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

“Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.” [Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao]

11. Professional tax may be imposed by a province or city but not by a municipality or barangay. a. Transaction taxed: Exercise or practice of profession requiring government licensure examination. b. Tax rate: In Accordance with a taxing ordinance which should not exceed P300.00. c. Tax base: Reasonable classification by the sanggunian. d. Exception: Payment to one province or city no longer subject to any other national or local tax, license or fee for the practice of such profession in any part of the Philippine professionals exclusively employed in the government. e. Date of payment: or on before January 31 or engaging in the profession. f. Place of payment: Province or city where the professional practices his profession or

where he maintains his principal office in case he practices his profession in several places.

12. Requirements: Any individual or corporation employing a person subject to professional tax shall require payment by that person of the tax on his profession before employment and annually thereafter. Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports, books of account, plans and designs, surveys and maps, as the case may be, the number of the official receipt issued to him. Exemption: Professionals exclusively employed in the government shall be exempt from payment. (Sec. 139, LGC) NOTE: For the purpose of collecting the tax, the provincial or city treasurer or his duly authorized representative shall require from such professionals their current annual registration cards issued by competent authority before accepting payment of their professional tax for the current year. The PRC shall likewise require the professionals presentation of proof of payment before registration of professionals or renewal of their licenses. (last par., Art. 228, Rules and Regulations Implementing the Local Government Code of 1991) 13. Who are the professionals who, if they are in practice of their profession, are subject to professional tax ? SUGGESTED ANSWER: The professionals subject to the professional tax are only those who have passed the bar examinations, or any board or other examinations conducted by the Professional Regulation Commission (PRC). for example, a lawyer who is also a Certified Public Accountant (CPA) must pay the professional tax imposed on lawyers and that fixed for CPAs, if he is to practice both professions. [Sec. 238 (f), Rule XXX, Rules and Regulations Implementing the Local Government Code of 1991]

14. X City issued a notice of assessment against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance with the Condominium Act which owns and holds title to the common and limited common areas of the condominium. Its membership

85

comprises the unit owners and is authorized under its By-Laws to collect regular assessments from its members for operating expenses, capital expenditures on the common areas and other special assessments as provided for in the Master Deed with ?Declaration of Restrictions of the Condominium. ABC Condominium Corporation insists that the X City Revenue Code and the Local Government Code do not contain provisions upon which the assessment could be based. Resolve the controversy.

No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC]. (The City of Manila, et al., v. CocaCola Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009)

REAL PROPERTY TAXATION 1. The fundamental principles of real property taxation are: a.

Appraisal at current and fair market

SUGGESTED ANSWER: ABC is correct. Condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise. X City, is authorized under the Local Government Code, to impose a tax on business, which is defined under the Code as ”trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.” By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005)

value;

15. Authority of Local Government Units (LGUs) such as the City of Manila to impose business taxes.

2. The reasonable market value is determined by the assessor in the form of a schedule of fair market values.

Section 143 of the LGC, is the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by cities or municipalities such as the City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are “not otherwise specified in preceding paragraphs.” In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance

b. Classification for assessment on the basis of actual use; c. Assessment on the basis of uniform classification; d. Appraisal, assessment, levy and collection shall not be let to a private person; e. Appraisal and assessment shall be equitable. NOTES AND COMMENTS: Real properties shall be appraised at the current and fair market value prevailing in the locality where the property is situated and classified for assessment purposes on the basis of its actual use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005)

The schedule is then enacted by the local sanggunian.

3. Fair market value is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adopted and might in reason be applied. The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 ) NOTES AND COMMENTS: In fixing the value of real property, assessors have to consider all the circumstances and elements of value and

86 must exercise prudent discretion in reaching conclusions. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005) Preparation of fair market values: a. The city or municipal assessor shall prepare a schedule of fair market values for the different classes of real property situated in their respective Local Government Units for the enactment of an ordinance by the sanggunian concerned; and b. The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999) Proposed fair market values of real property in a local government unit as well as the ordinance containing the schedule must be published in full for three (3) consecutive days in a newspaper of local circulation, where available, within ten (10) days of its approval, and posted in at lease two (2) prominent places in the provincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)

4. Approaches in estimating the fair market value of real property for real property tax purposes ? a. Sales Analysis Approach. The sales price paid in actual market transactions is considered by taking into account valid sales data accumulated from among the Registrar of Deeds, notaries public, appraisers, brokers, dealers, bank officials, and various sources stated under the Local Government Code. b. Income Capitalization Approach. The value of an income-producing property is no more than the return derived from it. An analysis of the income produced is necessary in order to estimate the sum which might be invested in the purchase of the property. c. Reproduction cost approach is a formal approach used exclusively n appraising man-made improvements such as buildings and other structures, based on such data as materials and labor costs to reproduce a new replica of the improvement. The assessor uses any or all of these approaches in analyzing the data gathered to arrive at the estimated fair market value to be included in the ordinance containing the schedule

of fair market values. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Local Assessment Regulations No. 1-92)

5. An ordinance whereby the “parcels of land sold, ceded, transferred and conveyed for remuneratory consideration after the effectivity of this revision shall be subject to real estate tax based on the actual amount reflected in the deed of conveyance or the current approved zonal valuation of the Bureau of Internal Revenue prevailing at the time of sale, cession, transfer and conveyance, whichever is higher, as evidenced by the certificate of payment of the capital gains tax issued therefore” is INVALID being contrary to public policy and for restraining trade for the following reasons: a. It mandates an exclusive rule in determining the fair market value and departs from the established procedures such as the sales analysis approach, the income capitalization approach and the reproduction approach provided under the rules implementing the statute. It unduly interferes with the duties statutorily placed upon the local assessor by completely dispensing with his analysis and discretion which the Local Government Code and the regulations require to be exercised. An ordinance that contravenes any statute is ultra vires and void. b. The “consideration approach” in the ordinance is illegal since “the appraisal, assessment, levy and collection of real property tax shall not be let to any private person”, it will also completely destroy the fundamental principle in real property taxation – that real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. Allowing the parties to a private sale to dictate the fair market value of the property will dispense with the distinctions of actual use stated in the Local Government Code and in the regulations. c. The invalidity is not cured by the prhase “whichever is higher” because an integral part of that system still permits valuing real property in disregard of its “actual use.” d. The ordinance would result to real property assessments more than once every three (3) years and that is not the congressional intent as shown in the provisions of the Local Government Code and the regulations.

87 Consequently, the real property tax burden should not be interpreted to include those beyond what the Code or the regulations expressly clearly state. e. The proviso would provide a chilling effect on real property owners or administrators to enter freely into contracts reflecting the increasing value of real properties in accordance with prevailing market conditions. While the Local Government Code provides that the assessment of real property shall not be increased once every three (3) years, the questioned proviso subjects the property to a higher assessment every time a sales transaction is made. Real property owners would therefore postpone sales until after the lapse of the three (3) year period, or if they do so within the said period they shall be compelled to dispose of the property at a price not exceeding the last prior conveyance in order to avoid a higher tax assessment. In the above two scenarios real property owners are effectively prevented from obtaining the best price possible for their properties and unduly hampers the equitable distribution of wealth. (Allied Banking Corporation, etc., v. Quezon

Transit Authority v. Central Board of Assessment Appeals, et al., G. R. No. 127316, October 12, 2000)

City Government, et al., G. R. No. 154126, October 11, 2005)

the real property tax on the subsequent owner which was neither the owner not the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. Consequently, MERALCO the former owner/user of the property was required to pay the tax instead of the new owner NAPOCOR.

6. Examples of personal property under the civil law that may be considered as real property for purposes of taxes. Personal property under the civil law may be considered as real property for purposes of taxes where the property is essential to the conduct of the business. a. Underground tanks are essential to the conduct of the business of a gasoline station without which it would not be operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)

b. Light Rail Transit (LRT) improvements such as buildings, carriageways, passenger terminals stations, and similar structures do not form part of the public roads since the former are constructed over the latter in such a way that the flow of vehicular traffic would not be impaired. The carriageways and terminals serve a function different from the public roads. Furthermore, they are not open to use by the general public hence not exempt from real property taxes. Even granting that the national government owns the carriageways and terminal stations, the property is not exempt because their beneficial use has been granted to LRTA a taxable entity. (Light Rail

c. Barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes. Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work. (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)

7. Unpaid realty taxes attach to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose

(Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)

NOTES AND COMMENTS: The above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18, 2001 decision but in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite the doctrine as emanating from the May 18, 2001 decision.

8. Secretary of Justice can take cognizance of a case involving the constitutionality or legality of tax ordinances where there are factual issues involved. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999)

Taxpayer files appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary

88 decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could already seek relief in court within 30 days from the lapse of the 60 day period. These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999)

9. Public hearings are mandatory prior to approval of tax ordinance, but this still requires the taxpayer to adduce evidence to show that no public hearings ever took place. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are

required to be conducted prior to the enactment of an ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999)

10. The concurrent and simultaneous remedies afforded local government units in enforcing collection of real property taxes: a. Distraint of personal property; b. Sale of delinquent real property, and c. Collection of real property tax through ordinary court action.

11. Notice and publication, as well as the legal requirements for a tax delinquency sale, are mandatory, and the failure to comply therewith can invalidate the sale. The prescribed notices must be sent to comply with the requirements of due process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)

12. The reason behind the notice requirement is that tax sales are administrative proceedings which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)

13. FELS Energy, Inc., had a contract to supply NPC with the electricity generated by FELS’ power barges. The contract also stated that NPC shall be

responsible for all real estate taxes and assessments. FELS then received an assessment of real property taxes on its power barges from the Provincial Assessor of Batangas. If filed a motion for reconsideration with the Provincial Assessor. a. Upon denial, FELS elevated the matter to the Local Board of Assessment Appeals (LBAA), where it raised the following issues: 1) Since NPC is tax-exempt then FEL’s should also be taxexempt because of its contract with NPC. 2) The power barges are not real property subject to real property taxes. b. Upon the other hand the Local Treasurer insists that the assessment has attained a state of finality hence the appeal to the LBAA should be dismissed. Rule on the conflicting contentions. SUGGESTED ANSWER: a. All the contentions of FELS are without merit: 1) NPC is not the owner of the power barges nor the operator of the power barges. The tax exemption privilege granted to NPC cannot be extended to FELS. the covenant is between NPC and FELs and does not bind a third person not privy to the contract such as the Province of Batangas. 2) The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes. Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered immovable property by

89 destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work. b. The Treasurer is correct. The procedure do not allow a motion for reconsideration to be filed with the Provincial Assessor. To allow the procedure would indeed invite corruption in the system of appraisal and assessment. it conveniently courts a graft-prone situation where values of real property ay be initially set unreasonably high, and then subsequently reduced upon the request of a property owner. In the latter instance, allusions of possible cover, illicit trade-off cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be prevented and excised from our system. (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)

14. A special levy or special assessment is an imposition by a province, a city, a municipality within the Metropolitan Manila Area, a municipality or a barangay upon real property specially benefited by a public works expenditure of the LGU to recover not more than 60% of such expenditure.

15. If the ground for the protest is validity of the real property tax ordinance and not the unreasonableness of the amount collected the tax must be paid under protest, and the issue of legality may be raised to the proper courts on certiorari without need of exhausting administrative remedies.

16. If the ground for the protest is unreasonableness of the amounts collected there is need to pay under protest and administrative remedies must be resorted to before recourse to the proper courts.

17. Procedure for refund of real property taxes based on unreasonableness or excessiveness of amounts collected. a. Payment under protest at the time of payment or within thirty (30) days thereafter, protest being lodged to the provincial, city or in the case of a municipality within the Metro Manila Area the municipal treasurer.

b. The treasurer has a period of sixty (60) days from receipt of the protest within to decide. c. Within thirty (30) days from receipt of treasurer’s decision or if the treasurer does not decide, within thirty (30) days from the expiration of the sixty (60) period for the treasurer to decide, the taxpayer should file an appeal with the Local Board of Assessment Appeals. d. The Local Board of Assessment Appeals has 120 days from receipt of the appeal within which to decide. e. The adverse decision of the Local Board of Assessment Appeals should be appealed within thirty (30) days from receipt to the Central Board of Assessment Appeals. f. The adverse decision of the Central Board of Assessment Appeals shall be appealed to the Court of Tax Appeals (En Banc) by means of a petition for review within thirty (30) days from receipt of the adverse decision. g. The decision of the CTA may be the subject of a motion for reconsideration or new trial after which an appeal may be interposed by means of a petition for review on certiorari directed to the Supreme Court on pure questions of law within a period of fifteen (15) days from receipt extendible for a period of thirty (30) days.

18. The entitlement to a tax refund does not necessarily call for the automatic payment of the sum claimed. The amount of the claim being a factual matter, it must still be proven in the normal course and in accordance with the administrative procedure for obtaining a refund of real property taxes, as provided under the Local Government Code. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, September 15, 2006)

NOTES AND COMMENTS: In the above Allied Banking case, the Supreme Court provided for the starting date of computing the two-year prescriptive period within which to file the claim with the Treasurer, which is from finality of the Decision. The procedure to be followed is that shown below.

19. Procedure for refund of real property taxes based on validity of the tax measure or solutio indebeti. a. Payment under protest not required, claim must be directed to the local treasurer, within two (2) years from the date the taxpayer is entitled to such reduction or readjustment, who must decide within sixty (60) days from receipt.

90 b. The denial by the local treasurer of the protest would fall within the Regional Trial Court’s original jurisdiction, the review being the initial judicial cognizance of the matter. Despite the language of Section 195 of the Local Government Code which states that the remedy of the taxpayer whose protest is denied by the local treasurer is “to appeal with the court of competent jurisdiction,” labeling the said review as an exercise of appellate jurisdiction is inappropriate since the denial of the protest is not the judgment or order of a lower court, but of a local government official. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) c. The decision of the Regional Trial Court should be appealed by means of a petition for review directed to the Court of Tax Appeals (Division). d. The decision of the Court of Tax Appeals (Division) may be the subject of a review by the Court of Tax Appeals (en banc). e. The decision of the Court of Tax Appeals (en banc) may be the subject of a petition for review on certiorari on pure questions of law directed to the Supreme Court.

20. Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements that are actually, directly and exclusively used for religious, charitable or educational purposes are exempt from taxation. [Sec.28 (3) Article VI, 1987 Constitution]

21. The constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83) The constitutional tax exemption covers property taxes only. What is exempted is not the institution itself, those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.

(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

22. The 1935 Constitution stated that the lands, buildings, and improvements are “used exclusively” but the present Constitution requires that the lands, buildings and improvements are “actually, directly and exclusively used.” The change should not be ignored. Reliance on past decisions would have sufficed were the words “actually” as well as :directly” are not added. There must be proof therefore of the actual and direct use to be exempt from taxation. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

23. The “actual, direct and exclusive use” of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purpose but is subject to taxation,. The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitution and the law. Solely is synonymous with exclusively. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

24. Portions of the land of a charitable institution, such as a hospital, leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from real property taxes. On the other hand, the portion of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

25. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income

91

from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government. So long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

26. Property that are exempt from the payment of real property tax under the Local Government Code. a. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted to a taxable person for a consideration or otherwise; b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes; c. Machineries and equipment, actually, directly and exclusively used by local water districts; and government owned and controlled corporations engaged in the supply and distribution of water and generation and transmission of electric power; d. Real property owned by duly registered cooperatives; e. Machinery and equipment used for pollution control and environmental protection.

27. Manila International Airport Authority (MIAA) it is not a government owned or controlled corporation but an instrumentality of the government that is exempt from taxation. It is not a stock corporation because its capital is not divided into shares, neither is it a non-stock corporation because there are no members. It is instead an instrumentality of the government upon which the local governments are not allowed to levy taxes, fees or other charges. An instrumentality “refers to any agency of the National Government, not integrated within the department framework vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies chartered

institutions and government-owned or controlled corporations.” [Sec. 2 (10), Introductory Provisions, Administrative Code of 1987] It is an instrumentality exercising not only governmental but also corporate powers. It exercises governmental powers of eminent domain, police power authority, and levying of fees and charges. Finally, the airport lands and buildings are property owned by the government that are devoted to public use and are properties of the public domain. (Manila International Airport Authority v. City of Pasay, et al., G. R. No. 163072, April 2, 2009)

28. A telecommunications company was granted by Congress on July 20, 1992, after the effectivity of the Local Government Code on January 1, 1992, a legislative franchise with tax exemption privileges which partly reads, “The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay.” This provision existed in the company’s franchise prior to the effectivity of the Local Government Code. A City then enacted an ordinance in 1993 imposing a real property on all real properties located within the city limits, and withdrawing all tax exemptions previously granted. Among properties covered are those owned by the company from which the City is now collecting P43 million. The properties of the company were then scheduled by the City for sale at public auction. The company then filed a petition for the issuance of a writ of prohibition claiming exemption under its legislative franchise. The City defended its position raising the following: a. There was no exhaustion of administrative remedies because the matter should have first been filed before the Local Board of Assessment Appeals; b. The company’s properties are exempt from tax under its franchise. Resolve the issues raised. SUGGESTED ANSWERS:

92 a. There is no need to exhaust administrative remedies as the appeal to the LBAA is not a speedy and adequate remedy within the law. This is so because the properties are already scheduled for auction sale. Furthermore one of the recognized exceptions to the rule on exhaustion is that if the issue is purely legal in character which is so in this case. b. The properties are exempt from taxation. The grant of taxing powers to local governments under the Constitution and the Local Government Code does not affect the power of Congress to grant tax exemptions. The term “exclusive of this franchise” is interpreted to mean properties actually, directly and exclusively used in the radio or telecommunications business. The subsequent piece of legislation which reiterated the phrase “exclusive of this franchise” found in the previous tax exemption grant to the company is an express and real intention on the part of Congress to once against remove from the LGC’s delegated taxing power, all of the company’s properties that are actually, directly and exclusively used in the pursuit of its franchise. (The City Government of Quezon City, et al., v. Bayan Telecommunications, Inc., G. R. No. 162015, March 6, 2006)

29. The owner operator of a BOT and not the ultimate owner is subject to real property taxes. Consistent with the BOT concept and as implemented, BPPC – the owner-manager-operator of the project – is the actual user of its machineries and equipment. BPPC’s ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCOR’s is contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. (National Power Corporation v. Central Board of Assessment Appeals, et al., G, R. No. 171470, January 30, 2009)

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