2019 Taxation Law Fundamentals

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TAXATION LAW FUNDAMENTALS

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REMINDERS

Q: Explain the theory of taxation and the source of the State‟s power to tax.

The following material does not predict bar questions. It is meant to orient and prepare the mind to approach questions in Taxation Law. Do not base your answers on logic, political beliefs or sense of morality. All answers must be based on a LEGAL PRINCIPLE. Cite a constitutional provision (do not quote the provision, just state the principle), a statutory provision, a legal doctrine, or jurisprudence (no need to cite the case title). Do not use civil law, criminal law or remedial law concepts in answering Taxation Law questions. Think long, write short. Please go straight to the point and DO NOT use up an entire page for an answer. TRY YOUR BEST TO LIMIT THE ANSWER TO NO MORE THAN 3-4 SENTENCES. Make sure the answer is COMPLETE. It is complete if it has a LEGAL PRINCIPLE AND IT IS APPLIED TO THE FACTS. To get full points, the answer must be SHORT and COMPLETE. Take time to choose the proper words to use in your answer. In the suggested answers below, the magic words are in bold. Remember that the examiner is looking for certain words or phrases.

A: Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. NPC v. City of Cabanatuan, GR No. 149110, April 9, 2003, 259 SCRA 401 II. Q: What cases fall under the exclusive appellate jurisdiction of the Court of Tax Appeals to review by appeal? A: Under Republic Act No. 9282, the CTA shall exercise exclusive appellate jurisdiction to review by appeal: (i)

YOU WILL PASS THE BAR. TIWALA. ACKNOWLEDGMENTS Subject Expert

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(ii)

(iii)

(iv)

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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 NIRC or other laws administered by the BIR; Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the NIRC or other laws administered by the BIR, where the NIRC provides a specific period of action, in which case the inaction shall be deemed a denial; Decisions, orders or resolutions of the RTC in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; 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 Page 1 of 14

(v)

(vi)

(vii)

other matters arising under the Customs Law or other laws administered by the Bureau of Customs; 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; 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 the Tariff and Customs Code; Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under the Tariff and Customs Code, as amended, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties.

(ii)

decided by them, in their respected territorial jurisdiction. 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. IV.

Q: What tax collection cases fall under the jurisdiction of the Court of Tax Appeals? A: The CTA has jurisdiction over the following tax collection cases: A. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties the principal amount of which, exclusive of charges and penalties, is One million pesos (P1,000,000.00) or more. If the amount claimed is less than One million pesos, it shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court.

III. Q: What cases involving criminal offenses fall under the jurisdiction of the Court of Tax Appeals?

B. Exclusive appellate collection cases: (i)

A: The following cases involving criminal offenses fall under the jurisdiction of the Court of Tax Appeals: (A) Exclusive original jurisdiction over all criminal offenses arising from violations of the NIRC and Tariff and Customs Code, as amended, and other laws administered by the BIR or the Bureau of Customs: Provided, that offenses or felonies 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. (B) Exclusive appellate jurisdiction in criminal offenses: (i)

Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally

(ii)

jurisdiction

in

tax

Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. 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. V.

Q: What are national internal revenue taxes? A: Under [Sec. 21 of] the National Internal Revenue Code, following taxes, fees and charges are deemed to be national internal revenue taxes:

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(a) Income tax; (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.

(iv)

(v)

VI. Q: What are the fundamental principles of local government taxation? A: Under the Local Government Code, the following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: (a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall: (1) be equitable and based as far as practicable on the taxpayer's ability to pay; (2) be levied and collected only for public purposes; (3) not be unjust, excessive, oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or in restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and (e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

(vi)

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(ix)

(x)

VII. (xi) Q: What are the common limitations to the local government power‟s to tax?

(xii)

A: Under the Local Government Code, unless expressly provided, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

(xiii)

(i)

(ii) (iii)

Income tax, except when levied on banks and other financial institutions; Documentary stamp tax; Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa;

(xiv)

(xv)

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Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit; Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise; Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; Taxes on business enterprises certified to by the BOI as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water; Taxes on premiums paid by way of reinsurance or retrocession; Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles; Taxes, fees, or other charges on Philippine products actually exported; Taxes, fees, or charges, on duly registered Countryside and Barangay Business Enterprises and cooperatives under the Cooperatives Code of the Philippines; and Taxes, fees or charges of any kind on the National Government, its Page 3 of 14

agencies and instrumentalities, and local government units. VIII. Q: 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? A: The local governments‟ taxing power is not inherent, but is granted by the Constitution subject to such guidelines and limitations as the Congress may provide. (Sec. 5 Article X, 1987 Constitution) Through ordinances passed by their respective Sanggunian, each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions of the Local Government Code, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. IX. Q: A, the sole employer of B, has correctly withheld the taxes of B for taxable year 2018. Was B required to file his income tax return for 2018 on or before April 15, 2019? A: No, B was not longer required to file his 2018 income tax return. Under [Sec. 51-A of] the National Internal Revenue Code, as amended by the TRAIN Act, individual taxpayers receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer (tax due equals tax withheld) shall not be required to file an annual income tax return. The certificate of withholding filed by the respective employers, duly stamped „received‟ by the BIR, shall be tantamount to the substituted filing of income tax returns by said employees. X. Q: What deductions are allowed to the estate of a citizen or a resident of the Philippines? A: In the case of a citizen or resident of the Philippines, the following deductions from the value of the gross estate are allowed under the NIRC (1) Standard Deduction - An amount equivalent to Five million pesos (₱5,000,000).

(2) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. (3) For claims of the deceased against insolvent persons where the value of decedent‟s interest therein is included in the value of the gross estate. (4) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent‟s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. (5) Property Previously Taxed. (6) Transfers for Public Use - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof for exclusively public purposes. (7) The Family Home. - An amount equivalent to the current fair market value of the decedent‟s family home: Provided, however, That if the said current fair market value exceeds Ten million pesos (₱10,000,000), the excess shall be subject to estate tax. (8) Any amount received by the heirs from the decedent‟s employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent. XI. Q: X passed away on 1 December 2018, leaving 20Million in time deposit in RoboBank. The administrator of X‟s estate tried to withdraw the said deposit, but the bank manager required the presentation of a BIR Certificate Authorizing Registration (CAR) to prove that the estate taxes on X‟s estate have been paid. According to the bank manager, until settlement of all taxes on the estate as evidenced by the CAR, X‟s bank deposits are frozen; the administrator may only withdraw an amount not exceeding Twenty thousand pesos (P20,000) upon authorization by the Commissioner. Is the bank manager correct? A: No, the bank manager is wrong. Under [Sec. 97 of] the NIRC, as amended by the TRAIN Act, if a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it

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shall allow any withdrawal from the said deposit account, subject to a final withholding tax of six percent (6%). For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. XII. Q: Y owns 1,000 shares of stock in A Corporation, which has a fair market value of PhP5Million. Y posted it for sale in all his social media accounts for a period of one month, and J‟s offer to purchase for PhP4Million was the highest offer; thus Y sold his shares of stock to J. The BIR subsequently assessed Y Donors Tax of PhP60,000, computed at 6% of the PhP1Million difference between the FMV of the shares and Y‟s selling price to J. Is the BIR correct in assessing Y? A: No, the BIR is not correct because the transaction was arms-length. Under Section 100 of the NIRC, as amended by TRAIN Act, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm‟s length, and free from any donative intent) will be considered as made for an adequate and full consideration in money or money‟s worth. The sale transaction between Y and J is an arms-length transaction and free from any intent to donate, as shown by the fact that the sale was made to the highest bidder. The PhP4Million purchase price is thus considered adequate and full consideration for the shares of stock, and no Donors Tax is due on the transaction.

Q: What is the tax base for VAT on importation of goods? A: Under [Section 107 of] the NIRC, as amended by the TRAIN Act, the VAT on importation of goods is 12% based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. XV. Q: Upon the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau, which of the VAT zero-rated services will already be subject to 12% VAT? A: (a) The following VAT zero-rates services will already be subject to 12% VAT the successful establishment and implementation of an enhanced VAT refund system: (i)

XIII. Q: Y sold his beach house for PhP10Million because he has been unable to use it often, and the maintenance cost too high. The fair market value of the property (highest of zonal and FMV of assessor) is PhP15Million. The BIR assessed Y for donor‟s tax on the difference between his selling price of PhP10Million and the FMV of PhP15Million. Is the BIR correct? A: No, the BIR is not correct because the sale of real property held as capital asset is expressly excluded from the coverage of Section 100 of the NIRC on transfers for less than adequate and full consideration. Considering that the beach house fall under the NIRC definition of capital asset, the sale for less than FMV will not result in any donor‟s tax liability. XIV.

(ii)

Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; and Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

(b) The following VAT zero-rates sale of goods will already be subject to 12% VAT, and no longer considered export sales, upon the successful establishment and implementation of an enhanced VAT refund system:

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(i)

(ii)

(iii)

Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local exportoriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer‟s goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws. XVI.

Q: N, a resident Filipino citizen engaged in the practice of his profession, projects that his income for the taxable year will be less than PhP3Million. He is a non-VAT registered taxpayer. What are his options for paying his taxes, and what taxes are payable for each option? A: N may opt to be taxed either: (i) At 8% of gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (₱250,000), in lieu of the graduated income tax rates applicable to resident Filipino citizens and the percentage tax under the NIRC; or (ii) At the graduated income tax rates applicable to resident Filipino citizens, based on his taxable (net) income. In which case, he will also be subject to percentage tax. N must indicate his option to be taxed at 8% of gross sales or gross receipts in his first quarter income tax return; otherwise, he shall be deemed to have opted to be taxed at the graduated income tax rates.

(1) the fair market value as determined by the Commissioner; or (2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. XVIII. Q: X and 2 other investors, Y and Z, exchanged their shares in DCorp for shares of Company A. Prior to the exchange, X owned 100% of the shares of Co. A. After the exchange X, Y, and Z owned 1/3 each of the shares of Co. A; and they then paid CGT on the transfer of their DCorp shares to Co. A. X subsequently filed for refund, but the BIR denied X‟s request because: (a) X was already a shareholder of Co. A prior to exchange, and in fact, X‟s ownership in Co. A decreased after the exchange. Thus, the transaction does not qualify under Section 40(C)(2) as an “acquisition of control”; and (ii) X, Y, and Z did not file for confirmation of exemption of the exchange with the CIR as required by regulations. Is the BIR correct on points (i) and (ii)? A: (i)

No, CIR is wrong that X‟s transfer is not exempt. Sections 40(C)(2) and 40(C)(6)(c) speak of control being acquired 'alone or together with others, not exceeding four persons.' The control requirement is sufficiently met when after the transfer, the transferors, not more than five, collectively become the owners of at least 51% of the equity of the transferee, or if already owning 51%, increase their equity further in the transferee corporation. It is not required that each of the several transferors individually gains control or individually increases his/her interest.

(ii)

No, CIR is wrong that a BIR ruling is a prerequisite for exemption. Revenue Regulations No. 18-2001 merely provides for guidelines in monitoring tax-free exchange of property. The BIR ruling/certification required under RR No. 18-2001 is for determining gain or loss on a subsequent sale or disposition of property subject of the tax-free exchange, and not as a precondition for availment of a tax exemption of the current transfer.

XVII. Q: What is the value of real properties for purposes of computing any internal revenue tax?

(CIR v. Co. CTA EB NO. 1522, Feb 28, 2018.)

A: Under [Sec. 6 of] the NIRC, as amended by the TRAIN Act, for purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: UP LAW CENTER TRAINING AND CONVENTION DIVISION

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Q: Father and son bought a parcel of land and a building from their common fund. They appointed a property manager to collect lease rentals and manage the property. Father and son divided the income equally. Later the BIR assessed them for alleged deficiency income taxes as an unregistered partnership. Questions: (i) What is the tax consequence of the income earned by an unregistered partnership? (ii) differentiate a co-ownership from an unregistered partnership. (iii) Does the sharing of profits or the pooling of funds automatically denominate a transaction among persons an unregistered partnership? (iv) In the instant case, what is the nature of the transaction of father and son?

(iv)

A:

Pascual and Dragon v. CIR, G.R. No. 78133 October 18, 1988; citing Evangelista v. Collector, G.R. No. 9996, Oct. 15,1957,102 Phil. 140

(i)

(ii)

(iii)

Income earned by an unregistered partnership are generally taxed as dividends because a partnership, no matter how created or organized, fall under the term “Corporation” under Section 22(B) of the National Internal Revenue Code, as amended. Co-ownership is the ownership of one asset by two or more persons. On the other hand, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits and losses among the contracting parties. The common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains. No, the sharing of profits or the pooling of funds does not automatically denominate a transaction among persons as an unregistered partnership. In order to constitute a partnership there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property. Thus, in the 2018 case of Pascual and Dragon v. CIR, the Supreme Court held that two isolated transactions whereby the parties purchased properties and sold the same a few years thereafter did not thereby make them partners. (Pascual and Dragon v. CIR, G.R. No. 78133 October 18, 1988)

Father and son had an unregistered partnership engaged in the business of real estate leasing. Their intention to engage in real estate transactions for profit, and then divide the same among themselves, is apparent from the fact that they appointed a property manager to manage the property and collect rentals. Thus, the affairs relative to said property have been handled as if the same belonged to a corporation or business enterprise operated for profit. (Evangelista v. Collector, G.R. No. 9996, Oct. 15,1957,102 Phil. 140)

XX. Q: What are the requisites for a taxpayer engaged in zero-rated or effectively zero-rated transactions to claim a refund or tax credit certificate for excess input tax credits? A: A taxpayer engaged in zero-rated or effectively zerorated transactions may claim a refund or tax credit certificate for excess input tax credits upon compliance with the following requisites: 1. That the taxpayer must be VAT -registered; 2. That the claim for refund was filed within the twoyear prescriptive period; 3. That there must be zero-rated or effectively zero-rated sales; 4. That input taxes were incurred or paid; 5. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales; and 6. That the input VAT payments were not applied against any output VAT liability. CIR v. Taganito Mining (CTA EB No. 1404, June 11, 2018) XXI. Q: NPC, a GOCC, entered into a BOT scheme with Luzon Hydro Corporation ("LHC") for the construction, operation and maintenance of the Bakun AC Hydroelectric Plant (the "Power Plant"). This arrangement was defined in a Power Purchase Agreement ("PPA"). Under the PPA and pursuant to the

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BOT Law, LHC undertook to construct, operate and maintain the Power Plant for NPC and to deliver to NPC all electricity generated by the Power Plant. In every sense of the word, NPC is the sole beneficiary of all electricity generated by the Power Plant. Further, under the PPA, NPC acknowledged and assumed responsibility for the payment of real property taxes levied on the Power Plant and its facilities. Subsequently, LHC declared the Power Plant machineries in its name as naked owner of the properties, and informed the Provincial Assessor of Benguet regarding the arrangement (i.e., that NPC shall be liable for payment of real property taxes). The Provincial Assessor thereafter issued a notice of assessment to LNC, which LNC, pursuant to the PPA, referred to NPC. NPC filed a protest on the ground that the machineries are exempt from real property taxes pursuant to Section 234 (c) of the Local Government Code, because: (i) NPC is the sole beneficiary of all electricity generated by the Power Plant; and (ii) under the PPA, NPC – a GOCC-is responsible for the real property tax. Is NPC correct that the machineries should be exempt under Section 234 of the LGC? A: No, NPC is not correct in claiming that the machineries of LNC are exempt from real property tax.

of Pasig. Thus, the Treasurer‟s Office of the City of Pasig informed the Manila Electric Company (Meralco), a legislative franchise grantee, that it is liable to pay the franchise tax and demanded from it the payment for taxes for the period covering 1996 to 1999, pursuant to the ordinance. Does Pasig City have the authority to levy franchise taxes on Meralco for the period 1996 to 1999? A: No, Pasig City had no authority to levy the franchise tax on Meralco. A municipality has no authority to levy and impose franchise tax on franchise holders within its jurisdiction, since only cities and provinces have such authority under the Local Government Code. At the time the ordinance in question was enacted in 1992, the local government of Pasig, then a municipality, had no authority to levy franchise tax; the ordinance was therefore void. The conversion of the municipality into a city does not remove the original infirmity of the ordinance. The assessment and collection made pursuant to a void ordinance are likewise void. (City of Pasig v. Manila Electric Company, G.R. No. 181710, March 7, 2018)

(i) To be entitled to exemption from real property tax under Section 234(c) of the Local Government Code, there must be actual, direct, and exclusive use of the machineries by a GOCC or local water district. In defining "actual use", the actor identified by the LGC is simply and solely "the person in possession" of the property. Thus, it is LHC, which is not a GOCC, that is the user. What NPC should prove is that it has the actual, direct, exclusive use of the subject machineries and equipment- rather than of all the power generated by the plant. (ii) The PPA cannot amend the LGC's provisions on real property taxation. It is basic that the law is deemed written into every contract. NPC v Luzon Hydro Corporation (CTA EB No 1022, May 20, 2018) XXII. Q. In 1992, the Sangguniang Bayan of the Municipality of Pasig enacted Ordinance No. 25 which imposed a franchise tax on all business venture operations carried out through a franchise within the municipality. In 1995, the Municipality of Pasig was converted into a highly urbanized city known as the City UP LAW CENTER TRAINING AND CONVENTION DIVISION

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XXIII. Q. The City of Manila assessed X Corporation local business taxes (manufacturer‟s tax) for the taxable year 2007 using a computation based on gross sales for the calendar year 2005. The assessment was based on “X” Corporation protested the assessment, arguing that: (a) the computation of the business tax should be on the basis of its gross sales in 2006, which amount, incidentally, was lower than its gross sales in 2005; and (b) the assessment constitutes obnoxious double taxation since Section 14 of Tax Ordinance No. 7794, which imposes a business tax on manufacturers, etc. pursuant to Section 143(a) of the Local Government Code may no longer subject the same manufacturers, etc. to a business tax under Section 21 of the ordinance, which is based on Section 143(h) of the Local Government Code. Is “X” Corporation correct? A. (a) Yes, X Corporation is correct that the computation of the business tax for 2007 should be based on its gross sales in 2006. Section 14 of the Revenue Code of Manila is derived from the Section 143 of the Local Government Code (LGC), which provides that the municipality may impose taxes on manufacturers based on their gross sales or receipts for the preceding calendar year. The LGC provides for the legislative guidelines and limitations on the local government‟s power to create its own sources of revenues and to levy taxes, to which any local business tax imposed by the City of Manila must conform. (b) Yes, X Corporation is correct that the assessment constitutes obnoxious double taxation. As stated by the Supreme Court [in the case of City of Manila v. Cosmos Bottling Corporation], when the city has already imposed a business tax on manufacturers pursuant to Section 143(a) of the LGC, the city may no longer subject the same manufacturers to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are "not otherwise specified in preceding paragraphs."

denied “X” Corporation‟s protest, which denial was received on February 6, 2007. “X” Corporation was then constrained to pay the assessment and filed a claim for refund with the City Treasurer raising the same grounds as discussed in its protest. “X” Corporation filed its complaint with the Regional Trial Court of Manila for the refund on March 8, 2007. The City of Manila argues that the assessment against “X” Corporation became final and executory when the latter effectively abandoned its protest and instead sued in court for a refund of the assessed tax and charges. (a) Is the City of Manila correct? (b) What are the remedies of a taxpayer in case of an assessment for deficiency local taxes? A. (a) No, the City of Manila‟s argument is wrong. As stated by the Supreme Court [in the 2018 case of City of Manila v. Cosmos Bottling Corporation], a taxpayer who protested and paid an assessment is not precluded from later instituting an action for refund or credit. If the deficiency local tax assessment was paid, the taxpayer may maintain an action in court questioning the validity and correctness of the assessment and at the same time, seek a refund of the taxes. 1)

The remedies available to the taxpayer depend on whether or not payment of the assessed deficiency tax was made by the taxpayer. A taxpayer may: (i)

(ii)

(City of Manila v. Cosmos Bottling Corp., G.R. No. 196681, [June 27, 2018]) XXIV. Q. On January 15, 2007, “X” Corporation received an assessment from the City of Manila for deficiency local business taxes. “X” Corporation protested the assessment in a letter dated January 18, 2008 and tendered payment of an amount which they argued was the correct computation of their local business tax. The City Treasurer refused to receive the payment and

If no payment was made, contest the assessment by filing a written protest before the local treasurer within 60 days from receipt of assessment. The local treasurer has 60 days to decide the protest. Should the local treasurer deny or ignore the protest, the taxpayer may appeal with the court of competent jurisdiction (Section 195 of the Local Government Code). If payment was made, file a written claim for refund before bringing a suit in court within two years from the date of payment. The written claim for refund from the local treasurer must be initiated within such twoyear prescriptive period, but before the judicial action. A taxpayer may proceed to the remedy of refund even without a prior protest against an assessment. (Section 196 of the Local Government Code)

(City of Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018)

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Q. (a) What are the requisites for claiming a refund of excess creditable withholding taxes? (b) If there is a finding by the BIR of a tax deficiency of a taxpayer for the taxable year since the taxpayer had carried over to the taxable year the prior year‟s excess credits which have already been fully applied against its income tax liability for the prior taxable year, is the BIR required to issue both the preliminary assessment notice and the final assessment notice and demand to enforce the deficiency income tax liability of the taxpayer for the taxable year? (c ) When the two-year period is about to prescribe and the claim for refund with the BIR Commissioner has not been acted upon, what should the taxpayer do? A. (a) The three requisites for claiming a refund of excess creditable withholding taxes are: 1) the claim for refund was filed within the twoyear prescriptive period; 2) the fact of withholding is established by a copy of a statement duly issued by the payor/withholding agent to the payee, showing the amount of tax withheld therefrom; and 3) the income upon which the taxes were withheld was included in the income tax return of the recipient as part of its gross income. (Commissioner of Internal Revenue v. Cebu Holdings, Inc., G.R. No. 189792, June 20, 2018) (b) No, a preliminary assessment notice is no longer required; but a final assessment notice and demand will still be required. Section 228 of the National Internal Revenue Code, as amended, states that a pre-assessment notice shall no longer be required when a taxpayer who 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 taxable year. However, the BIR is still required to issue a final assessment notice and demand letter to enforce the deficiency income tax liability of the taxpayer. (Commissioner of Internal Revenue v. Cebu Holdings, Inc., G.R. No. 189792, June 20, 2018) (c) When the two-year period is about to prescribe and the claim for refund with the Commissioner of Internal

Revenue (CIR) has not been acted upon, the taxpayer should file a Petition for Review with the CTA within the said two-year period. The law fixed the same period of two (2) years for filing an administrative claim for refund with the CIR, and for filing a petition with the CTA. (Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue, C.T.A. Case No. 8251, [February 27, 2014]; NEC Logistics Phils., Inc. v. Commissioner of Internal Revenue, C.T.A. Case No. 8533, [December 18, 2014]) XXVI. Q. Philippine Airlines made US dollar and Philippine peso deposits and placements in several banks. PAL earned interest income from these deposits and the banks deducted final withholding taxes. PAL claims that it is exempt from paying income tax on interest earned by virtue of its charter, Presidential Decree No. 1590, and consequently, for as long as it duly established that taxes were withheld from its income, it must be refunded. To prove that withholding tax on the interest income were remitted to the BIR, PAL presented the Certificates of Final Tax Withheld at Source issued by the banks. The BIR questions the grant of refund to PAL for the final income taxes withheld because there was no proof of actual remittance by the banks. Is the BIR correct? A. No, the BIR is not correct. A taxpayer claiming for refund of tax withheld does not have the duty to prove that the taxes withheld were in fact remitted to the BIR. The responsibility to remit the taxes withheld is with the withholding agent, not the taxpayer. Thus, should the BIR find that taxes were not properly remitted, its action is against the withholding agent and not against the taxpayer. (Philippine Airlines, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 201225-26, 201132, 201133, April 18, 2018) XXVII. Q. Can evidence not presented in the administrative claim for refund in the Bureau of Internal Revenue be presented in the Court of Tax Appeals? A. Yes, new evidence not presented in the administrative claim for refund may be presented to the Court of Tax Appeals to support the claimant‟s case for tax refund. The power of the Court of Tax Appeals to exercise its appellate jurisdiction under Republic Act No. 1125, as amended by Republic Act No 9282, does not preclude it from considering evidence that was not presented in the administrative claim in the Bureau of Internal Revenue. As evidence is considered and evaluated again, the scope of the Court of Tax Appeals'

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review covers factual findings. (Philippine Airlines, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 206079-80 & 206309, [January 17, 2018])

XXVIII. Q. What are the requirements and procedure for a taxpayer to file a VAT refund? A. Under Section 112, Subsections (A) and (C) of the NIRC, the procedure to be followed in claiming a refund or tax credit of unutilized input VAT is as follows: 1.

2.

3.

The taxpayer must first file an initial administrative claim with the BIR. This claim for refund or tax credit must be filed within two years after the close of the taxable quarter when the sales were made. The CIR is given a period of 90 days from the submission of complete documents in support of the application to either grant or deny the claim. If the claim is denied by the CIR or the latter has not acted on it within the 90-day period, the taxpayerclaimant is then given a period of 30 days to file a judicial claim via petition for review with the CTA. XXIX.

Q: The taxpayer filed its administrative claim with the BIR for the refund or tax credit of unutilized input VAT within two-years after the close of the taxable quarter when the sales were made. The taxpayer filed a judicial claim for refund with the CTA when the Commissioner of Internal Revenue (CIR) failed to resolve the claim within the same two-year period. The CIR moved to dismiss the judicial claim on the ground that it was filed prematurely. Is the CIR correct? A: Yes, the CIR is correct that the judicial claim was filed prematurely. The law provides for two scenarios before a judicial claim for refund may be filed with the CTA: (1) the full or partial denial of the claim within the 90-day period from the filing of the adminstrative claim for refund or tax credit, or (2) the lapse of the said 90-day period without the CIR having acted on the claim. The taxpayer-claimant may only file its judicial claim for

refund or tax credit for unutilized input VAT upon the happening of any one of the two scenarios. The failure of the taxpayer to observe the said period renders the judicial claim premature, divesting the CTA of jurisdiction to act on it. (See Team Sual Corporation vs. Commissioner of Internal Revenue, G.R. Nos. 201225-26, 201132, 201133, April 18, 2018) XXX. Q. Are invoices and official receipts as evidence in a claiming for refund of unutilized input VAT interchangeable? A. No, invoices and official receipts are not interchangeable as evidence in a claiming for refund of unutilized input VAT. As stated by the Supreme Court [in the case 2018 of Republic versus Team Energy Corporation], in a claim a refund of unutilized or excess input VAT, the purchase of goods or properties must be supported by VAT invoices, while the purchase of services must be supported by VAT official receipts. (Republic of the Philippines v. Team Energy Corporation, , G.R. No. 197663, March 14, 2018) XXXI. Q. Distinguish “excess input VAT” and an “excessively collected tax.” Does proof of excess input VAT entitle a taxpayer to a tax refund or credit? A. The term “excess input VAT” means that the input VAT available as credit exceeded the output VAT; whereas “excessively collected tax” is a result of error or mistake in payment or collection of taxes. The mere fact that a taxpayer has proved its excess input VAT does not entitle it as a matter of right to a tax refund or credit. A claim for input VAT refund or credit is in the nature of tax exemption; and thus construed strictly against the taxpayer. There must be strict compliance with the prescriptive periods and substantive requirements set by law before a claim for tax refund or credit of excess input VAT may prosper. (Team Energy Corp. v. Commissioner of Internal Revenue, G.R. Nos. 197663 & 197770, [March 14, 2018]). XXXII. Q. Chevron Philippines, Inc. (Chevron) filed an administrative claim for refund or credit with the BIR for

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alleged overpayment of taxes on imported finished gasoline and diesel fuel. The BIR, however, did not act on Chevron's claim. Thus, Chevron elevated the case to the CTA-Special First Division via a petition for review. The CTA-Special First Division rendered its decision partly granting the petition. The BIR moved for the reconsideration of this decision. Chevron filed its opposition to the motion for reconsideration and asserted that the BIR's motion for reconsideration was a pro forma motion because the BIR failed to set the motion for hearing pursuant to Revised Rules of the CTA. The CTA-Special First Division agreed with Chevron and denied the BIR's motion for reconsideration. The BIR once again moved for a reconsideration of the resolution, which the CTA-Special First Division denied with finality. After having confirmed that the BIR did not elevate the issue before the CTA En Banc within the 15-day reglementary period to appeal, issued an entry of judgment. The BIR filed a special civil action for certiorari under Rule 65 of the Rules of Court with the Supreme Court. Rule on the petition. Will the special civil action for certiorari prosper? A.

No, the BIR‟s petition should be dismissed.

For cases before the CTA, a decision rendered by a division of the CTA is appealable to the CTA En Banc as provided by Section 18 of R.A. No. 1125, as amended by R.A. No. 9282. The appropriate remedy to challenge the resolution of the CTA Division is an ordinary appeal to the CTA En Banc, not a petition for certiorari with the Supreme Court. (Bureau of Internal Revenue v. Acosta, G.R. No. 195320, [April 23, 2018]) XXXIII. Q. The Philippine Ports Authority (PPA) received a letter from the City Assessor of Davao for the assessment and collection of real property taxes against its administered properties located at Sasa Port. PPA appealed the assessment through the Office of the City Treasurer of Davao. The City Treasurer forwarded the appeal to the Local Board of Assessment Appeals (LBAA); which was eventually appealed to the Central Board of Assessment Appeals (CBAA), then to the CTA. While the case was pending, the City of Davao posted a notice of sale of delinquent real properties of PPA, and then sold the said properties. Subsequently, PPA filed a petition for certiorari with the Court of Appeals (CA), questioning the City of Davao‟s taxation of its properties and the subsequent auction and sale of the properties, which were without or in excess of its jurisdiction. The CA dismissed the petition, holding that the CTA had exclusive jurisdiction to determine the issues and that

the PPA should have applied for the issuance of writ of injunction or prohibition before the CTA. To this, PPA, filed a motion for reconsideration which was denied by the CA. Thus, PPA filed a Petition for Review before the Supreme Court. Does the CA have jurisdiction to issue the injunctive relief prayed for by PPA? A. No, the CA has no jurisdiction to issue the injunctive relief prayed for by PPA. Republic Act No. 1125, as amended by Republic Act No. 9282, provides that the Court of Tax Appeals has exclusive appellate jurisdiction over decisions of the CBAA 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 appeal. Once a court acquires jurisdiction over a case, it also has the power to issue all auxiliary writs necessary to maintain and exercise its jurisdiction, to the exclusion of all other courts. Thus, once the Court of Tax Appeals acquired jurisdiction over petitioner's appeal, the Court of Appeals would have been precluded from taking cognizance of the case. (Philippine Ports Authority v. City of Davao, G.R. No. 190324 , [June 6, 2018]) XXXIV. Q. When is a taxpayer be entitled to the immunities and privileges of a tax amnesty program? A. A taxpayer is entitled to the immunities and privileges of a tax amnesty program upon complying with the documentary submissions to the Bureau of Internal Revenue and paying the applicable amnesty tax. However, the immunities and privileges granted to taxpayers may not be absolute since the tax amnesty law concerned may impose suspensive conditions or resolutory conditions. (Commissioner of Internal Revenue v. Covanta Energy Philippine Holdings, Inc., G.R. No. 203160, January 24, 2018)

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XXXV. Q: (a) Does the CTA have jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations, and other administrative issuances? (b) In what cases does the CTA have authority to issue injunctive writs to restrain the collection of tax? A: (a) Yes, the Court of Tax Appeals has jurisdiction to pass upon the constitutionality or validity of a tax law or regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a refund, pursuant to its powers under Republic Act No. 1125, as amended. Further, the Supreme Court [in the 2018 case of Steel Corporation of the Philippines v. Bureau of Customs] has declared that the Court of Tax Appeals may likewise take cognizance of cases directly challenging the constitutionality or validity of a tax law or regulation or administrative issuance (revenue orders, revenue memorandum circulars, rulings).

(b) Section 11, Paragraph 4 of R.A. No. 1125, as amended by R.A. No. 9282, provides that an appeal to the CTA will not 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. However when, in the opinion of the CTA, the collection may jeopardize the interest of the Government and/or the taxpayer, it 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. Further, the requirement of deposit or surety bond may be dispensed with by the CTA. (Steel Corporation of the Philippines v. Bureau of Customs, G.R. No. 220502, [February 12, 2018]; citing Pacquiao v. Court of Tax Appeals, First Division (G.R. No. 213394, April 6, 2016, 789 SCRA 19): XXXVI. Q. What are the remedies for excess creditable withholding taxes or overpayment? A.

The remedies are as follows:

1. They are allowed as automatic credit against the taxpayer‟s income tax due for the taxable quarters/years immediately succeeding the taxable quarters/years in which the excess credit arose. 2. In lieu of the automatic application, apply for (a) cash refund, or (b) tax credit certificate.

Q: May a taxpayer revoke its choice to claim for a refund, and instead, after having claimed for refund in his return proceed to exercise the option to credit the tax in the succeeding taxable quarters/years? A: No, the taxpayer may not revoke its claim for refund and proceed to credit the tax in the succeeding taxable quarters/years. In the 2018 case of Rhombus Energy Inc v. CIR, the Supreme Court clarified that the irrevocability rule applies not only in the exercise of the option to carry over but also in the exercise of the option to claim for refund. (Rhombus Energy v. CIR, G.R. No. 206362, August 1, 2018. Note: it is important to cite the case of Rhombus if this question comes up because of a conflicting earlier ruling by the SC)

XXXVII. Q. Moog Controls Corporation – Philippine Branch (Moog) was assessed by the CIR for alleged deficiency income tax for fiscal year ended October 3, 2009. Moog protested the assessment, which was denied by the BIR on June 8, 2015. Moog filed a petition for review with the CTA. The CTA Second Division partially granted the petition in its decision dated January 3, 2018 and reduced the deficiency tax assessment and penalties. Both parties moved for the reconsideration of the decision. Moog argued that the simultaneous imposition of both deficiency and delinquency is already prohibited under the clear provisions of Republic Act No. 10963 or the TRAIN Law with its effectivity on January 1, 2018. Can deficiency interest and delinquency interest be imposed simultaneously? A. No, deficiency interest and delinquency interest may not be imposed simultaneously. Section 249 (A) and (B) of the NIRC of 1997 was amended by the TRAIN law provides that Interest shall be assessed and collected on any unpaid amount of tax at the rate of double the legal interest for loans or forbearance of money in the absence of any express stipulation set by the Bangko Sentral ng Pilipines, from the date prescribed for payment until the amount is fully paid; provided that in no case shall be deficiency and delinquency interest be imposed simultaneously.

Q: When shall deficiency interest and delinquency interest be imposed?

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A: Under Section 249 (A) and (B), respectively: (i)

(ii)

Deficiency interest is imposed on any deficiency tax due, which will be assessed and collected from the date prescribed for payment until the full payment, or upon the issuance of a notice of demand by the BIR, whichever comes first. Delinquency interest, on the other hand, is imposed on the failure to pay the amount of tax due on any return to be filed, the amount of tax due for which no return is required, or deficiency tax or any surcharge or interest appearing in the notice of demand.

action does not carry with it the extinction of the civil liability. (b) No, the assessment is not valid. As the Supreme Court held in Medicard Philippines, Inc. vs. CIR (GR 222743, April 5, 2017), an examination of the taxpayer may not be validly conducted without prior authority from the Commissioner of Internal Revenue himself or by his duly authorized representative, through a Letter of Authority (LOA). Without an LOA, the assessment issued by the BIR is void. (People of the Philippines vs. Robert Sia and John Kenneth L. Ocampo, CTA (En Banc) Criminal Case No. 045, December 12, 2018)

If the tax liabilities or deficiencies became due before the effectivity of the Train Law on Jan. 1, 2018 and if the tax liabilities or deficiencies were fully paid after the said effectivity date, the previous 20 percent interest rate will still apply up to Dec. 31, 2017 and the new 12 percent interest rate from Jan. 1, 2018 onwards. (Moog Controls Corp. v. Commissioner of Internal Revenue, C.T.A. Case No. 9077, [February 22, 2018])

XXXVIII. Q. Erwin Santos was criminally charged for violation of Sec. 255 of the Tax Code, or failure to pay deficiency taxes for taxable year 2015 despite notice and demand. Santos, the President of Asia-Pacific Industrial Sales Corporation (APISC), pleaded “Not Guilty” during arraignment. The CTA Third Division dismissed the case and acquitted the accused for failure of the prosecution to prove their guilt beyond reasonable doubt. Upon denial of the Motion for Reconsideration, the BIR filed a Petition for Review at the CTA En Banc. The BIR contended that the deficiency assessments have become final, executory, and demandable for failure of Santos to protest. It appeared that the revenue officer who investigated the books of APISC did so with a mere referral letter and not a “letter of authority”. (a) Can the accused be held civilly liable for the tax assessments despite his acquittal from the criminal case? (b)

Is the BIR‟s assessment valid?

A. (a) Yes. Despite acquittal in a criminal case based on reasonable doubt, a taxpayer can be held civilly liable for a tax assessment when the prosecution proves its case in the civil action by a preponderance of evidence. It is settled that the extinction of the penal UP LAW CENTER TRAINING AND CONVENTION DIVISION

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