UP Taxation Law Pre Week 2017

UP LAW BOC

TAXATION LAW PRE-WEEK

GENERAL PRINCIPLES Q1. When is the distinction between the power of taxation, police power, and eminent domain relevant? A1. The distinction is important when the one exercising it is the LGU (mere delegated authority). Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation, the distinction between police power and the power to tax, which could be significant if the exercising authority were mere political subdivisions (since delegation by it to such political subdivisions of one power does not necessarily include the other), would not be of any moment when Congress itself exercises the power. [NTC v. CA, 311 SCRA 508 (1999)] Q2. What is the Lifeblood Doctrine? Necessity Theory? The Benefits-Protection Theory? Doctrine of Symbiotic Relationship? A2. a) Lifeblood Doctrine – Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are collected. b) Necessity Theory – The power of taxation proceeds upon the theory that the existence of government is a necessity. It cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and property within its limits to contribute. c) Benefits-Protection Theory – The basis is the reciprocal duties of protection and support between the State and its inhabitants. The state collects taxes from the subjects of taxation in order that it may be able to perform the functions of government. The citizens, on the other hand, pays taxes in order that they may be secured in the enjoyment of the benefits of organized society. d) Doctrine of Symbiotic Relationship – Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed. Hence, every person who is able must contribute his share in the burden of running the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve. Q3. What are the principles of a sound tax system? A3. (1) Fiscal adequacy – The sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures. (2) Administrative feasibility – Tax laws should be capable of convenient, just and effective administration. Each tax should be capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity. (3) Theoretical justice or equality – The tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called ability to pay principle. Taxation should be uniform as well as equitable. Q4. What are the inherent limitations on the power to tax? A4. a) Public purpose —The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objective of the government or directly promote the welfare of the community b) Inherently legislative — Only the legislature has full discretion as to the persons, property, occupation or business to be taxed, provided these are all within the State’s territorial jurisdiction. It can also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection. c) Territorial — Taxation may be exercised only within the territorial jurisdiction of the taxing authority. Within its territorial jurisdiction, the taxing authority may determine the “place of taxation” or “tax situs”. d) International comity — This is a limitation which is founded on reciprocity designated to maintain a harmonious and productive relationships among the various states. Under international comity, a state must recognize the generally accepted tenets of international law, among which are the PAGE 2 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

principles of sovereign equality among states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken in that capacity. e) Exemption of Government Entities, Agencies, and Instrumentalities – To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over for itself. This immunity also rests upon fundamental principles of government, being necessary in order that the functions of government shall not be unduly impeded. Q5. What are the stages or aspects of taxation? A5. (1) [Legislative Act] Levy or Imposition – This process involves the passage of tax laws or ordinances through the legislature. The tax laws to be passed shall determine those to be taxed (person, property or rights), how much is to be collected (the rate and the base of tax), and how taxes are to be implemented (the manner of imposing and collecting tax). It also involves the granting of tax exemptions, tax amnesties or tax condonation. (2) [Executive Act] Assessment and Collection – This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the bureau of internal revenue or bureau of customs. (3) [Taxpayer’s Act] Payment – This process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the government. Payment of tax also includes the options, schemes, or remedies as may be legally open or available to the taxpayer. (4) [Taxpayer’s and Executive Act] Refund – A claim for refund must first be filed with the Commissioner of Internal Revenue. A suit or proceeding may be filed within two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment. The commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return, such payment appears clearly to have been erroneously paid. [Sec. 229, NIRC] Q6. What is the nature of the taxing power of the provinces, municipalities and cities? How will the local government units be able to exercise their taxing powers? A6. The taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by giving them the authority to create their own sources of revenue. These local government units (LGUs) do not exercise the power to tax as an inherent power or by a valid delegation of the power by Congress, but pursuant to a direct authority conferred by the Constitution. The said LGUs exercise the power to tax by levying taxes, fees, and charges consistent with the basic policy of local autonomy, and to assess and collect all these taxes, fees, and charges which will exclusively accrue to them. They are authorized to pass tax ordinances (levy) and to pursue actions for assessment and collection of the taxes imposed in said ordinances. [Sec. 129 and 132, LGC] Q7: What kind of taxes, fees, and charges are considered as National Internal Revenue Taxes under the NIRC? A7: a) Income taxes; b) Estate and donor’s taxes; c) Value-added tax; d) Other Percentage taxes; e) Excise taxes; f) Documentary stamp taxes; and g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. [Sec. 21, NIRC of 1997] Q8. Distinguish "direct taxes" from "indirect taxes." Give examples. PAGE 3 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

A8. A DIRECT TAX is one where the person supposed to pay the tax really pays it, without transferring the burden to someone else. Examples include income tax, transfer taxes (estate tax and donor’s tax), residence tax, and immigration tax. An INDIRECT TAX is one where the tax is imposed upon the good before reaching the consumer who ultimately pays for it, not as tax, but as part of the purchase price. Examples include percentage taxes, VAT, import duties and special import tax. [Maceda v. Macaraig, G.R. No. 88291 (1993)] Q9. What are the rules on prospectivity of tax laws? A9. a) General Rule: Tax laws are prospective in operation. The nature and amount of the tax under tax laws enacted after the transaction could not have been foreseen and understood by the taxpayer at the time of the transaction. b) Exception: Tax laws may be applied retroactively provided it is expressly declared or it is clearly the legislative intent. c) Exception to the exception: (i) If the tax law is so harsh and oppressive in its retroactive application that it transgresses the Constitution. [Republic v. Fernandez, G.R. No. L-9141 (1956)] (ii) Collection of interest on back taxes. It is not penal in nature; it is but a just compensation to the State. The constitutional prohibition against ex post facto laws is not applicable. [Central Azucarera v. CTA, G.R. No. L-23236 (1967)] Q10. Is double taxation prohibited? A10. There is no constitutional prohibition against double taxation. It is something not favored, but it is permissible, provided some other constitutional requirement is not violated. [Villanueva v. City of Iloilo, G.R. No. L-26521 (1968)] In order to constitute double taxation in the strict sense (direct duplicate taxation): (1) The same property must be taxed twice when it should be taxed once; (2) Both taxes must be imposed on the same property or subject matter; (3) For the same purpose; (4) By the same State, Government, or taxing authority; (5) Within the same territory, jurisdiction or taxing district; (6) During the same taxing period; and (7) Of the same kind or character of tax. There is double taxation in its broad sense (indirect duplicate taxation) if any of the elements for direct duplicate taxation is absent. It extends to all cases in which there is a burden of two or more pecuniary impositions. For example, a tax upon the same property imposed by two different states. Double taxation in its strict sense is undoubtedly unconstitutional. The taxpayer may seek relief under the uniformity rule or the equal protection guarantee. [De Leon] Q11. What are the modes of eliminating international double taxation? A11. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. [CIR v. SC Johnson & Sons, Inc., G.R. No. 127105 (1999)] (a) (b) (c) (d)

Allowing reciprocal exemption either by law or by treaty; Allowance of tax credit for foreign taxes paid; Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax; or Reduction of Philippine tax rate.

The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. PAGE 4 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. [CIR v. SC Johnson & Sons, Inc., supra] Q12. What is the distinction between the impact and incidence of taxation? A12. (1) Impact refers to the initial burden of the tax, while incidence refers to the ultimate burden of the tax. (2) Impact is at the point of imposition; incidence occurs at the point of settlement. (3) The impact of a tax falls upon the person from whom the tax is collected and the incidence rests on the person who pays it eventually. Example: Suppose a tax — excise duty — is imposed on soap. Its impact is on the producers, in the first instance, as they are liable to pay it to the government. But, the producers may succeed in collecting it from the consumers by raising the price of soap by the amount of tax. In that case, consumers eventually pay the tax and so the incidence falls upon them. (4) Impact may be shifted but incidence cannot. For, incidence is the end of the shifting process. Sometimes, however, when no shifting is possible, as in the case of income tax or such other direct taxes, the impact coincides with incidence on the same person. Q13. What is the relationship between impact, shifting, and incidence of a tax? A13. The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the setting or coming to rest of the tax. For example, the impact in VAT is on the producer who shifts the burden to the customer who finally bears the incidence of the tax. Q14. Distinguish tax evasion from tax avoidance. A14. Tax Avoidance Also called as Tax Minimization Means Legal Outcome of tax planning Punishable? No Purpose Merely minimize payment of taxes (tax savings)

Tax Evasion Tax Dodging Illegal Outcome of tax fraud Yes Entirely escape payment of taxes

Q15. What constitutes tax evasion? A15. Tax evasion or tax dodging is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. According to the Supreme Court, 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, in bad faith, willful, or “deliberate and not accidental; and (c) a course of action or failure of action which is unlawful. [CIR v. the Estate of Benigno Toda, Jr., G.R. No. 147188 (2004)] Q16. What is the doctrine of equitable recoupment? A16. The doctrine of equitable recoupment, otherwise known as doctrine of set-off, refers to a situation wherein the taxpayer has a claim for refund but was unable to file a claim within the prescriptive period. The taxpayer in this case is allowed to credit such refund to his existing tax liability. Although allowed in common law countries, this doctrine is not applicable in the Philippines. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax liability arising from the same transaction on which an overpayment is made and underpayment is due. The doctrine finds no application to cases where the taxes involved are totally unrelated, and although it seems equitable, it is not allowed in our jurisdiction. [CIR v. UST, 104 Phil 1062 (1958)] PAGE 5 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

Q17. May taxes be the subject of set-off or compensation? Explain. A17. As a general rule, internal revenue taxes cannot be the subject of set-off or compensation: a) The lifeblood theory requires that there should be no unnecessary impediments to the collection of taxes to make available to the government the wherewithal to meet its legitimate objectives; and b) The payment of taxes is not a contractual obligation but arises out of a duty to pay, and in respect of the positive acts of government, regarding the making and enforcing of taxes, the personal consent of the individual taxpayer is not required. [Republic v. Mambulao Lumber Co., G.R. No. L17725, February 28, 1962; Caltex v. Commission on Audit, G.R. No. 92585, May 8, 1992; and Philex v. Commissioner of Internal Revenue, G.R. No. 125704, August 28, 1998] However, there is a possibility that set-off may arise, if the claims against the government have been recognized and an amount has already been appropriated for that purpose. Where both claims have already become overdue and demandable as well as fully liquidated, compensation takes place by operation of law under Article 1200 in relation to Articles 1279 and 1290 of the New Civil Code. [Domingo v. Garlitos, G.R. No. L-18994 (1963)] Q18. Distinguish a tax amnesty from a tax exemption. A18. Tax Amnesty Immunity from civil, criminal, administrative Benefit liability arising from non-payment of taxes Coverage Past tax liability Actual Revenue Loss Yes

Tax Exemption Immunity from civil liability (relief from paying taxes) Future tax liability None

Q19. Distinguish a taxpayer’s suit from a citizen’s suit. A19. A taxpayer’s suit refers to a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. [Kilosbayan v. Guingona, Jr. (1994)] The plaintiff in a taxpayer's suit is in a different category from the plaintiff in a citizen's suit. In the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern. [De Castro v. JBC (2010)] Q20. The Constitution provides "charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non- profit cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. a) from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax b) from income tax only c) from value-added tax only d) from real property tax only e) from capital gains tax only A20. This exemption applies only to D, real property taxes. What is exempted is not the institution itself but the lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. [CIR v. CA, et al, G.R. No. 124043 (1998)] Q21. A inherited a two-storey building in Makati from his father, a real estate broker in the ‘60s. A group of Tibetan monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of P1 million for the whole year. The following year, the City Assessor issued an assessment against A for non-payment of real property taxes. Is the assessor justified in assessing A’s deficiency real property taxes? Explain. A21. Yes, the assessor is justified in assessing A’s deficiency real property taxes. Proof of actual use is necessary for tax exemption under this provision to apply, since tax exemptions are strictly construed against the taxpayer. Real property taxation is based on use, not ownership. PAGE 6 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

Q22. The Roman Catholic Church owns a 2-hectare lot, in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself, the southeastern side by some commercial establishments, while the rest of the property, in particular the northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land? A22. No. The Church cannot claim tax exemption on the entire land. Only the southern side and middle part that are occupied by the Church and a convent and the eastern side occupied by a school run by the Church itself are exempt, because such parts of the 2-hectare lot are actually, directly and exclusively used for religious and educational purposes. [Sec. 28[3], Art. VI, 1987 Constitution; Sec. 234, LGC] The southeastern side occupied by some commercial establishment is not tax exempt. 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. 'Solely' is synonymous with 'exclusively.' (Lung Center of the Philippines v. Quezon City, G.R. No. 144104, June 29, 2004) The property must be exclusively (solely) used for religious or educational purposes. The northwestern side, which is idle or unoccupied is not "actually, directly and exclusively" used for religious or educational purposes, hence not exempt from taxation. Q23. XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It collected and received the following: a) Tuition fees; b) Dormitory fees; c) Rentals from canteen concessionaires; d) Interest from money-market placements of the tuition fees; and e) Donation of a lot and building by school alumni. Which of these above cited income and donation would not be exempt from taxation? Explain briefly. A23. All of the income derived by the non-stock, nonprofit educational institution will be exempt from taxation provided they are used actually, directly and exclusively for educational purposes. The Constitution provides that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and exclusively used for educational purposes are exempt from taxation (Sec. 4 par. 3, Art. XIV, 1987 Constitution). The donation is, likewise, exempt from the donor's tax if actually, directly and exclusively used for educational purposes, provided not more than 30% of the donation is used by the donee for administration purposes. The donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation subject to conditions prescribed by law [Sec. 4 par. 4, Art. XIV, 1987 Constitution, in relation to Sec. 101(A.3), NIRC] Q24. Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop's family, rather than the Archdiocese, which of the above cited income and donation would be exempt from taxation? Explain briefly. A24. All of its income from school related and non-school related activities will be subject to the income tax based on its aggregate net income derived from both activities [Sec. 27(B), NIRC]. Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and building will likewise be subject to the donor's tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is a proprietary educational institution, the donation is taxable [Sec. 101(A.3), NIRC]. Q25. A municipality, BB, has an ordinance which requires that all stores, restaurants, and other establishments selling liquor should pay a fixed annual fee of P20.000. Subsequently, the municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the amount paid for the purchase PAGE 7 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

or consumption of liquor in stores, restaurants and other establishments. The municipal mayor, CC, refused to sign the ordinance on the ground that it would constitute double taxation. Is the refusal of the mayor justified? A25. No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed annual fee is in the nature of a license fee imposed through the exercise of police power while the 5% tax on purchase or consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article and this is not in violation of the rule against double taxation [Compania General de Tabacos de Filipinos v. City of Manila, G.R. No. L-16619 (1963)]

PAGE 8 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

NATIONAL TAXATION INCOME TAXATION Q26. Differentiate the global system and the schedular system. A26. Global System Schedular System It is a personal tax based on the income of the Tax on income producing activities. taxpayer. Emphasizes the burden allocation aspects. Emphasizes on revenue and administrative aspects. Most equitable system yet developed for Because of its multiple rates, the tax burden of a distributing tax burden. The burden of an person does not correspond to his income but individual is closely d related to his resources and rather fall fortuitously on the type of his income. It his ability to pay. is fixed and final. It serves as a means for redistributing income and This function is alien to schedular system where in wealth. Big income earners are subject to higher times of plenty or in times of need, people pay the taxes than small income earners it serves as an same fixed tax on their income. automatic counter-cyclical device to generate more revenues from people in times of expanding economies and at the same time to collect less from them in times of depression. It serves as a supplementary device to accomplish The schedular system cannot perform any of these non-fiscal goals of the government, such as, to functions. encourage desired activities. By adjusting the rates, for instance, it can promote saving or consumer's demand, or encourage donations worthy causes. Administration is not quite as easy as schedular The administration is simple, being confined to because one has to consider all income from each transaction or activity. whatever source. Q27. What is meant by taxable income? A27. 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] Q28. From what sources of income are the following persons/corporations taxable by the Philippine government? What rate applies? a) Resident citizens b) Non-resident citizens c) Resident aliens d) Non-resident aliens engaged in trade and business e) Non-resident aliens not engaged in trade and business A28. a) A resident citizen is taxable on all net income derived from sources within and without the Philippines. The 5%-32% schedular rate in Sec. 24(A)(2) of the NIRC applies. b) A non-resident citizen is taxable only on net income derived from sources within the Philippines. The 5%-32% schedular rate in Sec. 24(A)(2) of the NIRC applies. c) A resident alien is taxable only on net income derived from sources within the Philippines. The 5%32% schedular rate in Sec. 24(A)(2) of the NIRC applies. d) A non-resident alien engaged in trade and business is taxable only on net income derived from sources within the Philippines. The 5%-32% schedular rate in Sec. 24(A)(2) of the NIRC applies. PAGE 9 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

e) A non-resident alien not engaged in trade and business is taxable only on gross income derived from sources within the Philippines. The 25% tax rate applies. [Sec. 25(B), NIRC] [Sec. 23, NIRC] Q29. Explain briefly whether the following items are taxable or non-taxable: a. Income from jueteng; b. Gains arising from expropriation of property; c. Taxes paid and subsequently refunded; d. Recovery of bad debts previously charged off; e. Gain on the sale of a car used for personal purposes. A29. a. Taxable. The law imposes a tax on income from whatever source. [Sec. 32(A), NIRC] b. Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains from dealings in property are part of gross income. [Sec. 32(A)(3), NIRC] c. It depends. Taxes paid which are allowed as deduction from gross income are taxable when subsequently refunded but only to the extent of the income tax benefit of said deduction. [Sec. 34(C)(1), NIRC] It follows that taxes paid which are not allowed as deduction from gross income, i.e. income tax, donor’s tax, and estate tax, are not taxable when refunded. d. Taxable under the TAX BENEFIT RULE. Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. [Sec. 34(E)(1), NIRC] This is sometimes referred as the RECAPTURE RULES. e. Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence the gain is considered income. [Sec. 32(A)(3) and Sec. 39(A)(1), NIRC] Q30. Ronald McDonald, Filipino, residing in Makati City, bought shares of stock of a Jollibee Foods Corporation, a domestic corporation whose shares are listed and traded in the Philippines Stocks Exchange at the price of P2 Million. Yesterday, he sold the shares of stock through his favorite Makati stockbroker, Matt Broker, at a gain of P200,000. Is Ronald McDonald subject to income tax? A30. No. The gain on the sale or disposition of shares of stock of a domestic corporation held as a capital asset will not be subject to income tax if these shares were sold and traded in the stock exchange [Sec. 24(C), NIRC]. However, the seller is subject to a percentage tax of ½ of 1% of the gross selling price as stock transaction tax. [Sec. 127(A), NIRC] Q31. Based on the same facts of Q13. But instead of selling through his broker, Ronald McDonald opted to share his shares to his best friend residing in Makati, at a gain of P200,000. Is he now liable for Philippine income tax? If yes, what is the tax base and rate? A31. Yes. The sale of shares of stocks of a domestic corporation held as capital asset not through a trading in the local stock exchange, is subject to capital gains tax based on the net capital gain during the taxable year. The tax rate is 5% for a net capital gain not exceeding P100,000 and an additional 10% for any amount in excess of the P100,000. [Sec. 24(C), NIRC] Q32. James got married to Nadine last January 5, 2013. They were blessed with two children named Leo and Karen. On December 7, 2015, Nadine gave birth to the twins Kath and Daniel. Unfortunately, Nadine died in the course of the delivery. Daniel also died two days after the delivery. In James’ ITR for the year 2015, how much basic personal exemption and additional basic exemption should he claim? A32. James is entitled to a P50,000 basic personal exemption. [Sec. 35(A), NIRC] He is also entitled to a total of P100,000 additional basic personal exemption, P25,000 per dependent. [Sec. 35(B), NIRC]. Q33. What is included as part of gross income? A33. Gross Income is defined under Sec. 32(A) as all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; PAGE 10 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

(2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership. Q34. Distinguish Exclusions from Deductions and Tax Credit A34. (1) Exclusions from gross income refer to 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 Constitution or a statute; or (2) it does not come within the definition of income. Deductions, on the other hand, are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. (2) Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income. (3) 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. (4) Tax Credit refers to amounts subtracted from the computed tax in order to arrive at taxes payable. Q35. Radlapsobep Mechem, a resident citizen, received the following additional benefits from his employer in the year 2016: a) P50,000 13th month pay b) P20,000 Christmas bonus c) P30,000 Productivity bonus How much is the taxable benefits? A35. The taxable benefits is P18,000. The first P82,000 of the 13th month pay and other benefits are exempt from taxation. [Sec. 32(B)(7)(e), NIRC and R.A. No. 10653] Q36. Spouses Apollo and Artemis, both Filipino citizens, are the owners of a residential lot in Tagaytay City, which they acquired for P3,199,200 in 1990. Shortly after the recent wedding of their son, Jamie, to Cersei, the spouses donated said real property to the newly-wed couple. At the time of the donation, the real property has a fair market value of P10,000,000. Are Jamie and Cersei subject to income tax for the value of the property donated to them? Explain. A36: No. The value of the property acquired by gift is an exclusion of gross income. [Sec. 32(B)(3), NIRC] However, the spouses Apollo and Artemis are liable for the payment of donor’s taxes. [Sec. 101(A)(1), NIRC] Q37. Stuart Walton is the irrevocable beneficiary of his father’s life insurance policy. His father died on 4 May 2016. On 28 June 2016, he received the amount of P1,919,500 as proceeds of the said life insurance. Is this amount taxable? A37. No. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, are excluded from the gross income, and are exempt from income tax. [Sec. 32(B)(1), NIRC] Q38. What are the requisites for Individuals to avail of Optional Standard Deduction? A38. (1) Taxpayer is a citizen or resident alien; (2) Taxpayer’s income is not entirely from compensation; (3) Taxpayer signifies in his return his intention to elect this deduction; otherwise he is considered as having availed of the itemized deductions; PAGE 11 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

(4) Election is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years. Q39. Explain if the following items are deductible from gross income for income tax purposes. Disregard the person claiming the expense. a) Interest on loans used to acquire capital equipment or machinery. b) Depreciation of goodwill. A39. a) Deductible. The law gives the taxpayer the option to claim as a deduction, or treat as capital expenditure, interest incurred to acquire property used in trade, business, or exercise of a profession. [Sec. 34(B)(3), NIRC] b) Depreciation of goodwill is not allowed as deduction from gross income. While intangibles may be allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration. [Basilan Estates v. CIR (1967)]. Such is not the case with goodwill. Q40. Mr. Jason Malas started his sole proprietorship business in 2015 that is based in Pasig City. To facilitate the processing of his business permit for the year 2016, he paid P10,000 to the Secretary of the Mayor of Pasig City. In addition to that, he bought the whole office meryenda which cost him P1,500. In the preparation of his 2016 ITR, he told his accountant to claim the amount of P11,500 facilitation fee as one of his deductible business expenses. Are these expenses deductible? A40. No. No deduction from gross income shall be allowed for any payment made, directly or indirectly, to an official or employee of the local government, if the payment constitutes a bribe or kickback. [Sec. 34(A)(c), NIRC] Q41. Albus and Minerva got married in the year 1990. They have kids named Argus (21 years old), Pomona (18 years old), and Horace (10 years old). Albus earns P200,000 annually as headmaster of a small school in Dinagat Islands. Minerva is a stay-at-home wife. Argus, on the other hand, earns P100,000 annually as a call center agent. Is Albus, as the spouse claiming the additional exemption for dependents, entitled to the deduction in premium payments on health and/or hospitalization insurance? A41. No, because the gross income of the family is more than P250,000. [Sec. 34(M), NIRC] Q42. Miley inherited from her dad a 300 m2 property. At the time of her father’s death on 14 March 2010, the property was valued at P720,000. On 28 February 2011, to defray the cost of the medical expenses of her sick son, she sold the lot for P800,000 on cash basis. The prevailing market value of the property at the time of the sale was P1,500,000. Is Miley liable to pay capital gains tax on the transaction? If so, how much? A42. Yes. The capital gains tax is 6% of the higher value between the selling price (P800,000) and the fair market value (P1,500,000) of the real property. The capital gains tax in this case is P90,000. The capital gains tax is due on the sale of real property classified as capital asset. [Sec. 24(D)(1), NIRC] Q43. In January 1970, Juan Direction bought one-hectare of agricultural land in Laguna for P100,000. This property has a fair market value of P10 Million in view of the construction of a concrete road traversing the property. Juan Direction agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 Million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P90 million. What is the nature of the real properties exchanged for tax purposes? A43. The one-hectare agricultural land is a capital asset because it is not a real property used for trade or business. The one-half hectare residential property owned by Alpha Corporation is an ordinary asset because the owner is engaged in the purchase and sale of real property. [Sec. 39(A)(1), NIRC] Q44. How are non-resident aliens engaged in trade or business taxed? PAGE 12 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

A44. In the same manner as an individual citizen and a resident alien individual on taxable income from all sources within the Philippines. [Sec. 25(A)(1), NIRC] Q45. Who is a non-resident alien engaged in trade or business? A45. A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year. [Sec. 25(A)(1), NIRC] Q46. Is a non-resident alien engaged in trade or business allowed any exemptions? A46. Generally, no. However, he shall be entitled to a personal exemption, provided the following conditions are satisfied: (1) The country of which the non-resident alien is a subject or citizen has an income tax law; (2) The income tax law of his country grants personal exemptions to Filipinos who derive income in such country but who are not residing therein; and (3) He files a true and accurate statement of his income from all sources within the Philippines. [Sec. 25(D), NIRC] Q47. How are non-resident aliens not engaged in trade or business taxed? A47. As a general rule, they are normally subject to final withholding tax of twenty five percent (25%) from all sources within the Philippines. [Sec. 25(B), NIRC] Q48. Who are the individual taxpayers exempt from income tax and what is required of them if they claim exemption? A48. Individual Taxpayers exempt from income tax are: (1) Senior Citizens (2) Minimum wage earners (3) Exemptions granted under international agreements All individuals and entities claiming exemption from imposition of taxes on income and, consequently, from withholding taxes are required to provide a copy of a valid, current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment of the related income. The tax exemption certificate or ruling must explicitly recognize the grant of tax exemption, as well as the corresponding exemption from imposition of withholding tax. Failure on the part of the taxpayer to present the said tax exemption certificate or ruling as herein required shall subject him to the payment of appropriate withholding taxes due on the transaction. [RMC No. 8-2014] Q49. What taxes are payable by domestic corporations? A49. Taxes payable are: (1) Regular tax at 30% of taxable income (2) Minimum Corporate Income Tax at 2% of gross income Q50. What are the rules of MCIT? A50. The following rules apply to MCIT: (1) Applies to domestic corporations and RFCs. (2) It is imposed whenever such corporations have zero or negative taxable income or whenever the MCIT is greater than the normal income tax due from such corporations. (Rev. Reg. 9-98) (3) Imposed upon any domestic corporation beginning the fourth taxable year in which such corporation commenced its business operations. For purposes of the MCIT, the taxable year in which business operations commenced shall be the year when the corporation registers with the BIR (not in which the corporation started commercial operations). (4) Tax rate: 2% of the Gross Income (5) For the purpose of computing MCIT, the term gross income includes other items of gross income realized or earned by the taxpayer during the taxable period which are subject to normal income tax. It excludes income exempt from income tax and income subject to final withholding tax. PAGE 13 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

Q51. What is the treatment of excess minimum corporate income tax? A51. Any excess of the minimum corporate income tax over the normal income tax shall be carried forward on an annual basis. The excess can be credited against the normal income tax in the next three (3) succeeding taxable years. [Sec. 27(E)(2)] In the year to which carried forward, the normal tax should be higher than the MCIT. Q52. When may the MCIT’s imposition be suspended? A52. The Secretary of Finance, upon the recommendation of the Commissioner, may suspend the imposition of the MCIT upon submission of proof by the applicant-corporation that the corporation sustained substantial losses on account of the following (LMB): (1) Prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months and caused the temporary shutdown of operations), or (2) Force majeure (acts of God and other calamity; includes armed conflicts like war or insurgency), or (3) Legitimate business reverses (substantial losses due to fire, robbery, theft or other economic reasons). Q53. What corporations are exempt from the MCIT? A53. The following are exempt from the MCIT: (1) Banks and other non-bank financial intermediaries; (2) Insurance companies; (3) Publicly-held corporations; (4) Taxable partnerships; (5) General professional partnerships; (6) Non- taxable joint ventures; and (7) Enterprises that are registered: (a) with the Philippine Economic Zone Authority (PEZA) under R.A. 7916; (b) pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227; and (c) under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local. Q54. What deductions are allowed for corporations? A54. The following are allowed deductions: (1) Bad debts (2) Expenses (3) Losses (4) Taxes (5) Depreciation (6) Interest (7) Depletion of oil and gas wells and mines (8) Charitable and other contributions (9) Research and development (10) Pension trusts Q55. What are the passive income subject to tax? A55. Passive income subject to tax: (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties (2) Capital gains from the sale of shares of stock not traded in the stock exchange (3) Income derived from depository bank under the expanded foreign currency deposit system (4) Inter-corporate dividends (5) Capital gains realized from the sale, exchange, or of lands and/or buildings Q56. What passive income are not subject to tax? A56. The following are passive income are not subject to tax: PAGE 14 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

(1) Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from income exempt from income tax Except: net income from transactions specified by the Secretary of Finance upon recommendation by the Monetary Board BUT: Interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, other than offshore banking units in the Philippines, shall be subject to a final tax at the rate of 10%. (2) Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from exempt from income tax. Q57. What are capital assets and non-capital assets? A57. Capital assets refer to property held by the taxpayer but does not include: 1) Stock in trade or other property included in the inventory if on hand at the close of the taxable year; 2) Property primarily for sale to customers in the ordinary course of trade or business; 3) Personal property used in the trade or business and subject to depreciation; and 4) Real property used in the trade or business. Q58. What is a resident foreign corporation? A58. A resident foreign corporation is a corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines. (a) A Philippine branch of a foreign corporation duly licensed by the SEC is considered a resident foreign corporation. Thus, only the income of the Philippine branch from sources within the Philippines is subject to Philippine income tax. (b) Marubeni v. Commissioner: As general rule, the head office of a foreign corporation is the same juridical entity as its branch in the Philippines following the single entity concept. Thus, the income from sources within the Phils. of the foreign head office shall thus be taxable to the Philippine branch. Q59. How are resident foreign corporations taxed? A59. Resident foreign corporations are subject to any or some of the following: (1) Capital Gains Tax (2) Final Tax on Passive Income (3) Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT) (4) Branch Profit Remittance Tax Q60. How are non-resident foreign corporations taxed? A60. Except as otherwise provided, the tax is 30% of the gross income (except certain passive income)received during each taxable year from all sources within the Philippines, such as interests (except interests on foreign loans, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains EXCEPT capital gains on the sale of shares of stock (not listed and traded through a local stock exchange), of a domestic corporation which are subject to the tax rates prescribed for individuals and resident foreign corporations. Q61. What is the rule on taxation of GOCCs? A61. GOCCs are taxable as any other corporation engaged in similar business, industry or activity, except: (1) Government Service Insurance System (GSIS) (2) Social Security System (SSS) PAGE 15 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

(3) Philippine Health Insurance Corporation (PHIC) (4) Local water districts (LWDs) (5) Philippine Charity Sweepstakes Office (PCSO) [Sec. 27(C), NIRC]

WITHHOLDING OF TAXES Q62. How does the final withholding tax system work? A62. 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 tax due from payee on the said income (e.g., interest on deposits, royalties, etc.). The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of the withholding agent’s failure to withhold the tax or in case of under-withholding, the deficiency tax shall be collected from him. The payee is not required to file an income tax return for the particular income, nor is he liable for the payment of the tax. [Sec. 2.57, RR No. 2-98] The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax, such as gross receipts tax in the case of a bank. Q63. Under the withholding tax system, when should the tax be withheld? A63. The obligation of the payor to deduct and withhold the tax arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due, demandable or legally enforceable. Where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes. [Mamalateo]

PAGE 16 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

TRANSFER TAX ESTATE TAX Q64. For purposes of computing estate tax, how is the term “residence” interpreted? How may one change his or her residence? A64. For estate and inheritance tax purposes, the term "residence" is synonymous with the term "domicile". The two terms may be used interchangeably without distinction. (Collector v. De Lara, 102 Phil 813) To effect the abandonment of one's domicile, there must be (1) a deliberate and provable choice of a new domicile, coupled with (2) actual residence in the place chosen, with (3) a declared or provable intent that it should be one's fixed and permanent place of abode, one's home. (Velilla v. Posadas, 62 Phil 624) Q65. The prominent Don Fernando Marcos Romualdez, owner of all the hotels in Ilocos, died intestate, leaving behind his wife Imelda, and his children Imee, Irene, and Fernando Jr. Imelda renounced her conjugal share in favor of her favorite child, Imee. What is the tax implication of the renunciation by Imelda in favor Imee? A65. Imelda is liable for Donor’s Tax. This is because Section 11 of RR 2-2003 provides that the renunciation of the surviving spouse of his or her share in the conjugal partnership or absolute community after dissolution of the marriage in favor of the heirs of the deceased spouse or any other person is subject to donor’s tax. Q66. Stefan, in his will, designated his son-in-law, Philippe, as executor. Stefan died horribly after falling from one of the turrets of a castle while on tour in Germany, leaving behind as heir his only daughter, Aurora. Who is liable to pay the estate tax? A66. Philippe is liable to pay the estate tax. This is because Section 91 (C) of the NIRC and Section 9 (G) of RR 2-2003 provide that the estate tax imposed by the code shall be paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary. Q67. In February, Marcus Aurelius donated to his son Commodus one of his commercial rent-earning lots in Nuvali. In the deed of donation, Marcus Aurelius reserved for himself the exclusive right to receive rentals from the lot for life. One month after the donation, Marcus Aurelius died. Will the donated property form part of Marcus Aurelius’ estate? A67. Yes, the donated property will still be part of Marcus Aurelius’estate. This is because Section 85 (B) of the NIRC provides that the donated property will still form part of the decedent’s estate if the donor has retained for his life or for any period which does not in fact end before his death the possession or enjoyment of, or the right to the income from the property. Q68. In 1990, Kurt donated to his son Krist one of his pineapple plantations in Davao. In the deed of donation, Kurt reserved for himself the exclusive right to receive income from the plantation for a period of 10 years. In 1994, Kurt died. Will the donated property form part of Kurt’s estate? A68. Yes, the donated property will still form part of Kurt’s estate. This is because Section 85 (B) of the NIRC provides that the donated property will still form part of the decedent’s estate if the donor has retained for any period which does not in fact end before his death the possession or enjoyment of, or the right to the income from the property. Kurt died in 1994, well within the period of 10 years for which he reserved for himself the right to receive the income from the property, and a period that has not yet ended before his death. Q69. When Don Manny died, leaving behind an estate of 1B pesos, his wife Doña Jinky decided to honor him and his deeds by throwing a lavish funeral. Doña Jinky spent 20M pesos in total for the funeral. After interment, Doña Dionisia, the mother of Don Manny, to ensure that her son will go to heaven, offered masses for which she paid 250,000 pesos in total. How much can the estate of Don Manny deduct from the masses that Doña Dionisia offered? PAGE 17 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

A69. None. Section 6 of RR 2-2003 provides that expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible.

DONOR’S TAX Q70. Mrs. Angelina Smith owned several parcels of land, one of which, valued at 50M pesos, she donated to her daughter Shiloh. At the time of donation, the FMV of the land as per the CIR was 51M pesos. The FMV of the land however, according to the City Assessor, was 52M pesos. Which is the correct valuation for purposes of computing the donor’s tax on the gift? A70. The valuation given by the City Assessor is correct. This is because Section 102 of the NIRC provides that the FMV at the time of the gift shall be considered the amount of the gift, and in case of real property, the provisions of Section 88 (B) shall apply. Section 88 (B) in relation to Section 102 provides that the appraised value of the real property as of the time of death or donation, shall be the value of the estate or the gift whichever is the higher of the FMV as determined by the Commissioner of Internal Revenue or the FMV as shown in the schedule of values fixed by the Provincial and City Assessors. Q71. When does an incomplete gift because of the donor’s reservation of power become complete? A71. When either: (1) the donor renounces the power or (2) this right to exercise the reserved power ceases because of the happening of some event or contingency of the fulfillment of some condition, other than because of the donor’s death Q72. How is donor’s tax applicable to an exchange of shares of stock not traded through a local stock exchange? A72. In case the FMV of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the FMV of the property, if any, received as consideration shall be deemed a gift subject to the donor’s tax under Sec. 100 of the Tax Code, as amended. Q73. Who is a “stranger” in relation to donor’s tax? A73. A person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant or relative by consanguinity in the collateral line within the 4 th civil degree. Note: donations between business organizations and those made between an individual and a business organization will be treated as donations to strangers.

PAGE 18 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

VALUE-ADDED TAX Q74. Is the following transaction subject to VAT: construction by XYZ Construction Co. of concrete barriers for the Asian Development Bank in Ortigas Center to prevent car bombs from ramming the ADB gates along ADB Avenue in Mandaluyong City? A74. Yes. The transaction is subject to VAT at the rate of zero percent (0%). ADB is exempt from direct and indirect taxes under a special law, thereby making the sale of services to it by a VAT-registered construction company, effectively zero-rated (Sec 108 (B)(3), NIRC). Q75. What is the destination principle? A75. The destination principle means that the destination of the goods determines the taxation or exemption from VAT. Goods and services are taxed only in the country where they are consumed. Q76. What is the difference between zero-rated entities and VAT-exempt entities? A76. Zero-rated: (1) It is a taxable transaction but does not result in an output tax, (2) The input VAT on the purchases of a VAT- registered person with zero-rated sales may be allowed as tax credits or refunded, (3) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register. VATexempt: (1) Not subject to output tax, (2) 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, (3) Registration is optional for VATexempt persons. Q77. What are the rules on the period for filing the administrative and judicial claims for VAT? A77. I. Two-year prescriptive period (Administrative claim) A. (1) It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi) B. (2) The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when the relevant sales were made. (San Roque) Not the date when the payment was made (cf Aichi) C. (3) The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008. Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized input VAT payments should be counted from the date of filing of the VAT return and payment of the tax. (San Roque) II. 120 + 30 day period (Judicial claim) A. (1) The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. B. (2) The 30-day period always applies, whether there is a denial or inaction on the part of the CIR. C. (3) As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. (Aichi and San Roque); 1. Failure to comply with the 30-day period to appeal will result in dismissal by the CTA. D. (4) As an exception to the general rule, premature filing is allowed only if filed between 10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque) E. (5) Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force. (San Roque) 1. Premature filing of the judicial claim, or the filing of a petition prior to the lapse of the 120-day period under Sec. 112[C] of the NIRC and without any adverse decision from the CIR will rob the CTA of its jurisdiction to entertain the refund case. (CIR v. Aichi Forging Company of Asia, Inc., G.R. 184823, 6 October 2010) 2. These rules apply ONLY to claims for credit or refund of input tax – PAGE 19 OF 28

UP LAW BOC

i.

TAXATION LAW PRE-WEEK

Rules under Secs. 204[C] and 229 cover erroneous payments or illegal collections and NOT refund of unutilized input VAT. a. The reckoning date of Sec. 229 is the date of payment while in Sec. 112[A], the period is “within 2 years after the close of the taxable quarter when the sales were made.”

Q78. A VAT-registered contractor performed services for his customer in 2010 and billed him P11.2 Million, broken down as follows: P10 Million - cost of services, plus P1.2 Million, 12% VAT. Of the contract price of P10 Million, only P8 Million plus VAT thereon was received from the customer in 2010, and the balance of P4 Million plus VAT was received by the contractor in 2011. How much is the taxable gross receipts of the contractor for 2010, for VAT purposes? A78. P8 Million, the amount received from the customer in 2010 (Sec. 108, NIRC) Q79. Colossus Inc., a corporation engaged in firearms dealing is a VAT-registered company. Included in its roster of assets is a van that it uses to deliver machine guns to the AFP. The van being 10 years old and dated, Colossus decided to sell it to SugarWax, a corporation engaged in the business of providing mobile waxing services to busy office women. The selling price of the van was way below its acquisition cost. Is the sale of the van subject to VAT? A79. Yes, the sale of the van is vatable. According to Mindanao Geothermal Partnership vs CIR, March 11, 2013, although the sale of the van is an isolated transaction, it does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. A reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." Q80. Beauxbatons Inc. is a VAT-registered corporation and is engaged in the business of importing books and school supplies. In 2014, it imported 5M pesos worth of books, 2.5M worth of fountain pens and 2.5M worth of bookstands. Is the transaction subject to VAT? A80. Yes, but only as to the fountain pens and bookstands. The importation of books is a transaction exempt from VAT pursuant to Section 109 of the NIRC. Q81. Magdalena Motels Inc., a VAT-registered corporation, leases its vans to its customers. What tax is it subject to for the lease of the vehicles? A81. It is subject to 12% VAT pursuant to Section 108 of the NIRC. Q82. What is the rule on the VAT treatment for lessors of residential units? A82. (1) Monthly rental ≤ P12.8K  EXEMPT (2) P12,800 < Monthly rental ≤ P1,919,500 annually  3% percentage tax (3) P1,919,500 < Monthly rental  12% VAT Note: the provision only considers monthly rentals, regardless of the aggregate rentals received by the lessor during the year. (RR 16-2011) Q83. What are the sources of input taxes? A83. Sec. 4.110-1, RR 16-2005: (1) Purchase or importation of goods (2) Purchase of real properties for which a VAT has actually been paid (3) Purchase of services in which VAT has actually been paid (4) Transactions deemed sale (5) Presumptive input tax (6) Transitional input tax Q84. What are the instances where one can avail of a VAT-refund? A84. One may avail of a VAT-refund when there are (1) zero-rated and effectively zero-rated sales or (2) cancellation of VAT registration. PAGE 20 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

Q85. What is the effect when a VAT-registered person issues a VAT invoice or VAT receipt for a VATexempt transaction, but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale"? A85. The issuer shall be subject to VAT as if Sec. 109 did not apply. Q86. On what grounds can the Commissioner suspend the business operations? What are the limitations to such temporary suspension order? A86. In case of a VAT-registered person (1) Failure to issue receipts or invoices; (2) Failure to file a VAT tax return; (3) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipts for the taxable quarter. Or the failure of any person to register under Sec. 236. The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order. (Sec. 115) Q87. Carly Rae Jepsen Communications Inc., CRJCI, is a Philippine corporation engaged in providing technical support for Honyota car owners in South America. Honyota, a manufacturer of Chinese cars in India, pays for CRJCI’s services in Singaporean dollars and is duly accounted for with the BSP. What is the applicable VAT rate for the transaction? A87. The transaction is subject to a 0% VAT rate pursuant to Section 108 (B) (2) of the NIRC. Q88. What are the rules for filing VAT returns? A88. Quarterly returns for every person liable to pay for VAT filed 25 days following the close of the taxable quarter. For VAT-registered persons, they must pay VAT on a monthly basis on the 20 th day following the end of the month. (RR 16-2005)

PAGE 21 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

TAX REMEDIES Q89. What is the rule on appeal from decisions of the Collector of Customs in protest and seizure cases? When is the decision of the Collector of Customs appealable to the Court of Tax Appeals? A89. Decisions of the Collector of Customs in protest and seizure cases are appealable to the Commissioner of Customs within 15 days from receipt of notice of the written decision. The appeal is done by simply notifying the Collector of the taxpayer’s desire to have the matter reviewed by the Commissioner; the Collector then forwards the records to the Commissioner. No hearing on this appeal is required. From the decision of the Commissioner, the taxpayer may file with the CTA a petition for review within the 30-day reglementary period. (Sec. 2402, TCC; Sec. 7, RA 1125; Vitug and Acosta 405) Q90. What is the remedy available to challenge an adverse BIR ruling? A90. Request the Secretary of Finance to review the ruling. The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (NIRC, Sec. 4, par. 1); For decisions or inaction of the CIR in exercise of his quasi-judicial powers, the remedy is a petition for review to the CTA. (Sec. 7, RA 1125) Q91. Does the Court of Appeals have the power to review compromise agreements forged by the Commissioner of Internal Revenue and a taxpayer? A91. No, for either of two reasons (1) in instances in which the Commissioner of Internal Revenue is vested with authority to compromise, such authority should be exercised in accordance with the Commissioner’s discretion, and courts have no power, as a general rule, to compel him to exercise such discretion one way or another (Koppel Phils., Inc. v. CIR, 87 Phil, 351 (1950); (2) If the Commissioner abuses his discretion by not following the parameters set by law, the CTA, not the Court of Appeals, may correct such abuse if the matter is appealed to it. In case of arbitrary or capricious exercise by the Commissioner of the power to compromise, the compromise can be attacked and reversed through the judicial process. It must be noted however, that a compromise is considered as other matters arising under the NIRC which vests the CTA with jurisdiction, and since the decision of the CTA is appealable to the Supreme Court, the Court of Appeals is devoid of any power of review a compromise settlement forged by the Commissioner (PNOC v. Savellano, G.R. No. 109976) Q92. Are proceedings before the CTA in the exercise of its exclusive original jurisdiction in the nature of a trial de novo? A92. True. (CIR v. Manila Mining Corp. G.R. No. 153204, Aug. 31, 2005) Q93. What are the conditions that must be complied with before the Court of Tax Appeals may suspend the collection of national internal revenue taxes? A93. The CTA may suspend the collection of internal revenue taxes if the following conditions are met: (1) The case is pending appeal with the CTA; (2) In the opinion of the Court the collection will jeopardize the interest of the Government and/or the taxpayer; and (3) The taxpayer is willing to deposit in Court the amount being collected or to file a surety bond for not more than double the amount of the tax (Sec 11, RA 1125, as amended by RA 9282). Q94. On October 15, 2005, ABC Corp. imported 1,000 kilos of steel ingots and paid customs duties and VAT to the Bureau of Customs on the importation. On February 17, 2009, the Bureau of Customs, citing provisions of the Tariff and Customs Code on post-audit, investigated and assessed ABC Corp. for deficiency customs duties and VAT. Is the BOC correct? A94. No. The Bureau of Customs (BOC) has lost its right to assess deficiency customs duties and VAT. The imported steel ingots in 2005 have been entered and the customs duties thereon had been paid by thereby making the liquidation of the importation final and conclusive upon all parties after the expiration of three (3) years from the date of final payment of duties and taxes (Sec 1603, TCC, as amended by RA 9135). PAGE 22 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

Q95. What is the effect of the execution by a taxpayer of a "waiver of the statute of limitations" on his defense of prescription? A95. The waiver of the statute of limitation executed by a taxpayer is not a waiver of the right to invoke the defense of prescription. The waiver of the statute of limitation is merely an agreement in writing between the taxpayer and the BIR that the period to assess and collect taxes due is extended to a date certain. If prescription has already set in at the time of execution of the waiver or if the said waiver is invalid, the taxpayer can still raise prescription as defense (Phil. Journalists Inc., v. CIR, G.R. No. 162852, Dec. 16, 2004) Q96. What is an assessment notice? What are the requisites of a valid assessment? Explain. A96. An assessment notice is a computation prepared by the BIR of the alleged unpaid taxes, plus interests, penalties or surcharges, if any. However, a demand letter must accompany an assessment notice from the BIR in order to result in valid assessment (RR No. 12- 99). Q97. In criminal cases where the CTA has exclusive original jurisdiction, can the right to file a separate civil action for the recovery of taxes be reserved? A97. No. (Sec. 11, Rule 9, 2005 Revised CTA Rules) Q98. What are the differences between a request for reconsideration and a request for reinvestigation? A98. Request for Reconsideration – plea for evaluation of assessment on the basis of existing records without need of presentation of additional evidence. It does not suspend the period to collect the deficiency tax. Request for Reinvestigation – plea for re-evaluation on the basis of newly discovered evidence that will be introduced for examination for the first time. It suspends the prescriptive period to collect. Q99. Can the CTA pass on the constitutionality or a revenue regulation or revenue memorandum circular (as opposed to the regular courts)? A99. Yes. The CTA can now rule on the validity or constitutionality of a revenue regulation or revenue memorandum circular but only if it is involved in a tax assessment case or claim for tax refund. (Philamlife v. Sec. of Finance, G.R. No. 210987, 24 November 2014) Q100. On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010 issued by the Commissioner of Internal Revenue (CIR) for deficiency income tax for its taxable year 2008. It failed to protest the PAN. The CIR thereupon issued a final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was received by the corporation on May 10, 2010, following which or on May 25, 2010, it filed its protest against it. The CIR denied the protest on the ground that the assessment had already become final and executory, the corporation having failed to protest the PAN. Is the CIR correct? A100. No. The issuance of preliminary assessment notice (PAN) does not give rise to the right of the taxpayer to protest. What can be protested by the taxpayer is the final assessment notice (FAN) or that assessment issued following the PAN. Since the FAN was timely protested (within 30 days from receipt thereof, the assessment did not become final and executory (Sec 228, NIRC; RR No. 12-99). Q101. What is a jeopardy assessment? A101. As defined in Sec. 3(1)(a), RR 30-2002 for the purposes of entering into a compromise: A 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. Q102. MSI Corp. imports orange and lemon concentrates as raw materials for the fruit drinks it sells locally. The Bureau of Customs (BOC) imposed a 1% duty rate on the concentrates. Subsequently, the BOC changed its position and held that the concentrates should be taxed at 7% duty rate. MSI disagreed with the ruling and questioned it in the CTA, which upheld MSI's position. The Commissioner of Customs appealed to the CTA en banc without filing a motion for reconsideration. Resolve the appeal. PAGE 23 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

A102. The appeal should be dismissed because a motion for reconsideration is mandatory. (RA 9282; Rule 8, Revised Rules of the CTA) Q103. Mr. A was preparing his income tax return and had some doubt on whether a commission he earned should be declared for the current year or for the succeeding year. He sought the opinion of his lawyer who advised him to report the commission in the succeeding year. He heeded his lawyer's advice and reported the commission in the succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against the BIR assessment, the court ruled against Mr. A. Is Mr. A guilty of fraud? A103. Mr. A is not guilty of fraud as he simply followed the advice of his lawyer.

PAGE 24 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

LOCAL GOVERNMENT TAXATION Q104. What is the basis for the computation of business tax on contractors under the Local Government Code? A104. The business tax on contractors is a graduated annual fixed tax based on the gross receipts for the preceding calendar year. However, when the gross receipts amount to P2 million or more, the business tax on contractors is imposed as a percentage tax at the rate of 50% of 1% [Sec 143 (e), LGC]. Q105. How are retiring businesses taxed under the Local Government Code? A105. Retiring businesses under the LGC are taxed in their gross sales or gross receipts in the current year and not in the preceding year. If the tax paid in the current year is less than the tax due on gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired (Sec 145, LGC). Q106. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the City Government of Manila legally impose said levy on the corporation? A106. No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping line, because taxes on the gross receipts of transportation contractors and passengers or freight by hire and common carriers by air, land or water is a limitation on the exercise of taxing powers by local government units [Sec 133 (j), LGC]. Q107. What is the nature of the taxing power of the provinces, municipalities and cities? How will the local government units be able to exercise their taxing powers? A107. The taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by giving them the authority to create their own sources of revenue. The local government units do not exercise the power to tax as an inherent power or by a valid delegation of the power by the Congress, but pursuant to a direct authority conferred by the Constitution. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of Cabanatuan, 401 SCRA 259 [2003]). The local government units exercise the power to tax by levying taxes, fees and charges consistent with the basic policy of local autonomy, and to assess and collect all these taxes, fees and charges which will exclusively accrue to them. The local government units are authorized to pass tax ordinances (levy) and to pursue actions for the assessment and collection of the taxes imposed in the said ordinances. (Section 129, and 132, Local Government Code). Q108. What are the exempted properties from real property tax? A108. The following are properties exempt from RPT: (1) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; (2) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes; (3) All machineries and equipment that are actually, directly and exclusively used by local water districts and government owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (4) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and (5) Machinery and equipment used for pollution control and environmental protection. Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or controlled corporations are hereby withdrawn upon the effectivity of this Code. (Sec. 234, LGC) Q109. May LGUs impose taxes on bases or subjects not provided in the Local Government Code? A109. Yes. LGUs may exercise the power to levy taxes, fees, or charges on any base or subject not otherwise specifically enumerated in the (1) Local Government Code or (2) taxed under the NIRC or (3) other PAGE 25 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

applicable laws. These taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy. Additionally, the ordinance levying such taxes, fees, or charges, shall not be enacted without any prior public hearing conducted for the purpose. Q110. Which local government units may administer real property taxes? A110. Provinces, cities, and municipalities within the Metropolitan Manila Area. (Sec. 200, LGC)

REAL PROPERTY TAX Q111. Who may impose Real Property Tax? A111. Only provinces and cities as well as municipalities within Metro Manila may impose RPTs. (Sec. 200 and 232, LGC). Municipalities outside Metro Manila and barangays cannot impose RPT. Q112. What are the fundamental principles of real property taxation? A112. (1) Real property shall be appraised at its current and fair market value (2) Real property shall be classified for assessment purposes on the basis of its actual use (3) Real property shall be assessed on the basis of a uniform classification within each LGU (4) The appraisal, assessment, levy and collection of real property tax shall not be let to any private person (5) The appraisal and assessment of real property shall be equitable.

PAGE 26 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

TARIFF AND CUSTOMS CODE Q113. What is the flexible tariff clause? A113. The Flexible Clause refers to the power of the President upon recommendation of the National Economic and Development Authority (NEDA) to: (1) Increase, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher than one hundred percent (100%) ad valorem; (2) Establish import quota or to ban importation of any commodity as may be necessary; and (3) Impose additional duty on all import not exceeding ten percent (10%) ad valorem, whenever necessary. [Sec. 102(u), CMTA] Q114. When does importation begin? When does it end? A114. Importation begins when the carrying vessel or aircraft enters the Philippine territory with the intention to unload therein. [Sec. 1202, TCC; Sec. 103, CMTA] Imported goods shall be deemed “entered” in the Philippines for consumption when the goods declaration is electronically lodged, together with any required supporting documents, with the pertinent customs office. [Sec. 115, CMTA] Importation is deemed terminated when: (a) The duties, taxes and other charges due upon the goods have been paid or secured to be paid at the port of entry unless the goods are free from duties, taxes and other charges and legal permit for withdrawal has been granted; or (b) In case the goods are deemed free of duties, taxes and other charges, the goods have legally left the jurisdiction of the Bureau. [Sec. 1202, TCC; Sec. 103, CMTA] Q115. What are taxable importations? A115. Unless otherwise provided by law or regulation, all goods may be freely imported into and exported from the Philippines without need for import and export permits, clearances or licenses. [Sec. 116, CMTA] Q116. What is the rule with regard to de minimis importations? A116. No duties and taxes shall be collected on goods with an FOB or FCA value of ten thousand pesos (₱10,000.00) or below. [Sec. 423, CMTA] Q117. Distinguish between Misdeclaration, Misclassification, and Undervaluation of goods. A117. (a) Misdeclaration is as to the quantity, quality, description, weight, or measurement of the goods resulting to a discrepancy in duty and tax to be paid between what is legally determined upon assessment and what is declared. (b) Misclassification is the insufficient or wrong description of the goods or use of wrong tariff heading resulting to a discrepancy in duty and tax to be paid between what is legally determined upon assessment and what is declared. (c) Undervaluation when: (a) the declared value fails to disclose in frill the price actually paid or payable or any dutiable adjustment to the price actually paid or payable; or (b) when an incorrect valuation method is used or the valuation rules are not properly observed, resulting in a discrepancy in duty and tax to be paid between what is legally determined as the correct value against the declared value. [Sec. 1400, CMTA] Q118. What is the difference between Technical Smuggling and Outright Smuggling? A118. Technical Smuggling is the act of importing goods into the country by means of fraudulent, falsified or erroneous declaration of the goods to its nature, land, quality, quantity or weight, for the purpose of reducing or avoiding payment of prescribed taxes, duties and other charges [Sec. 101(pp), CMTA] Outright Smuggling is the act of importing goods into the country without complete customs prescribed importation documents, or without being cleared by customs or other regulatory government agencies, for PAGE 27 OF 28

UP LAW BOC

TAXATION LAW PRE-WEEK

the purpose of evading payment of prescribed taxes, duties and other government charges. [Sec. 101(ff), CMTA] Q119. Mr. Z made an importation which he declared at the Bureau of Customs (BOC) as "Used Truck Replacement Parts." Upon investigation, the container vans contained 15 units of Porsche and Ferrari cars. Characterize Mr. Z's action. A119. Mr. Z committed smuggling. Smuggling refers to the fraudulent act of importing any goods into the Philippines, or the act of assisting in receiving, concealing, buying, selling, disposing or transporting such goods, with full knowledge that the same has been fraudulently imported, or the fraudulent exportation of goods. [Sec. 101(nn), CMTA; Section 3601, TCCP; Rieta v. People of the Philippines, 436 SCRA 273] Q120. What is the dutiable value of an imported article subject to an ad valorem rate of duty under existing law? A120. The transaction value. [Section 201, Tariff and Customs Code, as amended by RA 8181] Q121. Where should a taxpayer file a protest against an assessment issued by the Collector of Customs for unpaid customs duties on imported goods? A121. The Collector of Customs. [Section 2308, Tariff and Customs Code] Q122. Under the Tariff and Customs Code, who becomes the owner of abandoned imported articles? A122. Expressly abandoned goods, when the owner, importer, or consignee of the imported goods expressly signifies in writing to the District Collector the intention to abandon the same, shall ipso facto be deemed the property of the government. [Sec. 1130, CMTA] Q123. Are forfeiture proceedings of goods illegally imported criminal in nature? A123. No, a forfeiture proceeding under tariff and customs laws in not penal in nature, the main purpose of which is to enforce the administrative fines or forfeiture incident to unlawful importation of goods or their deliberate possession. The penalty in seizure cases is distinct and separate from the criminal liability that might be imposed against the indicted importer or possessor and both kinds of penalties may be imposed (People v. CFI of Rizal, et al., No. L-41686, 17 November 1980). Q124. Can an underdeclared luxury car be seized while in inside the garage of the taxpayer’s residence? A124. No. The luxury car, being in a dwelling house, cannot be seized by officers of the Bureau of Customs exercising police authority without a search warrant issued by a judge of a competent court [Sec 2209, TCC; Pacis v. Pamaran, 56 SCRA 16 (1974)]. Q125. XYZ Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In December 2007, it imported several second- hand motor vehicles from Japan and Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing in the customs territory. Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? A125. No, because domestic corporations importing used vehicles that are “stored, used or traded” within the Subic Naval Base Area enjoy an exemption from customs duties and VAT, provided they are registered with the SBMA (Executive Secretary v. Southwing Heavy Industries, G.R. No. 164171, 20 February 2006). Q126. Regarding the facts in Q3, assuming duties and taxes have to be paid, when must the duties and taxes be paid? What are the bases for and purposes of computing customs duties and VAT? To whom must the duties and VAT be paid? A126. Duties and taxes must be paid upon release of the vehicle from Customs’ custody. Custom duties for motor vehicles are based on the value being used by the Bureau for assessing customs duties. VAT is also based on the value being used by the Bureau for motor vehicles [Sec. 107(A) NIRC]. Duties must be paid to the Bureau of Customs. VAT must be paid to the Bureau of Internal Revenue. PAGE 28 OF 28