Reviewer On Taxation -mamalateo 2014

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Tffi{ilN ATTY. VICTORINO C. MAMAI,ATEO

(T]M) LL.M. (IIARVARD), LL.B. (MLQU), MBA (UE), BBA-CPA Bar Examiner (2008 and 2012) Author: Value Added Tax (2013);

PhiliPPine Income Tax (2010); Tax Rights and Remedies (2011); Pre-Week Bar Reviewer: Ateneo University (2011); San Sebastian College-Recoletos (2003-2013); LYceum ofthe PhiliPPines (2007); (1989-to date); Professor oflaw: University ofthe Philippines (2007); ng Maynila Lungsod ng Pamantasan De La Salle Universitv/St. Benilde-CREB A (2002-20I3)i Managing Heacl, Tax Division (1994-2001): Punongbayan & Araullo' -CPAs^ (1993-1994) Assistani Cimmissioner (Asqessment): Bureau oflnternal Revenue (2006 to date)' Managing Partner, V.C. Mamalateo & Associates

Third Edition 20L4

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Philippino Copyright, 2014 bv

Foreword

kt

VICTORIN O C. MAMALA TEO

rsBN

978.97 t-23-87 40_3

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.. No,

0610 978-971-23-67

ilr

ilililIililil iltil|ililililililil1il 05-RV-00079

1ilil

897 1

ilhm by nfx pnirviq cor4pANy, iNc. rylx4gply &

cRarivE lirhoqnphy

l. i lbnnuno St, Quezon City Ill Noa, 712.4r'ol. 71241-08

Many bar candid ates said. "Ta.xation is otn of the m,ore diffrcult bar subjects to pass." There could be some truth to ttris statement because our tax laws are described to be complicated and highly technical, necessitating a well-rounded knowledge thereof that is acquired generally through years of studies, experience, and active practice. Taxation becomes even more difficult because our tax laws are very dynamic, particularly when the tax administration takes extra-aggressive positions in the interpretation and application oftax Iaws to be able to generate revenues. As a result thereo{ numerous deficiency tax assessments issued, which are considered by taxpayers as without factual or legal basis, are protested, and tax refund/ credit cases are filed by taxpayers to recover taxes erroneously paid, and necessarily, many decisions on such tax cases are promulgated by the Supreme Court and the Court of Tax Appeals for the proper interpretation and guidance of tax officials, taxpayers, and students oflaw under their power ofjudicial review. The Tax Code, Supreme Court decisions, and revenue regulations are the basic sources oftax laws that must be studied and learned by heart by any bar candidate.

It is the object ofthis updated Reviewer on Taxation to help the bar candidates acquire a strong understanding and good knowledge of the principles of tax law, such that no bar question or problem would be too difficult to answer. T?re discussions ofthe tax principles in the book have been expalrded to cover not only the 2005 National Internal Revenue Code and Local Government Code, as amended by the latest tax laws passed by Congress ofthe Philippines, but also the recent relevant decisions of the Supreme Court and administrative issuances promulgated by the Secretary ofFinance and the Commissioner of Internal Revenue, which also form part of the laws of the land. To inform the reader about the areas and types of questions given in the past bar examinations, the author included too the bar examination questions in the past years up to 2013 as well as the suggested answers thereto. For this, I am deeply grateful to the various honorable justices and respected professors oflaw who compose the Bar Examination Committee on Taxation at the UP College of Law, for allowing me to make use of the urofficial answers to the bar examination questions in this book.

CONTENTS PART I GENERAL PRINCIPLES AND LIMITATIONS ON THE PO1VER OF TAXATION

CIIAFIER

I

GENERAL PRINCIPLES l)efinition of Taxation..

1

Nature of the Power of Taxation..

1

It is an attribute ofsovereignty It is legislative in character................... It is generally not delegated to executive orjudicial

department.

It is subject to constitutional and inherent Aspects of

Taxation..

limitations

'l'heory or underlying basis of taxation... Lifeblood theory.......... Benefits-Protection Theory 'f'lrc Power to Tax involves the Power to Destroy....

l)r'linition of Taxes

Al,tributes or Characteristics of Taxes................... I'rrrposes and Objectives of Taxation.................. 'l'rrxcs Distinguished from Other

Impositions

2 2 3

4 5

6 6 7 7

8 8 11 13

'Iaxation Distinguished from Eminent Domain

Power.......... Debt.. Tax v. Toll '[':rx v. License Fee.......... 'l'ax v. Pena1ty................. l)orrlrlc'laxation l,lxcrrrption from Taxation................... 'f'rrx l,nws and Police

'lax v.

13 16 16 L7 19 19

25 29 29

Stututes levying taxes are construed against the government... ( lonstruction of statute by predecessors is not binding 29 on the successors....

.. 30 lkrtrouctivo zrpplication I'rirrt:iplcr ol'lcgislative approval by re-enactment....................... 31,

llcgrrlrrl,iorrs

32

Classifi cation of Regulations Necessity for Notice and Hearing

Publication.. Special laws prevail over general laws............. Tax Evasion v. Tax Avoidance ............

34 35 35 36 37

CIIAPTER II INHEREI{T AND CONSTITUTIONAL LIMITATIONS Inherent Limitations The levy must be for a public purpose. Non-delegation of the legislative power to tax. ............. Exemption from taxation of government entities.

International comity. Territorial jurisdiction. Constitutional Limitations ................... No person shall be deprived of life, liberty.or property

without due process of law ......... Nor shall any person be denied the equal protection of the laws The rule oftaxation shall be uniform and equitable. The Congress shall evolve a progressive system

oftaxation No law impairing the obligation of contracts shall be passed The free exercise and enjoyment ofreligious profession

and worship, without discrimination or preference, shall forever be allowed Freedom ofthe press Tax exemption ofproperties for religious, charitable, and educational purposes All appropriation, revenue or tariffbills shall originate from the House ofRepresentatives, but the Senate may propose or concur with amendments............., No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress................

Every bill passed by Congress shall embrace only one subject, which shall be expressed in the title thereof ........ Congress shall evolve a progressive system oftaxation. Supremacy of the national government over local governments in taxation.

42 42 45

PAR'T

CIIAPTER III II{TRODUCTION Income Tax Systems Global Tax System Schedular Tax System Semi-Schedular or Semi-Global Tax System ........ Features of the Income Tax Law.... Criteria in imposing income tax...............

Citizenship Principle Residence Principle Source Principle......

46 46 48 49

II

INCOME AND SITIIHOLDING TA)(ES

When is income taxable?

81 81

83 85 87 89 89 89 90 90

CHAPTERIV KINDS OF TA)PAYERS

49 51

57

63

Kinds ofTaxpayers Citizens Resident citizen v. nonresident citizen Engaged in trade or business or exercise ofprofession v. salaried employee Types of nonresident citizens AIiens..........

Definition of "residence.' .................

91 92

95 95 96 97 97

Nonresident Alien Engaged in Trade or Business 66 66 68

72

76

78

79

in the Philippines ........... Nonresident Alien Not Engaged in Trade or Business in the Philippines............ Employees entitled to preferential tax rates Filipino employees of multinational corporations ....................... Iiistates and Trusts... ( )o-ownership................... ( lo-ownership Due to Death of a Decedent..... ( icneral Professional Partnerships (GPP) .......... I )omestic Corporations and Foreign Corporations 'lbst in determining Status of Corporations................. I )oing Business.................. I'rr rl,nerships .loi rr t Ventures................. Fllements of joint venture

98 99 100 100

r02 104

t04 109 111

TI2 113 113 t1.4

tL4

F)xemptjoint venture or consortium is an unincorporated joint venture or consortium engaged in construction

79

llllt

activity or energy-related project.

rrrlings prior to Revenue Regulations No. 10-2012 'llrxrrlrk' .lrint Vt:nturos .................

115

Lt7 118

Resident Foreign Corporation. Philippine branch ofa foreign corporation is merely an extension of the foreign head office Types of Resident Foreign Corporations

119 119

721

CIIAI'TER V GROSS INCOME Gross income ......,.......... Net income ........... ....::.::.:.:::::.:...:.::: :::...:..:.:::....... To whom income is taxable..... Source Rules........... Interests: Residence ofthe debtor or obligor Dividends: Residence of the corporation paying diuidend..'...'.... Services: Place of perforrrlance of the seru ice Income from turnkey contract with onshore

and offshore Portions...'. "

International shipping line .............. International air carrier .......'.'....'..1... Rentals and royalties: Location or use of the property or interest in such property......'....... Sale ofreal property: Location Sale of personal property Definition of Income.....

of real property

Distinctions between Capital and Income Tests in determining income Realization test ............. Claim of right doctrine Income from whatever source

'

125 125

126 L28

sa1es.............

164 164 169

I7l

I7I 178

t29

Interest income

t79

Revenue Memorandum Circular (RMC) Nos. 77-2012,81-2012, and84-2012 clarified Revenue Regulations No. L4-2012.

r82

130 131 131

L34 135 135 136

t40 t40 140 140

L40

742 L42 743

Backwages, Allowances, and Benefits Awarded in Labor Dispute........ Items Not Included as Compensation Income Fringe Benefits De minimis benefits Stock option p1ans............

corporation

729

\28

Significance of knowing the \pe Compensation Income...... Who is an employee? .................. Compensation Income of Philippine Nationals and Aliens Employed by Foreign Governments and International Organizations in the Philippines.. Foreign Embassies and Diplomatic Missions. Aid Agencies of Foreign Governments.'.. "............. Advisory Committee on Voluntary Foreign Aid-USA...... Aid Agencies Asian Development Bank (ADB)

Statutory Minimum Wage...........

1G0

169

Deed of Exchan9e............ Rules on non-redemption ofproperty sold during

involuntary

1b8 159

Real property located outside the Philippines................. Other capital assets Passive Investment Income.........

14t

or Character of Income

property income Capital Assets Lease ofreal

Professional

Shares ofstock ofa domestic Real property

test .............

Economic benefit

Trade or business income or professional income..... Gross income from business.......

744

t45 745 745 145 746

r46 147 148 150 153 l5ilr

Dividend income Distinctions between Cash Dividend and Stock Dividend Stock dividends ................. Rules on taxation of dividends Dividend is paid by a domestic corporation

Royalty income......... Royalty paid by a Domestic Corporation. Royalty paid by a foreign corporation Rental income......... Other Income................... Income from any source whatever Prizes and awards

r72 179

186 187 188 189 189

L94 195 197

t97 198 198 199

CIIAPTERVI EXCLUSIONS FROM GROSS INCOME Items of exclusion representing Return of Capital ltem of exclusion because it is subject to another internal revenue tax Items of exclusion because they are expressly exempt from income tax .............. Under the Constitution................ Under a tax treaty. Llnder Special Laws n. llnder R.A. 6938 (Cooperatiue Code of the Philippines) lr. Llnder R.A. 7279 (Urban Deueloprnent Housing Act of 1g92) .... (' Ljnder R.A. 7653 (New Central Bank Act) ............. rl. lJnder R.A. 7916 (PEZALav) ........... ('. [lnder R.A. 9178 (Barangay Micro Business Enterprises Act of2002) l'. Itx:al Water Districts are erempt from income ta.x ,.............,.,..... g. Inutn.tiues under R.A. 9856 (The Real Estate Inuestment xl

2r2

2t2 2I2 ZI2 212

ZIg 2Ig 2IB

2I4 2L4

2t5 2IE

Trust Act of 2009) Persons entitled to enjoy incentiues....

h.

2L6

Requisites for Exe mption...................

2r7 2r7

Ta* Incentiues .................

218

R.A. 9505 (Personal Equity and Retirement Account [PERA] Act of2008)

2r9

Under the 2005 Tax Code Exempt corporations and associations .............. Exclusions from Gross Income Proceeds of life insurance policies

Amounts received under life insurance, endowment or annuity contracts...... Value ofproperty acquired by gift, bequest, devise,

220 220 221 221 222

or descent Amounts received through accident or health insurance............ Income exempt under treaty Retirement benefits, pensions, gratuities, etc. ............. Retirement benefits receiued under R.A. 7641, n.A.4917, and Section 60(8) of the 1997 Tax Code Separation pay for causes beyond the control

223 223 226

of the employee ................. Retirement benefits from foreign gouernrnent agencies ...... P ay rnent s under U. S. Vete rans Adminis tration . -...... -........ SSS benefits

229 230 230 230 230

GSIS benefi,ts Miscellaneous items Income of foreign gouernments Income deriued from any public utility .......... Prizes and awards in recognition of religious and charitable accomp lis hments ............. Prizes and awards for sports competitions 13th month pay and other gross benefits GS/S, SSS, Medicare and Pag -ibig contributions.............. Gains realized from the sale or exchange or retirement of bonds....... Exempt Corporations Charitable Organizations ................... Clubs for Pleasure, Recreation and Other Non-Profit Purposes.......... Non-stock, Non-Profit Hospital......

Educational institutions Income of non-stock, non-private educational institution exempt from taxation under the 1987 Constitution.......... Isolated sale ofproperty by non-stock, non-profit foundation Failure to observe requirement does not constitute waiver of right to exemption

227

227

23r 23L 232 233 233 234 234 234 235 237 237

238

241 241

Failure to strictly comply with Revenue Memorandum Order No. 1-2000, which requires the taxpayer to secure prior tax treaty relief from the BIR, will not deprive taxpayers of the benefit of a tax treaty .......... Non-stock, non-profit private educational institution Requirement for revalidation of tax exemption for non-stock, non-profit corporations and associations

242 252

254

CIIAPTERVII RETURN OF CAPITAL AND DEDUCTIONS Return of Capital Sale ofinventory ofgoods by manufacturers and dealers of properties Sale ofstock in trade by a real estate dealer and dealer

255 255

in securities

255 256 258 Business Expenses..... 259 Additional requirements for deductibility of certain payments........... 261 Interests...... 266 Sale of services.................. Deductions from Gross Income

Optional treatment of interest expense on capital expenditure........... 267 Conditions for deductibility of interest................. .. 267

Taxes

Losses

Bad Debt Theory Losses must be Evidenced by Closed and Completed

Transaction Bad Debts

Tax Benefit Rule Depreciation Who may take Depreciation Depreciation cannot go beyond acquisition cost ofproperty and cannot be based on appraisal value ........... Rules on Depreciation of Vehicles... Conditions for deductibility of depreciation ......... Charitable contributions................... Optional Standard Deduction (OSD) ......... Basic personal exemptions ................... Additional exemptions for taxpayer with dependents ............... R.A. 10165 (Foster Care Act of 2012) Status-at-the-end-of-the-year rule ....... Non-Deductible Expenses

270 27L 277 272 274

276 277

278 278 278 279 280 283

284 284 284 286 287

CIIAFTERVIII TAX BASES AND RATES

241 242

(ilobal tax system

290 2g7

lndividuals.. xill

292 294

Domestic corporations Resident Foreign Corporations Resident Foreign Corporations that are Subject to Preferential Tax Rates

297

298

Passive Investment Income

294 294 296 296

International carrier Offshore banking units .........'. Regional operating headquarters ...................

Branch Profit Remittance Tax on Philippine branch 297 297

of Foreign Corporations Tax base

Income ofnonresident foreign corporation subject to preferential tax rates Gain from Sale of Property................ Transfer for inadequate consideration... ".........' Nature of Asset or ProPertY Presumed income or gain...'..... Passive Investment Incomes

299

302 302

303 303 305

Importance of Knowing Nature of Asset Sale or Exchange.....

Capital Assets

CHAT'TERX TAX.FREE EXCIIANGES 311 313 3L7

""'

318 319

CIIAPTERXI ACCOT]NTING METIIODS AND PERIODS 321

Methods of Accounting

In

case ofconflict, tax rule prevails over accounting

322 322 322

principle Cash method

Accrual method........ Income is recognized when earning process is complete and exchange has taken place.....'...... "All events test" is followed for expenses Installment method Sale of real property involving deferred payments.... Percentage of completion method Long-term contracts...... When included in Gross Income......... xlv

323 323 323 324 324 325 326

327 327

328 329 329 331 333 333

334 334 335 335

CIIAPTERXII WITHHOLDING TA)GS

301

CIIAPTER D( ORDINARY ASSETS AND CAPITAL ASSETS

Tax-Free Exchanges Exchange ofproperty.. Original basis of properby to be transferred................... Sale of principal residence................'.. Requisites for Exemption from Tax of Sale of Principal Residence

Income Constructively Received

When expense is to be claimed as Deduction from Gross Income........ Transactions between Related Parties and Transfer pricing............... Filing of Tax Returns....... Individuals deriving purely compensation income...... Individual deriving purely trade, business or professional income, or mixed income Domestic corporation and resident foreign corporation.. Cumulative computation of quarterly and annual tax liabilities ........ Capital Gains Tax Returns........ Shares of stock of a domestic corporation Real property located in the Philippines............

Importance of Withholding Taxes...... Remittance of withheld taxes is the responsibility of the withholding agent-payor of income .......................... Final Withholding Tax..... Creditable withholding tax................ Expanded Withholding Tax.............. Persons exempt from withholding tax The income is fixed or determinable at the time of payment...... The income payment is listed in the regulations as subject to withhoIdinC................... The recipient of income is a resident of the philippines............. The payor-withholding agent is resident of the philippines.......

Withholding

Agent...........

'lime to Withhold and Remit Tax...............

.............................

336 336 337

339 339

340

34t 347 34L 341 343 343

'l'ime to Credit Expanded Withholding Tax From Income Tax............ 344 ()onsequences of Non-Withholding of Tax By the payor of Income ..... 344 ()onsequences of Non-Remittance of Tax Withheld by the Withholding Agent With Respect to the payee of Income .......... B4E llrrses of Withholding Tax.............. 845 Withholding tax based on gross income......... 845 Withholding tax based on g"oss selling price or fair market value, whichever is higher 846 Wit,hholding Tax Rates.... 847 Vcnuc firr filing withholding tax returns and time firr payment of tax 349

PART III TRANSFER TA)(ES CIIAPTER XIII ESTATE TAX 'l'rrr rrsfi'r'l'irxcs ..

350

Distinctions between donation inter uiuos and Donation mortis causa........... Estate Tax ............. Nature and Object of Estate Tax .............. Rates of estate tax........... Justification of Estate Tax.............. Reasons for Taxability of Transfers of Property Death is the Generating Source of Power...... Law and Market Value at the Time of Death is Applied.... Residence Gross Estate Settlement of Estate

Partition and Distribution of Estate................... Decedent's Gross Estate Kinds of Property Embraced Under Decedent's Interest Intangible personal property...... Reciprocal Exemption as to Intangible Personal Property Transfer in Contemplation of Death................:. Circumstances taken into account Revocable transfers (Transfer With Retention or Reservation of Certain Rights) Transfer of Property Under General Power of Appointment .............. Proceeds of Life Insurance....

Exclusive property Exemptions under special Iaws...........

Funeral expenses Claims against the estate.... Claims against insolvent persons Unpaid mortgages and taxes..... Losses..........

Family home............ Standard Deduction....

350

352 352 352 353

355 355 356 356 358 358 361.

362 362 363

364 365 367 368 369 370

37L 372 372 373 373

Assunta Valuation of Property

388 388 391

392 395

PART IV

354 354 354

VALTIE ADDED TAX (VAT)

CIIAPTERXV II{TRODUCTION Characteristics of Value Added Tax ............. Tax on value added. Tax Credit Method........

399 399 400

Sales tax

40r

Taxable transactions Broad-based tax on consumption in the Philippines ...........

402 402 402

Destination Principle...... Indirect Tax.............. Cumulative through the chain of distribution of goods and performance of services................ Tax-inclusive method./separate indication of VAT ... Value added tax does not cascade. Principle of Recoupment of Tax

403

404 404 405 405

CHAPTER XVI PERSONS LIABLE TO TAX 406 406

Taxable persons Husband and wife

Joint venture ..................

407 407

408 408 409

.t /D

Government Non-stock, non-profit association or organi2ation ....................... Condominium corporation Subdivisions or Villages Homeowners Associations Recreational or sports club .............

377

Importer......

477

373

Medical Expenses..... Property Previously Taxed (or Vanishing Deduction) Limitations as to Amount of Deduction Allowable

Donation of Conjugal Property...... Right of Accretion............. Transfer for Insufficient Consideration............... Exemptions under Special Laws......... Procedure for computing net gifts....

374 374

378

4r0

CHAPTERXVII OUTPUT TAX ON SALE OF GOODS OR PROPERTIES

CIIAPTER)ilV DONOR'S TAX Nature of gift tax.....

383

l,lkrrrrcnts of taxable sale of goods or properties

41.4

Purposes of Donor's Tax .............. Rates of Donor's Tax....... Taxable Transfers Essentials of a Taxable Donation..... Donative Intent.......... Consideration ..................

384

Srrk: olgoods or properties

474

384 385 387 387 388

'l'.y1xrs of sales ...................

415 415 415 416

At:tual sale ............. I )oemed sale.............. l,lxlxrrt sale.............. ( irxxls or properties

4I7 xvii

For valuable consideration ln the course oftrade or business. Goods are consumed or for consumption in the philippines. Absence of profit or margin does not make the perfoimance of taxable serwices for a fee exempt from VAT

4I8 418 419 420

CIIAPTERXVIII OUTPUT TAX ON SALE OF SER\rICES Categories of services... ProfessionaVtechnical consultancy.

Transfer oftechnolory Lease or use ofintangible property Lease or use oftangible property Requisites for taxability of services Sale of services ................. Service in the course of trade or business Lease of properties owned by non-residents....-.........

Actual or constructive receipt Dealer in securities Franchise grantees.......

Lending investor Categories of exemptions ..................

Exempt persons Exempt transactions Transactions with exempt persons Scope of exemption............ Partial exemption... Total exemption.............. Effectively zero-rated transaction.. Exemption based on location

422 422 422 423 423 423 423 424 425 425 426 426 428 430 430 430 430

43I 431 431

Sale ofgoods Sale of real property....... Sales discounts, returns, and allowances ................. Transactions deemed sale...............

Commissioner's power to determine tax base Sale of services ................. The GPP shall be treated as a separate and distinct

taxable person from the individual partners composing the partnership............... VAT is based on income actually received VAT is not based on gross billings......... Gross receipts of HMO includes amounts paid to hospitals and clinics

by RMC 89-2072 Deposits/advances part of gross receipts Claim for deduction ofexpenses Income pa;rments are subject to appropriate WT........................ Issuing ORs for deposits and advances .................. Customs broker Media advertising Travel agency......... Hotel, restaurant, and caterer Hotel guests, regardless ofnationality, are subject to value added tax..... Providing limousine service by a hotel to customers Gross receipts do not include monies or receipts entrusted to the taxpayer which do not belong to them and do notredound to the taxpayer's benefit.. Tolling fees received by a hotel for PLDT is not part

ofits gross

receipts

VAT on operator of tollways Non-life insurance company...... Dealer in securities Security agencies Movie and Cinema Houses

434

435 435 436 437 437 437

438

44r 442 442

443 443 443

443 444 444 445 445 445 445 446

446 447

448 449 449 449 450

CIIAPTER)O(

434

CIIAPTERXD( TAXBASES Actual sale ofgoods or properties

Advance rental payments.............. Reimbursement of expenses ................. Tax implications and recording of deposits/advances made by clients to GPP for expenses Tax implications and recording of depositVadvances for expenses received by taxpayers not covered

RATES OF VAT Output Tax..............

455

Input Tax....

455

Sale ofgoods

455

Service charges to foreign vessels engaged in international shipping is zero-rated Effectively zero-rated sales to PEZA and BOl-registered

firms...........

Zero percent (02,) vAr;; *I#;;;;;:.:..::.......... Services other than processing, manufacturing, or repacking of goods must likewise be performed

462 462 463

447

for persons doing business outside the Philippines........... 464 Zero-rating does not require that the services be destined 467 for consumption abroad or be exported .................. Source offoreigrr currency is not required by law

441

467 467

440 440

to be zero-rated ............... Sale ofservice to NPC is effectively zero-rated

Distinctions between automatically zero-rated and effectively zero-rated transactions Automatic zero rating Effectively zero-rated transactions Foreign embassies in the Philippines ...........

Mandatory 468 468

Invoicing

CIIAPTER)Oil 472

473 475 476 477

CIIAPTER)OilI II\PUT TAXES Sources of input tax credits ...

Refund or Tax Credit ofExcess Input Tax Categories of Refunds or Tax Credits Zero-r ated or effectively zero-rated sales ............ Excess input tax on purchase ofreal property Requirements for claims for refund or tax credit arising from zero-rated or effectively zero-rated sa1es........ Transitional input tax...... Input taxes that may be refunded or credited... Input tax attributable to goods exported Sale of raw materials to BOl-registered enterprises whose export sales exceed 70Vo oftotal annual

production Excess input tax arising from purchase of capital goods............ "Capital goods or properties" Excess input tax of dissolving unincorporated joint venture Allocation of input tax ............... Claim for refund or tax credit Deadline for submission of claim Atlas Consolidated Mining Case (SC-2007) ............

Mirant Pagbilao Case (SC-2008) ................ Aichi Forging Company (SC-2010).... Taganito Mining Case (CTA EB-2011)..... San Roque, Taganito and Philex Cases (SC-2013) ......................

CTIAPTER

479 481 482 482 483

xx

512

Requirements.....'............ Sales invoice v. Official receipt.....'....

513 515 515

Official receipts and invoices cannot be used interchangeably .............'." Information in VAT invoice or official receipt......... Additional information in VAT invoice or receipt..... Issuance of VAT Invoice or Receipt for Non-VAT or Exempt Sales............

518 519

Penalties.....

521.

517

520

Consequence of issuing erroneous VAT invoice

521

or official receipt......... F'iling of Return and Payment of Tax VAT returns and declarations .............. Payment of tax............ Requirement to pay in advance VAT on sale of flour and time of pa;'rnent of advance

l'inal Withholding

Tax.....

523

523 523

VAT...........'.

524 525

PART V TAXREMEDIES

484

CHAPTER)O(rV INTRODUCTION

487

489 489

489 489 490 490 490

49t 49L

492 493 493

494 495

)OilII

COMPLIANCE REQUIREMENTS Rcgistrartion Requirements ...................

507 509 510

Principalv.Supplementaryinvoicesandreceipts.......'...........

EXEMPT TRANSACTIONS Increased threshold effective January I,20L2 Sale of adjacent lots or units within a 12-month period and parking slots to the same buyer for purposes of utilizing as one residential area.............. Tax due on transaction - VAT or OPI? Theater operators are exempt from VAT.... Services subject to percentage taxes.........

Registration

When to Register as Non-VAT Taxpayer..... Optional VAT Registration.....'...... VAT Books of Accounts..

468 468

504

Organizational Structure..... Agcnts in the Collection of National Internal Revenue Taxes.'...""" Itrwcrs and Duties of BIR.......... Power to interpret tax laws and to decide tax case Petitions involving validity or constitutionality

lllll

"

oflaw or regulations.l\lwer to decide disputed assessments, refunds oftaxes, fees or other charges, penalties.. l\rwe r to examine books and other accounting records

and obtain information. l'owcr to inquire into banks deposits oftaxpayers. (larnishment of bank deposits .' I'owrrr lo iissess and collect the correct amount of tax...'.'........" Asscssment of correct or proper taxes............ I\rwcr to impute "theoretical interest" to taxpayer's

transactions

527 527

528 529 530 531

532 534 535 537

538 538

I'owrrr ttot, ttt allow withdrawal of any return, statement or tlecluralion, although the same may be amended......... 539 540 l'owr,r Lo tlclcgitl,c powors to subordinate officials....

Definition of remedies.. Types of remedies under the 1997 Tax Code.....

540 540

Substantive Remedies Imposition of withholding tax on certain income

54r

pa;rments.... Issuance of revenue regulations by administrative 4gency......... Failure to obey summons, including subpoenas... Declaration under penalties of pedury Administrative interpretations ehould be respected Principle of legislative approval by re-enactment...............

54r 54L 543 543 543

Power to Assess Basis of Assessment........ Questicn of Fact.......... Question of Law.......... Assessment Process........

1.

......r..............

Examination ofbooks ofaccounts and other accounting records oftaxpayers by revenue officers to determine correct tax liability

Best evidence obtainable. Networth method of investigation................. 2. Preparation oftentative findings and holding of informal conference

Administrative due process .................. Principle ofestoppel Power to allocate income and deductions among affiliated taxpayers .... 3. Issuance of Preliminary Assessment Notice (PAN)...........

4. 5. 6.

7. 8. 9.

559 560 561 563 563

property.......

564

Distraint and levy proceedings are validly begun or commenced by the issuance of the warrant and service thereofon the

property................ Forfeiture....

taxpayer

564 566

545 546 546 546 547

abatement................. Compromise

Compromise and

Power of Commissioner to compromise is not absolute

Abatement.. Penalties and fines......

549 549 550 550 551

Civil

action

576

of

and letter of demand Legal effects of issuance of FAN/DL.. Filing of administrative protest by the taxpayer against the assessment................. Submission of documentary evidence and arguments....... Denial of protest by the Commissioner or his authorized representative ................. Appealbythe taxpayer ofthe final decision of the Commissioner or his authorized representative on the disputed assessment to the Court of Tax Appeals .................

553 556

Wlrcn to go to

557

(

court?

578

actions

A

tlnder the 1997 Tax

ll

t

..

Code

lnrportant principles on criminal actions......... Willful means not merely voluntary, but with a bad purpose.... lnder the Tariffand Customs Code

I,lrc pctrdency of

protest

l\rrsons liable for criminal

............

prosecution.. xxllt

580 581

582 582

tax........'..

lriling of criminal action under the Tax Code during 559

577

578

Wlro approves the filing of civil action? llrrslxrndents in a civil action for the collection of

irirrrinal

577 577

protest.....

Failure to file a timely appeal to the CTA on the final decision of the Commissioner or his authorized representative on the disputed assessment

552

558

577 573 573

.Iurisdiction over civil actions......... When collectibility of tax liability arises.......... Self-assessed tax shown in the return was not paid within the date prescribed by law Final assessment is not protested administratively within 30 days from date ofreceipt Non-compliance with the condition laid in the approval

551

558

"............

CHAPTER)O(VI .II.]DICIAL REMEDIES OF GOVERNMENT

547

548 548

567 567 567 567

Forfeiture of property for want of bidder......

Reply.......... Tax amnesty as a defense. Issuance of Formal Assessment Notice (FAN)

xxll

559 559

Sale of

545

Presumption of correctness...............,...

Power to Collect Taxes........... Delinquency tax v. deficiency tax........ Distinction between remedies in the collection of deficiency tax and delinquency tax..........'.'.. Administrative remedies of the government to collect assessed taxes ........... Tax lien Distraint, levy, or garnishment Distraint of personal property......

Levy of real

544

CHAPTER )OW ADMIMSTRATIVE REMEDIES OF GOVER}IMENT

A.

B.

..

583 583 587 591 599 600 605

CIIAPTER )O(VII CTVIL PENALTIES Surcharges Deficiency and delinquency interests Compromise penalties

607

610

612

CIIAPTER )O(VIII REMEDIES OF TAXPAYERS Administrative remedies

615 615 616

Judicial remedies Substantive remedies Questioning the constitutionality or validity oftax statutes or regulations...................

Non-retroactivity of rulings ................. Failure to inform the taxpayer in writing of the legal and factual bases of assessment makes it void..................

616 617

618

Preservation of books of accounts and once-a-year 618 619

examination Publication of RMC and RMO Power of CIR to distribute or allocate gross income and deductions does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions Availment of tax amnesty................. Procedural remedies The issuance of PAN is mandatory Assessment is null and void for having been issued on the day the PAN was received by the petitioner.... \rpes of taxes................. Self-assessing taxes which do not require issuance of assessment ................... Taxes which require assessment to establish liabiIity................ Tax period of a taxpayer is terminated Deficiency tax liability arising from a tax audit conducted by the BIR..............

Tax lien....... Dissolving corporation..

619

Denial ofprotest Direct denial of protest..........'.... Indirect Denial of Protest..... Inaction of the CIR on the protest against assessment may be deemed a denial of protest or taxpayer may wait for CIR final decision on the disputed assessment..

Purpose of Statute of Limitations....-........'.'... Tax Code provisions prevail over Civil Code provisions on prescription................. Construction of law on prescription (Bar Question [2010]).....'

625 629

Prescriptive periods under the Tax Period to assess the

Burden 629 629 629 630 631 631

What is an assessment? ............... Essential requirements for valid assessment.. Assessment based on Presumption fssuance of LA for discrepancy noted in LN............... Issuance of valid L4................

632 632 634

Forms of assessment...................

643

64t 64t

644 644 645 647 647

648 649

649 650 651 656 659 659 660 661

662 663

667

CIIAPTER)OO( PRESCRIPTION

620 622 624

CIIAPTER)O(D( ASSE SSMEI{T AND PROTEST

xxtv

Significance of assessment'.....'............ When must an assessment be made? Basis of assessment......... When is a tax assessment made or deemed made?.-.....'.. Issue date Date of service or mailing Date of receipt.... "............. Who may sign an assessment notice? Revised assessment Forms of protest When to file administrative protest? ................. Administrative appeal to the Commissioner........ Motion for reconsideration on the Final Decision on Disputed Assessment. Meaning of CIR "decisions" appealable to CTA.........

ofproof

tax

Period to collect the assessed

What is a tax

return?

670

67I 67I

Code

674 675

tax.-........'....

677 678 680 681 686

677

Effect of filing an amended return....... False or fraudulent tax return When must fraud be raised by government? Consequence of failure to prove fraud '..........

Prescription.

When must issue on prescription be raised? Waiver of the defense of prescription......-......'.. Prescription in relation to acts or delays oftaxpayer.. Effect offraud assessments which are final and executory Extension ofthe prescriptive period. Differences between extension and interruption

ofprescriptive Periods llules in cases of more than one waiver signed.......... lnterruption ofthe prescriptive period

687

689 689 690

692 693

694 694 697

700

Prescriptive period is not suspended ............. Request for Reinvestigation is granted by BIR

70t 704

CIIAPTER)OOil TAX CREDIT OR REFI.]ND

All national internal revenue taxes, except VAT.............

709 717

Value Added Tax (VAT)... Tax Credit v. Tax Deduction Refunds are in the nature oftax exemptions and are construed strictly against the person claiming the same Principle of Exhaustion of Administrative Remedies.... Inaction of the Commissioner on a claim for refund or tax credit must be construed as a denial of the claim Starting date for counting the two-year period.......... Income Tax..............

725

Withholding Tax ..............

727

Value Added Tax.............. Interpretation of phrase "regardless of any supervening cause that may have arisen after payment" ................. Filing of written claim is mandatory

728

7\3 720 724 724 725

730 732

CIIAPTER)OOilI 739 740 74L

Fundamental Principles

742

Common Limitations Tax on goods or merchandise passing thru territorial

743

Excise tax on petroleum products Taxes that may be imposed by provinces

745

745

Franchise tax................ Tax on quarry resources Tax on amusements places.......... Taxes that may be imposed by municipalities and cities..................... Double Taxation Accrual and payment of tax.........

Situs of Taxes ................... Principal office v. branch Tax Ordinances ...............

748 749 749 750 751 751 752

758 760 761.

762

xxvl

770 770 77L

Periods........

Period to assess local taxes and fees Period to Collect the Assessed Tax..............

767 769

'-

ofTaxpayers assessment.. After an assessment.. Protest of assessment................... Injunction available against collection oftaxes protest claim for refund..........

772 772 772 772

Remedies

Prior to

773 775 775

CIIAPTER)OOilII Nature of Real Property

Tax..............

Accrual and Payment ofTax Types of Real Property Tax.............. Real Property Subject to Tax.......... BOT Agreement is not merely a Financing Classes ofreal

Local Government Code (R.A. 7160).. Scope of Taxing Power of LGUs

Press ...........

Prescriptive

Fundamental

LOCAL BUSINESS TAXES

jurisdictions

763 764 764 766

RDAL PROPERTY TAX

PART VI LOCAL GOVERNMEIVT CODE

Constitutional basis ........

Effectivity of ordinances (Sec. 59, LGC) '......--.' Appeal to Secretary of Justice..... Review of tax ordinances............. Appeal ofordinances to Secretary ofJustice..... Remedies of Taxpayers Against Tax Ordinance....."........'. Remedies for the collection of tax............

Principles property

777 777

778 781 783

Scheme...'..--

785

Exemptions from real property tax............'.. Supreme Court decisions on real property taxes ........... Manila International Airport Authority (MIAA) v' Paraflaque City (2006)... MIAA v. Pasay City (2009) Philippine Fisheries Development Authority (PFDA) v. CA & Iloilo City.... Light Rail Transportation Authority (LRTA) v. Central Board of Assessment Appeals (CBAA)

.-

788 789

791

79I 79I 792 793

Government Service Insurance System (GSIS) v.

(2009)..'........ of tax............ Power to subpoena does not include contempt power.....'.... Prescriptive periods Taxpayer's Remedies Exhaustion of Administrative Remedies....'....'.'.... Assessor of Manila

Civil remedies for the collection

No Motion for Reconsideration is Allowed Before the Assessor's Office....... Payment of tax under protest.......'.

KXVU

794 795 799 799 800 801 801 806

PARTVII TARIFFAND CUSTOMS CODE CIIAPTER)OOilV FT]NDAMET{TAL PRINCIPLES Customs Duties Imported Articles Subject to Duty

Prohibited Importations Conditionally Free Importations When importation begins and ends Bases of Assessment of Duty........ Entry, Withdrawal from Warehouse, for Consumption

809 809 809 811

82r 822

Due Process Automatic Review........

823 825 825

Publication.. Claim for Refund......... Seizure and forfeiture proceedings ................... Remedies under the Tariffand Customs Code.............

827

828 836

Smuggling... Refund of customs duties

842 845

PART

I

GENERAT PRINCIPLES ANI) LIMTIATIONS ON IIIE POWER OF TAXATION CIIAPIER

826

I

GENERAL PRINCIPLES

Definition of Taxation nTq,rotion'is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged

to enjoy its benefits and must bear its burden (51 Am. Jur. 34). Taxation is described as a destructive power which interferes with the personal and property rights ofthe people and takes from them a portion of their property for the support of the government (Paseo Realty & Deaeloptnent Corporation a. Court of Appeals, G.R. No. 779286, October 73, 2004).

Nature of the Power of Taxation Bar Question (2005) Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? Explain.

Suggested answer: The power of ta&ation is inherent in the State, being an attribute of souereignty. As q.n incident of souereignty, the power to tax has been described as unlimited in its range, acknowledging in its uery n.ature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the

-

Rrvrewrn oN TAxATToN

cotlstituency who are to pay it (Mactan cebu

Authority

u.

Marcos,26l

SCRA

GGZ

InternotianolAirport

t1g96D.

Being an inherent power, the legislature can enact laws to raise revenues even without the grant of said power in the constitution. It must be noted that constitutional provisions relating to the power of taxation do not operate as grants of power to the Government, but instead merely constitute as limitations upon a power which would otherwise be practically without limit (cooley, constitutional

Lirnitations, 1927 8th ed., p. 787).

Bar Question (1996) 1. It is an attribute of sovereignty The power of taxation is an essential and inherent attribute

of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people (pepei-

Cola Bottling Company of the Phil. a. Mun. of Tanaua.nr Lqsrte,

69 SCRA460).

Bar Question (2003) Why is the power to tax considered inherent in a sovereign State?

Suggested answer:

It is considered inherent in a souereign State because it is a necessary attribute of souereignty. Without this power, no souereign state can exist nor endure. The power to tax proceeds upon the theory that the existence of a gouernment is a necessity. The power to to,x is an

essential and inherent attribute of souereignty, belonging as a matter of right to euery independent state. No souereign state can continue to exist without the means to pay its expenses, and for those means, it has the right to compel all citizens and property within its rimits to contribute; hence, the emergence of the power to tan.

2. It is Iegislative in character The power of taxation is essentially a legislative function. The power to tax includes the authority to: (1) determine the (a) nature (kind); (b) object (purpose); (c) extent (amount or rate); (d) coverage (subjects and objects); (e) apportionment of the tax (general or limited application); (f) situs (place) of the imposition; and (g) method of collection; (2) grant tax exemptions or condonations; and (3) specify

GpNnnu PnrNcrpr.*

T""#ilffffii#t

PownR r.rr

Trxarrox

3

or provide for the administrative as well as judicial remedies that either the government or the taxpayers may avail themselves in the proper implementation of the tax measure (Petron a. Pililla, 798 SCRA 82).

3. It is generally not delegated to executive or judicial department The power to tax is purely legislative, and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers (Pepsi-Cola Bottling Company of the PhiI. u. Mun. of Tanauan, Leyte, supro,). Delegation of the power to tax is, however, allowed in the following cases:

a.

To local governments in respect of matters of local concern to be exercised by the local legislative bodies thereof(Sec. 5, Art. X, 1987 Constitution);

b.

When allowed by the Constitution. Thus, the Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it mayimpose, tariffrates, import and exportquotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government (Sec. 28t21, Art. VI, 1987 Constitution); Delegation of legislative powers to the President is permitted in Sections 23(2) and 28(2) of Article VI of the Constitution. By virtue of a valid delegation of legislative power, it may also be exercised by the President and administrative boards, as well as the lawmaking bodies of all municipal levels, including thebarangay (Cannarines Norte Electric Cooperatiue u. Torres, G.R. No, 727249, February 27, L998). Such delegation confers upon the President quasi-legislative power which may be defined as the authority delegated by the lawmaking body to the administrative body to adopt rules and regulations intended to carry out the provisions of the law and implement legislative policy. To be valid, an administrative issuance, such as an exccutive order, must comply with the following requisites:

l.

lts promulgation must be authorized by the k,gislirl,rrn';

Rnlrnwrn ou Taxlrrox

Gonrnar, Pniucpr,es lNo Lnr.trrauoxs oN TrrE Powrn or

TexarroN

General Principles

2. It

must be promulgated in accordance with the

prescribed procedure;

3.

It must be within the scope of the authority given by the legislature; and Exec. Secretanyt u. Southwing Heauy Ind.ustries, et al., G..R. No. 764777, Febrwary 20, 200G).

When the delegation relates merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standards expressed by law (Ceruantes u. Auditor General, gL Phil. 359), or implied from the policy and purpose of the Act (Maceda u. Mocaraig, 797 SCRA ZZI).

Bar Question (2003)

1. 2. 3. 4. 5.

Taxes are pecuniary in nature.

Taxes are enforced charges and contributions.

Taxes are imposed on persons and property within the territorial jurisdiction of a State. Taxes are levied by the executive branch of the government.

Taxes are assessed according to a reasonable rule of apportionment.

Justifu your answer or choice briefly.

Suggested answer: Taxes qre leuied by the executiue branch ofgouernment.

May Congress, under the 1987 Constitution, abolish the power to tax of local governments?

Suggested answer: No, Congress cannot abolish what is expressly granted, by the fundamentol law. The only authority conferred to Congress is to prouide the guidelines and limitations on the local gouernment's exercise of the power to tax (Sec. 5, Art. X, lg87 Constitution).

4. It is subject to constitutional

In our jurisdiction, which of the following statements may be erroneous?

4. It must be reasonable (Hon. c.

5

and inherent limitations

The power to tax is said to be the strongest of all the powers of goyernment. It is unlimited, plenary, comprehensive and supreme, in the absence of constitutional restrictions, the principal check on its abuse resting in the responsibility of members of Congress to their constituents. However, the power of taxation is subject to constitutional and inherent limitations.

Bar Question (2004) Taxes are assessed for the purpose ofgenerating revenue to be used for public needs. Taxation itself is the power by which the state raises revenue to defray the expenses ofgovernment. Ajurist said that a tax is that we pay for civilization.

This statement is erroneous because "leuy' refers to the act of imposition by the legislature which is done through the enactment of s tax law. Leuy is an exercise of the potuer to tax, which is exclusiuely legislatiue in nature and character. Clearly, taxes are not leuied by the executiue branch of gouernment (NPC a. Albay, 186 SCRA lgS

tleeoD.

Aspects of Taxation Well-known authors describe that the exercise of taxation has three (3) aspects, namely: (a) levy; (b) assessment; and (c) collection. The power to levy taxes is vested with the Congress of the Philippines, and all revenue or tariff bills shall originate from the House of Representatives, but the Senate may propose or concur with amendments.l The power to levy taxes, which involves tax policy, is essentially legislative in character, although the power may lre delegated to executive agencies with respect to administrative rnatters, provided that adequate guidelines or safeguards prescribed rrre fbllowed in the administration of tax laws. This delegated power l,r the executive department has been described as "administrative rcgulation" or "subordinate legislation."2 The power to assess and collect taxes involves tax administration and is exercised by the rStx:. 24, Arl.. Vl, l1)ll7 (lonstitution. )Scc.244, Nllt(l; ()rrlrrlrrng v. Williurrrs, ?0 lrhil. ?26

Gpxrnnr- PnrNcreres eNn

RrvrnwnR oN TaxetIoN

executive department of government, particularly the BIR with respect to internal revenue taxes.

Bar Question (2006) Enumerate the 3 stages or aspects of taxation. Explain each.

Suggested answer: The three stages or aspects of taxation are:

Leuy.

-

This refers to the enactment of a law by Congress,

imposing a tax.

This is the act of administration Assessment and collection. and. irnplementation of the tuc law by the executiue department through the qdminis t retiue agencies.

-

Payment. - This is the act of compliance by the taxpayer, includ.ing such options, schernes or remedies as nxay be legally auailable to him.

Theory or Underlying Basis of Taxation 1. Lifeblood Theory The existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes.

Bar Question (1991) Discuss the meaning and the implications of the following ,,Taxes are the lifeblood of government and their prompt statement: and certain availability is an imperious need."

Suggested answer: *tatres are the tifeblood' of government, etc'" The phrase ex.presses the underlying basis of taxation which is gouernmental nicessity, for ind.eed, without taxation, a gouernnxent can neither erist nor end.ure. Taration is the indispensable and ineuitable price for ciuilized. society; without tq.xes, the gouernrnent would be paralyzed. This phrase has been usedto justify the ualidity of the laws prouiding for simmary remedies in the collection of toxt's. ls e utn,s?trteru:c ol' 'the, aboue nil<:, on iniuncti,ort t44rittsl /ltr'tts'..lr'ssrttt'ttl tttttl ttllu'littrt

L:Tilfiffiil*

pownn or

TexarroN

7

of taxes is generally withheld by the laws imposing such taxes. Euen when it is not so under procedural laws, such an injunction may not be obtained os held in the case of Valley Ttad.ing Co. v. Court of First rnstance, L-49529, March gr, 7ggg, where the suprente court ruled that the damages thot may be caused to the tarpayer by being made to pay the tares cannot be said to be as irreparable as it would be against the gouernment's inability to collect tares.

2.

Benefits-ProtectionTheory

Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of their hard-earned income to the government, every person who is able to must contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material vafues. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power (Comtnissioner u. Algue, I5g SCRA gj.

The Power to Tax involves the power to Destroy This principle is pertinent only when there is no power to tax

a particular subject and has no relation to a case where such right to tax exists. Instead ofbeing regarded as a branket authorization of

the unrestrained use ofthe taxing power for any and all puqposes, this maxim is reasonably construed as an epigrammatic statement of the political and economic axiom that since the financial needs of a state may outrun any human calculation, so the power to meet those needs by taxation must not be limited even though taxes become burdensome or confiscatory. The phrase describes not the purpose for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise (McCulloch a. Maryland, US 4 Wheat. 816). ""rr"no" The power of taxation is sometimes also called the \touter to destroy."Therefore, it should be exercised with caution to minimize l,he injury to the proprietary rights of a taxpayer. It must be exercised firirly, equally and uniformly, lest the tax collector kill the "hen that l.ys the golden eggs." In order to maintain the general public's trust rrnd confidence in the government, this power must be used justly rrnd nrrt tretrcherrusly (Roro,e y Cia o. Court of Tar Appeatsr 23

GrNnRar, Pnructplns aNn

Rpunwnn oN TaxerroN

C o. v . C olle c tor

does not necessarily and unavoidably destroy. to the excess of destruction would be an abuse; to presume

scRA 276).Taxation To carry it

it would banish that confidence which is essential to all governments.

objects of gouernment. The underlying basis gouernment for its exercise is gouernm.ental necessity for without it no scope of all broqdest the cq,n exist nor end.ure. Accordingly, it has

4.

It is imposed by the State on persons, property, or excises within its jurisdiction, in accordance with the principle of territoriality.

5.

It is levied by the legislative

body of the State. Taxes are obligations created by law (Vera u. Fernand.ez, 8g SCRA 199). Atax creates a civil liability on the part ofthe delinquent taxpayer, although the non-payment thereof creates a criminal liability which could be the subject of criminal prosecution under existing laws. It is one's civil liability to pay national internal reyenue taxes that gives rise to criminal liability, not the other way around. Criminal cases cannot operate to discharge defendantappellee from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by statute prior to and independently of any attempts by the taxpayer to evade payment (Republic u. Patanao, ZO SCRA ZIZ).

6.

It is levied for a public purpose. It is personal to the taxpayer. A corporation's tax delinquency cannot be enforced against its stockholders. A corporation is vested by law with a personality that is

persons and property levied by the lawmaking body of the state by

opott th" will or contractual assent, express or implied, of the person taxed. It is not contractual, either express or inrpiitlcl, but p,sitiv. trcts rl{'g'vtlrnmtrnt' (Panay Electric

of Int ernal Rea e nu. e, L- I 0 5 Z 4, May 2 8,

It is a pecuniary burden payable in money, but backpay certificates may be used in payment oftax (Borja v. Gella, 8 SCRA 602).The taxpayer is not allowed to settle his tax liability by conveying property (real or personal) in view ofthe problem ofassigning value to such property.

"Ta,*es" are the enforced proportional contributions from

Attributes or Characteristics of Taxes 1. It is a forced charge, imposition or contribution' As such, it operates q'd' inuitum; i'e., it is in no way dependent

g

3.

Definition of Taxes .\ri"to" of its sovereignty for the support of government and for all (1 cootey 62). Ataxis a financial obligation imposed by a public -stutu needs otr persons, whether natural or juridical, within its jurisdiction, or property owned, income earned, business or profession engaged in, o" uny such activity analogous in character for raising the necessary revenues to take care of the responsibilities of government (Republic u. Philippine Rabbit Bus Lines, 32 SCRA 21L).

Taxarlot

It is assessed in accordance with some reasonable rule of apportionment which means that conformably with the constitutional mandate for Congress to evolve a progressive tax system, taxes must be based on taxpayer,s ability to PaY (Sec. 28[a], Art. VI, 1987 Constitution).

cirry out the legitimate

the powers of gouernment because in the absence of limitations, it is coniidered as unlimited, plenary, comprehensiue and supreme' The two limitq,tions on the power of ta*ation are the inherent and constitutional lirnitations which are intended to preuent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court's role to see to it thqt the exercise of the power does not transgress these lirnitations.

or

2.

Suggested answer: The power to ta.x is an inherent power of the souereign which is exercised,ihrough the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising reuenues to

oN THE pownR

1958).

Bar Question (2000, 1996) Justice Holmes once said: "The power to tax is not the power to destroy while this court (the supreme court) sits." Describe the power to tax and its limitations.

Lrurtatrots

General Principles

7.

separate and distinct from those of the persons composing

it

as well as that of any other legal entity to which it may be related (Sunio a. National Lobor Relations Comm.ission, 727 SCRA 390). Stockholders may be held liable for the unpaid taxes of a dissolved corporation, if it appelrs that the corporate assets have passed into their hands without the payment of taxes. The creditor of a tlir.qsolvc
10

Rnvmwrn oN Taxetlot'I

into the hands ofthe stockholders. The legal death ofthe corporation does not prevent such action that would the physical death of an individual prevent the government from assessing and collecting taxes from his administrator who holds the property which the decedent had formerly possessed.

The coconut levy funds are deemed as an exercise of police and taxing power. Coconut levy funds State's the partake of the nature of taxes which, in general, are enforced proportional contributions from persons and properties exacted by the State by virtue ofits sovereignty

for the support of government and for all public needs. Based on this definition, a tax has three (3) elements, namely: (a) it is an enforced proportional contribution from persons and properties; (b) it is imposed by the State by virtue ofits sovereignty; and (c) it is levied for the support of the government. The coconut levy funds fall squarely into these elements (Republic u. COCOFED, et al., G.B,, Nos. L47O62-64, December 14, 2OO1) -

GnNencL PRwcrpt

ts eNn Lrnarrartons oN THE powrn or General Principles

TlxauoN

11

Bar Question (2000, 2006) Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donor's tax, value added tax, excise tax, other

percentage taxes, and documentary stamp tax. classify these taxes into direct and indirect taxes, and differentiate direct from indirect taxes.

Suggested answer: Income tax, estate tar a,nd donofs tar are considered, os direct on the other hand, ualue added tax, excise tax, other percentage tax, and documentary stamp tq,x are indirect tu,xes. taxes.

A direct to.x is demanded from the uery person who, as intend.ed,, should pay the tax which he cqnnot shift to another, while an ind.irect tar is demanded in the first insta,ce from one person with the expectation thqt he can shift the burden to someone else, not as a tqx but as part of the purchase price (Maced.a a. Macaraigr Z2g SCRA

217).

Purposes and Objectives of Taxation Bar Question (2004) For failure to comply with certain corporate requirements,

the stockholders of ABC corp. were notified by the securities and Exchange Commission that the corporation would be subject to involuntary dissolution. The stockholders did not do anything to comply with the requirements, and the corporation was dissolved. can the stockholders be held personally liable for the unpaid taxes ofthe dissolved corporation? Explain briefly.

Taxation is used not only to raise revenues but also for other essential purposes of government. The following are the objectives of taxation:

1.

Revenue

-

To raise revenue to promote the general

welfare and protection of its citizens. The power of taxation is circumscribed by inherent and constitutional limitations.

2. Regulatory - Taxation is no longer envisioned measure merely to raise revenue

as a

to support the existence of

Suggested answer: No. As a general rule, stochholders cannot be held personally Iiable for the unpaid taxes of a dissolued corporation. The rule preuailing under our jurisdiction is that a corporation is uested by 7aw with a personality that is separate and distinct frorn those of the persons composing it (Sunio u. NLRC, 127 SCRA 390 t19841). Howeuer, stockholders may be held liable for the unpaid tones ofa dissolued corporation, ifit appears that the corporate assets haue passed into their hands (Tan Tiong Bio a. CIR, 4 SCRA 986 I 1962 I )' -Likewise, when stochholders haue unpaid subscriptions to the capital of the corporatiln, they can be m
government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. There can be no doubt that the oil industry is greaily imbued with public interest and stabilization of oil prices is a prime concern which the state via its police power may properly address ( C altex P hils. o. C ommis sion on Au d.it, 2 0 8 SC RA Z2 6). The ulawful subjects', and rrlawful m,eansu tests are used to determine the validity of a law enacted under the police power. While police power is inherent in the state, it is not

in nrrrnicipal corporations (Balacuit a. CFI of Agusan

del Norle,

163 SCITA ISZ).

12

ltt';vtt':wt';tt ot't'l'lx,l't'ttttt

( it,lttt,:ttnt,

IttttNt'tt't,t'tri nrutr l,tttt,t,n't.toNs ( ft

Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code requires owners ofvehicles to pay registration fee in the registration of their vehicles. The purpose of the law is to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. The Court ruled that the fees may be regarded as taxes even though they also serve as an instrument of regulation (Philippine Airlines,Inc' v. Ed'u, G..R. .l\/o. L'47383' August 75, 1988). The amount of license fees that may be imposed upon the operation of slot machines, which includes juke box, pinball and other coin-operated contrivances, based on an ordinance passed by the Municipal Board of Manila for

regulatory purposes, cannot be prohibitive, extortionate, confiscatory or in an unlawful restraint oftrade, but should be approximately commensurate with and sufficient to cover all the necessary or porbable expenses for issuing the license and ofsuch inspection, regulation and supervision as may be lawful (Morcoin Co. Ltd.. u. City of Manila, et al., G.R.No. L-75357, January 28,7967)'

3. Promotionofgeneralwelfare - Taxationmaybeused police power to promote the general as an implement of the welfare of the PeoPle.

(

)N 't.lil,1

Itowt,It

0t,. 'l'ifXnf,t<)I.t

,rrt.rrrl lrri rrr:iplcs

I,:n's. Hotrt:uer, police pouer moy be exercised, jointry with the power the purpose of raising reuenues (Lutz a. Araneta, gg

rl'ltttcttiltn t'ir Phit. t48).

4.

5.

6.

Reduction of social inequality

progressive system

oftaxation prevents the undue concentration ofwealth in the hands of a few individuals. progressivity is keystoned on the principle that those who are able to pay shoulder the bigger portion ofthe tax burden. Encourage economic gfowth by granting incentives and exemptions - The power to tax and the power to exempt are inherent in the State and in local governments. But the power to condone taxes does not exist, save in the condonation of taxes (e.g., real property tax) which can be granted only for certainjustifiable reasons expressly stated in the law (Sec. 2ZG, Local Gouernment Cod,e).

Protectionism competition.

-

To protect rocal industries from foreign

Taxes Distinguished from Other lmpositions l. Taxation distinguishedfromEminentDomainandpolice Power Taxation

Eminent Domain

Bar Question (1991)

Authority

May be exercised

May be:

who Exer-

The police power, the power to tax and the power of eminent domain aie inherent powers of government. May a tax be validly imposed in the exercise of the police power and not of the power to tax? If your answer is in the affirmative, give an example.

(1) Exercised

cises the

only by the government or its political subdivisions.

Power

Police Power May be exer-

by the cised only by the government or its government or its

political subdivi- political subdivisions;

sions.

(2) Granted to public serwice companies

or public utilities.

Suggested answer:

I)urpose

The police power may be exercised for the purpose of requiring licenses for which license fees may haue to be paid. The amount of the Iicense fees for the regulation of useful occupations should only be sufficient to pay for the cost of the license q.nd the necessary qcpense

of police surueillance and regulation. For non-useful occupations, ihl li""n"" fee rnay be sufficiently high to discourage the particular actiuity sought to be regulated. It is clear from the foregoing that police pouer may not be exercised by itself alone for the purpose of raising

13

The property (generally in the form of money) is taken for the support of the government.

The property is "taken" for public use; it must be compensated.

The use ofthe

property is "regulated" for the purpose of promoting the general welfare; it is not compensable.

Ihrr.urns Alli,r:t,rxl

Opcrates upon a

(l)Community;or (2) (llrrss of inrlivirl rrrr

ls.

.

Operates on an irrdividull as the owrrcr ol'rr lltrrt.ir:ttIrrr pro;x'rl,y.

Operates upon a (1) Community; or (2)

Class of individuals.

(ll:Nntuv, l)ttttirctt,t,t,:s

Iltrvtlwutr
74

nrt (

Taxation The money contributed becomes part ofthe public funds.

Effect

Eminent Domain There is a transfer ofthe right to property.

3.

Police Power

. There is tle.

on

4.

the injurious use

Benefits Received

It is assumed that the individual receives the equiva-

He receives the market value of the property taken from

lent ofthe tax in the form ofprotection and benefits he receives from

him.

Amount of Imposi-

tion

Generally, there is no limit on the amount of tax that may be imposed.

.

tion

tions.

cannot expropriate

Includingthe

private property, which under a contract it had previ-

contracts.

ously bound itselfto purchase from the other contracting

5.

Amount imposed

Norte,lffi

SCRA

n2).

The act of the Municipal Mayor in opening Jupiter and Orbit Streets, BeI-Air Subdivision, to the public was deemed a valid exercise of police power (Sa.ngalang a, Intertned.iate Appellate Courtr 176 SCRA 7W). The collection of universal charge under R.A. 9136 (EPIRA Law) is an exercise of police power, not of its taxing power. The distinction lies in the purpose. Ifthe generation

expenses.

incidental, the imposition is a tax. However, if regulation is the primary pu{pose, the fact that revenue is incidentally raised does not make the imposition a tax.

.

of revenue is the primary purpose and regulation is merely

Relatively free from constitu-

tional limitations.

Bar Question (1996)

. Is superior to the impair-

1(" is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of 300 square meters. On June 1, 1994, 100 square meters of said lot owned by 'X" was expropriated hy the government to be used in the widening of Quirino Avenue, for ?300,000.00, representing the estimated assessed value of said portion. From 1991 to 1995, 1(," who is a businessman, has not been payinghis income taxes. Xis nowbeing assessed forthe unpaid income tuxes in the total amount of F150,000.00. 'X,'claims his income tax liability has already been compensated by the amount of F300,000.00, which the government owes him for the expropriation of his property.

ment of contract provision.

Cases: The ordinance requiring owners of commercial cemeteries

(6Vo) of their burial lots for burial grounds of paupers was held invalid; it was not an exercise of tn" police power, but of eminent domain (Quezon City a. Ericta, 122 SCRA 759).

to reserve six percent

2.

The ordinance penalizingpersons chargingfull payment for admission ofchildren, ages7 to 12, in movie houses was an invalid exercise of the power, for being unreasonable and oppressive on business of petitionerc (Balacuit v. CFI of

should not be more than sufficient to cover the cost of the license and necessary

party.

1.

A zoning ordinance, reclassifying residential into

Agusan del

indirect benefits as may arise from

society.

No amount imposed but rather the owner is paid the market value ofproperty taken.

Constitu-

prohibition against impairment of the obligation of

fected receives

nomic standard of

Inferior to the impairment prohibition; government

.

The person af-

of a healthy eco-

Is subject to certain constitutional limita-

Relationship to

ofproperty.

the mainfenance

the government.

15

1988).

there

is restraint

o!"lhxn'rroN

commercial or light industrial area, is a valid exercise of the police power (Ortigas a. Feati Bank,94 SCRA 533; Sangolong a. Gaston, G.R. jVo. 77769, December 22,

no

transfer of ti-

. At most,

l,ttr,ttt'it't'lrHH oN't'lu,: l'owl:tt

lonorrrl IDrint:ipkts

l)ocide-

lluggeeted answer:

The Manila ordinance prohibiting barbershop shops from conducting massage business in another room was held valid, as it was passed for the protection of public morals (Velasco u.Villegas, 720 SCRA 568).

'fhe income to.x liability cannot be compensated with the amount owed hy the gouernment as compensation for his expropriated 1tnt1x,rty. Tores are of distinct kin.cl., ess'c nce and nature than ordinary ohl.iguliorts. 'I\ues and debts cunrt.ol. lx' lhc subicct of compensation

*

lll:vtt,:wt,:tt r ttt 'l'Axn't'lt

16

(il,:lrt,:l,tt,I'rrl'rlll'r,r,;ri,ttttrl,tttt,t,,t't,tot,ts{)N tN

(

"X' e,re rnt mutually creditors and debtors claim a of each other and for tanes is not a debt, demand contract, jud.gment to be set off (Francia v. Interm'ediate allowable as is or 76749, June 28, 1988), No. Appeltote Court, GR. because the gouernrnent and

Amount

Tax v. Debt 2. Taxv.Debt

Authority

Basis

No limit as to the amount oftax-

Amount of toll depends upon the cost ofconstruction or maintenance of the public improvement used.

May be imposed only by the government.

May be imposed by the government or private individuals or entities.

Based on contract

orjudg'

.1.

Tax v. License Fee

ment.

TAX Effect ofNonPayment

Mode of Pa5rment

Assignability Interest

Authority

Taxpayer may be imprisoned for his failure to pay the tax (except poll tax).

No imprisonment for failure to pay a debt.

Generally payable in money.

May be payable in moneY, property or services.

Not assigrrable.

Can be assigrred.

Does not draw interest unless delinquent.

Draws interest if stiPulated or delayed.

Imposed by public authority.

Can be imposed by Private

Purpose

Basis

Prescriptive periods for tax are determined under the NIRC.

Imposed for revenue

Imposed for regulatory purposes.

Imposed under the power oftaxation.

Imposed under the police power ofthe State.

No limit as to the amount of tax.

Amount of license fee that can be collected is

limited to the cost of the license and the expenses of police surveillance and

regulation. individuals.

Tirne of

Civil

Normally paid after the start of a business.

prescriptive period of debts.

Effect ofNon-

Normally paid before the commencement of the business.

Code governs the

Pa5rment

.).

LICENSE

purposes.

Amount

Pa5rment

Prescription

t7

DEBT

TAX Based on law.

t.til,: I'owt,:rror,,'['lxnt,tot,t

l,rrr,rrrl Itrirtr.i Jrlls

Failure to pay the tax

Failure to pay a license

does not make the busi-

fee makes the business

ness illegal.

illegal.

Taxes, being the

License fee may be with or without consideration.

Tax v. Toll TAX

Definition

Basis

DEBT

Enforced proportional

A sum of money for the

contributions from

use of something, a consideration which is Paid for the use of a propertY which is of a public nat:ure e.g., road, bridge.

persons and property.

A demand of sover-

eigrty.

A demand ofproprietorship.

Surrender

lifeblood ofthe State, cannot be surrendered except for lawful consideration.

The term otax" applies generally to all kinds of exactions which bccome public funds. The term is loosely used to include levies for

rcvenue as well as for regulatory purposes. Thus, license fees are

(x)mmonly called taxes. Legally speaking, license fee is a legal concept r;uite distinct from tax; the former is imposed in the exercise of porice power for purposes of regulation, while the latter is imposed under the

18

ll.r,:vlr,rwt,:tr

on 'l'nxA't

( it'rnt';ttnt'

tt tl.t

taxing power for the purpose of raising revenue (McQ uiLLin, Municipal Corporations, VoI. 9, Srd ed., p. 26) . Bott' a license fee and a tax may be imposed on the same business or occupation, or for selling the same article, this not being a violation ofthe rule against double taxation (Bentley Gray Drug Good's Co. a, City of Tampa, 737 Fha.647, 188 5O.758).

The term "license tar" has not acquired a fixed meaning' It is often "used indiscriminately to designate impositions exacted

for the exercise of various privileges." It does not refer solely to a license for regulation. In many instances, it refers to "revenue raising exactions on privileges or activities." On the other hand, "license fees" are commonly called taxes but, in contrast to the former which are imposed "in the exercise of police power for purposes of regulation." Accordingly, the designation given by the municipal authorities does not decide whether the imposition is properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be apparent from the provisions of the ordinance (Victorias Milling Co. u. Mun. of Victorias, Prou. of Negros Occid.ental, GJ,. No. L'21L83, Septem.ber 27' L968). Thus, if the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidental revenue is also obtained does not make the imposition a tax. To be considered a license fee, the imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs ofdirect regulation but also its incidental consequences as well. When an activity, occupation or profession is of such a character that inspection or supervision by public officials is reasonably necessary for the safeguarding furtherance of public health, morals and safety, or the general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be carried out at the expense ofthe persons engaged in such occupation or performing such activity, and that no one shall engage in the occupation or carry out the activity until a fee or charge sufficient to cover the cost of the inspection or supervision has been paid. Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power (Progressiae Deaelopmcnt Corp. a. Quezon City, GR. No. L-36087, April24, 7989). lf t}l'e

I'tttM'r|r'r':rt

^ii: ljlil]i^;;ll;.::;',i

I'owt'rtt

ot"l'nxn't'toN l9

'1lr'

lrrrrl,oso is prim.rrily revenue, or if revenue is, at least, one of the r.rrl irntl substantial purposes, then the exaction is properly called r Lux (Land. Transportation Office a. City of Butuan, G.R. No. l :t 1 512, January 20, 2OOO).

The motivation behind many taxation measures is the ir'plcmentation of police power goals. Progressive income taxes rrlle viate the margin between rich and poor; the so-called nsin tq.res' orr alcohol and tobacco manufacturers help dissuade the consumers I''m excessive intake ofthese potentially harmful products. Taxation

is distinguished from police power as to the means employed to irrrplement these public good goals. These doctrines that are unique

irr ltrxation arose from peculiar considerations such as those especially punitive effects oftaxation, and the beliefthat taxes are the lifeblood of l,hc state. These considerations necessitated the evolution oftaxation rrs a distinct legal concept from police power. Yet, at the same time, it has been recognized that taxation may be made the implement of the

slate's police power (Planters Products a. Fertiphjl G-R. No. 766006, March 74,2008).

6.

Corporation,

Tax v. Penalty TAX

Definition

Enforced proportional

Sanction imposed as a

contributions from

punishment for violation of a law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty.

persons and properby.

Purpose

Authority

PENALTY

Intended to raise revenue.

Designed to regulate conduct.

May be imposed only by May be imposed by: the government.

(1) (2)

Government; or

Privateindividualsor entities,

Double Taxation In order to constitute double taxation in the objectionable or prohibited sense, the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same

( it,;trt,:tr,t.

llr,:vtt,:wt,:tt on'l'nx,r't'tott

20

578). sense, double taxation means indirect duplicate extends to all cases in which there are two or more

In the broad

4.

2.

Regulation and taxation are two (2) different things, the first being an exercise of police power' whereas the latter involves the exercise of the power of taxation' While R'A' 2264 provides that no city may impose taxes on forest products and although lumber is a forest product, the tax in question is imposed not upon the lumber but upon its sale. There is no double taxation involved, and even if there was, it is not prohibited by law (Serafica a' City T?easurer ofOrmnc, L'24873, April 28,7968)'

3.

5.

That Tabacalera is being subjected to double taxation is more apparent than real. What is collected under

2t

The tax on the sale or disposal ofevery bottle or container of liquor or intoxicating beverages is a revenue measure,

Subjecting the interest on bank deposits to the five percent (1Vo) gross receipts tax (GRT) does not result in double

taxation. The taxes are imposed on two (2) different subject matters - 207o FWT is imposed on the passive income generated in the form of interest on deposits, while GRT is imposed on the privilege of engaging in the business ofbanking. A tax based on receipts is a tax on business rather than on the property; hence, it is an excise tax rather than a property tax. GRT is not an income tax, but a percentage tax not subject to withholding tax, unlike the FWT, which is an income tax subject to withholding. Also, the taxing periods they affect are different: FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is

A warehouseman is one who receives and stores goods of another for compensation. The fact that Hawaiian-

Philippine Co. (HPC) stores the planters'sugar for free for the first 90 days does not exempt it from liability' If this were the case, the law imposing the tax would be rendered ineffectual. Neither is the fact that HPC's warehousing business is carried on in addition to or in relation to the operation of its sugar central suffrcient to exempt it' Under Section 178 of the old Tax Code, the tax on business is payable for every separate or distinct establishment or place where the business subject to the tax is conducted, and one line of business or occupation does not become exempt by being conducted with some other business or occupation for which such tax has been paid' There can be no double taxation where the State merely imposes a tax on every separate and distinct business in which a party is engaged in (Com'missioner u. Hanoaiian'Phihppine Co., 7L SCRA 256).

Itowt,:tt ot. 'l'nxn't'tot.t

whereas the sum of F600.00 San Miguel pays annually is for a second-class wholesale liquor license, which is a license to engage in the business of wholesale liquor in Cebu City, and constitutes a regulatory measure, in the exercise of police power (San Miguel Brewery u. City of Cebu,43 SCRA 275).

Cases:

1.

l,tr'tt t',l t'l rlli oN 't'tl.: l'ttlrrrl I't'ittcipL's

r nrutr (

Ordinance No. llllSfl is tr liccnse f'ee, while the three (3) other rlrdinances impose a tax on sales of the merchandise. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article. This is not being in violation of the rule against double taxation (Compania General de Tabacos d.e Filipinas u. City of Manila, I SCRA 367).

property or subject matter, for the same purpose, by the same State, -Gorr"rtt-"ttt or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the Su-" kittd or character of tax (Yillanueua u' City of lloilo, 26 SCRA

taxation. It pecuniary impositions. The constitution does not prohibit the imposition of double taxation in the broad sense.

l'rrr'tltt't,t,l

earned; GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. The fact that the FWT is a special trust fund belonging to the government and that the bank did not benefit from

it while in custody of the borrower does not justify its exclusion from the computation of interest income subject

(Commissioneru.Bank of Commcrce, G.R.No. 749636, June 8,2005).

to GRT 6.

The authority of city mayors to issue or grant licenses and business permits is beyond cavil. It is provided for by law, particularly in Section l7l, par.2(n) of BP 337. In the present case, the objective of the imposition of

,),)

Itt.:t, t r,;wr,;rr or.r'l'A

\,r'nlr'r

( ir,:r.,r,:rrnr,

subject conditions on petitioner's businoss pertnit could be attained by requiring the optometrists in petitioner's employ to produce a valid certificate of registration as optometrist, from the Board of Examiners in Optometry. A business permit is issued primarily to regulate the conduct of business and the City Mayor cannot, through the issuance of such permit, regulate the practice of a profession, like that of optometry. Such a function is within the exclusive domain of the administrative agency specifically empowered by law to supervision the profession (Acebed.o Optical Company a. CA, et al., G.R. No. 700752, Mo.rch 31,2000). t.

The City of Manila passed an ordinance prohibiting short time admission in hotels, motels, lodging houses, pension houses and similar establishments in the City of Manila, and consequently, wash-up rate or other similarly concocted terms in hotels, motels, inns, lodging houses, pension houses and similar establishments. The Supreme Court, speaking through Justice Dante Tinga said: "To students ofjurisprudence, the facts

ofthis

case

will recall to mind not only the recent City of Manila ruling, but our 1967 decision in Ermita-Malate Hotel and Motel Operations Association u. Hon. City Mayor of Manila. Ermita-Malate concerned the City ordinance requiring patrons to fill up a prescribed form stating personal information such as name, gender, nationality,

age, address and occupation before they could be admitted to a motel, hotel or lodging house. This earlier ordinance was precisely enacted to minimize certain practices deemed harmful to public morals. A purpose similar to the annulled ordinance in City of Manila was sought a blanket ban on motels, inns and similar establishments in the Ermita-Malate area. However, the constitutionality of the ordinance in Ermita-Malate was sustained bv the Court.

The common thread that runs through those decisions and the case at bar goes beyond the singularity ofthe localities covered under the respective ordinances.

All three (3) ordinances were enacted with a view of regulating public morals, including particular illicit activity in transient lodging establishments. This could be

I'rtrrll'r.r,:r

^lll;';l;^;;lli:1,,,i :l'''

l'owl;rt ol

'l'rxn'r'ror.r

23

described as the middle case, where there is no wholesale ban on motels and hotels but the services offered by these establishments have been'severely restricted. At its core, this is another case about the extent to which the State can intrude into and regulate the lives of its citizens. The test of a valid ordinance is well established. A long line of decisions, including City of Manllo, has held that for an ordinance to be valid, it must not only be within the corporate of the local government unit to enact and pass according to the following substantive requirements: (a) must not contravene the Constitution or any statute;

(b) must not be unfair or oppressive; (c) must not be partial or discriminatory; (d) must not prohibit but may regulate trade; (e) must be general and consistent with public policy; and (f) must not be unreasonable. The Ordinance prohibits two (2) specific and distinct business practices, namely: wash rate admissions and renting out a room more than twice a day. The ban evidently sought to be rooted in the police power as conferred on local government units by the Local Government Code through such implements as the general welfare clause. The apparent goal of the Ordinance is to minimize if not eliminate the use of the covered establishments for illicit sex, prostitution, drug use and alike. These goals, by themselves, are unimpeachable and certainly fall within the ambit of the police power of the State. Yet the desirability of these ends do not sanctify any and all means for their achievements. Those means must align with the Constitution, and our emerging sophisticated analysis of its guarantees to the people. The Bill of Rights stands as rebuke to the seductive theory of Macchiavelli, and, sometimes even, the political majorities animated by his cynism. Lacking the concurrence of the requisites, the police measure shall be struck down as an arbitrary instrusion into private rights."

Bar Question (2004) A municipality, BB, has an ordinance which requires that all stores, restaurants, and other establishments selling liquor should pay a fixed annual fee of F20,000. Subsequently, the municipal board proposed an ordinance imposing a sales tax equivalent to \Vo of the

24

(it,;tt,;tr,rr l,trttr tt,t.t:l .rNrr l,tntil \ililNri,,N

li.t,;vrr'rwr':rr oN'l'AXA'r'roN

(

amount paid for the purchase or consumption ol'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.

Yes, bul i.t is tn l.y o (tst' ol'i.ntl,i,ru'|, d,upl,il:u,te lttxutiort which is not legally prohibitul hecause the taxes are imposed by different taxing aut horities.

(c)

The usual methods of auoiding the occurrence of double taxation are:

I.

Suggested answer:

t1e63l).

'2ll

(h)

Is the refusal of the mayor justified? Reason briefly.

No. The refusal of the mayor is not justified. The impositions are of dffirerut nature and charcr,cter. The fited annual fee is in the nature of a license fee imposed through the exercise of police power, while the SVo 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 sq.me article and this is not in uiolation of the rule against double tq.xation (Compania General d.e Tabacos d.e Filipinas u. City of Manila, S SCRA 367

illt, llrwItir)t,'l'\\,\r.tr)N

i('nr'r'irl I't tttltpl,'r;

Allowing reciprocal exemption either by law or by treaty;

2. 3. 4.

Allowance of tax credit fbr foreign taxes paid; Allowance of deduction for foreign' toxes paid; and Reductian of the Philippirue tax rate.

Bar Question (1996) "X," a lessor of a property, PaYS real estate tax on the premises, a real estate dealer's tax based on rental receipts and income tax on the rentals. He claims that this is double taxation. Decide.

Bar Question (1997)

(a)

Is double taxation a valid defense against the legality of a

tax measure?

(b) (c)

When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation?

What are the usual methods of avoiding the occurrence of double taxation?

Suggested answer:

(a)

No, double taxation standing alone and not being forbidden by our fundamental law is not a ualid defense against the le g ality of a ton me a s ure ( P ep si - C ola Bottling Comp any

of the Phil. u. Mun. of Tanauan, Leyte, 69 SCRA 460). Howeuer, if double taxation amo to a direct duplicate taxation, in that the same subject is taxed twice when it should be taxed but once, in a fashion thut both taxes are imposed for the same purpose by the same taeing authority, within the same jurisdiction or taxing district, for the sqme taxable period and for the same kind or character of a tax, then it becomes legally objectionable for being oppressiue and inequitable.

Suggested answer: There is no double taxation. "Double taxation" means toxing for the sq.me tax period the same thing or actiuity twice, wheru it should' be taxed but once, by the same taxing authority for the same purpose and

with the same kind or character of tax. The real estate tax is a tax on' property; the real estate dea.lef s tax is a tolc on the priuilege to engage in business; while the income tax is a tax on the priuilege to earn an income. These ta;ces are imposed by different taxing uuthorities and are essentially of different h,ind qnd charecter Uillanueua a. City of lloilo,26 SCRA 578).

Exemption from Taxation Art"eremption from taxation" is a grant of immunity, express or implied, to particular persons or corporations or to persons or corporations of a particular class, from a tax upon property or an excise which persons and corporations generally within the same taxing district are obliged to pay. It is a freedom from a charge or burden to which others are subject (Greenfield a. Meer, 77 PhiI. 394).

Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor ofthe taxing authority. It is the lawmakingbody and not the local chief executive who can make

26

(it.:t'tt,ttrlt.l'trlrur'tt't,l':lti\Nt,l,tNlttr\ilrltii, rril tltl,: llrwt,ltr ot 'l'AxAttot'l ( llttltttI I't tttr'tpllri

lit,rvt t,:wt,:tr oN'l'nxn'rror.r

the exemption (Philippine Petroleurn Corporation u. Pililla, rc8 SC&A 82 tL991/). He who claims the exemption must point to some provision of law creating the right. It cannot be allowed to exist upon a mere vague implication or inference. It must be indubitably shown to exist, for every presumption is against it and a well-founded doubt is fatal to the claim (Floro Cemcnt a, Gorospe,200 SCRA

tax lon inrportirt,iorr ol goorls lirr personal usel, but to an rnption from a dirccl tax - the property tax. The second ref'erence, the phrase: "in lieu of all taxes and assessments" cannot include the compensating tax, since the phrase is followed and modified by "upon the privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee." This provision merely reiterates the privilege granted in the first sentence - the exemption ofwires, poles, etc. from property taxes. The provision does not mean that Meralco is exempt from paying all other taxes aside from those required in paragraph 9. Moreover, compensating taxes (i.e., taxes imposed on imported goods for personal use of the importer thereof) could not have been intended to be included in the exemption found in the franchise, since the franchise was made earlier before the act imposing compensating taxes (Meralco u. Vera, 67 SCRA 351). exe

48O t19911).

Bar Question (1996) Why are tax exemptions strictly construed against the taxpayer?

Suggested answer: Tax exemptions are strictly construed against the taxpayer highly disfauored and may alrnost be said to be odious to the la.w (Monila, Electric Company u. Vera, 67 SCRA 357). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with fauor on tq.rc exemptions, they being contrary to the lifeblood theory which is the underlying basis for ta^tces. The natural rule is that eueryone in the State rnust contribute to because such prouisions are

2.

the support of gouernment. Exemptions are in derogation of souereignty; hence, they must be strictly construed against the person claiming it

(Commissioner a. Guerrero,2l SCRA 180).

Cases:

1.

Meralco claimed exemption because of paragraph 9 of its franchise. First, the opening sentence imposes a tax on enumerated properties, but "not including poles, wires,

transformers and insulators." Second, they are required by law to pay a certain percentage tax in lieu of all taxes and assessments of whatever nature and by whatsoever

authority. Tax exemptions are construed strictly against the taxpayer. Exemptions are highly disfavored and may almost be said to be odious to the law. The claimant to the exemption must point to a clear and unambiguous provision, and not rely on a mere inference or implication. A well-founded doubt is fatal to the claim. The first paragraph found in the opening sentence refers not to an exemption from compensating tax which is an indirect tax or excise -

27

The petitioner cannot avail of the privilege with respect to the imported machinery since it was found to be not directly necessary, but merely incidental, to the operation of the industry itself. The exemption clearly refers only to "machinery and equipment to be used exclusively in the new and necessary industry," not merely in connection therewith. The operation of the transportation, while it may bring convenience and economy to the petitioner, is not indispensable to or form part of the business of manufacturing plywood (Marli Plywood' & Veneer

Corporation 3.

u.

Aranaq

109

Phil.664).

Petitioner is taxable on its income derived from the sale of its property to the government, including portion of the purchase price of the property paid by the government in the form of tax-exempt bonds. The income from the sale of the land and the bonds are two (2) different and distinct taxable items so that the exemption of one does not operate to exempt the other, unless the law expressly so provides. The tax here involved is on the income from the sale of petitioner's property to the government, not the income from the sale or exchange of the bonds. Income from expropriation proceedings is income from sales or exchange of properby and therefore taxable (Rod'riguez u. Coll'ector,

L-23047, July 31, 1969).

28

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4.

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Section 193 of the Code prescribes the general rule: tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the Code, except with respect to those entities expressly enumerated, (City Gou't of So,n Pablo a. Reyes, supra). However, this provision does not affect contractual tax exemptions which are agreed to by the taxing authority in contracts. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in

r'orrcsponding Lo the lax passt:d ott r:luiln ol' AIJO Corp. meritoritlus?

Bar Question (2004) As an incentive for investors, a law was passed giving newly established companies in certain economic zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was organized and was granted such incentive. In the course of business, ABC Corp. purchased mechanical equipment fromY{Z, Inc. Normally, the sale is subject to a sales tax.

r,.w,,:rr,rr,r,nr,r,r,roN 29

l,o iL, since iL

is tax exempt. Is the

Suggested answer:

a.

contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling

laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its government immunity. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause. Indeed, Article XII, Section 11, of the 1987 Constitution is explicit that no franchise for the operation ofa public utility shall be granted, except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires (Manila Electric Company u. Proa. of Laguna, 306 SCRA 75O t19991).

^ll,il:::ll,^;,f;l.11,,,i,1,,,

No. Exemption from taxes is personal in nature and couers only taxes for which the taxpayer'grantee is directly liable' The sales ta$ is a tqx. on the seller who is not exempt from taxes. Since XYZ, Inc. is directly liable for the sales tax and no tax exemption priuilege is euer giuen to it, therefore, its clq.im that the sale is exempt is not tenable. A tafr exemption is construed in strictissimi juris qnd it cannot be permitted

to erist upon uague implications (Asiatic Petroleurn Co,, Ltd.. a. Llanes,49 Phil.466 [1926]).

b.

No. The cloim of ABC Corp. is not meritorious. Although the paid by it is not a tan but part of the cost it has assumed. The toxpayer who cq.n file a claim for refund is the person statutorily liable for the payment of the tax. Since ABC Corp. is not said toxpayer, it has no capacity to file a claim for refund. tq,x was shifted to ABC Corp. by the seller, what is

Tax Laws Statutes levying taxes are construed against the government It is a general rule in the interpretation ofstatutes levying taxes or duties, that in case of doubt, such statutes are to be construed rnost strongly against the government and in favor of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed beyond what the statutes expressly and clearly import. The purpose of imposing documentary stamp taxes is to raise revenue and the corresponding amount has already been paid and has become part of the revenue of government. There is no justification for the

government which has already realized. the revenue to require the payment of the same tax for the same documents (Collector u, Fireman's Fund Insurance Co., 748 SCRA 315),

XYZ, Inc. claims, however, that since it sold the equipment to ABC Corp., which is tax exempt,Y{Z should not be liable to pay the sales tax. Is this claim tenable?

Construction of statute by predecessors is not binding on the

Assume arguendo LhaL){J{Z had to and did pay the sales tax. ABC Corp. later found, however, thatXI{Z merely shifted or passed on to ABC the amount of the sales tax by increasing the purchase price. ABC Corp. now claims for a refund from the BIR in an amount

The power to pass upon the validity of General Circular No. V-t23 is vested exclusively in our courts in view of the principle of separation of powers. The Secretary of Finance acted without valid authority in revoking General Circular No. V-123 and in approving, in

successors

30

lit'rt'tt,rwt,:tr oN'l',,rrA'noN

lieu thereof, General Circular No. V-139. It cannot be denied, however, that the Secretary ofFinance is vested with authority to revoke, repeal or abrogate the acts or previous rulings ofhis predecessor in office because the construction of a statute by those administering it is not binding on their successors, if thereafter the latter becomes satisfied that a different construction should be given (Hilad.o u. Collector, 100

PhiI.288).

Retroactive application As a rule, taxing statutes must be applied prospectively, except

by express provision of the law. The mere fact that a tax law is retroactive does not make it invalid or against due process because retroactivity must be so harsh and oppressive in its application in order to invalidate the law. This principle finds application in R.A. 9238. Thus, the enrolled bill, exempting banks, finance companies, doctors of medicine and lawyers from the value added tax, was submitted to the President of the Philippines on January 5,2004,for her approval. Since the President did not exercise her right to veto the bill within the 30-day period prescribed in Section 27(1), Article VI of the 1987 Constitution, the enrolled bill became a law (R.A. 9238) onFebruary 5,2004. The above situation created some significant tax issues for lawyers who became exempt from the value added tax beginning January l,20}A,pursuant to the express provision ofthe amendatory law, which was published in a newspaper of general circulation only on February 16,2004. Following the doctrine enunciated in the case of Tuuera u. Tafi.ad.a (GR. No. 63975, April 24, 1985), some tax practitioners believe that said law became effective only after its publication on February 16,2004. This legal issue of when R.A. 9238 became effective became moot and academic when the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, promulgated Revenue Regulations No. 7-2004 on May 7, 2004, specifically providing that lawyers became exempt from value added tax on January I,2004, confirming what has been previously declared by the Commissioner of Internal Revenue in RMC 9-04 and 10-04 dated February 2004. This position finds support from the provision of Article 2 of the New Civil Code (R.A. 386), which states "that laws shall take effect after 15 days following the completion of their publication in the Official Gazette or newspaper of general circulation, unless it is otherwise provided." Since the law itself expressly provides for its date of effectivity, it shall take effect on January 1,2004.

(ir,:r.l:rmr.t,nrr,,l.rl,,r,;:r^lll.i;illli^l,l1lXl,,,i::,,t',wr,,rr,r,,'t'nxn,r,roN

:.|1

it d'oes not pass o pre'eristing ona-Fven though

When the Supremc Court clecid.et a case, neu) lau), but mercIy

intetprets

a

the taxpayer's petition was filed before the decision in case of CIR u. BWSC Mindanao was promulgated, the pronouncement made in that case may be applied to the present case without violating the rule against retroactive application. when the court interpreted section 102(b) of the 1977 Tax Code in the Burmeister case, this interpretation became part of the law from the moment it became effective. It is elementary that the interpretation of a law by the court constitutes part of that law from the date it was originally passed, since the Court's construction merely establishes the contemporaneous legislative intent that the interpreted law carried into effect (Accenture u. CIR, GR. No. 790702, July 1-L,2012).

Principle of legislative approval by Re-enactment The validity of the questioned rules can be sustained by the application of the principle of legislative approval by re-enactment. Under this concept, where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the legislature thereafter re-enacts the provisions without substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose. Revenue Regulations No. 6-66, implementing Section 192 of the C.A. 466 (Tax Code of 1939), has over the decades been substantially reproduced with every amendment of the Tax Code, up until its recent reincarnation in Section 118 of the 1997 Tax Code. The legislature is presumed to have full knowledge of the existing revenue regulations interpreting the provisions of law, and with its subsequent substantial re-enactment, there is a presumption that the lawmakers have approved and confirmed the rules in question as carrying out the legislative purpose. Thus, absent any showing that Revenue Regulations No. 6-66 is inconsistent with the provisions of the Tax Code, its applications shall be upheld and applied accordingly. This is in keeping with our primary duty of interpreting and applying the law. Regardless ofour reservations as to the wisdom or the perceived ill-effects of a particular legislative enactment, the court is without authority to modifr the same as it is the exclusive province of the lawmaking body to do so. Even with the best motives, the Court can only interpret and apply the law and cannot, despite doubts about its wisdom, amend or repeal it (Saguiguit u. People, cited' in Gulf Air Company, Phil. Branch a. CIR, G.R. No. 782045, September 19,2072).

I 32

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( it,:rut,:trnt,

Ittrttt|tt't,t,}i nnlr l,ttvll'l'n't'tot'ts rlN'l'lll,t I'owl'ltt (

Case: The Commissioner's contention that Burroughs Ltd. is no longer entitled to refund of overpaid branch profit remittance tax because Revenue Memorandum Circular (RMC) No. 8-82 dated March 17, 1982 had revoked and,/or repealed BIR Ruling of January 21, 1980 is without merit. What is applicable here is still the BIR Ruling of January 21, 1980 because respondent paid the tax in question on March 14, 1979. RMC 8-82 dated March 17, t982 cannot be given retroactive effect in the light of Section 327 (now Sec. 246) [prospectiue application of rulings] of the Tax Code (Comtnissioner a. Burroughs, 742 SCRA 324).

Bar Question (2004) Due to an uncertainty whether or not a new tax law is applicable to printing companies, DEF Printers submitted a legal query to the

Bureau of Internal Revenue (BIR) on that issue. The BIR issued a ruling that printing companies are not covered by the new law. Relying on this ruling, DEF Printers did not pay said tax. Subsequently, however, the BIR reversed the ruling and issued that the tax covers printing companies. Could the BIR now assess DEF Printers for back taxes corresponding to the years before the new ruling? Reason briefly. a new one stating

Suggested answer: No. The reuersal of a ruling shall not be giuen a retroactiue if said reuersal will be prejudicial to the taxpayer. Therefore, the BIR cannot ossess DEF Printers for bach taxes becquse it would be uiolatiue of the principle of non-retroactiuity of rulings and doing so would result in graue injustice to the taxpayer who relied on the first ruling in good faith (Sec. 246, NIRC; CIR u. Burcoughs, lnc.,742 SCftA 324 [1986]).

application,

Regulations Requisites for validity of regulations:

1. It is issued under authority 43

Phit

of law (Olsen u. Ald.anese,

64);

2. It must be within the scope and purview

of the law. The power of administrative officials to promulgate rules in the implementation of a statute is necessarily limited

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iJJ

lt'ttcrttl I'rittt'i1rh'r

to what is provided fbr in the legislative enactment. The implementing rules and regulations of a law cannot extend the law or expand its coverage, as the power to amend or repeal a statute is vested in the legislature. However, administrative bodies are allowed, under their power of subordinate legislation, to implement the broad policies laid down in the statute by "filling in" the details' All that is required is that the regulation be germane to the objectives and purposes ofthe law; that the regulation does not contract but conforms with the standards prescribed by law ( Public Sc hools District Superuisors Ass ociq.tion a. Hon. Ed.ilberto d'e Jesus, G.R. No. 757299, June 79, 2006).

Rules and regulations, which are the product of a delegated power to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted by the legislature to the administrative agency. It is required that the regulation be germane to the objects and purposes of the law, and that it be not in contravention to, but in conformity with, the standards prescribed by law. In this case, the Commissioner of Customs went beyond his powers

when the regulation (CMO 23-2007) limited the customs officer's duties mandated by Section 1403 of the Tariff and Customs Law, as amended. The provision mandates that the customs officer must first assess and determine the classification of the imported article before tariffmay be imposed. Unfortunately, CMO 23-2007 has already classified the article, even before the customs officer had the chance to examine it (Commissioner of Customs a. Hypermir Feed.s Corporation, G.R, No. 179579, February 1,2012),

Section 109(L) of R.A. 9337 as well as in the documentary evidence presented that petitioner's sale of sugar produce made by petitioner to its members as well as non-members is exempt from the payment of VAT. In declaring that in order to be exempt from VAT, a cooperative must be the agricultural producer of its sugar produce, the Commissioner has not engaged in mere interpretation, but has gone into unauthorized modification or amendment of the law. Only Congress can do this. Sections 3 and 4 of Revenue Regulations No. 13-

34

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lll,;vrr,:wr,:rr oN'l'nxrvrLolr

2008, insofar as it imposes this requirement is, therefore, ultr a - u ire s and invalid (N e gro s C o ns olid.at e d. F orm"ers Association Multi-Pufpose Cooperatiue a. CIR, CTA Case No.7994, FebruanTt 77,2012).

3.

It is reasonable (Lupangco u. Court of Appeals, 760 SCRA848);

4. It

must be published in the Official Gazette or in

a

newspaper of general circulation, as provided in E.O. 200. However, interpretative rules and regulations, or those that are merely internal in nature, issued by administrative superiors concerning the rules and guidelines to be followed by their subordinates in the performance of their duties, may be simply posted in conspicuous places in the agency itself. Such posting already complies with the publication requirement. Publication must !e in full, or it is no publication at all (Taft.ad.a u.Tfu.vera, 146 SCRAlU6).

5.

Where the regulations impose penal sanctions, the law itself must declare as punishable the violation of the administrative rule or regulation (People u. Moeeren, 79 SCRA 450), and, the law should fix or define the penalty for the violation of the rule or regulation.

Classifi cation of Regulations 1. Rules in the nature of subord.inate legislation.

rule in the nature of subordinate legislation

Administrative is designed to implement a law by providing its details, and before it is adopted, there must be a hearing under the Administrative Code of 1987. When an administrative rule substantially adds to or increases the burden ofthose concerned, an administrative agency must accord those directly affected a chance to be heard before its issuance (CIR u. Court of Appeals,26l SCRA 236). 2.

Interpretatiae rules.

The rules and regulations construing or interpreting- the provisions of a statute to be enforced are binding on all concerned until they are changed. They have the effect oflaw and are entitled to great respect; they have in their favor the presumption of legality (Gonzales v. Land. Bank,783 SCRA 520).T\e erroneous application of the law by public officers does not bar a subsequent correct application (Monilo Joekey

(ir';rut';ttirt I'Ittr'tt't.Lli

,tND l,t^tttit'r'tot'tiirN lllt': llrwt,:ttot.'l'lln't'tott ( ir,trlt rrl l'r'rrrlilrL's

3l-r

Club u. Court of Appeals, G.R. No. 703533, Decernber 15, 1998).

Necessity for Notice and Hearing There is no constitutional requirement for a hearing in the promulgation of a general regulation by an administrative body. Where the rule is procedural, or where the rules are, in effect, merely legal opinions, there is no notice required. Neither is notice required in the preparation ofsubstantive rules where the class to be affected is large and the questions to be resolved involve the use ofdiscretion c
Many regulations, however, bear directly on the public. It is here that administrative legislation must be restricted in its scope and application. Regulations are not supposed to be a substitute for the general policy-making that Congress enacts in the form of a public law. Although administrative regulations are entitled to great respect, the authority to prescribe rules and regulations is not an independent source of power to make laws (Reaiew Center Association a. Exec.

Secretary, G.R. No. 1"80046,

April2'

2009).

Publication The memorandum circular is merely for purposes of internal

administration of the BIR and not a regulation within the contemplation of the Tax Code and the Revised Administrative Code. As such, said circular needs no publication in the Official Gazette as erroneously argued by the petitioners. Section 79(b) of the Revised Administrative Code provides that chiefs of bureaus may be authorized to promulgate circulars or information for the officers and employees in the interior administration of the business ofeach bureau or office, and in such case said circular shall not be required to be published. When an administrative agency renders an opinion by means of a memorandum circular, it merely interprets a pre-existing law and no publication is necessary for its validity. Construction bv an executive branch of government of a particular law, although not binding upon the courts, must be given weight as the construction comes from the branch of government called upon to implement the law. In this case, the memorandum circular has the force and effect of law. In fact, the petitioners admitted that copies of said memorandum were distributed to and received by t}lem (La

:l

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Itt,:vtt,:wt,:tr oN'l'Axn'r'roru

Suerte Cigar & Cigarette Factory u. Commissioner, G.Il.

L-36737, January 77, 1985).

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Ncr.

Bar Question (1991) In view of the unfavorable balance of payment condition and the increasing budget deficit, the President of the Philippines, upon recommendation of the National Economic and Development Authority, issues during a recess of Congress, an Executive Order imposing an additional duty on all imports at the rate of ten percent (10Vo) ad ualorem. The Executive Order also provides that the same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the Executive Order on the grounds that only Congress has the authority to fix the rates of import taxes and, in any event, such an Executive Order can take effect only thirty days after promulgation and the President has no authority to shorten said period.

Are the objections of Mr. San Miguel tenable?

Suggested answer: No, the objections qre not tena,ble as the Executiue Order connot take effect immediately. Being an external law q,nd hauing the effect of law, the Executiue Order canruot becorne effectiue without publication, a requirement of due process (Tafi.ad.a u, Tuuera, 186 SCRA 2Z;

E.O.2O2).

Special laws prevail over general laws Cases:

a.

The demand on the taxpayer to pay is an assessment for deficiency franchise tax. As such, the right to assess and collect the same is governed by Section 331 of the Tax Code,

rather than Article ll45(2) in relation to Articles 1154 and 1155 of the Civil Code which provide for prescription after six (6) years. The Tax Code is a special law which must prevail over the Civil Code, a general law (Guagua Electric Light Plant Co. u. Commissioner, 7g SCRA 790). b.

Since January 1, 1996, when R.A. 7716 (E-VAT Law) became effective, all franchise grantees other than franchise grantees of electricity, water and gas became

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subject to value added tax, according to the BIR. However,

PAGCOR, a government-owned corporation authorized to engage in and operate gambling casinos in the country,

claims exemption from all taxes based on its charter or legislative franchise and anchors its position on the fact that the charter is a special law; hence, its repeal or modification by a subsequent general law must be express and not just implied. Indeed, the Supreme Court recently ruled that under P.D. 1869, PAGCOR is exempt from all taxes, direct and indirect, including value added tax.3 Moreover, because R.A. 7716, a general law, merely impliedly repealed the PAGCOR charter, which is a special law, the former cannot prevail over the latter. It must be noted that R.A. 9337 (R-VAT Law) expressly repealed the PAGCOR charter, effective November I,2005.

Tax Evasion v. Tax Avoidance Tax avoidance and tax evasion are the two (2) most common ways used by taxpayers in escaping from taxation. "Tax aaoidance" is the tax sauing deuice within the means sanctioned by law. This method

should be used by the taxpayer in good faith and at arm's length. "Tar eaasion," on the other hand, is q. scheme used outside of those Iawful ftLe&ns and when auailed of, it usually subjects the taxpayer to further or additional ciuil or criminq.l liabilities. Tax euasiorl connotes the integration of three factors: (1) the end to be achieued; i.e., the payment of less thqn that known by the taxpayer to be legally due, or the non-payment of tax when it is shown thq.t a tax is due; (2) a.n accompanying state of mind which is described as being "euil," in "bad faith,'"willful," or "deliberate and not q.ccidental"; and (3) a course of action or failure of action which is unlawful.

All these factors are present in the instant tax case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI, and not from Altonaga. That F40 million was debited by RMI and reflected in its trial balance as "other investment-Cibeles Bldg." Also, as of 31 July 1989, another F40 million was debited and reflected in RMI's trial balance as "other investment-Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga. sCommissioner of Internal Revenue v. Acesite Hotel Corporation, G.R. No L-147295, February 16, 2007 .

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Bar Question (2000) Mr. Pascual's income f'rom leasing his property reaches the

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company. But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation ofAltonaga was unserved, Altonaga having left for the United States in January, 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. Thus, the scheme resorted to by CIC in making it appear that there were two (2) sales of the subject properties; i.e.,from CIC to Altonaga, and then from Altonaga to RMI, cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. "Fraud" in its general sense is deemed to compromise

maximum rate of tax under the law. He donated one-half of his said property to a non-stock, non-profit educational institution whose irr"o-" and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4(3) of the constitution and section 3(h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain.

Suggested arrswer: There is tax q'uoidance. Mr. Pascual has exploited a legally method to reduce his income tax by permissiue -transferring alternq,tiue part of his rental incorne to a tax exempt entity through a

anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another.a

d.onation of one-half of the income producing property. The donation

is likewise exempt from the donor's tax. The donq.tion is the legal nxeans employei to transfer the incidence of income tq.x on the rental

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject to income to only five percent (\Vo) (now six percent [67o]) individual capital gains tax, and not ltre BSVo (now 32Vo) corporate income tax. Altonaga's sole purpose of acquiring

income.

Bar Question (1996) Distinguish tax evasion from tax avoidance'

and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. The intermediary transaction, which was prompted more on the mitigation of tax liabilities than for legitimate business purpose constitutes one of tax evasion.sTo permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.6

Suggested answer: "Ton euasion' is a scheme used outside of those lawful rleans to escape tax tiability and., when availed of, it usually subjects the taxpayer to further or additional ciuil or criminal liabilities. "Tax auoidorce," on the other hand, is a tox sauing deuice within the means sanctioned by law; hence, legal.

Bar Question (1996) When may a taxpayer's suit be allowed?

Suggested answer:

aCommissioner v. Court of Appeals, 327 Phil. 1.

5Commissioner v. Norton Harrison Co., 120 Phil. 6B4, and Cornmissioner v. Rufino, 148 SCRA 42, cited, in Commissioner v. Estate of Benigno P. Toda, Jr., G.R. No. 147188, September L4,2004. The opinion rendered by the BIR in response to a query ofAltonaga's counsel did not negate the existence offraud. GCommissioner v. Court Holding Co.,324 U.S. 334 (194b).

t

A tanpayet's suit may only be allowed when an act complained of, which rnay include a legislatiue enactment, directly inuolues the iilegal d.isbursemerut of public funds deriued from taxation (Pascual o. Eecretary of pubtic Worhs, 170 Phil.331). No ffIoney shall be

40

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4l

It is only when the local tax assessment and the final judgment ure both ouerdue, demandable, as u)ell fuUy liquidated may set-off or compensation be allowed (Domingo a. Garlitos, I SCRA 443).

paid out of the Treasury, except in pwsuance of an appropriation made by law (Sec. 29, Art. VI, 1987 Constitution).

Bar Question (2005) 1. May taxes be the subject of set-off or compensation? Explain.

Suggested answer: No. Taxes cannot be the subject of set-off or compensation for the

following reasons: (1) taxes are of distinct kind,

esseruce and nature, andthese im.positions cannot be classed in merely the same category as ordinary obligations; (2) the applicable laws and principles gouerruing each ere peculiar, not necessarily common, to each; and (3) public policy is better subserued, ifthe integrity and independence oftaxes are

maintained (Republic o. Mambulao Lumber Cornpanyr 4 SCRA 622 t19621).

Howeuer, if the obligation to pay taxes crnd the taxpayef s cloim against the gouernment are both ouerdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are ertinguished to their concurrent amounts (Domingo u. Garlitos, 8 SCRA 443 t19631).

Bar Question (2005)

2.

icnrrrrrl I tritrr:iplcs

Can an assessment for a local tax be the subject of set-offor compensation against a final judgment for a sum of money obtained by the taxpayer against the local government that made the assessment? Explain.

Suggested answer: No. Tqxes and debts are of different na.ture and character; hence, no set-off or compensation between these two (2) different classes of obligations is allowed. The taxes assessed are the obligations of the

taxpayer arising from law, while the money judgment against the gouernment is an obligation arising from corutract, whether express or implied. Inasrruuch as taxes are not debts, it follows that the two obligations q,re not susceptible to set-off or legal compensation (Francio. a. Intermediate Appellate Court, 162 SCRA 753 t1e881).

i

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43

Itthcrcrtt. rrrrrl ( )orrsl.it,utiontrl l,imitations

Cases: 1.

CIIAPTER

II

INHERENT AND CONSTITUTIONAL LIMITATIONS The power to tax is the strongest of all the powers of government

2.

( Honghon g

& Sha.nghai Banking Corporation u. Cornmissioner, 39 Phil. L45).The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon maybe imposed by the people through their Constitution (Roro;s y Cia a. Court of Tor Appeals, supra). Accordingly, no matter how broad and encompassing the power of taxation, it is still subject to inherent and constitutional limitations.

3.

lnherent Limitations (Bar Question [2009]) The inherent limitations are those limitations which exist despite the absence of an express constitutional provision thereon. These include the following:

1.

The levy must be for a public purpose.

The right oftaxation can only be used in aid ofa public object, an object which is within the purpose for which government is established. It cannot be exercised in aid ofenterprises strictly private,

A statute which authorizes towns to issue bonds in aid of manufacturing enterprises of individuals is void, because the taxes necessary to pay bonds would, ifcollated, be a transfer ofthe property ofindividuals to aid the projects of gain and profit ofothers, and not for public ruse (Citizens Sc.;oings and.I'oan Association of Cleaeland', Ohio u. Topeha City, 20 WaIl. 655, 22 L. Ed. 455). Commonwealth Act No. 567 was a valid exercise of police

power of the State. Since the promotion of the sugar industry is a matter of public concern, the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Thus, the increase in the existing tax on the manufacture of sugar and the levying oftax on lands devoted to the production of sugar is considered as a public purpose (Lutz a. Araneta, supra). The entrusting of collection of fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It does not depend on the nature and character ofthe person or corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose although it is under the direction ofan individual or private corporation (Bagatsing a. Ratnirez' 74 SCRA 306).

It is the essential

the court to interpose when properly called on for the protection of the rights ofthe citizen and aid to prevent his private property from being lawfully appropriated to the use of others.

character of the direct object of expenditure and not the magnitude of interests to be affected, nor the degree to which the general advantage of the community and ultimately the public welfare may be benefited by their promotion, which must determine its validity as justifying a tax. Incidental advantage to the public or the State, which results from the promotion of private interests and the prosperity ofprivate enterprises or businesses, does notjustify their aid by the use ofpublic

42

money. Where the land on which feeder roads were to be constructed belongs to a private person, an appropriation made by Congress for that purpose is null and void, and a donation to the government made five (5) months after

for the benefit of individuals, though in a remote or collateral way, the public may be benefited thereby. Though the line which distinguishes public use for which taxes may be assessed, from private use for which they may not, is not always easy to discern, it is always the duty of

4.

44

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45

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the approval of the Act does not cure the basic def'ect of the

law.

Tarpayefs suit A taxpayer, or group of taxpayers, is proper to question the validity of a law appropriating public funds (Tolentino u. Comclec, 41 SCRA 702; Sanid.ad. a. Comelec, 73 SCRII 333; Chaaez a. Public Estates Authority, GR. No. 733250, ,Iuly 9,2002; Tatad, a. Garciar 24S SCRA 436; Information Technology Found.ation a. Comcl.ec, GR, No. 759L39, Januany 73, 2O04; Jumamil a. Caf6, G.B. .|Vo. 744570, September 21,2(n0. Aproper party is one who has sustained or is in imminent danger of sustaining an injury as a result of. To be a proper party, one must have"legal stand.ing" (locus stand.i), which is defined as a right of appearance in a court ofjustice on a given question. Generally, the validity of a statute may be contested only by one who will sustain a direct injury in consequence ofits enforcement (1.e., direct injury test). However, a taxpayer may cause the nullification of laws providing for the disbursement of public funds, upon the theory that "the expenditure of public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the request of a taxpayer. Taxpayers have of the act complained

sufficient interest in preventing the illegal expenditure of moneys raised by taxation and may, therefore, question the constitutionality of statutes requiring expenditure of public moneys (Pascual u, Sec.

of Public Works and Cornmunicationq 17O Phil.337). The subdivision streets belong to the owner of the subdivision

until donated to the government or until expropriated upon payment of just compensation (White Plains Association a. Court of Appeals,297 SCRA 547). The use of LGU funds for the widening and improvement of privately-owned sidewalks is unlawful as it directly contravenes Section 335, R.A. 7160. This finds support in the language of Section 17, R.A. 7160, which mandates LGUs to efficiently and effectively provide basic services and facilities (Albon a. Fernand.o, G.R. No. 748357, June 30,2006).

Bar Question (1991) To provide means for rehabilitation and stabilization of the sugar industry so as to prepare it for the eventuality of the loss of the quota allocated to the Philippines resulting from the lifting

ol'U.S. sanctions against an Alricun country, Congress passes a law increasing the existing tax on the manufacture of sugar on a graduated basis. All collections made under the law are to accrue to a special fund to be spent only for the purposes enumerated therein, among which are to place the sugar industry in a position to maintain itself and ultimately to insure its continued existence despite the loss of that quotq, and to afford laborers employed in the industry a living wage and to improve their working conditions. "X," a sugar planter, fiIes a suit questioning the constitutionality of the law alleging that the tax is not for a public purpose as the same is being levied exclusively for the aid and support of the sugar

industry. Decide the case. Suggested answer: The suit filedby the sugar planter questioning the constitutionality of the sugar industry stabilization nleasure is untenable. Tarcation is no longer m.erely for raising reuenue to support the existence of gouernrnent; the power may also be exercised to carry out legitimate objects of the gouernrnent, It is a legitirnate object of gouernment to protect its local industries on which the nq.tional econom.y largely depends. Where the aim of the tq.x measure is to achieue such ct. gouernnxental objectiue, the tuc imposition can be said to be for a public purpose (Gaston a.

Republic Bank, 158 SCRA 626).

2.

Non-delegation of the legislative power to tax.

Bar Question (1991) The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of real property located within the

municipality at a rate of one-fourth (I/4) of one percent (I7o) of the total consideration of such transaction. 'X" sold a parcel of land in Malolos which he inherited from his deceased parents and refused to pay the aforesaid tax. He instead filed appropriate case asking that the ordinance be declared null and void since such a tax can only be collected by the national government, as in fact he has paid BIR the required capital gains tax. The Municipality countered that under the Constitution, each local government is vested with the power to create its own sources of revenue and to levy taxes, and it imposed the subject tax in the exercise ofsaid constitutional authority. Resolve the controversy.

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47

nhercnt tnd ( iorrsl,il,rrl,iorrll l,irn il,al,iong

Suggested answer:

Suggested anawer:

The ordinance passed by the Municipality of Malolos imposing a tax on the sale or transfer of real property is uoid. The Local Tax Code only allows prouinces and cities to impose a tax on the transfer of ownership of real property (Secs. 7 and 23, Local Tar Code). Municipalities are prohibited from imposing said tax that prouinces are specifically authorized to leuy (Sec. 22, Local Tax Code).

Mr. Cortez, being a non-resident alien indiuidua.l who has stayed lir an aggregate period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident

While it is true that the Constitution has giuen broad powers of taxation to local gouernment units, this delegation, howeuer, is subject to such limitations as may be prouided, by law (Sec. 5, Art. X, 1g87

Constitution).

3.

Exemption from taxation of government entities.

Bar Question (1998) Ace Tobacco Corporation bought a parcel of land situated in Pateros and donated it to the Municipal Government of Pateros for the sole purpose ofdevoting the said land as a relocation site for the less fortunate constituents of said municipality. In accordance therewith,

the Municipal Government of Pateros issued to the occupants/ beneficiaries Certificates ofAward giving to them the respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998, the said municipal government ordained that the lots awarded to the awardees/donees be finally transferred and donated to them.

Determine the tax consequence of the foregoing dispositions with respect to the Municipal Government of Pateros.

Suggested answer: The Municipality of Pateros is not subject to any donof s tax on the ualue of land it subsequently donated, it being exempt from taxes

as a political subdiuision of the National Gouernment.

4. Internationalcomity. Bar Question (2000) Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregate period ofmore than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad?

ulien doing business in the Philippines.

Considering the aboue, Mr. Cortez sha.Il be subject to an income ktr in the same rnanner as an indiuidual citizen and a resident alien indiuidual, on toxable income receiued from all sources within the Philippines ( Sec. 25[A][ IJ, NIRC). Thus, he is allowed to auail of the itemized deductions including the personal and add.itional exemptions but subject to the rule on reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in relq,tion to Sec.25tAlt1l and Sec. 35[DJ, NIRC).

Bar Question (1996) uX," a multinational corporation doing business in the Philippines, donated 100 shares of stock of said corporation to Mr. 'Y," its resident manager in the Philippines. What is the tax liability, if any, of 'X" corporation? Suggested answer: Foreign corporations effecting a donation are subject to donor's

if the property donated. is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in fauor of resident employees is not subject to donor's tar (BIR Ruling No. 018-87, January 26, 1987). Howeuer, if 85Vo of the business of the foreign corporation is located in the Philippines or the shares donated haue acquired business situs in the Philippines, the donation nxay be taxed in the Philippines subject to the rule of reciprocity. tax only

Bar Question (1992) The President of the Philippines and the Prime Minister of Japan entered into an executive agreement in respect of a loan facility to the Philippines from Japan, whereby it was stipulated that interest on loans granted by private Japanese financial institutions to private financial institutions in the Philippines shall not be subject to Philippine income taxes. Is this tax exemption valid? Explain.

48

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or'r'l'nxllror.r

Code does not require a foreign corporation to engage in business in the Philippines subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore,

Suggested answer: Yes. The tax exemption is ualid because an executiue agreement has the force and effect of a treaty under the prouision of the Reuenue

Code. Taration is subject to international cornity.

is not the place of business but the place of activity ( P hilippine Gu aranty C o. u. C ommis sioner, 7 5 SCRA

5. Teruitorialjurisdiction.

1).

c.

Cases:

Where the insured is within the Philippines, the risk insured against is also within the Philippines, and certain incidents of the contract are to be attended to in the Philippines, such as payment of dividends, sending of an adjuster into the Philippines in case of dispute, or making of proof of loss, the Government of the Philippines has the power to impose the tax upon the insured, regardless of whether the contract is executed in a foreign country and with a foreign corporation. Under such circumstances, substantial elements of the contract may be said to be so situated in the Philippines as to give its government the power to tax. Even if it be assumed that the tax imposed upon the insured will ultimately be passed on to the insurer, thus constituting an indirect tax upon the foreign corporation, it would still be valid, because the foreign corporation, by stipulations ofits contract, has subjected itselfto the taxing jurisdiction of the Philippines. After all, the Government of the Philippines, by protecting the properties insured, benefits the foreign corporation. It is thus reasonable that the latter should pay ajust contribution therefor (Manila Eleetric Company a. Yatco, 69 Phil. 89). b.

Reinsurance premiums are taxable in the Philippines. Foreign corporations are taxable on their income from sources within the Philippines. "Sozrces'has been interpreted as the activity, property or service giving rise to the income. The foreign insurers' place of business should not with their place of activity. Business implies continuity and progression of transactions, while activity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax

be confused

The sale of tickets in the Philippines by its general sales agent is the activity that produced the income. The tickets exchanged hands here and pa;rments for fares were also made in Philippine currency. The sllus of the source of payments is in the Philippines. The flow ofwealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration ofsuch protection, the flow ofwealth should share the burden of supporting the government. Thus, British Overseas Airways Corporation is a resident foreign corporation subject to tax upon its total net income from all sources within the Philippines. The source of the income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from the activity within the Philippines (Commissioner u. British Oaerseas Airuays Corporation, 749 SCftlt 395).

Gonstitutional Limitations

1.

No person shall be deprived of life, liberty or property without due process of law (Sec. 7, Art. III, 7987 Constitution).

Adversely affecting as it does property rights, both the due process and equal protection clauses may be invoked to invalidate

a revenue measure. Where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proofofsuch persuasive character as would lead to such a conclusion. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. Absent such a showing, however, the presumption of validity must prevail (Sison a. Ancheta, 130 SCRA 654).

50

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c.

Cases: a.

Sison, as taxpayer, alleges that he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession uis-d.-uis those which are imposed by Batas Pambansa Blg. I35 upon fixed compensation income or salaried individual taxpayers.

It should be noted that while

Roman Catholic Bishop of Bangued from real property taxes, without hearing the side of the Proyince of Abra. Motion to dismiss filed by the Province ofAbra was denied.

The 1973 Constitution added another requirement for tax exemption of lands, buildings, and improvements used exclusively for religious, charitable or educational purposes. They should not only be "exclusively" but also "actually" and "directly" used for religious or charitable purposes. The law frowns on exemption from taxation; hence, an exempting provision should be construed strictissimi juris. The Province of Abra is, therefore, fully justified in invoking the protection of procedural due process as proofis necessary to demonstrate that there is compliance with the constitutional provision that allows exemption (Proaince of Abra a. Hernandn, 107 SCRA 104).

while compensation income is subject to the graduated tax rates of zero percent (|Vo) to 357o but there is no deduction allowed therefrom, except the personal and additional exemption. The basis of distinction is that wage earners do not spend to produce income; their salary is produced by the sweat of their brow. Business income requires expenditures for raw materials, labor and other expenses. There can be no discrimination where the tax bases and rates for self-employed and professionals, on one hand, and for salaried employees, on the other hand, are different (Sison a. Ancheta, ibid).

Ordinance No. 6537 violates the due process of law

and equal protection rule of the Constitution. Requiring a person before he can be employed to get a permit from the City Mayor of Manila, who may withhold or refuse it at will is tantamount to denying him the basic right of the people in the Philippines to engage in a means of livelihood. While it is true that the Philippines as a State is not obliged to admit aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of law. This guarantee includes the means of livelihood. The shelter ofprotection under the due process and equal protection clause is given to all persons, both aliens and citizens Uillegas u. Hiu Chiong Tsai Pao Ho,86 SCRA270).

'l'lre Provincial Assessrlr of'Atrra levied a tax assessment on the properties of the Roman Catholic Bishop of Bangued. The latter filed for declaratory relief on the ground that it is exempt from real estate taxes. The Province of Abra filed a motion to dismiss claiming that declaratory relief is not a proper relief and that there was failure to exhaust

administrative remedies. After conducting summary

business and

Manila City passed Ordinance No. 6537 making it unlawful for any person not a citizen of the Philippines to be employed or engaged in trade or business within the city without first securing an employment permit.

l-r I

hearing, CFI Judge Hernando granted judgment exempting

professional income are subject to the higher rates of tax ranging from five percent (\Vo) to 607o,lhe taxable base is net income (i.e., gross income less allowable deductions),

b.

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2.

Nor shall any person be denied the equal protection of the laws (Sec. 7, Art.Iil, 7987 Constitution).

Cases:

a.

The Commissioner of Customs issued CMO 2l-2003, which

for tariff purposes, wheat was classified according to the following: (1) importer or consignee; (2) country of origin; and (3) port of discharge. The regulation provided an exclusive list ofcorporations, ports of discharge, commodity descriptions, and countries of origin. Depending on these factors, factor would be classified either as food grade or feed grade. The corresponding tarifffor food grade wheat was three percent (T%o);for feed grade, seven percent(7o/o).

'

fhe Supreme Court declared the contents of CMO 27-2003 as unconstitutional, for being violative of the equal protection clause. The equal protection clause means

52

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that no person or class of persons shall be deprived of the same protection of laws enjoyed by other persons or other classes in the same place in like circumstances. The guarantee of equal protection of laws is not violated, ifthere is a reasonable classification. For a classification to be reasonable, it must be shown that: (i) it rests on substantial distinctions; (ii) it is germane to the purpose of the law; (iii) it is not limited to existing conditions only; and (iv) it applies equally to all members of the same class. Unfortunately, CJ$.{O 27-2003 does not meet these requirements. The Court does not see how the quality of wheat is affected by who imports it, where it is discharged, or which country it came from. On one hand, even if other millers excluded from CMO 27-2003 have imported food grade wheat, the product would still be declared as feed grade wheat, a classification subjecting them to seven percent(77o). On the other hand, even if the importers listed under CN,IO 27-2003 have imported feed grade wheat, they would only be liable to pay three percent (37o) tariff, thus depriving the state ofthe taxes due. The regulation does not become disadvantageous to respondent only, but even to the State (Commissioner of Customs v. H5tperrnix Feed,s

b.

Corporation, G.fi. No. 779579, Februany 1,20L2). On July 25, 1987, former President Corazon C. Aquino signed Executive Order (E.O.) No. 273, pursuant to her constitutional power to legislate laws under the then Freedom Constitution that was promulgated immediately after the peaceful EDSA Revolution of 1986. Effective January 1, 1988, E.O. 273 levied a I07o VAT on sales and importation of goods and on sales of services, which replaced the then existing (1) complicated sales tax structure, composed of(a) fixed and percentage taxes on original and subsequent sales of goods and services; (b) excise tax on certain selected articles; and (c) mining taxes on mineral and mineral products, and (2) percentage taxes

on certain services based mainly on gross receipts.

The constitutionality of E.O. 273 was assailed in the case of Kapatiran ng mga Naglilinghod sa Pamahalaan

ng Pilipirtas, Inc., et al. u. lG.R. No. 81311, June 30, 1988.

Tant.,t

on the ground that the

l-ri

I

VAT is oppressive, discriminatory, regressive, and it violates the due process and equal protection clauses of the Constitution. The Supreme Court sustained the constitutionality of the law by applying the doctrine ofseparation ofpowers, because the grounds questioned by Petitioners merely attacked the wisdom of the law. The High Court stated that "the first Congress, created and elected under the 1987 Constitution, was convened on27 July 1987. Hence, the enactment of E.O. 273 on 25 July 1987 by the former President two (2) days before Congress convened on 27 July 1987, was within the President's constitutional power and authority to legislate." Petitioners claimed that Congress was really convened on 30 June 1987 and contended that the word "convene" is s;rnonymous with "the date when the elected members of Congress assumed office." This contention is without merit according to the High Court. "The word 'conuene,'which has been interpreted to mean 'to call together, cause to assemble, or convoke'is clearly different from assumption of office by the individual members of Congress or their taking the oath of office. To uphold the submission of Petitioners would stretch the definition of the word 'convene' a bit too far. It would also defeat the purpose of the framers of the 1987 Constitution and render meaningless some other provisions of said Constitution."

Petitioners also asserted that 8.O.273 is oppressive, discriminatory, unjust and regressive, and violates the provision that "the rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." On this point, the Court ruled that the Petitioners' assertions are not supported by facts and circumstances to warrant their conclusions. They have failed to show that the VAT is oppressive, discriminatory or unjust. Petitioners merely relied upon newspaper articles, which are actually hearsay and have no evidentiary value. To justify the nullification of a law, there must be a clear and unequivocal breacil ofthe Constitution, not a doubtful and argumentative implication. As the Court saw it, E.O. 273 satisfies all the requirements of a valid tax. The Court, in City of Baguio u. De Leon, said:

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" . . . In Philippine T'rust C
InEastern Theatricq.l Co. u. Alfonso (83 Phil. 852), the unifonrrity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To satisfu this requirement, all that is needed is that the statute or ordinance in question 'applies equally to all persons, firms and corporations placed in similar situation.'2 The sales tax adopted in E.O. 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of zero percent (07o) or I07o. The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceeding F200,000 (now F1.5 million). Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incident of the VAT, are expected to be relatively lower and within the reach of the general public." Court said: "Equality and

The Court also found no merit in the contention of the petitioner - Integrated Customs Brokers Association of the Philippines3 - that E.O. 273, more particularly Section 103(R) ofthe 1977 Tax Code, unduly discriminates against customs brokers. The contested provision states: "Sec. 103. Exempt transactions. - The following shall be exempt from the value added tax: "(R) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax under the Local 'zUy Matias v. City of Cebu, 93 Phil. 300. 3G.R. No. L-8t921, June 30, 1988.

l'tlwt,:lttll"l'rtxa't'ttltt

55

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Tax Code, and professional services performed by registered general professional partnerships;" On this matter, the High Court stated: "The phrase 'except customs brokers' is not meant to discriminate against customs brokers. It was inserted in Section 1B@) to cornplement the prouisions of Section 102 of the 1977 Ta"x Code, which makes the services of custorns brokers subject to the payment of the VAT and to distinguish customs brokers from other professionals, who are subject to the payment of an occupation tax under the Local Tox Code. With the insertion of the clarificatory phrase'except custorns brokers' in Section 103(R), a potential conflict between the two sections (Secs. 102 and 103), insofar as customs brokers are concerned, is auerted. At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Ta,x Code is based upon rnaterial dffirences, in that the artiuities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus subjected to the percentage tax under Section 174 of the Tax Code prior to its amendment by E.O. 273. E.O. 273 abolished the percentage ta.x, and replaced it with the VAT. If the petitioner-association did not protest the classification of customs brokers then, the Court sees no reason why it should protest nout.' The Court noted that E.O. 273 has been in effect for more than five (5) months now, so that the fears expressed by the petitioners that the adoption ofthe VAT will trigger skyrocketing of prices of basic commodities and services, as well as mass actions and demonstrations against the VAT, should by now be evident. The fact that nothing ofthat sort has happened shows that the fears and apprehensions of the petitioners appear to be more imagined than real.a On the claim ofregressivity, denial ofdue process and equal protection under R.A. 7716, the Supreme Court said that aKapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, et al. v. Hon. Bienvenido Tan, G.R. No. 81311, June 30, 1988; Kilusang Mayo Uno Labor Center, et ul. v. Executive Secretary, et al., G.R. No. L81820, June 30, 1988; Integrated Customs Brokers Association of the Phil. v. Commissioner of Internal Revenue, G.R. No. L81921, .lune 30, 1988; and Ricardo Valmonte v. Executive Secretary, et al., G.R. No. L-82152, .lune 30, 1988.

56

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( it,tNt,:l{At,

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there is basis for passing upon claims that on its face the statute violates the guarantees offreedom ofspeech, press and religion. The possible"chilling effecf" which it may have on the essential freedom of the mind and conscience and the need to assure that the channels of communication are open and operating importunately demand the exercise of this Court's power of review. There is, however, no justification for passing upon the claims that the law also violates the rule that taxation must be progressive and thot it denies petitioners' right to due process and equal protection of the laws. The reason for this different treatment has been cogently stated by an em.inent authority on constitutionql law. Thus: "When freedom of the mind is imperiled by law, it is freedom that commands comments of respect; when property is imperiled, it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the due process clause."

Suggested answer: No.

Equal protection ofthe lau clause

is subject to reasonable

classifi.cation. Classification, to be ualid, must: (a) rest on substantial distinctions; (b) be germane to the purpose of the law; (c) not be limited to existing conditions only; and (d) apply equally to all members of the same clq.ss.

There are substantial differences between big inuestors being *secured aree," and the business operators outside that enticed to the are in q.ccord with the equal protection clq.use that does not require territorial uniformity of laws. The classification applies equally to aII

57

lhe resklen.t indiuiduaLs arul husinesses within the "secured areq,." The nrsidents, heing in like circumsteruces to contributing directly to the achieuement of the end purpose of the law, are not categorizedfurther.

Instead, they are sirnilarly treated, both in priuileges granted and obligations required (Tiu a. Court of Appeals' 3OI SCRA 278).

d.

The Sarugguniang Bayan resolution ordering the closure or the transfer of petitioney's gasoline station was not a ualid exercise of the police pou)er. The Court found that there was a failure by the municipal offi,cials to comply with the due p roce s s cl aus e ( P aray no u. Jov e llano s, G R. No. 7 4 840 8,

JuIy 74,2006).

3.

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation (

Sec. 28[ 7],

Art.

II\

7987

Constitution).

Among the grounds cited by the petitioners in requesting for the declaration of Section 114(C) (withholding of ualue added tq.x) of the Tax Code, as amended by R.A. 9337 , as unconstitutional are:

a.

The law is violative of Article III, Section 1 of the 1987 Constitution in that it does not accord equal protection to similarly situated taxpayers; and

b.

The law is violative of Article VI, Section 28(1) of the 1987

Bar Question (2000) An Executive Order was issued pursuant to law, granting tax and duty incentives only to businesses and residents within the "secured area" of the Subic Economic Special Zone, anddenying said incentives to those who live within l};,'e Zone but outside such "secure area." Is the constitutional right to equal protection ofthe law violated by the Executive Order? Explain.

l'trtur'tt't.t,:lt tt,tlr l,ttlttt,tllot'tlioN llll,i llrwt,:tt ot"l'nxntlott Ittltcrcttl rtttrl ('otrsl.il.ttl.tottltl l,itrril,itl,iotts

Constitution in that it does not apply uniformly to all those belonging to the same class.

Petitioners submit that the limitation of the amount of input [ax that may be claimed as a credit against output tax, as well as the requirement that the government deduct a five percenL(SVo)final withholding tax on their gross payments on purchases of goods and services, effectively impose an arbitrary, unreasonable, oppressive, irnd excessive burden on the part of petitioner-taxpayers as to amount to confiscation of property without due process of law. The limitation of the amount of input tax and the requirement that government withhold a five percent (57o) final VAT on their gross payments on purchases ofgoods and services constitute an arbitrary and oppressive rrxercise of legislative power in violation of the due process clause of t,he 1987 Constitution. The Petitioners argue that by imposing a five percent(SVo)final withholding VAT on gross payments by the government, the law

58

u,t,t,lt/\Nl l,tNllAltoNjioN t'll,r l'owt,;l ot,'l)txl'l'tot lnlrr,tr.rrl rrtrrl ( iorrsl rl,ul.iottitl l,iutit.ltl,iotts

(lt,;t,tt,;ttnt, l'tttt.t,

Itt,:vt t,;wt,:rr on'l'rrxn'r'ror.r

actually imposes a cap on input tax equivalent to 7oo/o of the output tax. By limiting the amount of input tax that a taxpayer may claim against its output tax, Sections 110(.4.)(2), 110(B), and 114(C) of the Tax Code, as amended by R.A. 9337, are infringing on the property rights ofa taxpayer. The input tax is an asset. In fact, for accounting purposes, unapplied input tax is recorded as a deferred tax asset. When an asset subject to VAT is acquired or an expense subject to VAT is incurred, the appropriate asset or expense account is debited for the amount of the disbursement net of VAT, the input tax account is debited for the VAT component, and cash or the appropriate payable account is credited. Evidently, input tax is a property or property right that may not be appropriated, confiscated or limited without due process of law. Thus, the imposition of a 707o cap on input tax, the requirement that input tax on depreciable goods be generally spread out over the depreciable life of the asset, and the imposition of a five percent (|Vo) frnal withholding tax on gross payments made by government constitute an arbitrary exercise of legislative power.

Uniformity in taxation. - "Uniformit5t" has been defined as that principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make a reasonable and natural classification for purposes of taxation, but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that aII persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed.s

classification applies, not only to present conditions, but also to future conditions substantially identical to those ofthe present; and (4) the

classification applies equally to all those who belong to the same class."

In ruling in favor of the constitutionality of the law (R.A. 9337), the Supreme Court stated:

a.

sChurchill v. Concepcion, 34 Phil. 969 (1916).

InJ.M. Tuason & Co.,Inc. u. Land Tenure Administration (31 SCRA 413 t19701), the Supreme Court ruled that "the guaranty of equal protection, which applies not only to individuals but to juridical persons as well, ensures that those falling within a class are treated in the same fashion under the law and that whatever restrictions cast on some in the group are equally binding on the rest."

b.

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proofofsuch persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.

c.

Petitioner's contention that the new law imposes limitations on the amount of input tax that may be claimed and that in effect, a portion of the input tax that has already beeru paid cannot now be credited against the output tax, is not absolute. It assumes that the input tax exceeds 707o of the output tax, and therefore, the input tox in eJccess of 70Vo remains uncredited. Howeuer, to the extent that the input tax is less than.707o ofthe output tax, then 100Vo of such input tax is still creditable. The excess input ta"x, if any, is retained in e business's boohs of accounts and remains creditable in the succeeding quarter(s). In addition, Section 112(8) of the Tax Code allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input tuces haue not been applied against the output taxes. Such unused input tax may be used in payment of his other

Uniformity in taxation does not prohibit the classification of the objects oftaxation or the entities or subjects upon which taxes are imposed. However, to withstand any constitutional infirmity, such classification must comply with certain guidelines. Thus, in PepsiCola Bottling Co. of the Philippines,Inc. u. City of Butuan (24 SCRA 789 t19681), the Supreme Court said: "It is true that the uniformity essential to the valid exercise ofthe power oftaxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. The classification made in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied, unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the

59

internal reuenue taxes. d.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their analysis ofthe effect ofthe T0Tolirnitation is incomplete and one-sided. It ends at the net effect that

(;( )

ll.t,:vr r,:wr,:ri

(it,tttt,tttnt, lttatNr:tt,t,t,:ri lr.rtr l,tnt'tn't'tot.t:i ()N't'ttt,) Itowt,;tt

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ol,"l'nxn't'tttN

6l

Ittltcrcttl, rrttrl ( iottsl,il,ttl,ionul Limit.rtions

there will be unapplied/unutilized input tax for a given quarter. It does not proceed further to the fact that such unapplied,/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(8) or that it may later on be refunded or covered by a tax credit certificate under Section 112(B) of the Tax Code.

that all property belonging to the same class shall be toxed alihe. It does not signify an intrinsic, but simply a geographic, uniformity (Churchill & Tait u. Conception, S4 Phil.969). Uniformity does not require the same treatment; it simply requires reasonable basis for classification.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered person's entitlement to the creditable input

The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid by the driver, on all private cars entering the city during peak hours from 8:00 a.m. to 9:00 a.m. from Mondays to Fridays, but it exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid?

tax is a mere statutory privilege. The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privi_ leges. The State may change or take away rights, which were created by law of the State, although it may not take a\May property, which was vested by virtue of such rights. In this case, the law is uniform as it provides a standard. rate of zero percenL (\Vo) or L}Vo (or I2Vo) on all goods and services. Neither does the law make any distinction as to the type of industry or trade that will bear the TOVo limitation on the creditable input tax, five (S}year amgrtizaLion of input tax paid on purchase of capital goods, or the five percent (\Vo) finalwithholding tax by the government. The rule of uniform taxation does not deprive Corrgress of the power to classify subjects of taxation, and only demands uniformity within the particular class. g b.

R.A. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate does not apply to sales of goods or services with gross annual sales or receipts not exceeding F1.5 million. Also, basic marine and agricultural food products in their original state are still not subject to tax.

Bar Question (1998) Explain the requirement of uniformity as a limitation in the imposition and./or collection of taxes. Suggested answer:

in

The ta^x is uniform when it operates with the same force and effect euery place where the subject of it is found. ,,IJniformitSt, means

Bar Question (2003)

Explain.

Suggested answer: The ordinance is in. uiolq.tion of the rule of uniformity and equality, which requires that all subjects or objects of taxation, similarly situated m.ust be treated alihe q.nd must not be classifi.ed in an arbitrary nx&nner. In the case at bar, the ordinance erempts cars carrying more than two occupants from the said ordinance.

Furthermore, the ordinance imposes the ton only on private cars and exempts public uehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no substantial standard used in the classification used by the City of Makati. Another issue is the fact that the tax is imposed on the driuer ofthe uehicle and not on the registered owner thereof. The ordinance does not only uiolate the requirement of uniformity; the same is also unjust because it places the burden on someone who has no control over the route of the uehicle. Hence, the ordinance is inualid for uiolating the rules of uniformity and equality us well as for being unjust. Cases: 1.

The municipal council, in the exercise of its regulative authority, may require any person engaged in any business or occupation to obtain a permit for which a reasonable fee (F10.00) may be charged. The ordinance is valid as Commonwealth Act No. 472 authorizes municipal councils to impose municipal license taxes upon such persons, of which the only criterion as to the amount to be imposed

62

ot,'l"rxn't'tott

(lt,:Nt.:ttnt, Ittrtnr,tt't,t,;s ANt) l,tNil.t,At.t()Ns ()N'flll,l l'rlwt,ltt Ittltcrcttl, tttttl ( )ottnl,il,ttt,iorrrrl l,inritutions

li,t,:vt t.;wt.:lt oN'l'AxA't'toN

income and the public hardly profits from horse racing and this business demands relatively heavy police power supervision (Manila Race Horse TYainers Association

is that it should be just and uniform, and not percentage taxes. Shell's installation manager is still classified as an occupation, even ifhe is a salaried employee. The mere fact that there is no other person who exercises the privilege of an installation manager does not make the ordinance discriminatory inasmuch as it is and will be applicable to any person or firm who exercises such occupation (Shell Company of Phil. Islands u. Mun. of Cord.oaa, 94 Phil. 389). 2.

a.

4.

professionals do not).

It

should be noted that the ordinance imposes tax upon every

to the deterioration of the streets and public highways' The fact that they are benefited by their use, they should also be made to share the corresponding burden. And yet such is not the case. This is an inequality which renders the ordinance offensive to the Constitution (Association of Customs Brokers a. City of Manila,93 Phil. 107).

Phit.46).

In taxing only boarding stables for race horses (not ordinary horses), the court believes that the ordinance does not make an arbitrary classification. Taxingboarding stables for race horses to the exclusion ofboarding stables for ordinary horses is not indefensible. The owners of boarding stables for race horses and, for that matter, the race horse owners themselves , are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed. Race horses

are devoted to gambling

if

legalized, the owners derive

The Municipal Board ofManila passed Ordinance No. 3379, levying a property tax on all motor vehicle operating within the City of Manila.

the ordinance equally applies to motor vehicles which come to Manila for a temporary stay or for short errands' and it cannot be denied that they contribute in no small degree

person "exercising" or "pursuing" in Manila any one of the occupations named, but does not say that such person must have his office in Manila. What constitutes exercise or pursuit of a profession in the city is a matter ofjudicial determination(Punzalan a. Mun.Board. of Manila, g5

3.

Dela Fuente,88 Phil.60).

The ordinance infringes the rule of uniformity of taxation. The ordinance exacts the tax upon all motor vehicles within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor vehicle registered in the City of Manila and one which is registered in another place but occasionally comes to Manila and uses its streets and public highways. The distinction is important, if we note that the ordinance intends to burden only those registered in the City of Manila as may be inferred from the wotd "operating" used therein. The wotd"operating" denotes a connotation which is akin to a registration, for under the Motor Vehicle Law, no motor vehicle can be operated without previous payment of the registration fees. There is no pretense that

The Municipal Board of Manila passed Ordinance No. 3398, pursuant to its city charter, imposing occupation tax on persons exercising various professions in Manila and penalizes non-payment thereof. Punzalan filed a suit, in behalf of other professionals, for the annulment of the ordinance, claiming the ordinance is class legislation, because the legislature withheld this power to tax from other chartered cities, and it is unjust and oppressive because it creates discrimination within the class (i.e., professionals in Manila have to pay the tax; non-Manila Punzalan makes a distinction that is unfounded.

63

No law impairing the obligation of contracts shall be passed (Sec. 70, Art. nI, 7987 Constitution). The power of taxation cannot be exercised in a manner that would impair the obligation of contracts. what is prohibited is that a taxing statute be passed that would alter the relative rights ofthe pprties with each other. The mere fact that a tax makes the conduct

4.

of a business more expensive or makes an activity more

difficult does

not result in the impairment of the obligation of contracts. contract

is impaired only if the relative position of the parties to a contract

64

l(t,:vt r,:wr,:rr

(it,:t'.tt,:tt,tt,

oN'l'rxA't'toN

disturbed by the operation ofa taxing statute.

2.

'X" Corporation was the recipient in 1990 oftwo tax exemptions both from Congress, one law exempting the company's bond issues from taxes and the other exempting the company from taxes in the operation of its public utilities. The two laws extending the tax exemptions were revoked by Congress before their expiry dates. Were the revocations constitutional? Suggested answer: Yes. The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers. Since taxation is the rule ond

tax eremption, the exception, any tax exemption unilaterally granted cqn be withdrawn at the pleasure of the taxing authority without uiolating the Constitution (Mactan Cebu International Airport Authority u. Marcos,261 SCRA 667).

Neither of these was issued by the taxing authority in a contrsct lawfully entered by it so that their reuocation would not constitute an impairrnent of the obligations of contracts. Cases:

1.

Cagayan Electric Power & Light Company is the holder

of a legislative franchise under which its payment of three percent (3Va) tax on its gross earnings from the sale of electricity is "in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted" (Sec. 3, R.A. B42Z). R.A. 5431 amended Section 24 of the Tax Code by making liable for income tax all corporate taxpayers not specifically exempt therefrom. Franchise companies were made subject to income tax in addition to franchise tax. Congress could impair petitioner's legislative franchise

by making

it liable for income tax. The Constitution

provides that fianchise is subject to amendment, alteration,

or repeal by the Congress when the public interest

so

65

requires (Cagayan Electric Power & Light Co. u. Commissioner, L-601,26, September 25, 1985).

(i.e., equality that is assumed when the contract was entered into) is

Bar Question (1997)

lttttttt tt't,t,:rt.lttl l,llrltntl.t'.ts ()N'l'lll': ltowt'ltt ot"'l'nxn't'tot't I ttltcrt'ttl. trtrrl ( iolrn(,il.ttt,iotlrtl l,irrlit:rIions

Petitioner's claim that it is only liable for the two percent (2Vo) (now three percentl3%oD franchise tax rate is without merit. Nowhere in the franchise of the petitioner can a provision that the franchise tax prescribed therein "shall be in lieu of all other taxes" be found. It is thus subject to the five percent (\Vo) (now three percent [37o]) franchise tax provided in Section 259 (now Sec. 119) of the Tax Code. Having accepted said franchise subject to the condition that it may be amended, altered or repealed by Congress, petitioner cannot now assert that the imposition and collection of the higher rate of five percent (57o)isin violation of the impairment clause of our Constitution (Philippine Power & Deueloptnent Co. v. Commissioner, CTA Case No. 1752, October 37, L965) -

Bar Question (2004) A law was passed granting tax exemption to certain industries and investments for a period of five years. But three years later, the Iaw was repealed. With the repeal, the exemptions were considered revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of the repeal of the law.

NPC and KTR companies questioned the assessments on the ground that, having made their investments in full reliance with the period of exemption granted by the law, its repeal violated their constitutional right against the impairment of the obligations and contracts. Is the contention of the companies tenable or not? Reason.

Suggested answer: The contention is not tenable. The exernption granted is in the nature of a unilaterql tuc exem.ption. Since the exemption giuen is spontaneous on the part of the legislature an'd no seruice or duty or other remuneratiue conditions haue been imposed on the taxpayers receiuing the exemption, it may be reuohed at will by the legislature (Christ Church u. Philad.elphia, 24 How. 300 t18601). Whq't constitutes an impairment of the obligation of contract is the reuocution of an exemption which is founded on a uqluable consideration because it takes the fonn and essence of a contract (Casanouas o. Hord', 8 Phil. 125 t1907l; Maniln Ro'ilroad. Compan5t a.Insul'ar Collector of Customs, T2 Phil.146 t19151).

66

5.

The free exercise and enjoyment of rerigious profession and worship, without discrirnination or preference, shall forever be allowed (Sec. 5, Art. nI, IggT Constitution).

The City of Manila passed two (2) ordinances. Ordinance

2529, imposing a tax on sale of Bibles and other religious literature, cannot be applied to the plaintiff, for in doing so it would impair its

constitutional right to free exercise and enjoyment of its religious profession and worship as well as it rights of dissemination of

religious beliefs. such ordinance, if applied, would provide for religious censorship by restraining the free distribution and sale of Bibles and other religious literature. But with respect to ordinance 8000, requiring a person to secure a Mayor's permit before he can engage in business, trade or occupation, the court held that it does not impair the plaintiffs constitutional right (Amcrican Bibte Soeietgt u. btty

of Manila, 101 Phil.386).

6.

(It,:trt':trlt,Ittrtrur'tt't,t,;:i,tIt,Lttuttn't'tol',tfi{}N't'trr.r Itowt,;trot"'l',lx,n't'tott lnlttrrt'nl. rttttl ( lrttsl.i(.ttl.iorrrrl l,itrtikttions

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Freedom ofthe press.

R.A. 7716 amended Section 103 of the Tax Code by deleting paragraph (f) with the result that print media became subject to vAT with respect to all aspects of their operations. Latnr,however, based on a memorandum of the secretary of Justice, respondent secretary of Finance issued Revenue Regulations No. 11-94, dated June 27, 1994, exempting the "circulation income of print media pursuant to section 24, Article III of the 1982 philippine constitution guaranteeing against abridgment of freedom of the press, among others." The exemption of "circulation income" has left. income from advertisements still subject to the VAT. The Philippine Press Institute (PpI) is a non-profit organization

of newspaper publishers established for the improvlment of journalism in the Philippines. on the other hand, the plilippine Bible society (PBS) is a non-profit organization engaged in the printing and distribution of bibles and other religious articles. Both petitioners claim violations of their rights under sections 4 and s or the Bill of Rights as a result of the enactment of the VAT law.

PPI questions the law insofar as ithas withdrawn the exemption previously granted to the press under Section 109(f) of the NIRC. Although the exemption was subsequently restored by administrative re_gulation with respect to the circulation income of newspapers, the PPI presses its claim because ofthe possibility that the oruy -secretary still be removed by mere revocation of the regulation by"""*ption the of Finance. on the other hand, the PBS goes so far as to question

67

the Secretary's power to grant exemption for two (2) reasons: (a) the Secretary of Finance has no power to grant tax exemption because this is vested in Congress and requires for its exercise the vote ofa majority of all its members; and (b) the Secretary's duty is to execute the law. The Supreme Court ruled that it is unnecessary to pass upon the contention that the exemption granted is beyond the authority of the Secretary ofFinance to give, in view ofPPI's contention that even with the exemption of the circulation revenue of print media, there is still an unconstitutional abridgment of press freedom because of the imposition of the VAT on the gross receipts of newspapers from advertisements and on their acquisition of paper, ink and services for publication. Even on the assumption that no exemption has effectively been granted to print media transactions, we find no violation of press freedom in these cases. To be sure, we are not dealing here with a statute that on its face operates in the area of press freedom. The PPI's claim is simply that, as applied to newspapers, the law abridges press freedom. Even with due recognition of its high estate and its importance in a democratic society, however, the press is not immune from general regulation by the State. PPI does not dispute this point. What it contends is that

by withdrawing the exemption previously granted to print media transactions involving printing, publication, importation or sale of newspapers , R.A. 7776 has singled out the press for discriminatory treatment and that within the class of mass media, the law discriminates against print media by giving broadcast media favored treatment. We have carefully examined this argument, but we are unable to find a differential treatment of the press by the law, much less any censorial motivation for its enactment. If the press is now required to pay a value added tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but only because of the removal of the exemption previously granted to it by law. The withdrawal of exemption is all that is involved in these cases. Other transactions, likewise previously granted exemption, have been delisted as part of the scheme to expand the base and the scope of the VAT system. The law would perhaps be open to the charge of discriminatory treatment, if the only privilege withdrawn had been that granted to the press.6 6Philippine Press Institute, et al. v. Chato, et al., G.R. No. 115754, August 25, 1994

6rl

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7.

Tax exemption of properties for religious, charitable, and educational purposes.

ALR

d.

Exemption of religious, charitable and educational institutions applies to real property tax only. The test is usage, not ownership. b.

c.

M.B. Estate donated cash to the church through Rev. Fr. Ruiz, predecessor ofRev. Fr. Lladoc, for the construction of a new church in the locqlity. The donor filed donof s tax return. Donee did not fi.le tax return nor paid the tax. BIR assessed deficierucy donee's gift tax, uthich was protested by Reu. Fr. Lladoc. The court ruled thot the exemption of the church is only from the payment of taxes clssessed on such property enumerated, as property taxes, as distinguished from excise tax. Manifestly, gift tax is not within the exemption prouisions of the section mentioned. A gift tar is rlot a property tax, but q.n excise tax imposed on the transfer of property by way of Sift inter uiuos, the imposition of which on property used exclusiuely for religious purposes, does not constitute an impairment of the Constitution. uExernption frorn taxationr" as employed in the Constitution, should not be interpreted to meq.n exemption from all h,inds of taxes. Howeuer, petitioner is not liable personally for the gift tar end the Head of the Diocese or the Roman Catholic Bishop is the recrl party in interest (Llo.doc a. Commissioner, 14 SCRA 292). TNOTE: Under existing law, gifts in fauor of an educational andlor charitable, religious, cultural or social welfare institution shall be exempt from gift tax, prouided that not more than 307o of said gift is used for administratio n p utp o s e s ( S ec. 1 0 1 {A}, N I R C ).1 The word "exclusiae"means primarily rather than solely (Hospital d,e San Juan d.e Dios u. Pasay City, 76

SCRA 226).Thtrs, the admission of pay patients does not detract from the charitable character ofa hospital ifall its funds are devoted exclusively to the maintenance of the

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institution as a public charity. Where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that profit has been made will not deprive the hospital of its benevolent character (Praire Du Chian Sanitarium Co. a. City of Praire Du Chian,242 Wis.262,7 NW [2d] 832, 144

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 (Sec. 2B[3], Art. III, 1987 Constitution). Important principles in tax exemption of properties:

nlrr

hcrt,rrt, rr rrtl ( iorrgLitutional

1480).

The exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as school for training nurses, nurses' home, and recreational facilities (Herrera a.8C Board of Assessnzent Appeals,3 SCRA 186).

Bar Question (2006, 2000) Article \lI, Section 28(3) of the 1987 Philippine Constitution provides that charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, 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.

a)

To what kind of tax does this exemption apply?

Suggested answer: This exemption applies only to property ta.cces. What is exempted is not the institution itself but the lands, buildings and improuements actually, directly and erclusiuely used for religious, charitable, and educational purposes.

b)

Is proofofactual use necessary for tax exemption purposes

under the Constitution? Suggested answer: Yes, because tax exemptions are strictly construed against the taxpayer. There must be euidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real property tq.xq.tiorl is bq.sed on use and not on ownership; hence, the sctine rule must also be applied for real property tax exemptions (Commissioner a. Court of Appeals, G.R. No. L-724043, October 14,1998).

7o

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Bar Question (2005) 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 southern 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? Decide

with reasons.

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a parcel of land for the construction of a building to the PUP Alumni Association, a non-stock, non-profit organization. Portions of the building shall be leased to generate income for the association. Is the donation to the parish church subject to tax?

Suggested answer: The donation of F80,000.00 to the parish church, euen assuming that it is exclusiuely for religious purposes, zs not tox-erempt because the exemption granted under Article VI, Section 28(3) of the Constitution applies only to real estate ta"tces (Llnd.oc a. Cotnrnissioner, 14 SCRA

Suggested answer:

292).

No. The portions of the land occupied and used by the Church, conuent q.nd school run by the church are exempt from real property

Bar Question (1993)

tax.es,

while the portion of the land occupied by commercial

establishments and the portion, which is idle, are subject to reql property tares. The "usage" of the property and not the*ownership" is the determining factor whether or not the property is tqxable (Lung Center of the Philippines a. Quezon City, 4SS SCRA 1Ie t2004l).

7L

')C' sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for religious purposes by the Church. When the Church tried to register the title of the land,

the Register of Deeds refused claiming that the capital gains tax was not paid. Is the transaction exempt from the capital gains tax? Reasons.

Bar Question (1996)

Suggested answer:

The constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques

No. Under Section 21(e) to relation to Section 49(q.X4) of the National Internal Reuenue Code, the seller is the one liable for the payment of the capital gains tax from the sale of real property by an indiuidual taxpayer. Meanwhile, the Church in this instant case is the buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts church lands, buildings, and im.prouen'Lents, does not apply because the obligation to pay the capital gains tax herein is irnposed on nX,' the seller, q.nd not on the Church. Since payment of the capital gains ta.x is a condition precedent for the registration ofthe transfer certificate oftitle to real property, the non-pqynxent herein by the seller is a ualid reason for the Registry of Deeds to deny the transfer of title to the subject land.

and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes.

Mercy Hospital is a 100-bed hospital organized for charity patients. May said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain. Suggested answer: Yes. Mercy

Hospital can claim exemption from taxation under

the prouision of the Constitution, but only with respect to real property taxes prouided that such real properties q,re used actually, directly and.

exclusiuely for charitable purposes.

Bar Question (1994) In 1991, Imelda gave her parents a Christmas gift of F100,000.00 and a donation of F80,000.00 to her parish church. She also donated

Bar Question (2000) Under Article XIV, Section 4(8) of the 7987 Philippine Constitution, all revenues and assets of non-stock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as

72

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interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain.

Suggested answer: No. The interest income on banh deposits and yields from d,eposit substitutes are not automatically exempt from taxation. There must be a showing that the incomes are included in the school's annuar information return and duly audited financial statements, together with: (a) certifications from depository banks as to the amount of interest income earned from passiue inuestments not subject to the 20vo final withholding tax; and (b) certification of actual, direct und, excrusiue utilization of said income for educational purposes; (c) Board resolu-

tion on proposed project to

be funded out ofthe n'Loney deposited, in banks or placed in money market placements (Finance Departmnnt Ord.er No. 149-95 issued. Noaember 24, IggS), which must be used. actually, directly qnd exclusiuely for educational purposes.

The income deriued from dormitories, canteens and boohstores are not also automatically exempt from taxation. There is still the requirement for euidence to show actual, direct and exclusit)e use for educational purposes. It is to be noted that the 1gB7 philippine constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should, be actual, direct u.nd exclusiue for educational purposes. Consequently, the prouisions of Section S0 of the NIRC of 1gg7, that a non-stoch and non-profit educationel institution is exempt from taxation only "in respect to income receiued by them as such" courd, not affect the constitutionql tax exemption. where the constitution d.oes not distinguish with respect to source or origin, the Tux code should not make distinctions.

8. All appropriation,

revenue or tariff bills shall originate from the Ifouse of Representatives, but the Senate may propose or coneur with amendments (5ec.24, Art.VI, Iggz Constitution).

Case: Petitioners contended that R.A. 7216 did not originate exclusively

in the House of Representatives as required by Article vI, section 24 of the 1987 constitution, because it is in fact the result of the consolidation of two (2) distinct bills, House Bill (H.8.) No. 11192 and Senate Bill (S.8.) No. 1630. In this connection, petitioners pointed

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out that although Article Vl, Scctiorr 24 ol' Lhe Constitution was adopted from the American Federal Constitution, it is notable in two (2) respects: the verb "shall originate" is qualified in the Philippine Constitution by the word "exclusively," and the phrase "as on other bills" in the American version is omitted. This means, according to them, that to be considered as having originated in the House, R.A. 7716 must retain the essence of H.B. 11197. The Supreme Court ruled: "This argument will not bear analysis.

it is not the law - but the revenue bill - which is required by the Constitution to'originate exclusively'in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole bill. There is also a possibility of a third version by the conference committee. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute - and not only the bill which initiated the legislative process culminating in the enactment of the law - must substantially be the same as the House bill would be to deny the Senate's power not only to'concur with amendments'but also to 'propose amendments.' It would violate the co-equality of legislative power of the two houses of Congress and in fact make the House superior to the Senate. The contention the constitutional design is to limit the Senate's power in respect of revenue bills in order to compensate for the grant to the Senate of the treaty-ratifying power and thereby equalize its powers and those of the House overlooks the fact that the powers being compared are different. We are dealing here with the legislative power, which under the Constitution, is vested not in any particular chamber but in the Congress of the Philippines, consisting of"a Senate and a House of Representatives." The exercise of the treaty-ratifying power is not an exercise of legislative power. It is an exercise of a check on the executive power. There is, therefore, no justification for comparing the legislative powers of the House and of the Senate on the basis of the possession of such non-legislative power by the Senate. The possession of a similar power by the U.S. Senate has never been thought of as giving it more legislative powers than the House of Representatives. What the Constitution simply means is that the initiative of filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On To begin with,

74

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the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House

bill."

It is claimed that the Bicameral Conference Committee report included provisions not found in either the House bill or the Senate bill and that these provisions were "surreptitiously" inserted by the Conference Committee. Much is made of the fact that in the last two (2) days of its session on April 21 and 25, L994, the Conference Committee met behind closed doors. We are not told, however, whether the provisions were not the result of the give and take that often marks the proceedings of Conference Committee. Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in executive sessions. Often the only way to reach agreement on conflicting provisions is to meet behind closed doors, with only the conferees present. Otherwise, no compromise is likely to be made. The Court is not about to take the suggestion ofa cabal or sinister motive attributed to the conferees on the basis solely oftheir "secret meetings" on April 2L and 25, 1994, nor read anything into the incomplete remarks of the members, marked in the transcript of stenographic notes by ellipses. The incomplete sentences are probably due to the stenographer's own limitations or to the incoherence that sometimes characterize conversations. The only requirement in the third version drafted by the Conference Committee, which is considered an "amendment in the nature of a substitute," is that the third version be germane to the subject ofthe House and Senate bills. Indeed, th[e] Court recently held that it is within the power of the Conference Committee to include

in its report an entirely new provision that is not found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two (2) provisions, there is no reason why it cannot propose several provisions, collectively considered as an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bill before the committee. After all, its report was not final but needed the approval ofboth Houses of Congress to become valid as an act of the legislative department.?

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The enactment of Senate Bill (S.8.) 1630 is not the only instance in which the Senate, in the exercise of its power to propose amendments to bills required to originate in the House, passed its own version of a House revenue measure. It is noteworthy that, in the particular case of S.B. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second and third

readings. On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually did in this case, a separate bill like S.B. 1630 is instead enacted as a substitute measure, "taking into consideration ... H.B. 11197." The power of the Senate to propose or concur with amendments is apparently without restriction. It would seem that by virtue of this power, the Senate can practically rewrite a bill required to come from the House and leave only a trace of the original bill.8 The jurisdiction of the Conference Committee is not limited to resolving differences between the Senate and the House. It may propose an entirely new provision. What is important is that its report is subsequently approved by the respective Houses ofCongress.e

Bar Question (1997) The House of Representatives introduced House Bill No. 7000, which was envisioned to levy a tax on various transactions. After the bill was approved by the House, the bill was sent to the Senate as so required by the Constitution. In the upper house, instead of a deliberation on the House Bill, the Senate introduced Senate Bill No. 8000 which was its own version of the same tax. The Senate deliberated on this Senate Bill and approved the same. The House BiIl and the Senate Bill were then consolidated in the Bicameral Committee. Eventually, the consolidated bill was approved and sent to the President who signed the same. The private sectors affected by the new law questioned the validity of the enactment on the ground that the constitutional provision requiring that all revenue bills should originate from the House of Representatives had been violated. Resolve the issue.

sResolution, Tolentino v. Secretary of Finance and Commissioner, G.R. No ?Tolentino v. Secretary of Finance and Commissioner, G.R. No. 11548b, August 25, 1994.

115455, October 30, 1995.

'gPhilippine Judges Association v. Prado, 227 SCRA 703 (1993).

76

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Suggested answer:

Tuition fees;

There is no uiolation of the constitutional requirement that all reuenue bills should originate from the House of Representatiues. What is prohibited is for the Senate to enqct reuenue measures on its own without a bill originating frorn the House. But once the revenue bill was passed by the House and sent to the Senate, the latter cdn pass its own uersion on the same subject matter consonq,nt with the lattetts power to propose or concur with amendrlents. This follows from the co-equality of the two chambers of Congress (Tolentino u. Secretanyt of Finanee, G.B. No. 775455, October 30, 1995).

Dormitory fees;

9.

No law granting any tax exemption shall be passed without the concunrence of a majority of all the members of the Congress (Sec.28[4], Art.VI, 7987 Constitution). In order to place all the special economic zones created under

R.4.7227 (otherwiseknown as the Bases Conversion and Development Act) on equal footing and entitled to the same tax benefits granted to enterprises registered with the Subic special economic zone, former Presid.ent Fidel V . Rq.mos promulgated Proclamation No . 420 on July 5 , 1994. The court ruledthat the grant of preferentialtaxrateof fiue percent (57o) bq.sed on gross income earned in fauor of enterprises registered with the Camp John Hay special economic zone under Proclamation No.420 contrauenes ArticleVl, Section 28(4) of the 1987 Constitution, whirh prouides that "No law granting any tax exemption shall be passed

Rentals from canteen concessionaires;

Interest from money market placements of the tuition fees; Donation of a lot and building by school alumni.

1.

Which of these above-cited income and donation would not be exempt from taxation? Explain briefly.

2.

that XYZ Colleges is a proprietary educational institution owned by the Archbishop's family, rather than the Archdiocese, which of those above-cited income and donation would be exempt from taxation?

Suggested answer:

(1) All of the income deriued by the non-stock,

non-profit educational institution will be exempt frorn taxation, prouided they are used actually, directly and exclusiuely for educational purposes. The Constitution prouides that all reuenues and assets ofnon-stock, non-profit educational institution which are actually, directly and exclusiuely used for educational purposes a,re exentpt from toxation (Sec. 4, par. 3, Art. XIV, 1987 Constitution).

without the concurrence of a majority of all the members of Congress." It is clear that under Section 12 of RA.7227, it is only the Subic special economic zone which was granted by Congress with tatc exemption

The donation is likewise exempt from donor's tax, used for educational purposes, prouided that not ntore than 30Vo ofthe d.onation is used by the donee for administration purposes. The donee, being a non-stock, non-profit educational institution, is a qualifi,ed entity to receiue 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).

if actually, directly and exclusiuely

inuestment incertiues and the like. There is no express extension of the aforesaid benefits to other special economic zones (i.e., Clnrh, Camp John Hay, and Poro Point) under Section 15 of said Act. Therefore, the second sentence of Section 3, Proclamation No. 42 0, w hich extended the preferentialtax rate grantedby RA. 7227 only to enterprises registered with the Subic special econornic zone also to enterprises registered with the Camp John Hay and other special economic zones, is d.eclared nuII and uoid (John Hay Peoples Alternatiue Coalition, et al. u. Lirn, G.R. No. 7L9775, Octoher 24,2009).

Accordingly, none of the cited income and donation collected and receiued by the non-stock, non-profit educationq.l institution would not be exempt from tonation.

(2) Bar Question (2004) XYZ Colleges is a non-stock, non-profit educational institution,

run by the Archdiocese of BP City. following:

It

collected and received the

Suppose

,

If XYZ Colleges is a proprietary educational institution, all of its income from school-related and non-school-related actiuities will be subject to the income tox, based on its aggregate net income deriued from both a.ctiuities (Sec. 27[B], NIRC). Accordingly, all of the income enumerated in the problem will be ta"tcable.

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The donation of lot and building will liheutise be subject to the donoy's tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no diuidends. Since the donee is a proprietary educotional institution, the donation is tq^?cable (Sec. 10 1[A][3], NIRC).

10. Every bill passed by Congress shall embraee only one subject, which shall be expressed in the title thereof.r0 On the question whether the amendment of Section 103 of the National Internal Revenue Code (NIRC) is fairly embraced in the title of R.A. 7716, although no mention is made therein of Presidential Decree (P.D.) No. 1590 as among those which the statute amends, the Supreme Court believes it is, since the title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to widen its base by withdrawing some of the exemptions granted before. To insist that P.D. 1Sg0 be mentioned in the title of the law, in addition to Section 105 of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill should be a complete index of its content. The constitutional requirement is intended to preuent surprise upon the members of Congress and to inform the people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the same reason other statutes, although published, pass unnoticed until some euent somehow calls qttention to their existence. Indeed, the title of R.A. 7716 is not any more general than the title of PAL's own franchise under P.D. 1590, and yet no mention is made of its tax exemption. R.A. 7776 expressly amends PAL's franchise (p.D. 1590) by specifically excepting from the grant ofexemptions from the ualue q.dded tax PAL's exemption under P.D. 1590. This is u)ithin the power of Congress to do under Article XII, Section 11 of the Constitution, which prouides that the grant of a franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress, when the common good so requires.Lr

10Art. fV, Sec. 26(1), 1987 Constitution. lrPhilippineAirlines v. Secretary of Finance and Commissioner, G.R. No. 11bgZB, August 25, 1994.

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Bar Question (2011) Anne Lapada, a student activist, wants to impugn the of a tax on text messages. On what grounds may she do so?

validity

Suggested anawer: She may clairn that the law aduersely affects her since she sends messqges by text and that the tox trloney is being extracted and spent

in uiolq.tion of the constitutionally guaranteed communication. I

l.

right to freedom of

Congress shall evolve a progressive system of taxation.

Regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic, and political inequalities, or for the promotion of the right to quality education. These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

12. Supremacy of the national government over local governments in taxation.

When local governments invoke the power to tax on national government instrumentalities, the exercise of the power is construed strictly against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing

the tax (Manila Internotionol Airport Authority u. Court Appeals, G3,. No. 755650, July 20,2006).

of

Congress has the power of control over local governments.

If

Congress can grant a municipal corporation the power to tax certain

it can also provide for exemptions or even take back the power. The power of local governments to impose taxes and fees is always subject to limitations which Congress may provide by law. Local government units have no power to tax instrumentalities of the national government, such as PAGCOR, it being an instrumentality of the national government (Basco u. Pagcor, 197 SCRA 52). matters,

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or alien) or corporation (domestic or foreign)1, who is not a dealer in securities (Secs. 24[C], 25[A][3], 27tDl [2], and 28[A][c], NIRC) and capital gains tax on sale of real property classified as a capital asset located in the

PART II

Philippines by any person (other than a foreign cor?oration) who is not a real estate dealer, developer, or lessor (Secs. 24[D], 25[A][3], and 27[D][5], NIRC);

INCOME AND WIIIIHOTDING TAXES CHAPTER

INTRODUCTION "htcome ta.xu is defined as a tax on all yearlyl profits arising from property, professions, trades or offices, or as a tax on a person's income, emoluments, profits and the like.2 Income tax is a direct tax on actual or presumeds income (gposs or net) of a taxpayer received, accrued, or realized during the taxable year, which the law does not expressly exempt from taxation.

Title II (Income

Tax) ofthe 2005 Tax Code. These include:

1. 2.

Personal income tax on individuals (Secs.24-25, NIRC); Regular corporate income tax (RCIT) on corporations (Sec. 27[A], NIRC);

3.

Minimum corporate income tax (MCIT) on corporations (Sec.27[E], NIRC);

4.

Capital gains tax (CGT) on sale of shares of stocks of a domestic corporation by any person [individual (citizen

lThe basis for computing income tax shall be the taxpayer's annual accounting period (calendar year or fiscal year) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer (Sec. 43, NIRC). 2Fisher v. Trinidad, 43 Phil. 973. 3Generally, there must be an actual income, gain or profit. However, in sale of real property located in the Philippines classified as capital asset, the seller who is an individual (citizen or alien) or a domestic corporation (and not a foreigrr corporation) is subject to the six percent (6Vo) capital gains tax, based on the actual consideration or fair market value, whichever is higher, regardless ofwhether or not the seller makes a profit or incurs a loss from the sale (See Secs. 24,25, 27 and 28, NIRC).

80

5.

Tax on passive investment income, such as interest, dividend, and royalty (Secs. 24Bltll-t2l ; 25tAlt2l ; 27tDl [1] and [3]-[4], NIRC);

6.

Fringe Benefits Tax (FBT) (9ec.33, NIRC);

7.

Branch Profit Remittance Tax (BPRT) on Philippine

III

There are different types of income taxes under

tJl

branches of foreign corporations operatingin the Philippine

customs territory (Sec. 27, NIRC); 8.

Tax on Improperly Accumulated Earnings Tax (IAET) of corporations (Sec. 29, NIRC); and.

9.

Final Withholding Income Tax (FWT) on certain income from sources within the Philippines payable to resident (e.g., interest on bank deposits) or non-resident persons (e.g., interest on foreign loans or management fees paid to non-resident foreign corporations), or to certain special persons (e.g., OBU, ROHQ, PEZA- or SBMA-registered enterprises).

A taxable transaction shall be subject to only one kind of income tax. For example, sale of real property located in the Philippines, which is classified as a capital asset, by a domestic corporation shall only be subject to the six percent (67o) capital gains tax. Such gain from sale shall not be included in the gross income, which is considered in determining the net income subject to the regular or minimum corporate income tax. On the other hand, real property classified as an ordinary asset is subject only to the ordinary income tax under the global tax system, whether the seller is an individual or a corporation.

Income Tax Systems Bqr Question (1997) 1. Global Tax Systern.

- Under the global tax system, the totq,l allowable deductions as well as personal and

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additionel exemptions, in the case of qualified indiuiduals, or the total allowable deductions only, in the case of corporations, are d,educted from the gross income (i.e., sum of all items of taxable income, profit and gq.in) to arriue at the net ta,xable incomc subject to the gradua.ted income tar rates, in the case of indiuiduals, or to the corporate income tax rate, in the case of corporations. It did not matter whether the income receiued by the taxpayer is

is a piece of social legislation aimed to grant benefits and privileges to senior citizens. Among the highlights of this Act is the grant of sales discounts on the sale of medicines by establishments covered by the law (such as transportation services, hotels and similar lodging establishments, restaurants and recreation centers, and medicines) to senior citizens, provided that private establishments may claim the cost as tax credit. The foregoingproulso specifi cally allows the 20Vo senior citizens "discount to be claimed by the private establishment as a tax credit and not merely as a tax deduction from gross sales or gross income." In Bicolandia, we construed the term"cost" as "referring to the amount of the20Vo discount extended by a private establishment to senior citizens in their purchase of medicines." "We reiterated this ruling in the 2008 case of Cagayan Valley Drug by holding that

(e.g., raffle prize). All items of gross income, deductions, and personal and additional exemptions, if any, are reported in one inconte tq,tc return (BIR Fornt 1701 findiuidual] or 1702 [corporation]) to be filed at least annually, and the applicable tax rate is applied on the talc base (net taxable incorne). The pure global tax system was enforced in the Philippines from 1913 up to December 31, 1981, with rnalcimum graduated ta.x rate of 70Vo being applied on net income of indiuiduals.

petitioner therein is entitled to the tax credit for the full 207o sales discounts it extended to qualified senior citizens. This holds true despite the fact that petitioner suffered a net loss for that taxable year. We finally affirmed in M.E. Holding lhat the tax credit should be equivalent to the actual 207o sales discount granted to qualified senior citizens." However, the Court clarified that R.A. 7432b.as undergone two (2) amendments. The first was in 2003 by R.A. 9257, and, the second, by R.A. 9994 in 2010. The court stressed that "the 207a sales discount granted by establishments to qualified senior citizens is now treated as tax deduction and not as tax credit" (Mercury Drug Corporation a. CIR, G.R. No. 764050, July 20,2011).

The formula for computing income tax under the global tax system shall be as follows:

Net

sales

.Less.'Cost of goods sold or

income Zess.'Deductions

xxx xxx

xxx

services

Gross

Personal and additional exemptions (for individual) Net taxable income Income tax due

withholding tax Special creditable income tax Quarterly income tax paid Tax still due and demandable

Zess; Creditable

xxx xxx xxx xxx

xxx

xxx xxx xxx xxx

2.

Sched.ular Tas Systent.

Und.er the schedular ton systypes of incomes are subject to different sets of graduated or flat income tuc rutes. The applicable tue rate(s) will depend on the classification of the tarcable income (e.g., compensation income, capital gain, passiue income, or other tem,

xxx xxx xxx

xxx xxx

83

The special creditable income tax may arise by virtue of a special tax credit allowed under a special law. Thus, the Supreme Court declared: "Preliminarily, R.A. 7432

classified as compensation income (e.g., salaries receiued by employees), business or professional income (e.g., gainfrom sale of inuentories received by businessmen; professional fees of lawyers and accountants; talent fees of actors and actresses), possiue inuestment incorne (e.9., interest, royalty, or diuidend), capital gain (e.g., gain realized from the sale of shares of stocks of a domestic corporation), or other income

Gross sales Zess.'Sales discounts Sales returns and allowances

W|r'ilil()l,t]tN(i'l'Axtts l,rtxluction

dffirent

-

income) and the tqx base could be gross income (without deductions) or net income (i.e., gross incom.e less allowable deductions). Separate regular income tqJc return or capital gains tox return, whicheuer is applicable, is filed by the recipient of income for appropriate types of income receiued

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within the prescribed dates (e.g., 30 doys from date of'sole), but no income tuc return is filed by the recipient of'passiue income subject to firwl withholding tq.x because the withholding agent is rnade primarily responsible for the filing of the withholding tox return and the payrnent of income tax to the BIR on such passiue income of the inuestor or depositor. The pure schedular tqx systema was applied in the Philippines from January 1, 1982 to December 31, 1985.

deposit

3.

800,000

Section 57(A) of the 1997 Tax Code, are added together

F54,000

to arrive at the gross income, and after deducting the sum

of allowable deductions from business or professional income, capital gain, passive income and other income not subject to final tax, in the case of corporations, as well as personal and additional exemptions, in the case of

Example: i: :i

SaIe ofunlisted shares ofstocks of ABC Corp.

F10,000 5,000

Income tax due:

aOn January

Semi-Sched.ular or Semi-Global Tax Systent.. Effective January 7, 2008, the semi-schedular or semi-global tax system was adopted under R.A. 8424.

subject to final withholding income tax under

F900,000

Tax base is net capital gain (i.e., gross selling price less cost or adjusted basis).

Cost

1,000

Under the semi-schedular or semi-global tax system,5 the compensation income, business or professional income, capital gain and passive income, and other income not

Sale ofreal property classified as capital

b.

F

Multiplied by: x 207o Final withholding tax P _2_q_q Gross dividend income from domestic F50;000 corp. received by resident citizen Multiplied by: x TOVo Final withholding tax F5,OAq

Example:

Fair market value of real property Income tax due: F900,000 x 67o

Tax base is gross income (without any deduction)

Gross interest income on bank peso

Tax base is consideration or fair market value at the time of sale, whichever is higher.

asset

tls

Examples:

There are several ways of imposing final income tax on certain incomes subject to final withholding tax. The three (3) general categories ofincome subject to the schedular tax system are:

a.

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Selling price Less.'Cost

F10,000

Gain Multiplied by: Capital gains tax

F 5,000

5,000

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F

\Vo

individual taxpayers, the taxable income (i.e., gross income less allowable deductions and exemptions) is subjected to one set ofgraduated tax rates (ifan individual) or regular corporate income tax rate (if a corporation). With respect to the above incomes not subject to final withholding tax, the computation of income tax is "global." However, passive investment income subject to final withholding tax and capital gains from the sale or transfer of shares of stocks of a domestic corporation and of real

250

I, 1982, B.P. Blg. 135 adopted the schedular tax system. Gross compensation income (net of personal and additional exemptions) was subject to the graduated tax rates ranging from zero percent (0Vo) to \1%o;business and professional incomes were subject to graduated tax rates ranging from five percent (|Vo) to 60Vo on net taxable income; capital gains from sale ofshares ofstocks ofdomestic corporations and real property located in the Philippines as well as passive investment incomes were subject to final withholding taxes at varying rates.

5Effective January 1, 1986, E.O. 37 adopted the semi-global or semi-schedular ttrx systetn by reducing the graduated rates on business and professional income from 6o0/o tn 35Vo and by increasing the preferential tax rates on capital gains and passive investment incomes. R.A.8424 (1998) retained.t};re semi-global or semi-schedular tax system by introducing some structural and administrative reforms and by reducing the-tax rates on corporations by one percent (IVo) every year from 35Vo to 32Vo. Tlrre same tax system was maintained under R.A. 9337 effective November 1, 2005, but

the corporate tax rate was increased to 35Vo January I, 2009.

and,

it will

be reduced to 307o effective

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properties classified as capital assets located within the Philippines remain subject to different sets of tax rates and covered by different tax returns. The schedular tax system applies to the compensation income, capital gains, passive investment income, and other income subject to final income tax at preferential tax rates. To summarize, either (a) the global tax system (e.g., taxpayer with compensation income not subject to final withholding tax, or business or professional income, or mixed income - compensation and business or professional income), or (b) the schedular tax system G.g.,taxpayer with compensation, capital gains, passive income, or other income subject to final withholding tax), or (c) both the global and schedular tax systems, may be applied, depending on the nature of the income realized by the taxpayer during the year.

Suggested anawer: (a)

A global system of totcation is one where the taxpayer is required to lump up all iterns of incorne earned during a taxable period and pay tatc under a single set of income tax rates on these different items of income. A schedular system oftasation prouides for a different tax treatment of dffirent types of incorne so that a separate

tax return is required to be filed for each type of income and the tar is computed on a per return or per schedule basis. (b)

The current method of tuxation under the Tax Code belongs to a systern which is partly schedular and partly global.

Features of the Income Tax Law Bar Question (1996, 1994)

Bar Question (1994)

1.

Distinguish "schedular treatment" from "global treatment" as used in income taxation.

Suggested answer: Under q. schedular system, the uarious types literns of income (e.g., compensation; business /professional income) are classified accordingly urud are accorded dffirent tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise uary for each type of income. Under the global system, all income receiued by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom ercpenses and other allowq.ble deductions, are subjected to tax at a graduated or fixed rate.

Bar Question (1997)

(a)

Discuss the meaning of the global and schedular systems of taxation.

(b)

To which system would you say that the method of taxation

under the National Internal Revenue Code belongs?

Income tax is a "direct tax" because the tax burden is borne

by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it, while "indirect tax" is a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else (Cornmissioner u. Tours Speciulists, 183 scRA 402). 2.

Income tax is a progressive tax, since the tax base increases

as the tax rate increases. It is founded on the ability to pay principle and is consistent with the Constitutional provision that "Congress shall evolve a progressive system oftaxation" (Sec. 28[1], Art. III, 1987 Constitution). 3.

The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, the residence principle, and the source principle. Any one of the three principles is enough to justifii the imposition of income tax on the income of a resident citizen and domestic corporation that are taxed on worldwide income. Other types oftaxpayers (individual or corporation) are taxed only on their income from sources within the Philippines beginning January 1, 1998, following the "territoriality principle. "

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4.

The Philippines fbllows thc semi-schedular or semiglobal system of income taxation, although certain passive investment incomes and capital gains from sale of capital assets, namely: (a) shares of stock of domestic

2000 under R.A. U424. 'l'he utryxtrate

kt

c.

The Philippine income tax law is a law of American origin.

Thus, the authoritative decision of the American official charged with enforcing the U.S. Internal Revenue Code has peculiar force and persuasive effect for the Philippines. Great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution.

Bar Question (1996) (l-) What are the basic features of the present "income tax system?"

Suggested answer: Our present income tax system can be said to haue the following basic features:

a. It

has adopted a comprehensiue tax situs by using the nationality, residence, and source rules. This makes citizens and resident aliens taxable on their income deriued from all sources while non-resident aliens are taxed only on their income deriued from within the Philippines. Dornestic corporations are also taxed on uniuersal income while foreign corporations are taxed only on income from within.

rate was increased

It

has retained more schedular than global features with respect to indiuidual taxpayers but has maintained d n'Lore global treatment on corporations.

Distinguish a direct tax from an indirect tax. Suggested answer:

A "direct tax" is one in which the toepayer who pays the tox is directly liable therefor; that is, the burden of paying the tax falls tti.rectly on the person payirug the tax. The impact and incidence of ltmation remain with the person upon whom the tax utas imposed. An "ind.irect te-tr" is one paid by a person who is not directly lktble therefor, and who may therefore shift or pass on the ta.tc to o.nother person or entity, which ultirnately assumes the tax burden (Maced.a u. Macaraig, 797 SCRA 777). In this case, the impact ol'taxation is with the taxable seller of goods or seruice, while the incidence of taxation rests with the final consumer.

Criteria in lmposing lncome Tax 1. Citizenship Principle. - A citizen of the Philippines

is subject to Philippine income tax (a) on his worldwide income from within and without the Philippines, if he resides in the Philippines, or (b) only on his income from sources within the Philippines, if he qualifies as a nonresident citizen; hence, the income of a non-resident citizen from sources outside the Philippines shall be exempt from Philippine income tax.

2. Residence Principle. - An alien was subject to Philippine income tax on his worldwide income because

The indiuiduq,l income tax system. is mainly progressiue in

nature in that it prouides graduated rates of income ta"tc. Corporations in general are taxed at a flat rate of 35Vo on net income. INOTE: The corporate ton rate was reduced to 347o in 1998, 33Vo in 1999, and 32Vo beginning January 1,

tanc

iJ5(L, ellbctiue

Bar Question (1994)

INOTE: If the same question is ashed today , the answer should be: Resident citizens and domestic corporations are subject to tax on their worldwide income, while the other types oftaepayers (whether indiuidual or corporation) are taxed only from sources within the Philippines beginning January 1, 1998 under R.4.8424.1

b.

t]9

Nouember 1, 2005 and was reduced to i)0(/i,, starting January 7, 2009, under R.A. 9337 starting Nouember 1,2005.1

corporations; and (b) real property are subject to final taxes at preferential tax rates.

5.

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of his residence in the Philippines. This principle was copied from the United States income tax law, but was discarded in R.A. 8424 (1998) in view of the complexity in tax administration it brings. Thus, an alien (whether resident or non-resident) is now liable to pay Philippine

?

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income tax only on his income from sources within the Philippines and is exempt from tax on his income from sources outside the Philippines.

3.

Source Principle. - An alien or foreign corporation is subjectto Philippine income taxbecause he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on his income from sources within the Philippines, such as dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

CIIAPTER IV

KINDS OF TAXPAYERS

Kinds of Taxpayers A.

When is income taxable?

Individuals 1.

a. b.

Bar Question (2011) Income, gain or profit is subject to income tax, when the following 2.

requisites are present:

a. b.

The money or property received is income, gain or profit (and not return ofcapital);

The income, gain or profit is received (actually or constructively), accrued, or realized during the taxable

Citizens

The income, gain or profit is not exempt from income tax under the Constitution, treaty or statute.

Return or recovery of capital is not subject to income tax. Thus, payment of loan principal is exempt from income tax. Only the interest earned on the loan is subject to income tax. Also, cost of sales ofmanufacturers and dealers ofgoods or properties, which represents return of capital, is not subject to income tax.

The income, gain or profit is taxable to the person who earns the income, who is generally the recipient thereof. In the case of fringe benefits paid to a supervisory or managerial employee, the person taxed is the employee, but the employer is required under the law to assume the payment of the fringe benefit tax in behalf of said employee. Such employee is, however, allowed to claim as business expense deduction the grossed-up monetary value, consisting of the value of the fringe benefits and the FBT paid thereon.

Resident aliens

Nonresident aliens

i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the

year; and

c.

Nonresidentcitizens

Aliens

a. b.

i

Resident citizens

Philippines 3.

&

f I

Estates and trusts

a. b. R.

trust Irrevocable trust Revocable

Corporations 1.

Domestic corporations

2.

Foreign corporations

a. b. 3.

Resident foreign corporation

Nonresidentforeigncorporation

Partnerships

a. b.

Taxable partnership

Exempt partnership

i.

Generalprofessionalpartnership 91

? 92

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ii.

Bar Question (1997) .Iunn, a Filipino citizen, has emigrated to the United States in

Joint venture or consortium undertaking construction activity, or engaged in petroleum operations with operating contract with the

1997, where he is now a permanent resident. He owns certain income-

government.

carning property in the Philippines from which he continues to derive substantial income. He also receives income from his employment in lhe United States on which the US ineome tax is paid.

Citizens One

tar status a. d.ual tar status of ind.iaid.uals. -

Generally, a citizen has only one tax status during the calendar year, either as a resident citizen or a non-resident citizen. However, it is possible for a citizen to have dual status (resident and non-resident) during a calendar year for income tax purposes. He may be treated as a resident citizen and at the same a non-resident citizen during the same taxable year, if at the beginning of the year, he derives compensation and/or business or professional income, and sometime later during the same year, he departs from the Philippines as an immigrant, permanent worker, or a qualified non-resident citizen, or uice uersa. Where such citizen qualifies as a non-resident upon leaving the country (e.9., immigrant and permanent worker), the income from sources outside the Philippines from the time he departs from the Philippines is exempt from tax, while the income from sources within the Philippines shall remain subject to income tax. In the case of overseas contract worker, he becomes a qualified non-resident citizen only if he stays outside the Philippines for more than 183 days during the calendar year.

Citizen u . alien ind.iuidual employees of foreign embassies and international organizations in the Philippines. - Resident citizens who work for a foreign embassy or for an aid agency offoreign governments/international organization in the Philippines (e.g., JICA, GIZ, AUSAID, CIDA, Ford Foundation, Asia Foundation, etc.) are still subject to Philippine income tax because resident citizens are taxed on worldwide income, unless there is a law that expressly grants such tax exemption. In the case of Filipino citizens-employees of the Asian Development Bank, Section 45(b), Article XII of the Agreement provide that only officers and staff of ADB who are not Philippine nationals shall be exempt from Philippine income tax. Exemption of Philippine nationals is "subject to the pouer of the Gouernm.ent of the Philippines to ta* its nationa.ls" (RMC 312013, April 12, 2013). However, the alien individual employees of said foreign embassies or international organizations in the Philippines are exempt from Philippine income tax based on the international agreements entered into by the Philippines with said international organizations or under the Vienna Convention

On which of the above income is the taxable. If at all in the Philippines, and how, in general terms, would such income or incomes be taxed?

Suggested answer:

i

!r

Juan will be taxed on both his income from the Philippines and on his income from the United States because his being a citizen mahes him taxable on all income whereuer deriued. For the income he deriues from his property iru the Philippines, Juan shall be taxed on his net income under the Simplifi.ed Net Income Taxation Scheme (SNI?S) whereby he shall be considered as a self-employed indiuiduq.l. His income as employee in the United States, on the other hand, shall be taxed in accordqnce with the schedular graduated rq'tes of 7Vo, 27o and 37o, based on the adjusted gross income deriued by non-resident citizens frorn all sources without the Philippines during each toxable year. INOTE: Beginning 7998, business and professional income of resident citizens and income from foreign sources of n'on-resident citizens haue been modified or repealed. by R.A. 8424. Under this new law, income from sources within the Philippines of a non-resident citizen remains subject to Philippine income tax, but his income from sources outside the Philippines is exempt.l

Bar Question (2011) Federico, a Filipino citizen, migrated to the United States some six years ago and got a permanent resident status or green card. Should he pay his Philippine income tax on the gains he derived from the sale in the New York Stock Exchange in PLDT, a Philippine corporate whose shares are listed thereat?

Suggested answer: Yes. The gain from the sale of shares of stoch in a domestic cdrporation shq.Il be treated as deriued entirely from sources within the Philippines, regardless of where the said shares are sold (Sec. 42[E], NIRC). By this prouision of law, the gain, if any, from the sale

94

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ofshares ofstocks ofa domestic corporation by any person shall always be treated for income tax purposes as income from sources within the

Philippines.

Bar Question (1998) From what sources of income are the following persons/

corporations taxable by the Philippine government?

1. 2. 3. 4.

An alien individual, whether a resident or not of the A domestic corporation.

1.

A citizen of the Philippines residing therein is taxable on all income deriued from sources within ond without the Philippines.

2.

A nonresident citizen is tax,able only on income d,eriued, from

within the Philippines. An indiuidual citizen of the phitippines who is working and deriuing income from abroad as an ouerseas contract worher is taxable only on income from sources within the sources

Philippines.

4.

An alien indiuidual, whether e resident or not of the Philippines, is taxable only within the Philippines.

5-

The following are liable to pay income taxes:

a.

An individual citizen of the philippines who is working

Suggested answer:

3.

Suggested answer:

Nonresidentcitizen;

Philippines;

5.

eurned ?1,000,000.00, which they used for the supporb of the orphans in the city. Who are liable to pay taxes?

Citizen of the Philippines residing therein;

and deriving income from abroad as an overseas contract worker;

oru

income deriued from sources

A domestic corporation is tarable on all incorne deriued from sources within and without the phitippines (Sec. 25, NIRC).

Bar Question (1994)

- Four catholic parishes hired the services of Frank Binatra, a foreign nonresident entertainer, to perform for four nights at the Folk Arts Theatre. Binatra was paid F200,000.00 a night. The parishes

e5

b.

four Catholic parishes because the income receiued by them, not being income eqrned as such in the perforrrlance of their religious functions and duties, is taxable income under the last paragraph of Section 26, in relq'tion to Section 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an actiuity conducted for profit. The incorne of Frank Binatra, a non-resident alien under our law, is taxable at the rate of 30Vo (now 257o) fi'nal withholding tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines. The

Resid.ent citizen u. nonresid.ent citizen. - It is important to know whether a citizen is a resident or non-resident of the Philippines because he is (a) taxable on his worldwide income, ifhe is treated as a resident citizen, and (b) taxable only on his income from sources within the Philippines and exempt on his income from sources outside the Philippines, if he qualifies as a non-resident citizen (Sec. 23, NIRC).

Engaged. in trad.e or business or erercise of profession a. salaried. employee. - It is important to determine whether or not a resident citizen is engaged in trade or business or in the exercise of his profession, since he is entitled to deduct certain items of deductions from his business or professional income, capital gain, passive income, and other income not subject to final tax. However, no deductions are allowed (a) from his gross compensation income, although personal and additional exemptions, if any, and premiums on insurance where the gross family income does not exceed F250,000 during the year, may be deducted therefrom, and (b) from capital gains and passive incomes subject to final tax at preferential rates. If a resident citizen derives non-business or professional income, he receives either compensation income (because there is employeremployee relationship between him and his employer), or he derives pdssive investment income, or he realizes capital gain from the sale or transfer of shares of stock of a domestic corporation or from sale ofreal property.

96

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Types of nonresident citizena. - There are three (B) types of nonresident citizens, namely: (1) immigrants; (2) employees of a foreign entity on a permanent basis; and (3) overseas contract workers (Sec. 22[E], NIRC).Immigrants and employees of a foreign entity on a permanent basis are treated as nonresident citizens from the time they depart from the Philippines. However, overseas contract workers must be physically present abroad "most of the time" dtning the calendar year to qualify as nonresident citizens. The phrase "t rast of the time" means at least 183 days during the calendar year. His presence abroad, however, need not be continuous (Sec. 24, NIRC).

a.

b.

What is the rule of income taxation with respect to Mr. Sebastian's income in 1997 as a seaman on board the Norwegian vessel engaged in international shipping? Explain your answer.

If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf ofyour clients against the action of the BIR in enforcing collection ofthe tax by the summary remedies of warrants of distraint and levy? Explain your answer.

Suggested answer: The 7997 income of Mr. Sebastian as a seaman is considered as income of a nonresident citizen deriued from without the Philippines. The total gross income, in (J.5. dollars (or if in

other foreign curcency, its dollar equiualent) from without the Philippines shall be declared by him for income tax

purposes ustng a separate income tax return which

will

not include his income from business deriued within the Philippines (to be couered by another return). He is entitled to deduct from his dollar gross income a personal exemption

e7

of $4,500 and lireillt rurliltnal income taxes paid to arriue at his adjustecl inatme during the year. His adjusted income will be subject to the graduated tarc rates of l%o to 37o (Sec. 2 llbl, Ton Code of 1 986 IPD 1 1 58, as amended by PD 1994]). INOTE : The aboae proaision was anrcnd.ed' alread'y by R-A.8424 (Ta"rCod.eof 1997) effictiae January 7,7998.

Incorne ftom foreign sources of nonresid'ent citizens is exempt frotn incom.e tax.I

b. I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tatc return, when the said return is filed on time. The last day for filing the 1997 income tax return is April 15, 7998. Since the assessment was issued only on April 20, 2001, the BIR's right to @ssess has already prescribed.

Bar Question (2002) Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of the return, the BIR issued on April 20,200L a deficiency income tax assessment for the sum of F250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants ofdistraint and levy to enforce collection ofthe tax.

"

Aliens Alien individuals are classified into resident alien and nonresident alien. Nonresident aliens are further classified into engaged or not engaged in trade or business in the Philippines. The Philippines exercises limited taxation rights over income of aliens derived from the economic activities done within the Philippines. The "country of source" exercises its taxing rights due to the territorial link on the income.

Definition of uresid.ence.'

-

The 1997 Tax Code does not

define "residence," but the regulations provide relevant guidelines on

this matter. Thus, an alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for income tax purposes. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient. But ifhis purpose is ofsuch a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines,. he becomes a resident, though it may be his intention at all times to return to his" domicile abroad when the purpose for which he came has been consummated or abandoned (Sec. 5, Reu. Regs. No. 2). A resident alien l<,rses his residence status if he actually leaves the Philippines and abandons his residency thereof without any intention of returning.

98

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What the law requires for an alien to be considered as a resident of the Philippines is merely physical or bodily presence in a given place for a period of time, not the intention to make it a permanent place of abode (Gatrison a. Court of Appeals and Republic, 787

scnA525).

Nonresid.ent Alien Engaged in Tlade or Business in the - If the aggregate period of his stay in the Philippines is more than 180 days during any calendar year, he shall be deemed a "nonresident alien doing business in the Philippines," Section 22(G) of the 1997 Tax Code notwithstanding. As such, an alien engaged in trade or business in the Philippines is taxed on his income from sources within the Philippines (after deducting personal and additional exemptions, if any) at the graduated income tax rates of five percent (57o) to 327o, while his passive investment incomes shall generally be subject to 20Vo final tax (Sec. 25[B], NIRC).

Philippines.

Bar Question (2011) Alain Descartes, a French citizen permanently residing in the Philippines, received several items ofincome duringthe taxable year, such as consultancy fees received for designing a computer program and installing the same in the Shanghai facility of a Chinese firm; interests from his deposits in a local bank offoreign currency earned abroad converted to Philippine pesos; dividends received from an American corporation which derived 607o of lts annual gross receipts from Philippine sources for the past 7 years; and gains derived from the sale of his condominium unit located in Taguig City to another resident alien. Which item of income is not subject to Philippine income tax?

Suggested answer: The consultancy fees are not subject to Philippine incorne tax. Beirug an alien, it is subject to income tax only on income frorl sources within the Philippines (Sec. 23[DJ, NIRC). Since the consultancar fees are receiued by him for designing a computer program and installing the sarne in China, the same shall be treu,ted as incorne from sources outsid.e the Philippines (Sec. 42[cJ[3J, NIRC).

Bar Question (1991) Newtex International (Phils.), Inc. is an American firm duly a branch office.

authorized to engage in business in the Philippines as

ln its activity ofacting us a buying ugent for foreign, buyers ofshirts und dresses abroad and performing liaison work between its home olfice and the Filipino garment manufacturers and exporbers, Newtex does not generate any income. To finance its office expenses here, its head office abroad regularly remits to it the needed amount. To oversee its operations and manage its office here, which had been in operation for two (2) years, the head office assigned three (3) foreign personnel.

Are the three (3) foreign personnel subject to Philippine income tax?

Suggested answer: The three (3) foreign personnel are subject to tux on the incorne that they receiue for seruices rendered in the Philippines. Non-resident uliens are subject to tax on income from sources within the Philippines. Irucome is deemed deriued from sources within the coun'try when it is earned for seruices rendered in. the Philippines (Sec. 23, in relation to

Sec.42, NIRC).

Bar Question (2000) Mr. Cortez is a nonresident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period ofmore than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? Suggested answer: Mr. Cortez, being a nonresident alien indiuidual who has stayed for an aggregate period of more than 180 days during the calendar year 1999, shall for thut taxable year be deemed to be a nonresident alien doing business in the Philippines. Considering the aboue, Mr. Cortez shall be subject to an income in the sanae nlanner as a resident citizen on taxable income receiued from all sources within the Philippines (Sec. 25[N[1], NIRC). tax,

Thus, he is q.llowed to q.uq.il of the itemized deductions including the personal artd qdditional exemptions, but subject to the rule on reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in retation to Sec. 25[A][1], and, Sec. 35[D], NIRC). the

Nonresid.ent Alien Not Engaged. in Tfad'e or Business in - If the aggregate period of the nonresident alien's

Philippines.

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stay in the Philippines does not cxceed 180 d.rys during any calt:ndar year, he shall be deemed a "nonresident alien not doing business in the Philippines." As such, his compensation income, business or professional income, capital gain, passive investment income, and other income from sources within the Philippines is taxed at the flat rate of25o/o, but capital gains from sale or exchange ofshares of stocks in a domestic corporation and from real property located in the Philippines shall be subject to capital gains tax or stock transaction tax, as the case may be (Sec.25[BJ, NIRO. Employees entitl.ed to preferential ta* rates. Cerbain alien individuals who are employed in the Philippines are entitled to the 157o preferential income tax rate on their gross compensation income from sources within the Philippines. These employees entitled to the preferential tax rate are the alien individuals employed by:

a.

Regional or area headquarters and regional operating headquarters of multinational companies in the Philippines (Sec.25[C], NIRC);

b. c.

Offshore banking units established in the Philippines (Sec. 25[D], NIRC); and

Foreign service-contractor or sub-contractor engaged in petroleum operations in the Philippines (Sec. 25[E], NIRC).

It does not matter whether the alien starts to work in the Philippines at the start or end of the year. The only qualification provided for in the law relates to the entity that employs him in the Philippines. Moreover, the aggregate period of stay in the Philippines of the alien employee of the regional or area headquarters and the foreign service contractor or sub-contractor will not create a

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Ilags. No. 6-2001). The preferential tax treatment granted to alien employees of the above entities must necessarily be extended to their

Filipino counterparts in order to put them at par with each other. Alien employees of representative offices of multinational companies in the Philippines who were subject to the LSVo preferential tax rate on their gross income, pursuant to Revenue Regulations No. 2-98, were deleted from the list of alien employees entitled to the reduced tax rate beginning January 7,2002. The above rules in Revenue Regulations No. 2-98, as amended in Revenue Regulations No. 6-2001, have been modified by Revenue Regulations No. 11-2010 on Oetober 28,2OlO. Thus, Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option to be taxed at either 757o of their gross income or at the regular income tax rate on taxable compensation income in accordance with Section 24 of the Tax Code, if the employer is governed by Book III of E.O. 226, as amended by R.A. 8756. All other employees are considered as regular employees who are subject to the regular income tax rate on their taxable compensation income. To be entitled to the preferentialrale of L\Vo, the Filipino must meet

all of the following requirements:

a. Position and. Funetion Test.

The employee must occupy a managerial position or -technical position AND must actually be exercising such managerial or technical functions pertaining to said position;

b.

-- In order to be considered a managerial or technical employee for income tax purposes, the employee must have received, or is due to receive under a contract of employment, a gross annual Compensation Threshold, Test.

taxable compensation of at least F975,000 (whether or not this is actually received); provided, that a change in compensation as a consequence of which, such employee subsequently receiving less than the compensation threshold stated in this section shall, for the calendar year when the change becomes effective, result in the employee being subject to the regular income tax rate; and

permanent establishment in the Philippines for its foreign head office, even ifhe exceeds the 180-day rule provided for in the 1997 Tax Code, or the 183-day threshold prescribed in the tax treaty.

Filipino etnployees of multinational corporations. - The same preferential tax treatment granted to alien individuals shall apply to Filipinos employed and occupying the same position as those of aliens employed by the entities mentioned above, regardless of whether or not there is an alien executive occupying the same position. Filipino employees employed by Regional Headquarters or Regional Operating Headquarters governed by E.O. 226, as amended by R.A. 8756, may choose to be taxed either at the 15% preferential tax rate on their gross income or at the graduated tax rates (Sec. 2.57.1[5][D], Reu. Regs. No.2-98, April 17, 1998, as q,mended by Reu.

101

c.

Exclusiaity Test.-The Filipino managerial or technical employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. Exclusiuity means having just one employer at a time (Reu. Regs. No. 11-2010, October 26, 2010).

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Estates and Trusts An estate is created by operation of law, when an individual dies, Ieaving properties to his compulsory or other heirs, while a trust is a legal arrangement whereby the owner of property (the trustor) transfers ownership to a person (the trustee) who is to hold and control the property belonging to the owner's instructions, for the benefit ofa designated person(s) (the beneficiaries). Legal title to the trust property is vested in the trustee, while equitable title belongs to the benefi.ciaries.

If the trust were an employee's trust, which forms part of an employer's pension, stock or profit-sharing plan that complies with the requirements of tax exemption under Section 60(8) of the 1992 Tax Code, as implemented by Revenue Regulations No. 1-68, as amended, its income would be exempt from income tax. Since said provision grants tax exemption, the requirements of Section 60(8) are mandatory and should be strictly construed (Comrnissioner u. Visayan Electric Co.,23 SCRA 715), Taxable estates and trusts are taxed in the same manner and on the same basis as in the case of an individual, except that: (a) the amount of income for the year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the courb may direct, shall be allowed as deduction in computing taxable income of the estate or trust, but the amount so allowed as deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not; (b) in the case of income received by estates ofdeceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount ofthe income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary, butthe amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary (5ec.61, NIRC). However, they are entitled onlyto personal exemption equivalent to a single individual in the amount of F20,0001 (Sec. 62, rThe

amount of personal exemption of an individual has been increased to P50,000 under R.A. 9504 starting in July, 2008. Considering that an estate or trust is taxed like an individual, it is believed that the same amount of personal exemption granted to individuals must also be extended to taxable estates or trusts.

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be taxed to the trustor, where the (Sec. 63, NIRC), and the income revocable him is trust executed by where the trust is irrevocable trustee, to the of the trust is taxable (Secs. 60-61, NIRC).

NIIl(). 'l'he income o1'a trust will

Bar Question (2009) Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny's 1O-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to F720'000' The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. (a) What advice will you give the trustee? (b) Will your advice be the same, if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority. Why or why not?

Suggested answers:

ct.. It

depends. Where the trust document transferring the property is reuocable, the rental income shall be included in computing the taxable income of the grantor (Sec- 63, NIRC)On the other hand, if the trust document is irreuocable and

the donor's tax on the ualue of the transferred property was duly paid by the grantor at the time of the creation of the trust (Secs. 98-99, NIRC), the rental income shall be reported by the trustee in the income tax return to be filed by her. Income tq,rc shall apply to the income of the property hetd in trust, including income which is to be distributed currently by the fiduciary to the beneficiary (Sec. 60, NIRC). Howeuer, the taxable income of the trust shall be computed by allowing as deduction the amount of the income of the trust for the taxable year which is to be distributed currently by the fi.duciary to the benefi'ciary, but the amount so allowed as a deductioru shall be included in computing the ta"xcable income of the beneficiary, whether distributed to them or not (Sec.61[A], NIRC).

b. '

No, my aduice will be different if the trustee is directed to accumulate the rental income an'd distribute the same only *hen the beneficiary reaches the age of rnajority. Income

tax shall also apply to income accumulated or held for future distribution under the terrns of the trust document.

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Howeuer, the trustee is u,llowed os an &dditional tletluction in computing the taxable income ofthe trust the amount of' the income in the trust for the totcable year, which is properly

cornputing the toxoble income of the beneficiary (Sec. 61[8], NIRC).

Go-ownership There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. For income tax purposes, the individual co-owners in a co-ownership report their share of the income from the property owned in common by them in their individual tax returns for the year, and the co-ownership is not considered as a separate taxable entity or a corporation as defined in Section 22(B) of the 1997 Tax Code. In a co-ownership arising from the death of a decedent, the court clearly established that such co-ownership is automatically terminated upon the partition and distribution of the properties ofthe estate and an unregistered partnership is created when the heirs invested the common properties and income and placed

Co-ownership Due to Death of a Decedent l-. Before partition of property. - In general,

co-

ownerships are not treated as separate taxable entities. The income of a co-ownership arising from the death of a decedent is not subject to income tax, ifthe activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom. In which case, each co-owner is taxed individually on his distributive share. Before the partition and distribution of the estate of the deceased, all the income thereof belongs commonly to all the heirs.

2. After partition of property. - Should the co-owners invest the income of the co-ownership in

any incomeproducing properties after the extrajudicial partition of the estate, they would be constituting themselves into an

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unregistercd purtncrship which is consequently subject to income tax as a corporation. The co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and,ior the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. From the moment of such partition, the heirs are already entitled to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of the property as exclusively his own without the intervention of the other heirs. Accordingly, the heir becomes liable individually for all taxes in connection with his co-heirs. If after such partition, he allows his shares to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, at least an unregistered partnership is formed for tax purposes (Ona u. Cornrnissioner,4S SCRA 74).

paid or credited during such yeqr to any beneficiary, but the qmount so allowed as deduction shctll be included in

them under a single management. However, the co-ownership is not converted into a partnership where the transactions ofthe co-owners intended to liquidate the co-ownership are few or isolated, and the element of habituality is not present. The intention of the co-owners to establish a partnership should also be considered.

"

Bar Question (1997) Mr. Santos died intestate in

1989 leaving his spouse and five children as the only heirs. The estate consisted of a family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial settlement of the estate was executed from the heirs, each ofthem receiving his/her due share. The surviving spouse assumed administration of the property. Each year, the net income from the rental property was distributed to all, proportionately, on which they paid respectively, the corresponding income tax.

In

1994, the income tax returns of the heirs were examined and deficiency income tax assessments were issued against each of them for the years 1989 to 1993, inclusive, as having entered into an unregistered partnership. Were the assessments justified?

Suggested answer: Yes, the assessments were justified becq.use for income tax purposes, the co-ownership of inherited property is automatically

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conuerted into q,n unregistered partnership from the moment the said properties are used ds o common fund with intent to produce profits for the heirs in proportion to their shares in the inheritonce.

From the mom.ent of such partition, the heirs are entitled already to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of as exclusiuely their own, without the interuention of the other heirs, and accordingly, he becomes liable indiuidually for all taxes in connection therewith. If after such partition, he allows his shq,res to be held in common with his co-heirs under a single managerlent to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, euen if no document or instrument were executed for the purpose, for tox. purposes, at least, an unregistered partnership is formed (Lorenzo Ona, et al. u. CIR,45 SCRA 74).

Isolated. transactions of unintproaed. properties. - The petitioners bought two parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought three more parcels of land from one seller. In 1968, they sold the two (2) parcels at a profit after which they did not make any additional or new purchase. In 1970, they sold the remaining parcels also at a profit. It was held that there was no adequate basis to support the proposition that they thereby formed an unregistered partnership. The character of habituality peculiar to business transactions for the purpose of gain must be present to consider them so. Where the transactions are isolated, in the absence of other circumstances showing a contrary intention, the case can only give rise to coownership. The sharing of the profits in a common properby does not ofitselfestablish a partnership that is but a consequence ofajoint or common right or interest in the property. There must be a clear intent to form a partnership, the existence ofajuridical personality different from the individual partners, and the freedom ofeach party to transfer or assign the whole property (Pascual a. Comm.jssioner, 166 SCRA 560).

Bar Question (1994) Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro indiuiso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and F500,000.00 for parcel B.

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107

)

The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the BIR correct?

2)

The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR correct?

1

Suggested answer:

1)

The BIR is not cotect, since there is no showing that the acquisition of the property by Noel and Jouy Langit as pro indiuiso owners, and prior to the formation of the partnership, was used, intended for u'se, or bears any relation whqtsoeuer to the pursuit or conduct of the partnership business. The sale of parcel A sholl therefore not be treeted as a sale by aru unregistered partnership, but an ordinary sale of a capital asset, and hence will be subject to the SVo (now 67o) cq'pital gains tQ'xc and docurnentary stamp tax on transfers of real property, said taxes to be borne equally bY the co-ou)ners.

2)

The BIR is correct, since a "corporation" as deemed under Section 2A@) fnow Sec. 22(b)] of the Tox Code includes

partnerships, no matter how created or organized,

except general professional partnerships. The business partnership, in the instant case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B' The sale shall thus be subject to the creditable withholding tq.tc urlder Reuenue Regulations No. 7-90, as amen'ded by 12-94 [now Reu. Regs. No. 2'98, as amended], on the sale of parcel B, and the partnership shall report the gain realized from the sale when it files its income ta'x return-

Transfer of property f-rom father to child'ren.

-

completing payment on two (2) lots, the father transferred his

Aftet rights

to his four (4) children to enable them to build their residences. After having held the two (2) lots for more than a year, they sold them at a profit. They treated the profit as a capital gain and paid income tax on one-half thereof. The court ruled that there was no

partnership. To regard them as having a taxable partnership would result in oppressive taxation and obliterate the distinction between a co-ownership and a partnership. The children had no intention of forvning a partnership. The transaction was isolated. Their original purpose was to divide the lots for residential purposes. Iflater on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell

108

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the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership, which was in the nature of things a temporary state. The sharing of gross returns does not of itself establish a joint partnership whether or not the persons sharing them have a joint or common right or interest in the property from which the returns are derived. There must instead be an unmistakable intention to form that partnership or joint venture (ObiWns v. Comtnissioner, 139 SCRA 436).

Roberto Ruiz and Conrado Cruz bought three (3) parcels ofland from Rodrigo Sabado on 4 May 1976. Then on 8 July I9TT,theybought two (2) parcels of land from Miguel Sanchez. In 1988, they sold the first three parcels ofland to Central Realty, Inc. In 1989, they sold the two parcels to Jose Guerrero. Ruiz and Crrz realized a net profit of F100,000.00 for the sale in 1988 and F150,000.00 for the sale in 1989. The corresponding capital gains taxes were individually paid by Ruiz and Cruz.

On 20 September 1990, however, Ruiz and Cruz received a letter from the Commissioner of Internal Revenue assessing them deficiency corporate income taxes for the years 1988 and 1989 because, according to the Commissioner, during said years they, as co-owners

in the real estate transactions, formed an unregistered partnership orjoint venture taxable as a corporation and that the unregistered partnership was subject to corporate income tax, as distinguished from profits derived from the partnership by them, which is subject to individual income tax. Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax?

Suggested answer: Roberto Ruiz and Conrado Cruz qre not liable

General Professional Partnerships (GPP) A "general professional par-tnership" is a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business (Sec. 22[B], NIRC). To qualifr as such exempt entity, the GPP must not derive any active business income (e.9., rentalincome),

but may receive interest income on bank deposits and from dividend income.

GPP is not a taxable entity for incomc tax purposes.

Bar Question (1991)

for corporate

income tuc. Euidently abandoning the Gatchalian ruling, the Supreme Court in a recent ruling in Pascual u. Court of Tax Appeals (GR. No.78733, October 1"8, 1988) held that isolated transactions by two or n'Lore persons do not wq.rrant their being considered as an unregistered partnership. They will instead be considered as mere co-ou)ners; no corporate income tox. is due on nl.ere co-ownerships. It was, therefore, correct for Ruiz and Cruz to merely pay their indiuidual income tax liabilities on the gain from sale ofreal estate transactions.

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general professional partnership is not considered as a taxable entity for income tax purposes. The partners themselves, not the partnership (although it is still obligated to file an income tax return), are liable for the payment of income tax in their individual capacity computed

their respective distributive shares ofthe partnership profit. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation ofincome by, and the ultimate mechanism distribution of such income to, respectively, each of the individual partners (?on u. Del Rosario,237 SCRA 324). on

Share of partners in partnership

profit is d'eemed'

d.istributed. to the partners in the year profi.t is earned'. - The net profit of a general professional partnership is distributed to the partners composing the partnership in accordance with their agreement. The share of an individual partner in the net profit of a general professional partnership is deemed to have been actually or constructively received by the partner in the same taxable year in which such partnership net income was earned, and shall be taxed to them in their individual capacity, whether actually distributed or not, at the graduated rates of income tax ranging from five percent (57o) to 327o (Sec. 26, NIRC) . Thus, the principle of constructive receipt of income or profit is being applied to undistributed profits of general professional partnerships. The payment of such tax-paid profits by the GPP to the partners in another year should no longer be liable to income tax.

Bar Question (1995)

.

Five years ago, Marquez,Peneyra,Ja5rme, Posadas and Manguiat,

all lawyers, formed a parbnership which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter issued Revenue Regulationlsl No. 2-93 implementing R.A.

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7496, known as the simplified Net lncome'raxation scherne (sNITS).

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Revenue Regulation[s] No. 2-93 provides in part:

- The partnership and the partners are

general professional covered by R.A. 7496. Thus, in determining profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct costs are not deductible from his gross income."

(2)

Marquez and Peneyra Law Offices filed a taxpayer,s suit alleging that Revenue Regulations No. 2-93 violates the principle of uniformity in taxation because general professional partnerships are now subject to payment of income tax and that there is a difference in the tax treatment between individuals engaged in the practice of their respective professions and partners in general professional partnerships. Is this contention correct? Explain. Is Revenue Regulations No. 2-93 now considered as having adopted a gross income method instead of retaining the net

income taxation scheme? Explain.

Suggested answer:

(1)

The contention is not correct. General professional partnerships remain to be a non-ta)c.able entity. The partners comprising the same are taxable and they are obligated to report as income their share in the income of the general professional partnership during the tqtcable year, whether distributed or not. The Simplified Net Income Tax Systent (SNI"S) treats professionals as one class of taxpayers so that they shall be treated alihe, irrespectiue of tahether

they practice their profession alone or in association with other professionals under a general professional partnership. What are taxed differently are indiuiduols and corporations. All indiuiduals similarly situated are taxed alike under the regulations. Therefore, the principle of uniformity in taxation is not uiolated. On the contrary, all the requirements of a ualid regulation haue been complied with (Tan u. del Rosario, G.R. No. 10g29g, October S, 1gg4).

No. Reuenue Regulati
deduction by limiting it to direct costs and expenses' or 40Vo of gross receipts maximurn deduction in cases where the direct costs a.re dfficult to determine. The allowance of the limited deductions, howeuer, is still in corusonance with the net income ta,xation scheme rather than the gross incorne method. While it is true that not aII the ercpenses of earning the income might be allowed, this can weII be justified by the fact that deductions are not matters of right but are matters of legislatiue gra.ce. INOTE: R.A' 8424 (Tax Reform Act of 1997) repealed R.A.7496 in 1998-l

"Sec. 6. General Professional Partnershlp.

(1)

lII

Domestic Corporations and Foreign Gorporations The term od,om'estic," when applied to a corporation means created or organized in the Philippines or under its laws (Sec.22[C], NIRC), while the terrn"foreigz," when applied to a corporation, means a corporation which is not domestic (Sec.22[DJ, NIRC).The branches of a domestic corporation, whether located in the Philippines or abroad, are merely extensions of the local head office. Accordingly, their incomes in the Philippines and abroad of the head office and foreign branches are to be reported by the Philippine head office in its corporate income tax return, and the branch profits remitted by its forgign branches to the Philippine head office shall no longer be subject\to the branch profit remittance tax because (a) the income of the foreign branch had already been subjected to Philippine income tax, and (b) the branch profit remittance tax applies only to Philippine branches offoreign corporations operating in the Philippines operating in the customs territory and exempts from the tax profits remitted by the Philippine branch operating in special economic zones to their head offices abroad.

A "resid.ent foreign corpora.tiort" is a foreign corporation in trade or business within the Philippines (Sec. 22[H]' NIRC), and a nnonreeid,ent foreign corporatioz" is a foreign

engaged

corporation not engaged in trade or business within the Philippines (Sec.22[IJ, NIRC).

Bar Question (2012)

' Anchor Banking Corporation, which was organized in 2000 and existing under the laws of the Philippines and owned by the Sy Family of Makati City, set up in 2010 a branch office in Shanghai

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City, China, to take advantage of the presence of many l'ilipin
f

because the Shanghai Branch is treated as a foreign corporation and is taxed only on income from sources within the Philippines, and since the loan and other business transactions were done in Shanghai, these

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l)hilippinc ( )orportrtion Oorlo, provided that it is organized under the laws of'the Philippines. On the other hand, a corporation established by Filipino citizens under the laws of a foreign countrywill be treated as a foreign corporation, and the branch that such foreign corporation sets up in the Philippines is a resident foreign corporation. In other words, the nationality of the owners of the corporation has no bearing in ascertaining the status or residence of corporations, for income tax purposes.

incomes are not taxable in the Philippines.

a.

Doing Business

Is the bank correct in excluding the net income of its Shanghai Branch in the computation of its annual

I

corporate income tax for 2Ol0? Explain your answer.

b.

Should the Shanghai Branch of Anchor Bank remit profit to its Head Office in the Philippines in 2011, is the branch

liable to the l57o branch profit remittance tax imposed under Section 28(AX5) of the 1997 Tax Code? Explain your answer.

Suggested answers: No. A domestic corporation is tucable on all income deriued from sources within and without the Philippines (Sec. 23, NIRC). The income of the foreign brq,nch and that of the Head Office will be summed up for income tax purposes, following the "single entity" concept and uill all be included inthe gross income of the dnmestic corporation in the annual Philippine income tanc return. b.

Partnerships Except for a general professional partnership and an unin-

corporated joint venture or consortium engaged in construction or enerry-qelated projects, which in reality are also parbnerships, Section 22(B) ofthe 1997 Tax Code considers any other type ofpartnership (described here as "business partnership") as acorporation subject to income tax. Indeed, Section 24(B) of the 1997 Tax Code places a business partnership and an ordinary corporation on a similar footing, by imposing the lOVo dividend tax on the cash and./or property dividends actually or constructively received by an individual stockholder of a corporation, or in the distributable net income after tax of a partnership ofwhich he is a partner, except a general professional

No, The branch profit remittance tax is imposed only on remittqnce by branches of foreigru corporation in the Philippines to their Head Office abroad. It is the outbound branch profits thq.t is subject to the tax, ruot the inbound profits (Sec. 28[A] [5], NIRC).

Test in determining Status of Corporations Following the above provisions, it can be said that the Philippines adopted the"lano of incorporation test'ander which a corporation

is considered (a) as a domestic corporation, if it is organized or created in accordance with or under the laws of the Philippines, or (b) as a foreign corporation,

ifit

is organized or created in accordance

with or under the laws of a foreign country. Corollarily, a domestic corporation may be formed or organized by foreigners under the

The term "doing business" implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose of business organization. In order that a foreign corporation maybe regarded as doingbusiness within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character (BOAC u. Comtnissioner, 749 SCRA 395).

ta

partnership, received by a partner. The term"after'ta'x net profit" means the net profit of the partnership computed in accordance with generally accepted principles of accounting, less the corporate income tax imposed in Section 27 of the Tax Code (Sec.2, Reu. Regs. No.2-84, January 16, 1984). Section 73(D) of the 1997 Tax Code, however, provides that "the taxable income declared by a partnership for a taxable year which is subject to tax under Section 27(A) of this Code, after deducting the corporate income tax imposed therein,

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shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not."

Bar Question (2013) Y{Z Law Offices, s l6w partnership in the Philippines and

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nrako ar contribution, rroL necessarily of capital, but by way of services, skill, knowledge, material or money; profits must be shared

among the parties; there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; and usually, there is single business transaction (BIR Ruling No. 317-92).

a

VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, USA, but the e-mail came from California, where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business

in the Philippines. YYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank, which converted the remitted US$1,000 to pesos and deposited the converted amount in the XYZ Law Offices account. What are the tax implicaf ions of the payment toYYZ Law Of;fices in terms of VAT and income taxes?

Suggested answers: The payment to XYZ Law Offices by Gainsburg Corporation is subject to income totc and VAT in the Philippines. For income tqrc purpeseL, the compensation for seruices is part of the gross income of the law partnership. From its total gross income within and without, it has to compute its net incorne in the same nlanner as a corporation. The net income of the partnership, whether distributed or not, will be declared by the partners based on their agreement as part of their gross incorne who are to pay the income ta& thereon in their indiuidual

capacity (Sec. 26, NIRC). FoTVAT purposes, the transaction is a zero-rated sale ofseruices, where the output tax is zero percent and XYZ is entitled to clq,im as refund or tax credit certificate the input taxes attributable to the zerorated sale, if the same is not utilized by the partnership. The seruices were rendered to a nonresident person, engaged in business outside the Philippines, which seruices are paid for in foreigrt currency inwardly remitted through the banking systent, thereby making the sale of seruices subject to tax at zero-rated (Sec. 108[8][2], NIRC).

Joint Ventures Elem,ents ofjoint aenlure. -

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To constitute aujoint uentttrerD certain factors are essential. Thus, each party to the venture must

Exempt joint uenture or consortium is an unincorporated' joint aenture or consortium engaged. in conetruction actiaity or energy-related. project. - The terrn "ioint uenture or

consortiu.nt," referred to in Section 22(B) ofthe 1997 Tax Code that is not considered as a separate taxable entity, means an unincorporated entity formed by two (2) or more persons (individuals, partnerships or corporations) for the purpose ofundertaking construction project (P.D. 929, May 4, 1976), or engaging in petroleum and other energy operations with operating contract with the government. The term "joint aenture' was clarified by the Secretary of Finance when he issued Reaenue Regulations No. 10-2012 on June 7, 2072.In said Regulation, the joint venture that is not taxable as a corporation must comply with the following requisites: (a) the joint venture or consortium is formed for the purpose of undertaking construction activity; (b) It involves jointing or pooling ofresources by licensed local contractors; i.e., licensed as a general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry; (c) the local contractors are engaged in construction business; and (d) thejoint venture itselfis licensed as suOh-by PCAB. If all the above requisites are not met, the joint venture becomes liable to the corporate income tax. Each member of the joint venture not taxable as a corporation shall report and pay taxes on their respective shares to the joint venture profit. Since it is not considered as a separate taxable entity, the net income or loss ofthejoint venture or consortium is taken up and reported by the co-venturers or consortium members in accordance with their participation in the project as set forth in their agreement. The two (2) elements - unincorporated entity (or entity not registered with the Securities and Exchange Commission) and for the purpose of undertaking construction or energy-related project - must be present in order that the joint venture or consortium may not be considered as a separate taxable entity. Tax-exempt joint venture shall not include those who are mere sirppliers of goods, services or capital to a construction project.

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Joint Venture (JV) involving foreign contracto!.s may

be

treated as non-taxable corporation only if:

1.

Member foreign contractor is covered by a special license as contractor by PCAB; and

2.

Construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign-financed./internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine government and the foreign/international financing institution, pursuant to the rules and regulations of R.A. 4566 (Contractor's License Law).

Each member ofjoint venture not taxable as corporation shall report and pay taxes on their respective shares to the joint venture

profit.

All licensed local contractors must enroll to BIR's eFPS at the RDO where local contractors are registered as taxpayers. Foreign

joint

aenture or consortium that d.oes not sell

goods nor perfonn seruices in the Philippines. - A joint venture or consortium formed among non-resident foreign corporations in connection with a local project in the Philippines is not subject to Philippine income tax, where said foreign joint venture or consortium does not sell goods nor perform any service in the Philippines. This rule is anchored on the fact that a foreign corporation is taxable only on income from sources within the Philippines (81li Ruling No. 2395). Accordingly, no withholding tax is required to be deducted and withheld by the Philippine payor from income payments from foreign sources made to the foreign joint venture or consortium.

Erempt

partnership.

joint aenture or consortium may become tarable

-

Arr exempt joint venture or consortium undertaking

a construction of ofifice tower project may subsequently become subject

to income tax as a separate joint venture or consortium, where afber

the construction period, the joint venture partners engaged in the

business ofleasing the building floors or portions thereofseparately owned by them (BIR Ruling No. 317-92, October 28, 1992). The tax exemption of the joint venture granted under the law is valid only up to the completion of the construction project and does not extend to the subsequent sale or lease of the developed condominium floors or units to customers.

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BIR Rulings prior to Revenue Regulations No. l0-20l2z C orporation d.oe s not includ'e i oint a enture und'ertaking construction actiuity; allocation of floors, units, or lots is a mere return of capital. - The joint ventures described above

are not subject to the corporate income tax under Section 27 of th.e 1997 Tax Code, since the term "corporation" does not include a joint venture or consortium formed for the purpose of undertaking construction projects pursuant to Section 22(B) of t};,e 1997 Tax Code. Accordingly, the memorandum of agreement, jointventure agreement, or exclusive development and marketing agreement between or among the contracting parties, as the case may be, will not give rise to a

taxablejoint venture, and the allocation ofspecific floors or units or subdivision lots in the project is not a taxable event and is not subject to income tax and expanded withholding tax, because the allocation is a mere return of the capital that each party has contributed to the project.

Tlansfer of land. to ioint aenture is similar to capital contribution; d.istribution of deaeloped.lotslunits is merely an act of partitioning cotnrnonly ouned' property. - Joint venture

agreements for the construction and development of real property may or may not be treated as a separate taxable unit, depending on whether or not a separate taxable entity is established by the joint venture partners. Ifthe parties did not form nor register a separate entity and merely agreed to pool their resources to a common fund, no separate taxahle unit is created. In this case, eachjoint venture partner has to account for his respective share in the net revenue earned from thejoint venture project separate from otherjoint venture partners. Hence, the partners may file separate income tax returns for its net revenue for the project less its respective proportionate share in thejoint venture expenses. The contribution ofland to the joint venture is not a taxable event that will give rise to capital gains tax on sale or transfer of land. Such transfer is similar to a capital contribution that does not give rise to income tax. The distribution of developed lotsrunits is merely an act of partitioning the commonly owned property. It is nothing more than an act of terminating the coownership by making each partner specific owner of the identifiable lot or unit. At this stage, no taxable sum has yet been realized by the joint venture partners. That act of allocation or assigning portions of the developed lots to each member of the joint venture cannot be treated as a taxable event. The same is true despite the fact that the shares allocated to or received by the partners may not necessarily

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'-'''';il)i:I:riiil.,l;llil"'^correspond to the lot area originally contributed by thern to the joint venture. Hence, the titling of the land back to the joint venture partners is not subject to income tax, expanded withholding tax, and value added tax(BIR Ruling DA-165-03-18-99).

Sale of deaeloped floor, unit or Int is subject to incomc - Should the corporate landowner or developer sell any ofthe floors or portions ofthe floors allocated to them to third parties, the gain that may be realized by them from such sale will be subject to the regular corporate income tax and to the expanded withholding tax under Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as amended (BIR Ruling No.274-92, September 30, 1gg2). This rule applies even ifthe sale takes place before or during the construction

tax.

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Resident Foreign Corporation A "resid.ent foreign corporation" is a foreign corporation rrrrgrrgcd in trade or business within the Philippines (Sec. 22[H], N I It(:). Thus, the adjective"resid.ent" in the term"resid'ent foreign

corTtoration" is merely used to describe a corporation organized rrndcr the laws of a foreign country, which is engaged in trade or buuiness in the Philippines.

IDhilippine branch of a foreign corporotion is merely an (xtension of the foreign head' office A good example of a resident foreign corporation is the Philippine

ofa foreign corporation duly licensed by the Securities and

period.

lrrunch

Taxable Joint Ventures

l,lxchange Commission. The Philippine branch is merely an extension ol'the foreign head office (i.e., non-resident foreign corporation); hence, il, does not have nor issue Philippine shares of stocks, unlike that of

There are two (2) instances when a joint venture becomes a taxable entity. First, a domestic corporation jointly owned by individuals and by two or more existing domestic corporations and,/ or foreign corporations that is incorporated under the laws of the Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or licensed by the Securities and Exchange Commission [e.g., Marubeni Corporation - Philippine Branchl is a taxable corporation, even

if it is engaged in the business of construction or energy-related

activity. Second, if the unincorporated joint venture or consortium (or unregistered partnership) is engaged in any other line ofbusiness

than construction or energl-related activity with operating contract with the government, the same will also be treated as a taxable corporation. The income and expenses of the taxable joint venture must be reported by it during the taxable year. Examples of taxable partnerships include: (a) joint emergency operations of two (2) bus/business companies (Collector a. Batangas Tlansportation Co., 102 PhjI. 822); (b) leasing of 24 properties by three (3) sisters to various tenants under common management for 15 years (Euangelista u. Collector, 702 Phil. 140); (c) leasing by father and son of lot and building to tenants under administration by a building administrator (Reyes a. Cornmissioner,24 SCRA 798); (d) Insurance pool or clearing house, composed of41 nonJife insurance

corporations, for the purpose ofallocating and distributing the risks

(AFISCO Insurance Corporation a. Commissioner, G.R. No. L-772675, January 25, 1999).

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domestic corporation. There is only one foreign single entity. The lbreign head office and the Philippine branch are one and the same ontity. However, for income tax purposes, only the income of the l'hilippine branch from sources within the Philippines is subject to income tax, and the income of the Philippine branch as well as that of the foreign head office from sources outside the Philippines are exempt l'rom the Philippine income tax. Corollarily, the gross income from sources within the Philippines of the foreign head office is subject to the final incqrne tax that must be withheld and remitted to the BIR by the Philippine payor, unless such income of the foreign head office is attributed and thus taxed to the Philippine branch.

Bar Question (1999) HK Co. is a Hong Kong company, which has a duly licensed I'hilippine branch engaged in trading activities in the Philippines. HK Co. also invested directly in 407o of the shares of stock of A Co., a Philippine corporation. These shares are booked in the Head Office of HK Co. and are not reflected as assets of the Philippine branch. In 1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A Co. seeks your advice as to whether it will subject the remittance to withholding tax. No need to discuss withholding tax rates, if applicable. Focus your discussion on what is the issue.

Strggested answer:

I will aduise ACo. to withhold and rernit the withholding tax on the diuidends. While the general rule is that a foreign corporation is

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the sarne juridical entity as its branch office in the Philippines, when, howeuer, the corporation trqnsacts business in the Phitippines directly and independently of its branch, the taxpayer would be the foreign

corporation itself and subject to the diuidend tax sintilarly imposed on nonresident foreign corporation. The diuidends attributable to the Home Office would not qualify as diuid.ends earned by a resident foreign corporation, which is exempt from tax (Marubeni Corporation a. Commissioner, GR. No. 76573, September 14, Iggg).

hrnce, rutt torable to a lireign corporation in the Philippines (Sec. 42, NIRC; CIR o. Marubeni Corporation, G.R.

No. 137377, December 78, 2OO1). With respect to the installation works which was sub-contracted by FC to PCC, a dnmestic corporation, it is PCC (not FC) that does the work in the Philippines that should report the income thereon.

h.

Bar Question (2012)

in construction and installation projects. In 2010, Global Oil Corporation (GOC), a domestic corporation engaged in the engaged

a. b.

Is FC liable to Philippine income tax, and if so, how much revenue shall be reported by it in 2010 and in 2011? Explain your answer. Is PCC, which adopted the percentage of completion method of reporting income and expenses, liable to value added tax

in 2010 and in 20ll? Explain your answer. Suggested answers:

a.

No. FC is not liable to

Philippine income tax. The reuenues fromthe design and supply contracts, hauing been all done in Singapore, are income from without the Philippines;

Yes. PCC is liable to VAT as seller of seruices done in the Philippines for a fee. Howeuer, the sale of seruices to FC is subject to VAT at zero percent. Seruices rendered by a VAT-registered local contractor to a non-resident foreign

corporation who is outside the Philippines, paid for in foreign curcency inwardly remitted through the Philippine banhing system are zero-rqted sales of seruices (Sec. 108[8] [2], NIRC).

Foster Corporation (FC) is a Singapore-based foreign corporation

refinery ofpetroleum products, awarded an anti-pollution project to Foster Corporation, whereby FC shall design, supply machinery and equipment, and install an anti-pollution device for GOC's refinery in the Philippines, provided that the installation part of the project may be sub-contracted to a local construction company. Pursuant to the contract, the design and supply contracts were done in Singapore by FC, while the installation works were sub-contracted by FC with Philippine Construction Corporation (PCC), a domestic corporation. The project with a total cost of F100 million was completed in 2011 at the following cost components: (design - ?20 million; machinery and equipment - F50 million; and installation - F30 million). Assume that the project was 407o complete in 2010 and l00o/o complete in 2011, based on the certificates issued by the architects and engineers working on the project. GOC paid FC as follows: F60 million in 2010 and F40 million in 2011, and FC paid PCC inforeign currencythrough a Philippine bank as follows: F10 million in 2010 and F20 million in 20tL.

t21

Types of Resident Foreign Corporations Under the 1997 Tax Code, there are two (2) general types of rcsident foreign corporations:

1.

Those

2.

Those that are engaged in trade or business Pfiilippines and thus subject to income tax at:

that do not derive any income from sources within the Philippines because they are not engaged in trade or business and thus exempt from income tax; and

a.

in the

Preferential tax rate under the Tax Code or special law like R.A. 7916 (PEZA law) and other special economic zone laws, and R.A. 7227 (BCDA law), as amended, or

b.

Normal corporate income tax rate or minimum corporate income tax rate, whichever is higher.

Under the first category are the (a) regional or area headquarters (RHQ) established in the Philippines pursuant to the provisions of 8.O.226, as amended by R.A. 8756, (b) representative offices, and (c) regional warehouses of multinational corporations in the Philippines. They are exempt from income tax because they are not engaged in trade or business in the Philippines. They do not derive income from spurces within the Philippines and are merely cost centers. The regional or area headquarters (RHQ) is exempt from income tax only if the amounts received by it do not include fees or compensation for services rendered. The foreign operating companies give such

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amounts only as reimbursement of their shares in the allocated ofthe regional or area headquarters. There should also be no excess of amount received from the operating companies for the cost ofoperating the regional or area headquarters as its costs will be shared among the operating companies and shourd not result in any income (BIR Ruling No.047-2007, Septernber 28,2001).

l,lrr: aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the

airlinc, only

expenses

point of transshipment shall form part of GPB.

On March 27,2OL3, R.A. 10378 was enacted by Congress and signed by the President in order to promote tourism in the country. Section 23(AXg) of the new law provides "that international air carriers doing business in

Under the second category are branches engaged in trade or business in the Philippines. These branches entitled to preferential

the Philippines may avail of a preferential rate or exemption from the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage

tax rates include: 1.

The Regional Operating Headquarters (ROHe) of multinational corporations in the Philippines are authorized to sell various services (excluding goods) in

on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity such that an international carrier,

the Philippines to their affiliates, subsidiaries orbranches within the Asia-Pacific Region and they are taxed at IOVo on their net income from sources within the philippines. Income for services rendered abroad are exempt from

whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from the tax imposed under this provision." However, they remain liable to the three percent (\Eo) percentage (common carrier's) tax on their quarterly gross receipts derived from the transport ofcargo from the Philippines to another country. Section 109(S) of the 2005 Tax Code was amended by including "transport of passengers by international carriers" among the exempt transactions from VAT (RMC 40-2013, May 2, 2013; Reu. Regs. No. 15-2013, September 20, 2013).

Philippine income tax (Sec. 28[A]tGl, NIRC); 2.

3.

Offshore Banking Units (OBU) and Foreign Currency Deposit Units (FCDU) of Philippine branches of foreign banks are taxed at LDVo on their gross interest income on foreign cun'ency loans to residents, other than OBU/ FCDUs or local commercial banks, including local branches offoreign banks authorized by BSP to transact business with OBU/FCDUs. However, income derived by OBU/FCDU authorizedby BSP from foreign currency transactions with non-residents, other OBUIFCDUs, local commercial banks, including branches of foreign banks in the Philippines authorized by BSP to transact business with OBU/FCDU shall be exempt from all taxes, except net income from such transactions (Sec. 28tAJ[4], NIRC); International air carriers (whether online or offl.ine), and international shipping lines are taxed on their Gross Philippine Billings (GPB) at 2.5Vo. For international a,ir ca,rriers, GPB refers to the amount of gross revenue derived from carriage of persons, excess luggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective ofthe place ofsale or issue and the place of payment of the ticket or passage document, provided that for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another

For international shipping lines, GPB means gross fevenue whether for passenger, cargo or mail originating 'from the Philippines up to final destination (whether there is transshipment of cargoes taking place outside the Philippines in another foreign vessel) ( S ec. 2 8 [A] [2], N I RC ) ; 4.

Foreign service-contractors and sub-contractors engaged in petroleum operations in the Philippines (P.D. 187, as amended); and

5.

Registered enterprises with PEZA, SBMA, CDA, CJHDA, and other special zones and freeport zones (R.4. 7916 and 7227). Service enterprises accredited with the above zone authorities, Iike banks, janitorial services, security agencies, and the like, are not entitled to the tax incentives under said laws, but are subject to the ordinary taxes provided for in the l-997 Tax Code.

All other types of Philippine branches of foreign corporations are subject to the 307a corporate income tax

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based on their net taxable income from sources within the Philippines, unless the minimum corporate income tax that is computed at two percent (27o) of their gross income from sources within the Philippines is higher than the normal

CIIAPIER V

corporate income tax.

GROSS INCOME

A"non-resid,ent foreign corporation" is a foreign corporation not engaged in trade or business within the Philippines but deriving income from sources within the Philippines (Sec. 22[A, NIRC). Thus, the term ononresid.ent" means and is sJrnonymous to "not engaged in trade or business in the Philippines." Except as otherwise provided for in the Tax Code or special law, gross income from sources within the Philippines paid to a nonresident foreign corporation, shall be subject to the 307o ftnal corporate income tax, which must be withheld by the Philippine payor of the income.

nGross ittcome'means income, gain or profit subject to tax. It includes compensation for personal and professional services, business income, profits, and income derived from any source whatever (whether legal or illegal), unless exempt from tax under the Constitution, tax treaty, or statute. The preceding definition is used for purposes of computing the normal corporate income tax. The term "gross incomer" for purposes of computing the minimum corporate income tax, shall include all items of income, gain or profit, except exempt income and income subject to final tax(Sec. 27[E][4], NIRC). Revenue Regulations No. 9-98, however, expanded the definition of "gross income," by including "other or miscellaneous income" of the corporation such as gain from non-recurring sale of equipment.

Bar Question (2011) Aplets Corporation is registered under the laws of the British Virgrn Islands. It has extensive operations in Southeast Asia. In the Philippines, its products are imported and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets' net income derived from its exports to Kim. Is the BIR correct?

Suggested answer: No. Aplets Corporation is a non-resident foreign corporation

engaged

not

in trade or business in the Philippines (Sec. 22[I], NIRC)

q.nd its source of income is from outside the Philippines. As a foreign corporation, it is subject to Philippine incorne tar only on income from sources within the Philippines (Sec. 23[F], NIRC). Gains, profits and income from the sale of personal property outside the Philippines shall be treated as income from sources outside the Philippines (Sec. 42,

i

"Net incontc" means gross income less statutory deductions and exemptions (Sec. 36, Reu. Regs. No. 2).It is referred to as "taxable income" undersection 3l- of the 1997 Tax Code. Net income must be computed with respect to a fixed taxable period. That taxable period is twelve months ending December 31st of every year, except in the case ofa corporation filing returns on a fiscal year basis, in which case net income will be computed on the basis of such fiscal year. Items of income and of expenditures, which, as gross income and deductions, are elements in the computation of net income, need not to be in the form of cash. It is sufficient that such items may be appraised in terms of money (9ec.37, Reu. Regs. No.2).

Bar Question (1995)

(1) (2)

NIRC).

What is 'gross income" for purposes of the income tax? How does "income" differ from "capital?" Explain.

Suggested answer:

'

(1)

Gross income nleans all income from whateuer source d,eriued, including (but not limited to) compensation' for

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seruices, including fbes, commissions, and similer items; gross incorne from business; gains deriued from dealings

in property; interest; rents; royalties; diuidends; annuities; prizes and winnings; pensions; and partner's distributiue share ofthe gross income ofgeneral professional partnership (5ec.28, NIRC).

(2)

Income differs from capital in that income is any wealth which flows into the to,xpayer other than q return of capital, while capital constitutes the inuestment which is the source of income. Therefore, capital is fund, while income is the flow. Capital is weqlth, while income is the seruice of wealth. Capital is the tree, while income is the fruit (Mad.rigal a. Rafferty, 38 Phil. 474). Income is liable to income tar, while capital or return of capital is exempt from tax.

Bar Question (1995) Mr. Francisco borrowed F10,000.00 from his friend, Mr.

Gutierrez, payable in one year without interest. when the loan became due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the F10,000.00 and at the time the loan was condoned.

Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain. Suggested answer: No, Mr. Francisco did not deriue any income from the cancellation

or condonation of his indebtedness. since it is obuious that the creditor merely desired to benefit the debtor in uiew of the absence of

consideration for the cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included in the lattet's gross income. The gift may, howeuer, be subject to d,onof s tqx at 30vo, since Mr. Francisco and Mr. Gutierrez are not mernbers of the family.

To whom income is taxable Income from sale of goods or properties is taxable to the ownerseller of the goods or properties, including rights thereto, but income from sale ofservices is taxable to the person who renders the services.

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ringe benefits tax, the tax is imposed on the employee wlro rcccives the l'ringe benefits paid by the employer on account of tlrc cmployer-employee relationship, although the tax is assumed rrnd puid by the employer to the BIR. The fringe benefit tax cannot lxr imposed on the employer that paid the fringe benefits because it is the payor of the expense; otherwise, income tax can be said to be irnposed not on the income, but on expense. In the case ofbranch profit rrrrnittance tax, the tax is imposed on the branch profit remitted by l,lrc Philippine branch to its foreign head office, although the tax is puid by the Philippine branch to the BIR.

llr thc

crrsc ol'f

Dividends are prima facie lhe income of the record-owner of the

slock and are taxable to such owner. But where the record-owner has nold the stock under an escrow agreement under which title is to be

rctained by him, the dividends received by such owner and applied in reduction of the purchase price are not taxable to him (Moore u. Commissioner, 724 Ft2dl 99t ). Ownership of building by an individual makes the assessment ugainst the corporation improper (Meret's, Ine. u. Cotnrnissioner, CTA Case No.895, May L7, 1982).

Final tq,x on interest income frorn loans to resid.ent horrowers i,s.a d.ireet ha,bility of FCDU. - The lOVo frnal tax on interest income of a foreign currency deposit unit from loans extended to resident clients is a direct liability of the FCDU. Although the payor-borrower is the one constituted by law to withhold and remit Lhe I\Vo tax, the laws and jurisprudence do not absolve the FCDU f rom payment ofthe tax, if the payor-borrower fails to perform its duty us withholding agent. Corollarily, the withholding agent may also be ussessed deficiency withholding tax as a penalty for failure to fulfill its obligation to withhold as required by law. This is different from t,he FCDU's liability to the tax @CBC a. Com.missioner, CTA Case No. 6207, Decernber 75, 2004). Failure of local borrower to withhold and remitthe tax does not exempt OBU/FCDU on the onshore interest i ncome ( ING Bank N.V. Maniln Branch a. Com.tnissioner, 2005). Where legal title ouer the Fund is transferred to the trustee, the ineome of the Fund. shall accrue to the trustee, not to the trustor. - In a trust, one person has an equitable ownership in the property, while another person owns the legal to such property. The equitable ownership ofthe former entitles him to the performance of certain duties and the exercise of certain powers by the latter. A person who establishes a trust is the trustor. One in whom confidence is reposed as regards property for the benefit

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of another is the trustee. The person fbr whose benerit the trust is created is the beneficiary.

DBP alleges that it is the actual owner of the Fund and its income, on the following grounds: (a) DBP made the contributions to the Fund; (b) the trustees of the Fund are merely administrators; and (c) DBP employees only have an inchoate right to the Fund. However, DBP counters that the Fund is subject of a trust, and that the Agreement transferred legal title over the Fund to the trustees. The income of the Fund does not accrue to DBp. Thus, such income should not be recorded in DBP's books of account.

Clearly, the trustees received and collected any income and profit derived from the Fund, and they maintained separate books of account for this purpose. The principal and income of the Fund will not revert to DBP, even if the trust is subsequently modified or

terminated.

The resumption of the Salary Loan Program (SLp) of DBp did not eliminate the trust or terminate the transfer of legal title to the Fund's trustees. The records show that the Fund,s Board of Trustees approved the SLP upon the request of the DBp Career officials Association. The DBP Board of Directors only confirmed the approval ofthe sLP by the Fund's trustees. The beneficiaries of the Fund are the DBP officials and employees who will retire under Commonwealth Act No. 186, as amended by R.A. 1616. Also, it is not always necessary that the beneficiaries should be named or even be in esse (existence) at the time the trust is created in his favor. It is enough that the beneficiaries are sufficiently certain or identifiable (DBP u. Cornrnission on Aud.it, G.R. No. 144516, Februaryt 1I, 2004).

Source Rules The source rules to determine whether income shall be treated as income from within or outside the Philippines can be found in section 42 ofthe 1997 Tax code. There are different source rules for different types of income. The following incomes are considered as income from sources within the Philippines:

1.

Interests: Resid.ence of the debtor or obligor.

- If the obligor or debtor (corporation or otherwise) is a resident of the Philippines, the interest income is treated as income from within the Philippines. It does not matter whether the loan agreement is signed in the Philippines or abroad or

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the loan proceeds will be used in a project inside or outside

the country.

2.

Dividendsz Resid'ence of the corporation paying d.iaid.end. - Dividends received from a domestic

corporation or from a foreign corporation are treated as income from sources within the Philippines, unless less ttranSOVo ofthe gross income of the foreign corporation for the three (3)-year period preceding the declaration ofsuch dividends was derived from sources within the Philippines, in which case, only the amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources shall be treated as income from sources within the Philippines.

3.

Services: Place of performance of the seraice. - If the service is performed in the Philippines, the income is treated as from sources within the Philippines.

Gross income from sources within the Philippines includes compensation for labor or personal services performed within the Philippines, regardless of the residence of the payor, of the place in which the contract for seruice was made, or of the place of payment.If a specific aqount is paid for labor or personal services performed in the Philippines, such amount shall be included in the gross income. Ifthere is no accurate allocation or segregation ofcompensation for labor or personal services performed in the Philippines, the amount to be included in the gross income shall be determined on apportionment of time basis; i.e., there shall be included in the gross income an amount which bears the same relation to the total compensation as the number of days of performance of the labor or services within the Philippines bears to the total number of days of performance of labor or services for which the payment is made. Wages received for services rendered inside the territorial limits of the Philippines and wages of an alien seaman earned on a coastwise vessel are to be regarded as from sources within the Philippines (Sec. 155, Reu. Regs. No. 2).

A non-resid.ent alien is taxed. only on her comrnission

incomn for seraices rend.ered. in the Philippines. - Baier-Nickel, a non-resident German, is the President ofJubanitex, Inc., a domestic corporation engaged in manufacturing, marketing, acquiring, importing and exporting and selling embroidered textile products. Through its General Manager, the corporation engaged the services of Baier-Nickel as commission agent, who will receive 107o sales

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commission on all sales actually concluded and collected through her efforts. In 1995, Baier-Nickel received commission income, which Jubanitex withheld r|vo and remitted to the BIR. Baier-Nickel filed her income tax return on October 17 ,IggT and on April 14, 199g, she filed a claim for refund, contending that her commission income is not taxable in the Philippines because it was compensation for her services rendered in Germany. Non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income tax on their income received from all sources within the Philippines. The underlying theory is that the consideration for taxation is protection oflife and property and that the income rightly to be levied upon to defray the burdens of the Government is that income which is created by activities and property protected by the Government or obtained by persons enjoying that protection. The important factor, therefore, which determines the source ofincome ofpersonal services is not the residence ofthe payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered (Boier-Nickel v. Commissioner, GR, No. 156BO5, Febrttanyt IZ, 2003).

In this case, however, the appointment letter of Baier-Nickel, as agent of Jubanitex, stipulated that the activity or the service which would entitle her to rovo commission income, are sales actually concluded and collected through her efforts. what she presented as evidence to prove that she performed income-producing activities abroad were copies of documents she allegedly faxed to Jubanitex and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sares orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while Baier-Nickel was in Germany, she sent instructions/orders to Jubanitex. Thus, claim for refund was denied (Commissioner a. Baier-Nickel, GJ. No. ISBZSB, August 2g, 2006). Income from turnkqy contract with onshore and, offshore - while the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two (2) sets ofship unloader and loader, the

portiona.

boats and the mobile equipment for the NDC project and the ammonia

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storage tanks and refrigeration units were made and completed

in

Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the offshore Portion such as steel sheets, pipes and structures, electrical and instrument apparatus, were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture ofthe materials and equipment under Japanese Portion Yen I were made and completed in Japan. These services were rendered outside the taxingjurisdiction ofthe Philippines and are therefore not subject to tax on the part of a foreign corporation (Commission'er a. Marubeni Corporation, G.R. No. 737377, December 78,2007).

Bar Question (1994) Bates Advertising Company is a non-resident corporation duly organized and existing under the laws of Singapore. It is not doing business and has no office in the Philippines. Pilipinas Garment, Inc., a domestic corporation, retained the services of Bates to do all the advertising ofits products abroad. For said services, Bates'fees are paid through outward remittances. Are the fees received by Bates subject to any withholding tax?

Suggested answer: The fees paid to Bq,tes Aduertising Company, a non-resident are foreigru corporation, are not subject to withholding tax, since they not subject to Philippine income tox. They are exempt because they d.o not constitute income from Philippine sources, the same being compensation for labor or personal seruices performed outside the Philippines ( Sec. 36tcl [3] and Sec. 2 5 [b] [ 1], N IRC).

International shipping line. - In the case of an international shipping line, "Gross Philippine Billings" means gross revenue

whether for passenger, cargo, or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents (Sec. 28[A][3][b], NIRC).

International air canrier. - In the case of an international air carrier, its Gross Philippine Billings (GPB) shall be subject to income tax. The term "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous

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and uninterrupted flight, irrespective of the place of' sale or. issue and the place of payment of the ticket or passage document. Tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings, if the passenger boards a place in a port or point in the Philippines. However, for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion ofthe cost ofthe ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings (Sec.28[A][S][a], NIRC, as implemented by Reu. Regs. No. 15-2002). This new regulation removes the uncertainty as to the amount of GPB an international air carrier shall declare for income tax purposes. Beginning 2013, an international air carrier may be entitled to the preferential income tax rate under the tax treaty or even exempt from Philippine income tax, subject to rules on reciprocity on revenues from transport ofpassengers from the Philippines to a foreign port

(R.4. 10378, March 27,2013).

British Overseas Airways Corporation (BOAC) is an offline international air carrier. since it was not granted a certificate of Public Convenience and Necessity to operate in the philippines, it did not carry passengers and./or cargo to and from the philippines, although during the period covered by the assessment, it maintained a general sales agent in the Philippines not of a temporary character, which was responsible for selling BOAC tickets covering passengers and cargoes. The Court ruled that the source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the philippines, it is sufficient that the income is derived from activity within the Philippines. In BoAC's case, the sale of tickets in the philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in philippine currency. T}:.e situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration for such protection, the flow ofwealth should share the burden of supporting the government. A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. The test of taxability is the source, and the source of income is that activity which produced the income. The word "source" conveys one essential idea, that of origin, and the origin of the income is the philippines

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(Commissioner u. British Overseas Airuays Corporation, 749 SCRA 395).

Bar Question (1994) Caledonia Aircargo is an off-line international carrier without any flight operations in the Philippines. It has, however, a liaison office in the Philippines which is duly licensed with the Securities and Exchange Commission, established for the purpose of providing passenger and flight information, reservation and ticketing services.

Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine office subject to tax? Suggested answer: The reuenues in the Philippines of Caledonia Aircargo as an"offline" q,irline from ticket reseruation seruices are taxable income from "uthateuer sou.rce' under Section 28(a) of the Tax Code. This case is analogous to Commissioner u. BOAC (G.R. Nos. 65773-74, April 30, 1987), where the Supreme Court ruled that the incon'te receiued in the Philippines frorn the sale of tichets by an "off-line' airline is tqxable as income from whateuer source.

Bar Question (2005; 2009) An international airline with no landing rights in the Philippines sold tickets in the Philippines for air transportation. Is income derived from such sales of tickets considered taxable income of the said international air carrier from Philippine sources under the Tax Code? Explain.

Suggested answer: No. While the tickets are sold here by the international airline, this is for carriage of persons, etccess baggage, cargo and mail not originating from the Philippines, because the airline has no landing

rights in the Philippines. The income from the sale of tickets is actually the gross ret)enue deriued frorn the carriage ofpersons, excess baggage, cargo and mail (tnd these reuenues are considered as income from Philippine sources only if the flight originates from the Philippines in a continuous and uninterupted flight, irrespectiue of the place of piyment of the ticket or passoge d.ocu*ent (Sei. 28tAlt\ltal, NIRC). Accordingly, the income mentioned is not deriued from Philippine sources.

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Bar Question (1993) Pacific, Inc. is engaged in overseas shipping.

within tlrc PhiLippines

It time

chartered

one of its ships to a Japanese company on a five-year term. The charter was consummated through the efforbs of Kamino Moto, a Tokyo based

broker. The negotiation took place in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino Moto $SO,0OO.OO. your opinion is sought

whether Pacific, Inc. should withhold the tax before sending ihe compensation of Kamino Moto. Suggested answer: The compensation of Kamino Moto is not subject to withhotding ta;x- compensation for labor or personal seruices performed outsid,e

the Philippines are considered as income from sources without the Philippines (Sec. 36[c][3] and [aJ[S], NIRC). Kamino Moto's effort in consummating the Chq,rter is a form of labor or seruices.

(Sec. 42lAlL4l, NIRC). Considering that XYZ is a non-resident foreign corporation, such royalty income is subject to

the 30Vr, final withholding income tax under Section 29(B) of the Tax Oode, such tax to be withheld by ABC and paid in the sarne rnanner as prouided in Section 58 of the Toa Code. XYZ does not haue to file a Philippine income tqx, return on the royalty incorne. FoTVAT purposes, ABC must withhold q.nd assume the payment of the 12Vo VAT on the royalty income, which input tax can be credited against ABC's output tax for the taxable period.

5.

Sale of real propertyz Location ofreal property. - lf the real property sold is located within the Philippines, the gain is considered as income from the Philippines.

6.

Sale ofpersonal property: a.

considering further that Kamino Moto is a Tokyo-based brolzer, presumably q non-resident foreign corporation, it is taxuble only on income within the Philippines.

4.

Rentals and royaltiesz Location or use of the propertgt or interest in such propefty. If the property or interest is located or used in the Philippines, the gain or income is treated as income from sources within the philippines.

Any gain, profit or income shall be treated as -derived partly from sources within and partly from sources without the Phiiippines. b.

Bar Question (2010) ABC, a domestic corporation, entered into a software license agreement with xYZ, a non-resident foreign corporation based in the U.S. Under the agreement which the parties forged in the U.S., XyZ granted ABC the right to use a computer system program and to avail oftechnical know-how relative to such program. In consideration for such rights, ABC agreed to pay 1vo of Lhe revenues it receives from customers who will use and apply the program in the philippines. Discuss the tax implications of the transaction Suggested ansvrer: The royalty receiued by XYZ from ABC witt be subject to Philtppine income tax, because the source of the royarty iniome is from the Philippines. Rentals and royalties frorn property rocoted in the Philippines or from any interest in such property, incrud,ing rentals or royalties therefrom shall be treated as income from sources

Personal properby produced (in whole or in part) by the taxpayer within the Philippines and sold without the Philippines, or produced (in whole or in part) by the taxpa)'er without and sold within the Philippines

c.

Purchase of personal property within and its sale without the Philippines, or purchase of personal property without and its sale within the Philippines - Any gain, profit or income shall be treated as derived entirely from sources within the country in which sold. Accordingly, if the goods are shipped in a foreign port under "Free-on-Board (FOB) shipping point" arrangement, title to the goods is transferred at the foreign port and any gain from the sale ofsuch goods to a Philippine importer shall be treated as income from sources outside the Philippines. Shares of stock

in a domestic corporation

-

Gain,

profit or income is treated as derived entirely from sources within the Philippines, regardless of where the said shares are sold. Thus, a non-resident alien who owns shares of stocks of a domestic corporation

acquired through a foreign stock exchange is still liable to the Philippine income tax even if such shares are sold also through a foreign stock exchange.

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Enumeration of source rules aboae is not exelusivel reinsurance prentiums paid.to a foreign corporationis income from sources utithin the Philippines. - Reinsurance premiums remitted by a domestic insurance company to foreign reinsurance companies are considered income of the latter derived from sources within the Philippines. Since Section 53 (now Sec. 57) of the Tax Code subjects to withholding tax various specified income, among them, premiums, the generic connotation of each and every word or phrase composing the enumeration in subsection (b) is income. Perforce, the word "prerniu.rns" which is neither qualified nor defined by the law itself, should mean income and should include all premiums constituting income, whether they are insurance or reinsurance premiums. Section 24 (now Sec. 28) of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines, in order for its income from sources within the Philippines to be taxable. It subjects foreign corporations not doing business in the Philippines to tax for income from sources within the Philippines. If by source of income is meant the business of the taxpayer, foreign corporations not engaged in business in the Philippines would be exempt from taxation on their income from sources within the Philippines. Section BZ (now Sec. 42) of the Tax Code is not an all-inclusive enumeration; it provides that*the following items of gross income shall be treated as gross income from sources within the Philippines." It does not state or imply that an income not listed therein is necessarily from sources outside the Philippines (Alerand.er Howd.en & Co. a. Collector, L-Ig\g2, April 74, 7965).

Definition of lncome nlncom"e' means an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, income means cash or its equivalent (Conwi a. CTA and Comrnissioner, 213 SCRA83).Income is a flow of service rendered by capital bythe payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time (Mad,rigat o. Rafferty, 38 Phil. 414) .I'nconte covers gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets (Fisher u. T?inid.ad,, supra).Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as to their

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disposition (James u. U.S., 366 U.S.2f3). Thus, income from illegal drug and gambling activities is taxable as well Income may include: (a) increase in inventory at the end of the taxable year; however, mere increase in the value of property is not income but increase in capital; (b) transfer of appreciated property to employee for services rendered; and (c) just compensation paid by government for property acquired by expropriation. The following are not income: (a) deposit of property that does not increase networth of taxpayer (e.9., the increase in asset has a corresponding increase in liability); (b) increase in networth is due to correction oferrors in book entries; (c) voluntary assessments by a corporation paid by its shareholders under Revenue Regulations No. 2; (d) security deposit paid to a lessor until it is applied in payment of accrued rent; (e) contributions by lot owners for the memorial park care fund; and (f) loan proceeds received by the borrower.

Bar Question (2012) Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in Makati City in 1970 at a consideration of F1 million. In 2011, the land, which remained undeveloped and idle, had a fair market value of F20 million. Mr. Antonio Ayala, another Filipino citizen, is very much interested in the property and he offered to buy the same for F20 million. (a) Is Mr. Castillo liable for income tax in 2011 based oR the offer to buy by Mr. Ayala? (b) Should Mr. Castillo agree to sell the land in 2Ol2 for F20 million, subject to the condition as stated in the Deed of Sale that the buyer shall assume the capital gains tax thereon, how much is the Income tax due on the transaction and when must the tax return be filed and the tax be paid by the taxpayer?

Suggested answers:

'

a.

Mr. Castillo is not liable for income tax in 2077 because ruo income is realized by him during that year. To'x liability for incom.e tq.x attaches only if there is a gain reelized resulting from a closed and complete transaction (Mad'rigal u. Rafferty, G.R. No. L-72287, August 7,7978).

b.

He shall be liable to pay the 6Vo capital gains tax based on the gross selling price of the property of P20 million plus the capital gains tq,x qssumed by the buyer (following the doctrine of constructiue receipt of income). He should file

138

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the return within 30 days from the dote of sale and pay the tar as he fi.les the return (Sec. 24[DJ, NIRC).

Bar Question (2000)

a)

What is meant by taxable income?

Suggested answer: "Ta"rable incomc" means the pertinent items of gross income in the Tar Code, less the deductions and/or personal and additionql exemptions, if any , authorized for such types of incorne by specifi.ed

the Tq.x Code or other special laws (Sec. 37, NIRC).

Bar Question (1991) ABC Computer Corp. purchased some years ago Membership Certificate No. 7 from the Calabar Golf Club., Inc. for F300,000.00. In 4 September 1985, it transferred the same to Mr. John Johnson, its American computer consultant, to enable him to avail of the facilities of the Club during his stay here. The consultancy agreement expired two (2) years later in the meantime, the value of the Club share appreciated and what was purchased by the corporation at F300,000.00, commanded a market value of F800,000.00 in 1987. Before he returned home a few days after his tenure ended, Mr. Johnson transferred the subject share to Mr. Robert James, the new consultant of the firm and the newly designated playrng representative, under a Deed ofDeclaration ofTrust andAssignment of Shares, wherein the former acknowledged the absolute ownership of ABC Computer Corp. over the share, that the assignment was without any consideration and that the share was placed in his name because the Club required it to be done.

1)

2l

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Hrrggcnted answer:

t

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was really no income realized or receiued considering that in the

be

held to

be a

gift. To

be

considered

gill uithin the context of the NIRC, there must

be a transfer of ,ttuttt'rsh,ip or a quantifiable interest. More importantly, the transfer of lltr ntenr,hership certificate was merely a designation of the consultant Itt lx, Ihe "playing representatiue" of ABC Computer Corporation in

tltt' (iu.lrrhor Golf Club.

Bar Question (1996) X, a multinational corporation doing business in the Philippines rkrrrrtcd 100 shares of stock of said corporation to Mr. Y, its resident

nuur.rger in the Philippines.

) (2) (l

What is the tax liability, if any, of X corporation?

Assuming the shares of stocks were given to Mr. Yin consideration of his services to the corporation what are the tax implications? Explain.

Suggested answer:

(1)

Foreign corporations effecting a donation are subject to donot's tax only if the property donated is located in the Philippines. Accordingly , donation of a foreign corporation of its own shares of stochs in fauor of resident employees is not subject to donor's tax (BIR Ruling No. 018-87, January 26, 1987). Howeuer, if 857o of the business of the foreign corporation is locq.ted in. the Philippines or the shq.res donated haue acquired business situs in the Philippines the donation m.ay be tqlced in the Philippines subject to the rule of reciprocity.

(2)

If

The assignrnent or transfer of shares from Johnson to Jarnes is not subject to income tax. There had been no real change of ownership that took place. There hauing been no actual sale or exchange, no income tan, incidence can be said to haue occurced. In addition, there Deed of Declaration of Trust and Assignment of Shares, the absolute ownership of ABC Cornputer Corporation was explicitly recognized.

l:t9

ls Lhe said assignment a gilt and, therefore, subject to gift

Is the assignmenVtransfer of the shares from Johnson to James subject to income tax?

Suggested answer:

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The

the shares of stochs were giuen to Mr. Y in consideration of his seruices to the corporation, the same shall constitute tqxable compensation income to the recipient because it is a compensation for seruices rendered under an employeremployee relationship, hence, subject to income tax.

par ualue or stq.ted ualue of the shares issued

tl.eductible ex,pense to the corporation, prouided ruithholding tox on wages.

u.lso

constitutes

it is subjected to

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Distinctions between Capital and lncome The essential differences between follows:

1. 2.

!

llunk. Accordingly, the First National Bank requested the Mcllon Bank to effect the transfer. Unfortunately, the wire sent by Mellon Bank to Manufacturers Hanover I3ank, a correspondent bank ofPrudential Bank, indicated the amount transferred as "US $1,000,000.00" instead of US $1,000.00. Hence, Manufacturers Hanover Bank transferred one million dollars less bank charges to Prudential Bank for the account of Victoria Javier. On June 3, 1977, Javier opened a new dollar account (No. 343) in the Prudential Bank and deposited $999,943.70. Immediately thereafter, Victoria Javier and her husband, Melchor Javier, Jr., made withdrawals from the account, deposited them in several banks only to withdraw them later in an apparent plan to conceal, launder and dissipate the erroneously sent amount. Spouses Melchor and Victoria Javier filed their consolidated income tax return for the year with the notation "The taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an'error' and is now subject of litigation," but they did not declare it as income. The court ruled that the amount received is income subject to tax, but the tax return filed cannotbe considered as fraudulent because petitioner literally "laid his cards on the table" for respotrdent to examine. Error or mistake of fact or law is not fraud (Cornmissioner a. Jaaier, L99 SCRA 824).

A fund of property existing at an instant of time is called capital, while a flow of services rendered by that capital by the payment of money from it or any otherbenefit rendered by a fund of capital in relation to such fund through a period of time is called income;

4.

Capital is the tree, while income is the fruit; labor is a tree, income the fruit; property is a tree, income the fruit (Mad.rigal a. Raffergt, supra);

5.

Return or recovery of capital is not subject to income tax, while income is subject to income tax.

Tests in determining lncome a.

Realization test.

- There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation

which would result in the receipt of income (Eisner a. Macontberr 2S2 U.S. f89). Thus, stock dividends are not income subject to income tax on the part of the stockholder, because he merely holds more shares representing the same equity interest in the corporation that declared the stock dividends (Fisher a. T?inid.ad, supra). b.

Income from whateuer source,

return or repay that which would otherwise constitute a gain. To collect a tax would give the government an unjustified preference as to the part of the money that rightfully and completely belongs to the victim. The embezzler's title is void (Commissioner a. Wilcox, 286 u.s.417,424). On May 27, 1977, Dolores Ventosa requested the transfer of US$1,000 from the First National Bank, West Virginia to Victoria Javier in Manila through the Prudential

- All income not

expressly excluded or exempted from the class oftaxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income, and regardless of the source of income, is taxable (Blas Gutierrez a. Collector, 707 Phil. 773),

Claimofright d.octrine. - Ataxable gain is conditioned upon the presence ofa claim ofright to the alleged gain and the absence of a definite unconditional obligation to

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Capital is wealth, while income is the service of wealth;

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3.

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d.

Economic benefit test. - Any economic benefit to the employee that increases his networth (i.e., total assets Iess total liabilities), whatever may have been the mode by which it is effected, is taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise (not upon the grant or vesting of the right) (Commissioner a. Smith, 324 AS 177).

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All of the above tests are followed in the Philippines for purposes of determining whether income is received by the taxpayer or not during the year.

rrlcrncnts that are generally considered are: (a) the selection and rrnxrg(|rnent of the employee; (b) the payment of wages; (c) the power ol'rlismissal; and (d) the employer's power to control the employee wil,lr respect to the means and methods by which the work is to lxr acr:omplished. It is the so-called "control test" that is the most l,lrrr

Significance of knowing the Type or Character of lncome In general, it is important to know the types of income realized by the taxpayer, since the Philippines has adopted the semi-global or semi-schedular tax system. Under this tax system, compensation income, business and professional income, capital gains, passive income, and other income not subject to final income tax, are added together to arrive at the amount of gross income of an individual, and afber deducting the allowable deductions from business and professional income, capital gains, passive income, and other income not subject to final income tax as well as personal and additional exemptions, if qualified, the graduated income tax rates ranging from five percent (5Vo) to 32Vo are applied on the resulting net taxable income to arrive at the income tax due and payable. The passive investment income are generally subject to the final withholding tax; hence, the income recipient does not file a tax return covering such passive investment incomes, although the withholding agent-payor of income is held responsible under the law to deduct, withhold and remit the final income tax thereon to the BIR.

Capital assets subject to the final capital gains tax such as shares of stock of a domestic corporation and real property located in the Philippines, except when sold or transferred by a dealer in securities or real estate dealer, are covered by the capital gains tax return; hence, not included in the taxable income of the individual taxpayer subject to the global tax system and the graduated income tax rates.

The rules for individuals discussed above apply also to

a

corporation, except that the corporation does not receive compensation

income and are not entitled to deduct personal and additional exemptions from their gross income during the year.

Compensation lncome In general, the term ocompensation'meants all remuneration for services performed by an employee for his employer under an employer-employee relationship (See Sec. 2.78.3, Reu. Regs. No. 2-98, as amended), unless specifically excluded by the Tax Code. In determining the existence of an employer-employee relationship,

iurprrrtant element (Brotherhood. Labor Unity Moaemcnt of the Ithllippinee v. Zamora, L-48M5, Januany 7, 7987).

Who is an employee?

srj

[.'or taxation purposes, a director is considered an employee rrrrrlrrr Section 5 of Revenue Regulations No. L2-86, to witi "An irrdividual, performing services for a corporation, whether as an ollicer and director or merely as a director whose duties are confined l,o attendance at and participation in the meetings of the Board of I)irectors, is an employee." The non-inclusion of the names of some of'petitioner's directors in the company's Alpha List for 1997 does rrot lpso facto create a presumption that they are not employees ol'the corporation, because the imposition of withholding tax on

mmpensation hinges upon the nature of work performed by such individuals in the company. Moreover, Section 2.57.2.4(9) of Revenue Regulations No. 2-98 cannot be applied to this case as the latter is u later regulation, while the accounting books examined were for Lhe year t997 (Fi\st Lepanto Taisho Insurance Corporation a. CIR, Gn. No. 797777, April 10,2013). INOTE: Beginning L998, a director who is not an official or empl.oyee of a corporation is NOT an employee of said corporation; hence, the applicable withholding tax to he deducted from such income shall be 10Vo EWT, which is creditable against his ordinary income tos liability for the year, prouided it is euid.enced by BIR Form 2307. Howeuer, said directoy's fee is tqlced also under the global ta.x systernl. The term

oetnployee"

refers to any individual who is the recipient

of wages and includes an officer, employee or elected official of the government or any political subdivision, agency or instrumentality thereof. It includes also an officer of a corporation. Thus, a juridical entity that performs services to another person is not an employee of the latter. Accordingly, the proper withholding tax on such income payment is the expanded withholding tax (not withholding tax on compensation income). To create an employer-employee relationship, the person that performs the service to another must be an individual.

The term ocompensation incorne" means all remuneration for services performed by an individual employee for his employer,

144

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including the cash value of all remuneration paid in any medium other than cash. There are various types of taxable compensation income, such as salaries, wages, bonus, remuneration, honorarium, benefits and allowances (including representation and transportation allowance (RATA), personal emergency relief allowance (PERA), longevity pay, subsistence allowance, hazard pay, annuities, pensions, etc. Additional compensation allowance (ACA) given to government employees pursuant to E.O. 219 shall not be subject to withholding tax pending its formal integration into the basic pay. While its nature shall continue to be that of compensation, it shall be treated as part of the "other benefits" which are excluded from compensation income, provided that the total amount does not exceed F30,000 (BIR Ruling No. 034-2002, August 16, 2002 modified BIR Ruling No. 779-99, Nouember 22, 1999). BIR Ruling Nos. 120-96, November 8, 1996 and 062-2000, November 20,2000 exempt benefits and allowances such as longevity pay, subsistence allowance, and hazard pay granted to uniformed policemen and jail guards under R.A. 6975 (DILG Act of 1990). However, if the recipient is an AFP personnel, all remunerations (monetary and non-monetary) are taxable, except allowances for quarters, clothing and subsistence which are exempt from income tax pursuant to RMC 15-87 (BIR Ruling No. 143-96,

'"''''"''nf,',:,Y*"ill'lil,',1',""

Articles 34 and 37, Vienna Convention on Diplomatic Relations, exempts: (a) diplomatic agents who are not nationals or permanent residents of the Philippines; (b) members of family of diplomatic agent forming part of his/her household who are not Philippine nationals; (c) members of administrative and technical staff of the mission plus members oftheir families who are not Philippine nationals orpermanent residents of the Philippines; (d) members of service staffof the mission who are not Philippine nationals who are not Philippine nationals or permanent residents of the Philippines; and (e) private servants of members ofthe mission who are not Philippine nationals or permanent residents of the Philippines. The applicable mles are as follows:

Aid Agencies of Foreign Governments JICA: Only JICA resident representatives and his/her staff who were "dispatched from Japan" shall not be subject to Philippine income tax.

GIZ (Germany): Only German specialist of German construction and consulting firms shall be exempt.

AUSAID: Salaries and other remuneration paid by the

Gov.ernment of Australia or by Australian personnel, firms, institutions or organizations to any person performing work under the Memorandum shall be exempt.

Compensation lncome of Philippine Nationals and Aliens Employed by Foreign Governments and lnternataonal Organizations in the Philippines

CIDA: Only Canadian personnel who derive income from Canadian aid funds as provided under a subsidiary

Section 23 of the Tax Code lays down the general principles

agreement shall be exemPt.

in taxing citizens and alien individuals. Resident citizens are

Since the withholding tax is merely a method of collection of income tax, the exemption from withholding taxes on compensation income of foreign governments/embassies/diplomatic missions and international organizations does not equate to the exemption from paying the income tax itself by the recipients of said income.

r45

Foreign Embassies and Diplomatic Missions

December 24, 1996).

taxed on worldwide income, while resident aliens are taxed only on their Philippine-source income. As an exception to the general rule, most international agreements which grant withholding tax immunity to foreign governments/embassies/diplomatic missions and international organizations also provide exemption to their officials and employees who are foreign nationals and/or nonPhilippine residents from paying income taxes on their salaries and other emoluments.

'''^"'"

Advisory Committee on Voluntary Foreign Aid-USA CARE: Only CARE employees who are not Philippine nationals are exempt.

FPPI or PLAN: OnIy non-Filipino staffmembers of the PLAN who receive salaries and stipends in US dollars shall be exempt.

Aid Agencies

'

Ford Foundation, Rockefeller Foundation, Agricultural Dev Council, and Asia Foundation: Only non-Filipino staff members thereof who receive salaries and stipends in US dollars shall be exempt.

146

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IRRI (PD 728 and RA 3538)

Catholic Relief Services

-

NCWC and Tools for Freedom

Foundation (R.A.4481)

Asian Development Bank (ADB)

-

Section 45(b), Article

XII

of the Agreement between ADB and RP: Only officers and staff of ADB who are not Philippine nationals shall be exempt from Philippine income tax (because exemption is "subject to the power of the Government to tax its nationals." Any exemption from Philippine income tax must be granted under duly recognized international

agreements or particular provisions of existing law. Affected individuals (of foreign embassies and international organizations) who were not granted such exemption must file their income tax returns and pay the tax due thereon on or before the 15th day ofApril following the close ofthe taxableyear (RMC 31-2013, April 72,2013).

Statutory Minimum Wage Compensation income falling within the meaning of "statutory minirnum u)age"t (SMW) under R.A. 9504, effective July 6, 2008, as implemented by Revenue Regulations No. 10-2008 dated July 8, 2008, shall be exempt from income tax and withholding tax. Holiday pay, overtime pay, night shift differential pay, and hazard pay earned by Minimum Wage Earner (MWE ) shall likewise be covered by the above exemption, provided that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefi.ts, benefits in excess of the allowable statutory amount of F30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/leer entire earnings are not exempt from income tax and withholding tax.

Hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps, which expose them to gteat danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and withholding tax.z r"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by Regional

Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Emplo;nnent Statistics ofDOLE. The RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax for this purpose. 2See Sec. 1, Rev. Regs. No. 10-2008, July 8, 2008.

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I47

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Wlrrrrr irn awarrd of'backwages is made, there is an acceptance llrrrl, l,lrc rrnrlrloyee was illegally or unjustly dismissed, and the lrrrckwrrgcs are the salaries he was supposed to have earned had Irl rrol, becn dismissed. It is as though he was not separated from crrrlrlo.yrrrent, and as though he actually rendered service (Escareal t. (iourt of Tax Appeals, et al., CA-GR SPNo. 41989, September :tlr, l99tl).In this connection, RMC 39-2012 dated August 3,2012 lrrovirkrs that "the employee should report as income and pay the r', rrrrrslxrnding income taxes by allocating or spreading his back wages, u[uwulces and benefits through the years from his separation up l,o t,hct final decision of the court awarding the backwages. The said lrr rck wages, allowances and benefits are subject to withholding tax on wrl{()s. However, when the judgment awarded in a labor dispute is lrrlirrced through garnishment of debts due to the employer or other t'rrr
Backwages, Allowances, and Benefits Awarded in Labor Dispute Backwages, allowances, and benefits awarded in a labor dispute constitute remuneration for services that would have been performed by the employee in the year when actually received, or during the period of his dismissal from the service which was subsequently ruled to be illegal. The employee should report as income and pay the coruesponding income taxes by allocating or spreading his backwages, allowances and benefits thru the )zears from his separation up to the final decision of the court awarding the backwages.

' The backwages, allowances, and benefits are subject to withholding tax on wages.

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However, when the judgment awarded in a labor disputc is enforced thru garnishment of debts or having in possession or control of such credits (e.g., banks or other financial institutions)

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t) 'l'ltt lxtsis ol'X's income tax would

depend on whether is an employee or a practicing corporate l11.11tyttt'. ll'his employer is an employee, the basis of Xs irtcrtrru' tux is P6,500.00 equiualent to the total of the httsi.c sulory and the ualue of the board and lodging.

(2) lf the employer is an obstetrician who is self-employed, the basis of his income will only be P5,000.00, if it is

Compensation shall not include remuneration paid: (a) for agricultural labor paid entirely in products of the farm where the labor is performed; or (b) for domestic service in a private home; or (c) for casual labor not in the course of the employer's trade or business; or (d) for services by a citizen or resident ofthe Philippines for a foreign government or an international organization (Sec. 78[N, NIRC).

(1) (2)

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'l'h is is so becquse the employer hqs no place of business tohere the free bo&rd and lodging may be giuen. On the ril.h.er hand, if the corporate lawyer is a practicin g lawyer (self'-entployed), X should be taxed only on P5,000.00, ltnnided that the free board and lodging is giuen in the business premises of the lawyer and for his conuenience, u,n.tl that the free lodging was giuen to X as a corudition lbr his employment.

Items Not lncluded as Compensation lncome

X is employed as a driver of a corporate lawyer and he receives a monthly salary of F5,000.00 with free board and lodging with an equivalent value of Fl,500.00.

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In order to ensure the collection of the appropriate withholding tax on wages, garnishees of a judgment award in a labor dispute are constituted as withholding agents with the duty to withhold tax on wages equivalent to five percent (57o) of the portion of the judgment award, representing the taxable backwages, allowances and benefits (RMC 39-2012, August 3,2072).

Bar Question (1996)

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would normally release and pay the entire garnished amount to the employee. As a result, employers who are mandated to withhold taxes on wages cannot withhold the appropriate tax due thereon.

As a general rule, the income recipient is the person liable to pay the income tax. In order to improve the collection of income on the compensation income of employees, the State requires the employer to withhold the tax upon payment of the compensation income, such that at the end of the calendar year, the employee needs only to file a tax return and no tax is paid, because his total withholding tax during the year is equal to his income tax liability. lBeginning 2002, qualified employees need not file their income tax returns and the employer may file a substituted return for its employees.l

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prouen thq.t the free board and lodging is giuen within the business premises of said employer for his conuenience and that the free lodging is required to be accepted by X as condition for employrnent. Otherwise, X would be taxed on F6,500.00.

Bar Question (1999) A Oo., a Philippine corporation, has an executive (P) who is a l,'ilipino citizen. A Co. has a subsidiary in Hong Kong IHK Co.] and will irssign P for an indefinite period to work full time for HK Co. P w ill lrring his family to reside in HK and will lease out his residence rrr l,lrc Philippines. The salary of P will be shouldered 50Vo by A Co. wlrilrr lhe other SOVo plus housing, cost of living and educational rrllow:rnces of P's dependents will be shouldered by HK Co. A Co. will r:rrdit L}l'e 507o of P's salary to P's Philippine bank account. P will sign the contract of employment in the Philippines. P will also lrc rct:civing rental income for the lease of his Philippine residence.

Arc these salaries, allowances and rentals subject to the I'lrilippine income tax?

What will be the basis of X's income tax? Why?

Srrggested answer:

Will your answer in question (1) be the same ifXs employer is an obstetrician? Why?

'I'he salqries and, allowances receiued. by P q,re not subject to l'h il.ippine income tax. P qualifi.es us ct non-resident citizen because he l,'uoes the Philippines for employment requiring him to be physically

'

150

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present abroad most of the time during the taxable year (Sec' 22lEl' NIRC). A ruon-resident citizen is taxable only on income deriued from Philippine sources (Sec. 23, NIRC). The salaries and allowances receiued.frombeing employed abroad are incomes from without because these are cornpensation for seruices rendered outside ofthe Philippines (Sec.42, NIRC).

Howeuer, P is taxct'ble on rental income for the lease of his Philippine resid,ence because this is an income deriued from within, the leased. property being located in the Philippines (Sec. 42, NIRC)'

Bar Question (2004) Citing Section 10, Article VIII of the 1987 Constitution, which provides that salaries ofjudges shall be fixed by law and that during iheir continuance in office their salary shall not be decreased, a judge of MM Regional Trial court questioned the deduction of withholding taxes from his salary since it results into a net deduction ofhis pay. Is the contention ofthe judge correct? Reason briefly. Suggested answer: No. The contention is incorrect. The salaries of judges are not tax-exempt q.nd, their taxabitity is not contrary to the prouisions of section 70, Article vIII of the constitution on the non-diminution of the salaries of the judiciary during their continuance in office. The clear intent of the constitutional commission that framed the constitution is to subject their salaries to tax as in the case of all taxpayers. Hence, the d.ed.uction of withholding taxes, being a n?anner of collecting the income tuc on their salary, is not a diminution contemplated by the fundamental law (Nitafan, et al. u- Commissioner, 752 SCRA 284

t1e87l).

Fringe Benefits To ensure that fringe benefits are subjected to income tax,

Section 33 of R.A. 8424, which imposes a fringe benefits tax on the fringe benefits received by supervisory and managerial employees, was enacted. The law mandates that the employer shall assume

the fringe benefits tax imposed on the taxable fringe benefits of the managerial or supervisory employee, but allows the employer to deduct such fringe benefit tax as a business expense, when the grossed-up monetary value (composed of the value of the fringe benefits and FBT) is authorized as a business deduction. In other

lrtttr,Wt'uLttot,trtttr;'l'nxt:s

151

words, the l'B'I'on the f'"inge benefits of the employees. assumed by the employer, loses its character as an income tax in the hands ofthe employer. However, the fringe benefits ofrank-and-fiIe employees are treated as part of his compensation income subject to income tax and withholding tax on compensation income, which must be withheld and deducted by his employer from the compensation income of the employee.

Fringe benefits received by employees, except rank-and-file employees, including those in special economic zones and freeport zones, are subject to the 32Vo normal fringe benefits tax (effective January l-, 2000), or 257o on the fringe benefits received by nonresident aliens not engaged in trade or business in the Philippines, or l57o imposed on the fringe benefits received by an alien individual employed by a regional or area headquarters, regional operating headquarters, offshore banking units, or foreign petroleum service contractors or sub-contractors, or any of their Filipino individual employees who are employed and occupying same positions as those held by the alien employees (BIR RuIinS No. 04-2000, January 5, 2000).

As a general rule, the income recipient is the person liable to pay the income tax.3 In order to improve the collection of income on the compensation ineome of employees, the State requires the employer to withhold the tax upon payment of the compensation income, such that at the end of the calendar year, the employee needs only to file a tax return and no tax is paid, because his total withholding tax during the year is equal to his income tax liability.a It had been observed by government, however, that many of the fringe benefits paid by the employer to his employees are not being subjected to income tax and withholding tax on compensation. To plug this loophole, R.4.8424,5 which imposes a fringe benefits tax on the fringe benefits received by supervisory and managerial employees, was enacted in 1997 to take effect on the first day of the following year. The law mandates that the employer shall assume the fringe benefits tax imposed on the taxable foinge benefits of the managerial or supervisory employee, but allows the employer to deduct such fringe benefit tax as a business expense from its gross income. sWhile the FBT is mandated to be assumed by the employer,

it is still

a tax

irnposed on the income (fringe benefits) of the employee. aBeginning calendar year 20O2, qualified employees need not file their income tax returns and the employer may file a substituted return for the employees. 5FBT imposed in R.A. 8424 was implemented by Rev. Regs. No. 3-98.

t52

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However, the fringe benefits of rank-and-file employees are treated as part of his compensation income subject to income tax and withholding tax on compensation income, which must be withheld and deducted by his employer from the compensation income of the employee. Due to the different tax treatment of fringe benefits received by supervisory and managerial employees, on one hand, and those received by rank-and-fiIe employees, on the other hand, some say that the law is anti-poor and contravenes the fundamental principle that the income tax shall be imposed based on the taxpayer's ability to pay. This is also the reason why supervisory and managerial employees want to treat the amounts paid to them by their employers as fringe benefits, while the employer wants to consider the same payments as compensation income.

Fringe benefits received by employees, except rank-and-fiIe employees, in special economic zones and freeport zones are subject to the 32Vo norrnal fringe benefits tax (effective January 1, 2000), or 25Vo on the fringe benefits received by non-resident aliens not engaged in trade or business in the Philippines, or l57o imposed on the fringe benefits received by an alien individual employed by a regional or area headquarters, regional operating headquarters, offshore banking units, or foreign petroleum service contractors or sub-contractors, or any of their Filipino individual employees who are employed and occupying same positions as those held by the alien employees.6

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Fringe benefits of F18,000, which Philippine Long Distance 'l'cle phone Company granted per rank-and-file employee of the ('onr l):lny labor union in the form of education assistance in its recently ,'orrr:lrrdcd Collective BargainingAgreement, is exempt from the foinge lrr,rrclit,s tax on the part of the recipients.l0 )vrrrtime meal allowance furnished by a domestic corporation to its rrrnk-and-file and supervisory, professional and technical employees prrrsrrant to its Collective Bargaining Agreement is not subject to li'ingc henefits tax.r1 (

I)a nr.inimis benefits 'l'here are certain fringe benefits denominated as "d.e minirnis llcnefits"12 that are exempt from income tax and withholding tax, even il'rcurived by rank-and-file employees and supervisory or managerial r,rrrployees. These include:

o

Monetized unused vacation leave credits of private employees not exceeding 10 days;

o

Monetized value of vacation and sick leave credits paid to government employees;

Medical cash allowance to dependents of employees, not exceeding F750 per employee per semester or F125 per month;

Housing assistance granted by aPBZA-registered corporation to its expatriate employees who are directors ormanagers are considered as fringe benefits subject to the fringe benefits tax.7 The amount of rent subsidized by the company in behalf of its expatriate employee shall be treated as fringe benefit subject to the fringe benefits tax. However, where the amount of the lease is higher than the fringe benefit allowable, the excess shall be treated as income subject to income tax and withholding tax.8

Rice subsidy of F1,500 or one sack of 50 kg rice per month

amounting to not more than F1,500; Uniform and clothing allowance not exceedingP{,O0D per a,nnum;

Actual medicine assistance (e9., medical allowance to cover medical and healthcare needs, annual medicaVexecutive check-up, maternity assistance, and routine consultations, not exceeding F10,000 per clnnum;

The fringe benefits tax is imposed on 50Vo of the grossed-up monetary value of the leased motor vehicle. Thus, only l07o (6OVo less 40Vo) of the monthly car rental is subject to the fringe benefits tax ofthe firm engaged in the lease ofcars and other vehicles for use of its salesmen, executives and other employees, since Lhe 40Vo share 6BIR Ruling No. 04-2000, January 5, 2000. TBIR Ruling No. 208-99, December 28, 1999. sBIR Ruling No. 025-2001, June 13, 2001.

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Laundry allowance not exceeding F300 per month; Ruling No. 009-2000, January 4,2000. r"BIR Ruling No. 057-98, May 21, 1998. rIBIR Ruling No. 061-99, May 5, 1999. r2See Sec. 1, Rev. Regs. No. 10-2008, July 8,2008.

'$BIR

154

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Employees achievement awards (e.g., fbr length of service or

safety achievement, which must be in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding F10,000 received by employee under an established written plan which does

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(gcncrally when employee is rrxluircd to be on duty during the meal period).ra l,odging is excluded only if the employee must accept the lodging on the employer's business premises as a condition of his omployment.r6

not discriminate in favor of highly paid employees;

Stock Option Plans

Gifts given duringXmas and major anniversa4r celebrations not exceeding F5,000 per employee per clnnuffL;

A corporation grants options to its employees to buy its shares of stock at F150 per share. The employees exercised the options at the lime the shares of stock were selling at the stock exchange at F200 pcr share. There is additional compensation income of F50 per share .rt the exercise datelG (Commissioner a. Smith,324 U.5.177).

Daily meal allowance for overtime work and night/ graveyard shift not exceeding 257o ofbasic minimum wage on a per region basis (Beu. Regs. No. 5-2077, Mareh 16, 2O11).

The amount of "de minimis" benefits conforming to the ceiling herein prescribed shall not be considered in determining the F30,000 ceiling of "other benefits" excluded from gross income under Section 32(b)(7)(e) [Exclusions] of the Tax Code. However, ifthe employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the F30,000 ceiling. Any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. MWEs receiving'other benefits' exceeding the F30,000 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW.13 Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the BIR.

The prevailing judicial opinion is to the effect that generally, the value to the employee of living quarters and meals furnished in addition to salary constitutes income subject to tax. However, where the quarters and meals are furnished for the convenience of the employer, the ratable value of the same need not be added to the salary or cash compensation of the employee for income tax purposes (Hend,erson a. Collector, 7 SCRA 649, June 28, L957). The value of the meals is not taxable to the employee, if the meals are provided by the employer for a substantial non-compensatory business purpose 13Sec. 1, Rev. Regs.

No. 10-2008, July 8, 2008.

In BlE Ruling No. 119-2012, February 22, 2012, it was ruled lhat any income derived by the employees from their exercise of stock options is considered as compensation income subject to income tax and withholding tax. In said ruling, stock options were granted by the domestic corporations as part of compensation plan, and under the plan, the employees were given the right to buy a specified number of shares of a foreign corporation up to a specified time/period from the grant date, at a fixed price, regardless of the stock's future market price. The folloqing rules shall now be followed for stock option plans: 1.

Any income or gain derived from stock option plans granted

to managerial or supervisory employees, which qualifies as fringe benefits, is subject to FBT imposed under Section

33 ofthe Tax Code. 2.

The additional compensation of the taxable fringe benefit is the difference of the book value/fair market value of the shares, whichever is higher, at the time of exercise of the stock option and the price fixed on the grant date.

3.

The option has value only if, at the time of the exercise, the stock is worth more than the price fixed on the grant date.

4.

The additional compensation or taxable fringe benefit arises whether the shares ofstocks involved are that ofa domestic or foreign corporation.

laSec. 119-1(a), U.S. IRC. '5Sec. 119, U.S. IRC.

I6BIR Ruling No. 135-97, December 11, 1997

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t

shares to be used at the exercise ofthe stock options

come from the unissued shares of stock of the issuing corporation, the original issuance ofsaid shares is subject to DST. b.

When the employee subsequently sells or dispose of the shares of stocks, the tax treatment shall be as follows: If the shares involved are shares of stock in a domestic corporation not traded in the local stock exchange, the gain, if any, is subject to capital gains tax. The sale or transfer ofthe said shares is subject to DST, upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or endorsement ofsuch shares in favor ofanother. b.

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Bar Question (1995)

(l) Mr. Adrian is an executive

of a big business corporation.

Aside from his salary, his employer provides him with the following benefits: free use of a residential house to an exclusive subdivision, free use of a limousine and membership in a country club where he can entertain customers of the corporation. Which of these benefits, if any, must Mr. Adrian report as income? Explain.

(2)

Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the government gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the

involved are shares of stock listed and traded through the local stock exchange, the transaction is subject to the stock transaction tax.

camp.

Ifthe

Are these benefits income to Capt. Canuto? Explain. (3)

Bar Question (2003) A "ftinge benefit" is defined as being any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an income tax on it? Explain.

Mr. Infante was hit by a wayward bus while on his way toiwork. He survived but had to pay F400,000.00 for his hospitalization. He was unable to work for six months which meant that he did not receive his usual salary of F10,000.00 a month or a total of F60,000.00. He sued the bus company and was able to obtain a final judgment awarding him F400,000.00 as reimbursement for his hospitalization, F60,000.00 for the salaries he failed to receive while hospitalized, F200,000.00 as moral damages for his pain and suffering, and F100,000.00 as exemplary damages. He was able to collect in full from the judgment'

Suggested answer:

It is the employer who is legally required to pay an income ta^x on the fringe benefit paid to superuisory or managerial employee. The fringe benefit tax is imposed as a fr.nal withholding income ta.x on the fringe benefi.ts of the emplolee, but the legal obligation to remit the tax is placed on the ernployer, such that if the to.x is not paid, the legal recourse of the BIR is to go after the employer. Any amount or ualue receiued by the employee as a fringe benefi.t is considered tanpaid, or net of the income tq,x due thereon. The person who is legally required to pay is that person who, in case of non-payment, can be legally demanded to pay the tax. Howeuer, fringe benefit paid to a ranh-and-file employee is tucable to said employee, which the employer

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If the shares

shares involved are shares ofstock in a foreign corporation, the gain, ifany, is subject to the ordinary income tax or regular corporate income tax(RMC 882072, December 28, 2012).

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How much income did he realize when he collected on the judgment? Explain.

Suggested answer:

(1)

Mr. Adrian rnust report the imputed rental value of the house and limousine q's income. If the rental ualue exceeds the personal needs of Mr. Adrian because he is expected to prouide accommodqtion in said house for company guests or the car is used partly for business purpose' then Mr.

158

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Adrian is entitled only to a rq,table rental ualue of the house and limousine as excclusion from gross income and only q reasoneble amount should be reported q.s income. This is becq.use the free housing and use of the lirnousine are giuen partly for the conuenience and benefit of the employer (Hend.erson u. Collector, 7 SCRA 548).

(2)

(3)

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No, the free uniforms, free liuing quclrters and the free meals inside the camp are not income to Capt. Canuto because these are facilities or priuileges furnished by the employer for the employer's conuenience which are necessqry incidents to proper performance of the military personnel's duties. None. The F200,000.00 moral and exemplary damages are compensation for injuries sustained by Mr. Infante. The

P400,000.00 reimbursement for hospitalization expenses and the F60,000.00 for salaries he failed to receiue are umounts of any damages receiued whether by suit or agreement on account of such injuries. Section 28(bX5) of the Tax Code specifically excludes these amounts from the gross income of the injured indiuidual (Sec. 28[bJ, NIRC

and Sec.63, Reu. Regs. No.2).

''^-'"

159

rnrlo;xrndcnt occupation, representing the will of his employer only to thc result of his work and not as to the means and methods lr.y which the work is to be accomplished, he is a contractot (Luzon rrn

Steued.oring Co. u. Trinid'ad,43 Phil.8O3; Commissioner a. tlngineering Equipment and. Supply Co.,64 SCftA 597 [1975]), A firm which leases its neon signs and billboards cannot be considered itself as a media company, like a newspaper or a radio lrroudcasting company. Neon sigts and billboards are primarily rltrsigned for advertising. It performs advertising services. It is, l.lrcrcfore, an independent contractor (Ad.uertising Associates u. (tourt of Appeals,l33 SCRA t19841). Gross incomn frorn business.

-

In the case ofmanufacturing,

rrrrrrchandising, or mining business, "gross in'come'means the total Hrrlcs, less the cost of goods sold, plus any income from investments rrnd I'rom incidental or outside operations or sources. In determining t,he gross income, subtractions should not be made for depreciation, rlepletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold (Sec. 43, Reu. Regs. No- 2).Inthe case of sellers of services, their gross income is computed by deducting ull direct costs and expenses as prescribed in Revenue Memorandum Oircular Nos. 4,2003 and 30-2008 dated April 1, 2008.

Trade or Business lncome or Professional lncome

Bar Question (1994)

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term

The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a bookstore inside the campus' It also operates two dormitories for its students, one of which is in the

implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or for the purpose and object of the business organization (Commissioner a. British Oaerseas Ainoays Corporation, supra).

campus.

X Corporation rendered technical services through its "work engineers" to PNB, DBP and SSS in the construction of their buildings. The "work engineers" acted as overseers ofX Corporation, rendering

Is the University liable to pay income taxes for the operation of the:

1) 2) 3)

canteen? bookstore?

two dormitories?

Suggested answer:

their professional services as employees of the corporation. In this case, X Corporation is a contractor and not an employee of the

1) For the operation of the cq.nteen inside

contractees. The employer-employee relationship exists only where the person rendering employment services is an individual and not a corporation. Moreover, the true test in determining the relationship between the parties is that ifhe renders service in the course ofan

'

the campus, the income thereon being incidental to the operations of the uniuersity as a school, is exempt (Art- XIV[4][3]' Constitution; DECS Regulations No. 137'87, December 76, 1987).

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For the same reasons, the Uniuersity of'Bigaa is not liuble to pay income to.xes for the operation of the boohstore, since this is an ancillary actiuity the conduct of which is carried out within the school premises. The Uniuersity of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in the campus, for same reasons as the foregoing.

Howeuer, the latter shq.ll be liable for income tctxes on incorn'e from operations of the dormitory located outside the school premises. *Gross ittcorne" means all income Lease of real property. derived from whatever source, including rents (Sec. 32[A][5], NIRC). Rental income is treated as business income to which the lessor may claim allowable deductions under Section 34 of the 1997 Tax Code.

If the lessor is a citizen, resident alien, or non-resident alien engaged in trade orbusiness in the Philippines, his net taxable income

shall be subject to the graduated income tax rates provided for in Section 24 of the 1997 Tax Code, and if the lessors are husband and wife, they shall compute separately their individual income tax based on their respective taxable income. However, if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income (Sec.24[A], NIRC).

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Bar Question (2012) Spouses Pablo Gonzales and Teresita Gonzales, both resident

citizens, acquired during their marriage a residential house and lot located in Makati city, which is being leased to a tenant for a monthly rental of F100,000. Mr. Pablo Gonzales is the President of PG Corporation and he receives F50,000 salary per month' The spouses have only one minor child. In late June 2010, he was immediately brought to the hospital because ofa heart attack and he was pronounced dead on June 30, 2010. with no liabilities, the estate of lh" lut" pablo Gonzales was settled extra-judicially in early 2011. (a) Is Mr. Gonzales required to file income tax return for 2010? If so, how much income must he declare for the year? How much personal and additional exemption is he entitled to? (b) Is Mrs. Gonzales required to file income tax return for 2010? If so, how much income must she declare for the year and how much personal exemption is she entitled to? (c) Is the Estate of the late Pablo Gonzales required to file income tax return for 2010? If so, how much income must it declare for the year and how much personal exemption is it entitled to?

Suggested answers: Yes, Mr. Pablo Gonzales is requiredto fi'le income tax

return

and pay incorne tax on the following incomes for 2010: F301Q9Q - rental income (F100,00012 x 6 months), and F300,000 (F50,000 x 6 months) - salary, from January to June 30. Onty 507o of the rental is to be reported by him becq.use the leq'sed property is a property of the conjugal partnership of gains belonging to the spouses. He will be entitled. to personal exemption of ?50,000 and qdditional personal exemption of fl5,000 for one minor child. If the tarpayer dies during the tq'xable year, his estate may still claim the personal und additional exemptions for himself q,nd his dependent as if he died at the close of such year

If the lessor is a non-resident alien not engaged in trade or business in the Philippines, the rental income from real property located in the Philippines shall be subject to 257o final withholding tax(Sec. 25[B], NIRC), unless a lower rate is imposed pursuant to an effective tax treaty, such tax to be withheld and remitted by the lessee in the Philippines to the BIR within the prescribed dates (Secs. 57 and 58, NIRC).

(Sec. 35, NIRC).

If the lessor is a domestic corporation or a resident foreign corporation, its net taxable income shall be subject to the 327o (now SOVo) norrrral corporate income tax, or its gross income will be subject to the two percent (2Vo) minimum corporate income tax, whichever is higher (Sec.27[A] and Sec.28[A], NIRC). However, if the lessor is a non-resident foreign corporation, the gross rental income from real property located in the Philippines shall be subject to the 32Vo (now 307o) corporate income tax(Sec. 28[B], NIRC), such tax to be withheld and remitted by the lessee in the Philippines to the BIR within the prescribed dates.

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b.

Mrs. Teresita Gonzq.les is required to file her income tax return and pay income tax on P600,000 (P50,000 x 12 months), rental income for the year (January to December 2010). If any income of the spouses cannot be definitely attributed to or identified q.s income exclusiuely earned or req,lized by either of the spouses, the same shall be diuided equally between them for the purpose of determinirtg their respectiue tq.xable income (Sec. 24[A], NIRC). Since the Yes,

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deceased husband already claimed the additional personal excernption for the minor child, Mrs. Gonzales could no longer claim the same additional personal eremption (Sec.

35[B], NIRC).

c.

Yes, the Estq,te of the late Pablo Gonzales (through his Adrninistrator or Executor) is also required to file its income to.x return and pay tar, if applicable. Income tos, imposed by Title II upon indiuiduals shall apply to the incorne of estates, including incom.e receiued by estates of deceased persons during the period of administration or settlement of the estq.te (Sec. 60, NIRC), and the estate of a decedent (which shall haue its own TIN) shall be entitled to personal exemption of P20,000 (Sec. 61, NIRC). It is believed, however, that since the personal exemption of indiuiduals has been increased to F50,000 under R.A. 9504 (social legislation) in 2008, the same amount of ?50,000 shall q.lso be extended to estates and trusts. The rental income to be reported by the estate shall be P300,000 (F100,000 / 2 x 6 rnonths (from July 7 to December 31,2010).

Bar Question (1995) Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for ten years at a rental of F12,000.00 per year. The condition is that Mr. Enriquez will erect a building on the land which will become the property of Mr. Domingo at the end of the lease without compensation or reimbursement whatsoever for the value of the building. Mr. Enriquez erects the building. Upon completion, the building had a fair market value of F1 million. At the end of the lease, the building is worth only F900,000.00 due to depreciation.

Will Mr. Domingo have income when the lease expires and becomes the owner of the building with a fair market value of F900,000.00? How much income must he report on the building?

Explain.

Suggested answer: When q. building is erected by a lessee in the leased premises in pursuance of an agreement with the lessor tha.t the building becornes the property of the lessor at the end of the lease, the lessor has the option to report incorne as follows:

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a.

The lessor may report as income the mq,rhet ualue of the building at the time when such building is completed; or

b.

The lessor may spread ouer the life of the lease the estimated

depreciated ualue of such building at the termination of the leqse and report q.s income for each year of the lease q.n aliquot part thereof (9ec.49, Reu. Regs. No.2).

Sales or erchanges ofreal property. - Exchanges ofreal property classified as capital assets by individuals are subject to the capital gains tax based on the fair market value of the real property (BIR Ruling No. 037, February 10, 1988). So is a deed of reconveyance with assumption of mortgage (BIR Ruling No. 298, July 6, 1988). In mortgage foreclosure sales, the amount of loan secured by the mortgage is not considered as basis in computing the capital gains tax(BIR Ruling No.455, September 16, 1988); the basis, for income tax purposes, is the highest bid price. Section 24(DX1) ofthe 1997 Tax Code is comprehensive enough to cover not only voluntary sales but also involuntary sales, like execution sale and expropriationsale(BIRRuling No.091, May 2, 1989).In case of expropriation by the government, the actual consideration may be used as basis in determiningthe capital gains tax(BIR Ruling No. 175, September 30, tr 990).Thejust cornpensation paid by the government

to the seller/owner of property is the equivalent for the value of the property at the time of its taking (not at the time of payment). It is the fair and full equivalent for the loss sustained by the transferor that is the measure of indemnity. Such being the case' the amount approved by the Court as fair compensation must be used as the tax base for computing the gains derived out of such transaction. The l'orced character ofthe disposition ofthe real property provides the .iustification for the above-stated treatment of gain arising from the

expropriation sale (BIR Ruling No. 061, April 11, 1991).

Professional lncome "Professional incorne" refers to the fees received by a professional from the practice of his profession, provided that there is no employer-employee relationship between him and his clients. The existence or absence of the employer-employee relationship determines whether the income shall be treated as compbnsation income or professional fee. This fact is material {irr purposes of taxation because there is no deduction allowed against compensation income, whereas allowable deductions may

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be made from professional income. Thus, a lawyer may prnctico his profession as a legal officer of a private corporation, but for income

tax purposes, the compensation income he receives is subject to the graduated income tax rates without deductions (except for his personal and additional exemptions) because of the existence of employer-employee relationship.

CapitalAssets For tax purposes, there are three (3) general types ofcapital assets. These are: (a) shares ofstock ofa domestic corporation; (b) real property (of individuals) or land,ior building (of corporations); and (c) other types ofassets, including shares ofstock ofa foreign corporation. The rules provided for in the 1997 Tax Code are summarized below.

1.

Shares of stock of a domestic corporation

"Shares ofstoch" shall include shares ofstock ofa corporation, warrants and,/or options to purchase shares of stock, as well as units ofparticipation in a partnership (except general professional partnerships, joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates (Sec.22[L], NIRC). "Dealer in securities" means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers. It means any person who buys and sells securities for his/her own account in the ordinary course of business (Sec. 3.4, SRC). The rules on sale or exchange of shares of stock of a domestic corporation are:

a. Ifthe seller or transferor is a dealer in securities,

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shares ofstock (whether listed and traded in the local stock exchange, listed but not traded in the local stock exchange, or not listed) shall be treated as ordinary assets and the

ordinary gain, ifany, from the sale or transfer thereofshall be subject to the graduated income tax rates (five percent I57ol-32%o), in the case of individual seller or transferor,

or to the 30Vo normal corporate income tax, in the case of corporate seller or transferor.

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is not a dealer in securities, [he shatres of sttlck arc rtrgttrtled as capital assets. There is a need to determinc il'the shares of stock are listed and tr.rded in er local stock exchange.

b. ll'[lrc scllet'or tratrslirrrrr

Investor in shares of stock in a mutual fund company, in connection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund company (Sec. 32[B][6][h]' NIRC, Reu. Regs. No.6'2008, April22,2008). 1) Ifthe shares ofstock arelisted andtradedin the local stock

exchange, the transaction is exempt from income tax, regardless ofthe nature ofbusiness ofthe seller or transferor (indiYidual or corporation), except when it is a dealer in securities. Income taxes covered by the exemption are capital gains taxes from the sales of shares of stock by citizens, resident aliens, domestic corporations, resident and non-resident foreign corporations, and regular income tax on gains derived from sales of shares of stock (Sec. 70, Reu. Regs. No.3-95). However, it is subject to the ll2 of l%o stock transaction tax imposed in Section I27(A) ofthe 1997 Tax Code, based on the gross selling price or gross value in money of the shares of stock sold or transferred. The selling price of the shares of stock shall be the fair market value ofthe shares ofstocks transferred or exchanged (based on the listed priceon the date of sale or closest to it) and not the fair market value of the property received in exchange (Sec. 6[a], Reu. Regs. No. 2'82). The provisions of Revenue Regulations No. 2-82 were amended in 2008 as follows: "In determining the selling price, the following rules shall apply: (a) in cash sale, selling price shall be the total consideration per deed of sale; (b) if total consideration consists partly in money and partly in kind, the selling price shall be the sum of money and the FMV of the property received; (c) in case ofexchange, selling price shall be the FMV of the property received; and (d) in case FMV of the shares sold or exchanged is greater than the amount of money and./or the FMV of the property received, the excess of the FMV of the shares sold or exchanged over the amount of money and the FMV of the property, if any, received as consideration shall be deemed a gift subiect to donor's tax under Section 100 of the Tax Code" (Rea. Regs. No.6-2008, April 22,2008).

,

of stock sold shall be: sold or exchanged were (a) in the case of listed shares which of the local stock facilities outside of the trading system and./or

The

fair market value of the share

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A.

Fortransactions up to December Slrz0lzunder A stock transaction tax at the the Amended MPO Rule

rale of !/2 of one percent (77o)- of I}:re gross selling price or gross value in money of the shares of stock under Section 127(A) of the Tax Code;

The Fair Market Value (FMV) of shares of stock sold, in the case ofshares ofstock not listed and traded in the local stock exchange, shall be the value of the shares of stock at the time of sale. In determining the value of the shares, the Adiusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value ofthe equity. For purposes ofthis section, the appraised value of real property at the time of sale shall be the higher of (1) the FMV as determined by the CIR; or (2) the FMV as shown in the schedule of values fixed by the Provincial or City Assessor; or (3) the FMV as determined by independent Appraiser (Reu. Regs. No.6-2073, April 11,2073 annend.ed. Rea. Regs. No.6-2008, April 22,2008).

B.

The above taxes shall not apply to the following:

a. b.

c.

2)

Rules for publicly-listed shares whose public ownership fall below the mandatory MPO level

companies which are non-compliant

with the MPO as of

A

capital gain imposed under

final tax at either Sections 24,25 and 28 of the Tax Code, as amended.

The stockbroker who effected the sale has the duty to

December 31, 2011 and those whose public ownership levels subsequently fall below the above-mentioned MPO at any time

For transactions afrter December 31.,2Ol2 SVo/I\Vo on the net

collect the tax from the seller upon issuance of the confirmation of sale, issue the corresponding official receipt thereof and remit the same to the Revenue District Office wherein the Philippine Stock Exchange is located within five (5) banking days from the date of collection thereof.

may be prescribed by the Securities and Exchange Commission (SEC) or the Philippine Stock Exchange (PSE). Publicly-listed

167

prior to l)ecember 31, 201 2 may be allowed up to December 31, 2OI2 to comply with the MPO; otherwise, the non-compliant listed company shall be assessed as follows:

exchange, the closing price on the day when the shares are sold or exchanged. When no sale is made on the day when the listed shares are sold or exchanged, the closing price on the day nearest to the date of sale or exchange of the shares shall be the FMV; (b) in case of shares of stock not listed in the local stock exchange, the book value ofthe shares ofstock as shown in the financial statements duly certified by an independent CPA nearest to the date of sale (Reu. Regs. No.6-2008, April22,2008).

AII publicly-Iisted companies are required, at all times, to maintain a minimum percentage of ownership (MPO) of listed securities held by the public (or "public float") of the higher rate of ll%o of the publicly-listed companies'issued and outstanding shares, exclusive ofanytreasury shares, or at such percentage as

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Dealers in securities, provided that they shall not be subject to VAT on their gross receipts and income tax from their sale or exchange of securities;

Investors in shares of stock in a mutual fund company connection with the gains realized by said investors upon redemption of said shares of stock in a mutual fund company pursuant to Section 32(BX7Xh) of the Tax Code;

in

Persons who are exempt under existing investment incenlives and other special laws (Rea. Regs . No. 76'2072, December 7,2012).

Ifthe shares ofstock are not listed, or they are listed but not traded, in the local stock exchange, the net capital gains realized during the year, if any, shall be subject to the

final capital gains tax equivalent to five percent (\Vo) of lhenet capital gains not exceeding F100,000, and llVo, on any amount in excess of F100,000, such tax to be paid within 30 days from the date of sale (Sec.24[c] and Sec. 25tAlt3l; Sec' 27[D][2], Sec. 2StAlt7ltcl and Sec.28[B][5][c],NIRC). An annual capital gains tax return must be filed by the taxpayer, covering all his stock transactions during the calendar year, not later than the 15th day of the fourth month following the close of the taxable year (Sec. 7, Reu. Regs. No. 2-82, March 29, 1982; see Sec. 52[D]' NIRC). The effect of this provision requiring the filing of annual tax return is to allow the taxpayer to claim the lower rate offive percent (57o) only on the first F100,000 gross sales. Take note that it does not matter who is the seller or transferor (whether he is an individual (citizen or alien) or a corporation (domestic or foreigp), provided he/it is not a dealer in securities.

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requires that the listed shares must be traded in the local stock exchange. What is controlling is whether or not the shares of stock are traded in the local stock exchange (Del Rosario a. 1994).

and remitted by the stochbroher who effected the sale to the BIR within fiue (5) banhing days from the date of collection thereof (Sec. 127[C][1], NIRC).

However, the capital loss from the sale of listed shares outside ofthe local stock exchange can be deducted from the capital gain from another sale ofunlisted shares, or listed shares but traded outside ofthe local stock exchange because the tax base is net capital gain (capital gains less capital losses).

b.

The transfer by Compagnie Finonciere Sucres et Denrees of its eight percent (\Vo) eqrity interest in the Makati Shangri-

La Hotel to Kerry Holdings Ltd. is subject to the capital gains tax; hence, the claim for refund is denied. The capital gains tax return, which petitioner filed with the BIR, showed that it had a net gain. A tax on the profit of sale on net capital gain is the very essence of the capital gains tax law. To hold otherwise will ineluctably deprive the government of its due and unduly set free from tax liability persons who profited from said transactions (Compagnie Financiere Sucres et Denrees u. Cotnmissioner, G.B. No. 133834, August 28,2006).

Is John McDonald subject to Philippine income tax on the sale

ofhis shares through his stockbroker? Explain. If John McDonald directly sold the shares to his best friend, who is another U.S. citizen residing in Makati, at a gain of Php200,000, is he liable to Philippine income tax? If so, what is the tax base and rate?

Suggested answers:

q.

No, John McDonald is erempt from Philippine incorne tax on the gain arising from his sale of shares of stochs of

will be subject to Philippine income tax on the Php200,000 gain arising from his direct sale of the listed shares of stocks of a domestic corporation to his friend residing in Mahati. An alien indiuidual, whether or not a resident of the Philippines, is tct'xqble on income deriued from sources within the Philippines (Sec. 23[D], NIRC). Gain from the sale of shares of stock in a domestic corporation sholl be treated as deriued entirely from sources within the Philippines, regardless of where the said shares are sold (Sec. 42[E], NIRC). A fi'nal tax at Yes, John McDonald

the rates prescribed. below is hereby imposed upon the net capital gains realized during the taxable year from the sale of shares of stock in a domestic corporation, except shares sold of disposed of through the stock excharuge:

Bar Question (2008) John McDonald, a U.S. citizen residing in Makati City, bought shares ofstocks ofa domestic corporation whose shares are listed and traded in the Philippine Stock Exchange, at the price of Php2 million. Yesterday, he sold the shares of stocks through his favorite Makati stockbroker at a gain of Php200,000.

169

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The capital gain from the sale of listed shares over the counter or outside of the local stock exchange shall be subject to the 57o/I0Vo capital gains tax, since the law

Conmiasioner, CTA Case No.4796, December 1,

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Not over F100,000 On any amount in excess of F100,000 (Sec.24[c], NIRC) 2.

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Real property

Since the Tax Code does not define the term "real propertlr" the definitionof "immnuable property" inArticle 415, Civil Code of the Philippines shall be applied. The rules on the sale or exchange of real property located in the Philippines are summarized below: or transferor is a real estate dealer, the real property sold is an ordinary asset, and the ordinary gain, if any, is subject to the graduated income tax rates of five

Ifthe seller

percent (57o) to 327o (if an individual who is a citizen, or a resident or non-resident alien engaged in trade or business in the Philippines, or 25Vo final tax if a non-resident alien not engaged in trade or business in the Philippines), or to the SOVo norror'al corporate income tax (if a domestic

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corporation or a resident foreign corporation) (Sec. 24[AJ, Sec.25[A][1] and [B], and Sec.27[A], Sec.28[A][1] and [B][1], NIRC), unless the sale is exempt from income tax because it is a socialized housing (i.e., gross selling price is not more than F400,000) under R.4.7279 (Urban Development and Housing Act) or an economic housing under 8.O.223 (Investment Incentives Act), as validated in a ruling issued by the BIR. The buyer must withhold the proper expanded withholding tax on the transaction and remit the same to the BIR within the period prescribed in Revenue Regulations No.2-98, as amended. Non-resident foreign corporations are taxed on their gross income from sources within the Philippines, including gain from sale of real property at 30Vo, effective November 1, 2005.

A"real

esta,te d,eal.er" includes any person engaged

in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or part-time dealer in real estate (Sec. 4.106-7, Reu. Regs. No.7-95, as amended). b.

If the seller or transferor is not a real estate dealer, determine whether the real property sold or transferred is (a) used in the taxpayer's trade, business or profession, or (b) treated as fixed asset used in his trade, business or profession, subject to depreciation. If the answer in either of the two cases above is in the affirmative, the real property shall be treated as ordinary asset, and the gain, if any, from the sale or transfer thereof shall be subject to the graduated income tax rates (five percent [\Vo] to 32Vo), if an individual, or to the normal corporate income tax rate of 307o based on net taxable income, and expanded withholding tax, as discussed in the preceding paragraph. On the other hand, if the answer is in the negative, the real property shall be treated as capital asset, and the gain, ifany, by a citizen, alien (resident or non-resident), estate and trust, and domestic corporation and partnership shall be subject to the final capital gains tax ofsix percent(67o) based on the gtoss selling price or fair market value of the property at the time of sale, whichever is higher (Sec. 24[D], Sec.25[N[3] and [B]; Sec.27[D][5], NIRC).It is to be noted that foreign corporations (whether resident or non-resident) are not entitled to the preferential tax rates on their gain from sale ofreal property classified as capital

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asset because there is no similar express provision as that granted to domestic corporations. Therefore, regardless of classification, net taxable income from the sale of real properby realized by a resident foreign corporation shall be subject to the normal corporate income tax and expanded withholding tax. However, if the seller is a non-resident foreign corporation, the gain from sale shall be taxedat70Vo (Sec.4[e] and [fl, Reu. Regs. No. 7-2003). The real property referred to here could be a condominium unit which foreigners are allowed to own subject to certain conditions under the Condominium Act (P.D. 9 5 7, as amended by R A4726).

Deed ofExchange Deed of Exchange executed by the parties voluntarily and without any financial consideration, involving real properties, would subject either party (a) to the capital gains tax, based on the fair market value or consideration, whichever is higher, or (b) to the ordinary income tax or regular corporate income tax, depending on the nature ofthe assets exchanged. In this case, there are two (2) taxable transactions.

Transfer ofirlterest on real property shall be governed by the following rules: 1. If upon completion of payment of the purchase price of real property but before the execution ofthe Deed ofSale, the buyer assigns his right to another for a consideration, the assignment is a separate sale ofreal property; hence, subject to the expanded withholding tax or final withholding tax, as the case may be, and to DST on the same basis.

2. If the sale of interest

on real property (property was purchased under a Contract To Sell but sold by the original buyer before it was fully paid) it is taxable on the part ofthe seller based on the realized gain(i.e., selling price less the cost or adjusted basis) (Reu. Regs. No. 17'2003, March 31,2OO3),

Rules on non-redemption of property sold during involuntary sales, Revenue Regulations No. 9-2012 implements Sections 24(D)

(1), 2?(D)(5), 57,106 and 196 of the Tax Code, and Revenue

r72

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Regulations No. 2-98, as amended, and Revenue Regulations No. 16-2005, as amended on non-redemption of property sold during involuntary sales; and revokes and amends all contrary issuances and rulings.

If property is sold during involuntary sales, the SELLER shall income tax, which could either be:

be subject to (a)

Capital gains tax, ifproperty is a capital asset; or

Ordinary income tax or regular corporate income tax, if property is an ordinary asset, regardless of the type of proceedings and personality of mortgagees/selling persons; (b) VAT (if ordinary asset), and (c) DST.

o

Above taxes shall be due counted from the date the right to redeem the property ofthe buyer has expired. Buyer who is deemed to have withheld the CGT or CWT due from the sale shall file CGT and remit the tax within 30 days, or file CWT return and remit the RCIT within 10 days from date of expiration of redemption period, except for the month of December, which may be filed not later than January 15 of the following year.

If property sold is subject to VAT, it shall be paid by the owner/mortgagor within 2O or 25 days of the following month when the right of redemption expires. DST shall be paid within five (5) days after the close of the month after the lapse of the redemption period. The CGT/CWT/VAT and DST shall be based on whichever is higher of the consideration (bid price of the highest bidder) or the fair market value or the zonal value as determined in accordance with Section 6(E) of the Tax Code.

All regulations, rulings or orders inconsistent with

Revenue

Regulations No. 9-2012 are hereby revoked, repealed or amended.

Real property located outside the Philippines The gain from the sale or other disposition ofreal properby not located in the Philippines, regardless of classification, by resident citizens and domestic corporations shall be subject to the graduated income tax (if a resident citizen) or normal corporate income tax (if a domestic corporation), since they are taxed on worldwide income.

Wt't'ttttot,ntNti'l'Axt,:s

I73

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Such income is exempt from income tax in the case of non-resident citizens, alien individuals, and foreign corporations because they are taxed only on income from sources within the Philippines (Sec. 23, NIRC).

Bar Question (2013) In 2000, Mr. Belen bought a residential house and lot for

F1,000,000. He used the property as his and his family's principal

residence. It is now year 2013 and he is thinking of selling the property to buy a new one. He seeks your advice on how much income tax he would pay if he sells the property. The total zonal value of the property is F5,000,000 and the fair market value per tax declaration is F2,500,000. He intends to sell it for F6,000,000. What material considerations will you take into account in computing the income tax? Please explain the legal relevance of each of these considerations.

Suggested answer: Since the planned sale inuolues a real property classified as a capital asset, the material considerations to take into account to compute the income tax are:

1.

The'qument

currQnt

fair marhet ualue of the property

to be sold- The

fair marhet ualue is the higher between the zonal fair mq.rket ualue per tax declaration;

ualue and the

2. 3.

The gross selling price ofthe property;

Deterrnination of the to,x base, which is the higher annount between the gross selling price and the cunent fair market ualue of the property.

The income tax is computed at 67o of the tar base, which is in the nature of a final capital gains tax (Sec. 24[D][1]'

NIRC). Howeuer, since the property to be sold is a principal residence and the purpose is to buy a new one, I will aduise Mr. Belen that the sq.le can be exempt from the 6Vo capital gains tax, if he is willing to comply with the following conditions: mus.t utilize the entire proceeds of sale in acquiring a ,a. He new prr.ncipal residence within 18 months from date of disposition;

I 174

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b. c.

He should notify the Commissioner of his intention to auail of the exernption within 30 days from date of sale; He should open an escrou) account with a bank and deposit the 6Vo capital gains tq.x due on the sale. If he complies with the utilization requirement, he will be entitled to get back his deposit of the tax payment; otherwise, the deposit will be applied against the capital gains tax due (Sec. 24[D][2],

NIRC).

Bar Question (2009) Melissa inherited from her father a 300-sq.m. lot. At the time of her father's death on March 14, 1995, the property was valued at F720,000. On February 28, 1996, to defray the cost of the medical expenses ofher sick son, she sold the lot for F600,000 on cash basis. The prevailing market value of the property at the time of sale was F3,000 per sq.m. (a) Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? (b) Is Melissa liable to pay VAT on the sale of the property? If so, how much and why? If not, why not?

Suggested answers: a.

b.

Melissa is liable to pay the 6Vo capital gains tax based on the gross selling price (P600,000) or fair market ualue at the time of sale (fl00,000 = ?3,000 r 300 sq.m.), whicheuer is higher. The capital gains tar is F54,000 (fl00,000 x 6Vo). Although Melissa actually incurred a loss in the sale of the real property, this loss is disregarded for income to.x purposes because Section 24(D) of the Tax Code presumes that the seller realizes a gain from the sale of such req,l property classified as a capital asset and it imposes the to.x on the higher amount between the gross selling price and the fair marhet ualue. The real property is a capital asset, since it is not used in the trade or business of Melissq (Sec. 39[A], NIRC). No. Melissa is exempt from VAT on the sale of the req.l property classified as a capital asset. To be subject to VAT, the real property must be classified as an ordinary asset, the seller must be engaged in the real estate business, and the amount of gross sales must haue exceeded ?1.5 million. In this case, all the aboue requisites are not present.

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Bar Question (2005) Josel agped to sell his condominium unit to Jess for F2.5 million. At the time of the sale, the property had a zonal value of F2'0 million. Upon the advice of a tax consultant, the parties agreed to execute two deeds of sale, one indicating the zonal value of F2.0 million as the selling price and the other, showing the true selling price of F2'5

million. The tax consultant filed the capital gains tax return, using the deed of sale showing the zonal value of F2.0 million as the selling price. Discuss the tax implications and consequences of the action taken by the parties. Suggested answer: The capital gains ta,x due on the sale shall be based on the actual selling price of fl.S million, which is higher than the zonal ualue of the property (Sec. 24[D][1], NIRC). The documentary stamp tax on the conueyance ofreal property shall lihewise be based on the higher ualue (Sec. 196, NIRC). Accordingly, a d.eficiency capital gains ta'xc and documentary stamp tax are due from Josel plus the 507o surcharge irnposable on a fraudulent return.

Both Josel and his ta^x, consultant are criminally liable for tan euasion. Here, it is clear that the three (3) requisite factors to constitute tax euasion ai4 present, uiz.: (1) the end to be achieued, which is the payment of lesslthan that known by them' to be legally due; (2) an accompanying state of mind, which is euil, in bad faith, willful or d,eliberate and not merely accidenta,l; and (3) a course of action, which is unlawful ( CIR a. Estate of Benigno P. Tod.a, Jr -, 438 SCRA 290 t20041).

Bar Question (1993) Juan Panalo won a damage suit for F500,000.00 against Juana Talo. Panalo got a writ of execution and made a levy on the lot of Talo. The lot was sold at public auction where Panalo was the highest bidder for F500,000.00. Panalo refused to pay any capital gains tax on his purchase of said lot. Your opinion.

Suggested answer: The capital gains tax from sales ofreal property is payable by the ( S ection 2 1 [e] in relation to S ection 49[q] [4] of the NIRC). Hence, Panalo cannot refuse to pay the capital gains ta,x on his purchase of said lot, because he is treated q.s the statutory seller.

seller

176

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Bar Question (2008) Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San Francisco, California, U.S.A., which he acquired in 2000 for F15,000,000. On January 10, 2006, he sold said real property to Juan Mayaman, another Filipino citizen residing in Quezon City, for F20,000,000. On February 9,2006, Manalo filed the capital gains tax return and paid F1,200,000 representing6Vo capital gains tax. Since Manalo did not derive any ordinary income, no income tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed Manalo for deficiency income tax computed as follows: F5,000,000 (F20,000,000 less F15,000,000) x 35Vo = F1,750,000, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate broker who said that the F1,200,000 capital gains tax should be credited from the Fl,750,000 deficiency income tax.

a. b.

Is the BIR officer's tax assessment correct? Explain.

If you were hired by Manalo

as his tax consultant, what advice would you give him to protect his interest? Explain.

Suggested answers:

&.

Aresident citizen like Pedro Manalo is talcable on all incorne deriued from sources within and without the Philippines (Sec. 23[A], NIRC). Gains, profits and income from the sale of real property located without the Philippines a.re considered

q.s

incomes fron'L sources without the Philippines

(Sec.42[C][5]. NIRC).

The uacation house and lot in California, USA is a capital asset, since it is not used in the taepayer's trade or business (Sec. 39[A][1], NIRC). Howeuer, it is not subject to the 6Vo capital gains tax under Section 24(DX1) of the Tatc Code, since the real property is not located in the Philippines. Said preferentiq.l rate of income tcuc applies only when the seller is a resident citizen and the real property is classified as a capital asset locq.ted in the Philippirues. Accordingly, the gain of F5 million (20 million less F15 million) shall be included in the tatcable income of Pedro Manalo for 2006 subject to the graduatedincome tax rates of 57o to 327a (Sec. 24[A][1], NIRC). It is, therefore, erroneous for the BIR to apply the corporate income tdx r(fie of 35Vo on the tonable income of Pedro Manalo, a resident citizen.

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'I'he amou.tt.l. of' ?1,200,000 (67o times P15 m'illion), representing capital gains tax erroneously paid by Pedro Manalo, may be credited against the ordinary income tax due on the taxable income for 2006, since capital gains tax is another form of income tar, under Title II of the Tax Cod.e. If the BIR official insists on not allowing such tax credit of capital gains tax erroneously paid against ord.inary income tax due for the year, I would aduise my client to fite a written claim for tax credit or refund for the capital gains tax erroneously paid with the BIR within two (2) years from the date of payment (Secs. 204[c] and 229, NIRC).

Bar Question (2000) Last July 72, 2000, Mr. & Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City for T"tr *illiott pesos (F10,000,000.00) with the intention of using the

proceeds to acquire or construct a new principal residence in Aurora

Hills, Baguio City. What conditions must be met in order that the capital gains presumed to have been realized from such sale may not be subject to capital gains tax? Suggested answer: The conditions are: 1.

fully utilized in acquiring or constructing a new prirucipal residence within eighteen (18) calendar months from the sale or disposition of the principal The proceeds are

residence; 2.

The historical cost or adjusted basis of the real property sold or d.isposed shall be carried ouer to the new principal residence built or acquired;

3.

The Commissioner of Internal Reuen'ue must hq'ue been informed by Mr. & Mrs. Peter Camacho within thirty (30) d.ays from the date of sale or disposition on July 12, 2000, through a prescribed statement I return of their intention to auail of the tax exemption;

4.

Thq.t the said exemption can only be auailed of once euery ten (10) years; and

178

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5. If there is no full utilization

of tlte proceeds of' salc or

disposition, the unused portion of the gain presumed tut haue been realized from the sale or disposition shall be subject to capital gains tax

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(Sec.24[D][2], NIBC).

Other capital assets All other capital assets, except

shares of stocks of a domestic

corporation and real property located in the Philippines, shall be subject to income tax at the graduated income tax rates (if seller is an individual) or at 30Vo regular corporate income tax (if seller is a corporation). Examples are motor vehicles and jewelries not used in the taxpayer's trade or business, shares of stocks of a foreign corporation, and investments in short-term commercial papers that are not considered as deposit substitutes. "Hold.ing period.'of the property clnssified. as other capital asset is mnterial for individ.ual taxpayers only. - Only 50Vo of Iong-term capital gains are recognized as subject to income tax, if derived by an individual taxpayer, while L0O7o of l}:'e capital gains are subject to tax ifderived by an individual taxpayer from short-term capital asset transactions. A capital gain is treated as (a) long-term if the asset sold or exchanged is held for more than 12 months, or (b) short-term if the asset sold or exchanged is held for 12 months or less (Sec. 39[BI, NIRC).In the case of corporate taxpayers, the holding period is not material and the capital gain or capital loss is recognized in full.

Capital lnsses can be offiet only against and. to the extent ofcapital gains. - Capital losses cannot be deducted from ordinary gains or income. This principle applies to all types of taxpayers (corporate or otherwise). Capital losses are deductible only to the extent of capital gains.

Bar Question (2012) Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development company in the country and in 2010, he was promoted to Vice-President ofthe company. With more responsibilities comes higher pay. In 2011, he decided to buy a new car worth F2 million and he traded-in his old car with a market value of P800,000, and paid the difference of PI.2 million to the car company. The old car, which was bought three (3) years ago by the father of Mr. Pedro Aguirre at a price of F700,000, was donated by him and registered

I79

in the name of'his stltr. 'l'hc corresponding donor's tax thereon was duly paid by the father. (a) How much is the cost basis of the old car capital asset to Mr. Aguirre? (b) What is the nature of the old car pay tax on the income (c) to liable Is Mr. Aguirre or ordinary asset? gain from the sale ofhis old car? Suggested answers:

a.

F700,000. The basis of the property

in the hands of the

d,onee-son is the carry-ouer basis, the same basis as if it would be in the hands of the donor-father (Sec. 40[8][3]'

NIRC). b.

c,

The otd car is a capital asset. It is a property held by the taxpayer (whether or not connected with his trade or business), but is not stoch in trade or other property ofa kind which would properly be included in the inuentory of the taxpayer, ifon hand at the close ofthe year, or property held primarily for sale to custonrers in the ordinary course of his trad,e or business, or property used in the trade or business ofa character subject to depreciation, or real property used in trad.e or business of the taxpayer (Sec. 39[A], NIRC). Yes, ke.is liable to income ta'r onhis capital gain of ?100,000 (F800,A00less F700,000), but only 507o of the toxable gain shall be recognized and subject to income tax, considering that the holding period of the old car is more than one year (9ec.39, NIRC).

Passive Investment Income lnterest income In general, interests received or credited to the account ofthe depositor or investor are included in their gross income, unless they are (a) exempt from tax, or (b) subject to final tax at preferential rate under the 1997 Tax Code or under the applicable tax treaty.

Interest

means the amount which a depository bank may pay on

savings and time deposits in accordance with the rates authorized by theBangko Sentral ng Pilipinas (Reu. Regs. No' 12-80, as am'ended). Interest income has to be examined closely to determine whether it is taxable in the Philippines, and if so, what kind of income tax and what rate of tax shall apply to it. The rules on interest income under the Philippine 1997 Tax Code are summarized as follows:

180

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Incotne interest from Philippine cun'ency deposits and. deposit substitutes. - Gross interest income from Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements are subject to the 2Dofti final withholding tax, of all depositors, except when the depositor is a non-resident alien not engaged in trade or business in the Philippines, where such interest income shall be subject to the higher 257o tax rate pursuant to Section 25(B) of the Tax Code. However, if the depositor is an employee trust fund or accredited retirement plan, such interest income, yield or other monetary benefit is exempt from the final withholding Lax (Comtnissioner u. Court of Appeals and. GCL Retiremcnt Plan,207 SCRA487).

The term "d.eposit substitutes" shall mean an alternative form of obtaining funds from the public (the term"public" means borrowing from twenty [20] or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance

of debt instruments for the borrower's own account, for the purpose ofrelending or purchasing ofreceivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to, bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Banglao Sentra.l ng Pilipinas (BSP) and any authorized agent bank, certificate of assignment or participation and similar instruments with recourse. However, debt instruments issued for inter-bank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasibanks shall not be considered as deposit substitute debt instruments (Sec. 22[Y], NIRC).

(

l.

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2.

Interest income is subject to257o FWT, if received by a non-resident alien not engaged in trade orbusiness in the Philippines;

3.

Interest income is subject to 307o FWT, if received by a non-resident foreign corporation, unless it is from foreign loan, which is subject Lo 207o FWT;

4.

Interest income derived from an instrument that does not qualify as a deposit substitute is subject to the 2O7o Creditable Withholding Tax (CWT).

B. Interest derived from government

debt

instrrrments and securities: 1.

The debt instrument will be treated as a deposit substitute, regardless ofthe number ofinvestors, at the time of its issuance by the government (e.9., Bureau irf Treasury, Bangho Sentral ng Pilipina.s, etc.);

2.

The interest income is subject to 207oFWT, unless the investor is (a) an alien individual not engaged in trade or business in the Philippines, which is taxed at25Vo

FWT, or (b) a non-resident foreign corporation, which is taxed al30Va FWT, payable upon the issuance of the deposit substitute.

Interest derived from long-term (maturity period of at least five [5] years) deposits or investment

C.

certificates:

1.

Implementing Section 22(Y) of the Tax Code, the Secretary of Finance promulgated Revenue Regulations

Interest income in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments/ certificates shall be exempt from income tax, if made citizen, resident alien, or non-resident alien engaged in trade or business in the Philippines, under certain conditions; a

No. 14-2012 on November 7, 2012. The rules are summarized below:

A. Interest derived from currencybank deposit and yield or any other monetary benefit from deposit substitute, trust fund and other similar arrangements:

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2.

Interest income derived by a corporation on long-term deposits or investments is taxable at2o%o FWT' The

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D. Interest derived from a depository bank under the expanded foreign currency deposit system/OBU: Apply 7.57oFWT, if interest income is received by a citizen, resident alien, non-resident alien engaged in trade or business in the Philippines, domestic corporation, or resident foreign corporation;

2.

Interest income is exempt is received by non-residents (individuals or corporations);

3.

Joint bank accounts of resident and non-resident citizen shall be 50Vo exempt (on the part of the nonresident citizen) and 50Vo taxable at 7.5Vo FWT (on the part ofthe resident depositor).

Revenue Memorandum Circular (RMC) Nos. 77-2012 (November 23, 2Ol2), 8l-2O12 (December ll, 2Ol2), and, 84-2OL2 (December 26,2012) clarified Revenue Regulations No. 14-2012 (November 7,2Ot2) as follows:

1.

For zero-coupon instruments and securities issued by the government, t}re 2O7o FWT is payable upon the original issuance of the debt instrument.

2.

For interest-bearing instruments and securities issued by the government, the 207o FWT is payable upon payment of the interest (RMC 77-2012, Nouember 23,2012).

3.

Interest income received by banks from payors belonging to the Top 20,000 Corporations strictly arising from individual

loans obtained from banks that are not securitized, assigned or participated out remains to be subject to creditable withholding tax at two percent (2Vo). Corollanly, interest income paid by banks designated as Top 20,000 Corporations strictly arising from loans made to such banks that are not securitizedor participated out remains to be subject to CWT at two percent (2Vo). The 207o FWT and CWT imposed under the 1997 Tax Code and existing regulations cover interest arising from or paid out of debt securities (RMC 84-2012, December 21,2012).

"Yield," shall mean the difference between the amount the lender/investor loaned,/placed and the amount

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he received upon nrul,urity of the deposit substitute/debt instruments which shall in no case be lower than the interest rate prevailing at the time of the issuance or renewal of said debt instruments. Yield shall be synonynous with the interest rate of return earned by a debt security held to maturity (Reu. Regs. No. 12-80, a.mend.ed).

exemption from income tax is grarnted only on interest income of individual deposits or investments.

1.

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"Other h'ust arra ngemcr?/s" means on yield/income, not previously subjected to a final tax, pertaining to all and other trust and similar arrangements, whether covered by a trust indenture/agreement or by an investmenVportfolio management agreement or any other similar document involving the investmenVmanagement of funds (Reu. Regs. No. 13-78, as arnended by Sec. 7, Reu. Regs. No. 16-81, July 24, 198L; Reu. Regs. No.2-98).

b.

Interest income on foreign currency d.eposits. Gross interest income from foreign currency deposits with an Offshore Banking Unit (OBU) or Foreign Currency Deposit Unit (FCDU) in the Philippines is subject to the final withholding tax of 7.\Vo (BIR Ruling No. 103-99, JuIy 13, 1999). However, interest income from foreign cumency transactions ofa bank shall be subject to lo%ofinal

withhblding tax. If the foreign currency deposit is with a banklocated outside the Philippines, the interestincome is subject to the graduated income tax rates (if the depositor is a resident citizen) or the normal corporate income tax rate of 30Vo (ifthe depositor is a domestic corporation). Take note that interest income on foreign currency deposits with a bank located outside the Philippines by a non-resident cltizen, alien individual, and foreign corporation is exempt from income tax, pursuant to the express provisions of Section 28(AX4) for OBU and Section 27(DX3) for FCDU, both ofthe 1997 Tax Code. The tax base upon which the appropriate withholding tax rate shall be applied by the bank on interest income from foreign currency denominated loans extended to resident borrowers is the total amount of the interest income to be paid, without grossing up thereto the corresponding withholding tax due thereon, whether the borrower assumes to pay the tax or not (BIR Ruling No. 046-96, April2, 1996). The obvious purpose of the ruling is to avoid endless "pyramiding."

184

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wil,hhcld by thrr tlcposit,rtry bank lrom the proceeds of the krng-tcrm deprlsit or investment certificate based on the rcmaining maturity thereof:

is subject to the graduated income tax rates (if

\Vo; Four (4) years to less than five (5) years Three (3) years to less than four (4) years - l2Vo; 207o Less than three (3) Years ( Sec. 24tBlt1l and Sec. 25[A][2], NIRC). This tax exemption is not extended to a non-resident alien not engaged in trade or business in the Philippines, and Revenue Regulations No. 2-98 used "holding period" for purposes of determining the applicable withholding tax rate in case of Pre-termination. Interest incomc frorn long-terrn d'eposits or inuesttnents of corporations is taxable. - The preferential tax treatmlnt accorded to individuals is not extended to corporations as no similar provision can be found in Sections 27 and 28 of the Tax Code.

above,

the creditor is an individual) or the normal corporate tax rate (if the creditor is a corporation) and no creditable withholding tax is required to be made, except in the case of(a) non-resident alien not engaged in trade or business in the Philippines where the rate applicable is 257o final tax, and (b) non-resident foreign corporation where the rate applicable is 20Vo final tax (Reu. Regs. No. 4-75) .

Discounts &re treated. in the san,e n.anner as interest incorne. - Discount revenues in financing or factoring arrangements and in the issuance of longterm instruments and bonds are treated for income tax purposes in the same manner as interest income. Once one recognizes the identity ofthe present value and the future value formulations, it becomes unnecessary to distinguish between discount rates and interest rates. Indeed, in most areas of financial practice, we dispense with the distinction and simply refer to the two (2) collectively as the "yield." Although the term interest rate is often used to decide the rate used to take monies forward in time, there really is no difference between a discount rate and an interest rate, and practitioners often use the term "yield" in lieu of either. The amount of discount at which Treasury Bills are originally sold by the Republic of the Philippines is considered as interest (Sec. 7, Reu. Regs. No. 3-82, April 3, 1982).

e.

I85

Interestincon e f'romtrad.itional loans by lncal benhs and, other cred.itors. - Interest income derived from loans and other transactions, other than those enumerated

d.

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Intere st inc ome from long -term d,eposits or inv e stment s of ind.iuid,uals is exernpt. - Interest income from long-term deposit or deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipina.s received by a ciLizen, resident alien, and non-resident alien engaged in trade or business in the Philippines, shall be exempt from income tax. However, should the holder of the certificate pre-terminate the deposit or investment before the fifth year, a final tax shall be imposed on the entire income and shall be deducted and

f.

o

b.

Interest income on trad.itional lnans is not subiect to final or creditabte withhold'ing tar' - Interest payrqents for loans and other borrowings granted Li-fittancial institutions, ordinary corporations, and individuals are not subject to the final or expanded

withholding tax, unless made by a Top 20,000 Corporation (BIR Ruting No.043'96, March 25, 1996)'

h.Interestonforeignloans.-Interestonforeignloans

extended by non-resident foreign corporations is subject to

t'he2}vofinalwithholdingtax'unlessalowerrateoftaxis

imposed under an existing tax treaty' If the loan is granted

by a foreign goYernment or by a financial instrtution

owned, controlled or enjoying refinancing from the foreign

government, or an international or regional financing institution established by governments, the interest income

ofthelendersha]lnotbesubjecttothefinalwithholding tax ( Sec. 32[B] [7] [a], NIRC)' Bar Question (2008) In 2007, Mr. & Mrs. Renato Garcia, an overseas Filipino contract worker in Hong Kong, opened peso and dollar deposits at

the Philippine branch of the Hong Kong Bank in Manila. During the year, the bank paid interest income of Php10,000 on the peso deposit

186

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and US$1,000 on the dollar deposit. The bank withheld final income tax equivalent to 20Vo of t}re entire interest income and remitted the same to BIR.

a.

Are the interest incomes on the bank deposits of Mr. & Mrs. Renato Garcia subject to income tax? Explain.

b.

Is the bank correct in withholding the entire interest income? Explain.

187

/llg.s. No. 2). Ad.ioid.end is
In general, dividends are included in the gross income of the stockholder, unless they are exempt from tax or subject to final lax at preferential rate under the 1997 Tax Code. Cash dividend and property dividend are subject to income tax, whereas stock

The interest income onthe foreign currency d.eposit of Renato Garcia, a non-resident citizen, with the FCDU of HK Bank in Makq.ti is exempt from Philippine incom.e tax by ex,press prouision of law (Sec. 24[B] in relation to Sec. 28tAlt7ltbl, NIRC). His interest income on peso deposit with HK Bank

dividend is generally exempt from income tax. However, any type of dividend must come from the unappropriated retained earnings of the corporation, unless it is a liquidating dividend which is not a true dividend in the true sense. "Property d'iuid.end"'is a dividend payable in property, which may be investments in shares of stocks of another corporation, or real property, or some other property owned by the corporation, paying the dividend. Property dividend is different from stock dividend in that the shares ofstock declared as property dividend by a corporation are shares ofstock ofanother corporation to which the corporation paying the dividend has investments and is shown as assets in its balance sheet. On the other hand, "stock diuid.end.'i3 a dividend payable in the shares of stock of the corporation declaring such stock dividend. The issuance ofthe stock dividend will increase the number of shares issued and outstanding ofthe corporation that declared the stock dividend. A stock dividend, when declared, is merely a certificate of stock which evidences the interest ofthe stockholder in the increased capital ofthe corporation. A stock dividend, being one payable in capital stock, cannot be declared out ofoutstanding corporate stock, but only from retained earnings. However, a " liquid,ating diuid.e nd," although so-called dividend, is not truly dividend as contemplated under the income tax law.

in Makati will be subject to the 20Vo final withholding tax 24[8][1], NIRC in relation to Secs. 23tBl and 57[AJ,

(Sec.

NIRC). The interest income on the foreign currency deposit of Mrs. Garcia, a resident citizen, with the FCDU of HK Bank in Mq,kq.ti is subject to the 7.5Vo fi.nal withholding tox (Sec.24[8][1], NIRC), while her interest incorne on the peso deposit with the bank will be subject to the 20Vo final withholding to;tc.

b.

'''n'""

final tax on the

20Vo

Suggested answers:

a,.

nf,',l,Ll',','l,l,il,',1'.*"

No, a.s discussed aboue, the 20Vo final withholding tax applies only on the interest income on peso deposits. Since 20Vo FWT is higher thq.n the 7.5Vo FWT on interest income on foreign currency deposit of Mrs. Garcia, she can fiIe a written claim. for refund or tax credit for the excess tax paid, and Renato Garcia can also file a written clairn for refund or krx credit for the 207o FWT erroneously deducted and remitted to the BIR on his interest income on foreign currerucy deposit which is exempt from incorne ta.x,.

Dividend lncome Dividends comprise any distribution whether in cash or other property in the ordinary course ofbusiness, even though extraordinary in amount made by a domestic corporation, joint stock company, partnership, joint account, association, or insurance company to the shareholders or members out of its earnings or profits (Sec. 250, Reu.

Distinctions between Cash Dividend and Stock Dividend Divid.end. is a corporate profit set aside (from Retained Earnings), declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time. A stoch d'iaidend' is a dividend payable in reserve or increase of additional stock of the corporation. Acash d.iaid.end. is disbursement to the stockholder of the accumulated earnings, and the corporation parts irrevocably with all interest therein. A stock dividend involves no disbursement, and the corporation parts with nothing to the stockholders who receive, not an actual dividend but a certificate of stock. When cash dividend

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is declared and paid to the stockholders and such cash becomes the absolute property ofthe stockholders and cannot be reached by creditors ofthe corporation in the absence offraud. A stock dividend, however, still being the property of the corporation and not of the stockholder, may be reached by an execution against the corporation

and may be sold as a part of the corporate property (Fisher u, T?inid.ad' supra). Dividend is distinguished from "profi,ts," for profits in the hands of a corporation do not become dividends until they have been set apart, or at least declared, as dividends and transferred to the separate property of the stockholders (Hyatt a. Alen, 56 N.Y, 553).

Stock dividends

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corporirtc properties. As capital, il is not yet subject to income. llowever, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution or cancellation, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in rcdemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits. This process of issuance-redemption amounts to a distribution of taxable cash dividends, which was just delayed so as to escape the tax (Commission'er a. Court of Appeals and' A. Soriano Corporation, 307 SCRA 152).

constitute taxable income to the recipients thereof, notwithstanding the fact that the officers or directors of the corporation choose to call such distribution as a stock dividend. The distinction between a

Bar Question (2003) On 3 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the capital stock of Y Corporation, a domestic company. On 3 January 2000, Y Corporation declared, out ofthe profits ofthe company earned afber 1 January 1998, a hundred percent (!007o) stock dividends on all stockholders of record as of 31 December 1999 as a result of which X

stock dividend which does not, and one which does, constitute income taxable to the shareholder is the distinction between a stock dividend which works no change in the corporate entity, the same interest in the same corporation being represented after the distribution by more

holding in Y Corporation became two hundred (200) shares. Are the stock dividerqds received by X subject to income tax? Explain.

Suggested answer:

shares of precisely the same character, and a stock dividend where there either has been a change ofcorporate identity or a change in the interest ofthe shareholders after the distribution is essentially different from his former interest. A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests than did the old - the new certificates plus the old representing the same proportionate interest in the net assets ofthe corporation, paying the stock dividend, as did the old (Sec. 252, Reu. Regs. No.2).However, the receipt oftax-free stock dividends by the stockholder will reduce his cost or adjusted basis of the stocks in determining the gain or loss upon the subsequent sale or transfer thereof.

No. Stoch diuidends are not realized in'come. Accordingly' the different prouisions of the Tox Code, imposing a tax on diuid'end income couers cash and property diuidends only, mahing stoch diuidends exempt from income tq.tc. Howeuer, if the distribution of stock diuidends in the equiualent of cash or property diuidend, as when the distribution results to a change in ownership interest ofthe shareholders, the stock diuid.ends wilt be subject to income tq,x (Sec. Z4[B][2]; Sec. 25[A] and [B] ; Sec. 28[B][5][b], NIRC).

Subsequent cancellation or red.emption of stock d.ividend.s is essentially equiualent to the declaration of cash d.iuidend.. - In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the

Diuid.end. is paid. by a d.omestic corporation

Stoch d.iuid.end.s are generally exempt from tar. A stock dividend, which represents the transfer ofsurplus to capital account,

is not subject to income tax. However, a dividend in stock may

Rules on Taxation of Dividends The applicable rules with respect to dividend income under the Philippine 1997 Tax Code are as follows:

Recipient is a citizen or resident alien

' Up to December 37, !997, cash dividend or property dividend paid by a domestic corporation was exempt from income tax pursuant to the provisions of the 1.977 Tax Code, as amended.

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difl'erence in treatment for Philippine income tax purposes.

Suggested answers:

o..

6Vo - beginningJanuary 1,1998; or 8Vo - beginning January 1, 1999; or

-

beginning January 1, 2000.

However, the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax(Sec. 24[B][2], NIRC). The appropriate tax rate to be deducted and withheld on the cash dividend by the paying corporation shall be the rate prescribed in the year ofreceipt ofsuch dividend (not the rate in the year ofdeclaration of such dividend) (BIR Ruling No. 134-99, August 25, 1999).

Recipient is a non-resident alien engaged in trade or business in the

Philippines

f91

.your answer in (a) be the same, if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the

BeginningJanuary 1, l-998, cash dividend or property dividend paid by a domestic corporation or a joint stock company, insurance or mutual fund company, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) ofwhich he is a partner, or on the share of an individual in the net income afber tax of an association, joint account, orjoint venture or consortium taxable as a corporation of which he is a member or co-venturer, out of its earnings or profits in 1998 or succeeding years, is generally subject to the following final withholding tax rates:

1O7o

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In order to lessen the impact of double taxation on the sanne inconle, I would aduise Caruso to credit the U.S. income tax on the diuidend paid to the U.S. Federal Gouernment against the Philippine income tq'x to be paid to the Philippine Gouernment. This priuilege is, howeuer, subject to limitation as to amount and proof of ta,x payrnent made to the U.S. gouernrnent must be attached to the Philippine income tae return.

b. If Caruso became an immigrant

in 2008 and thus became citizen, such diuidend income Filipino non-resident a receiued from a U.S . corporation will be treated as a foreignsource income, exernpt from the Philippine incorne to,r- A non-resident Filipino citizen is taxed only on income from sources within the Philippines (Sec. 23[B], NIRC), q.nd diuidends receiued from a foreign corporatiort whose gross irtcome for the three-year period wqs deriued from sources oitside the Philippines (Sec. 42[B], NIRC).

*

I I

I

Bar Question (2001) What do you think is the reason why cash dividends, when

Cash and./or property dividends shall be subject to 20Vo final withholding tax ( Sec. 25[A] [2], NIRC).

received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of LOTo and not at the progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your

Recipient is a non-resident alien not engaged in trade or business in the Philippines

answer.

Cash and/or property dividends shall be subject to the final withholding tax rate of 25Vo (Sec. 25[B], NIRC).

final withholding tapc (rather than the cash diuidends received by a resident progressiue tax schedule) on citizen or alien from a domestic corporation is to ensure the collection of inconre ta.x on said income.If we subiect the diuidend to the progressiue to* rate, which can only be done through the fi.ling of income tax returns, there is no assurance thq.t the taxpayer will decla're the income, especially when there are other items of gross incorne earned duiing the year. It would be extremely difficult for the BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is uery easy to

Bar Question (2010) In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, USA. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. (a) What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? (b) Would

Suggested answer: The reason for irnposing

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check compliance becquse there are fewer withholding agents compored

to the number of income recipients.

Likewise, the imposition of a final withholding tax will make the tax auailqble to the gouernment at an ectrlier time. Finally, the final withholding tex will be q sure reuenue to the gouernment unlike when the diuidend is treated as a returnable income where the recipient thereof who is in a tax loss position is giuen the chance too offset such loss against diuidend income thereby depriuing the gouernment of the tax on said diuidend incorne. Recipient is a domestic corporation or a resident foreign corporation

Dividends received by a domestic corporation or resident foreign corporation from a domestic corporation (inter-corporate dividend) shall not be subject to tax (Sec. 27[D]t4l and Sec. 28tAl

[7][d], NrRC). Dividend exclusion has always been a dominant feature of corporate income tax. It is a device for reducing extra or double taxation ofdistributed earnings. Since a corporation cannot deduct from its gross income the amount of dividends distributed to its corporation-shareholders during the taxable year, any distributed earnings are necessarily taxed twice; initially at the corporate level when they are included in the corporation's taxable income, and again, at the corporation-shareholder level when they are received as dividend. Thus, without exclusion, the successive taxation of the dividend as it passes from corporation to corporation would result in repeated taxation of the same income and would leave very little for the ultimate individual shareholder. At the same time, the decision to tax a part of such dividends reflects the policy of discouraging complicated corporate structures as well as corporate divisions in the form of parent-subsidiary arrangements adopted to achieve a lower effective corporate income tax rate (Filipinas Life Assurance Co. a. Cornmissioner,2l SCRA 622). Recipient is a non-resident foreign corporation

Dividends received by a non-resident foreign corporation from a domestic corporation is subject to the ISVo final withholding tax, subject to the condition that the country in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20Vo for 1997 , lgTo for Lgg8, tSVo for 1999, and LTVo for 2000 and thereafter, which represents

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thc dill'erence between the regular income tax of 357o in 1997,34% in 1gg8, 330ft, in 1999, and 32/o in 2000 and thereafter andt]"JletSvo tax on dividends as provided for in this paragraph (sec.28[B][5][b], NIRC; P.D. 69 ond Sec. 2, Reu. Regs. No. 4-76). With the increase in the corporate income tax rate to 35Vo under R.A. 9337, effective November '1,,2005,the tax due which is deemed paid to the Philippine government shall be 20Vo of the dividend, and effective January 1, 2009, the tax due which is deemed paid shall be I|Vo. Atax sparing credit is a credit granted by the residence country for foreign taxes that for some reasons were not actually paid to the source country but that would have been paid under the country's normal tax rules. The usual reason for the tax not being paid is that the source country has provided a tax holiday or other tax incentive to foreign investors as an encouragement to invest or conduct business

in the country. In the absence of tax sparing, the actual beneficiary of a tax incentive provided by a source country to attract foreign investment may be the residence country rather than the foreign investor. This result occurs whenever the reduction in source-country tax is replaced by an increase in residence-country tax. In the leading case of Conxmissioner u. Procter & Gamble PMC (160 SCRA 560), t]ne court ruled that the preferential 75vo tax on dividend paid to a non-resident foreign corporation is inapplicable because of the failure of the claimant to show the actual amount credited by the U.S. government, to present the U.S. income tax returns of PGMC-USA, and to submit a duly authenticated document evidencing the tax credit of the 20vo diffetential. upon motion for reconsideration, the Supreme Court in an en' banc resolution reversed the earlier decision ofthe court. It pronounced that the l57o preferential tax rate was applicable to the case at bar, because it was established that the Philippine Tax code only requires that the U.S. shall "allow" Procter & Gamble USA "deemed paid" the tax credit equivalent lo 2OVo. Clearly, the "deemed paid" lax credit which must be allowed by U.S. law to P&G USA is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in the U.S. The "deemed paid" tax credit allowed in Section 902, U.S. Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30(C)(8) (now Sec' 28tBlt5ltbl, NIRC). The legal question should be distinguished from questions of administrative implementation arising after the legal question has been answered (comrnissioner u. Procter & Gannble PMC,204 SCRA 377).

I94

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The fact that Switzerland does not impose any tax on the dividends received from a domestic corporation should be considered as full satisfaction ofthe condition that the 20Vo differential is deemed credited by the Swiss government (as against the Commissioner's contention that the tax-sparing credit should apply only if the foreign country allows a foreign tax credit). The court observed that to deny private respondent the privilege to withhold only l57o provided for under P.D. 369 would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations'interest and discourage them from investing capital in our country (Commissioner a. Wand.er Philippines, 160 SCRA 573).

Bar Question (1994) What are disguised dividends in income taxation? Give an example.

Suggested answer: Disguised diuidends are those income payments ntade by a domestic corporation, which is a subsidiary of a non-resident foreign corporation, to the latter ostensibly for seruices rendered by the latter to the former, but which payments are disproportionately larger than the actual ualue of the seruices rend,ered. In such case, the arnount ouer and aboue the true ualue ofthe seruice rendered shall be treated as a diuidend, and shall be subjected to the corresponding tax of357o on Philippine sourced gross income, or such other preferential rate as may be prouided under a comesponding Tax Treaty. Example: Royalty payments under a corresponding licensing agreement.

Royalty lncome Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in which case, any gain derived therefrom is considered as an active business income subject to the normal corporate income tax(BIR Ruling No.57-2000; RMC 77-2003). Where a person pays royalty to another for the use of its intellectual property, such royalty is a passrve income ofthe owner thereof subject to final withholding tax. The rules on royalty as a passive income under the Philippine 1997 Tax Code are summarized hereunder:

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Royalty paid by a f)omestic Corporation utr*u*"d itt ttud" ot b,rtitt"tt itt th" Philippitt"t, ot u do-"tti" Royalty income from sources within the Philippines is subject

to20Vo final withholding (income) tax, except royalty on books, other

literary works and musical compositions received by individuals cited above which is subject to IOVo final tax (Sec- 24[8][1] and Sec.25tN [2], NIRC).

Recipient is a non-resident alien not engaged in trade or business in the Philippines Royalty income from sources within the Philippines is subject to 257a finalwithholding (income) tax, unless a lower tax rate is allowed under an existing tax treaty (Sec. 25[B], NIRC). Recipient is a non-resident foreign corporation

Royalty income from sources within the Philippines is subject to the 307o final withholding tax, unless a lower tax rate is allowed under an e;isting tax treaty (Sec. 28[B][il, NIRC). i

Bar Question (2002) The MKB-PhiIs is a BOl-registered domestic corporation licensed by the MKB of the United Kingdom to distribute, support and use in

the Philippines its computer software systems, including basic and related materials for banks. The MKB-Phils provides consultancy and technical services, incidental thereto by entering into licensing agreements with banks. Under such agreements, the MKB-Phils will not acquire any proprietary rights in the licensed systems. The MKB-Phils pays royalty to the MKB-UK, net of lSVo withholding tax prescribed by the RP-UK Tax Treaty. Is the income of the MKB-Phils under the licensing agreement

with banks considered royalty subject to 207o final withholding tax? Why? If not, what kind of tax will its income be subject to? Explain. Suggested answer:

'

Yes. The income of MKB-Phils under the licensing agreement with banks shatl be corusidered as royalty subject to 20vo final

withhotding tax. The term royalty is broad enough to include

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technical aduice, &ssistance or seruices rendered in connection with technicq.l nxanagement or qdministration of any scientific, industriul or corlmercial undertahing, uenture, project or schen?e (Sec.42[4]1fl, NIRC). Accordingly, the consultancy and technicq.l seruices rendered by MKB Phils uthich are incidental to the distribution, support and use of the computer systems of MKB-UK are taxable as royalty.

Ta,ration of royalty und.er the Philippines-U.5. Ta.r Tleaty. The Philippines-U.S. Tax Treaty provides that royalty paid by a -resident of the Philippines to a corporation domiciled in the U.S. shall be as follows: (a) 257o, in all other cases; (b) l\Vo, if paid by a BOIregistered enterprise engaged in preferred areas ofactivities, and (c) the lowest rate of Philippine tax that may be imposed on royalties of the same kind, paid under similar circumstances to a resident of a third State. The phrase "paid. und,er similar circum"stattces" under the most-favored nation clause in the Philippines-U.S. Tax Treaty has been construed as referring to the manner of payment of taxes or circumstances that are tax-related, and not to the subject matter of the tax (royalty). The entitlement of 107o rate by U.S. firms despite the absence of a matching credit (2OVo on royalties under RP-Germany Tax Treaty) would derogate from the design behind the most-favored nation clause to grant equality of international treatment, since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of the most-favored nation treatment precisely to underscore the need for equality of treatment. The concessional rate of I0Vo provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-U.S. Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. The two (2) tax treaties do not contain similar provisions on tax crediting. The tax treaty with Germany expressly allows crediting against German income and corporation tax of 207o of the gross amount of royalties (deemed) paid under the law of the Philippines. On the other hand, the tax treaty with the U.S. does not provide for similar crediting of 20Vo of the gross amount of royalties paid (Commissioner u. S.C. Johnson & Sons, G.R. No. 727705, June 25, 7999; Wrigley Philippines a. Comtnissioner, CTA Case No. 7738, July 26, 2007).

Treatrnent of royalty und.er the Philippines-China Tax Tleaty, - Under the Philippines-China Tax Tleaty effective January 7,2002, the tax on royalties shall not exceed:

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l\t/r, ol't hc gross alnount of royalties arising from the use oI, or thc right to use, any copyright of literary, arbistic or scientific work, including cinematographic films or tapes for television or broadcasting, or

2.

l07o of tlrle gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process' or from the use of, or the right to use, industrial, commercial, or scientific

equipment, or for information concerning industrial, commercial or scientific experience.

Considering that the treaty with China does not contain a "matching credit" provision similar to that found in the treaty with Germany, the tax on royalty payments to residents of China can be considered paid under similar circumstances to a resident of the United States and the most-favored-nation clause in the RP-U.S. Tax Treaty shall apply (RMC No. 46'2002, September 2, 2002)' Accordingly, the preferential 7O7o rate of tax may again be availed of by U.S. corporations under the most-favored nation clause in the Philippines-U.S. Tax T?eaty, in relation to the Philippines-China Tax Treaty, effective January l,2OO2'

b.

I

Royalty paid by a Foreign Corporation

Recipient is a resident citizen and a domestic corporation The royalty paid by a foreign corporation to a residenL citizen and a domestic corporation is subject to tax at the graduated rates oftax ranging from five percent (57o) to 327o (in the case ofresident citizens) or at 32Vo (in the case of domestic corporations), because they are liable to income tax on worldwide income. Recipient is

a

non-resident citizen. an alien, and a foreign corporation

Since they are liable to Philippine income tax only on income, the source of which is from the Philippines, they are exempt from income on the royalties received from a foreign corporation whose property or interest is not located or used in the Philippines.

Rental lncome Rental income on the lease of personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows:

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Non-Resident Corp. Non-ResidentAlien Vessel

Aircraft, machineries and other equipment Other assets

4.1Vo

2\Vo

7.SVo

257o

3O.OVo

2\Vo

Bar Question (1993) X is employed as security guard of Excel Supermarket, Inc. X lives in a room within the compound of Excel but he is not charged any rent. The rental value of the room is F300.00 a month. X wants your opinion on whether BIR can tax the value of the free use of his room.

Suggested answer: The rental value of the room is not taxable. Section 2.2 of the Audit Mentorandum Order No. 1-87 prouides that if the lodging is furnished in the business premises of the employer and the employee is required to accept such lodging as a condition of his employment, then the ualue of said lodging will be not taxable. It is merely for the conuenience, comfort and pleasure of the employer.

Revenue

Other Income lncome from any source whatever The phrase nincotne from any source tohateuer" is broad enough to cover gains contemplated here. These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action ofthe taxpayer in producing the gains (Blas Gutiet'rez a. Collector, supra).

Any economic benefit to the employee, whatever may have been the mode by which it is implemented, is income subject to tax. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee (Commissioner u. Smith, supra). A stock option is a right, but not an obligation, to purchase (caII option) or sell (put option) a specified number of shares at a fixed price before or at a certain date in the future.

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'l'hc principlc underl.ying the taxability of an increase in the net worth ol'a taxpayer rests on the theory that such an increase in

net worth, if unreported and not explained by the taxpayer' comes from income derived from a taxable source. In this case, the increase in net worth was not the result of the receipt by it of taxable income. It was merely the outcome of the correction of an error in the entry in its books relating to its indebtedness to the insurance company. The income tax law imposes a tax on income; it does not tax any or every increase in networth whether or not derived from income (Fernand.ez Herma.nos, Inc. a. Commissioner, CTA Case 787, June 10, 1963).

Prizes and Awards Prizes (except prizes amounting to F1"0,000 or less) and other winnings (except Philippine Charity Sweepstakes Office and lotto winnings) from sources within the Philippines shall be subject to 2OVo final withholding tax, if received by a citizen, resident alien or non-resident alien engaged in trade or business in the Philippines. However, if the recipient is a non-resident alien not engaged in trade or business in the Philippines, the prizes and other winnings shall

be subject to 257o final withholding tax. And if the recipient is a corporation (domestic or foreign), the prizes and other winnings are added to the cdrporation's operating income and the net income is subject to 30Vo corporate income tax.

However, prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement are excluded from gtoss income only if (a) the recipient was selected without any action on his part to enter the contest or proceeding; and (b) the recipient is not required to render substantial future services as a condition to receiving the prize or award (Sec. 32[B][7][c], NIRC). Moreover, all prizes and awards granted to athletes in local and international sporbs competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations are also excluded from gross income (Sec.32[B][7][d], NIRC). The grand prize of the Philippine Centennial Commemorative 100,000 PISO National Raffle Draw of one Jaguar Daimler is subject to the 2OVo final withholding tax, despite the fact that the raffie draw is a go,vernment-sponsored project (B IR Ruling No. 005-2001, February 15,2001).

200

i.

Bar Question (1996) Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of F500,000 as his prize which was donated byAyala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor's tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.

Suggested answer: The prize

wiII not constitute a taxable income to Onyoc; hence, the BIR is not correct in imposing the income tax. R.A. No. 7549 explicitly prouides that "All prizes qnd awards granted to othletes in Iocal and international sports tournaments and competitions held in the Philippines or abroqd and sanctioned by their respectiue national sports associations shall be exempt from income tax.u Neither is the BIR correct in collecting the donot's tor from Ayala Land Corporation. The law is cleor when it categorically stqted that the donor of said prizes and q.wards shall be exempt from the payment ofthe donofs tax.

Bar Question (1993) Evelyn is a graduate student of U.P. In January 1991,

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ll'he recipicnt wus selected without any action on his

part

to enter the rcntest or proceeding; and

ii.

The recipient is not required to render substantial future seruices as a condition to receiuing the prize or

award.'

The first award granted to Euelyn was a Palanca award. This hind of award requires submission of literary works. Hence, this is included in the gross income because it fails to meet the legal requisites prouided for in the afore-quoted prouisions of law specifically item (i). The second uward granted to Euelyn was the Most Valuable Player Award. In this kind of award, Euelyn did not file any application to enter into any contest. The award was giuen to her in recognition for her outstanding performance in the field of sports. Howeuer, the recognition in the field of sports is not among those stated in the afore-quoted prouision of law . Thus, the award granted to her does not fall under the afore-quoted prouision of law.

The lq.st award granted to her was the Fellowship Award. This

requires also submission of application to qualify for such award. Hence, it fails to meet the necessary requisites of the afore-quoted prouision oflqut specifically item (1).

Bar Questidn (1998) she

won the Palanca Award for an outstanding short story she wrote. The award was F25,000.00 in cash. In February, 1991, she was also named Most Valuable Player of the Varsity volleyball team and she was given a trophy plus F10,000.00. Finally, in March 1991, she received a Fellowship Award from the University of California to pursue a master's degree inAmerican literature. The fellowship is for $10,000.00 plus free board and lodging for two (2) semesters. Should Evelyn include these awards and fellowship in her gross income? Reasons.

Suggested answer: Gross income includes prizes and winnings (Sec. 27, NIRC), except those stated in Section 288(8), (E) of the NIRC, to wit:

"(E) Prizes and awqrds made primarily in recognition of religious, charitable, scientifi,c, educationol, artistic,literary, or ciuil achieuement but only if:

Is the prize of one million pesos awarded by the Reader's Digest subject to withholding of final tax? Who is responsible for withholding the tax? What are the liabilities for failure to withhold such tax?

Suggested answer:

It

If

the prize is considered as winnings deriued from sources within the Philippines, it is subject to withholding of final tax (Sec. 24[B] in relation to Sec. 57[A], NIRC). If deriued from sources

depends.

without the Philippines, it is not subject to withholding of final tax because the Philippine tax law and regulations could not reach out to for eign j uris dictions.

The toa shall be withheld by the Readet's Digest or local agent who has control ouer the payrnent of the prize.

Any person required to withhold or who willfully fails to

withhold, shall, in addition to the other penalties prouided under the Code, be liable upon conuiction to a penalty equal to the total amount of tax not withheld (Sec. 251, NIRC). In cqse of failure to withhold

202

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the tatc or

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in the case of under withholding, the deficiency tux shall

from the payer I withholding agent ( lst par., Reu. Regs. No.2-98). be collected

Sec.

Bar Question (2000)

(3)

swindling.

l{ow will you rule on each ofthe three grounds for the protest? l,)xplain.

Suggested answer: 1)

The contention that the income tax applies to legal incorne and not to illegal income is not correct. Section 28(a) of the Tax Code includes within the puruiew of gross income all income from whateuer source deriued. Hence, the illegality of the income will not preclude the imposition of the income tqx thereon.

e)

The contention that the receipts from his swindling did not constitute income because of his obligation to return the amount swindled is lihewise not corect. When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, ex,press or implied, of an obligation to repEy and without restriction as to their disposition, he has reieiued toxable income, euen though it may still be claimed that he is not entitled to retoin the money, and euen though he may still be adjudged to restore its equiualent (James u. U.5.,366 US 213, 1961). To treat the embezzled funds not as tarable income would perpetuate injustice by relieuing embezzlers of the duty of paying income ta"x,es on the money they enrich themselues with through embezzlement, while honest people pay their taxes on euery

(

or award.

Bar Question (1995) Mr. Lajojo is a big-time swindler. In one year he was able to earn

F1 Million from his swindling activities. When the Commissioner of Internal Revenue discovered his income from swindling, the The lawyer of Mr. Lajojo protested the assessment on the following grounds:

(1)

The income tax applies only to legal income, not to illegal income;

(2)

Mr. Lajojo's receipts from his swindling did not constitute income because he was under obligation to return amount he had swindled, hence, his receipt from swindling was

[f he has to paythe deficiency income tax assessment, there be hardly anything left to return to the victims of the

will

No. It is not includable in the gross irrcome of the recipient because the same is subject to a final tax of 207o, the arnount thereof being in excess of P10,000.00 (Sec. 24[8][1], NIRC). The prize constitutes a taxable income because it was made primarily in recognition of artistic achieuement which he won due to an action on his part to enter the contest (Sec. 32[B][7][c], NIRC). Since it is an on-the-spot contest, it is euident that he must haue joined the contest in order to earn the prize

Commissioner assessed him a deficiency income tax for such income.

2oB

pcso; and

Jose Miranda, a young artist and designer, received a prize of P100,000.00 for winning in the on-the-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain.

Suggested answer:

''^"''"

similar to a loan, which is not income, because for every pcso borrowed he has a corresponding liability to pay one

2.S1Al,

Any person required under the Tax Code or by rules and regulations to uithhold toxes at the tim.e or times required by law or rulcs and regulations shall, in addition to other penalties prouided by law, upon conuiction be punished by a fi,ne of not less thq,n Ten thousand pesos (Php10,000.00) and suffer imprisonment of not less than one (1) year but not more than ten (10) years (lst par., Sec. 255, NIRC).

nn',w';''i,T.irl;lli"

conceiuable type of income. (3)

The deficiency income tq$, assessment is a direct tax imposed on the ou)ner which is an excise on the priuilege to earn an income. It will not necessarily be paid out of the same income that was subjectedto the ta,rc. Mr. Lajojo's liability to pay the tq^rc is based on his hauing realized o taxable income from his swindling actiuities q.nd will not affect his obligation to mq,he restitution. Payment of the tax is q, ciuil obligation imposed by law while restitution is a ciuil liability arising

from a crime.

204

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Bar Question (1995) Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive, mentioned to the latter that his (Osorio) bank had just opened a business relationship with a big foreign Importer of goods which Perez'company manufactures. Perez requested Osorio to introduce him to this foreign Importer and put in a good word for him (Perez), which Osorio did. As a result, Perez was able to make a profitable business deal with the foreign

importer.

In gratitude, Perez, in behalf of his manufacturing firm, sent Osorio an expensive car as a gift. Osorio called Perez and told him that

(a)

What is the tax effect on the discharge ofthe unpaid balance ofthe obligation on the debtor corporation?

(b)

Insofar as the creditor is concerned, how is he affected tax-wise as a consequence of the transaction?

Suggested answer:

(a)

Suggested answer: The Cornmissioner is correct. The car, hauing been giuen to Mn Osorio in consideration of hauing introduced Mn Perez to a foreign importer uthich resulted to a profitable business d.eal, is consid.ered to be a compensation for seruices rendered. The transfer is not a gift

because it is not made out of a detached or disinterested generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business d.eduction for the payment indicates that it was consi.d.ered as a pay rather than a gift. Hence, the fair marhet ualue of the car is includible in the gross income pursuant to Section 28(a)(l) of the Ta,x Code (See 1974 Federal Ta$ Handbook, p. 145). Apayment though uoluntary, if it is in return for seruices rendered, or proceeds from the constraining force of any moral or legal duty or a benefit to the payor is anticipated, is a ta.x,able incorne to the payee euen if characterized as q ngift" by the payor (Com.missioner u. Duberstein, 363 U.5.278).

Bar Question (1997) An insolvent company had an outstanding obligation of

F100,000.00 from a creditor. Since it could not pay the debt, the creditor agreed to accept payment throughdacion en pa.go a property

The condonation ofthe unpaid balance ofthe obligation has the effect of a donation made on the part of the creditor. It is obuious that the creditor merely desires to benefit the debtor

and without any consideration therefore cancels the debt, the amount of the debt cancelled is a gift from the creditor to the debtor and need not be included in the lattet's gross income (Sec. 50, Reu. Regs. No.2).

expense.

Who is correct, the Commissioner or Osorio? Explain.

205

which had a market value ol'?30,000.00. In the dacion en pago document, the balance of the debt was condoned.

there was really no obligation on the part of Perez or his company to give such an expensive $ft. But Perez insisted that Osorio keep the car. The company ofPerez deducted the cost ofthe car as a business The Commissioner of Internal Revenue included the fair market value of the car as income of Osorio who protested that the car was a gift and therefore excluded from income.

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(b)

For the dffirence of 770,000.00, the creditor shall be subject to donot's tax at the applicable rates prouided for under the

National Internal Reuenue Code.

Bar Question (1995) Mr. Francisco borrowed F10,000.00 from his friend, Mr. Gutierrez, payable in one.year without interest. When the loan became due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the F10,000.00 and at the time the loan was condoned.

Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain. Suggested answer: did not deriue any income from the carrcellati'on or condonation of his indebtedness. Since it is obuious that the creditor merely desired to benefit the debtor in uiew of the absence of consideration for the cancellation, the annount ofthe debt is considered as a gift from. the creditor to the debtor and need not be included in the latter's gross income. No. Mr. Francisco

Bar Question (1997) During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business; (b)

206

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interests from money placements in the banks; (c) dividends lrorn its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (e) proceeds under an insurance policy in the loss ofgoods.

In preparing the corporate income tax return, what should be the tax treatment on each of the above items?

foregoing organizut,ionn lrom any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income shall be subject to tax imposed under this Code."

b.

Suggested answer: The gross receipts from trading business is includible qs an item ofincorne in the corporate incorne tax return and subject to corporate income tax rate based on net income. The other items of ret)enue will not be included in the corporate income tax return. The interest

Suggested answer: The exemption conternplated in the Constitution couers real estate tax on real properties actually, directly and exclusively used for religious, charitable or social welfare purposes. It does not couer exemption from the imposition of income tax, which is within the context of Section 30 of the Tax Code. As a rule, non-stock, non-profi.t corporations organized for religious, chd.ritable or social welfare purposes are exempt from income tatc on their income receiued by them as such. Howeuer, if these religious, charitable or social welfare corporations deriue income from their properties or any of their actiuities conducted for profi,t, the income ta.x shall be imposed on said items of income, ircespectiue of their disposition (Sec. 30, NIRC; Comm.issioner a. YMCA, G.R. No. 724043, October 74, 7998; CIR a. St. Luke's Med.ical Center, G.B. No. 795909, September 26, 20 72).

tax of 20Vo; diuidends from domestic corporations are exernpt from incorne tax; and gains from stock transactions with the Phitippine Stock Exchange are subject to transaction tax which is in lieu of the incorne tax. The proceeds under an insurance policy on the loss of goods is not an item of income but merely a return of capital; hence, not taxable.

Bar Question (2002) XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. Last January 3, 2000, it sold a portion of its lot used for religious purposes and utilized the entire proceeds for the construction ofa building to house its free Day and Night Care Center for children

was organized.

a.

Considering the constitutional provision granting tax exemption to non-stock corporations, such as those formed

exclusively for religious, charitable or social welfare purposes, explain the meaning of the last paragraph of said Section 30 of the 1997 Tax Code, which states that "ll]ncome of whatever kind and character of the

Is the income derived by YYZ Foundation from the sale ofa portion ofits lot, rentals from its boarding house and the operation ofits canteen and gift shop subject to tax? Explain.

from money rrtarhet placernents is subject to a final withhotding

ofsingle parents. In order to subsidize the expenses ofthe Day and Night Care Center and to support its religious, charitable and social welfare projects, the Foundation leased the 30O-square meter area ofthe second and third floors ofthe building for use as a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the income from which is used actually, directly, and exclusively for the purposes for which the Foundation

207

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b.

Yes. The income deriued from the sale of lot and rentals from its boarding house are considered, as income from properties which are subject to ta,x. Likewise, the incomes from the operation of the canteen and gift shop are income from its activities conducted for profit, which are subject to ta.x. The income ta.x attaches irrespectiue of the disposition ofthese incornes.

Bar Question (2005) Explain briefly whether the following items are taxable or nontaxable: (a) income frornjueteng; (b) gain arising from expropriation ofproperty; (c) taxes paid and subsequently refunded; (d) recovery ofbad debts previously charged off; and (e) gain on the sale ofa car used for personal purposes.

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Suggested answer:

b.

13th moruth pay is excluded from gross income for income tax purposes to the extent of F30,000. Any excess will be included in the gross income as part of gross compensation income ( Sec. 32[B] [7] [e], NIRC).

Taxable. There is a material gain, not exclud,ed by law, realized out of a closed, and, completed, trunsqction. Gqins from dealings in property are part of gross income (Sec.

income tax, donor's tux and estate tax, q,re ruot taxable when

refunded.

De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return because they are tax exempt. They are also exempt frorn the imposition of the fringe benefits tax (Sec. 33[C], NIRC).

Recouery ofbad debts preuiously charged offis taxoble to the extent of income tax benefit of said deduction (Sec. S4[E]

[1], NIRC). Gain on the sale of a car used for personal purposes is tq,xable. This is a gain deriued from dealings in property which is part of the taxpayer's gross income (Sic. J2tAl [3], NIRC). There is a material gain, not excluded by law,

c. .

realized out of a closed and completed transaction.

Bar Question (2005) state with reasons the tax treatment of the following in the

preparation of annual income tax returns: Proceeds

oflife insurance received by a child

as irrevocable

beneficiary;

b. c.

209

b.

NIBO.

Taxes paid which are allowed, as a d,ed,uction 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 taxe:s paid, which are not allowed as deduction from gross income, i.e.,

a.

lr

I'he proceeds of lifi: i,nsuranca receiued by a child as irreuocable beneficiary are not to be reported in the annual income to.x return, because they are excluded from gross income. This kind of receipt does not fall within the definition of income - oany wealth which flows into the taxpayer other than a mere return of capital." Since insurance is compensatory in nature, the receipt is merely considered as a return of capital (Sec. 32[BJ[11, NIRC; Fisher u. T?inid.ad, 43 Phil.73 t19221).

c. It depends.

e.

r'l'A \r,

a.

32tAlt?l, NrRO.

d.

I rtl,'tr

Suggested answer:

a. It is taxable. The law imposes a tctx on,irucorrue from uny source whateuer,' which rneans that it includes income whether legal or illegal (Sec. J2[A],

tr't

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13th month pay and de minimis benefits;

Dividends received by a domestic corporation from (i) another domestic corporation; and (ii) a foreign corporation;

d.

Interest on deposits with (i) BpI Family Bank; and (ii) a local offshore banking unit of a foreign bank;

e.

Income realized from sale of (i) capital assets, and (ii) ordinary assets.

Diuidends receiued by a domestic corporation from another domestic corporation qre not subject to inconce tax; hence, should not be declared in the income tax return (Sec. 27[D] [4], NIRC). Diuidends receiued by a damestic corporation from a foreign corporatioru are subject to income tax and shall form part of the gross income. There is no law exempting this type of diuidend frorn income tax (Sec. 32[n, NIRC).

d,

Interest on deposit with BPI Family Bank is a passiue income subject to a final withholding tar rate of 20Vo; the interest on deposit with a local offshore banking unit of a foreign bank is a passiue income subject to a final withholdirug tax rate of 7.57o (Sec. 24[8][1], NIRC). Both interest incomes q.re not to be declared as part of gross income in the income to.x return.

e. (L)

Generally, income realized from the sale of capital in the income tax return, as they are already subject to final taxes (capital gains tax on real property located in the Philippines and shares of stocks of a domestic corporation). What are to be reported in the annual income tax return assets qre not to be reported

210

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q,re the capital gains deriued

lront the dispositiort of capital assets other than real property located in the Philippines or shares of stochs in domestic corporations which dre not subject to final taxes. (ii) Income realized from the sale of ordinary assets is taxable ond the said incorne shall be declared in the annual income tax return. The income constitutes either income deriued from the conduct of trade or business or a gain deriued from dealings in property (Sec.32[4][2] and [3J, NIRC).

CIIAPTER VI

EXCLUSIONS FROM GROSS INCOME As the items of gross income subject to tax are being determined, l.he exclusions from gross income under the 1997 Tax Code and the

cxempt income under general or special laws must at the same time lrc ascertained. It is important to identify these exclusions and exempt income so that they are not included in the taxable income reported b.y the taxpayer in his/its regular income tax return (BIR Form 1701 lbr individuals and 1702, for corporations). The term "gross income" does not include those items of income cxempted by the statute, tax treaty, or fundamental law. Exemption is an immunity or privilege; it is freedom from a charge or burden to which otlrers are subjected (Greenfield. a. Meer, 77 PhiI. 394). Such tax-free income should not be included in the income tax return for individuals (BIR Form 1701) or corporate income tax return (BIR Form 1702), unless information regarding it is specifically called for. The exclusion of such income should not be confused with the reduction of gross income by the application of allowable statutory deductions (Sec. 61, Reu. Regs. No. 2). Exclusions are in the nature of tax exemptions, and it behooves upon the taxpayer to establish them convincingly ( C ommission er u. Mitsubis hi, 7 8 1" SC RA 2 L4). An example of exclusion is the maternity benefits advanced by the employer to his employees (BIR Ruling No. 012-99, January 28, 1999).

Under the 1997 Tax Code, the termnexclusiorr.s" refers to items

that are not included in the determination of gross income either because: (a) they represent return ofcapital or are not income, gain or profit; or (b) they are subject to another kind ofinternal revenue tax; or (c) they are income, gain or profit that are expressly exempt from income tax under the 1997 Tax Code.

Exemption may, however, be granted also under the 1987 Constitution, tax treaty or international agreement, or a general or a special law. Sometimes, exemption is granted by law to the individual, corporation or association that receives the income.

2rl

212

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Items of exclusion representing Return of Capital The return of capital may take many forms. The amount ol' capital is generally recovered through deduction ofthe cost or adjusted basis ofthe property sold from the gross selling price or consideration. It may also relate to indemnities, such as proceeds of life insurance

paid to the insured's beneficiaries and return of premiums paid by the insurance company to the insured under a life insurance, endowment or annuity contract. Moral damages are exempt because they represent return or recovery ofcapital and are not income to the injured or damaged person.

lrrolits irrtr irt,l,rihr.rttrble t,o a l)(rrlnlrIl(!nl, trstahlishment of the foreign corporirtion crtrated or deemed creat,ed in the Philippines. Also, capital grrins f rom sale of shares ol'stock of ar domestic corporation, which is rrlwirys presumed by law to have its situs in the Philippines, are gerlerrt.l.l.y not subject to Philippine income tax, if there exist no real ltntpert.v interest. UndcrSpeeral.laws il.

Item of exclusion because it is subjectto another internal

revenue tax The value ofproperty acquired by gift, bequest, devise, or descent is exempt from income tax on the part ofthe recipient thereof,l because

the receipt ofsuch property is already subject to transfer taxes (i.e., estate tax or donor's tax). The policy of Congress is to impose only one kind of direct tax - either the income tax or transfer taxes - on these transactions.

Items of exclusion because they are expressly exempt from income tax Under the Constitution

There is nothing in the BIR ruling to suggest that

Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines, is exempt from income tax.3 Business profits of a foreign corporation organized under the laws of a treaty country from sources within b.

Art. XIV, 1987 Constitution.

Under R.A.7279 (Urban Deuelopment Housing Act of 7992), the National Housing Authority is exempt from all fees and charges of any kind, whether local or national, such as

3In general, business profits from sources

within the Philippines are exempt from Philippine income tax, unless the foreigl corporation has a permanent establishment in the Philippines and such business profits are attributable to said permanent establishment.

it

2010).

the Philippines are not subject to Philippine income tax, unless such 32(BX2), NIRC.

.

applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine currency banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of its members, members of the cooperatives deserve preferential tax treatment pursuant to R.A. 6938, as amended by R.A. 9520 (Dumaguete Cathed'ral Cred.it Cooperatiue a. CIR, G.R. .A/o. 782722, January 22,

Under a Tax Tleaty

'zSec. 4(3),

Under R.A. 6938 (Cooperatiue Code of the Philippines), agricultural multi-purpose cooperative registered with the Cooperative Development Authority is exempt from ordinary income tax on its transactions with members and nonmembers for a period of 10 years from the date of registration. Thereafber, the income tax exemption shall be limited to business transactions with members only.a R.A. 9520 (Philippine Cooperative Code of 2008) exempts from any taxes and fees on duly registered cooperatives which do not transact business with non-members or the general public, and cooperatives with accumulated reserves and undivided net savings of not more than F10 million. However, If the cooperative has accumulated reserves and net savings of more than F10 million, it is subject to income tax on the amount allocated for interest on capitals, provided that it is not consequently imposed on interest individually received by members (Arts. 60 and 61, R.A. 9520, February 17, 2009)

All assets and revenues of a non-stock, non-profit private educational institution used directly, actually and exclusively for private educational purposes shall be exempt from taxation.2

1Sec.

2l:l

aBIR Ruling No. 008-2001, March 5, 2001

2t4

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income and realty taxes, while the private sector participating in socialized housing shall be exempt from the following taxes:r'

i.

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Project-related corporate or individual income taxes on income directly realized from the development and/ or improvement of socialized housing sites, slum areas, resettlement areas, and/or construction and sale of socialized housing units to qualified beneficiaries as

i.

ii. c.

Capital gains tax on sale of raw lands for use in socialized housing project.

Under R.A. 7653 (New Central Bank Act), as amended by R.A. 8791, the Bangko Sentral ng Pilipina.s is exempt from all national, provincial, municipal and city taxes for a period of five years.6 It is exempt from documentary stamp tax under R.A. 9243 (2003).

d.

Under R.A. 791.6 (PEZA Law), as amended,PEZA-reg;stered enterprises are given income tax holidays of six (6) or four (4) years from the date of commercial operation, depending on whether their qctiuities are considered as pioneer or non-pioneer.

Henceforth, registered ecozone and freeport zone enterprises already availing ofthe incentives and benefits under R.A. 9400 in accordance with these rules, shall be expressly disqualified from availing of the incentives and benefits defined and/or granted under other laws, rules and regulations. Qualified enterprises already enjoying incentives under other preferential regimes should have their registrations thereunder cancelled before they may subsequently avail of the benefits provided under R.A. 9400 (DOF Departmerut Order No. 18-2013, April 16, 2013; RMC 35-2013, April 25, 2013).

Pursuant to PEZA Board Resolution No. 12-610, dated November 13, 2013, which approves the guidelines on registration and administration of incentives to Tourism Economic Zone (TEZ) developers and locator enterprises, the following rules have been adopted: sBIR Ruling No. 064-96, June 7, 1996. 6BIR Ruling No. 138-96, December 12, 1996.

No more five percent (5%) gross income tax incentive to developers ofTEZs in Metro Manila, Cebu, Mactan Island,

and Boracay Island;

ii.

No more income tax holiday and five percent (57o) gross income tax incentives to locator enterprises of TEZs in the aforesaid four (4) areas, except for tax and duty-free importation and zero-VAT rating on local purchases of capital equipment;

iii.

No more new TEZs shall be established in the aforesaid four (4) areas.

approved by the HLURB or LGU concerned. The exemption

shall be issued by the BIR on a per project basis, and separate books of account shall be kept by the contractor, developer, owner or seller of socialized housing units.

2ll-t

The new policy shall not have retroactive effect. However, TEZ developers and locator enterprises in said four (4) areas that have not signed their Registration Agreement with PEZA shall be covered by the new policy. Existing and future TEZ developers and locator enterprises outside the four (4) areas shall continue to avail of the incentives, subject to existing guidelines: (a) For TEZ developer/operator-five percent (57o) gross income tax; and (b) for TEZ locator enterprises - ITH, five percent (57o) gross income tax; tax and duty-free importation; and zero percent(OVo) VAT on local purchases of capital equipment (RMC 23-2013,

February 22,2013).

Under R,A- 9L78 (Barangay Miero Business Entetprises Act of 2002), Barangay Micro Business Enterprises shall be exempt from income tax for income arising from the operation of the enterprise. BMBE refers to anybusiness entity or enterprise

engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from Ioans but exclusive of the land on which the particularbusiness entity's office, plant and equipment are situated, shall not be more than F3 million.

Local Water Di.stricts are erempt ftnm incom"e ta,r.1 Local water districts are now exempt from income under R.A.- 10026, as circularizedby Revenue Memorandum Circular No. 28-2010 dated March 23,2010. However, they were subject to income taxes and franchise taxes, in addition to the following taxes: (a) excise taxes; (b) value-added tax on sale ofgoods and services; (c) other percentage taxes; (d) capital gains tax; (e) income tax on ?RMC 63-03, October 10,2003.

216

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income not arising from the water district's productive activity such as interest, royalties, prizes, winnings and dividends; (fl

p.rrticipation ol'!'ilipinos in the ownership of real estate in the Philippines (Sec. 2, REIT Law), and to give alien individuals and foreign corporations to own indirectly real properties in the Philippines, Congress enacted Republic Act No. 9856, otherwise known as the "Real Estate Investment Trust (REIT)" Law. To make investments in REIT corporations attractive, the law gives the following tax incentives to qualified investors:

The exemption privilege (income and franchise taxes), granted to local water districts, was limited to a period of five (5) years from the effectivity of R.A. Z10g.e

Persons entitled. to enjoy incentiues

final tax of 20Vo on interest income from philippine currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangement; and (g) documentary stamp taxes on documents, instruments and papers effective August 18, 1996 or five (b) years from the effectivity of R.A. 7109.8

C.

217

Incentiaes und.er RA,. 9SSG (The Reat Estate Investment Tlust Act of 2oog)ro Under Section 10, Article XII of the 1982 Constitution, only Filipino citizens and domestic corporations organized and

existing under the laws of the Philippines, at least 60Vo of the capital of which is owned by Filipinos, are entitled to acquire and own land in the Philippines. A few exceptions to this rule exist, such as (a) when property is acquired by purchase by an alien individual or foreign corporation, and such property is part of the 4O7o interest in a condominium project or townhouse complex covered by a Condominium C ertifi c ate of Title I Re p ub tic Act No.4726 (Condominium Act), as amended by Republic Act No. 7899J; and (b) when property is acquired by purchase by a former natural-born Filipino citizenwho has lost his philippine citizenship, subject to limitations provided by law (Sec. g, Article XII, 1987 Constitution), such as Batas pambansa Blg. 185, law enacted to implement the above-cited provision of the Constitution, and Republic Act No. 812g, wtrich amended the "Foreign Investments Act." While ownership of real property in the philippines is not subject to limitation with respect to Filipino citizens, not so many citizens own such real properties because ofthe ever-increasing

cost to acquire the same. In order to provide opportunities to these Filipino citizens who are not capable of owning real property as such or to democratize wealth by broadening the 8Memo. No. 014-2002, October 24,2002 of Deputy Commissioner Edmundo

Guevara.

eBIR Ruling No. UN-439-95, November 17, 1995. 10As implemented by Rev. Regs. No. 18-2011, JuJy

25,21ll.

There are two (2) kinds of persons entitled to tax incentives, namely: (1) REIT, which is a stock corporation organized principally to own income-generating real estate assets; and (2) Investor in REIT shares ofstocks in accordance with a REIT Plan approved by the Securities and Exchange Commission (SEC).

Requisites for Exemption To be entitled to the incentives provided by law, the following requisites must be complied with:

,, 7.

REIT shares are registered with the SEC and the Philippine Stock Exchange (PSE);

2.

REIT complies with the foreign ownership limitations provided for in the 1987 Constitution and special laws on real property ownership;

3.

907o of the distributable income of the REIT shall be distributed to shareholders during the year. Distributable income excludes proceeds from the sale of REIT assets that are re-invested within one (1) year from date of sale;

4.

Minimum public ownership. There must be at - in the REIT, each least 1,000 public shareholders shareholder owning at least 50 shares ofany class of shares, who in the aggregate own at least one-third (1/3) of the outstanding capital of the REIT;

5.

Capitalization. The REIT must have a minimum paid-up capital -of F300 million;

6.

Allowable inuestments. The REIT may invest in - in the Philippines or if the following: (a) real estate the real estate is outside the Philippines, it does not

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exceed 4oo/o ofthe deposited property and upon special authority from the SEC; (b) real-estate related assets; (c) managed funds, debt-securities and listed shares;

.)

its gross incomc;

(d) government securities; and (e) other similar

7.

8.

outlets allowed by the SEC;

3.

Investrnent in synthetic inuestment products. The REIT may invest not more than five percent -(57o) of its investible funds in synthetic investment products, such as credit default swaps, credit-linked notes, etc., upon approval by the appropriate regulatory body;

The distributable income excludes the proceeds from sale of REIT assets that are re-invested by the REIT within one (1) year from the date of sale;

4.

One percent (l%o) creditable withholding tax on income payments to REIT;

5.

1O7o final tax on dividends paid by REIT, unless received by a non-resident person that is subject to income tax rate of less than LO%o, pursuant to a treaty. Overseas Filipino investor is exempt from the dividend tax for seven (7) years;

6.

The sale of listed investor securities through the PSE, including block sales or cross sales with prior PSE

Income-generating real estate.

-

The income-

generating real estate of the REIT must provide income representing at least 757o ofthe deposited property;

9.

Property deuelopmenf. The REIT must hold the developed property until- its completion and the total contract value shall not exceed lOVo ofthe deposited property of the REIT;

approval, is subject to stock transaction tax of one percent (77o) of the gross selling price;

10. Single entity limit.

The REIT shall not invest not more t};.an L1o/o -of its investible funds in any one issuer's securities or managed fund, except government securities where the limit is 25Vo;

l-1.

72.

REIT shall not make investment -Theor interests in an unlisted special by acquiring shares purpose vehicle constituted to hold./own real estate and the REIT shall have freedom to dispose of such investment; and

8.

The original issuance of investor securities shall be subject to documentary stamp tax;

9.

The sale or transfer of real property and security interest thereto shall be entitled to 5O7o discount of the applicable documentary stamp tax thereon, and the unlisted REIT may avail ofthis privilege, provided it listed within two (2) years from the initial availment of the incentive;

The valuation of the REIT assets shall be made by an

10.

initial public offering and secondary offering of investor securities is exempt from the IPO tax;

However, a seller of real property to a REIT shall be subject to income tax, because the REIT law does

not provide for any exemption on such transaction. Likewise, the sale and lease of real property by a REIT shall be subject to value added tax (VAT), but a REIT shall not be considered as a dealer of securities and shall not be subject to VAT on sale or exchange of securities forming part of its real estate-related

The tax incentives of a REIT corporation include the following: The regular corporate income tax (RCIT) ofthe REIT

shall be computed on its Net Taxable Income as in the REIT law (i.e., dividend paid during the year and on or before the last day of the 5th defined

month following the close ofthe taxable year which is considered paid as ofthe end ofthe year is deductible from its gross income);

of

The

JointVenture.

Ta,r Incentiaes

r/2,

7,

independent appraisal company at least once a year.

1.

'l'hc ltllI'l' slrrrII nol. lxr Ii.rble to the minimum corporate income tax (M(ll'l') computed at two percent (27o) of

assets. h.

nA.

9505 (Personal Equity and. Retirement Account A qualified contributor shall be TPERAI Act of 2008).

-

220

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entitled to a tax credit in the amount of five percent (5oI,) of the aggregate qualified PERA contributions made in one taxable year against his own income tax liability. However, if the contributor is an overseas Filipino, he shall be entitled to claim the five percent (\Vo) tax credit against any national internal revenue tax liabilities, excluding the contributor's withholding tax liabilities as withholding agent. The contribution of the employer to the PERA of a qualified employee shall not form part of the employee's taxable gross income; hence, exempted from the withholding tax on income, whether withholding tax on compensation or fringe benefits. The pERA-TCC may be issued only to a qualified overseas Filipino and self-employed contributor. The TCC arising from the pERA contributions shall not be refundable or transferable. On the part of the employer, he can claim the actual amount of his/its qualified employer,s contribution as a deduction from his/its gross income, but only to the extent ofthe employer's contribution that would complete the maximum allowable PERA contribution of an employee. The qualified employer's contribution allowable as deduction shall likewise be exempt from withholding tax on compensation, notwithstandingthe provisions of Section B4(K) ofthe Tax Code.

Investment income of the contributor consisting of all income earned from the investments and reinvestments of his PERAAssets in the maximum amount allowed shall be exempt from the following taxes: (a) FWT on interest from any currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust and similar arrangements, including a depository bank under the expanded FCDS; (b) capital gains tax on the sale, exchange, retirement or maturity of bonds, debentures or other certificates ofindebtedness; (c) ITVo tax on cash or property dividends actually received from a domestic corporation or mutual fund company; (d) capital gains tax on sale or other disposition ofshares ofstock in a domestic corporation; and (e) regular income tax(Reu. Regs. No. 1Z-2011, October 22, 2011).

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l'lriIippinc Health lnsurunr:c ()orporation (PHIC), the Philippine llrurity Sweepstakes Oflice (['CSO), shall pay such rate of tax upon l,lrcir taxable income as are imposed under Section 27 of the Tax

(

)rde upon corporations or associations engaged in a similarbusiness, irr
(

UnderR.A. 9337, effective November 1,2005, PAGCORbecame xubject to income tax on its income from casino operations, dollar pit operations, regular bingo operations, and income from mobile bingo operations operated by it, with agents on commission basis, provided t,htrt agents'commission income shall be subject to the regular income l,rrx and withholding tax, and on income from other related operations. I'AGCOR's contractees and licensees (i.e., entities authorized and licensed by PAGCOR to perform gambling casinos, gaming clubs and olher amusement places, and gaming pools) are subject to income tax under the Tax Code. In addition, P.D. 1869, PAGCOR is subject to f'ranchise tax of five percent (57o) of its gross revenues or earnings t'rom the above activities (RMC 33-2013, April 17, 2013).

Exclusions from Gross lncome Section 32 of the Tax Code enumerates the excluded items froryr gross income. These are as follows:

1.

life insurance policies. - Proceeds of life insurance policies, paid by reason of the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in income. The interest income shall be taxed at the graduated income tax rates. Proceeds of

Bar Question (2003)

Under the 2005 Tax Code

On 30 June 2000, X took out a life insurance policy on his own life in the amount of F2,000,000.00. He designated his wife, Y, as

Exempt corporations and associations All corporations, agencies, or instrumentalities owned or controlled by the government, except the Government Service

irrevocable beneficiary to F1,000,000.00 and his son, Z,Lothe balance of F1,000,000.00, but in a latter designation, reserving his right to substitute him for another. On 1 September 2003, X died and his wife and son went to the insurer to collect the proceeds of Xs life insurance policy.

Insurance System (GSIS), the Social Security System (SSS), the

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lil;iH,:il Are the proceeds of'the insurance subject to income tax on the part of Y andZ for their respective shares? Explain.

Suggested answer: No. The law explicitly prouides that proceeds of tife insurance policies paid to the heirs or beneficiaries upon the death ofthe insured are excluded from gross income qnd is exempt from toeation. The proceeds oflife insurance receiued upon death ofthe insured constitutes a compensation for the loss of life; hence, a return of capital, which is beyond the scope of income taxation (Sec. J2[B][il, NIRC). TNOTE: The reseruation as to his right to designate or substitute the beneficiary for another is not important for income tax purposes, arthough it is mctterial for estate tax purposes.l

2.

:-t.

paid by reason of the death of the insured and interest pa;rments

the death of the insured are likewise exempt. But at least, it may be said that the law is indefinite in phraseology and does not permit the courb unequivocably to hold that the proceeds oflife insurance policies received by corporations constitute income, which is taxable. Life insurance is like that of fire and marine insurance a contract lrSec. 62, Rev. Regs. No. 2. t'zSec. 14.029(10), (15), U.S. IRC.

Value of property acquired by giftrtt bequest, devise, or descent.ra - If the payment of a gift or bequest is to be made at intervals, it is taxable to the donee (or beneficiary) to the extent that it is made out of income.15 Gifts, bequests and devises (which are subject to estate or gift taxes) are excluded, but not the income from such property. If the amount received is on account of services rendered, whether constituting a demandable debt or not, or the use or opportunity to use of capital, the receipt is income (Piroaano u. Cornmissioner, 14 SCRA 832).

on such amounts) under a life insurance, endowment, or

Life insurance is a contract of indemnify. It is cerbain that - beneficiaries the proceeds of life insurance policies paid to individual upon the death of the insured are exempt. It is not so certain that the proceeds oflife insurance policies paid to corporate beneficiaries upon

223

of indemnity. Proceeds ol' lilir insurance, payable upon the death ol'the insured, are considered as indemnity rather than income to l.he heirs or beneficiaries who could be corporations or individuals (El Oriente Fabrica d.e Tabacos u. Posad.o,s,56 Phil. 747).But interest payments thereon shall be taxable, if such amounts are held by the insurer under an agreement to pay interest.

Amounts received under life insurance, endowment or annuity contracts. - Amounts received (other than amounts annuity contract are excluded from gross income, but if such amounts (when added to amounts already received before the taxable year under such contract) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation.llNo loss is realized on surrender of a life insurance policy for its surrender value.12

,Iil,:'ill:iiil,;:,1il:

4.

Amounts received through accident or health insurance. - Amounts received through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amounts of any dnma'ges received, whether by suit or agreement, on account of such injuries or sickness. Compensations for damages to personal or family rights, damages for slander and libel, award for loss of life, damages

for injuries to the goodwill of a taxpa)'er's business are not taxable, unless they exceeded its cost. Payments in settlement of an action for breach of promise to marry and compromise payments in settlement of an action for damages against abank on account of conduct impairing the taxpayer's goodwill by injuring its reputation are not taxable.l6Damages received for r3Girt is a gratuitous transfer. The essential elements of a gift are: (a) a donor competent to make the gift; (b) a clear and unmistakable intention on his part to make it; (c) a donee able to take the gift; and (d) a conveyance, assignment or transfer vesting legal title in the donee, without power ofrevocation at the will ofthe donor, and a relinquishment of dominion and control of the subject matter of the gilt by delivery to the donee (Sec . 821 1; 82 19[5], U.S. IRC) . laSec. 64, Rev. Regs. 16Sec. 102; 1.102-1,

No.2

U.S. IRC

16lyde McDonald, 9 BTA 1340; Farmers and Merchants Bank of Carlettsburg v. Commissioner, 59 Fed. Qd) 9I2.

224

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patent infringement, breach oI'contract,r {iduciary duty und recoveries (except punitive damages) for anti_trust vir.rlations are excluded from gross income to the extent that the l,sses to which the damages relate did not give rise to a tax benefit either in the recovery year or earlier tax years. However, "insider profits" recovered by a corporation from the insider (major stockholder or director) are taxed to the corporation.lr The theory of these cases is that recoupment on account of such losses is not income, since it is not "derived from capital, from labor or both combined." And the fact that the payment of compensation for such loss was voluntary does trot .hurrg" its exempt status. It was in fact compensation for a loss, which impaired petitioner's capital.

In order that moral damages may be awarded, there

must be pleading and proof of moral suffering, mental anguish, fright and the like. The award of moral damages fulfills two (2) purposes: (a) to compensate the morally injured; and (b) to alleviate his suffering (B-F. Metal u. Spouses Lomotan, GR, No. 770873, April IG, 2008; Sutpicio Lines u. Curso,G..R. lVo. 757009, March 72,2010). Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer (Kierulf a. CA, G.R. No.99BOI, March IS, 7992; Frq,ncisco a, Ferrer, G.R. No. 142029, February 2gr 2OOI).

Moral damages are in the category of an award designed to compensate the claimant for the actual injury suffered and not to impose a penalty on the wrongdoer. The award is not meant

to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion or amusement that will serve to obviate the moral suffering he has undergone (ABS-CBN Broad,casting Corporation a. Court of Appeals, 3OI SCRA 575). Damages awarded to compensate for rost profits are taxable

to the recipient thereof.

Bar Question (2003) X, while driving home from his office, was seriously injured

when his automobile was bumped from behind by a bus drinen by a lTPrentice-Hall Federal Tax Handbook, 19g8, p. 141.

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225

rrr:klcss driver. As a rosult,, ltc hud [o pay F200,000.00 to his doctor rrrrd P100,000.00 t
Suggested answer:

Nothing is taxable. Under the Tqlc Code, any amount receiued (rs u)mpensation for personal injuries or sichness, plus the amounts litr u,ny damages receiued whether by suit or agreerlent, on account of xu:h injuries or sickness shall be excluded from gross inconte. Since the

tntire amount of P450,000.00 receiued represents award of damages ort. uccount of the injuries sustained, all shall be excluded from his gross income. Obuiously, these damages are considered by law as mere

n:turn of capital (Sec.32[8][4], NIRC),

Bar Question (2005) JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical injuries which required

hospitalization for 3 months. Following negotiations with the trirline and its insurer, an agreement was reached under the terms of which JR was paid the following amounts: F500,000.00 for his hospitalization; F250,000.00 as moral damages; F300,000.00 for loss of income during the period of his treatment and recuperation. In addition, JR received from his employer the amount of F200,000.00, representing the cash equivalent of his earned vacation and sick leaves. Which, if any, ofthe amounts he received are subject to income tax? Explain. Suggested answer: The amount of fl00,000.00 that JR receiued from his employer is subject to income tax, except the money equiualent of ten (10) days unutilized uacqtion leaue credits which is not taxable. Amounts of uacation q.llowq.nces or sich leq.ue credits which are paid to an employee corustitutes com.pensation (Sec. 2.78[A][7], Reu. Regs. No. 2-98, as amended by Reu. Regs No. 10-2000).

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The amounts that JR received from the airline are excluded from gross income and not subject to income tax because they are compensation for personal injuries suffered from an accident as well as damages received as a result of an agreement on account of such injuries (Sec. 32[8][4], NIRC).

5.

-

Income exempt under treaty.

- Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines, is exempt from income tax. Interest income from foreign currency loan extended by Asian Finance and Investment Corporation of Singapore is exempt from the 20Vo final withholding tax under the tax treaty.ls

Interest onprornissory notes issued. to foreign eompanies. The National Development Company (NDC) entered into contracts

in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were

made in cash and through irrevocable letters of credit. Promissory notes were issued by NDC. The remaining payments and interests were remitted in due time. The BIR assessed NDC for deficiency withholding tax on interest income paid to the foreign corporations. NDC claimed exemption under the old Section 29(b)(4) of the 19ZZ Tax Code. The court ruled that C.A. 182, as amended by C.A. 311, does not provide such authorization exempting interest under Section 29(b)(4) of the old Tax Code, but like R.A. 1407, it does not exempt from taxes the interest on such securities. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in fauor of the taxing power. Moreouer, there was nothing in the undertaking signed by the Secretary ofFinance that the court found, any inhibition against the collection ofthe disputed taxes. In fact, the gouernment made such undertaking in consonance with and certainly not against the prouisions of the Tax Code. It must be noted that NDC is not the entity being taxed here. The tqx was due on the interest earned by the Japanese shipbuilders, which NDC is mandated to withhold and deduct from the payment (National Deaelopment Company a. Cotnrnissioner, G..R. No. L-53967, June 30, 7987). INOTE: Exemption of interest on gouernment securities is no longer prouided for in R.A. 8424J

tsBIR Ruling No. 118-96, November 4, 1996.

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Retirement beneflts, pensions, glatuities' etc.

a.

Retirernent benefi.ts receiaed' und.er RA. 7647r1s RA'. 4977, and Section 60(8) of the 7997 Tax Cod.e. Retirement benefits received under R.A. 7641 and those received by officials and employees of private firms, whether

individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer under R.A. 4917, provided that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement, and the benefit shall be availed of by an official or employee only once.2o Retirement benefits of Sl-year old employee who has rendered still subject to income tax and withholding tax, because the retirement plan of said employee requires minimum of 55 years of age and 25 years of continuous service.2lRetirementbenefits of a lady employee of a private company who has completed 10 years of employment with the firm but who was only 49 years old and 10 months at the time of her retirement shall not be exempt from income. R.A. 4917 requires the presence of two (2) conditions.22 23 years of continuous service to the iompany is

The tax exemption privilege of employees' trusts springs from Section 53(B) of the Tax Code (now Sec. 60[8]), which specifically exempts them from income tax. The law (R.A. 1983) has singled out employees' trusts for tax exemption. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly old age retirement, death, sickness or disability. It provides security against certain hazards to which members of the PIan may be exposed. It is an independent and additional source of protection for the working group. R.A. 1983 was conceived in order to encourage the formation and establishment of such private plans for the benefit of laborers and employees outside of the social security system. It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. l'gR.A. 7641 only requires the employee to render ser-vices to his employer for at Ieast five (5) years and that he be not less than 60 but not more than 65 years of age at the time of his retirement. 1-68, as amended by Rev. Regs. 'z0R.A. 4917, as implemented by Rev. Regs. No. No. 1-83 and Rev. Regs. No. 11-2001. 'zrBIR Ruling No. 052-2000, October 30, 2000. "BIR Ruling No. 128-96, November 26, 1996.

228

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Otherwise, taxation of those earnings would result in a diminul"ion of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. Besides, P.D. 1959 which deleted the prouisos regarding tax exemption and preferential tax rates under the old law, cannot be deemed to extend to employees'trust. Said decree, being a general law, cannot repeal by implication a specific provision, Section 56(b) (now Section 53[b], in relation to R.A. 4917 , granting exemption from income to employees' trust (Commissioner u. GCL Retiremcnt Plan, 207 SCRA 487).

Interest income derived by Private Educational Retirement Annuity Association Retirement Plan from its depository bank under the expanded foreign currency deposit system is exempt from the 7.SVo

frnal income tax.23

Any and all amounts representing return of the personal contributions to the funds ofthe employees, who are still in the active service of the SVD, shall not be subject to income tax, since the same are considered as mere return of capital. However, the income or earnings derived from the personal contributions by the employee members (that are distributed currently) are subject to income tax since in a retirement plan under R.A. 4917, the employer or officials and employees or both, contribute to a trust fund for the purpose of distributing to such officials and employees or beneficiaries, the corpus or income accumulated by the trust in accordance with the plan. In the instant case, it is only upon their retirement that the total benefits which the employees of SVD shall receive consisting of their personal contribution, counterpart contributions of the employer, and the income of the fund to which the employees are entitled and are distributed to them shall be exempt from income.za

illl,l'li;:,iilil"::llll

22e

9l'its exisLilg lrr()videtrI l"utrrl lor [he employees, and the officials

of'PNll ccasirrg [0 be Provident Fund members even il'still employed with PNB as a private bank, any amount received by them f'rom PNB as a result of its privatization, including those lrom the Provident Fund and the money value of the accumulated unused vacation and sick leave credits, are exempt from income tax and withholding tax.25 b. Separation pay for cau'les beyond' the control of the employee. - Amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control ofthe said official or employee. Income from sale of lot that ca,rne ftom trust fund' is The documents issued and certified by exempt frorn incorne tax. Citybrust showing that money from the Employees'Trust Fund was invested in the MBP lot cannot simply be brushed aside by the BIR as self-serving, in the light of previous cases holding that citytrust was indeed handling the money of the Employees'Trust Fund. These documents, together with the notarized Memorandum of Agreement, clearly es,tablish that petitioner, on behalf of the Employees' Trust Fund, indeed invested in the purchase of the MBP lot. Thus, the Employees'Trust Fund owns 49.59Vo of the MBP lot.

ancl emplo.yees

since petitioner has proven that the income from the sale of the MBP lot came from an investment by the Employees'Trust Fund, petitioner, as trustee of the Employees' Trust Fund, is entitled to .lui- th" tax refund of F3'037,500 which was erroneously paid in the sale of the MBP lot.26

Proaid.ent fund. is an employees' trust. - The Philippine National Bank (PNB) Provident Fund is an employees'trust. Any

For any cause beyond the control of the said official or

amount received by an employee or by his heirs from his employer as

employee

a consequence ofseparation ofsuch employee from the service

ofhis

employer due to death, sickness or other physical disability or for any cause beyond the control ofsaid employee is exempt, regardless ofage or length of services. Since the contemplated separation of officials and employees from the service of PNB as a result of the bank's privatization is not of their own making, the possible termination

'z3BIR 'zaBIR

Ruling No. 042-2000, September 15, 2000. Ruling No. 051-2000, October 30, 2000.

The phrase "for any cause beyond' the control of the said' official or ernplo5tee" means that the separation of the employee must be involuntary and not initiated by him. Retrenchment of the employee due to unfavorable business conditions or financial reverses is considered as involuntary. No withholding of tax is, therefore, '5BIR Ruling No. 088-96, August 6, 1996. 26Miguel Osorio Pension Foundation, Inc. v' Commissioner, G'R' No' 162175, June 28, 2010.

2:10

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necessary to be deducted by the employer f'rom the separation pay. Thus, if the employee is separated under a Voluntary Separation Program of his employer, any separation pay received by the employee thereat shall be taxable. The early retirement package under the Business Process Re-engineering Program, intended to rationalize and streamline the operations of the company to cut on unnecessary cost and abolish positions that have become redundant is non-taxable to the recipients.2T

Bar Question (2005) Company A decides to close its operations due to continuing krsses and to terminate the services of its employees. Under the l,ubor Code, employees who are separated from service for such cause are entitled to a minimum of one-half month pay for every year of scrvice. Company A paid the equivalent of one month pay for every .ycar of service and the cash equivalent of unused vacation and sick leaves as separation benefits. Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons.

Tertnina,l leaue pay. Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee is excluded. The tax exemption applies to the salary or cash equivalent of accumulated vacation and sick leaves such as the "terminal leave pays" of retiring government employees, which are considered not part of the gross salary (Commissioner u. Castaned.a, ZOg SCRA Z2). c.

Suggested answer: The separation benefits paid by Company Ato its employees are excluded from gross incorne, being iru the nature of benefits giuen to employees whose seruices were terminated due to causes beyond their control (Sec. 32[B][6][b], NIRC). The entire benefits, thus, are not

tuxable and not subject to withholding tan under the Tax Code.

Retiremcnt benefits from forei.gn gouer.nmcnt agencies. - The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens of the Philippines or aliens who come to reside permanently in the philippines from foreign government agencies and other institutions, private or public;

d.

Payments und.er U.S. Veterans Ad.ministration.

e.

SSS benefifs.

7.

the

SSS;28

Incotne of foreign goaernrnents. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established

by foreign goyernments (Philippine Long Distance Telephone Co. u. Commissioner, CTA Case No.4375, January 7,1992).

Loan agreemcnt without stipulation that foreign cred'itors act for Eximbanh. - If the loan agreements state nothing about the loan being obtained from Eximbank of Japan nor can it be inferred or deduced from the loan agreements that foreign creditors acted for and in behalf of Eximbank of Japan, or Eximbank of Japan had to finance or guarantee the loans extended by foreign creditors, interest income is not exempt from the Philippine income tax (Asia Tlansrnission Corporation a. Comm.issioner, CTA Case No.3380' July 27,

Benefits received from or enjoyed under

GS/S benefits. - Benefits received from the GSIS,2e including retirement gratuity received by government officials and employees.

27BIR

Miscellaneous items

a.

Payments of benefits due or to become due to any person residing in the Philippines under the laws of the U.S. administered by the U.S. Veterans Administration; -

237

1988).

Ruling No. 105-96, October 1b, 1996.

Loan and. sales contract without reference to Erimbank.

28R.A.8282.

"R.A. 8291, which amended P.D.1146, exempts GSIS from all internal revenue

The loan and sales contract between Mitsubishi and Atlas does not -contain any direct or inferential reference to Eximbank whatsoever.

f

I

T 232

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IN( IrMl,r ANII WIt ttttrrt,trlttri'l'nxt,ls

233

l,lxclrrltotrrr lirrttr ( itrrtrtr Irtt otttt,

lhe (iovernntctti, ol Llrc l'hilippines or to any political

The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the document, one prestation was in consideration ofthe other. The specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous, to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction. Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being procured would be used as a loan to and in consideration for importing copper concentrates from Atlas. Such an innocuous statement of purpose could not have been intended for, nor could it legally constitute, a contract of agency. The taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" along without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedience of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of to take advantage ofthe tax exemption law under discussion (Commissioner a. Mitsubishi Metal Corporation, G.R. No.54908, January 22,

subdivision thcreol;

c.

Prizes and. sward,s in recognition of religious and charitable aceomplishmcnts. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

b.

S0BIR

Income d.eriaed. from any public utility. - Income derived from any public utility or from the exercise of any essential governmental function accruing to

Ruling No. 139-96, December 12,1996. 3rBIR Ruling No. 013-96, February 7, 1996.

the recipient was selected without any action on his part to enter the contest or proceeding; and

ii.

the recipient is not required to render substantial future services as a condition to receiving the prize or award.

The Government of Singapore Investment Corporation is a financing institution wholly-owned and controlled by the government of singapore entitled to the issuance of a Tax credit certificate for the erroneously paid final tax of 20Va on its interest income from Philippine T-bonds ( Gou' t of Singapore Inuestment Corp. a. CIR, CTA Case Nos. 6745, June 6, 2008, and' 7726, April 29' 2070).

d.

Prizes and. ausards for sports cornpetitions. - All prizes and awards granted to athletes in local and international competitions and tournaments whether held in the "sports Philippines or abroad and sanctioned by their national sports associations

The F1 million prize money won by the Filipino International Chess Grand Master from the First Parnbansa (National) Millennium Chess Grand Prix sanctioned by the National Chess Federation is subject to the 20Vo final withholding tax. To be eligible for exemption, the national sports association referred to in the law that should sanction said sport activity is the Philippine Olympic Committee.32 The prize received by Luisito Espinosa from WBC Featherweight Championship Fight in Cotabato in 1997 is exempt from income tax, but the prize of Challenger Carlos Rios of Argentina is subject to 307o (now 25Vo) final withholding tax.33 However, cash prizes won by local players/participants in golf tournaments are not passive incomes inasmuch as participating in golf

1990).

Loan guaranteed. by a gouernrnent financial institution. Interest income arising in the Philippines and paid in respect of a loan made, guaranteed or insured by the Korea Exchange Bank, a financial institution which is 1007o owned by the Government of South Korea, shall not be subject to income tax and withholding tax.soSimilarly, interest income on loans paid to the Commonwealth Development Corporation that is owned by the government of United Kingdom is exempt from tax.31

i.

I

I j

t

li

3'zBIR

33BIR

Ruling No. 026-2000, June 13, 2000. Ruling No. 126-97, December 3, 1997.

234

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tournaments is their profession and/or occupation. Such being the case, the cash prizes are subject to the rates under Section 24(A) and not to 20Vo final withholding tax imposed by Section 24(B).34 e.

73th month pay and. other gross benefi.ts.

- 13th month pay and other gross benefits received by officials and employees of public and private entities, to the extent of F30,000; GSIS, SSS, Med.ieare and Pag-Ibig contributiot.s. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals;

o

Gains realized, finrn the sale or erchange or retiremcnt of bonds. - Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.

Gains cannot includ.e interest. - Gains cannot include interest, since it clearly refers to gains from the sale of bonds, debentures and other certificates of indebtedness. Whereas,theterm ointerest" in its general sense, this rule cannot be "gainsu includes applied to Section 32(BX7)(d of the Tax Code in the specific sense. Section 32(A) of the Ta^x Code define.s "gross income' and it is clear that there is a distinction between "gains deriued from dcalings in property" and "interests.' oGains realized from the sale or exchange or retirement of bonds, debentures and other certifi.cate of indebtedness" would fall under the category of "gains deriued from dealings in property." On the other hand, "interests" would include interest from bonds, debentures and other certificate of indebtedness. OnIy citizens, resident aliens and non-resident aliens engaged in trade or business are exernpt from income tax on interest from long-terrn deposit or inuestment. On the other hand, domestic and resident foreign corporations are subject to a 20Vo fi.nal tax on such interest. If Congress intended to exempt interest from bonds, debentures and other certificates ofindebtedness under Section 32(BX7Xil of the Tan Code, it would haue done so in clear and

(Nippon Life Insurance Company u. Commissioner, CTA Case No.6742, Febntan7t 4,20O2).The Supreme Court will not set asid.e lightly the conclusion reached by the CTA which, by the uery nature of its function, is dedicq.ted exclusiuely to the considerq.tion of tax problems. The court agreed with the CTA, uhose findings of facts will not ordinarily be reuiewed, absent any showing of gross error or specific terms

ii;:iH,lil

abuse on its part because ol'its recognized expertise, that

Ruling No. 052, February 19, 1988.

235

if Congress

had intended to exempt interest from bonds, debentures and other certificates of indebtedness, it would ha.ue done so in cleqr and specifi'c terms (Malayan Zurich Insurance a. Comrnissioner, CA-GR SP No. 7707O, March 28, 2OO5). Interest income from long-term deposits in the form of a common trust fund established by RCBC through its Trust and Investment Division is exempt from the 207o frnal withholding tax. However,

should the holder of the certificate pre-terminate the deposit or investment before the fifth year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate on the remaining maturity thereof.3s

Exempt Gorporations Government-owned or controlled corporations.

- All

corporations, agencies, or instrumentalities owned or controlled by the Government, except:

1. 2. 3. 4.

Government Service Insurance System; Social Security System;

Philippine Health Insurance Corporation; and

Philippine Charity Sweepstakes Office

shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity, the provisions of existing special or general laws to the contrary notwithstanding.36

Exempt corporations and associations. - Section 30 of the 199? Tax Code expressly exempts from tax the income received by the following organizations as such: (A)

Labor, agricultural or horticultural organization not organized principally for profit;

(B)

Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock

35BIR Ruling No. 063-2000, November 20,2000. The BIR treats the common trust like an individual that is exempt from interest income on long-term deposits or

investments. saBIR

illl,l'l'lli,:'Ji',,iill:

seSec. 2Z(c),

NIRC.

236

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organized and operated for mutual purposes and without

profiu

(c) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents;

(D)

Cemetery company owned and operated exclusively for the benefit of its members;

(E)

Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural pu{poses, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;

(F)

Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or

indiyidual; (G)

Civic league or organizalion not organized for profit but operated exclusively for the promotion of social welfare;

(H) A non-stock and non-profit educational institution; (D

Government educational institution;

(J)

Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them.

lii:ill,lll,Yil,l'l'ili::il';:1il:

237

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations

f'rom any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code.

While the 1997 Tax Code enumerates certain non-stock, nonprofit associations that are exempt from income tax, their income from property, real or personal, or from an activity conducted for profit, regardless of the disposition of the proceeds of the sale or income, shall be taxable to them.

Charitable Organizations The phrase "any of their actiaities cond.ucted' for profit' does not qualify the word "properties." This makes income from

the property of the organization taxable, regardless of how that income is used - whether for profit or for lofty non-profit purposes. Thus, the income derived from rentals of real property owned by the Young Men's Christian Association of the Philippines, Inc.

(YMCA), established as a welfare, education and charitable non-profit corporation, is subject to income tax' The rental income cannot be exempted on the solitary but unconvincing ground that said income is not coll0cted for profitbut is merely incidental to its operation. The law does not make a distinction. Where the law does not distinguish, neither should we distinguish. Inasmuch as taxes are the lifeblood

of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. YMCA is exempt from the payment of property taxes only but not income taxes because it is not an educational institution devoting its income solely for educational purposes. The term "ed'ucational institutioz' has acquired a well-known technical meaning. Under the Education Act of 1982, such term refers to schools. The school system is s;monymous with formal education which "refers to the hierarchically structured and chronologically graded learning organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to higher levels

(Commiseioner a. YMCA of the Philippines, G.R. No. 724(M3, October 14,1998). Clubs for Pleasure' Recreation and OtherNon'Frofit Purlroses Clubs for pleasure, recreation and other non-profit purposes are

not in the current list of tax-exempt corporations in section 30 of the

238

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nr r rl,il,t nxt r Wt t t tttot,ltt'tr i'l'nxt,:s ],)xclttxtutrH li'ont ( itrrss I ttrrrtltr:

I rr.r

1997 Tax Code. Aperson, object or thing omitted from the enumeration must be held to have been omitted intentionally; hence, their income from whatever source, including membership fees, assessment dues,

rental income, and service fees are subject to income tax. For VAT purposes, even non-stock, non-profit organizations are liable to pay VAT on their sale of goods or services (COMASERCO a . CIR, ibid) . Thus, the gross receipts of recreational clubs, including membership fees, assessment dues, rental income, and service fees are subject to VAT (RMC 35-2012, August 3,2012). Non-Stock, Non-Profit Hospital St. Luke's Medical Center is a hospital organized as a non-stock and non-profit corporation. The BIR assessed it for deficiency income tax for 1998 at l07o preferential tax rate, because it was operating for profit and only LSVa ofits revenues were used for charitable purposes.

The hospital's board, officers and employees directly benefit from its profits. St. Luke's maintained that it was exempt as a charitable and social institution under Section 30(E) and (G) of the Tax Code. Making of profit per se does not destroy its tax exemption. Besides, it secured a BIR ruling confirming its tax exemption. The Supreme Court ruled that Section 27(B) of the 1997 Tax Code does not remove the income tax exemption of proprietary nonprofit hospitals under Section 30(E) and (G) of the Tax Code. They can be construed together without the removal of such tax exemption. The effect ofthe introduction ofSection 27(B) is to subject the taxable income of two (2) specific institutions, namely: proprietary non-profit educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to the I07o preferential rate under Section 27(B), instead ofthe ordinary 30Vo corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1). As a general principle, a charitable institution does not lose its character

as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient or confined in the hospital, or receives subsidies from the government, as long as the money received is devoted or used altogether in the charitable object which it is intended to achieve, and no money inures to the private benefit of the persons managing or operating the institution.

"Proprietary" means private; "non-profi.f," means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit. "Non-profill" does not

239

"choritable" (Collector a. Club Filipino, Inc. d.e Cebu). The sports club in CIub Filipino de Cebu may be nonprofit, but it was not charitable. To be charitable, an organization must meet the substantive test of charity in Lung Center of the Philippines a. Quezon City. Any profit by a charitable institution necessarily mean

must not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is intended to achieve." Charity is essentially a grft to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. As a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. Moreover, to be exempt from income tax, Section 30(E) of the Tax Code requires that a charitable institution must be "organized and operated exclusively" for charitable purposes. Under Section 30(G) of the Tax Code, the institution must be "operated exclusively" for social welfare. However, the last paragraph of Section 30 of the Tax Code qualifies the words "organized and operated exclusively." The last paragraph provides that if a tax exempt charitable institution conducts "any" activity for profit, such activity is not tax exempt, even as its not-for-profit activities remain tax exempt. Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its non-for-profit activities. The only consequence is that the "the income of whatever kind and character" of a charitable institution "from any ofits activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Insofar as the revenues from paying patients are concerned (i.e.. Fll billion revenues from paying patients in 1998 as compared to free services expenditures of F218 million), St. Luke's is a corporation "not operated exclusively" for charitable or social welfare purposes' With the introduction of Section 27(B) of the Tax Code, the rate for non-prof.t proprietary hospital is now \07o. InJesus Sacred Heart College, the Court declared that there is no official legislative record explaining the phrase "any activity conducted for profit." However, it quoted a deposition of Senator Cuenco, who

? 240

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introduced the phrase "or from any activity conducted fbr profit." The question was whether having a hospital is essential to an educational institution like UST College of Medicine. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should be subject to income tax. Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable activities from being taxes (CIR u. St. Luhds Medical Center,Inc., G.R. Nos. 195909 and. L95960, September 26, 2012).

Bar Question (2013) A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital's use and not more than 30Vo of its funds were used for administrative purposes. Is the hospital subject to tax on its income? If it is, at what rate?

Suggested ansvyer: Yes, a non-stoch, non-profit hospital organized for charitable purposes, although generally exempt from income tanc, becomes tanable on incorne deriued from actiuities conducted for profit. Seruices rendered to paying patients are considered ectiuities conducted for profit which are subject to income tax, regardless of the disposition of the said income. The rate is 10Vo of net income, considering that the income earned appears to be deriued solely from hospital-relqted cr.ctiuities (CIR a. St. Luke's Med.ical Center, ibid).

Priuqte educational institution that engages in profitable undertah,ing is subject to tax. - A priuate educational institution which deuiates from its purely educational purposes and actiuities shall be treated like any priuate domestic corporation engaged in business for profit with respect to income deriued therefrom. The protectiue mantle of income tax benefit or exemption cannot be extended to a priuate educationq,l institution which chooses to descend from its high pedestal of tae preference or immunity to the leuel of an ordinary priuate corporation engaged in profi,table undertaking or business (Xaaier Schoolr lnc. a. Commissioner, CTA Case 7682, October 8,7969).

iil.;l:,lli,

,lll,l'li;:,ii'ii,;:llli

24t

Educational institutions. - The income of a private

cducational institution may be exempt from or subject to income tax, depending on what law it is claiming exemption. If it is a non-stock, non-profit private educational institution, whose assets and income are used exclusively, directly and actually for its educational purposes, it is exempt from tax under the 1987 Constitution. However, if it does

not qualify under said provision of the Constitution, it may claim partial exemption from the normal corporate income tax under Section 27(B) of the 1997 Tax Code. It wiII be entitled to the 107o preferential tax rate on its net taxable income, provided that the gross income from unrelated trade, business or other activity the private educational institution and hospital, which is non-profit, does not exceed 507o of the total gross income derived from all sources. The decisions of the court in the cases below have been modified by the amendment to the income tax law. Income of non-stoch, non-priaate ed,ucational institution exempt from taration und.er the 1987 Constitutiot '. - Interests from savings and time deposits are exempt from the 2OVo final withholding tax, if earned by non-stock, non-profit educational institutions as all revenues and assets of these institutions, which are actually, directly and exclusively used for educational purposes are exempt from taxation under the Constitution. The relief given to such schools is expected to be passed on to students in the form of lower tuiticin fees. The specification that these institutions must be non-stock has been added as a safeguard because the moment a stock corporation is formed, there is expectation of dividends or profits (Southeast Asian Regional Center for Grad.uate Stud'y and. Researc h in Agriculture I SEARCA] u. C ommissioner, CTA Case No.4982, October 6, 1995).

Isolated. sa,le of property by non-stock, non-profit found.ation. - GAUF is a non-stock, non-profit organization. On April 25, L998, a Deed of Absolute Sale was executed between GAUF, as seller, and Spouses Callangan, as buyers, involving a real property together with improvements thereon, in the total sum ofF1.3 million. All the proceeds of sale will be used for the construction and improvement of the Golden Pavilion Building, which is an expansion program of GAUF where the service offices of the Registrar, Business and Finance, Accounting, Cashier and Treasurer are now presently located. It also houses a multi-purpose recreational center for the students and personnel of the University. The sale of the land with improvements is exempt from the capital gains tax, considering that

the income derived therefrom did not result from the productive

242

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r rNil,t At.ilr Wt t ttttilt,iltrur i'l'l\t':lt lrolrr ( ilorrrr lrrcotrtr,

24:l

l,lxr'lttltotlr

use of real properties but from a single transaction which is mcrcly incidental to the purpose for which GAUI' was organized; hence, said income is not within the contemplation o{'the last paragraph ol' Section 30 of the 1997 Tax Code.3TThis opinion has been sustained and adopted by the CTA in Congregacion de la Mission de San Vicente Paul u. Collector, CTA Cqse No. 1468, October 74, 1968.1t8

de

Failure to obserae requirem"ent d.oes not constitute utaiuer to eremption. - V.G. Sinco established Foundation College

ofright

of Dumaguete. The Department of Education required that colleges should be incorporated. Hence, in 1951, he organized V.G. Sinco

Educational Institution, a non-stock corporation. It never distributed any dividend or profit to its stockholders. Only part of its income went to the payment of its teachers and to the other expenses of the college incident to an educational institution, but none of the income had been channeled to the benefit of any individual stockholders. While the acquisition of additional facilities may redound to the benefit of the institution itself, it cannot be positively asserted that the same will redound to the benefit of its stockholder, for no one can predict the financial condition of the institution upon its dissolution. Moreover, intended to relieve the taxpayer of the duty of fiIing returns and paying the tax, it cannot be said that the failure to observe the requirement called for therein constitutes a waiver of the right to enjoy the exemption. To hold otherwise would be tantamount to incorporate into our tax laws some legislative matter by administrative regulation. The fact that appellant charges tuition fees and other fees for the different services it renders to the students, which is its only source of income, does not in itself make the school a profit-making enterprise that would place it beyond the puruiew of the law U.G. Sinco Ed.ucational Cotporation a. Collector, 700

Phit.127).

Failure to strictly comply with Reaenue Mernorand.um Ord.er No. 7-2000, which requires the ta.rpayer to secure prior to,r treaty relief from the BIR, will not d.epriae taxpayers of the benefit of a tax treatSt. - BIR issued Revenue Memorandum Order No. 1-2000, which requires that any availment of the tax treaty relief must be preceded by an application with ITAD at least 15 days before the transaction so as to streamline the processing of the application for tax treaty reliefand to prevent the consequences ofan erroneous interpretation and./or application of treaty provisions. Petitioner filed 37BIR 38BIR

Ruling No. 115-92, Apnl 2, 1992. Ruling DA-172-03-19-99.

clirirn lirr [ax credit lirr ovtrrllrrirl llrrrrrr:lt ;lrolil rcrnittance tax &t l5('/r,, whtrre the tax treaty merc,ly rertluires payment of such tax aLLOo/,. BIll, rclying r-rn the late filing of the application under RMO 1-2000 and on the Supreme Court's minute resolution on Mirant (Phil) Operations Corporation u. CIR (CTA EB No. 40, June 7,2005), affirmed by the SC in G.R. No. 168531 in Minute Resolutions dated November 12, 2007 and February 18, 2008, denied the claim, which claim was also denied by the CTA.

The Supreme Court said its minute resolution on Mirant is not a binding precedent, as clarified by it in Philippine Health Care Prouiders u. CIR. Our Constitution provides for adherence to the general principles ofinternational law as part ofthe law ofthe land. The time-honored international principle of pacta sunt seruandq. demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in filrce is binding upon the parties, and obligations under the treaty must be performed by them in good faith. A state that has contracted valid International obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken. Thus, laws and issuances must ensure that the reliefs sranted under tax treaties are accorded to the narties entitled thereto. The BIR must not impose additional requirements international abreements. Moreso, when the RP-Germany Tax Tleaty does not provide for any pre-requisite for the availment of the benefits under said agreement.

Likewise,

it

must be stressed that there is nothing in RMO

1-2000, which would indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. The Supreme Court recognized the clear intention of the BIR in implementing RMO 1-2000, but the CTA's outright denial of a tax treaty relief for failure

to strictly comply with the prescribed period is not in harmony with the objectives of the contracting states to ensure that the benefits granted under tax treaties are enjoyed by duiy entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The obligation to comply with a tax treat)' must take precedence over the objective of RMO 1-2000. Non-compliance with

244

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tax treaties has negative implications on international relnl,ions, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO 1-2000 involve an administrative procedure, these maybe remedied through other system management processes; e.9., imposition of a fine or penalty. More importantly, treaties have the force and effect of law in the Philippines. Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions (CIR a. S.C. Johnson and Son). Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation (Deutsche Bank AG Manila Branch a. CIR, G.n. No. 78855O, August 79,2073).

Bar Question (1996)

(1)

X, an employee ofABC Corporation died. ABC Corporation gave Xs widow an amount equivalent to Xs salary for one

year. Is the amount considered taxable income to the widow? Why?

24lt

Bar Question (1994) Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the interest income from a time deposit ol'F500,000.00 with ABC Bank. Is Miss Santos liable to pay any tax on her income? Suggested answer: Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28[b][7][F], NIRC). Howeuer, as regards her time deposit, the interest she receiues thereon is subject to 207o final withholding tan (Sec.21[a][c], NIRC).

Bar Question (1991) X owns a half-hectare property in Bacoor, Cavite which in 1980 was expropriated by the national government, through the Department of Public Works and Highways. After ten years, X was paid F2,000,000.00 as just compensation plus 6Va annaalinterest by the DPWH but minus the withholding tax. Is the action of DPWH proper? Reasons.

Suggested answer:

Suggested ans\tr'er:

No. The amount receiued by the widow from the decedent's employer may either be a gift or a separation benefit on account of death. Both are exclusions from gross income pursuant to prouisions of Section 28(b) of the Tax Code.

No, the action of DP,:WH is not proper. In the case of Prouince of Tayabas u. Perez (66 Phil. 467), just compensation was defined as "the just and complete equiualent of the loss which the owner of a thing expropriated has to suffer by reason ofthe expropriation."

(2)

A, an employee of the Court of Appeals, retired upon reachingthe compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of F500,000.00.

Is said amount subject to tax? Explain.

Suggested answer: No. The commutation of leaue credits, more commonly known as

terminal leaue pay, i.e., the cash equiualent of accumulated uq.cation and sich leaue credits giuen to an officer or employee who retires, or separated from the seruice through no fault of his own, is exempt from income tqe (B IR Ruling N o. 23 8 I 1, N ou e mber 8, 1 9 9 1 ; C ommis sioner a. Castafi.eda, GR. No.96076, October 77, 7997). -

Further, in BIR Ruling No. 61-91, "just compensation" wq.s defined as that which is paid by the Gouernment equiualent to the ualue of the property at the time of its taking. It is the fair and full equiualent for the indemnity. Based on the foregoing

it is clear therefore that

the amount

receiued after 10 years as just compensation is not in &ny way a profi,t, gain or income on the part of X, in the same uein, the 67a annual interest paid by DPWH is not income. The same partakes of the nature of a

penalty or irudemnity due and accruing to X for hauing been depriued of the use and benefit by not being paid of the fair market ualue of the property since its tahing 70 years ago. Hence, the DPWH should not haue withheld taxes.

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Bar Question (1993) The employees of Travelers, Inc. staged a strike. X, a nonunion member joined the strike and volunteered to picket the company premises from 8:00 A.M. to 12:00 P.M. Monday to Friday. Six months into the strike. X ran out of money and asked financial aid from the union since he has no other source of income and needed financial assistance in order to live. The union gave him F1,000.00 a month to take care of his food requirements plus F500.00 to take care of his monthly rent. When X filed his return, he excluded these benefits from his gross income. The exclusion was denied by the BIR. Decide. Suggested ansv/er: The Fl,500.00 is not compensation income because compensation income arises out of employer-employee relationship as payment for seruices without compensation. The F1,500.00 is a gift from. the Iabor union. According to Section 28(bX3) of the NIRC, gifts are to be excluded from gross income. Thus, the BIR's denial is not ualid.

Bar Question (1991) Born of a poor family on 14 February 1944, Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985, he received F400,000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paylng an annual premium of F1,520.00 since 1965, also matured. He was then paid the face value of his insurance policy in the amount of F50,000.00.

1)

Is Mario's F400,000.00 retirement benefit subject to income

tax?

Suggested answer:

Mario's P400,000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must haue been extended to an employee who is at least 50 years of age and who would haue worked for at lea.st ten (10) years with the employer. The amount cannot be

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247

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2)

Is his F50,000.00 insurance proceeds exempt from income

taxation? Suggested answer:

The F50,000.00 insurq,nce proceeds is not totally exempt from income tax. The ercluded amount is only that portion which corresponds to the premiums that he had paid since 1965. At the rate of F1,520.00 per year multiplied by twenty (20) years which was the period of the policy, he must haue paid a total of F30,400.00. Accordingly, he will be subject to report as toxable income the amount of F19,600.00 (9ec.28, NIRC).

Bar Question (1991) Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the compulsory retirement age of 65. Would the amount he is entitled to receive by way of commutation of his accumulated Ieave credits, of his terminal leave pay, be subject to income tax? Suggested answer: The a,mount tha,t Emrna.nuel Perez is to receiue should not be subjected to incorne tax, and such was the ruling by the Suprerne Court in the In Re: Zialcita Administratiue Case (Adm.. Matter No. 90-6015-SC, October 18, 1990). The ruling apparently repudiated, or at least is inconsistent with, its earlier decision in Commissioner u. Victoriano, G.R. No.83176, August 10, 1989.

Bar Question (1994) Pedro Reyes, an official of Corporation X, asked for an "earlier

retirement" because he was emigrating to Australia. He was paid F2,000,000.00 as separation pay in recognition of his valuable services to the corporation. Juan Cruz, another official of the same company,

was separated for occupying a redundant position. He was given F1,000,000.00 as separation pay. Jose Bautista was separated due to his falling eyesight. He was given F500,000.00 as separation pay. All the three (3) were

248

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not qualified to retire under the BlR-approved pension plan of the corporation.

(1) (2) (3)

Is the separation pay given to Reyes subject to income tax?

(2)

The separation pay giuen to Reyes is subject to income tax ds corLpensation income because it arises from a seruice rendered pursuant to an employer-employee relationship. It is not cortsidered an exclusion from gross income because the rule in taxation is talc construed in strictissimi juris or the rule on strict interpretation of ta.x exemptions.

The separation pay receiued by Cruz is not subject to

The separation pay receiued by Bautista is likewise not subject to his separation is due to disability, hence inuoluntary.

Under the law, separation pay receiued through inuoluntary from taxation,

co.uses is exempt

Bar Question (1999) A Co., a Philippine corporation, has two divisions

-

manufacturing and construction. Due to the economic situation, it had to close its construction division and lay-offthe employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are 2 groups of employees to be laid off:

(a)

Employees who are at least 50 years of age and has at least l-0 years of service at the time of termination of employment; and

(b)

Employees who do not meet either the age or length of service.

A Co. plans to give the following:

-

one month for every year of service.

sick leave credits.

incorne tox because his separation from the company was inuoluntary ( Sec. 28[b] [7], NIRC).

(3)

of service.

For both categories, the cash equivalent ofunused vacation and

How about the separation pay received by Bautista?

Suggested answer:

(1)

I,-or categorv (A) entploy{,(,.s - the benefits under the BIR approved plan plus an ex gntliu peryment of one month of every year For category (B) ernployees

How about the separation pay received by Cruz?

249

A Co. seeks your advice as to whether or not it will subject any of these payments to withholding tax. Explain your advice. Suggested answer: *A"

employees, all the benefits receiued on account of For category their separation are not subject to income tax; hence, no withholding tq.x shall be imposed, The benefits receiued under the BlR-approued plan upon meeting the seruice requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifi.es ds an exclusion from gross income, being in the nature of beneft.t receiued, on account of separation due to causes beyond he employees' control (Sec. 32[B], NIRC). The cash equiualent of unused uacation and sick leave credits qualifies as part ofseparatioru benefits excluded from gross income (CIR u. Court of Appeals' G,R. No. 96076, October 17, 7997).

For category "B" employees, all the benefi.ts receiued by them will also be exempt from income tax; henee" not subject to withholding to'x. These are benefi.ts receiued on accourl,t of separation due to causes beyond the employees' control, which'are specifi.cally excluded from gross income (Sec.32[B], NIRC).

Bar Question (1995) Mr. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered voluntary redundancy program in order to reduce overhead expenses. Under the program an employee who offered to resign would be given separation pay equivalent to his three month's basic salary for every year of service. Mr. Jacobo accepted the offer and received F400,000.00 as separation pay under the program.

After all the employees who accepted the offer were paid, the firm found its overhead still excessive. Hence it adopted another redundancy program. Various unprofitable departments were closed. As a result, Mr. Kintanar was separated from the service. He also received F400,000.00 as separation pay:

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(1)

Did Mr. Jacobo derive income when he received his

h,c i,s en.l,i,l,l,erl.

separation pay? Explain.

plon woukl nttl

Suggested answer:

(1)

(D

Yes, Mr. Jacobo deriued ataxq.ble income when he receiued his separation pa,y because his separation from employment was uoluntary on his part in uiew of his offer to resign. What is excluded fronx gross income is any amount receiued by an official or employee as d consequence of separation of such offi.cial or employee from the seruice of the employer for any cause beyond the control of the said official or employee (Sec.

28, NIRC).

ltt nt't,it,t' tr ttt!cr Lh.a BIR-approued retirement tlurr.Li.fv us un exclusion from gross income.

No. The amount receiued was in consideration of his loyalty and inualuable seruices to the company which is clearly a compensation income receiued on account of employment. Under the employet's'motiuation test,' emphasis should be placed on the ualue of Mr. Quiroz seruices to the company as the compelling reason for giuing him the gratuity; hence, it should constitute a tutable income. The payment would only qualify as a gift if there is nothing but 'good will, esteem and kindness' which motiuated the employer to giue the gratuity (Stanton u. U.S., 186 F. Supp.393). Such is not the case in the herein problem.

Bar Question (1995) Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months' salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital's retirement plan. In view of his loyalty and Invaluable services for forty-five years; hence, it resolved to pay him a gratuity of F1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the F1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (a) it was a retirement pay, and (b)

it was a grft. (1) Is Mr. Quiroz correct in claiming that the additional FlMillion was retirement pay and therefore excluded from

Bar Question (2002) XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. Last January 3, 2000 it sold a portion ofits lot used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Day and Night Care Center for children of single parents. In order to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social welfare projects, the Foundation leased the 30O-square meter area of the second and third floors of the building for use ars a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the income from which is used actually, directly, and exclusively for the purposes for which the Foundation was organized.

a.

exemption to non-stock corporations such as those formed

income? Explain.

(2)

exclusively for religious, charitable or social welfare purposes, explain the meaning of the last paragraph of said Section 30 of the 1997 Tax Code which states that "income of whatever kind and character of the foregoing organizations from any oftheir properties, real or personal, or from any oftheir activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code."

Is Mr. Quiroz correct in claiming that the additional F1 Million was gift and therefore excluded from income? Explain.

Suggested answer:

(1)

No. The additional Fl million is not a retirerruent pay but a part of the gross corlpensation income of Mr. Quiroz. This is not a retirement benefit receiued in accordance with a reasonabl,e priuate benefit plan maintained by the employer as it was not paid out of the retirem.ent plan. Accordingly, the amount receiued in excess of the retirem.ent benefits that

Considering the constitutional provision granting tax

b.

Is the income derived by YYZ Foundation from the sale ofa portion ofits lot, rentals from its boarding house and the operation ofits canteen and gift shop subject to tax? Explain.

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Suggested answer:

a.

The exemption contemplated in the Constitution couers real estate tax on real properties actually, directly, and exclusiuely used for religious, charitable or social welfare purposes. It does not couer exemption from the imposition of the income tax which is within the context of Section 30 of the Tafi Code. As a rule, non-stoch non-profit corporations organizedfor religious, charitable or social welfare purposes

(b)

as such. Howeuer,

b,

lot and rentals its boarding house are considered as incorne from from Yes. The income deriued from the sale of

properties which are subject to tax. Likewise, the incomes from the operation of the canteen and gift shop are income from its actiuities conducted for profit which are subject to tuc. The income tax attaches irrespectiue of the disposition of these incomes (Sec. 30, NIRC; CA and. CIR u.YMCA,

ibid.). Non-stock, non-profit private educational institution

Bar Question (1993) X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for religious purposes by the Church. When the Church tried to register the title of the land, the Register of Deeds refused, claiming that the capital gains tax was not paid. Is the transaction exempt from the capital gains tax?

2Sil

orul intpnttttrrtlctt.ls, thx's rtttt apply becattse the obligation to pay the co1titul, guins tax herein is imposed on X, the seller, and rutt on the Church. Since payment of the capital gains tax is a condition precedent for the registration ofthe transfer certifi.cate of title to real property, the non-payment herein by the seller is a ualid reason for the Registry of Deeds to deny the transfer of title to the subject land'

are exempt from inconxe tuc ontheir income receiued by them

if these religious, charitable or social welfare corporations deriue income from their properties or any of their actiuities for profit, the incorne tax shall be imposed on said items of income irrespectiue of their disposition (Sec. 30, NIRC; CIR u. CA and. YMC{ 298 SCRA 83).

t

No. The tar exemption granted to churches in the Constitution refers to property tax and not to capital gains tax which is an income tan. Besides, the capital gains tax is the liability of the seller X and not the purchaser-

Bar Question (2000) Under Article XIV, Section 4(3) of the 1987 Philippine Constitution, all revenues and assets of non-stock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes

automatically exempt from taxation? Explain.

Suggested answer: No. The interest income on banh deposits aBd yields from deposit

substitutes are not automatically exempt fronl taxation. There must be a showing that the incomes are included in the school's annual information return and duly audited fi'nancial statements together

with:

1.

Certifications from depository banks as to the amount of interest income earned from passiue inuestments not subject to the 20Vo final withholding tax;

Reasons.

2.

Certification of actual, direct and exclusiue utilization of said income for educational purposes;

Suggested answer:

3.

(q.)

No. Under Section 21(e) in relation to Section 49(a)(4) of the National Internal Reuenue Code, the seller is the one liable for the payment of the capital gains tatc from the sale of real property by an indiuidual ta"tcpayer. Meanwhile, the Church in this instq.nt case is the buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts church lands, buildings,

Board resolution on proposed proiect to be funded out of the money deposited in banks or placed in money marhet placements (Finance Department Order No. 749-95, November 24, 1995), uhich must be used actually, directly and exclusiuely for educationq'l purposes. The income deriued frorn dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the

254

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requiretnent for euidence to show actual, direct and erclusiue use for educational purposes. It is to be noted that the 1g87 philippine constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should actual, direct and exclusiue for educational purposes. Consequently, the prouisions of Section 30 of the NIRC of 1gg7, that o non-stock and non-profit educational institution is exempt from tarotion only "in respect to income receiued by them as such" could not affect the constitutional tar exemption. where the constitution does not distinguish with respect to source or origin, the Tax Code should not make distinctions.

CHAPTER

be

Requirement for revalidation of tax exemption for non-stock, non-profit corporations and associations In the light of the ruling of the Supreme Court in the case of all hospitals and

St. Luke's Medicol Center u. CIR, the BIR requires

non-stock, non-profit organizations operating hospitals which were issued tax-exempt rulings before to submit a request for revalidation of their tax-exempt status by submitting cerbain documents. cIR also declares that all rulings issued prior to November l,2\IL,which grant

RETURN OF CAPITAL AND DEDUGTIONS

Return of Capital Income tax is levied by law only on income, which may be gross income or net income; hence, the amount representing return of capital should be deducted from the proceeds from sales of assets and should not be subject to income tax. Cost ofgoods purchased for resale, with proper adjustment for opening and closing inventories, are deducted from gross sales in computing gross income (Sec. 65, Reu. Regs. No.2). Payment of principal by a debtor to a creditor is deducted from the total amount received by the latter in order to determine his interest income.

1.

tax exemption to proprietary non-profit hospitals or to non-stock,

non-profit entities operating hospitals shall no longer be valid (RMC No. 4-2013, January 1 1, 2013). Corporations and associations under Section B0 of the Tax that have been issued tax exemption rulings/ certificates prior to June 30, 20L2 as well educational institutions, shall file their applications for tax exemptions with the RDO where they are registered, by submitting cerbain documentary requirements (RMC No.20-2013, July 22,2013).

VII

Code, including those

Sale of inventory of goods by manufacturers and dealers ofproperties. - In sale ofgoods or properties representing inventory, the amount received by the seller consists ofreturn ofcapital and gain from sale ofgoods or properties. That portion ofthe receipt f'Presenting return of capital is not subject to income tax. Accordingly, cost of goods manufactured and sold (in the case of manufacturers)

or cost of sales (in the case of dealers) is deducted from gross sales and is reflected above the gross income line in a profit and loss statement.

2.

in trade by a real estate dealer and dealer in securities. - While real estate dealers and Sale of stock

dealers in securities also maintain stocks in trade primarily for sale to customers in the course oftheir trade or business,

they are ordinarily not allowed to compute the amount representing return ofcapital through cost ofsales. Rather,

they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged. However, computation of the cost of building projects on pre-sale stage can be based on the estimated

255

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construction cost of the project on the theory that income tax is a tax on gross or net income.

3.

Sale of services. - Sellers of services do not buy and carry nor sell any stock in trade or inventory ofproperty; hence, they do not take or assume any risk of loss similar to sellers ofinventory ofgoods. Their entire gross receipts are treated as part of income. Some sellers of services, however, have cost of services that must be deducted from their gross receipts in order to arrive at their gross income, which amount is used in computing their two percent (2Vo) MCIT for the year.

Bar Question (1993) In 1990, X started constructing a commercial building with spaces for lease to the public. X required Y, a prospective lessee to sign a pre-lease agreement, which principally provided: (a) that the lessee shall extend to the lessor a non-interest bearing loan of F100,000.00

payable within twelve (12) months; and (b) that in consideration of the loan, the lessee shall be given preference in the lease and his rentals shall not be increased while the loan remains unpaid. Upon completion of the building, Y extended the loan of F100,000.00 to X and he was given a space in its ground floor. May the BIR consider the F100,000.00 as taxable income of X? Reasons.

Suggested answer: Section 28 of the NIRC defines "gross income' as all income from whateuer source deriued including but not limited to the following items:

a)

Compensation for seruices, including fees, cornmissions, ond similar items;

b) c) d) e) fl g) h)

Gross income deriued

from business; Gains deriued from dealings in property; Interest; Rents; Royalties;

Diuidends; Annuities;

il j) h)

2lt7

rrtr
Prizes and wirtrt,itt.gs; Pensions; and

Partner's distributiue share of the gross income of general p rofe s s io nal p artner s hiP.

Further, under Section 36 of Revenue Regulations No.2, "toxable in a broad sense n'Leans all wealth which flows into the taxpayer other than as a rnere return of capital. incon1.e"

of the income specifically describedas gains gains deriued from the sale or other disposition and profits, including of assets. Gross income, n'Lectns income (in the broad sense) less income which is by statutory prouision or otherwise exempt from. the tax

It includes the forms

imposed by law.

Applying the aboue prouision of law to the case at bar, the amount of ?100,000.00, being a loan or an indebtedruess, is an outlay, not a taxable incorne or gain.

Bar Question (2001) Distinguish "Exclusion from Gross Income" from "Deductions From Gross Income." Give an example of each' Suggested answer: Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part ofgross income, fpr purposes of computing the tarpayet's taxable income, due to the folloving reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; (3) It does not come withinthe definitionof income (9ec.61, Reu. Regs.

No.2). Deductions from gross income, on the other hand, are the a,mounts, which the lq.w allows to be deducted from. gross income in order to q.rriue at net income. Exclusions pertain to the com'putation of gross income, while deductions pertain to the computation of net income.

Exclusions are something receiued or earned by the taxpayer, which do not form part of gross income while deductions are something

spent or paid in earning gross income.

Example of an exclusion from gross income is proceeds of life insurance receiued by the beneficiary upon the death of the insured

258

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q.n income or 13th month pay of an employee not exceeding P30,000.00, which is an income not recognized for tax purposes. Example of a deduction is business rental.

purchase oflaw books, enlertainrnent expenses, car insurance and car depreciation. The BIR disallowed the deductions. Was the BIR

Ded.uctions are construed. strictly against the taxpoyer - He who claims a deduction must point to the specific provision of the statute authorizing it, and he must be able to prove that he is entitled to it. As a general rule, deductions are strictly construed against the taxpayer claiming them and it is incumbent upon the taxpayer to establish a clear right to tax exemption. Tax exemptions are looked upon with disfavor (Western Minolco Corporation o. Cornrnissioner, 124 SCRA 272).If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent (Comrnissionerof Customs u.Philippine Acetglene Co., Bg SCRA 7O). However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction will not apply (Commissioner a. Arnold.us Canpenhy Shop, 159 SCRA 199).

Suggested answer:

which is not

claiming it.

Deductions from Gross lncome There are three (3) types ofdeductions from gross income. These are:

a.

The itemized deductions in Section 3 (A) to (J) and (M) available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines;

b.

The optional standard deduction in Section 34(L) available to individual and corporate taxpayers deriving business,

c.

correct?

No, the BIR is wrong in disallowing the deductions claimed by Atty. Gambino. It appears that the general professional partnership cloimed itemized deductions from its gross reuenues in arriuing at its distributq.ble net income. The share of a partner in the net income of the partnership must be reported by him as part of his gross income from practice of profession qnd he is allowed to claim further deductions which are reasonable, ordinary and necessa'ry in the practice of profession and were not claimed by the partnership in cornputing its net income (5ec.26, NIRC; Reu. Regs. No. 16'2008, February,2010). INOTE: The examinee may want to qualify his answer further by citing the rules on (a) purchases of law boohs, which can be a capital expenditure; (b) entertainment ex,penses, which must conform to the ceiling for sellers of seruices; (c) car insurance and depreciation, which are deductible only to the extent that it was used for business or practice of IawJ.

Business Expenses Conditions for deductibility of business expenses:

1. It must be ordinary and necessary; 2, It must be paid or incurred during the taxable year; 3. It must be paid or incurred in carrying on or which are directly attributable to the development, management,

professional, capital gains, passive income, or other income not subject to final tax; and

operation and/or conduct ofthe trade, business or exercise of profession;

The special deductions in Sections 37 and 38, both ofthe Tax Code, and in special laws like the BOI Law (E.O. 226).

4. It must be supported by adequate invoices or receipts; 5. It is not contrary to law, public policy or morals; and 6. The tax required to be withheld on the expense paid or

Bar Question (2013) Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty. Gambino, in accordance with its articles of partnership. In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim, such as

payable is shown to have been remitted to the BIR (Sec. 2.58.5, Reu. Regs. No. 2'98, April 77, 1998).

An expense is "ordinary" when it connotes a payment, which is normal in relation to the business ofthe taxpayer and the surrounding circumstances. An expense is "necessary" where the expenditure is appropriate or helpful in the development of the taxpayer's business

260

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or that the same is proper for the purpose of realizing a profit or minimizing aloss (General Electric IPJJ, Inc. u. Collector, CTA Case 7717, July 74, 1963).

Bar Question (2009) Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense as deduction from gross income, claiming an ordinary business expense. Is MFC correct?

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Suggested answer: In 1995, respondent paid P9.4 million for aduertising a product. This was disallowed by the BIR as ordinary and necessqry erpense and considered the sante as capital expenditure, since the amount was staggering, which was incurced to creqte or maintq,in some form of goodwill for the taxpayer's trade or business or for the industry or profession of which the taxpayer is a member. The court held thot "goodwill" generally denotes the benefit arising from connection and reputation, and efforts to establish reputation qre akin to acquisition ofcapital assets. Therefore, eJcpenses related thereto are not (ordinary and necessary) business ucpenses but are capital expenditures (that are not deductible pursuant to the prouisions of Section 36 ofthe Tax Code) (Commissioner a. General Foods Phjl., G.R. No. 14g6Z2, April 24,2OOg).

Professional erpensea are d.eductible in the year the professional seraices are rend.ered., not in the year they are billed.. - In 1984 and 1985, legal services were rendered by the

26t

or liability bc known ubsolul,trl.y; it only requires that a taxpayer has at its disposal the inlirrrrration necessary to compute the amount with reasonable accuracy, which implies something less than an exact

or completely accurate amount. Moreover, deduction partakes the nature of tax exemption; it must be construed strictly against the taxpayer ( Commis sioner u. Isabela Cultural C orporation, G.R. No. L72231, Februany 12,2007).

Additional requirements for deductibility of certain payments Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with this Section, Sections 57 and 58 of this Code (Sec. 34[K], NIRC). Implementing the above provision of law, Revenue Regulations No. 12-2013 dated July 12,20L3 provides that: "No deduction will also be allowed, notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Sections 57 and 58 of the Code."

Bar Question (1994) In December 1993, the So ngguniang Bayan auLhored a Christmas bonus of F3,000.00, a cash gift of F5,000.00, and transportation and

representation allowance of P6,000.00 for each of the municipal

lawyer, but they were billed by the lawyer and paid by the respondent in 1986. In 1985, auditing services were rendered by the accountant but billed and paid in 1986. In the audit of the books for 1986, the BIR disallowed the expenses for 1986 pursuant to the "all events test." The CTA and CA ruled in favor of the respondent. However, the Supreme Court reversed their decisions since taxpayer uses the accrual method of accounting.

employees.

The Court ruled that accrual of income and expense is permitted when the "aII euents test' h:as been met. This test requires: (1) fixing a right to income or liability to pay; and (2) the availability of reasonably accurate determination of such income or liability. It added that it does not, however, demand that the amount of income

Suggested answer:

(1) (2) (3)

Is the Christmas bonus subject to any tax? How about the cash gift?

How about the transportation and representation allowances?

(1)

The Christmus bonus giuen by the Sangguniang Bayan to the municipal employees is taxable as additional compensation (Sec. 21[a], NIRC).

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(2)

The cash gift per employee of ?5,000.00 being substantial may be considered taxable qlso. It is in the nature of additional cornpensation income as it is highly doubtful if municipal gouernments are authorized to make gifts in substantial sums such as this. It is not furthermore Sift of

"srnall ualue" which employers might giue to their employees on special occasions like Christmas - items which could be exempt under BIR Reuenue Audit Memorandum Order No. 1-87. INOTE: It is considered q,s de minimis benefits under Reu. Regs. No.3-98, as amend.ed; hence, exempt from income tuc q.nd fringe benefits tax.l

(3)

The transportation and representation allowances qre actually reirnbursements for excpenses incurred by the employee for the ernployer. Said q.Ilowonces spent by the employee for the ernployer are designed to enhance the quality of the seruice that the employer is supposed to perform for its clientele like the people of the municipality.

Bar Question (2006) Gold and Silver Corporation gave extra 14th month bonus to all its officials and employees in the total amount of F75 million. When it filed its corporate income tax return the following year, the corporation declared a net operating loss. When the income tax return of the corporation was reviewed by the BIR the following year, it disallowed as item of deduction the F75 million bonus the corporation gave its officials and employees on the ground of unreasonableness. The corporation claimed that the bonus is an ordinary and necessary expense that should be allowed.

Suggested answer:

I will rule against the deductibility of the bonus. The extra bonus is both not normal to the business and unreasonq.ble. Admittedly, there is no fixed test for deterrnining the reasonableness of a bonus as dn additional compensation. This depends upon nxany factors, such as the payment must be made in good faith; the character of the taxpayet's business; the uolunte a.nd amount of its net earnings; the locality; the type and extent of the seruices rendered; the salary policy of the corporation; the size of the particular business; the employees' qualification and contributions to the business uenture; and general economic conditions (CJ],1. Hoskins & Co, Ine. u. CIR, 30 SCRA 434 t19691). Giuing an extra bonus at a time that the company suffers

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nol u lttr,vtrtut.l irt. gtxtd laith and is not normal to the business; hence, unreasonttltle und would not qualify as ordinary and necessary ex,peruse. operatinSl los.stts is

Bar Question (1993) X just hurdled the bar examinations and immediately engaged in the practice of law. In preparing his income tax return he listed the following as deductible items: (a) fees paid to the Supreme Court to be able to take the bar examinations; (b) fees paid to a law school to enroll in its pre-bar review classes; (c) malpractice insurance; and (d) amount spent to entertain a judge who decided his first case. Which deductions are allowable? Reasons.

Suggested answer: Section 29 of the Nation'al Internal Reuenue Code on deductions,

among other things, prouides:

"(a)

Expenses

(1)

Business Expenses (q) In General - All the ordinary and necessary qcpenses paid or incurred during the taxq.ble year in carrying on any trade or business. Including a

reasonqble allowance for salaries or other compensation for personal seruices actually rendered; traueling ucpenses while away from' home in' the pursuit of a trade, profession or business: rentals or other payments required' to be mq'de as a condition to the corutinued use or possession, for the purpose of the trade, profession or business of property to which the taapayer has not taken ruor is not tahing title or in which he has no equity."

Further, Section 69 of Reuenue Regulations No. 2, as amended, otherwise known as "Income Tax Regulations," reads:

"Sec. 69. Professional Expenses - A professional may claim as deductions the cost of supplies used by him or in the practice of his profession, etcpenses paid in the operation and repair of transportation equipment used in making professionq,l calls, dues to professional societies and subscriptions to professiorual jourruals; the rent paid for office roon'Ls' the expenses of the fuel, Iight, u)ater, telephone, etc.

264

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used on such offices, qnd me hire of office assistants.

Amounts currently expended for books, furniture and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture and professional instruments and equiprnent of a permanent charqcter are not allowable deductions." From the foregoing prouisions oflaw that ordinary and necessary expenses incurred during a tascable year pertaining

directly to the practice of a profession may be allowed as d.eductions, it may be inferred from a keen reading of Section 69 of Reuenue Regulations No. 2 thot aside frorn personal exemptions, only direct costs or ouerhead expenses incurred in the actual practice of a profession may be claimed; i.e., supplies, fuel, Iight, electricity, salaries, etc. Applying the aboue considerations in the case at bar, it appears that arnong the expenses incurred by X, only the premiums he paid for malpractice insurance qualifies as a deductible expense, the same being an ordinary q.nd necessctry expense in the pursuit of a profession as defined by Section 29 of the NIRC and further qualift.ed by Reuenue Regulations No. 2. The tuition fees for pre-bar classes and the bar examination fees paid to the Supreme Court by X do not qualify as deductible expenses under Reuenue Regulations No. 2. As for the amount spent by X to entertoin the Judge who decided his first case, the same may not be claimed as an expense. A business elcpense to be deductible must be sustained by adequate proof and that the same must not be against the law or public policy (Consolid.ated Mines a. Court of Tar Appeals and, Commissioner, 58 SCRA 618,.

Bar Question (1993) X is the Advertising Manager of Mang Douglas Ham, Inc. X had dinner with Y, owner of a chain of burger restaurants, to convince the latter to carry Mang Douglas'hamburger. AJter Y agreed, both X and Y went their separate ways. X celebrated by going to a single's bar. He picked up a partner and consumed a bottle of beer. He drove home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as a result ofthe accident. X settled the case extra-judicially by payrng the heirs of the pedestrian F50,000.00. The money, however, came from Mang Douglas Hamburger, Inc. Discuss whether the F50,000.00

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cun be claimed by Murrg l)otrglrrs I lamburger, Inc. as an ordinary and necessary expense.

Suggested answer: No. As the expenditure hq.d not been incurred in carcying on his trad.e or business, the same cannot be cortsidered an ordinary and necesscrry expense for which deduction may be claimed- Such expense is a personal expense which is not deductible from the gross income pursuant to Section 36 ofthe 1997 Tax Code-

Bar Question (1998) MC Garcia, a contractor who won the bid for the construction of public highway, claims as expenses, facilitation fees which according to him are standard operating procedure in transactions with the government. Are these expenses allowable as deduction from gross a

income?

Suggested answer: No. The alleged facilitation fees which he claims as standard operating procedure in transactions with the gouernment comes in the form of bribes or "kich,bach" which are not allowed as deductions frorn gross income (Sec. 34[A]fl1[c], NIRC)-

Bar Question (2001) In order to facilitate the processing of its application for

a

Iicense from a government offrce, corporation A found it necessary to pay the amount of Php100,000 deductible from the gross income of Corporation A? On the other hand, is the Php100,000 taxable income of the approving official? Explain your answers.

Suggested answer: Since the amount of Php100,000 constitutes a bribe, it is not allowed a.s a deduction from gross income of Corporation "A" (Sec' 34tAltlltcl, NIRC). Howeuer, to the recipient gouernment official, the same constitutes a ta.xable income. All income from legal or illegal sources is taxable absent any clear prouision of law exempting the same. This is the reason why gross income had been defined to include inconre d,eriued. from whateuer source (Sec. 32[A], NIRC). Illegally acquired. income constitutes rectlized income under the claim of right doctrine (Ruthin u. U.S., 343 U.5.130).

266

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Bar Question (1993) X is the proprietor ofVanguard, which is a security and detective

agency. X was able to get the contract to provide the security services of a government agency. He signed the Security Agreement with the director of the government agency calling for the deployment of 100

security guards on a 24-hour basis. The contract was revocable at the will of the director. To please the director, X gives him at the end of the month F100,000.00 per guard hired. May X deduct from his income the money he paid to the director? Reasons.

Suggested answer:

paid

to please the director is not deductible. This is bribery. Deductions shall not be qllowed if the expense is

The money

a form of contrary to law, public policy or for immorq.I purposes (Za,mora v. Commissioner, I SCEA 763; Roras a. CTA and. Cornmisaioner, 23 SCRA 276).

Bar Question (1998) Are contributions to a candidate in an election subject to donor's tax? On the parb of the contributor, is it allowable as a deduction from gross income?

Suggested answer:

q,)

b)

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No, prouided the recipient candidate had complied

with the requirement for fi.ling of returns of contributions with the Comrnission on Elections as required under the Omnibus Election Code. The contributor is not allowed to deduct the contributions because the sa.id ex,perlse is not directly attributable to, the

deuelopment, management, operation andlor conduct of a trade, business or profession (Sec. 34[A]il1[a], NIRC). Furthermore, if the candidq,te is an incumbent government

official or employee, it rnay even be considered as a bribe or a kichback (Sec. 34[A]fl1[c], NIRC).

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In general, the amotttrt, ol'interest expense paid or incurred within a taxable year on indebtedness in connection with the taxpayer's trade, business or exercise ofprofession shall be allowed as a deduction from the taxpayer's gross income. The provisions of Section 4(b) of Revenue Regulations No. 13-2000 to the contrary

notwithstanding, interest incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction heretofore mentioned. Thus, such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax.

Optional treatrnent of interest expense on capital erpend,iture. - At the option of the taxpayer, interest expense on a capital expenditure incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction in full in the year when incurred, the provisions of Section 36(AX2) and (3) of the 1997 Tax Code to the contrary notwithstanding, or may be

treated as a capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure (Sec. 34[B]t31, NIRC). However, should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments because that would constitute double tax benefits which is not authorized by law (Paper Ind.ustries Corporation of the Philippines u. Com'missioner, 250

scRA434). Conditions for deductibility of interest.

- In general, for the requisites are the following the subject to certain limitations,

deductibility of interest expense from gross income, uiz.:

1.

There must be a valid and existing indebtedness;

2.

The indebtedness must be that of the taxpayer;

3.

The interest must be legally due and stipulated in

4.

The interest expense must be paid or incurred during the taxable year;

i).

The indebtedness must be connected with the taxpayer's trade, business or exercise ofprofession;

6.

The interest payment arrangement must not be between related taxpayers as mandated in Section 34(BX2)(b), in relation to Section 36(8), both of the Tax Code of 1997;

lnterests olnterest'is the amount paid by a debtor to his creditor for the use or forbearance of money (Art. 1956, Ciuil Code of the Philippines).

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7. 8.

The interest is not expressly disallowed by law to be deducted from the taxpayer's gross income(e.9., interest on indebtedness to finance petroleum operations); and The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayer's otherwise allowable deduction for interest expense shall be reduced by 33Vo (Sec. 34[B][1], NIRC).

Bar Question (1992) Sometime in December 1"980, a taxpayer donated to his son 3,000 shares of stock of San Miguel Corporation. For failure to file a donor's return on the donation within the statutory period, the taxpayer was assessed the sum of F102,000.00, as donor's tax plus 25Vo stncharge or F25,500.00 and 2OVo interest or F20,400.00 which he paid on June

24,L985.

April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for interest amounting to F9,500.00 and On

reported a taxable income of F96,000.00. On November 10, 1986, the taxpayer filed an amended income tax return for the same calendar year 1985, claiming therein an

additional deduction in the amount of F20,400.00 representing interest paid on the donor's gift tax.

The commissioner's argument is misplaced because the interest on the d.onorls tuc is not one that can be considered as hauing been incurred. in connection with the to.xpayer's trade, business or exercise of profession. Tq,x obligations constitute indebtedness for purposes of d.ed.uction from gross income of the amount of interest paid on

indebtedness (CIR u. Palanea, 78 SCRA 496). Although interest payment for delinquent taxes is not deductible as ta'x, the taxpayer -is preclud.ed. not from claiming said interest q,s deduction a's such

(Collector

What is your opinion on the argument of the Commissioner that a tax is not indebtedness so that deducibility on the interest on taxes should not be allowed?

Magalona, L-75802, Septem.ber 30,7960).

Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense.

1)

Interest on loans used to acquire capital equipment or machinery;

2)

Depreciation of goodwill.

Suggested answer:

1)

This is a deductible item from gross income. The law giues the toxpayer the option to clairn as a deduction or treat a'6 capital expen'diture interest incurred to acquire property used in trade, business or exercise ofa profession (Sec.34[B] [3], NIRC).

2)

Depreciation for 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 defi'nitely lirnited in d'uration (Basilan Estates u. CIR,21 SCRA 17). Such is not the case with goodwill-

is deductible from the gross income for the same year pursuant to Section 29(bX1) of the National Internal Revenue Code.

1)

u.

Bar Question (1999)

took issue with the Court of Tax Appeals' determination that the amount paid by the taxpayer for interest on his delinquent taxes

The Commissioner of Internal Revenue pointed out that a tax is not indebtedness. He argued that there is a fundamental distinction between a "tax' and a "debt." According to the Commissioner, the deductibility of interest on indebtedness from a person's income tax cannot extend to interest on taxes.

269

Suggested anawer:

A claim for refund of alleged overpaid income tax for 1985 was fiIed with the Commissioner which was subsequently denied. Upon appeal with the Court of Tax Appeals, the Commissioner

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Bar Question (1999) A Co., a Philippine corporation, issued preferred shares ofstock with the following features:

1. 2.

Non-voting; Preferred and cumulative dividends at the rate of tOTo pet annum, whether or not in any period the amount is covered by earnings or Projects;

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3.

In the event of dissolution of the issuer, holders of pref'erred stock shall be paid in full or ratably as the assets ofthe issuer may permit before any distribution shall be made to common stockholders; and

4.

The issuer has the option to redeem the preferred stock.

A Co. declared dividends on the preferred stock and claimed the dividends as interest deductible from its gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains that the preferred shares with their features are really debt and therefore the dividends are really interests. Decide.

Suggested answer: The diuidends are not deductible from gross income. Preferred shares shall be considered capital, regardless ofthe conditions under which such shares are issued and, therefore, d,iuidends paid thereon are not considered ointerest" which are allowed to be deducted from the gross income of the corporation (RMC No. 17-71, July 12, 1971).

All taxes, national or local, paid or accrued during the taxable year in connection with the trade or business or profession of the taxpayer are deductible from gross income, except: Philippine income tax(9ec.87, Reu. Regs. No.2); Foreign income tax(9ec.82, Reu. Regs. No.2);

'l'axes are nttt Hpccilicull.y excluded by law from being deducted from lhe taxpayer's gross income' unutilized creditable input taxes attributable to zero-rated sales can only be recovered through the application for refund or tax credit. unapplied input taxes after the expiration of the two (2)-year prescriptive period may not be expensed outright. Tax exemptions are strictly construed against the taxpayer, and deductions are in the nature of tax exemptions (BIR Ruling No. 123-2013, March 25, 2013; RMC No. 57'2013, August 23,2013).

4.

Losses Losses are generally classified into: (a) those incurred in a trade

or business for profit; (b) those incurred in any transaction entered into for profit, although not connected with the trade or business; and (c) casualty losses that arise from fire, storm, shipwreck, or other casualty, or from theft or robbery, even though not connected with the trade or business ofthe taxpayer.

Conditions for deductibility of losses

The loss must be that of the taxpayer;

3. 4.

The loss is evidenced by a closed and completed transaction;

Special assessments on real property (Sec. 84, Reu. Regs.

5. 6.

Electric energJ consumption tax under B.P. 36.

Pa5rments must be for taxes;

Taxes are imposed by law upon the taxpayer;

The loss is actually sustained and charged taxable year;

offwithin the

The loss is not claimed as a deduction for estate tax purposes;

Conditions for deductibility of taxes:

1. 2. 3.

(Reu. Regs' No' 12'77

1. 2.

Estate and donor's taxes (Sec. 83, Reu. Regs. No.2);

No.2); and

5.

t

and Reu. Regs. No. 10-79)

Taxes

1. 2. 3. 4.

27

7.

The loss is not compensated for by insurance or otherwise; case of an individual, the loss must be connected his trade, business or profession, or incurred in any with transaction entered into for profit though not connected with his trade, business or profession; and Inthe case ofcasualtyloss, ithasbeenreportedtothe BIR within 45 days from date ofoccurrence ofthe loss'

In the

Taxes must be paid or accrued during the taxable year

Bad Debt Theory

profession; and

Under the bad' d'ebt theory, loss from theft or embezzlement occurring in the year and discovered in another year is ordinarily deductible for the year in which sustained. In a case, however, where

in connection with the taxpayer's trade, business or

272

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the taxpayer had no means of determining the actual date o{'thc embezzlement, a loss was sustained in the year of discovery. The rule is now modified by the bad debt theory which holds that since ltreembezzlement of funds creates a debtor-creditor relationship, the loss is deductible as bad debt in the year when the right of recovery becomes worthless (Talisay-Silay Milling Co. u. Comrnissioner, CTA Case 1-399, Decetnber 29, 1965).

Losses must be Evidenced by Closed and Completed Transaction The rule is that loss deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss (Plaridel Surety & Insurance Co. v.

Collector, 21 SCRA 1187). Losses must usually be evidenced by closed and completed transactions. Proper adjustment must be made in each case for expenditures or items of loss properly chargeable to capital account, and for depreciation, obsolescence, amortization, or depletion. Moreover, the amount of the loss must be reduced by the amount of any insurance or other compensation received, and by the salvage value, ifany, ofthe property. A loss on the sale ofresidential property is not deductible unless the property was purchased or constructed by the taxpayer with a view to its subsequent sale for pecuniary profit. No loss is sustained by the transfer of property by gift or death. Losses sustained in illegal transaction are not deductible.l The law contemplates the deduction from gross income of losses only which are fixed by identifiable events. The income tax law is concerned only with realized losses and it was only in 1949 that petitioner reasonably ascertained the fact of and the amount of the loss was not yet evidenced by a closed and completed transaction as the possibility of reimbursement was still real and substantial (Alhambra Cigar & Cigarette Mfg. Co. o. Collector, CTA Case 743, July 37, 7956).

LSec. 96, Rev. Regs.

No. 2.

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Bar Question (2010) "A" is a travelling salesman working full time for Nu Skin

Products. He receives a monthly salary plas 37o commission on his sales in a southern province where he is based. He regularly uses his own car to maximize his visits even to far-flung areas. one fine day, a group of militants seized his car. He was notified the following that the marines and the militants had a bloody aav lv tt "-police car was completely destroyed after a grenade hit his and encounter file a claim for casualty loss. Explain the legal basis to wants it. "A"

ofyour tax advice. Suggested answer:

I would, aduise oA" not to file a claim for casualty loss deduction frorn gross income, because he deriues purely compensation income, 'whici

includ.es the SVo commission on his sales, from his employer. An ind.iuid,uul who receiues compensation income under an employer' employee relationship is not entitled to any kind of deduction (whether itemiied. or the stand.ard ded.uction) frorL gross income (Sec. 34, NIRC} Ind,eed1 he is allowed to deduct from his gross compensation income only the personal and ad.ditional exemptions authorized in section 35 olihe fax Cod.e. Besid,es, to be deductible fronx gross income, casualty loss rnust relate to a property connected with the trade, business or profession of the taxpayer (Sec. 34[D][2] ' NIRC).

Bar Question (1998) Give the requisites for deductibility of a loss.

Suggested answer: The requisites for deductibility of a loss are: (a) loss belongs to the taxpayerj &) q.ctuqlty sustained and charged offduring the ta"x,able (c) euid'enced, by a closed and com'pleted transaction; (d) not yeq.r; -compensated. by insurance or other forms of ind.emnity; (e) not claimed q,s i d,eduction for estate tax purposes in case of indiuidual taxpayers; and. (f) if it is a casualty loss it is euidenced by a declaration of loss filed within 45 days with the BIR.

Bar Question (1993) X is a traveling salesman in Jolo, Sulu. In the course of his travel, a band of MNLF seized his car by force and used it to kidnap

274

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a foreign missionary. The next day, X learned that the military and the MNLF band had a chance encounter. Using heavy weapons, the military fired at the MNLF band that tried to escape with the use of Xs car. All the members of the band died and X's car was a total wreck. Can X deduct the value of his car from his income as casualty

Suggested answer: Section 29(1Xc) of the National Internal Reuenue Code prouides that in cases of indiuiduq.l taxpayers, losses to be deductible must:

a)

Bar Question (1999) Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the deduction.

1) 2)

loss? Reasons.

actually be sustained and charged off within the taxable

c)

haue been incurred in trade, profession or business or in any transaction entered into for profi.t, though not connected with trade, profession, or business; be euidenced by a closed

and completed trctnsaction.

Moreouer, Section 1 of Reuenue Regulations No. 12-77 defined loss' as a complete or partial destruction. of property resulting an identifiable euent of sudden, unexpected, or unusual nature. from It denotes accidents, some sudden inuasion by hostile agency, and ocasualty

excludes progre s siue deterioration.

Bosed on the aboue-mentioned laws and the circumstances

of

the case at bar, the ualue of the wrecked car is deductible as casualty lo ss, prou ided the regulation s gou erning sub stq.n tiation requirements

for losses are complied with.

Bad Debts The term "bad debt" refers to debt resulting from the worthlessness or uncollectibility, in whole or in part, of amount due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. A bad debt arises when a loan or debt for services or sale or rental ofproperby becomes worthless or uncollectible. The debt must have had a value

when acquired or created. If a worthless debt arises from unpaid wages, rents, etc., there is no deduction, unless the unpaid amount has been included in income. A genuine creditor-debtor relationship must exist. (Sec.2, Reu. Regs, No. 5-99, March 70, 1999, as amended by Reu. Regs. No.25-2002, Nouember 19,2002).

Reserves forbad debts;

Worthlesssecurities.

Suggested answer:

1)

ye&r;

b)

27{t

2)

for bad debts are not allowed as deduction from gross income. Bad debts must be charged off during the taxable year to be allowed as deduction from gross income' The mere setting up of reserues will not giue rise to any deduction ( Sec. 34[E], NIRC). Worthless securities, which are ordinary assets, are not allowed, as d.eduction from gross income beca,use the loss is not realized. Howeuer, if these worthless securities are capital assets, the owner is considered to haue incuted a capital loss as of the last day of the ta*able year and, therefore, ded,uctible to the extent of capital gains (Sec' 34tDlt4l, NIRC). This deduction, howeuer, is not q'llowed to a bank or trust company (Sec. 34[E][2], NIRC). Reserues

Bar Question (2004) PQR Corporation claimed as a deduction in its tax return the amount of F1,000,000.00 as bad debts. The corporation was assessed by the commissioner of Internal Revenue for deficiency taxes on the ground that the debts cannot be considered as "worthless," hence, lhey do not qualif] as bad debts. The company asks for your advice o' i,Whut factors will hold in determining whether or not the debts are bad debts?" Answer and explain briefly.

Suggested answer: In ord.er that d,ebts shall be considered as bad debts because they haue become worthless, the taxpayer should establish that during the year for which the deduction is sought, a situation deueloped as a result of which it became euident in the exercise of sound, objectiue business jud.gment that there remained no practical, but only uaguely theoretical, prospect that the debt would euer be paid (collector of Internal Reuenue o. Good'rich International Rubber Co'r 21

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SCRzf /J,36 [1967]). "Worthless" is not determined bv an in/h:xihl.e formula or slide rule calculation, but upon the exercise of' stturut, business judgment. The factors to be consid,ered include, but aret rutl limited to, the following: (a) the debtor has no property nor uisible income; (b) the debtor has been adjudged banhrupt or insoluent; (c.) collateral shares haue become worthless; and (d) there ere numerous debtors with small amounts of debts and further qction on the accou.nts would entail etc.penses exceeding the amounts sought to be collected.

Bar Question (2003)

A. B.

What is meant by the "tax benefit rule"? Give an illustration of the application of the tax benefit rule.

Suggested answer:

A.

Tax benefit rule states that the taxpayer is obliged to declare as tucable incorne subsequent recouery of bad debts in the year they were collected to the extent ofthe tax benefit enjoyed by the taxpayer when the bad debts were written-off and claimed as deduction from gross income. It also applies to taxes preuiously deducted from gross income but which were subsequently refunded or credited. The ta;xpayer is also required to report as tq.Jcable income the subsequent tax refund or tax credit granted to the extent ofthe tax benefit ofthe taxpayer enjoyed when such taxes were preuiously claimed as deduction from income.

B.

X Company has a business

connected receiuable amounting to F100,000.00 fromY who was declared bankrupt by a competent court. Despite eq,rnest efforts to collect the same, Y was not able

to pay, prompting X Cornpany to write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for income tax purposes reducing the taxable net income of X Cornpany to only P1,000,000.00. Three (3) years later, Y uoluntarily paid his obligation preuiously written-off to X Company.In the year of recouery, the entire amount constitutes part of gross income of X Company because it was able to get full tax benefit three (3) years earlier.

Tax Benefit Rule.

-

The recovery of bad debts previously

allowed as deduction in the preceding year or years shall be included as part of the taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said deduction. Example: If in the year the taxpayer claimed deduction of bad debts written-off,

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277

hrr rcirlized a rcductitltt ol't,Jtrr ittt:otttel lax due from him on account of the srrid deduction, his subscquent recovery thereoffrom his debtor shall be treated as a receipt of realized taxable income. conversely, if'the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e., where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereofshall be treated as a mere recovery or a return ofcapital, hence, not treated as receipt of realized taxable income.

Under the "tax benefit rule or equitable doctrine of tax benefit," the recovery of amounts deducted in previous years from gross income become taxable income unless to the extent thereof, the deduction did not result in any tax benefit to the taxpayer. Revenue Regulations No. 2 provides that any amount subsequently received on account ofa bad debt previously charged offand allowed as deduction for prior years must be included in the gross income for the taxable year in which received. But construing a similar provision in the Federal Income Tax Regulations, it was ruled that recoveries of bad debts previously deducted do not constitute taxable income, unless the deductions of bad debts in prior years resulted in a reduction of income tax liability. This doctrine can only be availed ofby a creditor but never by a debtor (Philippine Fiber Processing Co. a. Commissioner, 7966).

Depreciation Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescence. The term is also applied Lo amortization of the value of intangible assets, the use ofwhich in the trade orbusiness is definitely limited in duration. A reasonable allowance for the exhaustion' wear and tear, and obsolescence of property used in the trade or business may be deducted from gross income. For convenience, such an allowance will usually be referred to as depreciation, excluding from the term any idea of a mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence. The proper allowance for such depreciation ofany property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent useful life of the property in business, equal the basis of the property. Due regard must also be given to expenditures for current upkeep (Sec. 105, Reu. Regs. No.2).

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4.

All mainlcnlur(:c

Depreciation cannot go beyond. acquisition cost of prcperty cannot be based. on appraisal aalue. - Depreciation is the gradual diminution in the useful value of tangible property resulting

5.

The input taxes on the purchase ofnon-depreciable vehicles

from wear and tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually wasted without making provision out of earnings for its replacement. He is entitled to see that from earnings, the value ofthe property invested is kept unimpaired so that at the end of any given term of years, the original investment remains as it was in the beginning. It is not only the right of a company to make such a provision, but it is its duty to its bond and stockholders, and in the case ofa public service corporation, at least, its plain duty to the public.

6.

Who may tahe Depreciation. - The person who sustains an economic loss from the decrease in property value due to depreciation gets the deduction. Ordinarily, this is the person who owns and has a capital investment

in the property.

and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes.

and.

Rules on Depreciation ofVehicles

1.

No deduction from gross income for depreciation shall be allowed, unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain, among others, the specific motor vehicle identification number, chassis number, or other registration identification numbers of the vehicle, the total price of the specific vehicle subject to depreciation, and the direct connection or relation ofthe vehicle to the development, operation, and,/or conduct oftrade or business or exercise of profession.

2.

Only one vehicle for a land transport is allowed for the use of an official or employee, the value of which should not exceed F2,400,000.

3.

No depreciation shall be allowed for yachts, helicopters,

airplanes, and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer's

main line of business is transport operations or lease of transport equipment and the vehicles are used in said operations.

(lxponsos on account of non-depreciable vehicles fbr taxation purposes are disallowed in its entirety. Loss incurred in the sale of such non-depreciable vehicles shall not be allowed as deduction from gross income.

The regulation shall be effective on October L7,2OI2(Rev. Regs. No. 12-2012, October 12, 2012).

The income tax law does not authorize the depreciation of an asset bevond its acouisition cost. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time through depreciation of investment made is the philosophy behind depreciation allowance; the idea ofprofit has never been the underlying reason for the allowance. Hence, depreciation on appraisal value is not allowed (Basilnn Esta.tes a. Collector,2T SCRA 77).

Conditions for Deductibility of Depreciation

1. The allowance for depreciation must be reasonable; 2. It must be for property arising out of its use in the trade or business, or out of its not being used temporarily

during

the year; and

3. It must be charged off during the taxable year from the taxpayer's books of accounts.

Bar Question (1998) 1. What is the proper allowance for depreciation of any property used in trade or business?

2.

What is the annual depreciation of a depreciable fixed asset with a cost of P100,000.00 and an estimated useful life of 20 years and salvage value of F10,000.00 after its useful Iife?

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The proper allowance ofdepreciation ofany property used in trade or business refers to the reasonable allowance for the etchaustion, wear and, tear (including reasonable allowance for obsolescence) ofsaid property. The reasonable allowance shall include, but not limited to, an allouance computed

under any of the following methods: (a) straight-line method; (b) dcclining-balarrce method; (c) sum-of-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Cornmissioner of Internal Reuenue (Sec. 34[FJ, NIRC).

2.

The annual depreciation of the depreciable fixed asset may

straight-line method which will allow the tax,payer to deduct an annual d,epreciation of F4,500, arriued at by diuiding the depreciable ualue of ?100,000 by the estirnated useful life (20 years). be computed on the

Charitable contributions Conditions for Deductibility

1.

2. It must be made within the taxable year; 3. It must not exceed 107o (individual) or five percent (5Vo)

(corporation) of the taxpayer's taxable income before charitable contributions (whether deductible in full or subject to limitation);

4. 5.

t

!

!

Bar Question (1993) The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital, on his birthday, as was his custom. He gave F1,000,000.00 to the hospital and F5,000.00 to a crippled girl whom he particularly pitied. A crippled son of X is in the hospital as one of its patients. X wants to exclude both the F100,000.00 and the F5,000.00 from his gross income. Discuss.

Suggested answer: (Jnder Section 29(hX1) of the National Internq'l Reuenue Code charitable contributions to be deductible must be:

a.

It must be evidenced by adequate receipts or records; and The amount of charitable contribution of property other than money shall be based on the acquisition cost of said property (Sec.34[H], NIRC). The limitation is imposed to prevent abuse of donating paintings and other valuable properties and claiming excessive deductions therefrom.

Irrespective of the accounting method used by the donor, donation is recognized as a deduction from his gross income in the year such donation was actually paid or made, not in the year the deed of

actually paid or made to domestic corporations or associcr.tions organized and operated exclusiuely for religious,

charitable, scientific, youth and sports deuelopment, cultural or educational purposes or for rehq'bilitation of ueterans or to social welfare institutions no part of which inures to the benefi,t of any priuate indiuidual;

The charitable contribution must actually be paid or made

to the Philippine government or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic corporation or association specified in the Tax Code;

2'I

donation was perlirt:l,c<|. 'l'lttr tltrtluc[ibility of donation is not governed h.y the urdinary rules on dcductibility of the expense. Donation must be both perfected and consummated before it can be allowed as a deduction (Philippine Stoeh Exchange a. Commiesioner, CTA Case No.5995, October 75,2002).

Suggested answer:

1.

llil:i'iil;,;i}:;;,,.

b. c.

mq,de within. the taxable year;

(for indiuiduals) or 37o (for corporations) of the taxpayer's tuxable income to be computed without i nc I uding the c ontrib ution. not more than

6Vo

Applying the aboue-prouisions oflaw to the case at bar, it is clear therefore that only the F100,000.00 contribution of X to Filipinas Hospital for Crippled Children qualifi.ed as a deductible contribution. Section 29(h)(1) of the NIRC expressly prouides that the same must be actually paid to a charitoble organization to be deductible. Note that the law accorded no priuilege to similar contributions extended to priuate indiuiduals. Hence, the ?5,000.00 contribution to the crippled girl cannot be claimed as a deduction.

Bar Question (1993) X's favorite charity organization is the Philippine National Red Cross (PNRC). To raise money, PNRC sponsored a concert featuring

282

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the Austria Boys Choir. X advanced P100,000.00 to the l'Nlt(l for which he was issued a promissory note. Before its maturity, X cancelled and returned the note to PNRC. An advertising man, X also undertook the promotions of the Austria Boys Choir. Part of the promotions campaign was to ask prominent personalities to publicly donate blood to the PNRC a day before the concert. X himself donated 100 cc. of blood. X intends to claim as deductions the value of the note, the cash value of the promotions campaign and the cash value of the blood he donated. Give your legal advice.

2tt3

Optional Standard Deduction (OSD) The optional standard deduction, which is in lieu of the itemized deductions, is merely a privilege that may be enjoyed by certain individual taxpayers. The requisites for its exercise are as follows:

a.

OSD is available only to citizens or resident aliens and to

domestic corporations and resident foreign corporations;

thus, non-resident aliens and non-resident foreign corporations are not entitled to claim the optional standard deduction;

Suggested answer: The ualue of the note can be claimed as deduction as chq.ritable

contribution. While the u.mount was originally a loan, it can be consid.ered to haue become a gift or contribution when X cancelled and returned the note to PNRC,

l;::,:iill;,"

ct

b.

The standard deduction is optional; i.e., unless taxpayer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions;

c.

Such election, when made by the qualified taxpayer, is irrevocable for the year in which made; however, he can change to or select the itemized deductions in succeeding year(s);

d.

The amount of standard deduction is limited to AOVo of taxpayer's gross sales or gross receipts (in the case of individuals selling goods or services, as the case may be) and on gross income (in the case of a corporation); and

e.

Proofofactual deductions is not required.

charitable organization.

On the other hand, the cash ualue of the promotions campaign cannot be claimed as a deduction. Aduertising expenses can only be deducted from the reuenues where the expenses were incurred. In the case at hand, PNRC is the reuenue-producing entity not X, X did not deriue any reuenue. Thus, the cash ualue of his promotions campaign cq.rlnot be claimed as deduction.

Finally, the cash ualue of the blood donated by X cannot

be

clq.imed as deduction. Blood has no monetary ualue in this cq.se q.s it is not disbursed in the form ofexpense.

Bar Question (2001) Taxpayers, whose only income consist of salaries and wages from their employers, have long been complaining that they are not allowed to deduct any item from their gross income for purposes of computing their net taxable income. With the passage ofthe Comprehensive Tax Reform Act of 1997 , is this complaint still valid? Explain your answer.

Suggested answer: No more. Gross compensation income earners ore nou) allowed

at least qn item of deduction in the form of premium payments on health and / or hospitalization insurance in an annount not exceeding F2,400.00 per annum (Sec. 34[M], NIRC). This deduction is allowed if the aggregate farnily income do not exceed fl50,000.00 and by the spouse, in case of married indiuiduq,l, who claims additional personal exernption for dependents.

Exemptions are fixed at arbitrary amounts intended to substitute for personal and living expenses. They are roughly the equivalent of the taxpayer's minimum subsistence and those of his dependents (Mad.rigal u. Raffirty, supra). Bar Question (2009) Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 20O7, claiming optional standard deductions. Realizing that he has enough documents to substantiate his profession-connected expenses, he now plans to fiIe an amended income tax return for 2007, in order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend his return? Why or why not?

284

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one taxable year. Only ontt I'otlltlr parent, who must be of legal age,

Suggested answer: Ernesto

will not be allowed to fi,le an amended return for

2007,

not because of Section 6(A) of the L997 Tox Code which allows the fi.ling of amended tax return prouided thq.t no audit notice hqs been serued upon him by the BIR in the meantime, but because of Section 34(L) of the Tatc Code, which prouides that "Such election (of the itemized or standard deduction) when made in the return shall be irreuocable for the to*able year for which the return is made."

Basic Personal Exemptions For each individual taxpayer taxed under Section 24(A) (i.e., citizens and resident aliens), the personal exemption shall be F50,000 (R.4. 9504, July 1, 2008).

at least 16 years older than the fbster child, unless the applicant is a relative of the foster child, among others, can treat the foster child as dependent for a particular year. An agency may also enjoy exemption from income tax, as implemented by Revenue Regulations No. 13-98 and it can apply for qualification as a donee institution entitled to deduction from gross income and exemption from donor's tax(RMC No. 41-201"3, April 17, 2013).

Bar Question (2001) Distinguish allowable deductions from personal exemptions. Give an example of an allowable deduction and another example for personal exemption.

A "senior citizen" is any resident citizen of the Philippines ofat least 60 years old, including those who have retired from both

Suggested answer:

government offices and private enterprises, and has an income of not more than F60,000per annum. subject to the review of the National Economic Development Authority (NEDA) every three (3) years (R.4. 7432, implemented by Reu. Regs. No.2-94, August 23, 1993).

exemptions are as follows:

Ad.d.itional eremptions for ta.rTtoyer with d,epend.ents. A married individual or a head of family shall be allowed an additional exemption of F25,000 for each qualified dependent child, provided that the total number of dependents for which additional exemptions may be claimed shall not exceed four (4) dependents. The additional exemptions for qualified dependent children shall be claimed by only one of the spouses in the case of married individuals.

A "d.epend.ent'

2Ult

meants

The distinction between allowable deductions und personal

1.

As to amount - Allowable deductions generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession while personal exemptions are arbitrary amounts allowed bY law.

2.

As to nature - Allowable deductions constitute business expenses while personal exemptions pertain to personal ex,penses.

3.

a legitimate, illegitimate or legally

adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

R.A. 9504, which was signed by the President on June 17,

Deductions are allowed to enuble the taxpayer to recoup his cost ofdoing business while personal exemptions are allowedto couer personal, family and liuing

As to purpose

-

etcpenses.

4.

As to claimants - Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while personal exemptions can be clairned only by indiuidual taxpayers.

2008, increased personal exemptions to F50,000, as irrespective of whether the individual is single, head of the family, or married. It also increased additional exemptions for children not exceeding from to F25,000 for each child not exceeding four (4).

Bar Question (1997) Mar and Joy got married in 1990. A week before their marriage, Joy received, by way of donation, a condominium unit worth F750,000.00 from her parents. After marriage, some

R.A. 10165 (Foster Care Act of 2Ol2') authorizes a foster parent to claim an additional exemption of F25,000 for a foster child, if the period of foster care is at least a continuous period of

renovations were made at a cost of F150,000.00. The spouses were both employed in 1991 by the same company. On 30 December 1992, their first child was born, and a second child was born on

286

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07 November 1993. bought a new unit.

oru'l'nxllrow

In 1994, they

sold the condominium

I

unit and

Under the foregoing facts, what were the events in the life of the spouses that had income tax incidence?

Suggested answer: The euents in the life of Spouses Mar and Joy, which haue income tq.r, incidences,

a. b.

are the follouting:

Their marriage in 1990 qualift.es them to claim personal eremption for married indiuiduals ; Their employmerut in 1991 by the same conxpq.ny will make them liable to the income imposed on gross compensation income;

c.

Birth of the fi.rst child in December 1992 would giue rise to an additional exemption of F5,000.00 (now fl5,000.00) for the taxable year 1992;

d.

e.

Birthoftheir secondchildinNouember 1993 wouldlihewise entitle them to claim udditional exemption of P5,000.00 (now ?25,000.00) raising their additional personal exemptions to P10,000.00 for to.tcable year 1993; SaIe of their condominium unit in L994 shall make the spouses liable to the SVo (now 67o) capital gains tar on the gain presumed to haue been realized from the sale.

2U7

Bar Question (2004) RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to twins. Unfbrtunately, however, LISA died in the course of her delivery. Due to complications, one of the twins also died on December 15, 2003.

In preparing his income tax return for the year

2003, what (a) single; (b) his civil status: return as in the should RAM indicate (e) (d) (c) none of the above? widower; family; head of the married; Why? Reason.

Suggested answer: RAM should indicqte "(b) mq'ried" os his ciuil status in preparing his income tax return for the year 2003. The death of his wife during the year will not change his status because should the spouse die during the ta.xq.ble year, the taxpayer may still claim the sq.me exemptions (that of being married) as if the spouse died q't the close of such year (Sec.35[c], NIRC).

Non-Deductible Expenses In general, in computing net income, no deduction shall in any in respect to -

case be allowed

1. 2.

Status-at-the-end-of-the-year ru le "Status-at-the-end.-of-the-year rule' which means that whatever is the status ofthe taxpayer at the end ofthe calendar year shall be used for purposes of determining his personal and additional exemptions generally applies. A change of status of the taxpayer during the taxable year generally benefits, but does not prejudice, him. Thus, if he marries at the end of the year (2012), he shall be entitled to personal exemption of F50,000.00. If a child is born at any time during the calendar year, even on the last day of the year, the taxpayer is entitled to claim his child as a dependent entitling him to deduct additional exemption of F25,000.00 for that year. On the other hand, if one of his qualified dependent children dies during the year, the law considers that the child died on the last day ofthe year; hence, he is entitled to claim the full amount of additional exemption of F25,000.00 for the deceased child for the year.

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Personal, living or family expenses;

Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value ofany property or estate. This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations, which are deductible under Subsection (GX1) of Section 34 of this Code;

3.

Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or

4.

Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy (Sec. 121, Reu. Regs. No.2);

288

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Losses from sales or exchanges of property betueen relnted.parties. - In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges ofproperty directly or indirectly -

a.

Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;

or

b.

Except in the case of distributions in liquidation, between an individual and a corporation more than 50Vo in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

c.

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Except in the case of distributions in liquidation, between two corporations more lhan 507o in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, ifeither one ofsuch corporations, with respect to the taxable year ofthe corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign or a foreign personal holding company;

d.

Between the grantor and a fiduciary of any trust; or

e.

Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or

Between a fiduciary of a trust and a beneficiary of such trust.

Bar Question (2004) OXY is the president and chief executive officer of ADD Computers, Inc. When OXY was asked to join the government service as director of a bureau under the Department of Trade and Industry, he took a leave of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with OXY in the government, ADD proposed to obtain a policy of insurance on his life. On ethical grounds, OXY objected to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted

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to ?100,000.00. Is sttitl protttiurn deductible by ADD Computers? Reason.

Suggested answer: No. The prernium is not deductible because it is n'ot an ordinary business expense. The term "ordinary" is used in the income tax law in its common significance and it has the connotation of being normal, usual or customary (Deputy a. Du Pont, 308 US 488 [ 1940]) . Paying

prernium for the insurance of a person not connected to the co\npqny is not normal, usual or custonxdry. Another reason for its non-deductibility is the fact that it ca.n be consid,ered as an illegal compensation made to a gouernm.ent ernplqtee. This is so because if the insured, his estate or heirs were made as the beneficiary (because ofthe requirernent ofinsurable iruterest), the payment of premium will constitute bribes which are not allowed as d.eduction from gross income (Sec. 34[A][1][c]' NIRC). On the other hand, if the comp&ny was ma,de the ben'efi'ciary, whether d,irectly or indirectly, the premiurn is not allowed as a deduction from gross income (Sec. 36[A][4], NIRC).

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ln this connrrclion, it can be stated that capital gains and passive investment incomes not subject to capital gains taxlfinal withholding income tax shall be subject to the regular income tax or global tax system.

of an individual.

CIIAPTER

VIII

TAX BASES AND RATES The Philippines has adopted the semi-schedular or semi-global income tax system. For this reason, each type or group of income is subject to one set of graduated income tax rates, or normal or minimum corporate income tax rates, or preferential tax rates. These tax rates are, however, applied to different tax bases depending on the t;pe or group of income. oTs.x base" is the amount of taxable income upon which the applicable tax rate is applied to arrive at the income

The graduated income tax rates applicable to individuals on their taxable income beginning January 1, 2000 are: Tax Brs,chet

Not over F10,000 over F10,000 but not over F30,000

over F80,000 but not over F70,000

Tqlc Rete \Vo

F500 + 1070 0f the excess

filF]|i1|,

orthe excess

over F70,000 but not over F140,000 F8,500 + 20vo of the excess

tax due.

The tax bases can be grouped into the following general categories: 1.

lndividuals

Compensation income, business and professional income, capital gains, passive income, and otherincome not subject to final tax;

2.

Capital gains subject to final withholding income tax at preferential tax rates; and

3.

Passive investment income subject to final withholding income tax at preferential tax rates.

Glnbal tax system. - We follow the global tax system insofar as compensation income, business and professional income, capital gains, passive incomes, and other income not subject to final tax. This means that allowable deductions under Sections 34, 37, and 38 of the Tax Code as well as personal and additional exemptions under Section 35 of the Tax Code, with respect to individuals, are deducted from the taxable gross income (except capital gains from sale or exchange ofshares ofstock ofa domestic corporation and real property, and passive incomes that are subject to final withholding taxes). The resulting figure is the net utarable incomc'(i.e., gross income less allowable deductions) (Sec. 31, NIRC).It must be noted that no deductions (whether itemized or optional standard) are allowed by law to be deducted from the gross compensation income 290

over p140,000 but not over F2b0,000

fltfJli;Thortheexcess

Over F250,000 but not over F500,000

F50,000 + 307o ofthe excess

Over F500,000

F125,000 + 32Vo of the

over F250,000

excess over F500,000

Certain ind'ivid.uals are subiect to 1"5Vo preferential ta*'

-

However, there are certain alien individuals employed by regional or (ROHQ), area headquarters (RHQ), regional operating headquarters and contractors service petroleum offshore banking units, and foreign

sub-contractors, whose taxable base is their gross compensation income without any deduction oftheir personal and additional exemptions. The same tax treatment is accorded to Filipinos employed and occupying the same positions as those of aliens employed by the RQHs and RoHQs (Sec. iSFl, [D] and' tUl, NIRC). The citizens cannot be treated Iess

advantageously than their alien counterparts in the Philippines.

Bar Question (2001) what is the rationale

of the law in imposing what is known as the Minimum Corporate Income Tax on Domestic Corporations?

Is a corporation which is exempted from the minimum corporate income tax automatically exempted from the regular corporate income tax? Explain your answer.

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Suggested answer: The imposition of the Minimum Corporate Income Tax (MCIT) is designed to forestall the preuailing practice of corporations of ouer claimirtg deductions in order to reduce their income tax payments. The filing of income tax returns showing a tctx loss euery year goes against the business motiue which impelled the stochholders to form the corporation. This is the reason why domestic corporations (and resident foreign corporations), after the recouery period offour

years frorn the time they comn'Lence business operations, become lioble to the MCIT wheneuer this tax imposed at 2Vo of gross income exceeds the normal corporate income tax imposed on net income (Sponsorship Speech, Chairman of Senate Ways and Means Committee).

No. The minimum corporate income tax is q proJcy for the normal corporate income tax, not the regular income tax paid by a corporation. For instance, a proprietary educationol institution rnay be subject to a regular corporate income tax of 10Vo (depending on its dominq.rlt income), but it is exempt from the imposition of MCIT because the lq.tter is not intended to substitute special tax rates. So is with PEZA enterprises, CDA enterprises, etc. [NOTE: If what is meqnt by regular income tox is the 32Vo tax rate imposed on net tueable income of corporations, the onswer would be in the affirmatiue, because domestic corporations and resident foreign corporations q.re either liable for the two percent (2Vo) of gross income (MCIT) or 32Vo of net incorne (the normq,I corporate income tax), whicheuer is higher.l

Domestic corporations A domestic corporation is subject to Philippine income tax at 30Vo (effective

January 1, 2009) of its net taxable income from sources

within and without the Philippines (Sec. 27[A], NIRC), except in the case of a proprietary educational institution and hospital which is non-profit, which shall be subject to income tax at IOVa of its taxable income, unless its gross income from unrelated trade, business or other activity exceeds SOVo of t}re total gross income derived from all sources (Sec. 27[B], NIRC). A domestic corporation is subject to the corporate income tax for year, the equal to the higher amount between the regular corporate income tax (RCIT), computed atSOVo on its net taxable income, and the minimum corporate income tax (MCIT) computed at two percent(2Vo)

of its gross incomc during t,hc.ycur..'l'herelbre, there will be two (2) yearly computations of'corpor.ate income taxes for every corporation subject to either the RCIT or MCIT, whichever is higher. The MCIT is one of the changes introduced by the 1997 Tax code, which primarily aims to forestall tax evasion by corporations that declare losses despite their business operations. Thus, even ifa corporation incurs net loss in its business operations, it is still subject to an MCIT of two percent (27o) of its gross income. while it is true that MBC did not conduct business operations for almost 12 years as it was placed under receivership proceedings, it is still subject to the two percent (2%o)MCIT for the year 1999. Hence, BIR Ruling No' 007-2001, which stated that the law allowing the suspension of the imposition of the MCIT applied to both newly created and existing corporations, is void. The four (4!year grace period provided in section 27(E)(7) of the Tax code is given only to newly formed corporations and not to existing corporations (Manila Banking Corporation v' Comrnissioner, CA-GR SP.l/o. 77777, Mary 77,2005).

A domestic corporation that is registered with the Camp John Hay Development Authority is not entitled to the five percent (57o) preferential income tax rate on its gross income earned and thus subject to the normal corporate income tax rate on its net taxable income from worldwide sources. Proclamation No' 420, which was issued by the President of the Philippines and which extended the same privileges enjoyed by enterprises registered with the Subic Bay Metropolitan Authority (SBMA) under R'A' 7227 (otherwise

the Bases Development and conversion Law) to enterprises registered with the other Freeport zones like the Camp John Hay, violated the 1987 constitution, which provides that now law granting tax exemption shall be passed without the concurrence of a majority of all the members of congress (John Hay Peoples Alternatiae Coalition a. Lirn, G.R. No. 719775, October 24,2003). This legal problem was solved when clark and the other freeport zones (Poro Point and camp John Hay) were declared as special economic zones under the amendatory laws.

known

as

However, proprietary educational institutions and hospitals which are non-profit shall pay a tax of l07o on their taxable income, except those covered by Subsection (D) hereof, provided that if the gross income from unrelated trade, business or other activity exceeds 507o of the total gross income derived from all sources, the tax prescribed in subsection (A) hereof shall be imposed on the entire taxable income (Sec.27[B], NIRC).

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Resident Foreign Gorporations As a general rule, a resident foreign corporation is subject to Philippine income tax on its sources within the Philippines at B\%t (30Vo etrective January 1, 2009) of its net taxable income. Its income from foreign sources shall be exempt from Philippine income tax. There are, however, certain exceptions to the general rule. These

are discussed hereunder: Resident foreign corporations that are exempt from Philippine income tax:

a.

Regional or area headquarters (RHQ) shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets (Sec. 22[DD], NIRC and Art. 50, 8.O.226).

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international pay a tax shall Philippines in the carrier doing brrsincss (GPB). An "Gross Billings" Philippine of 2-I/2ok on its agent a sales or office branch a off-line airline having in the Philippines which sells passage documents for compensation or commission to cover off-Iine flights of its principal or head office, or for other airlines covering flights originating from Philippine ports or off-Iine flights, is not considered engaged in business as an international air carrier in the Philippines, and is, therefore, not subject to

2, Ileu. lil'g.s. No. I 5'2U)2, May 30, 2002).An

GPB tax nor to the three percent (37o) common carrier's tax.

An international air carrier having flights originating from any port or point in the Philippines, irrespective ofthe place where passage documents are sold or issued, is subject to the GPB tax of 2.57o, unless subject to a different tax rate under the applicable tax treaty to which the Philippines is a signatory (Sec.28[A][3], NIRC). Philippine tax treaties

generally reduce the rate to 1.57o.

Representative office is a branch in the Philippines of a foreign multinational corporation whose activities are limited to information dissemination, product promotion, and the performance of quality control of goods for export to its head office or affiliates.

Under R.A 10378, July 23,2OL3, international air carriers may be entitled to preferential income tax rate of I.57o on GPB under the tax treaty, or even exempt from Philippine income tax, subject to rules on reciprocity, on revenues from the transport of passengers from the Philippines to a foreign port.

Regional area headquarters and representative offices of multinational corporations in the Philippines are exempt from income tax since they are not engaged in business in the Philippines nor derive any active business income from sources within the Philippines. However, income from passive investments like interest income on bank deposits or deposit substitutes in the Philippines is subject to the final withholding tax.

The2.57o tax on GPB under the 1997 Tax Code is an income tax levied on the presumed gain ofthe international airline companies (and not a percentage tax).T}re prouiso in P.D. 69 and the definition of GPB provided in P.D. 1355, now incorporated in Section 28(B) ofthe 1997 Tax Code, ensured that international airlines are taxed on the income they derived from Philippine sources (Commissiorr'er u,

b.

Arnerican Airlines, L80 SCRA 274).

Resident Foreign Gorporations that are Subject to Preferential Tax Rates a. International carrier. - ulnternq,tional air canrier,' refers to a foreign airline corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation

services/activities or flight operations anywhere in the world. Offline carrier refers to an international air carrier having no flight operations to and from the Philippines (Sec.

In the case ofthe passenger's passage documents or flights from any port or point in the Philippines and back, that portion ofrevenue pertaining to the return trip to the Philippines shall not be included as part of GPB.

In the case of flights that originates from the

Philippines but transshipment of passenger' excess baggage, cargo and./or mail takes place somewhere in another aircraft belonging to a different airline company, the GPB shall be that portion of the revenue corresponding

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to the leg flown from any point in the Philippines to thc point of transshipment. b.

Offihore banhing units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangho Sentral ng Pilipinas (BSP) from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of I}Vo of such income.

Income derived by an FCDU or an OBU from foreign currency transactions with residents of the philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of lOVo.Income from foreign currency transactions shall include interest from lending operations, includingbank charges, commissions, service fees, and net foreign exchange transactions gains. Income from foreign currency transactions with non-residents of the Philippines shall not be subject to income tax by express provision of the law. The person making the income payment shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58 of the Tax Code (]ec.2.22, Reu. Regs. No. 10-98, August 25, 1998). Income derived by an FCDU or an OBU llom activities other than foreign currency transactions shall be subject to the pertinent income taxes prescribed under Section 22 or 28 ofthe Tax Code.

All items of income other than

income from

international air transport services shall be subject to tax under the pertinent provisions ofthe Tax Code. c.

Regional operating head.quarters. - Shall pay a tax of IOVo of their net taxable income from sources within the Philippines ( Sec. 28[A] [6] [b], NIRC). Accordingly, income from sources outside the Philippines is exempt from income

tax.

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2'(t7

Branch Profit Remittance Tax on Philippine branch of Foreign Gorporations To equalize the tax burden on foreign corporations maintaining, on one hand, local branch offices, and organizing, on the other hand, a subsidiary domestic corporation where at least a majority of all the

latter's shares of stock are owned by such foreign corporations, the ls%obranc};. profit remittance tax is imposed on the profit actually remitted by the Philippine branch to its head office (Banh of Amcrica NT and. SA v. Court of Appeals and' Cornrnissioner,2S4 SCRA 302), lt does not matter whether the head office of the foreign corporation is located in a tax treaty country, in a tax haven or other non-treaty country.

Tax base. - Effective January 1, 1998, the tax base of the ISTobranct, profit remittance tax imposed on profit remitted by the Philippine branch to its foreign head office is the total profit applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine EconomicZone Authority). Revenue Regulations No. 2-98 also exempts from the branch profit remittance tax enterprises registered with the Subic Bay Metropolitan Authority (SBMA) and the Clark Development Authority (CDA) which are covered under R.A.7227. Prior to R.A.8424 (January 1, 1998), only the amount of profit actually remitted abroad was ruled by the courts subject to lhe I57o branch profit remittance tax. The tax was imposed on the amount sent abroad and the law called for nothing further (Banh of Arnerica NT & SA u. Court of Appeals an'd' Commissianer, ibid.).

lncome of Non-resident Foreign Corporation Subiect to Preferential Tax Rates The following incomes of a non-resident foreign corporation are

subject to the preferential tax rates:

1.

Non-resident cinematographic film owner, lessor, or distributor shall pay ataxof 25Vo of its gross income from sources within the Philippines (Sec. 28[8][2)], NIRC).

2.

Non-resident owner or lessor of vessels chartered by Philippine nationals shall be subject to a tax of 4-U2Va of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority (Sec. 28[8][3], NIRC).

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Non-resident owner or lessor of aircraft, machineries and other equipment shall pay a tax of 7-L/2Vo of their gross rentals or fees (Sec.28[8][4], NIRC).

4.

Interest income on foreign loans contracted on or after August 1, 1986 shall be subject to a final withholding tax of 207o (Sec.28[B][5][a], NIRO.

5.

Cash and,/or property dividends received from a domestic corporation shall be subject to a final withholding tax at the rate oflSVo, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to ls%o,whichrepresents the difference between the regular income tax of BOVo on corporations and the ISVo tax on dividends as provided in this subparagraph (Sec. 29tBltsltbl, NIRC). When the country of residence of the non-resident foreign corporation does not impose income tax on dividends paid by a domestic

corporation, there is substantial compliance with the above condition on "deemed paid" tax credit, andonly \EVo shall be withheld by the domestic corporation paying the dividend to the foreign corporation (Wand.er u. Cornmis sioner, supra.) 6.

Phitippines

Net capital gains realized by a non-resident foreign corporation during the taxable year from the sale, exchange

or other disposition of shares of stock in a domestic corporation, except shares sold or disposed of through the stock exchange, shall be subject to the final tax at the following rates: (a) five percent(\Vo) on net capital gains not over F100,000; and (b) L|Vo on net capital gains in excess of P100,000 (Sec. 28[B][5][cJ, NIRC).

Gain from Sale of Property In general, the gain from the sale or other disposition ofproperty shall be the excess of the amount realized therefrom over the basis or adjusted basis, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received (Sec.40tAl, NIRO.

The basis

a.

ofproperty shall

be:

The cost thereof, ifsuch property was acquired by purchase;

or

b.

The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or

c.

If the property was acquired by grft, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value;

or

d. If the property was acquired for less than an adequate

consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property; or

e.

The basis as defined in paragraph (CX5) ofSection 40 of the Tax Code, if the property was acquired in a transaction where gain or loss is not recognized under paragraph (C) (2) also of this section.

The term "aQiusted' basil" means the original cost to acquire the property plus amounts spent for new buildings, improvements, betterments, and other capital expenditures made to increase the value of any properby or materially prolong the life of the property less accumulated depreciation up to the date of sale.

Transfer for inad.equate consid'eration.

-

As a rule,

transfers for less than an adequate and full consideration in money or money's worth is deemed a gift under Section 100 of the 1997 Tax Code. However, this is not absolute. In the case of Commissioruer u. B.F. Goodrich Philippines (G.R. No. 104171, February 24, 1999),l}re Supreme Court ruled that "It is possible that real property may be sold for less than adequate consideration for a bona fde business purpose; in such event, the sale remains as'arm's length'transaction. In the present case, the private respondent was compelled to sell

the property even at a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendment. In other words, private respondent was attempting to minimize its losses. At the same time, it was able to lease the property for 25 years, renewable for another 25. This can

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price."'fhus, since there

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is no showing of donative intent on the parb of the seller, there is no donation here. Although it is true that dealings done in the ordinary course ofbusiness are not sufficient to rule out existence ofdonative intent, it is equally true that donative intent is not s5rnonymous with disparity in consideratio n (B I R Ruling N o. 0 3 3 2 002, August 1 6, 2002 ) .

laut imposes the fin.u,l. kw ol'6'ilt ott. the gain presumed to h'aue been realized on the sale of' Lands und / or buildings of corporations treated as capital assets. The applicable corporate income tax rate beginning January 1,2000 under R.A. 8424 is 327o an'd starting Nouember 7, 2005 und,er R.A. 9337 is 357o, but starting January 7' 2009, the rate is 30%ol.

Bar Question (1992)

Nature of Asset or Property

ABC, a domestic corporation, sold in 1989 two (2) condominium units of Legaspi Towers in Roxas Boulevard for F8,1b8,142.00. The corporation declared in its income tax return for taxable year 1989 its gains derived from the sale of the two (2) condominium units as

The kind of income tax applicable on the property transaction depends on the nature ofthe property sold or exchanged. The nature of ihe asset is, however, not material with respect to certain passive investment incomes subject to final taxes at preferential tax rates.

-

follows:

a. UNITA (316.5 sq.ft.)

Proceeds from sale

F3,933,679

UNIT B (322

sq.f1u.)

?4,224,463

Less:

(a) Acquisition

costs (Deed of Sale

I,50I,295

L,529,755

49,248

55,413

Total of (a)ft)

r,550,543

1,585,168

Gains

2,383,136

2,639,295

9/9/83)

(b)

Payments of Realty Tax

Without going into computations, answer the following question: Since ABC derived gains from the sale ofthe condominium units, it pay the \Va capital gains tax, 35Vo corporate income tax or none ofthe above because the corporation is not a real estate dealer?

should

Discuss.

Suggested answer: ABC Corporation must pay the 357o corporate inconte tax. The National Internal Reuenue Code does not prouide for the payment by corporations of SVo (now 67o) capital gains tqx on the sale of real property, whether considered capital assets or not. Such income is included in. the computation of net income (gross taxoble incorne less deductions) and is subject to the tax rate of 357o. INOTE: Existing

Ord'inary asset.

- If the property sold is classified as

an ordinary asset, income tax due is the normal corporate income tax computed at307a of its net taxable income (in the case ofcorporations), or the graduated income tax rates

ranging from 5Vo to 32Vo applied on his net taxable income (in the case of individuals other than a non-resident alien not engaged in trade or business in the Philippines)' Actualincomc or gain. - The actual gain from the sale ofreal property classified as an ordinary asset by an individual or corporation is subject to income tax at the graduated income tax rates (in the case of individuals) (^Sec' 24[AJ and' Sec. 25[A], NIRC), ot at 30Vo of its net taxable income (in the case of a corporation) (Sec. 27[A] and Sec' 28[AJ, NIRC). The gain is arrived at by deducting the cost or adjusted basis of the property sold from the amount realized (i.e., amount of cash and./or fair market value of property received). As a general rule, the income tax law imposes the tax only when there is actual income, gain or profit. asset. - In general, if the real property sold is classified as a capital asset, the income tax due is the capital gains tax computed at six percent (61o) of L}:re actual consideration or fair market value of the real property sold as determined by the Commissioner, whichever is higher' If the shares of stock of a domestic corporation sold are unlisted, or if the shares of stock of a domestic corporation sold are listed but not traded in the local stock exchange, and they are classified as capital assets' the income tax due

b. Capital

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is the capital gains tax computed at five percent (\Vo) on the first F100,000 net capital gain and l|Vo onthe amount in excess of F100,000. Presumed, incorne or gain. - Where an individual or a corporation sold real property or land and./or building, respectively, classified as a capital asset, the law presunoes that there was a capital gain realized, and the capital gains tax is computed at six percent (6Vo) of the actual consideration or the fair market value at the time of sale of the real property, whichever is higher (Sec. 24[D][1], Sec.25[B]

[3], and Sec.27[D][5J, NIRC).In other words, regardless of whether or not the seller makes a profit or incurs a loss from the transaction, the capital gains tax must be paid thereon by the seller. However, no donor's tax is due on the transfer ofsaid real property for less than its full and adequate consideration pursuant to Section 100 ofthe Tax Code. This is an exception to the general rule that there must be actual income, gain or profit realized by the taxpayer in order that income tax may be imposed thereon.

Passive lnvestment lncomes Passive investment incomes subject to final withholding taxes are taxed on the gross amount, without any deduction of cost and expenses of sale.

Bar Question (2010) What is the "immediacy test"? Explain briefly. Suggested answer: To deterrnine the reasonable needs of the business in order to justify an accumulation of earnings (and not impose the 107o tax on improperly a.ccumulated earnings of corporations), the "immediacy

test" under American jurisprudence has been adopted in the Philippines. Thus, the term "reasonq.ble needs of the business" is construed to nxean the immediate needs of the business to accumulate earnings and profits (instead ofdeclaring diuidends to shareholders), including reasonably anticipated needs.

CHAPTER IX

ORDINARY ASSETS AND CAPITAL ASSETS

lmportance of Knowing Nature of Asset Knowledge ofthe nature ofthe asset sold or exchange is very important to determine the kind of income tax applicable on the transaction as well as the tax rate(s) on the proper tax base (i'e', gross selling price, fair market value, or net taxable income)' The character of the asset is crucial also in determining the tax liability of the taxpayer upon its sale or disposition. It is worthwhile to know that where the gain from sale of property is small or when the sale results in a loss, it is best that the character ofthe property sold is an ordinary asset, because the cost or adjusted basis ofthe asset is deducted from the gross selling price and only the gain, if any, shall be subject to income tax at the graduated tax rates offive percent('vo) to 327o (if an individual) or atSovo (if a corporation). when there is a loss from sale of ordinary asset, such loss is carried forward and may be deducted from the gross ordinary income of the taxpayer for the next three succeeding taxable years. On the other hand, ifa gain is realized from the sale ofordinary asset, such gain is added to ordinary income and taxed at the graduated tax rates (if an individual) or at 357o (if a corporation).

Sale or Exchange In order to have tax consequences, the sale or exchange of property must be consummated and not just perfected. There is a sale o" exchange ofproperty when there is an effective and actual

transfer of ownership of the property to another as would divest the transferor ofthe benefits accruing from the ownership ofthe property, for a valuable consideration. nsale' or oerchange" are to be considered in the light The terms of their ordinary meaning from a consideration of the substance of the transaction. courts often rely on the significance of the words in common usage, assuming thereby that the legislature intended that 303

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meaning to prevail (Helaering a. Hannmel, 377 U.S. 504). Thus, forced sales, such as foreclosure sales and tax sales, have been held embraced within the meaning of the law. A distribution in complete liquidation has been held to be an "exchange" for the purposes of determining gain or loss (Helaering u. Chester N.Weauer Co.r 305

u.s.293). A sale or exchange will ordinarily be held to occur on the date the transfer of title over the asset is effected, or when ownership is terminated in the hands of the transferor. What is generally taken into account is not the perfection of the contract but the consummation thereof (U.5. Industrial Alcohol Co. u. Heluering, 137 F. tzdl 577).However, in condemnation proceedings, the sale occurs at the time of taking of the property rather than when the proceeds of the

judgment are received (Kieselbach a. Comrnissioner, SlT U.5.399, 87 L. ed.358,63 S. Ct.3Og). Dacion en pago is the transmission of the ownership of a thing by the debtor to the creditor at an accepted equivalent ofthe performance of an obligation (8 Manresa 324).Indacion en pqgo, the debtor offers another thing to the creditor who accepts it as equivalent of payment ofoutstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against

the debtor's debt (Filinuest Cred.it Corporation u. Philippine Acetylene Co., 777 SCRA 421).

Bar Question (1993) Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned without any consideration this share to X, one of its foreign consultants, to enable him to use its facilities for the duration of his stay in the Philippines. X signed a Declaration of Trust where he acknowledged that the share is owned by Oriental, Inc. and where he promised to transfer the same to whoever will succeed him as consultant. When X's contract with Oriental, Inc. expired, he left the Philippines and assigned for free the share to Y, his successor in office. What tax, if any, can be imposed by the BIR on the transaction? Suggested answer: The BIR cannot impose any tax because there was no real transfer

of the ownership of the subject Capitol Golf Club, Inc. ("Capitol") proprietary share from X to Y. Oriental, Inc. is the true owner of the Capitol proprietary share. It remained the true owner from the time

305

of'the capitol shartis u,se by x, b th<: transfer of the capitol share's use to Y. Oriental remainetl the legal ou)ner thereof all throughout, while X and Y are only the benefi.cial owners'

Bar Question (1994) X-land Condominium Corporation was organized by the owners of units in X-land Building corporation in accordance with the Master Deed with Declaration of Restrictions. The X-land Building corporation, the developer ofthe building, conveyed the common areas in favor of the X-land condominium corporation. Is the conveyance subject to any tax?

Suggested answer: any tax. The same is without The conueyance -and. is not subject to with a sale rnade to X-Iand connection in not consid.eration, purpose of the conueyance to the the and Corporation, Cond.om.inium areas for the cornmon conl,mon of the nTanagement the Iatter is for owners. unit benefit of the The same is not subject to income tax since no income was realized, a.s a result of the conueyance, which was made pursuant to the cond.om.inium Act (R.A. 4626), and the purpose of which was merely to uest title to the common areas in fauor of theX-land Condorninium Corporation. There being no monetary consideration, rueither is the conueyarrce subject to the creditable withholding tax imposed under Reuenue Regulations No. 7-90, as amended. The second. conueycrnce was actually no conueyance at

all because

when the units were sold to the uarious buyers, the common areas were alread,y part and parcel of the sale of said units pursuant to the Cond.ominium Act. Howeuer, the Deed of Conueyance is subiect to documentary stamP tax.

GapitalAssets "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not The term

include:

1.

Stock in trade ofthe taxpayer or other property ofa kind which would properly be included in the inventory of the taxpayer ifon hand at the close ofthe taxable year; or

306

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2.

Property held by the taxpayer primarily fbr sale to customers in the ordinary course of his trade or business; or

3. 4.

Property used in trade or business, ofa character which is subject to the allowance for depreciation provided in Subsection (F) ofSection 34; or

Where the real property is located outside the Philippines, the norrrral corporate income tax of 307o (in case of a domestic corporation) or the graduated income tax rates offive percent (SVo) to 32Vo (in case of a resident citizen) shall apply, even though such property is classified

as a capital asset. The preferential rate ofsix percent (67o) applies only when such real property is situated within the Philippines. This rule is clearly set forth in Section 24(D) of the Tax Code, with respect to sales of real property by individuals, and it is believed that when the preferential rate was extended to corporations, it was made under the same conditions granted to individuals (RMC No. 41-86).

Bar Question (1995) In 1990, Mr. Naval bought a lot for F1,000,000.00 in a subdivision with the intention of building his residence on it. In 1994, he abandoned his plan to build his residence on it because the surrounding area became a depressed area and land values in the subdivision went down; instead, he sold it for P800,000.00. At the time of the sale, the zonal value was F500,000.00.

(1) (2)

Is the land a capital asset or an ordinary asset? Explain. Is there any income tax due on the sale? Explain.

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(2)

Real property used in trade or business of the taxpayer (Sec.39[A], NIRC).

Since the enumeration of capital assets is made in the negative manner, the four (4) general types of assets listed are "ord.inanyt a"ssets." The exclusion from the term "capital assets" of property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange. It has no application to gains or losses arising from the sale ofreal property used in the trade or business to the extent that such gain or loss is allocable to the land, as distinguished from depreciable improvements upon the land (Sec. 132, Reu. Regs. No.2).

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'fhe loncl is a capital usset because it is neither for sale in the ordinary course of business nor a property used in the trade or business of the taxpayer (Sec. 33, NIRC)' Yes, Mr. Nqlal is tiable to the 5o/o (now 67o) capital gains tax imposed under Section 21(e) of the Tax Code based on the gross selling price of F800,000.00, which is an amount higher than the zonal ualue'

Bar Question (2008) In January, 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for F100,000. This property has a current fair market value of F10 million in view of the construction of a concrete road

traversing the property. Juan Gonzales agrees to exchange his agricultural lot in Laguna for a one-halfhectare residential property located in Batangas, with a fair market value of F10 million, owned by Alpha Corporation, a domestic corporation engaged in the buy and sale ofreal property. Alpha Corporation acquired the property in2007 for F9 million. a. What is the nature ofthe real properties exchanged for tax purposes

-

capital asset or ordinary asset? Explain.

b.

Is Juan Gonzales subject to income tax on the exchange of property? Ifso, what is the taxbase and rate? Explain'

c.

Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain'

Suggested answers:

a.

The term "capital Q'ssets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stoch in trade ofthe toscpayer or other property of a kind which would properly be includcd iru the inuentory ofthe toxpayer, ifon hand at the close of the taxable year, or property held by the taxpayer primarily

for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation, or real property used in trade or business ofthe toxpayer lgss. lB[A][1], NIRC)- Based on foregoing definition, the agricultural tand of Juan Gonzales is a capital asset, while

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the residential property of Alpha Corporation is un asset. b.

agricultural land in Laguna he exchanged to Alpha Corporation.

In this case, the law presumes that Juan

Gonzales mq.hes a profit from sale or transfer of property (Sec.24[D][1], NIRC). c.

Yes, Alpha Corporation is liable to pay corporate income tax on the net taxable income (gross sales less cost of sales and deductions) realized by it from the sctle or excharuge of its Batangas property for the agricultural land in Laguna owned by Juan Gonzales. The net profit of Fl million ( F10 million selling price less fl rnillion cost) will be added to the other ordinary incomes and from such gross income, business excpenses and other a.llowable deductions will be deducted to arriue at net ta,xable income for the year to which we will apply the regular corporate income tax rate

of 357o.

Bar Question (2003, 1998)

1.

What is the difference between capital gains and ordinary gains?

2.

What does the term "ordinary income" include?

Suggested answer:

1.

Capital gains are gains realized from the sale or exchange of capital assets, while ordinary gains refer to gains realized from the sale or disposition ofordinary

2.

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Yes, Juan Gonzales is subject to the capital gains tax equal to 6Va of the gross selling price or fair marhet ualue at the time of the exchange, whicheuer is higher, on the

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39[A]111, NIRC).

Bar Question (1998) An individual, who owns a ten (10)-door apartment with a monthly rental of F10,000.00 each residential unit, sold this property to anotler individual taxpayer. Is the seller liable to pay the capital gains tax?

Suggested answer: No. The seller is not liable to pay the capital gains tq'x because the property sold, is an ordinary asset, i.e., real property used in trade

o, butin""". It is apparent that the taxpayer is engaged in the real estate business, regularly renting out the l}-door apartment'

Bar Question (1997) A corporation, engaged in real estate development, executed deeds of sale on various subdivided lots. One buyer, after going around the subdivision, bought a corner lot with a good view of the surrounding terrain. He paid F1.2 million, and the title to the property was issued. A year later, the value ofthe lot appreciated to a market value of F1.6 million, and the buyer decided to build his house thereon. Upon inspection, however, he discovered that a huge tower antenna had been erected on the lot frontage totally blocking his view. When he complained, the realty company exchanged his lot with another corner lot with an equal area but affording a better view. Is the buyer liable for capital gains tax on the exchange of the lots?

u.ssets.

The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset. These are the gains deriued from the sale or exchange ofproperty such q.s stock in trade ofthe taxpayer or other property ofa hind which would properly be included in the inuentory of the taxpayer if on hand at the close of the taxable year, or property held by the taspayer primarily for sale to custorners in the course of his trade or business, or property used in trade or business of a character which is subject to the

Suggested answer: is subject to capital gains tax on. the exchange preuailing fair market ualue of the property basis of of lots on the of the exchange or the fair rnarket ualue of the tirne transferred, at the is higher (Sec.21[e], NIRC)- Real property whicheuer property receiued, -transactions gains tax are not limited to sales but to capital subject exempted by a specific prouision of unless ofproperty also exchanges Yes, the buyer

law.

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Bar Question (2001) A, a doctor by profession, sold in the year 2000 a parcel ofland which he bought as a form of investment in 1990 for Phpl million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so the land was sold only for Php800,000 which was then the fair market value ofthe land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay t}:,e 67o final tax because he did not have any actual gain on the sale. Is his contention correct? Why?

Suggested answer: No. The 67o capital gains tatc on sale of real property held as capital asset is imposed on the income presumed to haue been realized from the sale which is the fair market ualue or selling price thereof, whicheuer is higher (Sec. 24[DJ, NIRC). Actual gain is not required for the imposition of the tax, but it is the gain by fiction of law which is taxable.

t CIIAPIER X

TAX.FREE EXCHANGES Tax-free Exchanges The entire amount of the gain or loss shall be recognized upon the sale or exchange ofproperty, except as herein provided:

1..

No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -

a. A corporation, which is a party to a merger or

consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or

Bar Question (2003)

b.

What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain.

is a party to the merger or consolidation, solely for the stock ofanother corporation, also a party to the merger or consolidation; or

c.

Suggested answer:

Asecurityholderofacorporation, which is a partyto the merger or consolidation, exchanges his securities

Losses from sales or exchanges ofcapital assets shall be allowed only to the extent ofthe gains from such sales or erchanges (Sec. 39[c], NIRC). Thus, capital losses are not deductible from ordinary gains.

The rationale for this rule is that a capital asset refers to property held which is not considered as an ordinary asset. Generally, capital assets are properties of the taxpayer that are not used in his trade or business, as distinguished from ordinary assets which are used in the trq.de or business of the taxpayer. To qllow the deductiort of non-business (capital) losses from business (ordiruary) income or gain could mean the reduction or euen elimination of taxable income of the taxpayer through personal, non-business related etcpenses, resulting in substantiq.I losses of reuenue to the gouernment.

A shareholder exchanges stock in a corporation, which

in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation.

2.

No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result

of such exchange, said person, alone or together with others, not exceeding four (4) persons' gains control ofsaid corporation, provided that stocks issued for services shall not be considered as issued in return for property (Sec. 40tcl[2], NIRC; See Reu. Memo. Ruling No. 1-2002, April 25,2002, inuoluing de facto rnerger).

While the law refers to the merger or consolidation and the exchange of property ( e.g., r eal property, shares of stocks, receivables, 311

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etc.) for shares of stock of a corporation as a result of which the transferor gains control or further control ofthe corporation, the law merely defers the recognition of the gain or the loss insofar as the transferor and transferee is concerned. Thus, upon the subsequent sale or disposition ofthe property covered by the tax-free exchange by the transferor or the transferee, the historical cost or basis shall be used for purposes of determining the gain or loss from the subsequent sale or transfer. So that the historical cost or basis may be monitored upon the subsequent sale of transfer of the property, the same is required to be annotated at the back ofthe title ofthe land or the certificate of stock of the corporation and special books or records are also mandated to be maintained by the parties to the tax-free exchange.

In d.etermining control, collnctiae control ofpersorr.s up to a marimum of fiue (5) uho transferred. property for stock shall be counted.. - FDC is an investment holding company with substantial investments in real estate companies, principally FL and FA. In 1996, FDC, FA and FL entered into a Deed of Exchange, whereby FDC and FA agreed to transfer to FL properties worth F4.81M in exchange for 463,094,30L shares of stock of FL. Prior to the exchange, FDC owned 67.427a of FL, but after the exchange, FDC owned only 61.037o of FL and FA owned 9.96Vo. FDC owns 8O7a of FA, the remaining2OVo being held by FL. Hence, FDC indirectly owned 69Vo of FL after the exchange.

In 1997, FL requested for a ruling from the BIR that no gain or loss would be recognized in the transfer ofthe properties in accordance with Revenue Memorandum Order No. 26-92. The BIR granted the ruling and held that FDC and FA clearly gained control of FL. On various dates during 1996 and 1997, FDC extended to its affiliates various advances. On November 15, 1996, FDC formed ajoint venture company named FAC based in Singapore with a Singaporean firm. FAC was tasked to manage FDC's 507o ownership interest in its PBCom Office Tower Project. Pursuant to the joint venture, FDC's equity participation in FAC was 60Vo.In payment of its subscription in FAC, FDC transferred a portion of its rights in the Project to FAC. FDC reported a net loss of F190.7M in its 1996 income tax return.

Under BIR Ruling No. 210-91, Section 3ak)Q) of the Tax Code shall be understood to mean that any number of persons may exchange property for stocks, provided that as a result of the transaction, not more than five (5) transferors would control the corporation. oControl" means ownership of stocks in a corporation possessing at

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letstSl(/a of the totll votirtg powor ot'all classes of stocks entitled to vote. ln determining Lba 5l(I, stock ownership, only those persons who transf'erred property fbr stock in the same transaction may be counted up to a maximum of five (5). FDC and FA together gained control of the corporation. The fact that FDC's stockholding was eroded and that FA acquired only 9.967o is of no moment. BIR even gave a ruling that the exchange was tax-free. The assessment of income tax on the alleged gain on "dilution" is premature as said gain has yet to be realized by FDC. The prospective

gain did not result from any alienation ofproperty, but represents terely an alleged increase in the value of the shareholdings of FDC in FAC resulting from the assignment of a percentage of its rights in the project to FAC. Such gain becomes taxable only if and when FDC a;tu;lly realizes the incremental value of its investment should it finally disposes of its shares in FAC (Commissioner u. Filinaest Deuelopm.ent Corporation, CA'GR SP No. 74570, January 26, 2006).

Exchange of proPertY Gain or loss arising from the acquisition and subsequent disposition of property is realized only when as the result of a

transaction between the owner and another person, the property is converted into another property that has a market value. The term "tna.rhet ualu.e" means the fair value of the property in money as between the one who wishes to purchase and one who wishes to sell. It is not, however, what can be obtained from the property when the owner is under peculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative value which an owner could not reasonably to ottain for the property although he might possibly be "*p""t fortunate enough to do so. "Market ua,lu.e" is the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price, bolh having reasonable knowledge of the facts, will trade. EvidLnce as to the assets and liabilities of a corporation and as to its earnings may furnish definite indications of the market value of its stock (Sec. 740, Reu. Regs. No. 2).

Bar Question (1999) HK Co. is a Hong Kong corporation not doing business in the

Philippines. It holds 40vo of the shares of A co., a Philippine company, while fhe 6OVo is owned by P Co', a Filipino-owned Philippine corporation. HK Co. also owns 1007o of the shares of B Co', an

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Indonesian company which has a duly licensed Philippine branch. Due to worldwide restructuring of the HK Co. group, HK Co. decided

to sell all its shares in A and B Companies. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The agreement provides that the purchase price shall be subject to withholding tax. Explain your advice.

Suggested answer: P Co. should not subject the payments of the purchase price to withholding tan. While the seller is a non-resident foreign corporation which is not normally required to frle returns in the Philippines and, therefore, ordinarily all its income earned from Philippine sources is tqxed uict the withholding ta,x system, this is not the procedure auailing with respect to sq,les of shares of stock. The capital gains tax on the sale of shares of stock of a domestic corporation is always required to be paid through capital gains tax return fi.l.ed. The sale of the shares of stock of the Indonesian Corporation is not subject to income tux under our jurisdiction becquse the income deriued therefrom is considered as a foreign-source income.


2)

Suggested answer:

cDI itsetf is not liable for any taxable gain since subscription payments dre not considered as taxable income being merely inuestments in the corporation. Howeuer, a tq,xable incidence may occur as and. when the corporation sells the parcel of land for a price ouer and. aboue the ualue ofthe shares of stoch or in this case ouer and q,boue fl50,000.00. Until such time, howeuer, there is no realizable income on the part of the corporation. Bar Question (1994) (1) In a qualified tax-free exchange of property for shares

under Section 3a(c)(2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the corporation; and (b) the sale ofthe shares received by the stockholders in exchange of the assets?

Bar Question (1991) Cebu Development Inc. (CDI) has an authorized capital stock of F5,000,000.00 divided into 50,000 shares with a par value of One Hundred Pesos (F100.00) per share. Of the authorized capital stock, twenty-five thousand (25,000) shares have been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of F950,000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of Assignment.

Upon investigation, the BIR discovered that Mr. Legaspi acquired said property for only F500,000.00.

1)

Is Mr. Legaspi liable for any taxable gain?

Suggested answer: The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did not increase his stockholdings in the corporation. It cqnnot be said that he acquired control of the corporation by uirtue of the transfer of the land. His percentage of stockholdings in the capital stock of the corporation remains the same after the transfer as before. Therefore, Mr. Legaspi

Is the CDI liable for any taxable gain?

(2)

In a qualified merger under Section 3 ak)Q) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale ofthe assets received by the surviving corporation from the absorbed corporation; and (b) the sale ofthe shares of stock received by the stockholders from the surviving corporation?

Suggested answer:

(1) In a qualified tax-free exchange of property for shares of T @Q) of the Toa Code, the tax basis gain on the: the computing for (a) sale ofthe assets receiued by the corporation shall be the original /historical cost (i-e., purchase price plus ercpenses of acquisition) of the property / assets giuen in exchange of the shares of stock. stock under Section'

(b)

sale ofthe shares of stock receiued by the stockholders

in exchange of the assets shall be the original I historical

cost

ofthe property giuen in exchange ofthe

shares of stock.

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(2)

In a qualified merger under Section J4(cX2) of the Tax the tax basis for computing the capital gains on:

(a)

(b)

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the sale of the assets receiued by the suruiuing corporation from the absorbed corporation shall be the original / historical cost of the assets when still in the hands ofthe absorbed corporation. the sale of the shares of stock receiued by the stochholders from the suruiuing corporation shall be the acquisition / historical cost ofassets transferred to the suruiuing corporation.

Section 40(C)(2) rnerely defers recognition of gain or loss from exchange of propertSt. - Section g4(C)(2) (now Section 40lCl l2l of the 1997 Tax Code) merely defers recognition of the gain or loss from the exchange of properties, for in determining the gain or Ioss from a subsequent transaction ofthe real properties or ofthe stocks involved in the exchange, the original or historical cost ofthe properties or the stocks is considered (BIR Ruling No. 050-2000, August 10,2000). The amount of income derived or loss sustained from a tax-free exchange of property is the difference between the market value at the time ofthe exchange ofthe property received in exchange and the original cost, or the adjusted cost basis, ofthe property exchanged to the transferor. The cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of

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Yes. The exchange in 1995 is a tax-free exchange so thot the subsequent sale of one of'the brothers of his sh(tres to the other two (2) brothers in 1997 will be subject to income tax. This is so because the to"x-free exchange merely deferred the recognition of income on the exchange transaction. The gain subject to income tax in the sale is measured by the dffirence between the selling price of the shares (fl Miltion) and the basis of the real property in the hands of the transferor q.t the time of exchange which is the fair mq,rhet value of his share in the real property at the tint'e of inheritance (Sec. 34[b][2], NIRC). The net gain frorn the sale of shares of stoch is subject to the schedulq.r capital gains tax of 107o for the ftrst F1'00,000.00 and 20Vo for the excess thereof (Sec. 21[d], NIRC). INOTE: The current capital gains tax rates are 57o on the first F100,000.00 net capital gain and 707o on the arnount ouer F700,000.001.

Original basis of property to be transferred The original basis ofthe property to be transferred shall be the following, as may be approPriate:

(a)

The cost ofthe property, ifacquired by purchase;

ft)

The fair market price or value as of the moment of death ofthe decedent, ifacquired by inheritance;

(c)

The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair market value of the property at the time of donation, then, for purposes of determining loss, the basis shall be such fair market value; or

Bar Question (1997) (d)

In

1995, they transferred the property to a newly organized corporation as their equity which was placed at the zonal value of F6.0 million. In exchange for the property, the three brothers thus each received shares of stock of the corporation with a total par value of F2.0 million or, altogether, a total of F6.0 million. No business was done by the Corporation, and the property remained idle. In the early part of 1997, one of the brothers, who was in dire need of funds, sold his shares to the two brothers for F2.0 million. Is the transaction subject to any internal revenue tax (other than the documentary stamp tax)?

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the transferor (Sec. 147, Reu. Regs. No. 2).

Three brothers inherited in 1992 a parcel ofland valued for real estate tax purposes at F3.0 million which they held in co-ownership.

t t't

(e)

The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money's worth; The adjusted basis of(a) to (d) above, ifthe acquisition cost of the property is increased by the amount of improvements

that materially add to the value of the property or appreciably prolong its life less accumulated depreciation;

(fl

The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(CX2) ofthe Tax Code of 1997.

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Sale of Principal Residence The term "Principal Resid.ence" shall refer to the dwelling house, including the land on which it is situated, where the husband and wife or an unmarried individual, whether or not qualified as head of family, and members of his family reside. Actual occupancy of such principal residence shall not be considered interrupted or abandoned by reason of the individual's temporary absence therefrom due to travel or studies or work abroad or such other similar circumstances.

The character of permanency must be present in the principal residence, in that said individual intends to return to the dwelling house, whenever he is absent. Where ownership of the land and the dwelling house thereon belongs to different persons, e.g., where the land is leased to the dwelling house owner, only the dwelling house shall be treated as principal residence ofthe dwellinghouse owner. Thus, ifthe said land and the dwelling house thereon be jointly sold or disposed by the said owners, only the sale or disposition of the dwelling house shall be entitled to the benefit of exemption from the capital gains tax herein prescribed: Prouided, howeuer, That where both the owner of the land and owner of the dwelling house actually reside in the said dwelling house, then both the said land and dwelling house shall be treated as their principal residence (e.g., owner of the land is the parent while owner of the house is his child, or uice uersa).

Where the land and the dwelling house thereon be owned by several co-owners, e.g., inherited by two or more heirs through hereditary succession, and where the said property is actually used as principal residence by one or more of the said co-owners, including the members of their family, the said property shall be treated as the principal residence of the co-owner/s actually occupying and using the same as his/their principal residence but to the extent of his/their proportionate share in the value ofthe principal residence. Conversely, the capital gains tax exemption benefit herein prescribed shall not apply in respect of the other co-owners who do not actually use and occupy the same as their principal residence.

The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the date of sale of the said real property shall be treated, for purposes ofthe regulations, as a conclusive presumption about his true residential address, the certification of the Barangay Chairman, or Building Administrator

(in case of a condominium unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or the

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principle of estoppel (r'.g., il't,lrc property was sold on May 1' 2000' ihe vendor's annual income tax return for the year 1999, which he filed on or before April 15, 2000, showing his residential address, shall be treated as a conclusive presumption that his true residential address is that which is shown in his aforesaid income tax return). If the vendor is exempt from filing any tax return' in which case' he then has no tax record immediately prior to the sale of his property, or chairman the aforementioned certification from the Barangay Building Administrator, as the case may be, shall suffice'

RequisitesforExemptionfromTaxofSaleofPrincipal Residence

Bar Question (2000)

LastJuly]r2,2ooo,Mr.&Mrs.PeterCamachosoldtheir

principal residence situated in Tandang Sora, Quezon City' for h"r, *iltlot, pesos (F10,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio CitY' what conditions must be met in order that the capital gains

presumed to have been realized from such sale may not be subject to capital gains tax?

Suggested answer: When the real property sotd or disposed by a natural person (e.g., citizen orcesid.eoi atiiru) is a capital asset and his principal 'r"iid"n"n, the capital gains presumed to haue been realized from the ,i," o, d.isposition thireof shall be exempt from the 67o capital gains tox, provided that: The proceed's of sale is fully utilized in acquiring or 1. consiructing a new principal residence uithin 18 calendar months from the date of sale or disposition; 2.

.t.

The Commissioner is duty notified by the taxpayer within 30 d.ays from the d'ate of sale or disposition through

o prei"ribed' return of his intention to auail of the tax eremption; and The tuc exernption is auq'iled only once euery 70 years' The o, ad.justed' basis ofthe real property sold or historical "oit d.isposed. shall be carried ouer to the new principal residence built or acquired.

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If there is no full utilization of the proceeds of'sare or dispositirn, the portion of the gain presumed realized from the sale or disposition shall be subject to the capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) ofthis subsection shall be imposed thereon (Sec.24[D], NIRC).

In order to ensure payment of the six percent (6Vo) capital gains tax on sale or exchange of real property classified as capital asset, and to prevent tax leakages arising from non-compliance with the conditions for tax exemption discovered by the tax authority at a later time, payment of the capital gains tax under escrow is then required. Thus, the six percent (6Vo) cspil^l gains tax otherwise due on the

presumed capital gains derived from the sale, exchange or disposition of his principal residence shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District officer, the seller/Transferor and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such seller/rransferor upon certification by the said RDo that the proceeds of sale or disposition thereof has, in fact, been

utilized in the acquisition or construction ofthe seller/Transferor's

new Principal Residence within 18 calendar months from date of the said sale or disposition. The date ofsale or disposition ofa property

refers to the date of notarization of the document eviaencing the transfer of said property. In general, the term "EscrotD, means ,,a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the ratter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee" (Reu. Regs. No. 14-2000, Nouember 20, 2000).

CHAPTER XI

ACCOUNTING METHODS AND PERIODS The method. of accounting regularly employed' by the tarpayer must clearly reflect his income. - The method of

accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting that clearly reflects his income, the computation shall be made in such manner as in the opinion of the commissioner of Internal Revenue clearly reflects it(Sec' 43,NIRC; Sec. 166, Reu. Regs' No.2).In view of this express mandate in the law that the method regularly employed by the taxpayer in keeping his books must clearly reflect his income for the year, the Tax code provision and regulation used in preparing the taxpayer's income tax return and in computing his tax liability will prevail over the generally accepted accounting principles used by taxpayers in keeping their books ofaccounts and by external auditors in conducting the statutory audit and in preparing the audited financial statements, which are required to be attached to the income tax return of the taxpayer.

No unifonn mnthod. of accounting is prescribed' for all ta,xpayters. - It is recognized that no uniform method of accounting

c"tr b" p""rcribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by Iaw to make a return ofhis true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved

standard method of accounting that reflects taxpayer's income may

be adopted.

Methods of Accounting There are several methods ofaccounting revenues and expenses that may be used by taxpayers under the 1997 Tax Code' These are: 321

322

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1. 2. 3. 4. 5.

Cash receipts and disbursements method;

Accrual method;

Installment method; Percentage of completion method; or Crop year basis.

In case of conflict, tar rule preaails ouer accounting principle. - In general, tax accounting requires that payments

received for services to be performed in the future must be included in gross income in the taxable year of receipt. However, this treatment varies from the generally accepted accounting principles consistently used by many accrual method taxpayers in the treatment of payments received in one taxable year for services to be performed by them in the next succeeding taxable year. In this case where there is conflict

between a tax rule and an accounting principle, the tax rule shall prevail, because the method of accounting used by the taxpayer must clearly reflect his income for the year.

Cash method..

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Cash method is a method of accounting

whereby all items of gross income received during the year shall be accounted for in such taxable year and that only expenses actually

paid shall be claimed as deductions during the year. Under this method, income is realized upon actual or constructive receipt of cash or its equivalent, and expenses are deductible only upon actual payment thereof, regardless of the taxable year when the service is performed or the expense is incurred. Accrualm,ethod.. - Accrual method is a method of accounting for income in the period it is earned, regardless of whether it has been received or not. In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid. Under this method, net income is being measured by the excess of the income earned during the period over the expenses incurred during the same period. The income that has been earned and the expenses that have been incurred are to be reporbed duringthe year, although they have not been collected or paid. In the succeeding year of receipt or paJrment, the taxpayer shall report no additional income

:12:l

Incorne is recognized when earning process is complete and erchonge hae tihen ploce. - Under the realization principle, revenue is generally recognized when both ofthe following conditions are met: (a) ttre earning pio""t" is complete orvirbually complete; and (b) an exchange has taken place. This principle requires that revenues

b"fore they are received. Amounts received in advance must be "urn"d revenue ofthe period in which they are received but as treated not are as revenue ofthe future period or periods in which they are earned. These amounts are carried as unearned revenue, that is, liabilities to transfer goods or render services in the future - until the earning process is complete (Manila Mand.arin Hotels u. Cornrnissioner, CTA Case No.5046, March 24, 7997).

6All Eaents TestD is followed' for erpenses' the - Under year in taxable the for deductible accrual method, an expense was the fact of the determined which which all the events had occurred liability and the amount thereof could be determined with reasonable .a"orr-"y (the so-called "all euents test"). If the "all eoents test" was satisfied, an accrual basis taxpayer generally could deduct the full face amount of the liability (ignoring any discounting of the amount to reflect the time value of money). Thus, the courts held that expenditures are deductible only when the activities that the taxpayer is obligated to perform are in fact performed, not wJren the "fa&" of the obligation to perform is determined (SpencerrWhite & Prentis u. Cornmissioner, 744 Fzd 45,2d Cir' 1944)'

Bar Question (2010, 2009) What is the "all events test"? Explain briefly' Suggested answer:

or expenses.

Accrual of income and expense is permitted when the "all euents test' has been ntet. This test requires (1) fixing a right to the income or liabitity to pay, and (2) auailability of reasonably accurate d.etermination of iu"i ircome or liability. It does not, howeuer, de'mand that the amount of income or liability be hnown absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the omount with reasonable accuracy, which implies something less than an exact or cornpletely accurate amount'

Taxpayers that have inventories ofgoods for sale and have trade receivables and payables must use the accrual method of accounting their income and expenses.

m.ethod.. - It is a method considered appropriate the proceeds of sales and incomes extend over of when collections periods oflime and there is strong possibility that full long relatively

Installment

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collection will not be made. As customers make installment payments, the seller recognizes the gross profit on sale in proportion to the cash

inconrg drlrivcd lrom srrt:lr trrttl,rttt:t rna.y be reported upon the basis of pcrcen[age of completiOn. ln de[cr.mining the percentage of completion of'a contract, one of the lbllowing methods is generally used:

collected during the year.

Generally, income from a sale of property on the installment

a.

basis may be reporbed as the pa5rments are received. Ifthe installment method is elected for qualifying sales, the gain reported for any taxable

year is the proportion of the installment payment received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price. Expressed in accounting formula, the income to be reported for the year is the product of the total collections during the year multiplied by the gross profit rate. In general, the contract price is the amount, which will be paid to the seller. The function of the installment method of reporting income is to permit the spreading of the income tax over the period during which paSrments of the sales price are received. Thus, the installment method alleviates possible liquidity problems, which might arise from the bunching of gain in the year of sale when a portion of the selling price has not been actually received. SaIn ofrealproperty inuolaing d.efetedpaymcnts. Under Section 49(B) of the Tax Code, deferred payment sales of property include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion ofthe selling price has been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales under (a) or (b) fall into two (2) classes when considered with respect to the terms of sale, as follows:

1.

Sales of property on the installment plan, that is, sales

in which the cash or property, other than evidence of indebtedness ofthe purchaser, received in payment during the taxable year in which the sale is made do not exceed 25Vo of t}re selling price; or

2.

Deferred-payment sales not on the installment plan, that is, sales in which the pa5rments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed 257o of the selling price.

Percentage of completion method,. - This method is applicable in the case of a building, installation or construction contract covering a period in excess of one (1) year, whereby gross

b.

The costs incurred under the contract as of the end of the tax year are compared with the estimated total to be performed; or The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed.

Long'term contracts, which are usually contracts taking

more than a year to complete, and frequently involving large scale projects for the construction of industrial plants or buildings, are regulated due to the timing issues on the reporting of income and In long-term contracts, the return should be accompanied ""p"rrru.. ofthe architect or engineer showing the percentage a certificate by oi completion during the taxable year of the entire work performed under the contract. There should be deducted from such gross income

all expenditures made during the taxable year on account of the

contract, account being taken of the materials and supplies on hand at the beginning and end ofthe taxable year for use in connection with the work under the contract but not yet so applied. Taxable income of a taxpayer is figured on the basis of his annual

accounting period. An accounting period or taxable year normally consists of tZ months, which could be the calendar year or the fiscal year. Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required to be made and their income computed for each calendar year ending on December 31st ofevery year. However, corporations, associations, or partnerships may with the approval of the commissioner of Internal Revenue first secure, file their returns and compute their income on the basis of a fiscal year which means an accounting period of l-2 months ending on the last day of any month other than December. But in no instance shall individual taxpayers be authorized to establish a fiscal year as basis for filing their returns and computing their income (sec. 169, Reu. Regs. No.2).

An accounting period of a taxpayer may be for less than 12 months, as when the annual accounting period of a subsidiary is changed to conform to the annual accounting period adopted by its foreign parent company, for easy consolidation of their audited worldwide financial statements.

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When included in Gross lncome The amount of all items of income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43 of the 1997 Tax Code, any such amounts are to be properly accounted for as of a

different period. In case ofdeath ofa taxpayer, there shall be included in computing net income for the taxable period in which he died amounts accrued up to the date ofhis death, ifnot otherwise properly includible in respect ofsuch period or a prior period, regardless ofthe fact that the decedent may have kept his books and made his returns on the basis of cash receipts and disbursements (Sec. 44, NIRC; Sec. 170, Reu. Regs. No.2). Gains, profits, and income are to be included in the gross income for the year in which the taxpayer received them, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one (1) year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery

for patent infringement. Bad debts or accounts charged offbecause of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off(Sec. 51, Reu. Regs. No. 2). The fundamental support for the sale basis is found in legal considerations. In giving the vendee title to valuable goods, the vendor acquires a claim that is in itselfrecognized property and that is quite distinct from any asset possessed prior to sale. Accordingly, the shipment of merchandise to the customer is generally regarded as the time for recognizing the sale. Generally, revenue is recognized at the point of sale. However, revenue may also be recognized subsequent to the time of sale. This is common practice in connection with installment sales where the customer receives the goods and agrees to pay for them in a series of periodic payments or installments and the vendor usually retains protective title to the goods. When a company is primarily a service enterprise, the act or process of furnishing the service to the customer constitutes the "sale" and marks the time for revenue recognition. Corollarily, the absence of billing statement by the seller of service does not justify the delay in the recognition ofthe expense by the buyer thereofin

the yclr thc scrvicg wrrs ltgrlirrrlgd, where the requirements of the "all events test" have betln met.

lncome ConstructivelY Received Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made' A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt (Sec. 52, Reu. Regs. No.2)-

When expense is to be claimed as Deduction from Gross [ncome Ata,xpayer has the right to claim all authorized' d'ed'uctions d,uring thi cuffent year, and' he cannot ad,aance or d'elay such claim in a prior or succeed'ing year. - Each year's return, so far as practicable, both as to gross income and deductions therefrom,

should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses, liabilities, or deficit ofone year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances and it follows that if he does not within any year deduct certain ofhis expenses, Iosses, interests, taxes, or other charges, he cannot deduct them from the income ofthe next or any succeeding year. Ifit is recognized, however, that particularly in a going business of any magnitude there are certain overlapping

items that do not materially distort the income, and so long as these overlapping items do not materially distort the income, they may be included in the year in which the taxpayer, pursuant to a consistent policy, takes them into his accounts. Judgments or other binding judicial adjudication, on account of damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or

328

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paid, unless taken under other methods of accounting which clearly reflect the correct deduction, less any amount of such damages as may have been compensated for by insurance or insurance. Ifsubsequent to its occurrence, however, a taxpayer fi.rst ascertained the amount ofa loss sustained during a prior taxable year which has not been deducted from gross income, he may render an amended return for such preceding taxable year, including such amount of loss in the deduction from gross income and may in proper cases file a claim for refund ofthe excess tax paid by reason ofthe failure to deduct such Ioss in the original return. A loss from theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which sustained (9ec.76, Reu. Regs. No.2).

Ded.uctions and. cred.its must be tahen for the year in whieh thqt are paid, or incurred. - The terms "paid. or incurredn and "paid, or accrued" will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year in which "paid or accrued" or "paid or incurred," unless in order clearly to reflect the income, such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was "paid or accrued" or "paid or incurred," he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue, together with a complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually "paid or incurred" or "paid or accrued," as the case may be. Upon the audit of the return, the Commissioner of Internal Revenue will decide whether the case is within the exception provided by the law, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable.

Transactions between Related Parties and Transfer Pricing The Commissioner of Internal Revenue is authorized to distribute, distribute or allocate gross income or deductions between or among two or more organizations owned or controlled directly or indirectly by the same interests, if he determines that such is necessary to clearly reflect the income of any such organization(Sec. 50, NIRC).

:l2t)

grrirlrrlincs on cross-border transactions and domestic transactions between entcrprises between associated Regulations No' 2'2013 dated Revenue enterprises, associated largely based on arm's length was which i}lr}, January 2g, Guidelines, was promulgated. Transfer OECD set outin methodologies comparable uncontrolled include methodologies length These arm;s plus method, profit split cost method, price r"esale p"i"e r""tttod, profit split contribution approach, ptoht split method, residual also regulation The method. margin net ,pp"ou"'h, and transactional facility is a which arrangement, pricing advance provide for securing available to taxpayers who are engaged in cross-border transactions to determine in advance an appropriate set of criteria to ascertain transfer prices of controlled transactions over a fixed period of time, and double so as to reduce the risk of transfer pricing examination advance multilateral or bilateral, unilateral, be taxation. This could pricing arrangement.

ln order to pr
Filing of Tax Returns person The frequency of filing income tax returns depends on the

and the nature oi itt"o-u received' The rules are summarized as follows: a. Ind.iuid.uolls d.eriving pure$t cornpensation income' Individual deriving purely compensation income must

-

filehisincometaxreturn(BIRForm1701)notlaterthan Aprillsofthefollowingyear.Thisrequirementoffiling taxreturnsisnolongerrequiredbeginningforthecalendar year2o}2,iftheemployeequalifiesunderthesubstituted filing sYstem.

substituted filing of tax returns is required where (i) an

or one employee receives purely compensation- income from a single (ii) amount correct emptoyet *tto deducted and remitted to the BIR the or*itrrrrotaing tax from the employee's compensation income during the year, and said employee has (iii) no taxable other income subject tax to incorne tax under the global tax system. In lieu of the regular Form BIR file returns to be filed by the employees, the employer shall

2316 (certificate of Income Tax Withheld on compensation) with (sec. 2.83.1, the BIR on or before January 31 of the following year March 3-2002' No' Reu. Regs. No. 2-98' q.s amend'ed' by Reu' Regs' effect to the 27,200r). BIR Form 2316 shall contain a certification considered be that the employer's filing of BIR Form 1604-CF shall to the as a substitutea nnng o1 th" employee's income tax return

330

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^lil;,',T,l,l;'#liilllil'lllli extent that the amount of compensation and tax withheld in BIR Form 1604-CF as filed with BIR is consistent with the corresponding amounts indicated in BIR Form 2316 (5ec.2.83.1, Reu, Regs. No. 192002, October 11,2002). However, non-resident citizens who receive purely income from foreign sources are no longer required to file their Philippine income tax returns, although they must still file an income tax return covering income from sources within the Philippines.

Filipino employees of foreign embassies and international organizations in the Philippines, including ADB Foreign embassies and international organizations shall submit to the Office of the CIR a Summary List of Employees as of December 3t, 2Ol2 who want to avail of abatement of penalties not later than May 10, 2013 and the tax must be paid not later than May 15, 2013 with Declaration of Availment of Abatement plus required attachments and that no pending criminal case for 2}l2isfiled with the Department of Justice or the court. International organizations whose non-Filipino employees enjoy immunity from taxation need not submit information on their non-Filipino employees (Reu. Regs. No. 7-2013, May 9, 2013). In lieu of the Summary List of Employees, the employee may obtain a Certificate of Employment from his/her employer disclosing the information on his/her position or rank, period of employment for 2012, and the monthly salaries, emoluments and monetary benefits (Reu. Regs. No.8-2013, May 9,2013).

Bar Question (1997) A bachelor was employed by Corporation A on the first working day of January 1996 on a part-time basis with a salary of F3,500.00 a month. He then received the 13th month pay. In September 1996, he accepted another part-time job from Corporation B from which he received a total compensation of F14,500.00 for the year 1996. The correct total taxes were withheld from both earnings.

With the withholding taxes already paid, would he still

be

required to file an income tax return for his 1996 income?

Suggested answer: Yes, because what is exempt from

the to.res correctly withheld only by one employer. In this cqse, euen if his aggregate compensation income from both his employers does not exciid ft0,000.00 ond that total withholding ta,xes were correctly withheld by his employers, the fact that he deriues compensation income concuffently from two employers at anytime during the toxable year, d.oes not exempt him from filing his income ta'x return (RA- 7497 ' as implemented by Reu. Regs. No. 4-93)-

Bar Question (2000) a monthly PNB-Makati with the he deposits which GSIS, pension from the branch. Is he exempt from income tax and therefore not required to file an income tax return?

Mr. Javier is a non-resident senior citizen. He receives

Suggested answer:

Mr. Jauier is exempt from income tax on his monthly GSIS (Sec. 32tBlt6ltfl, NIRC), but not on the interest income that pension -might accru,e on the pensions deposited with PNB which are subject to final withholding tax. Consequently, since Mr. Jauiey's sole ta.rable income would have been subjected to a fi.nal withholding tar, he is not required anymore to file an income tax return (Sec. 51[N[2][c], NIRC)'

Bar Question (2001) In the year 2000, X worked part time as a waitress in a restaurant in Mega Mall from 8am to 4pm and then as a cashier in a 24-hour convenience store in her neighborhood. The total income of X for the year from the two employees does not exceed her total personal and additional exemptions for the year 2000. was she required to file an income tax return last April? Explain your answer.

Suggested answer: Yes. An indiuidual deriuing compensa'tion concurrently from two or m,ore employers at any time during the taxable year shall file an income tax return (Sec. 51[A][2][b], NIRC)'

b. ftIing are those indiuiduals

who haue total comperusation income not exceeding P60,000.00 with

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income, or other income must file his quarterly income tax returns (BIR Form 1700 Q), and an annual income tax return (BIR Form 1700) as follows: Period

Due Date for Filins Return

Ql Return

April

Q2 Return Q3 Return Annual Return (9ec.74, NIRC)

15 of same year August 15 of same year November 15 of same year April 15 of the following year

To determine the taxable income to be reported in the quarterly tax returns, the gross income and deductions shall be computed on a cumulative basis. The gross income that shall be reported are those subject to tax at the graduated tax rates, excluding capital gains and passive income subject to final taxes at preferential tax rates. The income tax due every quarter shall be computed based on the cumulative taxable income for the quarter and any preceding quarters. The amount of income tax to be paid shall be the balance of the income tax after deducting therefrom the total quarterly income taxes previously paid and any taxes withheld under the expanded withholding tax system from the items of gross income reported for the period (Sec. 5, Reu. Regs. No.7-93, January 4, 1993). Bar Question (1991) Robert Patterson is an American who first arrived in the Philippines in L944 as a member of the U.S. Armed Forces that liberated the Philippines. After the war he returned to the United States but came back to the Philippines in 1958 and stayed here up to the present. He is presently employed in the United States Naval Base, Olongapo City. For the year 1985, he earned US$10,856.00. Sometime in 1986, the District Revenue Office of the Bureau of Internal Revenue served him a notice, informing him that he did not file his income tax return for the year 1985 and directing him to file said return in 10 days. He refused to file any return claiming that he is not a resident alien and is therefore not required to file any income tax return. Is Patterson's claim correct? Suggested answer: Pqtterson's claim is not correct. While Paterson is exempt from income tax, an exemption from income tax does not, howeuer,

necessarily mean an ext:ntptiltn. likewise from the filing of'an income tax return (Garrison u. Court of Appeals, 187 SCRA 525)'

Domestie corporation and. resid.ent foreign corporatiot '. - Domestic corporation and resident

foreign corporation shall file quarterly corporate income tax return (BIR Form 1702 Q) within 60 days after the end of the calendar or fiscal quarter used, and annual corporate income tax return (BIR Form 1702) on or before the 15th day of the fourth month following the close of the calendar year or fiscal year, as the case may be (Sec. 75,N/fiC)' The deadlines for the filing ofthe tax returns by a corporation using the calendar year are as follows:

Ql Return Q2 Return Q3 Return

Annual Return

May 31 of same year August 31 of same year November 30 of same year April 15 of the following Year

Cumulatiae cornputation of quarterly and' annual tax liabitities. - computation of the quarterly and annual tax returns

of individuals (except those receiving purely compensation income) and corporations shall be made on the cumulative basis; 1.e., gross income and deductions are consolidated and the income tax liability is computed on the consolidated net income, and the income taxes paid for the preceding quarter(s), including the creditable withholding

iaxes withheld by the withholding agent(s) duly supported by certificates of Taxes withheld, and excess tax paid in prior year(s) carried over to the current taxable period, are credited against the consolidated income tax due. The filing of corporate income tax returns and the payment of tax could be done manually or electronically. The following taxpayers have been required to e-file and e-pay: (a) large taxpayers notified by BIR; (b) Top 20,000 Corporations notified by BIR; (c) Top 5,000 Individuals notified by BIR; (d) taxpayers who wish to enter contract with government; (e) corporations with paid-up capital of F10 million o" *oi"; (f) pEZA-registered entities and those located within special economic zones; and (g) government offices, insofar as remittance of withheld VAT and business tax is concerned(Reu. Regs. No. 1-2013, January 23, 2013). Also, corporations with complete computetized accounting system, taxpayers joining public bidding pursuant to E.O. 398, a" imple*ented by Revenue Regulations No' 3-2005, and

334

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enterprises enjoying fi.scal incentives shall use the EFPS (electronic filing and paJrment system). Any manual filing of tax returns and./or payment of taxes, other than those authorized by the BIR, such as during system unavailability upon written notification by DCIR-ISG, shall be considered as a violation under Section 275 of the Tax Code, subject to penalties (RMC 30-2013, April 8,2013).

Bar Question (2001)

a)

How ofben does a domestic corporation file income tax return for income earned during a single taxable year? Explain the process.

b)

What is the reason for such procedure?

Suggested answer:

a)

b)

A domestic corporation is required to file income tox returns four (4) times for income earned during a single taxable year. Quarterly returns are required to be filed for the fi.rst three quarters uhere the corporation shall declare its quarterly sunxnxary of gross income q,nd deductions on a cumulqtiue basis (Sec. 75, NIRC). Then, a final adjustment return is required to be filed couering the totol taxable income for the entire year, cqlendar or fi.scal (Sec. 76, NIRC). The reason for this procedure is to ensure the timeliness of collection to meet the budgetary needs of the gouernment. Likewise, it is designed to ease the burden on the tatcpayer by prouiding it with an installment payment scheme, rather than requiring the payment of the tar on a lurnp-sum basis after the end ofthe year.

Capital Gains Tax Returns a. Shares ofstock ofa dornestic corporation Listed. and. trad,ed in a local stock erchange

- The transaction is exempt from income tax, but subject to the L/2 of one percent (I7o) stock transaction tax based on the gross selling price which is required to be withheld and deducted by the stockbroker handling the transaction and remitted to the BIR within five (5) working days from the date of sale (Sec. 127[a], NIRC). Unlisted., or listed but trad.ed outsid.e a local stock excha.nge

-

The capital gains tax must be filed within 30 days from

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the date of sale with the llevcnuc District office where the principal place ofbusiness ofthe seller is located. Also, an annual capital gains iax return covering all transactions involving shares of stock (not subject to stock transaction tax) shalt be filed not later than the 15th day of the fourth month following the close of the taxable year.

Real property located in the Philippines The capital gains tax return shall be filed by the seller within 30 days from the date of sale with the Revenue District office having transferred is lurisdiction over the place where the property being iocated (Sec .3,Reu. Rbgs. No.8-98, August 25, 1998)' This regulation clarifies that the seller is the one responsible for the filing ofthe capital gains tax return, but there shall be no expanded withholding tax to be ieducted from the gross selling price by the buyer-withholding agent. The certificate Authorizing Registration (cAR) shall be issued by the RDO where the real property is located. Accordingly, even if the real property is an ordinary asset (i.e., subject to the global tax system withholding tax), the proper tax return, together with urra ""putraed the application for the issuance of cAR, shall be filed with the RDO where the real property is located.

b.

Passive lnvestment lncome since the passive investment income is already subject to the final withholding tax, which tax is already withheld and deducted from the income payment and remitted to the BIR by the withholding agent-payor, by filing his/its withholding tax return, no other income ti ""t ."tr is rlquired to be filed by the recipient of income covering such income to the BIR. These passive investment incomes subject to the final tax at preferentialiax rates will be shown as adjustments to net income of ih" t""pry"r as shown in the audited financial statements prepared by the external auditors'

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CIIAPTER XII

WITHHOLDING TAXES

lmportance of Withholding Taxes Withholding tax is a method of collecting income tax in advance from the taxable income ofthe recipient of income. Thus, ifthe income of the recipient is exempt from income tax, no withholding of tax is required to be made by the payor of such income, which is constituted as a withholding agent.

The withholding of income tax on compensation income, on certain income payments made to resident taxpayers, and on income payments made to non-resident taxpayers is very important for all taxpayers, because the obligation to withhold and remit the tax is mandatory and prescribed by law. Also, expenses that are subject to withholding tax are disallowed by revenue officers as deductions from gross income of the taxpayer. In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive ofthe tax base. In an ad ualorem tax, the tax paid or withheld is not deducted from the tax base, except when the law clearly spells out in defining the tax base (Bank of America u. Commissioner, 234 SCRA 302). The duty to withhold is different from the duty to pay income tax. Indeed, the revenue officers generally disallow the expenses claimed as deductions from gross income, if no withholding of tax as required by law or the regulations was withheld and remitted to the BIR within the prescribed dates.

Rernittance of withheld tq.res is the responsibility of the withhold.ing agent-payor of income. Sections 57 and 58 of the 1997 Tax Code, as implemented by Section 2.58.3(8) of Revenue 336

:l:17

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Rcgulations N0. 2-9t1, clcrrrl.y provido that proof of remittance is the responsibility ofthe withh0lding agent and not of the taxpayer-refund claimant. It should be borne in mind by that payors of withholding taxes are by themselves constituted as withholding agents of the BIR. The taxes they withhold are held in trust for the government. In the event that the withholding agents commit fraud against the government by not remitting the taxes so withheld, such act should not prejudice respondent. Respondent has no control over the remittance Lf ifru taxes withheld from its income by the withholding agent or payor who is the agent ofthe petitioner. The certificate of creditable bax Withheld issued by the withholding agents of the government are prima facie proof of actual payment by respondent-payee to the gorr""rr-"rrt itself through said agents. We stress that the perbinent frovisions of law and the established jurisprudence evidently demonstrate that there is no need for the claimant-respondent to prove actual remittance by the withholding agent to the 1IR (C/R i. Ario,l'n Transmission Corpora,tion, GJ-. No' 779677, January 79,2077).

Final Withholding Tax 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. Instancls when the income is subject to final withholding taxes are listed in Section 57(A) of the 1997 Tax Code' The liability for payment of the tax rests primarily on the payor as a withholding aglnt. Thus, in case of the withholding agent's failure to withhold tte 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.s7, Reu. Regs. No. 2-98). The income subjected to final withholding tax is no longer reported in the income tax return of the individual tr"pry"t (BIR Form 1701) or corporate taxpayer (BIR Form 1702), but the final withholding tax deducted is not deductible from the ordinary income tax or regular corporate income tax of the taxpayer. 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.

338

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Since the withholding agents (who have control, custody, or receipt of the funds) deduct the withholding taxes when the income payments are paid or payable, they are described as,,withholding taxes-at-source." ln other words, the tax is withheld and deducted at the source and time of payment. This is particularly significant where the payee is a non-resident individual or a non-resident foreign corporation.

Bar Question (2001) What is meant by income subject to "final tax"? Give at least two examples of income of resident individuals that is subject to the final tax. Suggested answer: Income subject to final tax refers to an income wherein the tox due is

fully collected through the withholding tar system. und,er this

procedure, the payor of the income withholds the tatc and remits it to the gouernm.ent ds a final settlement of the income tax d.ue on said, incorne. The recipient is no longer required to include the item of income subjected to "final taJc" es part of his gross income in his income tuc returns. Exarnples of income subject to finat tax are diuidend income, interest frorn bank deposits, royalties, etc.

Bar Question (2001) Is a non-resident alien who is not engaged in trade or business or in the exercise of profession in the Philippines but who derived rental income from the Philippines required to file an income tax return on April of the year following his receipt of said income? If not, why not?

Explain your answer.

Suggested answer: No. The income ta,x on all income deriued frorn philippine sources by a non-resident alien who is not engaged in trad,e or business in the Philippines is withheld by the lessee as q, Fincll withhordirg Tax (sec. 57[A], NIRC). The gouernment cunnot require persons outsid.e of its territorial jurisdiction to file a return; for this reason, the income tarc on income deriued from within must be collected through the uithhotding to"tc system and thus relieue the recipient of the income the duty to fite income tan returns (Sec. 51, NIRC).

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Creditable Withholding Tax 'lhe Secretary of'I"inance may, upon recommendation of the

commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, Ly puyot-"orporation/persons, at the rate ofnot less than one percent dbLr*not more thanB2Vo thereof, which shall be credited against the income tax liability of the taxpayer for the taxable yeat (sec. 57[B], NIRC).

under the creditable withholding tax system, taxes withheld on

certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an irr"o*" tax return, as prescribed in Sections 51 and SZL1 the Tax Code, to report the income and./or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable from the ordinary income tax of an individual or a corporation.

There are three (3) types of creditable withholding taxes, namely: (1) expanded withholding tax on certain income payments made ty private persons to resident taxpayers; (2) withholding tax income for services done in the Philippines; and (3) or, "o-p"tt.ation withholding tax on money payments of the government'

Expanded Withholding Tax An income payment is subject to the expanded withholding tax if the following conditions concur: a. An expense is paid or payable by the taxpayer, which is income to the recipient thereof subject to income tax; The income is fixed or determinable at the time of b. payment; The income is one of the income payments listed in the c. regulations that is subject to withholding tax, unless the payor of the income is a Top 20,000 Corporation or Top 5,000 Individual, where the regulations require the wiihholdlng of the creditable income tax on purchases ofgoods or services from regular suppliers, regardless of arnount, or from irregular suppliers, where the amount is F10,000 or more;

340

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d.

The income recipient is a resident of the Philippines liable

to income tax; and

The payor-withholding agent is also a resident of the Philippines. Persons exempt from withhold.ing ta.x. The withholding of creditable withholding tax shall not apply to income payments made to the following: 1.

2.

National government and its instrumentalities, including provincial, city or municipal governments and barangays, except government-owned or controlled corporations ; Persons enjoying exemption from payment of income taxes pursuant to the provisions ofany law, general or special, such as but not limited to the following:

a.

Sales of real property by a corporation which is registered with and certified by HLURB or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed F400,000.00;

b.

Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption from income tax under 8,O.226, R.A. 7916, and R.A. 7227 , respectively;

c.

Corporations, which are exempt from income tax under Section 30 ofthe Tax Code, such as GSIS, SSS, and PHIC;

d.

General professional partnerships;

e.

Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium

agreement under a service contract with the

'

:r4

I

llred or duterminuble at the time of paymcnt lncome is fixed when it is to be paid in amounts definitely

,I'he income fu

basis for pre-determined. It is determinable, whenever there is a An ialculation by which the amount to be paid may be ascertained' time it is paid from income is described as annual or periodical, when need not be income The intervals' regular at not to time, whether or No' 2)' puiJ unnoully if it is paid periodically (Sec' 799' Reu' Regs' The ineorne payrnent is listed'

in the regulations as subject to

uithhold'ing the Revenue Regulations No' 2-98, as amended' enumerates tax' withholding expanded different income payments subject to the If the income payrnent is not one of those listed in the regulations' payor is then it is not subject to withholding tax, unless the income case' which in Individual' a Top ZO,0O0 Coiporation or a Top 5,000 purchase local percent(lqo),for It uppfl"uUle nWt rate shall be one of "goods or two percent (27o) for purchase of services' The recipient of incomp is a resid'ent of the Philippines Theprovisionsoftheexpandedwithholdingtaxregulationsapply

Philippines' The only where the recipient of income is a resident of the to pay incornc ta'x" term,?esid.en f,,, seems to refer to a person "liabl'e agent' The tax withholding the by made be on the income payment to immaterial' Thus' status of the withholding agent-payor of income is

association whether or not the payor of itt--" is a corporation or with the registered or Philippines the of orguttir"a under tft" Uws or not the payor se"curities and Exchange commission, or whether the responsibility of of income is taxable or"exempt from tax, it has withholding and remitting the proper tax' If the recipient of the income is a non-resident taxpayer, the tax, not to income puy-"rri shall be subject to the final withholding the creditable withholding tax discussed above'

Revenues derived from carriage of persons, cargo

Philippines The payor-withhotd,ing agent is resid'ent of the of tax The power of the government to require the withholding

or mail originating from the Philippines up to final destination, paid to international shipping line or through its shipping agent in the Philippines, subject to the 2.57o final on Gross Philippines Billings (81fi Ruling No. DA-204-2006 and 321-2008, December 12,

extendsonlytotaxpaye-rswhoareresiding(j.e.,doingbusinesswithin the territorial jurisdiction of the Philippines). Thus, non-resident and foreign embassies in the Philippines may not foreign agents of the "o"portiions be constituted nor be compelled to act as withholding obligations their with non-compliance of go\ru"n-unt, because in case

government; and

2008).

342

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to withhold, the Philippines may not enforce its tax laws beyond its

2.

territorial jurisdictions.

under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? Suggested answer:

b. In the absence of retirement

plan or agreement providing for retirement benefits, the benefits are excluded from gross income and exempt frorn income tax if: (i) retiring employee must haue serued at least fiue (5) years; and (ii) that he is not less than 60 years of age but not more than 65.

Withholding Agent The following persons are constituted as withholding agents:

(a) It

depends. An employee retiring under a cornpany's qualified and priuate retirement plan can only be exempt from incorne tax on his retirement benefits if the followiig requisites are met: (1) that the retiring employee must haue been in seruice of the same employer for at least 10 years; (2) that he is not less than S0 years of age at the time of retirement; q.nd (S) the benefit is auailed of onty once. In the instant case, there is no mention whether the employee has lihewise compiled tuith requisites number (2) and (3).

The conditions to be met in order that retirement benefits receiued by officials and employees of priuate firms are excluded from gross income and exempt from taaation are as follows:

Under RA.4977 (those receiued under a redsonable priuate benefit plan):

a.

I'hose receiued under existing collectiue bargaining agreement and other agreements are exemPt; and

Is the employer correct in withholding the tax? Explain.

1.

ithou.t. u,rt.y ntli,re atent plan) :

a.

To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private company after ten (10) years of service. Pursuant to the company's qualified and approved private retirement benefit plan, he was paid his retirement benefit which was subjected to withholding tax.

(b)

IJnder It.A. 7641 (th'ose receiue'd from employers w

Bar Question (2000)

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the retiring official or employee must haue been seruice of the same employer for at least l0

in

years;

b.

that he is not less than of retirement; and

c.

that the benefit is auailed ofonly once.

S0

years of age at the time

1.

In general, anyjuridical person, whether or not engaged in trade or business;

2.

An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; and

3. All government

offices, including government-owned or -controlled corporations, as well as provincial, city, and municipal governments and barangays.

Time to Withhold and Remit Tax Withholding tax shall be deducted and withheld by the

withholding agent when the income payment is paid or payable or accrued (Reu. Regs. No. 2-98, as q,mended by Sec. 4, Reu. Regs' No' 12-2001, September 7, 2001), 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 lo the date the obligation becomes due, demandable or legally enforceable. Where the 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

344

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of the return period in which the same is claimed as an expense or amortized for tax purposes.

Time to Credit Expanded Withholding Tax From lncome Tax The amount of the expanded withholding tax as shown in BIR Form 2307 (certificate of creditable Tax withheld) shall be claimed by the taxpayer-seller ofgoods or services as tax credit against hiV its income tax liability for the quarter or year, which should be in the same taxable year when the corresponding sales or revenues were reported in the annual income tax return. Where no BIR Form 2307 was issued by the buyer thereofin the year ofsale despite the withholding of the creditable income tax as shown in the journal voucher, secondary documentary evidence such thejournal voucher and the check, evidencing payment and deduction of withholding tax, in lieu of BIR Form 2307, may be submitted by the seller of goods or services in support of the tax credit. However, where the buyer issued the BIR Form 2307 upon payment of the selling price in the succeeding year for credit sales, such act does not conform with the regulation, and the late withholding and remittance of the tax has the effect of disallowance of the business expense or deduction from the gross income for the year, and the BIR may still pursue the assessment and collection of the deficiency creditable withholding tax that should have been withheld and remitted to the BIR(Reu. Regs. No. 12-2013, July 12,2013).

Consequences of Non-Withholding of Tax By the payor of lncome Any income pa5rment which is otherwise deductible under the Tax Code shall be allowed as a deduction from the payor,s gross income only if

it is shown that the income tax required to be withheld has

been paid to the Bureau in accordance with sections bz and b8 ofthe

Tax Code.

No deduction will also be allowed, notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Sections b7 and b8 of the Tax Code ( Sec. 2.58.5 of Rea. Reg s. No. 2 -98, as am.end.ed. by Rea. Reg s. No. 12-2013). Revenue Regulations No. 12-2018 will apply on tax audit for the year 20LB (nMC No.63-2013, September 26,201J).

Consequences of Non-Remittance of Tax Withheld by the Withholding Agent With Respect to the Payee of lncome should the duly constituted withholding agent of the government fail to remit the amount of tax withheld to the BIR, the payee of the income from whom the withholding tax was deducted may still credit the amount withheld from his income tax liability for the year. The act of the agent (withholding agent) is the act of the principal (government). Proof of actual remittance by the respondent is not needed in

order to prove withholding and remittance of taxes to petitioner. Section 2.5S.3(B) of Revenue Regulations No. 2-98 clearly provides that proof of remittance is the responsibility of the withholding agent and not of the taxpayer-refund claimant. It should be borne in mind by the petitioner that payors of withholding taxes are by themselves constituted as withholding agents of the BIR. The taxes they withhold are held in trust for the government. In the event that the withholding agents commit fraud against the government by not remitting the tixes so withheld, such act should not prejudice herein respondent who has been duly withhetd taxes by the withholding agents acting under government authority. Moreover, pursuant to Sections 57 and 5g of the NIRC of 1997, as amended, the withholding of Income tax and the remittance thereof to the BIR is the responsibility of the payor and not the payee. Therefore, respondent, x x x has no control over the remittance ortn" taxes withheld from its income by the withholding agent or payor who is the agent of the petitioner. The certificates of creditable Tax withheld at source issued by the withholding agents of the government are prima facie proof of actual payment by herein responlent-payee to the government itself through said agents. we stress that the pertinent provisions of law and the established jurisprudence evidently demonstrate that there is no need for the claimant, respondent in this case, to prove actual remittance by the withholding agent (payor) to the BIR (CIE a. Asian Tlansmission Corporation, G.R. No. 779677, January 19, 20L7)'

Bases of Withholding Tax Withhotd.ing tax based. on gross income'

-

As a general

rule, the gross amount of income payment shall be used as basis in computing the expanded withholding tax. However, the following are the exceptlons to the general rule where the basis of the withholding tax is nol just the income but may include return of capital, which is not subject to income tax:

st 346 1.

and corporate cinematographic film owners, lessors or distributors Gross payments to contractors

3.

Gross selling price paid to sellers of real property classified as ordinary

-

asset 4.

27o

-

-

1.57o

-

Il2Vo ofLVo

_

IVo

-

2Vo

-

2Vo

67o

Income payments made any of the Top 10,000 corporations to their regular local suppliers of

a. goods b. services 6.

\Vo

Gross amounts paid by any credit card

company to any business entity representing sale ofgoods or services 5.

c.

Gross payments to resident individuals

2.

fncome payments by the government

suppliers

Withholding ta* based. on grtss selling price or fair market aalue, whicheaer is higher. A creditable withholding tax based on the gross selling pnce/total amount of consideration or the fair market value, whichever is higher, paid to the seiler/owner for the sale, transfer or exchange ofreal property, other than capital asset, shall be imposed upon the withholding agenvbuyer, in accordance with the following schedule:

a.

Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business as per proof of registration with the HLURB or HUDCC: With a selling price of F500,000.00 or less With a selling price of more than F500,000.00 but not more than F2,000,000.00 With a selling price of more than p2,000,000.00

b.

Where the seller/transferor is not habitually engaged in the real estate

business

Where thtl strlkrry't,rtrttslilrrlr is exempt from

creditable withholding tax in accordance with Section 2.57.5 ol'[tcv. Regs. No. 2-98 - Exempt Imposing the graduated withholding tax rates on the gross selling ptice or fair market value, whichever is higher, on the sale o1. real property classified as ordinary asset by real estate dealers, tpp"ut. to be beyond the authority granted by law-to the commissioner of Internal Revenue. while the tax rates are within the range prescribed in section 57 of the 1997 Tax code, the mandated ta" bas" upon which the tax rates are applied is the "gloss income," which rn"un. the amount after deducting the cost or adjusted basis ofthe real property sold or exchanged. Review by the BIR ofthe tax rates or evln the tax base is in order, so as to remove the inequity against real estate dealers.

Withholding Tax Rates

on their purchases ofgoods from

local

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The withholding tax rates applied on income payments liable to income tax are as follows: 1. Professional fees for services rendered by individuals, including professional real estate practitioners (brokers, appraisers, and consultants)l as well as professional entertainers and athletes, and directors:

If gross income for current year

exceeds F720,000.00, or professional does not file

-

l57o

F720,000.00

-

IOTo

Rental income Real properties Personal properties Poles, satellites and transmission facilities Billboards

-

57o i%o 57o

Gross payments to resident individuals and corporate cinematographic film owners, lessors or distributors

-

1Vo

Sworn Declaration for first semester of the year with BIR, regardless of gross income. If gross income for current year does not

2.

3.

lSee Revenue Regulations No. 10-2013, June 6, 2015

\Vo

348

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4.

Gross payments to certain contractors

-

20r,

5.

Income distribution to beneficiaries

-

l5o/o

6.

Income payments to certain brokers, including real estate brokers who did not pass the Board examination, and agents

-

IOTo

-

ISVo

-

LIVo

-

L57o

-

LIVo

ry

,.

fncome payments to partners of general professional partnerships:

Ifgross income for current year exceeds F720,000.00

If gross income for current year does not exceed P720,000.00 8.

9.

Gross additional payments to government personnel from importers, shipping and airline companies, or their agents

Commissions of independent and exclusive

distributors, medicaVtechnical and sales representative, and marketing agents of multi-level marketing companies 10.

Tolling fees paid to refineries

11.

Income payments made by pre-need companies to funeral parlor

t2.

Payments made to embalmers

-

13.

One-half of gross payments made by any credit card company in the Philippines

*

14.

Supplier of services

16.

t7.

LVo

l7o 2Vo

Income payments made by any Top 20,000 Corporation

Supplier ofgoods

15.

i%o

Income payments made to suppliers of agricultural products Income pa5rments on purchases of minerals, mineral products and quarry resources

Political contributions to candidates

-

LVo

27o

-

LVo

-

t0Vo

|Vo

^-'"

:t4e

venue for filing wlthholding tax returns and time for payment of tax creditable withholding taxes deducted and withheld by the withholding agenvbuyer shall generally be filed with the Authorized Agent Ban[ located within the principal place of business of the *itt t otaitrg agent. However, expanded withholding taxes on the sale, transfer or exchange of real property classified as, ordinary r"r"t, shall be paid by thJwithholding agenVbuyer upon filing of the return with the authorized agent bank located within the Revenue District office having jurisdiction over the place where the property being transferred is located within 1-0 days following the end of the However, taxes withheld -ort-h in which the transaction occurred. 15 of the following January or before in December shall be filed on 1998)' 25, year (Reu. Regs. No. 8-98, August

' 'i,:;lii,i

2.

IRANSFER TAIGS

before the death ofthe transferor, or the transferor retains the ownership, full or naked, of the property conveyed; it is the donor's death that determines the acquisition of, or the right to the property. In donation inter uiuos, its effect

ESTATE TAX

disposition of private property. Under the Tax code, transfer taxes refer to:

is produced while the donor is still alive'

4.

2.

5. 6.

tookeffectimmediatelyuponthedonee'sacceptance thereof and it was subject to a resolutory condition that the donation would be revoked if the donee did not fulfill

certain conditions, the donationisinter uiuos (Bonsato rt' Court of APPeals, gS Phil' 48L)'

Bar Question (1994)

(1) (2)

death, without the donor's intention to lose the thing

conveyed or its free disposal in case of survival, while a donation inter uiuos is made without such consideration but out of the donor's generosity (Balaqui u. Dongso, 58 Phil.673), although the subject matter is not delivered at once, or the delivery is to be madepos/ mortern,which is a simple matter of form and does not change the nature ofthe act.

350

The transfer would be void if the transferor survived the transferee, in the case of donation mortis causa' Donations, being in the form of a will, are never accepted

bythedoneesduringthedonor's]ifetime.Acceptanceisa requirementfordonationsinterujuos.Wherethedonation

Donor's tax (donation inter uiuos) Tax levied on the - person (donor) transmission of properties from a living to another living person (donee).

Distinctions between Donatio n inter vivosand Donation mortis causa 1. A donation mortis causq is made in consideration of

The transfer is revocable before the transferor's death and revocability may be provided indirectly by means of the reserved power in the donor to dispose of the property conveyed.

1. Estate tax (donation

mortis cq.usq) _ Tax levied on the transmission of properties from a d.ecedent to his heirs. Estate tax is the tax on the privilege to transmit property at death and on certain transfers which are made the equivalent of testamentary dispositions by the statute.

tttttrl

S.Thetransferconveysnotitleorownershiptothetransferee

CIIAPIER XIII

Transfer Taxes *Transfer t@xes" are taxes imposed upon the gratuitous

,r-r I

is (tttsu, being testamentary in nature' should be cnrbodied in a last will and testament (Art' 728, Ciuil Cocle).It is not a contract; it is a legacy' If not (Puig a' embodied in a valid will, the donation is void 736)' Pefi.aflorid'a, 76 SCRA

A transl'(]r

PART III

;'; ,1,11

What is the principle of mobilia sequuntur personam? Are donations inter uiuos and donations mortis cdusa subject to estate taxes?

Suggested answer:

(1)

Principle of m.obitia sequuntur personam refgrs to the of intangible personal property principle 'g"n"riuy that taxation ou)ner follows the residence or domicile of the thereof-

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(2)

Donations inter uiuos are subject to donot's gift tax (St:c. 91[a], Tax Code) while donations mortis causo are sub.ject to estate tar (Sec. 77, Tax Code). Howeuer, donations inter uiuos constituted lifetime lihe transfers in contemplation of deqth or reuocqble transfers (Sec. ZStbl and [c], Tax Code) may be taxed for estate tax purposes, the theory being that the transferor's control thereon ertends up to the time of his death.

Il'the Net EstuLc

Estate tax is laid neither on the property nor on the transferor or the transferee. It is an excise tax or privilege tax and its object is to tax the shifting of economic benefits and enjoyment of property from the dead to the living (Gregg a. Cornmissioner, 3IS Mass. 704).

Taxation of the transmission of the decedent's estate and donations made by,persons, natural or juridical, whether citizens or aliens, residents or non-residents shall be governed by these regulationsl promulgated to implement the provisions of R.A. g424. For purposes of these regulations, the provisions of the Family Code of the Philippines (E.O. 209) which took effect on August 3, 1988 shall govern the property relations between husband and wife whose marriage was celebrated on or after such date. For marriages celebrated prior to the effectivity of the Family code of the philippines, the civil code of the Philippines shall govern the property relations between husband and wife in relation to the pertinent provisions of the Family Code. Rates of Estate Tax The transfer ofthe net estate ofevery decedent, whether resident non-resident of the Philippines, as determined in accordance

or with the code, shall be subject to the estate tax. The entire value of the net estate is divided into brackets and each rate is imposed on the corresponding bracket. Below is a table showing the tax on each bracket and the cumulative total tax for the entire net estate, pursuant to the rates provided in the Code. rRev. Regs. No. 02-03, December 16,2002 amended Rev. Regs. No. 17-93.

ts

Of the excess not The tax over Plus be shall Over over ExemPt P 200,000 |Vo F 200'000 O F 200,000 500,000 87o 5oo,ooo F 15,ooo 5oo;ooo 2,ooo,ooo 2,000,000 llTo 135,000 2,000;000 5,000,000

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Estate Tax Nature and Object of Estate Tax

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10,000,000 465,000

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fO,OOO,OOO and over 1,215,000 20Vo

5'000'000 10,000'000

Justification of Estate Tax l.Benefit.receivedtheory.-(Seediscussionson..benefitreceived theory" in income taxation);

2.PrivilegetheoryorStatepartnershiptheory._Succession

to the property of a deceased person is not a fundamental right and consLquently, the legislature can constitutionally

burdensuchsuccessionwithatax(Stebbinsu'Rilly,268

us

3.

137);

Ability to pay theory. - Those who have more properties to transfei to their heirs upon death shall pay more estate taxes.Anothernameorconceptsimilartotheabilitytopay theory is the redistribution of wealth theory' The taxes paid by rich people are programmed for disbursement by borrgr"r. more for the benefit of the poor in terms of social services, education, health, etc'

The term "d.eced.ent" refers to a deceased person who is the source ofthe hereditary property or estate which is to be distributed. He is called "testq,tor" oi;tesiatrin," 7f he/she left a will' antd"intestate," if he/she left no will. "Inheritance" refers to the mass of proirerty, rights' and obligations of a person existing at the time of his death and which are iot extinguished by his death (Art. 776, NCC), including those which have a-ccrued from that time (Art.781, NCC). Rights which are extinguished by death because they are intransmissible by their natrire and porpotu (e.g., right of usufruct, right of personal easement, or right to tife annuity), not by contractual stipulation, are also called purely personal rights because are inseparable from their holder or owner. They are not included in the inheritance. i

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For purposes of computing the estate tax, only property and rights existing at the time of death shall be included in the grLss estate of the decedent.

Reasons for Taxability of Transfers of property The dominant purpose of the law is to reach such transfers

which are really substitutes for testamentary dispositions and thus prevent the evasion of the estate tax (U.5. u. Wells, 2gJ U.S. 102). In most of these transfers, the property remains substantially that of the transferor during his lifetime notwithstanding the transfer as he still retains either the beneficial ownership or naked title to the property. Hence, the transfer is essentially similar in respect to a transmission by testacy or intestacy upon the death ofthe decedent. The transfer by inter uluos must be absorute and outright with no strings attached whatsoever by the donor. A transfer ofproperty by trust or donation is not consummate until put beyond recall TBurnet u. Guggehein, 288 U.S. 2BO).

Death is the Generating Source of power Estate tax laws rest in their essence upon the principle that

death of an individual is the generating source from which the taxing power takes its being, and that it is the power to transmit or the transmission from the dead to the living on which the tax is more immediatelybased (Lorenzo u. posad.c,s,64 phil.Bd8). No manual transfer ofthe property to the heirs is required, but the source and direction ofthe property are under the control ofthe probate court and the transfer is not effected until its recipients are determined and title is lodged in them (BS CJS 990).

The taxpayer cannot foresee and ought not to be reqiired to guess the outcome of pending measures. The tax may be made retroactive in its operation, but legislative intent that a tax statute should operate retroactively should be perfectly clear (Lorenzo u.

Posad.as, ibid).

The fair market value at the time of death of properties left by the decedent to his/her heirs shall be used in determining the amount of his gross estate (Sec. BS, NIRO.

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Residence "Reeid,ence" refers to the permanent home, the place to which whenever absent, for business oi pleasure, one intends to return' and depends on facts and circumstances, in the sense that disclose intent (ioro u.Tan cort e, 100 phil,32L).kis, therefore, not necessarily the actual place of residence. Thus, a citizen who went abroad for operation in a prestigious hospital and stayed there for orre month but unfortunately died therein is still a resident of the Philippines for estate tax PurPoses.

Gross Estate time oilis ieath shall be included in his gross estate. Where the a"""a"rrt h.d, before his death, relinquished his interest in property, he could not be deemed to have transmitted any interest in such property at his death (Crooks a. Hasselson,282 U'S' 55)' The value ofthe gross estate ofthe decedent shall be determined

by including the value at the time of death of all property, real or (Sec' 85' NIRC) ' fl"rotul, tangiUte or intangible, wherever situated The properbies includible in the gross estate of the decedent and would d"plrrd on whether or not the decedent is a citizen or alien at Philippines the of whether or not the alien decedent is a resident the time of his death. Thus,

1.

Citizen and resident alien decedent:

(a) (b) (c)

Law and Market Value at the Time of Death is Applied The law in force at the time of death of the decedent governs.

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Real property wherever situated;

Tangible personal property wherever situated; Intangible personal property wherever situated'

Non'resident alien decedent:

(a) (b) (c)

ReaI property situated in the Philippines

(

,

Tangible personal property situated in the Philippines;

Intangible personal property with a sllus in the Philippines, unless exempted on the basis of reciProcitY ( Sec. 104, NIRC)'

The estate of a d'eceased person is a juridical entity that has a personality of its own. Judgment in a case binds only the parties

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therein and not the estate of a deceased person which might have been represented at one time by one of the parties (Nazareno a. Court of Appeals,343 SCRA 63Z t2OOOl).

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Judicial

Settlement of Estate

2.

when it is made by the decedent himself Extrajudicial by an act inter -uiuos or by will (Art. 1080, NCC), or by a third person entrusted by the decedent (Art. 1081, NCC), or by the heirs themselves who are all of age and there are no debts (Sec. 7, Rule 74, Rules of Court).

The estate left by a decedent may be settled and distributed: By extra-judicial settlement among the heirs where there are no debts or claims against the estate (RuIe 74, Sec. 7, Rules of Court). b.

c.

By ordinary judicial action for partition, when the heirs cannot come to an extra-judicial settlenent (ibid.); and By judicial settlemerrt, which may be summary, in which case no administrator is appointed to represent the estate, or regular, in which case an administrator is appointed (Sec. 2, Rules of Court; Villocino u. Doyon, 65 SCRA 460 t1e75l).

The "executor" is the person appointed by the testator in his will to carry out its provisions. Upon the probate of the will (Art. 838, NCC), the probate court appoints him, unless he is unfit to discharge the trust as such (Sec.4, Rule 80, Rules of Court). The "administrator" is the person appointed by the probate court to

administer the estate of a person who dies intestate, or testate without having appointed an executor; or where the person is unfit or refuses to act as such; or where the will was void and not allowed to probate (Art.881, NCC).

Partition and Distribution of Estate Partition is the separation, division and assignment of a thing held in common among those to whom it may belong. The thing itself may be divided, or its value (Art. 102g, NCC). The idea of partition involves not only the setting apart and division of a thing owned in common but also the assignment or allotment of the respective shares or parts of the heirs, so that they may enjoy and possess the same separately and exclusively. It is the purpose ofpartition to put an end to co-ownership. It seeks a severance ofthe individual interest of each heir, vesting in each a full ownership in specific property and giving to each one the right to enjoy his estate without supervision or interference from the others (Confessor v. Pelayo, 1 SCRA gl7 tL9611). Partition of the estate may be:

wh('n it is mude by the court in an ordinary action fbr- partition or in the course of administration proceedings (Rules 69-90, Rules of Court); or

Where there are two (2) or more heirs, the whole estate of the decedent is, before its partition, owned in common by such heirs' subject to the payment of debts of the deceased (Art. 1078, NCC). From the moment of death of the decedent, the heir, If there is only one, becomes the sole owner of the estate (Art. 777, NCC). There is no need for judicial declaration of his heirship. An affidavit of extrajudicial declaration suffices to settle the entire ofthe decedent(Sec.7, Rule 74, Rules of Court; Cabuyao u. Caagbay, 95 Phil. 61.4 t 19541) . Pending actual partition, the co-heirs succeeding to the estate are co-owners lhereof (Art. 484, NCC), with respect to the part or portion which might be adjudicated to each of them, subject to the payment of debts of the deceased. Until a partition is made, the respective share ofeach heir cannot be determined and every heir exercises, together with the others, joint ownership over t}ne pro indiuiso property, in addition to his use and enjoyment thereof with no other limitation than that he shall not injure the interests of his co-heirs or co-owners.

Bar Question (2008) Jose Cerna, Filipino citizen, married to Maria Cerna, died in in NLEX on JuIy 10,2007 . The spouses owned, among others a 10O-hectare agricultural land in Sta. Rosa, Laguna with current fair market value of ?20 million, which was subject matter of a Joint Venture Agreement about to be implemented with Star Land Corporation (SLC), a well-known real estate development company. He bought the said real property for P2 million fifty [50] years ago. On January 5, 2008, the administrator of the estate and SLC jointly announced their big plans to start conversion and development of the agricultural lands in Sta. Rosa, Laguna into firstclass residential and commercial centers. As a result, the prices of real properties in the locality have doubled. The administrator of the Estate ofJose Cernan filed the estate tax return on January 9, 2008, by including in the gross estate the real property at F2 million' After 9 months, the BIR issued deficiency estate tax assessment; by valuing a vehicular accident

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a proportiottttl,c sJrttrc in property, only the value of such share has to lrc includcd in the gross estate. Ifhe is entitled

the real property at ?40 million. (a) Is the BIR correct in valuing the real property at P40 million? (b) If you disagree, what is the correct value to be used for estate tax purposes?

only to the use ol'the property, it is the value of that use that has to be included.

Suggested answers:

a.

Examples:

in ualuing the req.l property at ?40 million. The ?40 million represents the ualue of the real property in 2008, after the announcentent by the joint No, the BIR is wrong

uenture partners thot deuelopment plans would be pursued

in the area. The ualue of the gross estate of the

Since the fair rnarket ualue of the real property at the time of death of Mr. Jose Cerna in 2007 was fl,O million, this rnorhet ualue should be the one used for purposes of determining the gross estate. Whateuer is the uq,lue of the property after his death-whether it increases or decreases -is of no moment for estate tax purposes.

Decedent's Gross Estate 1.

Decedent's interest;

2.

Transfers in contemplation of death;

3.

Revocable transfers;

4.

Property passing under general power of appointment;

5.

Proceeds of life insurance;

6.

Prior interests;

7. 8.

Tlansfers for insufficient consideration; Capital of the surviving spouse (9ec.85, NIRC).

Kinds of Property Embraced Under Decedent's Interest:

1. 2.

Property owned. - The decedent possesses all the attributes of ownership. Interest in property possessed.

-

a.

Dividends declared by a corporation before death of the stockholder although paid after death;

b.

Partnership profits even partner;

c.

Proceeds of a life insurance policy payable to a designated revocable beneficiary;

d.

Right of usufruct.

decedent

shall be determined by including the ualue qt the tim.e of death in 2007 ofall property, real or personal, tangible or intangible, whereuer situated (Sec. 85, NIRC).

b.

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interest or right in the nature ofproperby, but less than title having value or capable ofbeing valued, transferred by the decedent at his death. If the decedent owns only

3.

if paid after

death of the

Property or interest transferred.

Bar Question (2005) Ralph Donald, an American citizen, was a top executive of a U.S. company in the Philippines until he retired in 1999. He came to like the Philippines so much that following his retirement, he decided to spend the rest of his life in the country. He applied for and was granted a permanent resident status the following year' In the spring of 2004, while vacationing in Orlando, Florida, USA, he suffered a heart attack and died. At the time of his death, he left the following properties: (a) bank deposits with Citibank Makati and Citibank Orlando, Florida; (b) a resthouse in Orlando, Florida; (c) a condominium unit in Makati; (d) shares of stock in the Philippine subsidiary of the U.S. Company where he worked; (e) shares of stock in San Miguel Corp. and PLDT; (0 shares of stock in Disney World in Florida; (g) U.S. treasury bonds; and (h) proceeds from a life insurance policy issued by a U.S. corporation. Which of the foregoing assets shall be included gross estate in the Philippines? Explain.

in the taxable

Suggested answer: resident of the Philippines at the time of his death, the gross estate of Ratph Donald shall include q'll his property, real or personal, tangible or intangible, whereuer situq.ted at the time of his d.eath (Sec. 85, NIRC). Thus, the following shall be included in his taxable gross estate in the Philippines: Being

q.

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a.

bank deposits with Citibank Mah,otiand Citibanh Orlqndo,

Florida

b. c. d.

a resthouse in Orlando, Florida q condominium

unit in Mahati shares of stoch in the Philippine subsidiary of the U.S. com.pany

e. f. g.

sha.res in San Miguel Corp. and

PLDT

shares of stoch in Disney world in Florida

U.S. treasury bonds

The proceeds from a life insurance policy issued by a U.S. corporation is included as part of the gross estate of Ralph Donald, ifthe designation ofthe beneficiary is revocable or irrespective ofthe nature of the designation, if the designated beneficiary is either the estate ofthe deceased, his executor or administrator. Ifthe designated beneficiary is other than the estate, executor or administrator and the designation is irrevocable, the proceeds shall not form part ofhis gross estate (Sec.85[E], NIRC).

Bar Question (1994) Jose Ortiz owns 100 hectares of agricultural land planted to coconut trees. He died on May 30, 1994. Prior to his death, the

government, by operation of law, acquired under the Comprehensive Agrarian Reform Law all his agricultural lands except five (b) hectares. Upon the death of Orliz, his widow asked you how she will consider the 100 hectares ofagricultural land in the preparation of the estate tax return. What advice will you give her?

Suggested answer: The 100 hectares of land, which Jose Ortiz owned but which prior to his death on May 30, 1994 were acquired by the gouernment under CARP, ctre no longer part of his taxable gross estate, with the exception of the remaining fiue (5) hectqres which under Section TS(a) of the Tar Code stiil forms part of "decedenf,s interest."

Bar Question (1994) Cliff Robertson, an American citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He left 10,000 shares of Meralco, a condominium unit at the Twin Towers

l3uilding at Pasig, Mc[ro Mrttrilrr California.

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rrrrd a house and

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lot in Los Angeles,

What assets shall be included in the Estate Tax Return to be filed with the BIR? Suggested answer:

Att of Mr. Robertson's assets, consisting of 10,000 shares in the Meralco, q, condominium unit in' Pasig, and his house and lot in Los Angeles. California, are taxable. The properties of a resident alien decedent like Mr. Robertson are taxable whereuer situated (Secs. 77, 78 and 98, NIRC).

lntangible personal property As a general rule, the situs of an intangible personal property is at the domicile or residence of the owner (51 Am. Jur. 494-495). This is the known as the principle of "rnobilia sequuntur personarn." The principle, however, is not controlling (a) when it is inconsistent with express provisions of statute, or (b) when justice does not demand that it should be, as when the property has in fact a situs elsewhere ( Collector a. Fisher, 1 SCRA 9il. Bonds, mortgages and certifi cates

of stock are taxable at the place where they are physically located (Burnet u. Broohs,288 U.5.378). Under the Tax Code, the following intangible personal properties have situs in the Philippines:

1. 2. 3.

Franchise which must be exercised in the Philippines; Shares, obligations, or bonds issued by any corporation or sociedu.d anonirna organized or constituted in the Philippines in accordance with its laws; Shares, obligations, or bonds issued by any foreign corporation 857o of the business of which is located in the

Philippines;

4.

Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs (i.e., they are used in furtherance of its business in the Philippines by the foreign corporation)

in the Philippines;

5.

Shares or rights in partnership, business or industry established in the Philippines (Sec' 104, NIRC).

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Reciprocal Exemption as to lntangible Personal Property A decedent's intangible personal property may be subject to transfer taxes both in his place of domicile or residence and in the place where such property has a situs or is located. In order to prevent multiplicity of taxation, the Tax Code provides that the tax imposed

by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country, subject to limitation (Sec.86[E], NIRC). No tax shall be imposed in respect of intangible personal property of a citizen and resident of a foreign country (a) when the foreign country does not impose transfer tax of any character in respect ofintangible personal property ofcitizens ofthe Philippines not residing in that foreign country, or (b) when the foreign country imposes transfer taxes but grants similar exemption from transfer taxes in respect ofintangible personal property owned by citizens of the Philippines not residing in that foreign country (Se c. 104, NIRC) . The term "foreign counhlt may refer to the Federal Government or to the individual states of the United States (Collector u. Norton, 103

Phit.1558).

Reciprocity in exemption does not require the foreign country to possess international personality in the traditional sense. Thus, Tangier, Morocco (Collector v. Cannpos Rued.a,42 SCRA 28) and, California, a state in the American Union (Collector u. Lara, LO2 Phil. 813) were held tobe "foreign countries'within the meaning of Section 108 ofthe Tax Code.

Transfer in Contemplation of Death The term 'in contemplation of death" does not refer to the general expectation of death which all entertain. The words mean that it is the thought of death, as a controlling motive, which induces the disposition ofthe property for the purpose ofavoiding the tax. The decedent either has retained for his life or for any period which does not in fact end before his death (a) the possession or e4joyment, or the right to the income from the property, or (b) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom, except in case of a bona fide sale for an adequate and full consideration in money or money's worth (See Sec.85[B], NIRC). The decedent's motive or intention is a question of fact. Thus, the imminence of death may afford convincing evidence of the impelling cause of the transfer. However, it is contemplation of death and not necessarily

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contemplation of immincnl clouth to which the statute refers (U.S. u.Welle,283 U.5.102).

This provision is not confined to disposition of property or property rights made by last will and testament or to gifts mortis cq,usa, which are made in anticipation of impending death, are revocable and are defeated if the donor survives the apprehended perll (Basket u. Hassel, 707 U.S. 602).

Gircumstances taken into account include:

1.

Age and state of health of the decedent at the time of gift, especially where he was aware of a serious illness;

2.

Length of time between the gift and the date of death (Dison u. Posad,as, 57 PhiI. 465). A short interval suggests the conclusion that the thought of death was in the decedent's mind, and a long interval suggests the opposite (Estate of Mary Aushm,an,4O BTA 948);

3.

Concurrent making of a will or making a will within a short time after the transfer (Roces v. Posad'as,58 Phil. 708).

Motives associated with life that precludes the category of transfer in contemplation of death are:

1. 2.

To relieve the donor from the burden of management;

3.

To settle family litigated and unlitigated disputes;

4.

To provide independent income for dependents;

5.

To see the children enjoy the property while the donor is alive;

6. 7.

To protect family from hazards of business operations; and

To save income or property taxes;

To reward services rendered.

Bar Question (2013) Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration, a house and lot to his son. He died one year later. In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation ofdeath and should therefore form part ofthe gross estate for estate tax purposes. Is the BIR correct?

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Suggested answer: No. The house and lot were not transferced in contemplation of' death; therefore, these properties should not form part ofthe decedent's gross estate. To qualify as a transfer in contemplation of death, the transfer must be either without considerotion or for insufficient consideration. Since the house and lot were sold for ualuable and sufficient consideration, there is no transfer in contemplation of death for estate tax purposes (Sec. 85[BJ, NIRC).

Bar Question (2001) A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter viuos gifts to his children. Ten days later, he died. In your opinion, are the inter uiuos gifts considered transfers in contemplation of death for purposes ofdetermining properties to be included in his gross estate? Explain your answer.

Suggested answer: Yes. When the donor mqkes his will within a, short time of, or simultaneously with, the mahing of gifts, the gifts are considered as hauing been made in contemplation of death (Roces a. Posadasr SS Phils. 708). Obuiously, the intention of the donor in mahing the inter uiuos gifts is to auoid the imposition of the estote tax and since the donees ure lihewise his forced heirs who are cqlled upon to inherit, it will create a presumptionjuris tantum thq.t said donations were made mortis causa; hence, the properties donoted shall be included as part of A's estate.

Revocable Transfers (Transfer With Retention or Reservation of Gertain Rights) Revocable transfers cover transfers (except in case of bona fide

sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date ofhis death to any change through the exercise

of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power) to alter, amend, revoke or terminate or where any such power is relinquished in contemplation of the decedent's death (Sec. 85[C], NIRC).

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Transfer of Property Under General Power of Appointment Any property passing under a general power of appointment exercised by the decedent: (a) by will, or (b) by deed executed in contemplation of, or intended to take effect in possession or enjoyment

at, or after his death, or (c) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) the right, either alone or in conjunction with .rry p""tott, to designate the persons who shall possess or enjoy the proplrty or the income therefrom, except in case of a bona ficle sale io" Ln adequate and full consideration in money or money's worth (sec. 85[D], NIRC).

A"power of appointment" refers to a right to designate the p"rrotr oi p"rsons who shall enjoy or possess certain property from the estate of a prior decedent. Itis"general" when it gives to the donee the power to appoint any person he pleases, including himself, his spouse, as Lis estate, executor or administrator, and his creditor, thus having *special" full dominion over the property as though he owned it. It is when the donee can appoint only among a restricted or designated class of persons other than himself (Morgana, commissioner, S09 u.s.78). The property passing under a general power of appointment comes from the donor and the donee (decedent). The power to dispose of property at death by the exercise of a power of appointment is the equivalent of ownership. It is a potential source of wealth to the appointee and the disposition ofwealth effected by its exercise or refinquishment at death is one form of the enjoyment of wealth (Graaes a. Schmid.lapp, 36 U -5. 657).

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Bar Question (2009)

In 1999, Xavier purchased from his friend, Yuri, a painting for F500,000. The fair market value of the painting at the time of purchase was F1 million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worbh F1.5 million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Zandro died in 2OO7, and Wilma succeeded to the property. (a) Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? (b) Should the painting be included in the gross estate ofZandro in2007 and thus, be subject to estate tax? (c) May a vanishing deduction be allowed in either or both ofthe estates?

this case, the dailh. of'Zundro occurred in 2007, and rnore than fiue (5) years haue, therefore, elapsed from the date of death ofXauier in 2001.

Proceeds of Life lnsurance Taxation of the proceeds of life insurance will depend on the designated beneficiary, the manner of designation of such beneficiary (whether irrevocable or revocable), and the period and source ofthe funds used in paying the premiums on the insurance contract. Thus,

1.

b.

The ualue of the gross estate of the decedent shall be determined by including the ualue q.t the time of his deq.th of all property, real or personal, tangible or intangible, whereuer situated (Sec. 85, NIRC). Accordingly, the fair market ualue of the painting in 2001, which was owned by Xauier at the tirne of his death, should be included in the gross estate of Xavier and be subject to estate tax. The ualue of the painting in 2007, which was bequeathed by Xavier to Zandro by will in 2001 with power to appoint his wife, Wilma, as successor to the painting, should not be included in the gross estate of Zandro. Only property passing under a general power of appointment is included in the gross estate of the decedent. In this case, the painting has to be transferred by Zandro to his wife, Wilma, based on the will of his father, Xauier, and since the power of appointment granted by Xauier to Zandro is specific (i.e., only to his wife), such property should not be included in

The proceeds of life insurance are taxable in the following cases:

Suggested answers: a.

(a)

Beneficiaryis the estate ofthe deceased,his executor or administrator, irrespective of whether or not the insured retained the power ofrevocation;

(b)

Beneficiary is other than the decedent's estate, executor or administrator, when designation of beneficiary is not expressly made irrevocable or the designation of the beneficiary is revocable (Sec. 85[E], NIRC). Under P.D. 1460 (Insurance Code of 1978), insurance proceeds are presumed to be revocable; hence, includible in the decedent's gross estate.

2.

The proceeds of life insurance are not taxable in the following cases:

(a)

Accident insurance proceeds. Tax Code specifically mentions only life insurance policies;

(b)

Proceeds ofa group insurance policy taken out by a company for its employees. The law speaks of policies "taken out by the decedent upon his own life";

(c)

Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. The transfer is absolute and the insured did not retain

his gross estdte in 2007. c.

No, uanishing deduction is not auailable to both Estates

of Xauier and Zandro because in the case of Xauier, he acquired the painting by purchase, and in the case of Zandro, the painting shall not be included in his gross estate; hence, there would be no double taxation of the same property, for estate tax purposes. Moreouer, the two (2) deaths ntust occur within a period offiue (5) years. In

367

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any legal interest in the insurance

(d)

(S

ec. 85[E], NIRC);

Proceeds of insurance policies issued by the GSIS to government officials and employees (P.D. 1146) arc

exempt from all taxes;

(e)

Benefits accruing under the SSS law (R.A. 7767, as amended);

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(0 3.

Proceeds of life insurance payable to heirs ol'dcccascd members of military personnel (R.4. 360).

2.

To determine the conjugal or separate character of

3.

Policy taken before marriage

-

source of funds

determines ownership ofthe proceeds of life insurance;

(b)

Policy taken during marriage

i.

Beneficiary is estate ofthe insured - proceeds are presumed conjugal; hence, one-half share of surviving spouse is not taxable;

ii.

Beneficiary is third person - proceeds are payable to the beneficiary even if premiums were paid out of the conjugal partnership (DeI Val u. DelVal,29 Phil. 534).

Bar Question (2003) In June 2000, X took out a life insurance policy on his own life in the amount of F2,000,000.00. He designated his son, Z, as his beneficiary with respect to F1,000,000.00, reserving his right to substitute him for another. X died in September 2003. Are the proceeds oflife insurance to form part ofthe gross estate ofX? Explain.

Suggested answer: Only the proceed of F1,000,000.00 giuen to the son, Z, shall part of the gross estate of X. Under the Tatc Code, proceeds of form life insurance shull form part of the gross estate of the decedent to the extent of the amount receiuable by the beneficiary designated in the policy ofinsurance except when it is expressly stipulated that the designation of the beneficiary is irreuocable. As stated in the problem., only the designation ofY is irreuocable, and the decedent reserued the right to substitute Z as beneft.ciary for another person. Accordingly, the proceeds receiued by Y shall be excluded, while the proceeds receiued by Z shall be included in the gross estate of X (Sec. 85[E], NIRC).

That whiclr ttttt:lt ittrlttiros duringthe marriagebylucrative

That which is acquired by right of redemption or by exchange with other property belonging to only one of the spouses; and

That which is purchased with exclusive money of the wife or of the husband (Sec. 148, Ciuil Code). The sums collected by installments during the marriage from credit payable in a certain number ofyears are considered property of the spouse to whom the credit belongs (Art- 156, NIEC)' The right to an annuity, whether perpetual or for life, and the right of usufruct, belonging to one of the spouses, form part of his or her separate property, but the fruits, pensions and interests, due during the marriage belong to the partnership (Art. 157, NIRC). AII other property belongs to the conjugal partnership. The fair market values of exclusive properties of the decedent are included in full to his gross estate and no deduction for share of the surviving spouse shall be considered therefrom. Indeed, share of the surviving spouse shall be computed and taken only against the fair market values of conjugal properties or absolute community of properties.

Exemptions under special laws

1.

Benefits receivedbymembers from the Government Service

2.

Amounts received from the Philippine and United States governments for damages suffered during the Iast war (R.A.227);

3.

Benefits received by beneficiaries residing in the

4.

Bequests, legacies or donations rnortis causa to social welfare, cultural, or charitable organizalions (P'D' 307); but bequests to religious and educational institutions are not exempt (BIR Ruling 75-001, January 15, 1975);

5.

Grants and donations to the Intrq'rnuros Administration (P.D. 1616).

The following are the exclusive property of each spouse:

That which is brought to the marriage as his or her own;

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4.

Exclusive Property

1.

r

title;

proceeds, the following factors are considered:

(a)

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Insurance System (P.D. 1146) and the Social Security System (R.A. 1161, as amended) by reason of death;

Philippines under laws administered by the U.S' Veterans Administration ( R.A. 360) ;

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Bar Question (1999)

Suggested answer:

A died, survived by his wife and three children. The estate tax was properly paid and the estate settled and divided and distributed among the four heirs. Later, the BIR found out that the estate failed to report the income received by the estate during administration. The BIR issued a deficiency income tax assessment plus interest, surcharges and penalties. Since the 3 children are residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR correct?

No. This expen$e utill not faII under any of the allowable deductions from gross estate. Whether uieuted in the context of either funeral expenses or medical expenses, the same will not qualify as a deduction. Funeral expenses may include medical expenses of the last illness but not expenses incurred after burial nor expenses incurred to conlmemorate the death anniuersary (De Guzman u. De Guzmon, 83 SCRA 256). Medical expenses, on the other hand, are allowed only if incurred by the decedent within one year prior to his death (Sec. 86[A][6], NIRC).

Suggested answer: Yes. The BIR is correct. In q, case where the estate has been distributed to the heirs, the collection remedies auailable to the BIR in collecting tut liabilities of an estate may either ( 1) sue all the heirs and collect frorn each of them the amount of tar, proportionate to the, iruheritance receiued or (2) by uirtue ofthe lien created under Section 279, sue only one heir and subject the property he receiued from the estate to the payment of the estate tax. The BIR, therefore, is corcect in pursuing the second remedy although this will giue rise to the right of the heir who pays to seek reimbursement from the other heirs (Collector u. Pined.a,2l SCRA 105).In no case, howeuer, can the BIR enforce the tax liability in excess of the share of the widow in the inheritance.

Funeral expenses Amounts for actual funeral expenses or in an amount equal to five percent (57o) of the gross estate, whichever is lower, but in no case to exceed F200,000 shall be deducted from gross estate (Sec. 86[A][1], NIRC).

Bar Question (2001) On the first anniversary of the death of Y, his heirs hosted

a

sumptuous dinner for his doctors, nurses, and others who attended

to Y during his last illness. The cost of the dinner amounted to Php50,000. Compared to his gross estate, the Php50,000 did not exceed five percent of the estate. Is the said cost of the dinner to commemorate his one year death anniversary deductible from his gross estate? Explain your answer.

Glaims against the Estate Claims against the estate shall be deductible from gross 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 ofthe decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan (Sec. 86[c], NIRC).

The requirements for the deductibility of claims against the estate are:

1.

They were contracted in good faith and for an adequate and full consideration in money or money's worth;

2. They must be existing against the estate; 3. They must be enforced by the claimants; 4. They must be reasonably certain in amount; and 5. 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 ofthe decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the

loan(P.D.1994).

An indebtedness that has been condoned or has prescribed may not be claimed as a deduction (Bocanegro u. Collector, CTA Case No.420, October 72, 1959). Unpaid taxes such as income and real estate taxes that accrued after the death ofthe decedent are not deductible from gross estate as they are properly chargeable to the income of the estate (Dela' Vina v. Colleetor, 65 Phtl. 620).

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In the testate or intestate proceedings to settle the estate of er deceased person, the properties ofthe estate are under thejurisdiction of the court until they have been distributed among the heirs entitled

thereto (Domingo a, Garlitos, S SCRA443).

Glaims against lnsolvent Persons For claims against insolvent persons to be deductible from the it is important to show that:

gross estate (Sec. 86[d], NIRC),

1.

The amount of said claims has been part ofhis gross estate; and

2.

The incapacity of the debtors to pay their obligations is proven, not merely alleged (Monserrat a. Collector, CTA Case No. 77, December 28, 1955),

initially included

as

Unpaid Mortgages and Taxes Unpaid mortgages upon, or any indebtedness in respect to, property shall be deductible from gross estate, where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. However, unpaid income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax shall not be deductible from gross estate. The unpaid mortgages and taxes must be contracted bona fide and for an ad.equate and full consideration in money or money's worth (Sec.

Losses l:ossos incurred during thc settlement of the estate arising {'rom fires, storms, shipwreck, or other casualties, or from robbery, t,he [t or ernbezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the [estate] return, such losses have not been claimed as a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax(i.e., six [6] months from date of death) are deductible from gross estate (Sec. 86[e], NIRC).

Family home Family home means the dwelling house, including the land it is situated, where the husband and wife, or a head of which on family, and members of their family reside, as certified to by the Captain of the locality. The family home is deemed Barangay the the house and lot from the time it is actually occupied on constituted and is considered as such for as long as any of residence as a family resides therein'z actually its beneficiaries Cond.itions for the allowq.nce of family homc as d'ed'uction from the gross estate -

1.

The family home must be the actual residential home ol' the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated;

2.

The total value of the family home must be included as part ofthe gross estate ofthe decedent; and

3.

Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedent's interest (whether conjugal or community, or exclusive property), whichever is lower, but not exceeding

86[e], NIRC),

Where the decedent owned only one-half of the property mortgaged so that only one-half of its value was included in his estate, only one-half of the mortgage debt was deductible, even though the executor paid the entire debt, the liability of the decedent being solidary, inasmuch as the executor would be subrogated to the rights of the mortgagee as against the co-owner and co-mortgagot (Pa'rrot u. Comrnissioner, 279 U.S. 870). Indebtedness secured by mortgage of real property situated outside the Philippines may not be deducted where such property is not includible in the gross estate for the reason that the decedent at the time of his death was a non-resident alien (Intestad'o d.e Don Valentin Descals u. Collector,9S Phil.694).

F1,000,000.00.

Standard Deduction A deduction in the amount of One million pesos (F1,000'000) shall be allowed as an additional deduction without need of 2Arts. 152 and 153, Family Code

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substantiation. The full amount of F1,000,000 shall be allowed as deduction for the benefit ofthe decedent. The presentation ofsuch deduction in the computation ofthe net taxable estate ofthe decedent is properly illustrated in these regulations.

of the prior tloctr
4.

Medical Expenses All medical expenses (cost of medicines, hospital bills, doctors' fees, etc.) incurred (whether paid or unpaid) within one (1) year before the death of the decedent shall be allowed as a deduction, provided that the same are duly substantiated with official receipts

Any amount of medical expenses incurred within one (1) year from death in excess of F500,000 shall no longer be allowed as a deduction under this subsection. Neither can any unpaid amount thereof in excess of the F500,000 threshold nor any unpaid amount for medical expenses incurred prior to the one (l)-year period from date ofdeath be allowed to be deducted from the gross estate as claim against the estate.

5.

ofthe property previously taxed or the aggregate value of such property if more than one item, as finally determined for the purpose ofthe prior estate tax (or gift tax) or the value ofsuch property in present decedent's gross estate, whichever is lower.

2.

3.

Death

- The present decedent died within five (5) years from date ofdeath ofthe prior decedent or date ofgift.

2. Identity

of the property - The property with respect to which deduction is sought can be identified as the one received from prior decedent or from the donor, or as the property acquired in exchange for the original properly so received.

3.

Inclusion of the property - The property must have formed part of the gross estate situated in the Philippines

Deduction for mortgage or other lien - The initial value in #1" above shall be reduced by the total amount paid, ifany, by the present decedent, on any mortgage or other lien on the property where a deduction was allowed, by reason of the payment of such mortgage or other lien from the gross estate ofthe prior decedent, or gift ofthe donor, in determining the estate tax of the prior decedent or the donor's tax.

The vanishing deduction operates to ease the harshness of successive taxation of the same property within a relatively short period of time (up to five [5] years) occasioned by the untimely death ofthe transferee after the death ofthe prior decedent or donor.

1.

No previous vanishing deduction on the property No such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent. This limitation is intended to preclude the application ofvanishing deduction on the same property more than once (Sec.86[N[2], NIRC)-

Limitations as to Amount of Deduction Allowable: 1. Value of property - The deduction is limited by the value

Property Previously Taxed (or Vanishing Deduction)

Requisites:

Previous taxation of the property - The estate tax on the prior succession, or the donor's tax on the gift, must have beenfinally determined and paidbythe priordecedent or by the donor, as the case maY be.

for services rendered by the decedent's attending physicians,

invoices, statements of account duly certified by the hospital, and such other documents in support thereofand provided, further, that the total amount thereof, whether paid or unpaid, does not exceed F500,000.

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Deduction for expense' lossesr indebtedness' taxes' etc. - The value as reduced in #2 above shall be further reduced by an amount which bears the same ratio to the amounts allowed as deductions for expenses, losses, indebtedness, taxes, and transfers for public use as the amount otherwise deductible for property previously taxed bears to the value ofthe decedent's gross estate.

4.

Percentage of deductions - The vanishing deduction shall be the value in #3 multiplied by the following percentage of deduction:

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(a)

one (1) year prior to the death ofthe present decedent,

l,htrt c:ruscd [hc inst,irrrl,lltt(!()tts tlt:aLJr tlf',Jaime. The following day, Assunta also died in a hospi[ttl. 'lhe spouses and their son had the lbllowing assets and liabilities at the time of death:

death;

Assunta

700Vo of

the value, if the prior decedent died within

or if the property was transferred to him (present decedent) by gft within the same period prior to his

(b)

80Vo,

more than two (2) years; (c)

Exclusive

if the period is more than one (1) year but not

6OVo,7f the period is more than two (2) years but not more than three (3) years;

F10,000,000

Cash

Cars

(d)

407o,if t}r'e period is more than three (3) years but not more than four (4) years; or

Land Residential house Mortgage payable Funeral expenses

(e)

207o,if the period is more than four (4) years but not more than five (5) years.

a.

In outline form, the computation of vanishing deduction shall

b.

be as follows:

2,000,000

500,000 5,ooo,0oo 4,000,000 2,5oo,o0o 300,000

Jaime F1,200,000 2,ooo,00o

Is the Estate of Jaime Asuncion liable to estate

tax?

Explain. Is vanishing deduction applicable to the Estate of Assunta

Asuncion? Explain.

Value taken of property previously taxed (pdg1 decedent's gross estate) Zess: Mortgage debt paid,

Conjugal

if any (1st deduction)

Suggested answers: a.

Initial basis

Since his estate is entitled to stq,ndard deduction of Fl million and funeral expenses equiualent to 5o/r, of his gross estate not exceeding 7200,000, plus the fact that the first F200,000 of his net estate is exempt from estate tax, there would be no estate ta'r due on his net estate'

Divided by the value ofgross estate ofprcsent decedent

Multiplied by expenses, indebtedness, etc. and transfers for public purposes Equals 2nd deduction

Initial basis less 2nd deduction Equals final basis

Multiplied by applicable rate of vanishing deduction Equals amount of vanishing deduction [NOTE: The amount of uanishing deduction is not subtracted from the ualue of the conjugal property to determine the share of the suruiuing spouse.l

Bar Question (2008) While driving his car to Baguio City last month, Pedro Asuncion, together with his wife, Assunta, and only son, Jaime, met an accident

The Estate of Jaime Asuncion is not liable to estate tos. At the time of death, his gross estate amountedto P7,200,000.

b.

No, there would be no ua.nishing deduction allowed to the Estate of Assunta Asuncion, since she did not in'herit or receiue any property frorn her deceased son' Jaime, that was preuiously subjected to estate tax or donot's tq'tc. While her estate could be entitled to receiue one-half of F1.2 million (or F600,000) cush deposit from her deceased son, this is eJcenxpt from estate tan, as explained aboue. To be en'titled to the uanishing deduction, it is important that the property (cash of F600,000 in the instant case) must haue been' taxed in the estate of a prior decedent.

Bar Question (1994) What is vanishing deductions in estate taxation?

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Suggested ansryer: Vanishing deductions or property preuiously taxed in estate taxation refers to the diminishing deductibility / exemption, at the rate of 207o ouer a period of fiue (5) years until it is lost after the fifth year, of any property (situated in the Philippines) forming part of the gross estate, acquired, by the decedent from a prior decedent who died within a period of fi.ue (5) years from the decedent's d,eath.

Valuation of Property 1. "Fair market uahte" is the price which a property will bring when it is offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under no

(Manila Railroad Co. u. Vel.a.squez, 32 Phil. 286).It is the price at which a property would change hands between a willing buyer and a willing seller with neither being under any compulsion to buy or sell and both having reasonable knowledge ofthe facts and acting for their own best interests Morcester Countryt T?ust Co. a. Commissioner, IS4 F.2nd. 5ZB). necessity ofbtryrng it

2.

The estate shall be appraised at its fair value as of the time of death since by fiction of law, property is deemed to be transferred at such time (Art. 777, Ciuil Code).

3.

For real property, the current and fair market value as shown in the schedule of values fixed by provincial and city assessors or the fair market value as determined by the Commissioner (commonly referred to by revenue officers as "zottalvalue"), whichever is higher, shall be used. The use of the schedule of values is prescribed in order to minimize

the discretion of examiners in making valuation of real property.

4.

For unlisted shares of stocks of domestic corporations, fair market value shall be determined in accordance with the provisions of Revenue Regulations No. 6-2018 dated April 11, 2013. For the listed shares of stocks of domestic corporations, the fair market value of the shares of stocks on the date ofdeath or closest to the date ofdeath ofthe decedent shall be used.

If the property is a real property, the fair market value shall

fair market value as determined by the commissioner or the fair market value as shown in the schedule of values fixed by the

be the

;

:t79

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llrrrvincial and cit.y :rssossor$, wltichcver is higher. For purposes of prescribing real property values, the Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers, both from the private and public sectors, determine the fair market value of real properties located in each zone or area. In the case of shares of stocks, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchanges. Unlisted common shares are valued based on their book value while

unlisted preferred shares are valued at par value. In determining the book value of common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, ifthere are any.

For shares which are listed in the stock exchanges, the fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date ofdeath, ifnone is available on the date ofdeath itself. To determine the value ofthe right to usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

Bar Question (2006) Varnishing deduction is availed of by taxpayers to:

a.

correct his accounting records to reflect the actual deductions made;

b. c. d.

reduce his gross income; reduce his output value-added tax liability; reduce his gross estate.

Choose the correct answer. Explain'

Suggested answer: I choose (d), reduce his gross estute. Vanishing deduction or property preuiously tuced is one of the items of deductions alloued in computing the net estate of a decedent (Sec. 86tAlt2l and 86[8][2]' NIRC).

380 Bar Question (2000)

a)

Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent.

Suggested answer: The ualue of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall be determined by including the uq,Iue qt the time of his death of all property, real or personal, tangible or intangible, whereuer situated to the extent of the interest therein of the decedent at the time of his death (Sec. 85 [A], NIHO. These properties shall haue a situs of taxation in the Philippines; hence, subject to Philippine estate taxes. On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Phitippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate, prouided. that with respect to intangible personal property, we apply the rule of

With. resltt:<:l ttt I ttt'

Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a hearb attack while on a business trip to the USA. He died intestate on June 15, 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid?

Suggested answer: The gross estate shall be determined by including the ualue at the time of his death all of the properties mentioned, to the extent of the interest he had at the time of his death becquse he is a Filipino citizen (Sec. 85[A], NIRC).

lili' ittsruttttt't'

Ttrtx:eeds, the amount

includible

tux purposes would be to the extent 0f' th.e um\unt receiuable by the estate of the deceased, his executor, or orlministrator, under policies taken out by decedent upon his own lif'e, irrespectiue of whether or not the insured retained the power of reuocation or to the extent ofthe amount receiuable by any beneficiary d.esignated. in the policy of insurance, except when it is expressly

irr th( gross estate.

lbr

lrtt.i.l.i1t1tin.e

stipitated that the designation ofthe beneficiary is irreuocable

(Sec.

85[E], NIRC). The deductions that may be clq'imed by the estate are:

1)

The actual funeral etcpenses or in an amount equal to fiue (SVo) ofthe gross estate, whicheuer is lower, but in

percent

no case to exceed two hun'dredthousartdpesos

(fl00,000'00)

(Sec. 86[A][1] [a], NIRC);

2)

Thejudicialexpenses inthe testate or intestate proceedings (Sec.86[A][1], NIRC);

3)

The ualue of the decedent's family home located in Valle Verd'e, Pasig City in an amount not exceedin'g one million pesos (?1,000,000'00) and upon presentation of a

reciprocity.

b)

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4) 5)

certificalion ofthe barangay captain ofthe locality that the same has been the decedent's family home (Sec' 86[Al[4]' NIRC) The stand.ard d'eduction of P1,000,000.00 (Sec' 86[A][5]' NIRC); Med.ical expenses incurred within one year from death in an amount not exceeding F500,000'00 (Sec. 86[A][6]' NIRC),

The estate tax return shatl be filed within six (6) months from the deced.ent's d.eath (Sec. 90[B], NIRC), prouided that the Commissioner of Internal Reuenu.e shall haue authority to grant in meritorious cq.ses' u, reasonq.ble extension

not exceeding thirty (30) days for filing the

return (sec. gqfc], NIRC),

Except in cases where the cornmissioner of Internal Reuenue otherwise permits, the estate tax return shq.Il be filed with an authorized. agent banh, or Reuenue District officer, collection offi'cer, or d.uly autiorized. Treqsurer of Pasig City, the City in which the decedint, Mr. d.e Ia Cruz, was domiciled ctt the time of his death (sec. qo[D], NIRC).

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Bar Question (2002) Mr. Castro inherited from his father, who died on June

10,

1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of p2b0,000.00 was paid on December 6, 7994. The Tax Fraud Division of the BIR

CIIAPTER XIV

investigated the case on the basis of confidential information given

by Mr. Santos on January 6, 1gg8 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for F1,2b0,000.00, inclusive of sTvo

surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment, on the ground of prescription.

A. B.

What legal requirement must Mr. Santos comply with that he can claim his reward? Explain.

so

The protest should be resolued against Mr. Castro. Whqt was filed is a fraudulent return making the prescriptiue period for assessment 70 years from discouery ofthe fraud (Sec. 222, NIRC). Accordingly, the assessment wcts issued within the prescriptiue period to mahe an ussessrnent based on a fraudulent return.

B.

The legal requirements that must be satisfied. by to entitle him to reward are as follows:

1.

2.

"Donation" is an act of liberality whereby a person (donor) (donee) disposes gratuitously of a thing or right in favor of another *ho accepts il (Art. 725, Ciuil code). There is also donation when a person gives to another a thing or right on account ofthe latter's merits o" of th" services rendered by him to the donor provided they

gift imposes upon the donee a burden which is less than the value of the thing given (Art. 726, Ciuil Code). under the Tax Code, donation has a broader meaning. It extends to sales or exchanges ofproperty, other than real property classified as capital asset located in the Philippines, for less than adequate and fuII consideration in money or money's worth (Sec' 700, NIRC)' do not constitute a demandable debt or when the

Decide Mr. Castro's protest.

Suggested answer:

A.

DONOR'S TAX

Mr. Santos

He should uoluntarily file confi,dential information under oq.th with the Law Diuision of the Bureau of Internal Reuenue alleging therein the specific u iolatio ns c o n s tit ut ing fraud ; The information must not yet be in the possession of the Bureq.u of Internal Reuenue, or refer to a cctse already pending or preuiously inuestigated by the Bureau of Internq.l Reuenue;

Nature of gift tax Gift tax is not a property tax but an excise tax imposed on the privilege of the owner to give. It is not a tax on property as ,o"h bu"uo*e the imposition does not rest upon general ownership (Bromley a. McCaughn, 280 U.S. 124). Thus, the levy on the

transfer by way of donati oninter uiuos of property used exclusively for religious po"por"r does not infringe the provisions of the constitution exelpting from taxation churches and parsonages a1d a{ lands, buildings and improvements used actually, directly and exclusively for religious purposes (Ltad,oc u. cornrnissioner, 14 SCRA 29D. HowevJr, gifts in favor of religious institutions are now exempt from donor's tax. Donor's tax is imposed upon the transfer by any person, resident or non-resident, of the property by stft. The tax shall apply whether

3.

Mr. Sq,ntos should not be a, gouernment employee or a relatiue of a gouernment employee within the sixth degree of corusanguinity; and

the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible (Sec. 98, NIRC).

4.

The information must result to collections of reuenues and/or fines and penq,lties (Sec.282, NIRC).

383

jf 384

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Purposes of Donor's Tax

1. 2.

To supplement estate tax;

Rates of Donorts Tax schedular rates of donof s tax imposabre on donation rnad.e to a donee who is not a stranger. The transfer ofthe total net gifts made during the calendar -year shall be subject to tax in accordance with the schedule provided in section gg (rates of tax payable by donor) ofthe Tax code. The entire value ofthe net gifts for each calendaryear is divided into brackets and each rate is imposed on the corresponding brackets as shown below: If net gift is:

Over

Over F100,000

F100,000 200,000 500,000 1,000,000 3,000,000 5,o0o,0oo 10,000,000 B.

200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

The tax shall be

Of the excess

Plus

over

0

2Vo

F100,000

2,000

4Vo

14,000

6%

44,000 204,000

L0Vo

200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

404,000 1,004,000

nstranger" is person a who is not

,

c.

contribution for election campaign - Any contribution in cash or in kind to any candidate, political party or coalition ofparties for campaign purposes, shall be governed by the Election Code, as amended.

The application of the rates as provided above is imposed on donations made beginning January 1, 1998, which is the effectivity date of R.A.8424.

Bar Question (2011) Celia donated F110,000 to her friend Victoria, who was getting married. celia gave no other gift during the calendar year. what is the donor's tax implication on Celia's donation?

Suggested answer:

Exempt

8Vo

t2% lSVo

Tax payable by the donor if donee is a stranger. When the d9n9e or beneficiary is a stranger, the tax puyublu -by the donor shall be 307o of the net gifts. For purposes of the donor,s tax, a 1.

Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger.

To prevent avoidance of income tax through the device of splitting income among numerous donees, who are usually

But not

ilfll-r

and therelirrc, dorrttliotr Lo him shall not be considered as donation made to stranger.

members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of income tax.

A'

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a:

Brother, sister (whether by whole or half-blood), spouse, ancestor, and lineal descendant; or Relative by consanguinity in the collateral line within the fourth degree of relationship.

A legally adopted child is entiiled to all the rights and obligations provided by law to legitimate children,

Cetia shall pay a 307o donor's tax on the F100,000 cash d,onation, sinceVictoria, the donee, is a stranger to her. A"stranger" is a person who is not a brother, sister (whether by whole or halfblood.), spouse, ancestor and lineq'l descendant; or a relatiue by consanguinity in the colloteral line within the fourth ciuil degree of relationship (sec. 99[B], NIRC). Celia. is not entitled to deduct the amount of P10,000 as dowry or gift on account of marriage because that priuilege is giuen only to parents of the donee who is getting married (Sec. 101[4], NIRC).

Taxable Transfers The term "transfer of property in trust or othenoise, d.irect or ind'irecf," is used by the law in the most comprehensive sense. It includes not only the transfer of ownership in the fullest sense but also the transfer of any right or interest in property, but less than title. A transfer becomes complete and taxable only when the donor has divested himself of all beneficial interest in himself or his estate. The law contemplates the passage of control over

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the economic benefits of the property, rather than mere technical changes in the title (Sanford. a. Cornrnjssioner, g0B U.S. Sg).

Bar Question (1996) X, a multinational corporation doingbusiness in the Philippines, donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines.

(1) (2)

What is the tax liability, if any, of X corporation? Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation, what are the tax implications? Explain.

Suggested answer:

(1)

(2)

Foreign corporations effecting a donation are subject to donor's tax only if the property donated is located in the Philippines. Accordingly, don ation of a foreign corporation of its own shares of stochs in fauor of resident emplqtees is not subject to donot's tax (BIR Ruling No. 018-87, January 26, 1987). Howeuer, if 85Vo of the business of the foreign corporation is located in the Philippines or the shares donoted haue acquired business situs in the Philippines, the donation rnay be taxed in the Philippines subject to the rule of reciprocity.

If

the shares of stocks were giuen to Mr. Y in consideration of his seruices to the corporation, the same shall constitute talcable compensation incorne to the recipient because it is a corlpensation for seruices rendered an employer-employee relatiortship; hence, subject to income tax.

The par ualue or stated ualue of the shares issues also constitutes deductible ercpense to the corporation, prouided it is subjected to withholding tar on wages.

Bar Question (1992) Mr. Bill Morgan, a Canadian citizen and a resident of

Scarborough. Ontario, sends a gift check of $20,000.00 to his future Filipino daughter-in-law who is to be married to his only son in the

Philippines.

1)

Is the donation by Mr. Morgan subject to tax? Explain.

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Suggested anslver: Yes. While the

gift has been made on account of rnarriage' to

ualue qualify for exemptioi'to the extent of the first F10'000'00 of the recognized a legitimate' giuen to been haue gi-ft shoutd' ii"r"if,' ,u"h natural or adopted child ofthe donor'

2)

(Filipino What is the tax consequence, if any, to the donee daughter-in-law of Mr' Morgan)?

Suggested answer:

gift, with respect to the don'ee, is excluded from gross income iicome taxation' There is no donee's gift tax' and. is "*Jipt from 3) Can you name one kind of gift that is exempt from donor's taxwhichisextendibletobothresidentsandnon-residents ornon-citizensofthePhilippines?Includequalifications, The

if anY. Suggested answer: any Gifts rnad.e to or for the use of the National Gouernment or profit' conducted not is for which. agertcies its of entity creq,ted' by any Gouernment' are exernpt i, ti ony potitical tubdiuition of the said q'nd non-residents' residents both to iti tn iuc with respect

Essentials of a Taxable Donation

1. 2. 3.

CaPacitY of the donor;

Donative intent;

Delivery, whether actual or constructive' of the subject matter;

4.AcceptanceoftheSrftbythedonee(Art'746'CiuilCode)'

Donative lntent Donatiae intent

must be present in a direct gift of property in such intent order that the donor's tax can be assessed and collected.

followedbyadonativeactisessentialtoconstituteagift,andno should strained urrd u"tifi"i.l construction of a supplementary statute beincludedtotaxasgiftatransferactuallylackingdonativeintent. ihor, it was held thafthe transfer of properties from o-ne corporation

to' and a to another corporation which is connected with' subordinate

district or local organization or branch ofthe transferor corporation

388

is not subject to donor's tax because wanting in donative intent. such

transfer, being in name only, a transfer from the right hand to thc left hand, and merely to enable the transferee corporation to better perform its obligation to administer, apply and use the said properties for the same purposes (religious, charitable and educational) for which the transferor was created and still exists (The christian & Missionary Alliance Churches of the phil. a. Collector, CTA Case No.668, August 21, 1964). Donative intent is not, however, required in transfers of property for less than adequate and full consideration. In such a case, donative intent is superfluots (Perez a. Commissioner, CTA Case IZOZ,

February 10,19Og).

Consideration "Consideration" mearrs money or equal value or some goods or service capable of being evaluated in money. "Grqtitude" is not a consideration the value ofwhich can be deducted from that ofthe properby transferred as a gift. Like "love and affection," it has no economic value and is not "consideration" in the sense of the word is used in section 103. Thus, donation given out ofgratitude for services rendered constitutes taxable donation. It is not deductible from gross income of the donor for the value ofsaid serwices does not constitute recoverable debt

(Piroaano u. Commissioner, L-L9BG1, July

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1965).

Donation of Gonjugal Property The spouses are co-owners ofconjugal property (Art. 124, Ciuit Code). Thus, a gift made by the spouses of conjugal property shall be deemed separate donations by the husband and the wife in proportion to their respective interests. In other words, there will be lwo (2) donations made and two (2) separate computations of donor's taxes. However, unless the wife expressly joins in making the donation of conjugal property, it shall be deemed to have been made by the

Accretion is .r right l)lrs0rl ()n the presumed will of the decedent. whcn [hc testator givcs il d()l() rminate, undivided thing or the same inheritance to two (2) or more persons, without designating their specific shares, he thereby manifests his desire to give to said persons preference to the right over the thing or inheritance assigned. Hence, iffo, urry reason one ofthem does not or cannot receive his share, the law, foilLwing the testator's implied desires, gives the vacant share to the others. Accretion is a right and not an obligation; hence, it maybe renounced or waived by anyone who stands to benefit from it (Ynza u. Rod.riguez,95 PhiL 347 t19541).

Accretion, whether in testamentary or intestate succession, refers only to the free portion. It never operates in compulsory succession. However, an heir who repudiates his inheritance cannot be represen ted (Art. g77 , NCC) . Hence, in intestate succession, the share of a co-heir who renounces his share in the inheritance accrues to his co-heirs. The effect is the same as where there is accretion.

Bar Question (2013) In the settlement of the estate of Mr. Barbera who died Intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their children. The BIR determined that there *u. u taxable gift and thus assessed Mrs. Barbera as a donor. was

the BIR correct?

Suggested answer:

gift but only insofar conjugal property the in as the renunciation of the share of the wife consideration, without property is concerned.. This is a transfer of q'nd it thus lwife, transfer which talzes effect during the lifetime of the (Reu2-2003)' Regs. No. qualifi.es as q texable gift The BIR is correct that there was

q.

tatcable

husband alone (Tang Ho u. Board. of Tax Appeals, gZ phit. ggg).

But the renunciation of the wife's share in the inheritance from her property d.eceesed, husba,nd is not q. taxable gift, considerirtg that the law due of operation by heirs other to the transferred is automatically (BIR DA'333-07)' No' Ruling her inheritance of to her repudiat;ion

Right of Accretion Accretion is a right by virtue

Bar Question (2008)

of which, when two (2) or more persons are called to the same inheritance, devise or legacy, the part assigned to the one who renounces, or cannot receive his share, or who died before the testator is added or incorporate to that ofhis coheirs, co-devisees, or co-legatees (Art. 1015, Ciuit Cod.d.

Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon city. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to them. At the time of donation, the real property has a fair market value of F2 million'

390

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Are Mario and Maria subject to income tax for the value of the real property donated to them? Explain. b.

Are Jose and Clara subject to donor's tax? If so, how much is the taxable gift of each spouse and what rate shall be applied to the gift? Explain.

Suggested answers:

a.

Mario and Maria, donees, are exempt from income tq,x on the ualue of the real property receiued by them through donotion of their parents. The ualue of property acquired by gift, bequest, deuise, or descent, sholl not be included in

the gross income of the donees. Howeuer, incorne from such property shall be included in their gross incomes during the yeur (Sec. 32tBlt3l, NIRO.

b.

Spouses Jose and Clara are subject to donofs ton on the fair marhet uolue (72 million) of the real property d,onated. to their son, Mario, and on the donation made to Mario's wife, Maria. There are four (4) tq.xable donations of F500,000 made by the spouses. Donor Jose mode p500,000 d,onation to his son, Mario, and another donq.tion of F500,000 to his daughter-in-law, Maria. Donor Claro also mad,e ?500,000 donationto her son, Mario, and another d,onotion of ?500,000 to her daughter-in-law, Mario. Since the donations to their son, Mario, were mqde by the Spouses Jose and Clara on account of his maniage, Jose and Clora can each deduct P10,000 front his or her gross gift. Their net gifts of P490,000 (P500,000 less F10,000) will be subject to the graduoted donofs tax rates ranging from 2Vo to TSVo ( Sec. 99[A], NIRC). With respect to their donations to their daughter-in-law, Maria, their gross gifts of F500,000 shail be subject to the 30Vo d,onof s tax rate, considering that the donee is a stranger in relation to the donors. A,,stranger" is a person who is not a: (i) brother, sister (whether by whole or half-blood), spouse, ancestor and lineol d.escend,ant; or (ii) relotiue by consanguinity to the collateral line within the fourth degree of relationship (Sec. gg[B], NIRC).

Bar Question (1998) Ace Tobacco Corporation bought a parcel of land situated at Pateros and donated it to the Municipal Government of pateros for the sole purpose of devoting the said land as a relocation site for

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the lcss lirrtunate cuns[ilutrnts of'said municipality. In accordance thercwith, the Municipal (iovernment of Pateros issued to the occupants/beneficiaries Certificates of Award giving to them the respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998, the said municipal government ordained that the lots awarded to the awardees be finally transferred and donated to them. Determine the tax consequence of the foregoing dispositions with respect to Ace Tobacco Corporation, the Municipal Government of Pateros, and the occupants/beneficiaries.

Suggested answer: The donq.tion by Ace Tobacco Corporation is exempt frorn the donot's tax because it qualifi,es as a gift to or for the use of any political subdiuision of the Nq.tional Gouernment (Sec. 101[2J, NIRC). The conueyance is lihewise exempt from documentary stamp tax because it is a transfer without considerq,tion. Since the donation is to be used as a relocation site for the less fortunate constituents of the municipality, it may be considered as q.rl undertahing for human settlernents; hence, the ualue of the land may be deductible in full from the gross income of Ace Tobacco Corporation if it is in qccordance with q. National Priority Plan determined by the National Economic Deuelopment Authority (Sec. 34[H][2][q.], NIRC). If the utilization is not in accordance with

a Nq.tional Priority Plan determined by the Nationq,l Economic Deueloprnent Authority, then Ace Tobacco Corporation may deduct the ualue ofthe land donated only to the extent offiue percent (5Vo) ofits taxq.ble income deriued fVom trade or business as computed without the beruefit of the donation (Sec. S4Hlt2lta] in relation to Sec. 34tHl

[1], NIRC). The Municipality of Pateros is not subject to any donoy's tax on the ualue of land it subsequently donated, it being exempt from taxes as a political subdiuision of the Nq.tional Gouernment. The occupants/beneficiaries are subject to real property taxes because they now own the land.

Transfer for Insufficient Consideration Bar Question (1999) A, an individual, sold to B, his brother-in-law, his lot with

a

market value of F1,000,000.00 for F600,000.00. As cost in the lot is F100,000.00. B is financially capable of buying the lot. A also owns X Co., which has a fast growing business.

392

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A sold some of his shares of stock in X Co. to his key executives in X Co. These executives are not related to A. The selling price is F3,000,000.00 which is the book value of the shares sold but with a market value of F5,000,000.00. A's cost in the shares sold is F1,000,000.00. The purpose of A in selling the shares is to enable his key executives to acquire proprietary interest in the business and have a personal stake in its business. Explain ifthe above transactions are subject to donor's tax.

Suggested answer:

first trqnsq,ction where a lot was sold by A to his brotherin-lq,w for a price below its fair ntarket ualue will not be subject to donot's ta"tc if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration which giues rise to a deemed gift, d.oes not apply to q. sq.le of property subject to capital gains tax (Sec. 100, NIRC). Howeuer, if the lot sold is an ordinary asset, the ercess of the fair market ualue ouer the consideration receiued shall be considered q.s a gift subject to the donor's tox. The

The sale of shares of stoch below the fair market ualue thereof is subject to the donor's tax pursuant to the prouisions of Section 100 of the Tax Code. The erccess of the fair mq,rhet ualue ouer the selling price is a deemed gift.

Exemptions under Special Laws 1. Donations to Philippine government for scientific,

7.

Donations to social welfare, cultural, and charitable organizations (P.D. 507; R.A. 1916);

3.

Donations to the International Rice Research Institute (R.4.2707);

4.

Donations to Ramon Magsaysay Award Foundation (R.A. 3076);

5.

Donations to the National Museum, the National Library, and the archives of the National Historical Institute (P.D. 973);

6.

Donations to the Southern Philippines Development Administration (P.D. 690);

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393

I]onati0ns kr t,lrc lnt,rirmuKrs Administration (P.D. 1616).

Bar Question (2011) Levox corporation wanted to donate F}5 million as prize money

for the world piofessional billiard championship to be held in the Philippines. since the Billiard sports Federation of the Philippines ao". ,rot recognize the event, it was held under the auspices of the International Professional Billiards Association, Inc. Is Levox subject to donor's tax on its donation? Suggested answer: Yes, since the

national sports association for billiards does not

sanction the euent, and the donation is not included among the exempt donations under the law'

Bar Question (2002) on December 6, 2001, LVN Corporation donated a piece ofvacant lot situated in Mandaluyong city to an accredited and duly registered non-stock, non-profit educational institution to be used by the latter in building a sports complex for students. a. May the donor claim in full as deduction from its gross incomeforthetaxableyear200ltheamountofthedonated lot equivalent to its fair market value/zonal value at the time of the donation? Explain your answer'

b.

engineering and technological research, invention and development (R.A. 1606);

2.

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In order that donations to non-stock, non-profit educational institution may be exempt from the donor's gift tax, what conditions must be met bY the donee?

Suggested answer:

a.

No. Doncttions and. I or contributions tnad,e to qualified donee

institutions consisting of property other than money shall be based' on the acquisition cost of the property' The donor

isnotentitled.toclaimasfulldeductionthefairmarhet ualue I zonal ualue of the tot don ated ( Sec ' 34[H]

b.

, NIRC)

'

In ord.erthat donations to noru-stoch, non-profit educational institution may be exempt from the donor's gift tax, it is required' that not more thl.n 307o of the said gifts shall be used, by the donee-institution for administration purposes ( Sec. 101[A] [3], NIRC) -

394

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Bar Question (1994) In 1991, Imelda gave her parents a Christmas gift ofP100,000.00 and a donation of F80,000.00 to her parish church. She also donated a parcel of land for the construction of a building to the PUP Alumni Association, a non-stock, non-profit organization. Portions of the building shall be leased to generate income for the association.

(1)

Is the Christmas gift of F100,000.00 to Imelda's parents subject to tax?

(2) (3)

How about the donation to the parish church? How about the donation to the P.U.P. Alumni Association?

Suggested answer:

(1)

(2)

The Christm,as gift of ?100,000.00 (now fl00,000.00) giuen by Imelda to her parents is taxoble up to ?50,000.00 (now ?100,000.00) because under the law (Sec. 92[a] now Sec. 99[A],NIRC), net gifts rntexceeding ?50,000.00 qre exernpt.

The donation of ?80,000.00 to the parish church euen assuming that it is erclusiuely for religious purposes is not

I llu.l, NI It()). b'urthermore,if the candidate is an gouernmeril offi<:ial or employee, it may euen be corusidered as bribe or a kichback (Sec. 34[A][1][c], NIRC)'

prolbssion(sec.34lAll -incu.mbent

Bar Question (2009) Miguel, a citizen and resident of Mexico, donated US$1,000

worth of stocks in Barack Motors corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and abouito be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous tra-ns-fers of property. (a) Is Miguel entitled to claim a dowry exclusion? why or (b) Is Miiuel entitled to the rule of reciprocity in order to *frv "oiZ be exempt from the Philippine donor's tax? Why or why not?

Suggested answers:

a.Dowriesorgiftsmadeonaccountofmarriageandbeforeits celebratioior within orue ye&r thereafter by parents to each oftheirlegitimate,recognizednaturqloradoptedchildren to the extent of the first Ten thousand pesos (F10'000) is exempt from d'onot's tax (Sec' 101[A], NIRC)' To be entitled

tae-exempt becquse the exernption granted under ArticleVl, Section 2B(3) of the Constitution applies only to reql estate ta.xes (Lladoc u. Cornmissioner, 14 SCRA292).

(3)

The danation to the P.U.P. AlurnniAssociation d.oes not also qualify for exemption both under the Constitution and the afore-cited law because it is not an educational or research organization, corporation, institution, foundation or trust.

Bar Question (2003, 1998) Are contributions to a candidate in an election subject to donor's tax? On the part of the contributor, is it allowable as a deduction from gross income?

Suggested answer: No, prouided the recipient candidote had complied with the requirement for fiIing of returns of contributions with the Commission on Elections as required under the Omnibus Election Code. The contributor is not allowedto deductthe contributions because

the said expense is not directly attributable to, the deueloprnent, rlanagement, operation and/or conduct of a trade, business or

:t95

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tothed'owryexemptionunderthedonor'staxluw,thedonor mustbearesid'entofthePhilippines.SiruceMiguelisanonresid,entalien',hed.oesnotqualifytoclaimsuchexernption.

b.

Miguel is not entitled to the rule of reciprocity in order to be eximpt from the Philippine donot's tq'x' In the first place'

thed'onationbyMiguel,anon-residentMexicancitizen, of the shares of stochs of Barach Motors Corporation' a Mexican compcrny' which has not acquired business situs in the Philippines, to his son, Miguelito, is exem'pt from d.onot's taxind'er Section 104 of the 1997 Tct'r Code, which prouid,esthq,t"...wherethedonorwas&non-residentalien atthetimeofhisdonation,hisrealandpersonalpropertyso transferred.butwhichq.resituatedoutsidethePhilippines shall not be iruclud,ed as part of his'gross gift''" In other q'nd word.s, there is nothing to be subject to donoy's tq'x' exemption' claim to necessary rule there is no reciprocity

Procedure for comPuting net gifts The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year in accordance with the schedule of tax rates prescribed in the law (i.e., The first

396

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P100,000.00 net gift is exempt; two percent (2Vo) is applied on the amount of net gift over F100,000.00 and 157o, on the amount of net gift over F10,000,000.00) (Sec. 99[A], NIRC).

in the schedule of ualues fixed by the ()ity The fact that the property is Assessors' Prouincial anct

The tax is imposed on the cumulative basis during the calendar year; i.e., the rates are applied on the aggregate net gifts during the calendar year, but donor's taxes paid during the calendar year are

unlessitcanbeshownthatthisualueisoneofthetwoualues

credited against the donor's tax due on the latest donation during the same calendaryear. Thus, all donations made in one (1) calendar year by a donor are taxed at the same graduated tax rates as ifthey had been made at one (1) time. A new computation of donor's tax is made for gifts made by the donor in another calendar year(s).

marhet

worthflTmitlionasofthetimeofdonationisimmaterial, mentioned' as prouided' urud'er Section 81 of the

(3)

Dino gained' an income of F19 rnillion frorn the sale' Dino acquires a carry-ouer basis which is the basis of the property

inihe

How much is the value of the gifts in 1994 and 1995 for purposes of computing the gift tax? Explain.

donations into 1994 and 1995. He says that since there were only two (2) days separating the two (2) donations they should be treated as one, having been made within one year. Is he correct? Explain.

(3) (4)

Suggested answer:

(1)

The ualue of the gifts for purposes of computing the gift tax shall be P7.5 million in 1994 and ?7.5 million in 1995. In ualuing a real property for gift tax purposes the property should be appraised q.t the higher of two ualues as of the

time of donation which are (a) the fair mq,rket uqlue as d.etermined by the Comrnissioner (which is the zonal ualue fixed pursuant to Sec. 16[e] of the Tax Code), or (b) the fair

or Fl rnillion. The gain from the

flO million. (4) If the commercial lot was receiued by inheritance the gain the from the sale for F20 mittiott' is F5 rnillion because

basis is the fai,r marhet ualue as of the date of acquisition' The steppei"up basis of FL'5 miltion which is the ualue for gain estq'te tax puiposes is the basis for determining the

Dino subsequently sold the land to a buyer for F20 Million. How much did Dino gain on the sale? Explain. Suppose, instead of receiving the lot by way of donation, Dino received it by inheritance. What would be his gain on the sale of the lot for F20 Million? Explain.

hand.s of the d.onor

sale or other d.isposition ofproperty shall be the excess-ofthe amount reulized, therefrom ouer the basis or adjusted basis gain (Sec' 34[a] , NIRC) ' Since the property for 'wasd'etermining acquired' bi Sift, the basis for determining gain shall or be the same as if it would be in the hands of the donor not was property the whorn by the last preced'ing owner acquired by gift. Hence, the gain is computed by deducting thi basis il rl *ittton from the amount realized which is

pro indiuiso interest to the same son on 2 January 1995.

The Revenue District Officer questions the splitting of the

Code'

The Reuenue District Officer is not correct because the computation of the gift tax is cumulatiue but ortly insofar as calendar year' Therefore' there gifti rnad.e wlihtn ihn "o*n is no legal justification for treating two (2) gifts effected in' two (2) separute calendar years as one gift'

Kenneth Yusoph owns a commercial lot which he bought many years ago for F1 Million. It is now worth F20 Million although the zonal value is only F15 Million. He donates one-halfpro indiuiso interest in the land to his son Dino on 31 December 1994, and the other one-half

(2)

Tq"x'

(2)

Bar Question (1995)

(1)

uaLut, us shtnDrt.

(sec. 34[b][2], NIRC).

Bar Question (2001) to Your bachelor client, a Filipino residing in Quezon city, wants purposes give his sister a gift of Php200,000. He seeks your advice-' for if reducing if nolt ehminating the donor,s tax on the gift, on whether it is better for him to give ai of the Php200,000 on Christmas 2001 or to give Php100,000 on Christmas 2001 and the other Php100'000 on January 1,2002. Please explain your advice'

Suggested answer: would' ad.uise him' to split the don'ation' Giuing the Php200'000 to a higher as a one-tin'te d.onation *ould. mean that it will be subject

I

398

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tax bracket under the graduated tuc structure, thereby necessilu,tirLg the payment of donor's tax. On the other hand, splitting the donatiltn into two equal am.ounts of Php100,000 giuen on two (2) dillbrenl yeurs will totally relieue the donor from the donor's tox because the first Php100,000 donation in the graduated brackets is exempt (Sec. 99, NIRC). While the donor's tatc is computed on the cumulatiue donations , the aggregation of all donations made by a donor is allowed only ouer one calendar year.

PART IV VATUE ADDED TA}{ CIIAPTER Xry

INTRODUCTION

Bar Question (2000)

a)

When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30Vo ofLhe net gifts. For purposes of this tax, who is a stranger?

Suggested answer: A "stranger" is a person who is not a:

(1)

Brother or sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or

(2)

Relatiue by consanguinity in the collateral line within the fourth degree of relationship (Sec.98[BJ, NIRC).

b)

What conditions must occur in order that all grants, donations and contributions to non-stock, non-profit private educational institutions may be exempt from the donor's tax under Section 101(a) ofthe Tax Code?

Characteristics of Value Added Tax (Bar Question [19961) 1. It is a tax on the value added ofa taxpayer' 2. It is collected through the "tax credit method" or "invoice method."

3. 4.

The following are the conditions:

2)

It is a transparent form ofsales tax. It is a broad-based tax on consumption of goods, properties or services in the Philippines as it applies to all stages of manufacture, production, and distribution of goods and services.

5. 6.

Suggested answer:

1)

ffAT)

7.

It is an indirect tax. The Philippines adopted the "separate indication of tax method." There is no cascading in the value added tax system'

Not more than 30Vo of said gifts shall be used by such donee

Tax on value added

for administr ation

vAT is a tax on the value added of a taxpayer arising from taxable sales of goods, properties or services during the quarter at the rate of

p

urp o s e s ;

The educational institution is incorporated as a non-stock

entity, paying no diuidends, gouerned by trustees who receiue no conxpensation, and deuoting all its income, whether students' fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation ( Sec. 10 1[A] [3], NIRC).

p"rc"ttt (O7o) or lo7o. "Value add.ed"'is the difference between """o total sales ofthe taxpayer for the taxable quarter subject to value added tax and his total purchases for the same period subject also to value added tax. In this sense, the value added of a businessman is the same as his gross profit, provided that he is not engaged in transactions exempt from value added tax. If there is no value added 399

400

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on taxable sales (because the gross sales or receipts is equal to the gross purchases) or where there is a loss from sale (because the gross purchases is more than gross sales or receipts), there is still output tax due on the transaction. There will be no value added tax due or there will be an excess input tax which may be carried over to the next quarter(s), respectively. The presence or absence ofmark-up or profit by itself is not material for purposes of determining taxability of a transaction subject to tax. The term "output tax" mearrs the value added tax due on the sale or lease oftaxable goods, properties or services by any person registered or required to register under Section 236 ofthe Tax Code (Sec. 110[A], NIRC). The term "input tatr" mearrs the value added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods, properties or services, including lease or use ofproperty, from a VAT-registered person (Sec. 110[A], NIRC). The buyer becomes entitled to the input tax upon consummation of sale and issuance of a VAT invoice, in the case of sale of goods or properties, and upon payment of service fee or compensation, in the case of sale of services. It is not necessary that the inventory ofgoods or properties be sold before the buyer thereof becomes entitled to claim the input tax.

The value added of a taxpayer and his value added tax due or excess input tax on his transactions during the quarter can be computed by using the formula shown below: CASE

"A"

CASE

"8"

Amount VAT Amount VAT Sales

Output tax

(100 x I2Vo)

Purchases

Input tax

(80 or 130 x L2Vo) Value added VAT payable (20 xt2Va)

Excess input tax [(30) x t2%o)l

100 80 20

100

t2.o

t2.o 130

9.6

15.6

"Cost d.ed.uctittrt melhod"

401

re I'ers

to the manner of computing

shifted when the buyer ofgoods, properties or services used in trr" production or distribution process passes the input tax forward to t is iluyer, or backward to his iupplier. There is generally forward shifting of t." when there is a seller's market (i.e., there are more is buyers"than sellers or demand is greater than supply), and there balkward shifting of tax when there is a buyer's market like in real person estate and coconut oil industries. Although the seller is the legally liable to pay the tax, the seller shifts the burden of the tax tJtn" irrt"rmediate buyers who successively pass on the tax to their buyers until the goods, property or service reaches the final consumer. the It;ill be noted that whether it is the cost deduction method orinput tax credit method is used, the value added tax due or the excess tax is the same. (See illustration above)'

The tax

i

Sales Tax VAT is a tax on the taxable sale, barter or exchange ofgoods' properties or services. A barter or exchange has the same tax ion*"qo".r"e as a sale. A sale may be an actual sale or a deemed sale' or an export sale or a local sale. Generally, there must be an actual sale of goods, properties or services in ihe philippines in order that value added tax may be imposed. Exceptions are as follows:

2.4 (3.6)

Tax Gredit Method There are two (2) popular ways of computing the value added tax of a taxpayer. These are the (a) cost deduction method, and (b) tax credit method.

VA'l't

thetaxpayer'svalueaddtrdtaxliabilitybydeductinghiscostsand subject to value added tax from his taxable sales ofgoods, "*p"rrru. properties or-seruices, and multiplying the resulting value added by I2Vo. (See illustration above). "Tar cred'it method." (sometimes called "inaoice mcthod'") is refers to the manner by which the value added tax of a taxpayer are computed. The input taxes shifted by the sellers to the buyer the sells in turn he when taxes output buyer's the creditud against taxable goodr, properties or services (Secs' 105 and 110[N' NIRC)'

1.

(30)

t

ttl trxlttcl tott

2.

Importationofgoods. - Imporbationofgoodsbyanyperson' who may or may not be engaged in trade or business in the Philippines' in which case, the tax is imposed on the import"t-Uoyut (Sec' 105, NIRC)' Take note that importation of service is not subject to value- a-dded tax' unlesssuchserviceisperformedwithinthePhilippines; Sales of

4O2

goods, properties or services exempt from value added tax

are not covered by the value added tax system and should be evidenced by non-VAT invoices or receipts. However, the

erroneous issuance by a seller of a VAT invoice or receipt for an exempt sale of goods, properties or services makes him liable to the value added Lax(Sec. 113[D], NIRC); and,

3.

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Deemed sales of goods or properties (Sec. 106[8], NIRC).

Taxable Transactions The main object of the value added tax is the transaction. A transaction could either be: (a) a sale, barter or exchange ofgoods or properties in the course oftrade or business; (b) a sale ofservice in the course of trade or business; or (c) an importation of goods, whether or not made in the course of trade or business (Sec. 105, NIRC).

Broad-based tax on consumption in the Philippines VAT is broad-based because every sale ofgoods, properties or services at the levels ofmanufacturers or producers and distributors (whether at wholesale and retail) is subject to value added tax. While every taxable sale ofgoods, properties or services is subject to value added tax, the tax burden rests with the final consumer who consumes the goods, properties or services. Consumption takes place when the taxpayer does not sell further the goods, properties or services either because he is the final consumer or he is not engaged in business subject to value added tax like sale ofagricultural food products in their original state. Sale of goods located and consumed outside the Philippines is exempt from value added tax, even if the contracting parties are both domestic corporations. The VAT system encourages savings because the tax is imposed only upon consumption. Moreover, investments in capital goods such as machinery and equipment are effectively not subject to value added tax due to the provision in the Tax Code allowing taxpayers to recover input taxes paid on acquisition ofcapital goods through refund or tax

credit.

Destination Principle The destination of the goods determines taxation or exemption from tax. Export sales ofgoods are subject to zero percent (OVo)rate

'i,1,:lll;il,l"'t,tVA'r')

403

zerO-rated), while itnporl,s ol'grxds are subjectto!2Vovalue added border tax. some mlings referre.d to the destination principle as "cross of doctrine." Exports are zero-rated because the consumption such

(
be made outside the philippines, while imports of goods ire subject to l27ovalue added tax because they are for consumption within ine fnmppines. In the case of services, the consumptiorr takes place where the service is performed, following the "situs-of-seruice

g"oJ,

*il

principle." When the goods, properties or services are consumed or are no output destined for consumption abroad, they are zero'rated;hence' passed on upon taxes input the but ta* is imposed on the sale thereof, by claimed be may services or properties goods, por"trut" of taxable BIR' the from credit ih" tu*puy"r as refund or tax

lndirect Tax An indirect tax is a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden io *o*"orr" else (Commissioner u. Tours Speciolists,In-c" G3,' is not No.66476, March 27, 7gg0).It is one paid by a person who pass on or shift thereafter may directly liable therefore, and who the assumes ultimately which the tax to another person or entity, of tax burden (Maced'a v. Macaraig, 797 SCBA 777) ' The impact while imposed, been has tax the taxationis on the seller upon whom which the tlre incid.ence of tan is onihe final consumer, the place at tax comes to rest. A person who is engaged in trade or business subject to value

addedtaxdoesnotbeartheburdenoftaxation,sincehegenerally

not), passes on the tax to his customers (whether VAT-registered or passing" in which case, there is "forward passing" of tax. "Backward tax' which of tax happens when the seller aJsumes the payment ofthe

than happens when there is a buyer's market or supply is greater demand. This is illustrated below:

FORWARD BACI{WARI) PASSING Selling Price Output tax Cost Input tax Gain VAT Payable

107.14

1_20.0

L2.86

L4.4

100.00

100.0

12.00

t2.0 7.r4

20.0 2.4

0.86

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In the example above, the total invoice amount (gross selling price plus l27o YAT) is F134.40 (F120 + PI4,40), in forward shifting of tax, and F120.00 (F107.14 + F12.86), in backward shifting of tax.

Gumulative through the chain of distribution of goods and performance of services Every taxable sale or transfer ofgoods, properties or scrvices is subject to value added tax. This means that on the taxable transaction,

the seller is subject to output tax, while the buyer is entitled to input tax. When there is a new sale of the same goods, properties or services, the new seller is subject to the output tax and the new buyer is entitled to input tax. This procedure is repeated until the last sale to the final consumer. In such a case, the input tax passed on to the final consumer becomes part of his acquisition cost or operating

such provisitln, Revcnttc ltogtrlrtl,ions N
Value added tax does not cascade ..tax on tax,, (Sec, 106[A]' A tax is said to cascade when there is is 108[A], and. 110[N, NIRC). Another name given to'ocascading" tax "py"u-iait g" - the tax should not be imposed upon another 3 2' Au gu st 7 6' ii.opt" a. Eolr'ld'iganb ay an and' T an, G'R' N o' 7 52"gtoss receipts," iOOil.In defining the terms "gross selling price" and taxes added value the excludes expressly law addedlax the value the input taxes due ;;;; on by the sellers to the buyers'toMoreover, iloro o" p.ld by the buyer are allowed be credited against his output sales taxes. There was cascading in the old sales tax system as the iL o" original sales of goods paid by imporbers and manufacturers goods and the turnover taxes paid by wholesalers and retailers of

expense.

becamepartofthegrosssellingpricesubjecttotheturnovertax.

Tax-inclusive method/separate indication of VAT

Principle of RecouPment of Tax

Sale of goods by the supplier must be subject to value added tax in order to entitle the buyer who is also subject to VAT to credit the input tax from the output tax on his taxable sale. The VAT-registered seller need not show the output tax as a separate item in his sales invoice or receipt to be liable to the value added tax, nor is the VATregistered buyer required to prove to the BIR that it has been shown

in the sales invoice or receipt to be entitled to input tax. The law presumes that in every VAT invoice or receipt, as a separate item

there is always a VAT component shilted by the seller, which can easily be determined by dividing the total invoice amount by 11 or by multiplying the total invoice amount by l/ll, when the regular VAT rate is ll%o, or by dividing the total invoice amount by 9.33333 or multiplying the total invoice amount by 1/9.33333, when the regular VAT rate is 72Vo (Sec. 106[D][1] and Sec. 108[C], NIRC). The value added tax was mandated not to be shown as a separate item in the invoice or receipt, except in the case of banks which are required to indicate the value added tax as a separate item in the invoice or receipt in order that the same may be credited by a VAT-registered buyer of the bank's services from his output tax (Secs. 106 and 108, NIRC, as implemented by Reu. Regs. Nos. 12-2003 and 20-2003).

Effective November 1,, 2005, R.A. 9337, however, made

a

complete turn-around by requiring that the VAT component shall be separately indicated in the VAT invoice or receipt. To implement

Interposing an exempt transaction along the chain of distribution diminishes the-ability of th" VAT system to collect the tax on the 'llralo", added by each seller; in fact, it aggravates cascading of taxes' prior.exempt As a result, the value added tax that was foregone in the is liable who customer succeeding the from transaction is recouped to value added tax.

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l,hrrt the taxable sulcs 9l'gorxls, lrropcrties and services by each spouse

CHAPIER XVI

PERSONS LIABLE TO TAX Taxable persons A person may be characterized as a taxable person, if (a) he undertakes taxable transactions in goods, properties or services consumed or destined for consumption within the Philippines, (b) such transactions are entered into in the course ofhis trade or business, and (c) the amount of his gross sales or receipts is over the threshold fixed by law or regulations. As provided in Revenue Regulations No. 16-2011 dated October 28,201.I, the general threshold under Section 109(V) of the 1997 Tax Code was increased to P1,919,500 effective January I, 2012. As clarified in Revenue Regulations No. 3-2012, February 20, 2012, for instruments executed and notarized on or after November 1, 2005 but prior to January L,2012, the threshold amounts for sale of resident lot is F1,500,000 and sale of residential house and lot and other dwelling, F2,500,000. An importer of taxable goods, whether made in the course of trade or business, is also a taxable person.

A taxable person must register for value added tax purposes 237[A], NIRC). However, his failure to register as a VAT person does not exculpate him from his liability to pay the value added tax on his taxable sales ofgoods, properties or services. In other words, registration as a VAT person is not a requirement to make a person liable to value added tax (Secs. 106, 107 and 108, NIRC). (Sec.

A taxable person may conduct business as an individual (single proprietorship), estate or trust, partnership, joint venture, corporation, cooperative or association. Special attention must be given to the following situations: Husband and. wife. - For VAT purposes, husband and wife shall be treated as separate taxpayers. Each spouse engaged in taxable sale of goods, properties or services must comply with the administrative requirements prescribed for VAT taxpayers. However, the "aggregation rule" for each spouse shall apply, which means 406

shall be added togethor Lo dctcrmine whether he/she has exceeded thc general threshold prescribed by law (F1,919,500). If he/she does, then he/she must register as a vAT person and comply with hisftrer obligations under the vAT law; otherwise, he/she would be subject to the three percent (\Vo) percentage tax under section 116 of the Tax Code.

Joint aenture. - An unincorporated joint venture is created

when two (2) corporations, while registered and operating separately, were placed under one sole management, which operated the business

affairs of said companies as though constituted as a single entity, thereby obtaining substantial economy and profits in the operation. An unincorporated joint venture is a variant form of temporary organization erected for the purpose of carrying out some particular transaction or project. Dissolution is effected upon accomplishment or abandonment of the purpose for which the organization was formed. An unincorporated joint venture engaged in construction activity or in enerry-related projects, although exempt from income tax, is liable to value added tax. Hence, it must register as a vAT person, secure its own Taxpayer Identification Number, keep its books of accounts, issue sales invoices or official receipts, and file vAT declarations or returns and pay value added taxes. However, the BIR has allowed certain arrangements through which the unincorporated joint venture is treated merely as a "flowthrough entity" that does not pay value added tax. In such a case' the members of the joint venture are responsible for their respective obligations under the joint venture agreement and can claim input taxes on their taxable purchases (See BIR Ruling No. 2-97, January 14,1997).

Gouernmcnt. - The government, consisting of the three (3) branches, namely the executive, legislative, and judiciary, and its political subdivision, performing an essential governmental function, is exempt from value added tax. However, government entities and instrumentalities, including government-owned or -controlled corporations, are subject to value added tax if they sell goods, properties or services in the course oftrade or business or when they p"tlor- proprietary functions. Thus, local water districts and similar public utilities are not exempt from value added tax. Beginning November 1, 2005, the government is required to withhold a final vAT of five percent(1Ta) based on the gross payment for its purchases oftaxable goods, properties or services pursuant to the provisions of R.A.9337.

40rl

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Non-stoch, non-profit association or organization.

lilcs and rlther assessments/charges by r1e mbers/tenanl.s 9l'ir trlrrr|rnrinium corporation form part of gross income of the latter sub.iect to income tax (and expanded withholding tax) as well as value added tax, because a condominium corporation furnishes its members/tenants with beneficial services (i.e., benefits, irs association

association or organization whose

Generally, a non-stock, non-profit receipts come purely from association dues or special assessments from members is not subject to the value added tax. The reason for the exemption may either be (a) that it is not engaged in business or in taxable sale of goods, properties or services, or (b) that the amount received by it from the members is not income but represents additional capital contribution, or (c) that it is a liability of the association which must be spent by the association for the special purposes for which the fund was created, and the passing of Board Resolution by the Board of Tlustees should clearly spell this out. Thus, a business league, which is not organized for profit, relies solely on the mandatory contributions of its members for its operating expenses, and performs functions exclusively for the benefit of its members, is not considered rendering service in the course oftrade or business; hence, not subject to VAT.I

The Manila Bethel Temple, Inc., a religious organization, is

exempt from all taxes to which it is directly liable on activities not conducted for profit. Such activities include gross receipts from the following sources: (a) sale of bibles and other religious articles (all reading materials) on a non-profit basis to church members; (b) receipts from the Music College in the form of offerings on a voluntary basis; and (c) receipts from the Bible College in the form of offerings on a voluntary basis.2Along the same vein, the receipt of small sums of money by priests or their congregation from the relatives and friends ofthe deceased for praying for the soul ofdead persons is also exempt from value added tax, since such religious activity is not considered as a taxable trade or business.

Condnminium cotporation. - A condominium corporation that will not sell, barter, exchange, or lease any good or property and will not render service for a fee, but merely implements the administration ofthe required services to collect the association dues and assessments from the unit owners, pursuant to its corporate purposes as "trustee" of the fund, is not subject to VAT on such activity. The above ruling was recently revoked by Revenue Memorandum Circular No.65-2012

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advantages, and privileges in return for such payments)' The RMC ,"u. urr"hored on the decision of the Supreme court in the case of cIR u. CA and. Comrnonwealth Management and Seruices Corporation (G.R. No. 125355, March 30,2000), whereby the said stated: "Even a non-stock, non-profit organization or government entity is liable to pay vAT on the sale of goods or services. vAT is a tax on transaction, Lv"n itt the absence ofprofit attributable thereto." In Section 105 of the Tax code, the term "in the course oftrade or business" requires the regular conduct or pursuit of a commercial or economic activity, regardless of whether or not the entity is profit-oriented. The provision of section 105 is clear. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for ,"rrri""" rendered to its affiliates on a reimbursement-of-cost basis only, without realizing profit, for purposes of determining liability for VAT' on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.

subd,iuisions or villages Homeowners Associations. Section 18 of R.A. 9904 (Magna Cartq, for Homeowners and -Homeowners, Associations) provides that the association dues from rentals of property of the homeowners' derived income and from income tax, vAT and percentage exempted be may association

tax, provided that the homeowners'association complement, support the local government unit in providing vital services arrd "t"engthen and the grant of tax incentives shall be subject to members, to their conditions: following the

1. 2.

The homeowners' association must be a duly constitute "association" as defined under Section 3(b) of R'A. 9904; The local government unit having jurisdiction over

thehomeowners'associationmustissueacertification identifying the basic services being rendered by the homeowners' association and therein stating its lack of resources to render such services, notwithstanding

dated October 31,2012,3 where the CIR ruled that amounts paid in rVAT Ruling No. 801-90, October 11, 1990. ZVAT Ruling No. 266-89, October 26, 1989. 3A petition for declaratory relief against the RMC was filed by the First e-Bank Tower Condominium Corporation on December 26, 2}l2before a Makati RTC. The court ruled that the RMC did not only clarify an existing law, but changes its import and interpretation that in so doing it prejudices the right ofthe petitioner as a taxpayer.

40!)

tl*t the BIR failed to give due notice and opportunity to be heard, before "dd"d Thus, in imposing additional tax burden on petitioner, respondent circular. said issuing violated the constitutional right to due process and hearing'

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410

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its clear mandate under the applicable laws, rules

and regulations, provided that such services must fall within the purview of the "basic community services and facilities" which is defined in Section B(d) of R.A. 9904 as those referring to services and facilities that redound to the benefit of all homeowners and from which, by reason of practicality, no homeowner may be excluded such as but not limited to security, street and vicinity lights, maintenance, repairs and cleaning of streets, garbage collection and disposal, and other similar services and facilities; and

3.

The homeowners' association must present proof (e.g., financial statements) that the income and dues are used for the cleanliness, safety, security and other basic services

needed by members, including the maintenance of the facilities of their respective subdivisions or villages. unless the above conditions are met, the homeowners'association shall generally be subject to income tax and vAT because beneficial services are rendered by the association to its members.a

Recreational or sports club. - The euezon City Sports Club is not subject to VAT on membership dues and fees and guest fees, tennis, pelota, squash, badminton, bowling, billiards and gym fees as paSrments for the use of facilities.s However, this ruling was superseded by Revenue Memorandum Order No. 85-2012 dated August 6, 2012, which declares that even a non-stock, non-profit organization or government is liable to pay VAT on the sale of goods or services. Thus, the gross receipts ofrecreational clubs, including but not limited to membership fees, assessment dues, rental income, and seryice fees are subject to VAT. Also, PCCI, which is a non-stock, non-profit corporation organized to maintain and protect the integrity of its registry of purebred dogs and whose activities are principally sourced from registration and membership fees from its members, is subject to VAT (RMC No. 64-2013, September 30,2015). However, the moment the non-stock, non-profit association in any taxable sale of goods or services, like operating a

engages

aRMC

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No. 9-2013, January 31, 2018. The homeowners associations argue that the LGUs involved would not generally issue the certification stating that they have no resources to render such basic community seryices in order to get the tax-exempt status. The said condition thus effectively removes the window when the homeowners association may be exempted from tax. 6VAT Ruling No. 098-88, April 14, 1988.

4ll

restaurant or canttttttl, lxrul,itltttl or shop selling sporting goods' or leases its facilities or spaces t() others, it is liable to the value added tax where the amount of its gross sales and./or gross receipts exceeds ?1.5 million (now F1,g1g,50b), or subject to the 3Eo percentage tax, if gross sales and receipts is F1.5 million or less. Non-stock, non-profit issociation may include foundations and condominium corporations. It should be noied, however, that a non-stock, non-profit association cannot be exempt from VAT on its purchases of goods, properties or services inasmuch as its exemption from income tax is not a legal basis to make

it

exemPt from VAT.6

cultural center of the Philippines is not subject to tax on ticket sales ofcultural shows but is taxable on sales ofgoods by its The

gift

shops.T

Irnporter. - Although the actual seller of goods is the head office intapan, it cannot be made liable for value added tax as the

sale was consummated in Japan. Neither is the Philippine branch ofthe foreign corporation liable for value added tax as it is not the actual sellei. The branch merely acted as an agent of the head office

in promoting its sales, delivering the samples and the quotation to the possiblJuyers. The head office is the actual seller of the goods as indicated ilrthe commercial invoices. The head office in Japan as a trading office buys the goods from manufacturers in Japan and then ,"llr th" same to local buyers in the Philippines. VAT is properly and legally due on the local buyers who are considered the i*pott"t.. Considering that such value added tax on importation

it should no longer be imposed pnitippine (Kanematsu Corporation, Manila branch on the 4875, February 72' No' Case Branch u. io**i"sioner, CTA was already paid by the local buyers,

1997).

Bar Question (2008) Greenhills Condominium corporation is an existing nonstock, non-profit association of unit owners in Greenhills Tower, San Juan City since 2001. To be able to reduce the association dues being collected from the unit owners, the Board of Directors of the corloration agreed to lease part of the ground floor of the condominium building to DEF Savings Bank for F120,000 a month starting JanuarY, 2007. 6VAT Ruling No. 247-89, October 4, 1989. ?VAT Ruling No. 18-89, January 25, 1989.

*f r1,\gr1r1:tr'l'lx t VA'l't l'r,t'rronri l,rrrlrlc Lo'l\rx

\./11

412

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a.

)N

Is the non-stock, non-profit association liable to value added

tax in 2007? If your answer is in the negative, is it liable to another kind ofbusiness tax? b.

Will the association be liable to value added tax in 200g, if it increases the rental to F150,000 a month beginning January,2008? Explain.

Suggested answers: d.

No, Greenhills Condominium Corporation

4

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shirts and t.lrcsscs rrlrrOrrtl rrrrrl pcrlirrtning litrison work between its home officc and the l'ilipin
will not be

subject to ualue added totc, since its gross rental income for the year 2007 will be Fl,440,000 (F120,000 times 12). The sale or lease of goods or properties or the perforntance of seruices other than the tra,nsactions mentioned in the preceding paragraphs, where the gross annuel sales and, / or receipts do not exceed the amount of One million fi,ue hundredthousandpesos (Pl,500,000), shall be erempt from ualue added tax (Sec. 109NJ, NIRC). Howeuer, it would, be subject to the SVo percentage ta^x, on its gross rental income under Section 116 of the Tax Code. b.

1

Yes. If Greenhills Condominium Corporation increases the monthly rental income to F150,000, it wilt be subject to the 12Vo ualue added tax beginning Nouember 7, 2008, unless it registers as aVAT person effectiue January 1,2008. The reason for this is that the gross annual rental income of the association for 2008 would be Pl,800,000 (F150,000 times 12) (Sec. 109M, NIRC). Moreouer, the association will be deemed to be engaged in the business of leasing, despite its being a non-stock, non-profit organization. The phrase "in the course oftrade or business" fiLeatLS the regular conduct or pursuit of a commercial or en economic actiuity, including transactions incidental thereto, by any person, regardless of whether or not the person engaged therein is a non-stock, non-profit priuate orgaruization (irrespectiue of the disposition of its net income and whether or not it sells exclusiuely to mernbers or their guests), or gouernment entity (Sec. 105, NIRC).

Bar Question (1991) Newtex International (Phils.), Inc. is an American firm duly authorized to engage in business in the Philippines as a branch office. In its activity ofacting as a buying agent for foreign buyers of

Newter is not subject to vAT. The vAT is imposed on sellers and. not on buyers. The bra.nch offi,ce did not deriue any income or compensation so as to possibly permit the imposition of a ualue added tax'on compensation for seruices rendered. In addition, since the transactiois are d.irect export sales, the VAT does not apply. Export ualue sales are among those thit are either zero-rated or exempt from (Secs. NIRC). 99-100, ud.ded tax

rf (

CHAPTER XVII

OUTPUT TAX ON SALE OF GOODS OR PROPERTIES

Elements of Taxable Sale of Goods or Properties To be subject to value added tax, the sale of goods (tangible or intangible objects that have value) must be: (a) an actual or deemed sale of goods or properties for a valuable consideration; (b) undertaken in the course of trade or business; (c) for the use or consumption in the Philippines; and (d) not exempt from value added tax under the Tax Code (Sec. 109, NIRC), special law, or international agreement.

sale.

Types of Sales l.Actualsale._Inactualsale,aVAT.registeredpersonis thesellerandanotherVAT-registeredpersonisthebuyer. Thesellersoutputtaxbecomesthebuyer'sinputtax'which the latter can credit against his output tax on his taxable sales ofgoods, properties or services during the quarter'

Bar Question (1997)

2.

414

Deemcd. sale. - The following transactions are considered as deemed sales:

a.

Transfer' use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course ofbusiness;

b'Distributionortransfertoshareholdersorinvestors

as share in the profits of the VAT-registered persons

or to creditors in PaYment of debt;

c.

Consignment of goods, if actual sale is not made within sixty days following the date such goods were consigned; and

d.Retirementfromorcessationofbusiness,withrespect to inventories of taxable goods existing as of such

Sale of Goods or Properties

goods or properties.

4l lt

The valuc addtlcl Lttx ttccrutrs upon the consummation of sale of the goods or properties, regtrrdlcss ol'the terms of payment between NIRC) 237 and 1 13 ' contracting parties ( Sic. I 06, in relation to Secs ' ' (whether the sale is Thus, ,, ,Jo., as the seller issues a VAT invoice for cash or on credit), he becomes liable to value added tax on such

With respect to sale or exchange of real property, all of the following requirements must be met: (a) the seller executes a deed of sale, barter or exchange, assignment or conveyance, or contract to sell, of real property; (b) the real property is located within the Philippines; (c) the seller or transferor is engaged in real estate business either as a real estate dealer, developer, or lessor; (d) the real property is held primarily for sale or for lease in the ordinary course of his trade or business, or at least an ordinary asset used in the trade or business of the VAT taxpayer as an incident to his VAT-taxable activity; and (e) the sale is not exempt from value added tax under Section 109 of the Tax Code, special law, or international agreement binding upon the government of the Philippines.

By the contract ofsale, one ofthe contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent (Art. 1458, New Ciuil Code). A sale is a transfer of goods or properties to a buyer either for cash or on credit, or partly for cash and partly for credit. The term "sale" includes barter or exchange of

Vnt,trl, At,trl'.n'l'nx (VA'l') )ttl,prtl 'litx ,rrr l'irrll ol ( irxxls or l'rttlxrrt'ics

retirement or cessation'

In deemed sales, the seller is also the buyer and no valuable consideration is thus paid. For example, if the owner withdraws

goods for personal (non-business) use from his inventory' he derives

tax advarrtage from the input tax, which he has already credited at the time of furchase against his output tax. Since the withdrawal goods or transfer of goods ,uroit, in the use or consumption of such byaperson(thesellerhimself)whoiseffectivelythefinalconsumer' added such withdrawal or transfer is deemed a sale subject to value is to provisions sale tax. The rationale of the transaction deemed

i

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Itt,:vr t':wr,rrt oN'l'nxn'r'ror.: (

(2)

recapture the value added tax that was claimed as input tax at thc time of purchase.

of aessels by NDC is a d.eerned. sale. While the subject sales transaction involving the five (5) vessels may not be considered a "sale" envisaged in Section 99 (now Sec. 106) ofthe Tax Code, which is a general provision, it is, and it should be, considered a,,sale', within the purview ofSection 100(b) (now Sec. 106tbl) ofthe Tax Code, as implemented by Section 4 of Revenue Regulations No. 5-g7, which enumerates the transactions "deemed sale" subject to the l\vo value added tax. Undeniably, when NDC offered for sale, as one lot and by public bidding, all of its shares of stock in NMC, and the subject five (5) NDC-owned "Klockner" vessels operated by NMC, to the private respondents group of private companies, a corresponding change in ownership of NMC resulted. As to whether or not this change of ownership in NMC may have been brought about by the privatization policy of the government, the law or Section 4(E)(1) of Revenue Regulations No. 5-87, does not distinguish. Where the law does not distinguish, courts should not distingujsh (Comrnissjoner a. CTA and Magsaysay Lines, et al., CA-G.R. SPl/o. 2ggg4, March 7I, Sal.e

(3) (4) (5)

(b)

However, in Mind.anao II Geothermq.l Partnership u. CIR (G.R. Nos. 19330I and 794687, March 1I,20Ig), the Supreme court ruled that the sale by the petitioner of its Nissan patrol to its executive may be said to be an isolated transaction. However, it does not follow that an isolated transaction cannot be an incidental transaction for vAT purposes. A reading ofsection 105 ofthe 1997 Tax code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." The court also explained its ruling in CIR u. Magsaysay Lines, which involved the sale of vessels by NDC to Magsaysay Lines; the sale was involuntary and made pursuant to government's policy of privatization.

Expor.t sale.

(1)

(a) The

oriented enterprise to be used in manufacturing' processing, packing or repacking in the Philippines ofthe said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of lhe Bangho Sentral ng Pilipinas IBSP); Sale of raw materials or packaging materials to

Sale ofgold to t]ne Bangh'o Sentral ng

Pilipinas IBSP);

Those considered export sales under E'O' 226' otherwise known as the Omnibus Investment Code of 1987, and other sPecial laws; and (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations' Foreign Currenc5r Denom'inated' Sale' - The phrase uforeign currency d.enom.inated' sale" means sale to a ,ron-r"rid"r,t of goods, except those mentioned in Sections l4gandlsO,assembledormanufacturedinthePhilippines

fordeliverytoaresidentinthePhilippines,paidforin

acceptable foreign currency and accounted for in accordance

with the rules and regulations of the Bangho Sentral ng Pilipinas (BSP).

(c)

Sales to persons or entities whose exemption under special

lawsorinternationalagreementstowhichthePhilippines is a signatory effectively subjects such sales to zero tate'

Goods or ProPerties

shipping amangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and

;;

regulations of theBangko Sentral ng Pilipinas (BSp);

4t7

Sule ol'rtrw ttttttcrittls
tetm"export sales" means: The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any

-

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export-oriented enterprise whose export sales exceed 7O7o oftolal annual Production;

1997).

3.

1,,

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The term "good's" means any movable, tangible object' which is appropriable or transferable, and having intrinsic value. It connotes

produced and subsequently purchased to satisfy the needs of the buyer (Reu' Regs' No' 5-87'

";-"dity wants and perceived culent

September 1,1987).

Theterm"goodsorproperties"meansalltangibleand

intangible objects, whether real or personal, which are capable of

41u

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ll,lrvt l':wr,:tr. oN'l' xn,rroru

pecuniary estimation. It includes: (a) real properties, such as lands and buildings, held primarily for sale to customers or held for lease in the ordinary course of trade or business, and (b) intangible properties (i.e., the right or privilege to use patents, "opy"ight., trademarks, etc.; the right or privilege to use in the philippi.r& oirtry industrial, commercial or scientific equipment; the right or privilege to use motion picture fi.lms, films, tapes and discs; and radio, television, satellite transmission and cable television time), which are capable of pecuniary estimation (Sec. 106, NIRC).

For valuable consideration A transaction is outside the scope ofvalue added tax, unless it is made for a valuable consideration. consideration may consist of money, or something of value other than money (e.g., barter of pen for wristwatch), or partly money and partly in kind (e.g., exchange or trade-in of motor vehicle). Transfer of property without valuable consideration (e.g., gift) is exempt from value added tax.

ln the course of trade or business The phrase "in the course of trad,e or business"

means the regrrlar conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person, regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective ofthe disposition ofits net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity to the contrary notwithstanding, services rendered in the philippines by non-resident foreign persons shall be considered as being."tta""ea in the course of trade or business (Sec. 105, NIRC).

"Incid.entol" means depending upon or appertaining to something else as primary; something necessary appertaining to, or depending upon another which is termed the principal (Word.s & Phrases, 1940,Vol- 20, p.41g). A transaction will be characterized as having been entered into by a person in the course oftrade or business, i?it is regularly conducted and undertaken in pursuit of a commercial or economic activity. Transactions that are undertaken incidental to the pursuit of a commercial or economic activity are considered" as enterled into in the course oftrade or business.

4t9

Goods are consumed or for consumption in the Philippines Domestic sales in the Philippines and importation of goods

from abroad that are indubitably intended to be used or consumed in the Philippines are taxable at l2va. Export sales of qoods which are destined-to b" used or consumed outside the Philippines are subject to value added tax at zero percent (07o). sale of goods by a VAT-registered person located in the Customs Territory will also be deemedls u"poit sale and thus zero-rated, if made to a corporation *ith trr" Philippine ExportZoneAuthoriw (PEZA) or Subic ""girt"r"a BJy Metropolitan Authority (SBMA), since the special economic zone or ireeporLzone is consideied by fiction of law as a foreign territory.l This rule is in conformity with the principle that the vAT is a tax on consumption of goods in the Philippines'

VATonimported.goods.-Thereshallbelevied,assessedand imporiation of goods a value-added tax equivalent "rr"ry to 1,2Vo based on thelotal 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: Prouided' Th"t *h""" the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on tft" landed cost plus excise taxes, if any (Sec' 707, NIRC) ' collected or,

Bar Question (2005) AnalienemployeeoftheAsianDevelopmentBank(ADB)who is retiring soon has offered to sell his car to you, which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal use under the ADB Charter' which is iecognized by the tax authorities. Ifyou decide to purchase the car, is the sale subject to tax? ExPlain' Suggested answer:

Yes.Thesqleissubjecttota'x.Section107(8)oftheTaxCode that "[I]n the case of tax-free irnportation of goods into

prouid.es

Rev. R,egs' No. 4-2007 (February 7,2007) considers current sales automatically zero-rated sales, see Sec. 106-5(e), Rev' N". 16_0b; itMc T4-99 dated october 1b, 1999; see commissioner v. Seagate commissioner v. TeJhnology (philippines), G.R. No. 153866, February 11, 2005 and

'S""J.1065,

to ecozone or freeport ron"

i,

il;r.

9' 2005' Toshiba Ilnfor-ation Equipment (Phils'), G'R' No' I5OI54' August

420

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lr,l'l'rtxnt,rotr

the Philippines by persons, entities or agencies erempt from tax, where such goods are subsequently sold, transferred. or exchanged in the Philippines to non-exempt persons or entities, the purchasirs, transferees or recipients sholl be considered, the importer ihereof, who shall be liable for any internal reuenue ta* on such importation.,

Absence of profit or margin does not make the performance of taxable services for a fee exempt from VAT commonwealth Management and services corporation

(comaserco) is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of philippine Anierican Life Insrrrance company (Philamlife), organized by the latter to perform

collection, consultative and other technical services, including

functioning as an internal auditor of philamlife and its other affiliates. These services were performed on a "no-profi.t, reimbursement-of-cost only" basis by comaserco, which averred that it was not engaged in the business of providing services to philamlife and its ahhates. comaserco was established to ensure operational orderliness and administrative efficiency of philamlife and its affiliates, and not in the sale ofservices.

The Supreme Court ruled that contrary to Comaserco,s contention, section r05 (persons liabte) of the Tax code clarifies that even a non-stock, non-profit organization or government entity is liable to pay vAT on the sale of goods or services. vAT is a tax on transactions, imposed at every stage ofthe distribution process on the sale, barter, exchange ofgoods or property, and on the performance of services, even in the absence ofprofit attributable thereto. The term "in the course oftrade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. It is immaterial whether the nrimary purpose of a corporation indicates that it receives payments for ser-vices rendered to its affiliates on a reimbursement-of-cost basis only, without realizing profit, for purposes of determining liability for vAT on services rendered. As long as the entity provides serrrice for a fee, remuneration or consideration, then the service rendered is subject to vAT. At any rate, because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government.2 2commissioner v.

CI{APIER XVIII

OUTPUT TAX ON SALE OF SERVICES The phrase "sale or exchange of seruiees" broadly embraces the performance of all kinds of services in the Philippines for others for i fee, remuneration or consideration, by a person, regardless of whether the performance thereof calls for the exercise or use of the physical or mental faculties. It means any transaction undertaken in ih" .oo"ru oftrade or business which does not constitute sale ofgoods and which is not expressly exempt from value added tax under the Tax code or special law. services of the following persons are subject to value added tax:

1. 2.

Construction and service contractors; Stock, real estate, commercial, customs and immigration brokers;

3. Lessors ofproperty, whether personal or real; 4. Warehousing services; 5. Lessors or distributors of cinematographic fiIms; 6. Persons engaged in milling' processing, manufacturing repacking goods for others;

7. Proprietors, operators or keepers of hotels,

motels,

resthouses, pension houses, inns, resorts;

refreshment purlor., cafes and other eating places, including clubs and

8. Proprietors or operators of restaurants, caterers;

9.

Dealers in securities;

10. Lending investors; 11. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or ..rgo"t for hire and other domestic common carriers by

cA and commonwealth Management and services

Corporation, G.R. No. I2SZEE,March 80,2000.

or

421

422

ltr,:vrr,:wr,:rr oru 'l'rrxn.r,lor.r (

land, air and water relative to their transport of goods or cargoes;

12. 13.

Services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 ofthe Tax Code;

rances), including surety, fidelity, indemnity and bonding

4.

Lease oruse oftangible property. - Tangibleproperties may be grouped into (a) industrial, commercial or scientific equipment, including the supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of such properties, and (b) motion picture films, films, tapes and discs.

performance thereof calls for the exercise or use of the physical or mental faculties (Sec. 108[A], NIRC).

2. Transfer of technology. -

Transfer of technology consisting of the supply of scientific, technical, industrial or commercial knowledge or information, including ancillary and subsidiary assistance to and furnished as a means of enabling the application and enjoyment of the technology transfer. In this connection, it is important to differentiate between the service rendered and the

product arising from the performance of the service. The efforts or activities undertaken (for which the supplier receives a remuneration or compensation) to produce scientific, technical, industrial or commercial knowledge or information should be distinguished from the product which may emerge from or be created as a result of such efforts. The first is a performance of service, which may be carried on within or outside the Philippines; the second is an intellectual or other intangible property and the right to use such property may be exercised either within or outside the Philippines for a consideration called royalty. The situs of the former is where the service is performed;

or use of intangible property. - Intangible (a) patents,

Leq.se

15. Similar services regardless of whether or not the

- The supply of technical advice, assistance, or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

42:t

3.

companies; and

Categories of services 1. Professionalltechnical consult&ncy.

Vlt t,t, Atrtrt,:tr'l',rx IVA'l't Ittl 'l'rrx rrtr i'iltlc ol Scrvitts

the sila.s ol'l,ltc lrrt,l,cr is Lhe place where the right to use the propert.y is excrcised.

Services of banks, non-bank financial intermediaries and finance companies;

14. Non-life insurance companies (except their crop insu-

tttl

copyrights, properties may be grouped into designs or models, plans, secret formula or processes, goodwill, trademark, trade brand or other like property or right, and (b) right to use radio, television, satellite transmission and cable television time'

Requisites for taxability of services

1.

The service must be performed or is to be performed in the course of trade or business in the Philippines, except in the case of service done in the Philippines by a non-resident person under Section 105 ofthe 1997 Tax Code;

2.

For a valuable consideration actually or constructively received; and

3.

The service is not exempt under the Tax Code, special law,

or international agreement.

Sale of services As an insurance broker, Winternitz income comes from commissions, and not from premium payments; hence, the basis for vAT should be the commission it receives and not the premium payments it receives and remits to the insurance company. Such sales constitute part of the taxable income of the insurance companies, and not Winternitz, as a broker. Section 301 of P.D. 612 defines an

"insttrance broher"asany person who, for compensation, commission or another thing of value, acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance contract or in placing risk or taking out insurance, on behalfofan insured other than himself. InAnscor Insurance Brohers u. CIR and CTA, the Supreme court held that an insurance broker is different from an insurance agent, since the broker acts as a middle between the insured and the

424

ll,t.:vt t,:wr,:tr oru'l'Axn'r'lolr (

Insurance company and solicits insurance under no employment f'r
broker Minternitz Associates Insurance Brohers Corp. u. CIR, CTA Case No. 7977, June 9, 2077). Since National Development Company (NDC) is a VAT-registered person on its sale of services, its transactions incident to the normal VAT-registered activity of leasing out personal property, including sale of its own assets (vessels) that are movable, tangible objects, which are appropriable or transferable are subject to the lOVovaIue added tax. This finds support in VAT Ruling No. 395-88 dated August 18, 1988 which stated that NDC operates like a holding company with various interests/investments in other companies operating for profit; its functions are purely proprietary. It is registered as a VAT person engaging in leasing personal property and it does not pay the three percent (3Vo) common carrier's tax. The terms of the bidding provide that a value added tax of lOVo (now !27o) onthe value ofthe vessels shall be paid by the winning bidder (Magsaysay Lines, et al. a. Commissioner, CTA Case No.4353, April27, 1gg2).

Service in the course of trade or business It is not absolutely necessary that the person who entered into a contract to perform service for another in the course oftrade or business should personally render the service. The service may be performed by another as a subcontractor. Thus, in the case of Philippine Healthcq,re Prouiders Corporation u. Commissioner ( supra), the Court ruled that petitioner merely acted as a sub-contractor and did not perform medical services to its members.

AII kinds of services performed in the Philippines by a VATregistered person for a resident or non-resident person are subject to value added tax at the rate of l27o or OVo. Certain services performed in the customs territory of the Philippines are subject to zero percent (0Vo), andserwices performed outside the Philippines, including special economic zones and freeport zones which are considered as foreign territories by fiction of law (Saura Import & Export Co. a. Meer, G.B. No. L-2927, Februany 25, 7957), even if undertaken in the course oftrade or business, are beyond the scope ofthe value added tax and thus exempt from value added tax.

The place where the service is performed determines the jurisdiction to impose the value added tax (situs-of-seraice

VAr.r n, Arlrt';tr'l',rx (VA'l') )rrlprtl 'l'rrr ,,tt li:tlc rtl'Scrvirts

principte). The plucc

ot'tt"

42ft

(tl' prr.yrncnt is immaterial since t]ne situs

service is dctt:rminod

b.y

the place where such service is

performed. The word "incid.ental" means depending upon or appertaining to something else as primary; something necessary, appertaining to, or depend.ing upon another, that is termed the principal. The sale of NDC's vessels was pursuant to the government privatization program beyond the control of NDC. The sale of the vessels as such is not necessary to carry out NDC's primary function of leasing personal properties. The act ofselling capital assets does not necessarily follow lhe-act ofleasing these assets. The sales transaction was in isolated case. An isolated transaction does not warrant the imposition thereof of business taxes (Magsaysay Lines, et al. u. Comrnissioner, CTA

Case No.4353,

April 27, 1992).

Lease of Properties Owned by Non-residents A non-resident person who derives rental income from the Iease of tangible property physically situated in the Philippines or receives royalties for granting the right to use in the Philippines the

intangible property (eg., copyright or patent) belonging to him is a taxable person. The amount of rentals and royalties remitted to the non-resident lessor or licensor is subject to value added tax (except when the payor is an enterprise registered with the Philippine Export Zone Authority tPEZAl, Subic Bay Metropolitan Authority [SBMA]' clark Development Authority tcDAl and other related authorities under R.A. 7916 and 7227, as amended), irrespective of the place where the contract of lease or licensing agreement is executed, if the property is leased or used in the Philippines. The Tax Code prescribes an ancillary criterion for determining the destination of the service rendered in the form of lease of tangible properties, which is the place where the property is leased or used'

Actual or Constructive ReceiPt Tax accounting rules for gross receipts within a taxable period for value added tax is different from the accrual method of accounting for income tax purposes. Issuing and,/or sending statement of account to the customer for whom the service was rendered or still to be performed does not create output tax liability to the seller nor does it give rise to input tax (creditable by the vAT-registered buyer) until the consideration is received by the seller.

426

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r

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Actual or constructive receipt of the contract price, compensation, remuneration or fee makes the seller of service liable to value added tax, even if no service has yet been performed by him. Thus, if a contractor receives upon the execution ofthe contract a down pa5rment of 20Vo of the total contract price, such amount received is already subject to value added tax although he does not start the construction ofthe project until after the next taxable quarter.

"Constructiue receipt" occurs when the money consideration or its equivalent is placed under the control ofthe person who rendered the service without restrictions by the payor. Examples are: deposit in banks which are made available to the seller of services without restrictions; issuance by the debtor ofa notice to offset any debt or obligation and acceptance thereofby the seller as paJrment for services rendered; and transfer ofthe amounts retained by the contractee to the account of contractor.

Dealer in Securities A"d,ealer in securities" is a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers. He buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. A pre-need. cotnpany is considered as a dealer in securities subject to tOVo value added tax on gross income. Its gross receipts

consist of actual receipts of premium on contract price minus contributions to the trust funds to be set up independently as mandated by the Securities and Exchange Commission.

Franchise Grantees A franchise is the privilege of doing that which does not belong to the citizens of the country generally by common right; it is a right and privilege acquired by special grants from the public through the legislature which imposes on the grantee as a consideration therefore, a duty to the public to see that they are properly used. Before the effectivity of R.A. 7716 (otherwise known as the Expanded VAT Law), sale of services by legislative franchise grantees were subject to tax prescribed by their respective franchises. BeginningJanuary 1, 1996, all franchise grantees, except those subject to franchise tax under Section 119 of the 1992 Tax

Vnt.lt,t At,t,t, l,'l'nx tVA'l't

427

()rrl.prrl 'l'rrx ott Sttlt'ol ( irxxln ttr I'rolx'rlics

Code (such as grantees ol'gus,

tnd water utility firms and radio and,/

or television broadcasting companies whose annual gross receipts for the preceding year do not exceed F10 million), became subject to value added tax. However, under P.D. 1869, PAGCOR is subject to franchise tax offive percent (57o) ofils gToss revenues or earnings from its casino operations, dollar pit operations, regular bingo operations, and income from mobile bingo operations operated by it, with agents on commission basis (EMC 33-2013, April 17,2013).

Tollway operators are couered by the VAT because they render seruices for a fee. They arejust lihe lessors, warehouse operators and other groups expressly mentioned in the law' - Under P.D. 1112 (Toll Operation Decree), tollway operators construct, maintain, and operate expressways, also called tollways, at the operators' expense. Tollways serve as alternatives to regular public highways that meander through populated areas and branch out to local roads. In consideration for constructing tollways at their expense, the operators are allowed to collect government-approved fees from motorists using the tollways until such operators could fully recover their expenses and earn reasonable returns from their investments. When a tollway operator takes a toll fee from a motorist' the fee is in effect for the latter's use of the tollway facilities over which the operator enjoys private proprietary rights that its contract and the law recognize. Toll operators are franchisees because franchise broadly covers government grants ofa special right to do an act or series of acts of public concerns. Also, the VAT law does not define franchisees as only those who have legislative franchise. Petitioners contend that toll fees are of public nature and are therefore not sale of services. This is not correct. The law in the same manner includes electric utilities, telephone, telegraph and broadcasting companies in its list of vAT-covered businesses. Their services are also of public nature. Moreover, statements made by individual members of congress in the consideration of a bill do not necessarily reflect the sense ofthat body and are' consequently, not controlling in the interpretation of law. The Congressional will is ultimately determined by the language of the law that the lawmakers voted on. The toll fee is not a tax. It is not collected by BIR or by the government. It does not go to the government coffers. It is not collected for a public purpose. The operation by the government of a tollway does not change the character of the road as one for public use. The charging of fees to the public does not determine the character of the property whether it is for public dominion or

428

Itt,rvt t,:wr,:H or.r'l'Axn'r'roN (

not. The seller remains directly and legally liable for payment ol' the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the goods, property or service. VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator (Renato Diaz, et al. a, Seeretary of Finance and CIR, G.R. No. 793007, July 7g,2OI1). R.A. 9337, effective November L,2005, subjects to zero percent rate all sales of power or sales of fuel, as long as said power/ electricity and fuel are generated or produced from renewable sources of enerry, which means that the seller of power/electricity or fuel must not only be limited to generation companies, unlike in R.A. 9136 (EPIRA Law), which requires that the sale of generated power must be made by a generation company (Energy Deoelnpmcnt Corporation a. CIR, CTA Case No. 7792, Noaernber 19, 2012).

Vnt.t rl'l Atrt rt':tr'l'nx (VA'l') )rrl,prrl,'l\tx ott Srrlc ol ( ltxrtls or Itrolltrrl.itrs

429

Suggested answer:

1.

2.

(OVo)

VAT exernpt. Sale of agricultural products such as fresh uegetables in their origin'al state, of a kind generally used as, or producing foods for human consumption, is exempt fromVAT (Sec. 109[c], NIRC).

VAT at 10Vo. Since Juke's Construction Company has rendered seruices to theWorld Health Organization, which is an entity exempted from ta,xation under iruternational agreements to which the Philippines is a signatory, the supply of seruices is subject to zero percent (07o) rate (Sec.

108[B][3J, NIRC).

3.

VAT at 707o. Tractors and other agricultural implemen'ts fall under the definition of goods which include all tangible objects which are capable of pecuniary estimcttion (Sec. 106tAlt1l, NIRC), the sales of which are subject to VAT at 10Vo.

Lending investor A "lend.ing inuestor" is a person, other than a bank, non-

4.

bank financial intermediary, finance company and other financial intermediary not performing quasi-banking functions, who makes a practice of lending money for himself or others at interest.

This is subject to VAT at 707o. This transaction also falls under the definition of goods, the sales of which are subject to VAT at 707o.

5.

VAT exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding F8,000 (now F10,000), which is exempt from VAT, regardless of the amount of aggregate rentals receiued by the lessor during the year (Sec- 109[x], NIRC). The term "unit" shall mean per person in the case of dorntitories, boarding houses and bed spaces (5ec.4.103-1' Reu. Regs. No.7-95).

Bar Question (1998) State whether the following transactions are (a) VAT Exempt; (b) subject to VAT at lOVo (now l2Vo); or (c) subject to VAT at OVo:

1.

Sale of fresh vegetables by Aling Ining atthe Pamilihang Bayan ng Trece Martirez;

2.

Services rendered by Jake's Construction Company, a contractor to the World Health Organization in the renovation of its offices in Manila;

3.

Sale of tractors and other agricultural implements by Bunghal Incorporated to local farmers;

4.

Sale of RTW by Cely's Boutique, a Filipino dress designer, in her dress shop and other outlets;

including VAT, under R.A. No. 6938, the Cooperative Code of the Philippines.

5.

Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity operating a student dormitory (monthly fee F1,500).

Do you think your client can obtain the necessary exemption from the BIR? If your answer is in the affirmative, explain the basis for the grant. If your answer is in the negative, state the basis for the rejection of the request.

Bar Question (1992) Your client, United Market Cooperative, is requesting the Commissioner of Internal Revenue to exempt it from the payment of VAT on its purchases of prime commodities from food suppliers/ manufacturers on the ground that it is exempt from all taxes'

430

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llt,:vr r,:wr,:tt oN'l'nxrvlror.r

Suggested answer:

1.

An exemption is not necessary. The ualue added tax is not imposed on the purchaser but on the seller, except in importation of goods.

2.

No. The exemption to which the toxpayers are entitled to refers to those that are leuied on the exempt taxpayer or directly imposed on. the exempted goods. The ualue added tax is imposed on the sellers of goods and seruices, rlot on the purchasers.

Gategories of exemptions

1.

Exempt persons - the seller or the buyer is not liable to value added tax; or

2.

Exempt transactions

-

( )rrl,1rrrl.

A seller who is a VAT-registered person may be exempt from legal liability to pay the value added tax. Such exemption may be express or implied. An express exemption may be granted under a specific provision of the Tax Code or a special law, which confers upon such person the exemption from the payment of the value added tax. The exemption from value added tax may be implied; 1.e., it is intrinsic from the very nature of the entity itself as a non-taxable person (e.g., government performing essential governmental functions and non-stock, non-profit associations not undertaking any taxable transaction). A person, who is engaged in business of undertaking exempt transactions, is not liable to value added tax. However, if at the same time, he also undertakes taxable transactions, the value of which does not exceed the prescribed threshold, he is not liable to pay value added tax, unless he opts to register as a VAT person.

Transactions with exempt persons If the law merely exempts an entity as a seller from direct liability for payment of the value added tax on his sales and it does not relieve the same person as a purchaser from the direct burden of the value added tax that may be shifted to it by a VAT-

4;l

I

registered seller, the purchust: lransaction is not exempt from value added tax.

VAT is an indirect tax, which is shifted by the seller to the buyer by adding the same to the cash cost and/or selling price' The tax exemption granted to a rural bank by virtue of section 15 of Republic Act No. 7353 extends only to those taxes which a rural bank is directly liable to pay and not to the taxes which are merely passed on to it as a consequence of the sale (The Region Bank [Los Bafi'os Rural Bankl v. Commissioner, CTA Case No.5378, September 1,7997).

Scope of exemption 1. Partia'l erernption

transactions in certain goods,

properties or services, which are not subject to value added tax, even ifsuch goods, properties or services are sold by a VAT-registered person, and regardless ofthe annual gross sales or receipts derived therefrom.

(VA'l')

'l'ttr ott Sltk' ol ( |xxls or I'r<tp
2.

The seller has no output tax liability -input taxes passed on to him by his but the on his sales, properties or services form part ofhis ofgoods, suppliers expenses. operating assets or Total eremption - Total relief from value added tax is accomplished by subjecting the sales to zero rate, but the input taxes passed on to him by his suppliers may be recovered from the BIR through claims for tax credits or

refunds. means that the seller is relieved from the tax on his taxable transactions for which added the value payment of liable. legally and he is directly

Eremption from ta.r

The Philippine value added tax system is replete with exemptions that not only complicates to a certain degree the implementation of the value added tax but also limits the tax base.

nln lieu of prouision exent'pts PLDT from VAT on

phrase "in - The for (Black place on substitution of; or in of; instead lieu of'means "in mean not does Kan.381).h 742 p.2d' 626, 6251 a. Barneq46 246 Co., Briek (Glossrnon ts. Baltimare Co, Const. to" addition Md.478, 228 Azd 472,474, Black's Law Dictionary, 6th ed-, 7990, p. 787). The "in Iieu of implies the existence of something for which L substitution is being made. Thus, the "in lieu of all other taxes" means that none other than the tax specified however described, can be demanded. It limits the liability to the specific tax (State of Tennessee a. Bank of Commerce, 53 F- 735, 736, Words and Phrases, Vol. 27, p. 474). Thus, the phrase "in lieu of all taxes" has

importation of mnchineryt and' equipmcnt-

432

llt,:vtt,:wt,:ti ot't'l'nx,r'r'roN (

the effect of exempting from taxation the VAT (which is covered under the general term "taxes" under Section 12 of R.A. 7082) on the purchases of imporbed equipment, machineries and spare parts made by petitioner by virtue ofits paying the three percent (37o) franchise tax pursuant to Section 117 of the NIRC and Section 12 of R.A. 7082. The rationale for the exemption from all other taxes except the income tax and the real property tax granted on petitioner upon the payment of the three percent (3Vo)franchise tax is "that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee" (Proaince of Misamis Oriental a. Cagayan Electric Power and. Light Companyr Inc., GR. No. 45355, January 72, 1990).It is an elementary rule in statutory construction that the exceptions in the law will not be enlarged beyond the actual signification ofthe words used or extended beyond the limits the words themselves actually set (De Jesus v. City of Manila, 2g Phil.73). The exemption from VAT was declared by the BIR in BIR Ruling No. UN-140-94 dated April 19, 1994 and confirmed by the Department of Finance ruling dated January 5, 1995 (Philippine Long Distance Telephone Company u. Commis sioner, CTA Case No.5706, Decetnber 18, 7995). Generally, the exemption is fundamentally intended to benefit the purchaser, not the VAT-registered seller. There is no reason to exempt the seller because he can charge the value added tax against his customer, thereby enabling him to recoup what he pays to the government. A seller may enjoy exemption from value added tax, not necessarily under a special law but because ofits intrinsic nature as an entity that is not subject to value added tax. However, an international agreement or special law must include indirect taxes, such as value added tax, among the transactions with a purchaser to make them eligible either for exemption (partial reliefl or zero-rating (complete reliefl.

Illustrative Sec.7o9(il

-

Cases:

percent (\Vo) comrr'on carrier's tax under Section 115 of the Tax Code. Petitioner is engaged in the hotel business and not in the business of transporting passengers as defined in Article 1732 of lhe New Civil Code. On the occasion when the petitioner extends transport services like providing limousine service and the like, it does so only for its hotel guests and not to the public in general. Respondent is thus

4:t:l

(Manila crrrrgct in subjeclirtg [lttrstr rcv(]llLlos to the value added tax March 5046, No' Case CTA Comrnittsioner, u. Mand.arin Hotels 24,1997). Sec.1O9(l)

Hospital seraices

-

.,Medical services" include various items of services like general

treatment, physical examination, consultation, medication, dressing, suturing sutgicat operation, and all that pertain to or deal with the healing art of the science of medicine (BIR Ruling No. 107-99' Nouemberl2, 1ggg, quoting Cortes a- Pan Orienta'l Match Co',7 CAR [2s] 1014). The sale of drugs and other pharmaceutical items to in-patients of the hospital is a vAT-exempt transaction within the meaning of Section 103(l) [now Section 109(l)] of the Tax Code' The maintenance and operation ofa pharmacy or drugstore by a hospital is a necessary and essential (hospital) service or facility rendered by any hospital for its patients ( st . Lukd s Med.ical center u . cTA and. com.missioner, CA-GR. SP No. 45892, March 73, 1'998). Before a taxpayer may claim that its sale of drugs or pharmaceutical items is classified as "hospital services" exempt from VAT, the following must be established: (i) that the taxpayer operates a hospital; (ii) that said hospital has a pharmacy or drugstore; and (iii) that the sale of drugs was -ade uy sala hospital drugstore or pharmacy to in-patients of the hospital being operated by the taxpayer. Under R.A.4226,"hospital" ,rr"*rr. a place devoted primarily to the maintenance and operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, injury or deformity, or in need of obstetrical or other medical and nursing care. A perusal of petitioner's Articles of Incorporation reveals that petitioner is essentially a non-stock, ,rorr-profit educational corporation. They also failed to provide proof that the discrepancy is due to sales of medicine, equipment and supplies to in-patienis (Herm'no Miguel Febres Cord'ero Med'ical Found.ation a. CIR, suPra).

Comman carriers

The petitioner is not a common carrier subject to the three

V^r,r r' Arr'r.tr'l'nx tVA'l't )rtllrttl 'l'rrr ,,tt ljrtlr' ,rl ( ioorls or l'rol)('rl,i('s

Sec.1O9(q)

-

Special law or international agreement

Though Japanese nationals may be considered exempted from value added tax pursuant to section 103(u) [now section 109(q)] ofthe NIRC, the exemption refers to its own direct tax liability by reason of its own supply of products and services, meaning the output tax due. This cannoi refer to input taxes passed on to it by its suppliers as forming part of the invoice price. AVAT-exempt person is exempted

434

llt,:vt t,;wr,;tr or'r'l'nx,t't tor.r

for value added tax (output tax) but is not entitlcd to clainr inprrt t,ax credit. In view thereof, petitioner is not entitled to the refund of input taxes because it failed to qualify as an effectively zero-ratcd VA'l' person and even as an exempt taxpayer by virtue ofthe Exchange o1'

CIIAPTER XIX

Notes between the Philippine and Japanese governmenLs (KurnagaiGumi Co., Ltd.. tPhil. Branch] u. Cornrnissioner, CTA Case Nos. 4670, July 29, 7997 and.4777, May 4, 1998).

Effective y zer o -r ated tra n sacti o n I

Effectively zero-rated sale of goods or properties shall refer to the sale by a VAT-registered seller to a person who was granted indirect tax exemption under a special law or international agreement. However, the exemption of the entity does not extend to its personnel and guests with respect to the value added tax that may be passed on to them by their suppliers.

In CIR o. Acesite Hotel Corporation, the Supreme Court already settled the issue as to PAGCOR's exemption under P.D. 1869. It ruled that under PAGCOR's Charter, it is granted exemption from payrnent of taxes, except franchise tax, which shall be in lieu of all kinds of taxes, levies and fees or assessments of any kind, nature or description, levied, established or collected by any government

authority. Such exemption is extended to entities or individuals dealing with PAGCOR in casino operations. Since Grand Plaza's transaction with PAGCOR pertains to the latter's casino operations, PAGCOR's exemption from taxes, specifically from VAT, extends to its transaction with Grand Plaza. Section 108(BXg) of the Tax Code effectively zero rates services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0Vo) rate (Grand. Plaza Hotel Corporation v. CIR, CTA Case No.7794, Februany 18,2017).

Exemption based on location The exemption or extent of exemption of a person may depend upon the location of its business. A Board of Investments (BOI)registered firm is granted exemption even if it is located and doing business within the customs territory. On the other hand, a special economic zone or freeport zone is granted exemption because it has to locate and conduct business within a geographically demarcated

TAX BASES

Actual sale of goods or ProPerties 'Tax base" is the amount or value on which the value added tax rate will be applied in computing the output tax. For a taxable person who sells goods or properties, the tax base is the "gross selling price," the total amount of money or its equivalent which

the purchaser pays or is obligated to pay to the seller in consideration ofthe sale, barter or exchange ofthe goods or properties, excluding the value added tax(Sec. L06tAl, NIRC). Thus, in the case of sale of appliances and other personal properties on installment basis, the entire gtoss selling price is subject to l27o VAT in the quarter of sale (whether the consideration is received in fulI or not in the quarter of sale). However, in the case of sale, barter or exchange on or after January 1, 1996 of real property subject to VAT, "gross selling price,' shall mean the consideration stated in the sales document iwhich may include cash, property, and evidence of indebtedness issued by the buyer). However, the commissioner shall determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange ofgoods or properties, where the gross selling price is unreasonably lower than the actual market value (Se c. 106[E] ' NIRC).If the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed tobe inclusiue of VAT.

Sale of goods As a general rule, the value added tax (output tax) accrues on sale ofgoods or properties (other than a real property) at the time of sale, when the sales invoice is issued, although none or only a part of the gross selling price is paid by the buyer at the time of sale'

area. 435

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Sale of real property Sale of real property may be for cash or on installment sale. A cash sale is subject to value added tax at the time of execution of the document of sale. The amount subject to value added on installment sales will depend on the initial pa5rments received during the taxable

year.

An installment sale is a sale of real property whereby the payment of the consideration therefor is not made in full at the time of sale but is deferred or staggered at a later date or dates. "Initial paymcnts" means paym.ents, which the seller receiues before or upon execution of the instrurnent of sale, plus the payments which he expects or is scheduled to receiue in cash or property (other than euidence of indebtedness ofthe purchaser) during the calendar year when the real property is sold.

In the case of sale of real property on the installment plan, where the initial payments do not exceed 25Vo of the total contract price or gross selling price, the tax base shall be the amount actually or constructively received during the taxable quarter. The seller shall recognize output tax and input tax shall accrue to the buyer at the time of the execution of the instrument of sale. On the other hand, in the case of a deferred payment sale not on the installment plan, where the initial pa5rments exceed 257o ofthe total contract price or gross selling price, the tax base shall be the entire gross selling price, in which case, even if only a part ofthe total consideration is received by the seller, his output tax is computed on the entire gross selling price. His subsequent receipt of the unpaid balance in succeeding years will no longer be subject to

value added tax that must be evidenced by non-VAT invoice or receipt (Sec. 4.106-7, Reu. Regs. No. 7-95).

If the sale of real property is on installment plan where the zonal value/fair market value is higher than the consideration/selling price, exclusive of the VAT, the VAT shall be based on the ratio of actual collection of the consideration, exclusive of VAT, against the agreed consideration, exclusive of VAT, appearing in the Contract To SeIVSale of SaIe applied to the zonal value/fair market value of the property at the time of the execution of the Contract To SelVContract of Sale at the inception of the contract. Thus, since the output VAT

is based on the market value of the property which is higher than the consideration/selling price in the sales document, exclusive of the VAT, the input VAT that can be claimed by the buyer shall be

Vlt,t tr Atrtrt,:l'l'nx t VA'l't 'lirx lhtHls

4:17

in the sales document issued by the scller. Therefore, the output vAT which is based on the market value must be billed separately by the seller in the sales document with specific mention that the vAT billed separately is based on the market value of the property (Sec. 4.106-4, Reu. Regs. No. 4-2007, February 7,2007). t,hc scparately-billed ou[put VA'l'

Sales discounts, returns, and allowances Sales discounts determined and granted at the time of

sale,

which are expressly indicated in the sales invoice relating to sales of goods or properties do not form part ofthe tax base; hence, deducted irom the gross selling price. The sales discounts must be recorded in the books of accounts of the seller. The grant of sales discounts must not depend upon the happening of a future event. Thus, discount granted after the buyer has achieved a certain sales volume quota for the period is not allowable deduction from gross sales. Senior citizens are entitled to 20Vo discount under R.A' 9257, otherwise known as the Expanded senior citizens Act of 2003. The tax base shall be the net sales after deducting the 20vo discoant granted to the senior citizen and the dealer may deduct such discount from its gross selling price without requiring the indication of the buyersenior citizen's TIN.I

Transactions deemed sale The tax base for transactions deemed sale, such as (a)

withdrawal of goods from business for non-business use; (b) business assets distributed to shareholders or investors as their share in the profits or to creditors in payment of debt; and (c) goods consigned lor a period exceeding 60 days, is the market value of such goods as of the occurrence of the transaction deemed sale' However, in the case of retirement from or cessation of business which is also a transaction deemed sale, the tax base shall be the acquisition cost or the current market price of the goods, whichever is lower (sec. 106[8], NIRC).

Commissioner's power to determine tax base If the gross selling price in the invoice is unreasonably lower

than the actual market value, the commissioner is authorized to rRev. Regs. No. 1-2007. R.A. 925? was amended by R.A. 9994 (Expanded Service Citizens Act of 2010) which grants 207o discount and exempts sales from VAT'

438

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4:J9

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determine and prescribe the actual market value to be used as the tax base. The gross selling price is considered unreasonably lower than the actual market value, if it is lower by more than 307o of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale (Sec. 106[D]

r:ornpanies), relativtrs b.y r:orrsrrttgtrinity or affinity within the fourth civil degree, even if'trlvcrotl ll.y an agreement to the contrary.2 To be subject to value added tax, the sale or exchange ofservice must meet all of the following essential requisites:

[3], NIRC).

1.

There is a sale or exchange ofservice or lease ofproperty enumerated in the law or other similar services;

Sale of services

2.

The service is performed or to be performed in the

The fundamental principle for the imposition of value added tax on sale of services is the performance of services in the Philippines. The value added tax accrues upon actual or constructive receipt of payment by the seller of service. Thus, when the seller received no payrnent, no ualue added tax (output tax) liability arises. Corollarily, if an amount of the contrqct price, fee or conxpensation is receiued by the seller, he is liable to ualue added tqx euen though he has not performed any seruice to the buyer during the quarter.

For sale of services, the tax base is gross receipts. The term "gross receipts" means the total amount of money or its equivalent, representing the contract price, compensation, seruice fee, rental or royalty, including the antount charged for materials supplied utith the seruices and deposits and aduaruce payments actually or constructiuely receiued during the taxable quarter for the seruices performed or to be performed for another person, excluding the ualue added tan (Sec. 108[A], NIRC), except those arnounts earrnarhed for payment to unrelated third party or receiued as reimbursement for aduance payment on behalf of another, which do not redound to the benefit of the payor. A payment is a "paSrment to a third party," if the same is made to settle an obligation of another person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice or official receipt issued by said third party to the obligor or debtor (e.g., customer or client of the payor of the obligation).

An advance payment is an "advance payment on behalf of another," if the same is paid to a third party for a present or future obligation of said another party, which obligation is evidenced by a sales invoice or official receipt issued by the obligee or creditor to the obligor or debtor (i.e., the aforementioned "another part") for the sale of goods or services by the former to the latter. For this purpose, "unrelated party" shall not include taxpayer's employees, partners, affiliates (parent, subsidiary and other related

Philippines;

3.

The service is performed or to be performed in the course ofthe taxpayer's trade or business or profession;

4.

The service is performed or to be performed for a valuable consideration actually or constructively received; and

5.

The service is not exempt under the Tax Code, special law,

or international agreement.

Ifany ofthe above essential requisites is not met, the transaction it may be subject to other percentage tax under Title V ofthe Tax Code.

is exempt from value added tax, but

The services of the following persons listed in Section 108 of the Tax Code are subject to value added tax:

1. 2.

Construction and service contractors; Stock, real estate, commercial, customs, and immigration

brokers;

3. 4. 5. 6.

Lessors ofproperty, whether personal or real;

Warehousingservices; Lessors or distributors of cinematographic films; Persons engaged in milling, processing, manufacturing or

repacking goods for others;

7.

Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, and resorts;

8.

Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;

':Sec. 4.108-4, Rev. Regs. No. 4-2007, February 7,2O07; Manila Jockey Club v. Collector and Philippine Tourist Trade Corp. v. Commissioner, supra.

440

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9.

Dealers in securities'

10.

Lending investors;

11.

Transportation contractors on their transport ofgoods or cargoes, including persons who transport goods or cargoeg for hire and other domestic common carriers by land relative to their transport ofgoods or cargoes;

12.

Common carriers by air and sea relative to their transport

of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; 13.

Sales of electricity by generation, transmission, and distribution companies, and electric cooperatives;

L4.

Services of franchise grantees of electric utilities, telephone

and telegraph, radio and television broadcasting, and all other franchise grantees, except those under Section 119 (franchise tax) of the Tax Code; 15.

Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and

16.

Similar services, regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.3

The GPP shall be treated. as a separate and. d,istinct taxable person from the ind.iaid.ual partners composing the partnership. - For VAT purposes, all gross receipts from the sales of services rendered by the partners for and in the name of the partnership shall be entirely taxable against the partnership. However, the sales of services made by any of the partners thereof, in his personal and individual capacity, shall not be attributed to the partnership, but shall be taxable against such partner as an individual professional. The GPP is treated as a separate and distinct taxable person from the individual partners composing the partnership. As such, in determining whether or not a professional's gross receipts exceed the prescribed VAT threshold, receipt of his share in the net income of the GPP, of which he is partner, should not be considered.

VAT is based, on income actually receiued.. - While it may that there was an overpayment because there was a decrease

be true

3Sec. 108(A),

NIRC, as amended by R.A. 9337; Sec. 4.108-2, Rev. Regs. No. 16-05.

I

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l

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irr l,lrc t:hirrl,cr ltinr lilr, l,lrc lrrw, ltowcvcr, is cxplicit that the l0o/oYAT slroulrl not be lrasccl orr lhc itrcomc that must have been received lrul, orr thc income that was actually received. Although the taxable transaction is the past, present or future performance of service, the t,ux accrues only upon actual or constructive receipt ofconsideration ( P hilippine Fast Feny Corporation u . Cornrnissioner, CTA Caee No. 6302, August 75, 2002).

VAT is not based. on gross billings. - In BIR Ruling No. 085-99 dated June 29, 1999, then Commissioner Beethoven Rualo ruled that reporting of output VAT based on accrual method of accounting is not correct and output tax liability should be recorded on cash basis. Indeed, petitioner erred in using its "gross billings" as basis in the computation and recording of its output VAT (PLDT a. Commissioner, CTA Case No. 5892, June 27,2002).

Gross receipts of HMO includ.es atnounts paid. to hospitals and. clinics. - The membership fees in connection with prepaid group practice health care program are subject to value added tax. The revenues ofhealth care providers are actually

derived from the application and membership fees being paid by their members. Thus, the basis for computing the tax shall be the gross receipts, which in this case shall be the payments for medical plans and application fees actually received from the members, undiminished by any amount paid or payable to owners/operators of hospitals, clinics and medical and dental practitioners (Philippine Health Care Prouid.ers a. Commissioner, G.R. No. 768729, April 24,2OOZ).

Advance rental payments Advance payment by the lessee which actually in the nature of: (a) a loan to the lessor from the lessee; or (b) an option money for the property; or (c) a security deposit to insure the faithful performance ofcertain conditions ofthe lessee to the lessor is not subject to value added tax. The receipt of a deposit as a requirement of the seller from his tenants in the form ofsecurity or collateral does not constitute a sale and the amount thereof does not form part of the lessor's gross selling price. It is only upon forfeiture of such deposit due to the customer's failure to fulfill certain conditions creating a taxable event that will justify inclusion of the deposit in the tax base (VAT Ruling No. 27688).

*I 442

lil

:vr r,rwr,lrr

Vlr,t

or'l'.,rxn'r'ror.r

25,2002).

Tax implications and recording of deposits/advances made by clients to GPP for expenses

1.

2.

Upon receipt ofthe cash deposits/advances from the client, the general professional partnership (GPP) shall issue an official receipt. The amount received shall be booked as income ofthe GPP and form part of the GPP's gross receipts and subject to VAT, if applicable.

The GPP shall record the expenses it incurred and paid on behalf of the client as its own expenses, for income tax purposes, ifthe official receipVinvoice issued by the thirdparty is in the name of the GPP. Said expenses, supported by official receipt/invoices issued by the third-party establishments in the name of the GPP, may be claimed by the latter as deductions from its gross income. Conversely,

44:l

tlrcsc cxpcns()H lnir.y trot llc claimed as deductions from the gross incottrc ol'thc clicnt. 3.

All payments made by the client to the GPP shall be allowed as deduction from its gross income as professional feels provided that they are duly substantiated by official receipts issued by the GPP pursuant to Section 34(AX1) of

To be exernpt from VAT, receipts couering reimbureed

expenses must be in na,mn of customcr. - Petitioner not only acted as the exclusive mining service contractor of DMC in the production/ extraction of dolomite ore from the mining claims owned by the latter in Cebu but also became the exclusive buyer of the raw dolomite ore it produced./mined for DMC. Thus, petitioner incurred two types of costs and expenses in its operations, namely: (a) those costs and expenses incurred by petitioner as a service contractor of DMC in mining and producing the dolomite ore which under the Service Contract were to be reimbursed by DMC; and (b) those incurred by petitioner in connection with the processing of the raw dolomite ore after buying them from DMC and before the same were sold to third parties. Only the costs and expenses under the first t5rye were covered by the Service Contract and reimbursed by DMC to petitioner. The second type of costs and expenses pertained to petitioner's independent operations and were borne solely by petitioner. To be exempt from value added tax, the receipts covering the reimbursed expenses must not be in the name of petitioner but that of the customer (Philippine Mining Ser-aice Corporation a. Commissioner, CTA Case No. 5725, July

Atrtrt,;t,'l',rx t VA'l't 'l'rt x llttncs

Reimbursement of expenses Generally, reimbursements do not form part of thc lax llrso of the seller of service, provided they conform to the requiremonl,n prescribed in the law or its implementing regulations.

rr,

the Tax Code. 4.

The GPP and client are not precluded from availing of the Optional Standard Deduction provided under existing tax laws, rules and regulations.

Tax implications and recording of deposits/advances for expenses received by taxpayers not Govered by RMG

89-2012 Depositslad.aances part of gross receipts: When cash deposits or advances are received by taxpayers, other than a general professional partnership (GPP) covered by Revenue Memorandum Order No . 89-2012, from the clienUcustomer, a corresponding Official Receipt shall be issued. The amount received shall be booked as income and shall form part of the Gross Receipts subject to VAT or OPT, and shall in turn be deductible as expense by the clienVcustomer, provided it is duly substantiated by Official Receipts pursuant to Section 34 ofthe Tax Code.

Claim for d.ed.uction of expenses: Receipts incurred, paid for and issued in the name of the taxpayer shall be recorded as its own expenses for income tax purposes. These expenses shall be claimed as deductions from gross income, provided these are substantiated by ORs/invoices issued by

third-party establishments. Incom,e payments are subject to

appropriate WT:

All clients/customers shall, upon payment of deposits/advances, withhold tax at the rate prescribed in Revenue Regulations No. 2-98, as amended, which shall be remitted/paid on or before 10th day of following month, except for taxes for December, which shall be filed on or before January 15 ofthe following year. For taxpayers using eFPS, regulations pertaining thereto shall apply.

444

Issuing

ll.t,:v t t,:wt,ttr

ORs

VAr rir'

oN'l'nxrvlror'r

for d.eposits and. ed.aances:

An OR shall be issued for every deposit and advance pursururl, to section 113 of the Tax code. The oR shall cover the entire amourrl, which the clienVcustomer pays. For VAT taxpayers, the VAT OR will constitute the output ttrx for taxpayers other than GPP and in turn, the input tax of its cliernU customer (RMC 76-2073, February 75,2073).4

Arrlt,:tr'l'nx (VA'l')

'lirr

44lt

llirsr,s

Media advertising 'l'hc tax basc on mcdia transactions is (a) the amount of gross rcccipts representing agency commissions received by an advertising irgency for the services it performed as a broker for the media and the rrdvertiser; and (b) the amount representing gross receipts derived by the media from its advertising service.

Travel agency

Reimbursemnnts from mall tenants for utilities are exempt fromVAT. - Petitioner paid charges for electricity, air-conditioning, water, common facilities and janitorial services based on the floor area occupied by each tenant and the lessees were made to reimburse these advances made in accordance with the lease agreements. It is not the petitioner who directly supplies electricity, water and similar other goods to the lessees, neither does it render security and janitorial services. What petitioner does is to pay PLDT, Meralco, MWSS, and other similar establishments for the services that they render and the goods that they supply for the whole Harrison Plaza Complex. Therefore, reimbursements sought from the tenants for advances made by petitioner are not subject to value added tax(Tourist Tladz and. Tlauel Corporation a. Commissioner, CTA Case No.4806, Januany 19,1996),

The value added tax on a travel agent is based on his gross receipts which will not include the (a) cost of airline or ship tickets, and (b) the reimbursement of expenses for services rendered by third party other than the travel agent and paid to such party. Typical of these reimbursements are passport and visa fees for all types of passengers and hotel room charges, bus and./or car tour charges, guide fees, resort fees and meal charges for tourists. Iftour packages are packaged and sold to domestic tourists, the value added tax will be based on the total receipts of the tour operator, excluding the fees paid to bus operators, resort and guide fees and meal expenses. To be excluded from gross receipts, said expenses must be supported by receipts issued by the supplying company or establishment.

Gustoms broker

The tax base includes charges for rooms, laundry and valet services, food and beverage consumption, corkage, handling charges for providing telephone, telex, cable, or fax services, cake shop sales, lease to concessionaires, compensation and other service fees. However, it does not include (a) service charges billed separately and actually distributed to waiters and employees; (b) actual cost of long distance and overseas telephone calls, fax, cable, telex and charges of the telecommunication companies collected by the establishment

Gross receipts of a customs broker do not include advances for port fees, such as arrastre, wharfage, stamps, etc., provided that in issuing receipts for the brokerage bill, the reimbursement for advances are segregated. The BIR has ruled that advances for expenses payable to the government entities and./or government controlled corporations and trucking, transportation, petty, representations and other miscellaneous expenses related to shipping, are excludible from the taxable gross receipts of a customs broker if: (a) the advances are billed separately and a non-vAT receipt is issued to the client for the total amount advanced; and (b) each person or entity who directly renders service to the broker's client for whom he advanced the payment, issues a receipUinvoice in the name of the client. aMany tax practitioners and taxpayers do not agree with the above administrative issuance. They believe that a deposit/advance (which is a liability account) does not automatically become the income of the professional or the contractor upon receipt thereof (for income tax and vAT purposes), provided that they can show that such advance/deposit is paid in the name oftheir clienucontractee as shown by the vAT/ NV invoice or receipt issued by the supplier ofgoods or seryices.

Hotel, restaurant, and caterer

from the customers for the concerned telecommunication companies, which are earmarked for payment to the latter; and (c) local taxes charged.

Hotel guests, regard,Iess of nationality, are subiect to ualue ad.d.ed.tar. - The saleof servicebyhotels, motels andinnsis subject to value added tax, regardless of the tax status of their customers, who could be citizens or foreigners. In the case of foreign guests of a hotel, the hotel and other charges paid by them are subject to the regular VAT rate, considering that zero-rating of services applies only to "seryices other than processing, manufacturing or repacking

446

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llt,:vtt,:wt,ltt oN'l'Axn.rror.t

Ar,r,r',rr'l'nx t VA'l't

447

'l'rrx llrgr.s

rendered to a person engaged in business conducted outside thc Philippines or to a non-resident person not engaged in businoss wh, is outside the Philippines when the services are performed."r' Proaiding limausine sertsice by a hotel to customers. .Iho hotel is not a common carrier subject to the three percent(Bo/o) common carrier's tax under section 115 of the 19gz rax code. petitioner is engaged in the hotel business and not in the business oftransporting passengers as defined in Article l7B2 of the New civil code. on the occasion when the petitioner extends transport services like providing limousine service and the like, it does so only for its hotel guests and not to the public in general. Respondent (commissioner) is thus correct in subjecting these revenues to the varue added tax.6 whether or not the common carrier's tax can be credited against the value added tax liability of the hotel operator, the authoi believes that it is not possible because only input taxes are creditable against output taxes. common carrier's tax is a percentage tax under Title v of the Tax code. The remedy of the hotel is to file a written claim for tax credit or refund within two (2) years from the date of erroneous payment of the tax. Gross receipts do not includ.e m.onies or receipts entn'sted. to the ta.xpayer which do not belong to thern and da nat rednund to the taxpayet's benefit. - It is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax code. The hotel room charges held in trust by a local travel agency for foreign tourists and travelers and./or correspondent foreign travel agencies and paid to local host hotels do not form part ofthe taxable gross receipts.z rhis decision is in accord with the earlier ruling of the supreme court in another case.sThus, the amounts are delivered to the Board on Races, the horse owners and the jockeys. These amounts are merely held in trust for distribution as prizes to the owners of winning horses. They are destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning horses. BIR contends that gross receipts include the entire gross receipts of a taxpayer undiminished by any amount, and the only exception sSec. 108(BX2), as amended by R.A. 9887.

.Manila Mandarin Hotels v. Commissioner, CTA Case

No

[o this rule is whctt tltcrc is tr lttw or regulation, which would exempt

liutrt t,hc lax. 'lhe Supreme Court ruled that the term "grols reeeipts" subject to tax do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the foreign trauel agencies to the priuate respondent do not form part ofits gross receipts within the defi.nition of the Tax Code. The said receipts neuer belonged to the priuate respondent. The priuate respondent neuer benefited from their payment to the locol hotels. This arrangement was only to q.ccommodate the foreign trauel agencies. If the hotel room charges entrusted to petitioner will be subject to the three percent (SVo) contractor's tax qs what respondent would want to do in this case, that would in effect do indirectly whqt P.D. 37 tttould not like hotel room charges of foreign tourists to be subjected to hotel room to'tc. Although respondent may claim that the three percent (3E') contractor's tax (replaced by ualue added tax in 1988) is imposed upon a different incidence; i.e., the gross receipts of petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though dffirent, it nonetheless imposes a tax actually on roon'L charges. One way or the other, it would not haue the effect of promoting tourisrn in the Philippines as that would increase the costs or expenses by the addition of a hotel room tqx in the ouerall etcpenses of said tourists.e such gross receipl,s

Tolling fees receiaed' by a hotel for PLDT is not part of

its gross receipts. - The definition ofgross receipts refers to the amount of money actually or constructively received by the taxpayer as service fees. There is no reason why the hotel should include tolling charges for the overseas calls made by its guests as part of its gross receipts, because these are charges of PLDT. This ruling is consistent with the decision of the Supreme Court in the cases of the Collector u. Manila Jochey CIub, 108 Phil. 821, and Commissioner u- Tours Specialists and CTA, 183 SCRA402. Moreover, the demolition of civil

works in the building of petitioner paving the way for a renovation thereofper se cannot be considered subject to value added tax. The same is true with the retirement of the operating equipment' (e.g., silverwares) because the reason for their retirement was due to loss or

. E046,March24,lgg7

?Commissioner v. Tours Specialist and CTA, G.R. No. 66416, March 21, 1990. sCollector v. Manila Jockey Club, 108 Phil. 821 (1960).

eCommissioner v. Tours Specialists, Inc. and CTA, G.R. No. 66416, March 21, 1990.

ql 448

ll.t,:vrr,:wr,:rr

(vn'r')

u^"''

oN'l'nxl't.rolr

44e

f;]l';';,,1^x obsolescence but not the sale thereof'subject to value added tax. 'l.hc

selling of unserviceable equipment and other assets, including reul property improvement are not subject to value added tax. The selling of these assets are merely incidental to its renovation. Petitioner is in the hotel business. Where the law taxes a business, it is presumed to be the legislative intent not to separately tax every activity which is merely incidental or necessary to the conduct of said business (Manila Mandarin Hotels u. Commissioner, CTA Case No.5046, March 24,7997).

VAT on operator of tollways. Tollway fees are not taxes. They are not assessed and collected by the BIR and do not go to the general coffers of government. A tax is imposed under the taxing

power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Taxes may be imposed by the government under its sovereign authority, while toll fees may be demanded by either the government or private persons as an attribute of ownership. Accordingly, VAT on toII fees is not a tax on tax. The CIR did not usurp legislative prerogative or expand the VAT law's coverage when she sought to impose VAT on tollway operations. Section 108(4) of the Code clearly states that services of all other franchise grantees are subject to VAT, except as may be provided under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions under Section 109 ofthe Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have been well for the law to clearly say to. Tax exemptions must be justified by clear statutory grant and based on language in the law too plain to be mistaken. But as the law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is found. PAGCOR is exempt from VAT pursuant to its charter, P.D. 1369. Being a special law, P.D. 1869 prevails over R.A. 7216, a subsequent general law. To be valid, repeal of a special law by a general law should be express (CIR a. Acesite Hotel Corp, G.R. No. I4Z2\S,

Februany 16,2007).

Non-life insurance company Tax base consists of the total premiums collected whether such premiums are paid in money' notes, credits or any substitute for money. It does not include (a) premiums refunded within six (6) months after payment on account of rejection of risk or returned for other reason to the person insured (return premiums); (b) premiums

on reinsurance of a company that has already paid the tax; (c) premiums on account of any reinsurance, if the risk insured against covers property located outside the Philippines; and (d) documentary stamp tax and local tax passed on by the insurance company to the insured. Premiums collected from crop insurance,life and disability insurance, and health and accident insurance policies are excluded from the tax base.

Dealer in securities For sales of securities listed and traded in the local stock exchange, the tax base is gross income derived from their sale or

exchange of such securities. "Gross in'come" means the excess of total gross selling price over the total acquisition cost ofsecurities sold for the month or quarter plus other or incidental income. The value added tax on "over-the-counter" transactions is the gross income as indicated in the VAT invoice; otherwise, the tax shall be computed by multiplying 1/11 of the total invoice amount.

A pre-need company is considered as a dealer in securities *Gross irtcorne" subject to value added tax on gross income received. means actual receipts on contract price minus contributions to the trust funds to be set up independently as mandated by the Securities and Exchange Commission. The amount of such contribution is required to be indicated in the official receipt; otherwise, the entire amount will be subject to tax.

Security agencies Security agencies, whether in the form of a sole proprietorship or in corporate form, are subject to value added tax based on their gross receipts representing their agency fees, exclusive of the amount intended or earmarked for salaries of the security guards, provided that the contract must show the breakdown between the agency fee and the security guards' salaries. The client shall be entitled to input tax only on the agency fee covered by VAT receipts. The legal basis for the new position is that under R'A- 6727 (Wage

450

Ilt,:vtt,twt,:tr

u^"'l;l'J';'i,lirx

ott'l'lxn'troru

Rationalization Act), the liability of securitics lbr increases in wage rates of workers are explicitly required to be borne by their principuln or clients of construction/service contractors and the contracts aro deemed accordingly. Also, under R.A. 5487, the amount of salary or compensation of security guard ofprivate detective shall be earmarked and set aside. The same shall be segregated from the monies received by the agency from its clients as an amount reserved for the remuneration of the guard of detective. After all, the security agency has no control or dominion over the portion of payment earmarked as salaries of guards (RMC No.39-2007, January 22,2007).

Movie and Cinema Houseslo Theatres and movie houses are not included in the enumeration of taxable services in the VAT law. However, they were added among the taxable sellers of services in the regulation on account of the phrase "other similar services" in the definition of the term "sale or exchange ofservices" in Section 108 ofthe Tax Code. In the recent decision ofthe CTA involving movie houses, the Tax Court ruled that they are exempt from value added tax. The history of the value added system reveals the legislative intent to subject certain sales ofservices to value added tax and others to percentage tax or amusement tax. The activity of showing cinematographic films, by tradition, is considered not as service covered by value added tax, but as an amusement subject to amusement tax. Although Commonwealth Act No. 466 provided that the amusement taxes from gross receipts received by the proprietor, lessee, or operator of theaters, cinematographs, concerb halls, circuses, and other places of amusement shall be collected, the collection of amusement taxes on such places of amusement paid on admissions was transferred to the Iocal government units under P.D. 231 (Local Tax Code), which took effect on July 1, 1975. While the phrase "to the exclusion of both the national or municipal government" is no longer found in R.A. 7160 (Local Government Code of 2001), it does not mean that the national government is now empowered or authorized to levy and collect tax on the gross receipts from admission fees collected by the operatorV proprietors of theaters, cinemas and other amusement places without the Congress enacting a statute enabling the national government to do so. When the legislature enacts a provision, it is understood that it is aware of preuious statutes relating to the same subject matter and that in the absence of any ex,press repeal or amendment therein, the new

(VA'r')

4t't

prcuision should be deenu,d. cnu,cted pursuant to the Legislatiue policy embod.ied in the prior st
(A)

Sale or importation of agricultural and marine food products

in their original state, livestock and poultry of or king generally

used as, or yielding or producing foods for human consumption; and

breeding stock and genetic materials thereof. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, dryrng,

salting, broiling, roasting, smoking or stripping. Polished and./or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state; (B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

(C) Importation of personal and

household effects belonging from abroad and nonreturning Philippines of the to the residents Prouided,That Philippines: in the resettle to coming citizens resident the Tariff and under duties from customs goods exempt are such Philippines; the of Customs Code

(D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects trSM Prime Holdings and First Asia Realty Dev. Corp. v. Commissioner, CTA

'oRMC 28-01, JuJy 2,2001; VAT Ruling No. 31-2000, September 8, 2000.

Case No. 7079, December L4,2O06.

I 452

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(except any vehicle, vessel, aircraft, machinery other goods lirr usc irr the manufacture and merchandise of any kind in commercial quantil,.y) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change ofresidence is bona fide;

(E) (F)

Services subject to percentage tax under Title V;

(G)

Medical, dental, hospital and veterinary services except

Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

those rendered by professionals;

(H) Educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions;

(I)

Services rendered by individuals pursuant to an employer-

employee relationship;

(J)

Services rendered by regional or area headquarters

established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

(K)

Transactions which are exempt under international

agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;

(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing oftheir produce; (M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;

Arrtrt,:r'l'nx ( VA'l') 'l'rrx llrtst,s

453

(N)

Sales b.y nott-ttgricttltural, non-electric and non-credit c<-roperatives duly rcgistered with the Cooperative Development Auihority: prouided., That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless ofthe aggregate capital and net surplus ratably distributed among the members;

(O)

Export sales by persons who are not VAT-registered; (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course oftrade or business or real property utilized for low-cost and socialized housing as defined Uv nepuUtic Act No. 7279, otherwise known as the Urban Development and Housirrg Act of 1992, and other related laws, residential lot valued at one million five hundred thousand pesos (F1,500,000)1'z and below, house and lot and other residential dwellings valued at Two million five hundred thousand pesos (F2,500,000)13 and below: (3) Prouid.ed.,That not later than January 31, 2009 and every three their to adjusted be shall stated herein years thereafter, the amount present values using the consumer Price Index, as published by the national Statistics Office INSO);

(Q)Leaseofaresidentialunitwithamonthlyrentalnot

exceeding Ten thousand pesos (F10,000);1a Prouided, That not later

than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to their present values using the consumer Price Index, as published by the national Statistics Office (NSO);

(R)

printing or publication of books and any or bulletin which appears at regular review newspaper, ,,'agurlttu and sale and which is not subscription prices for intervals with fixed paid adverbisements; of publication the devoted principally to Sale, importation,

(S)

Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;

(T)

Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; (U) Services of banks, non-bank financial intermediaries tT*re..""d t"

F1,919,500 beginning Jan:uary L,20:12 under Rev. Regs' No. 162011, october 27,2}ll and clarified in Rev. Regs. No. 3-2OL2, February 2O,2O12. l3lncreased to F3,199,200 beginning January 1, 20L2, ibid' lalncreased to F12,800 beginningJanuary 1, 2Ol2'ibid'

454

l},:vr r;wr:rr oN'l'nxl,t,ror.r

performing quasi-banking functions, and other non-bank linancial intermediaries;

(V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and,/or receipts do not exceed the amount of One million five hundred thousand pesos (F1,b00,000):t6 Prouid.ed., That not later than January 31, 2009 and every three (B) years thereafber, the amount herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the national Statistics Office (NSO).

CI{APTER IC(

RATES OF VAT

Output Tax

1. 2.

l2%o standard

\Vo

rate;

(zerotale).

lnput Tax

1. 2. 3. 4. 5.

I2Vo slandard rate; \Vo

(zetotate);

27o Lransitional 4Eo pteslTmptive 1Vo

or I2Vo actual input tax rate;

input tax rate; and

finalwithholding tax rate.

The L27o standard rate and o7o (zero rate) are applied directly value on the tax base. Transitional input tax rates are applied to the of goods existing at the date a person commences business and,/or beimes liable to the value added tax. A presumptive input tax rate is applied to purchases of VAT-exempt goods used as inputs by a VAT-regist"rud p"I'.o,, in manufacturing or processing certain food products.

In general, sale ofgoods, properties and services subject to value added ta'x are subject to the !2vo standard rate beginning February 1,2006.

Sale of goods The following transactions involving sales of goods ate zeto' rated: 1.

(aetual-cxpad-sald' The rblncreased to F1,919,500 startingJanuary 1,2012 underRev. Regs. No. 16-2011

dated October

27

,2011.

455

456

lil,lvil,;wl,:rr oN 'l'nxA,nr

rr,r

paid in acceptable fbreign currency or its equi..,el,(,ttt in goods or seruices and accounted for in accordancc with the rules of the Bangko Sentral ng Pilipina.s (BSp). payment of the export proceeds in equivalent goods or services is

allowed in order to promote exchange deals between or among corporations belonging to the same group(s) or even between unrelated parties doing business in the region or in the world. After all, the inward remittance of foreign currency (for export sales) will be compensated by an equal amount of another foreign currency to be remitted outwardly (for import of goods). To avoid future assessment or issue on this matter with the BIR, the BSp and the BIR may be requested to issue a Certification or Ruling, respectively, confirming that the exchange deal complies with the accounting requirements or liquidation of the foreign currency under the BSp Circulars and Tax Code. 2.

Sale ofgoods, which are considered as "deemed', export sale by a VAT-registered person to certain entities who are also residents of the Philippines, such as:

a.

Internal or constructive export sales. The term "internal or constructive export sales" -covers sales of raw materials or packaging materials to export-

oriented enterprises, which the Tax Code considers as export sales at the level of the supplier of raw materials in the Customs Territory. The sale by VAT-registered person of raw materials or packaging materials to a non-resident buyer is eligible for zerorating, if the (a) raw materials or packaging materials are delivered, (b) to a resident (local) export-oriented enterprise, (c) to be used in manufacturing, processing or repacking in the Philippines of the said buyer,s goods, and (d) such sale is paid for in acceptable foreign currency and accounted for in accordance with BSP rules. Moreover, sale by a VAT-registered enterprise of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 7IVo ofhis total production is eligible for zerorating. Any enterprise whose export sales exceed 70Vo ofthe total annual production ofthe preceding taxable year shall be considered an export-oriented enterprise.

tr'l',lr t VA'l't llrrllrr ol VA'l'

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4lt7

"Oonridered erport sales undrcr E'O'

226" shall rncan the Philippine port F.O'B' value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer' or the net sellingprice ofexport products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same: Prouided, That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents. Prouided, further, That pursuant to E.O. 226 and other special laws, even without actual exportation, the following shall be considered constructively exported for purposes of these provisions: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones, pursuant to R'A' 7916. as amended. 7903, 7922, and other similar export processing zones; (3) sales to enterprises Meiropolitan Authority pursuant to R.A. 7227;1 (4) sales io registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board of Investments in consultation with the Bureau of Internal Revenue and the Bureau of Customs; and (5) sales to diplomatic missions and other agencies and./or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not.z enterprises operating within the special economic zones and fieeports (Clark, Poro Point, Camp JohLHay, uttd Motottg, Bataan) pursuant to Sec' 15 of R'A' six(6) months 7227 , asamended, were granted tax amnesty by paying F25,000 within tax and -.R"gi"t"red the applicable and 200?, 20, March approved from the effectivity ofR.A. 9399, the duty liabilities (i.e., difference between all national and local tax impositions and gross income). (\Vo) on tax flnal five percent 2The underlined provisions have been added by sec. 4.106-5 0fRev. Regs. No. E.o. 226" 4-2007 ,February 7 , 2007 . The definition of "considered export sales under and to ecozone territory customs in the a vAT-registered is expanded to make sales by

458

Itt,;vt t,:wt,:tt oN'l'Axn,r'ron

V,rr,r rr,:

registered export traders shall include commission income. The exportation of goods on consignmen[ shall not be deemed export sales until the export products consigned are in fact sold by the consignee. Sales of goods, properties or services made by a VATregistered supplier of a BOl-registered manufacturer/ producer whose products are lo07o exported are considered export sales. A certification to this effect must be issued by the Board of Investments, which shall be good for one (1) year, unless subsequently re-issued by the BOI. Effectively zero-rated sales. The term "effectively zero-rated sale of goods and properties" shall refer to the local sale of goods and properties by a VATregistered person to a person or entity who was granted direct and indirect tax exemption under special laws or international agreement.

It is not the person

enjoying tax exemption

privilege under special law or international agreement

which is given the privilege of enjoying zero-rating under the VAT law, but the sales (by suppliers) to such persons or entities which may be subject to zero rate.3

Likewise, in the case of Coconut Oil Refi'ners Association, Inc., et al. u' Hon' Executiue Secretary Ruben Torres, et al- (G-R. No' 132527, July 29, 2005), the Supreme Court explained that "the provision of incentives, such as tax and duty-free importations of raw materials, capital and equipment, should be interpreted within the context and in a manner that would promote in the fullest manner and objects of the legislature. Hence, all goods needed in the ecozone or freeport zone and which are used and consumed within the ecozone or freeport zone should enjoy tax and dutY exemPtion."

Sales to entities, the exemption of which under a

special law or an international agreement binding to the government ofthe Philippines effectivelyzero rate such sales, are effectively zero-rated. Sales ofgoods or

property to persons or entities who are exempt from direct and indirect taxes under special laws; eg., sales to enterprises dulyregistered and accredited with the Subic Bay Metropolitan Authority (SBMA) pursuant to R.A. 7227, sales to enterprises duly registered and accredited with the Philippine Economic Zone Authority (PEZA) or international agreements to

freeport enterprises automatically zero-rated. corollarily, the definition of"effectively zero-rated sales" in sec. 4.106-6 is restricted to transactions that grant direct and indirect tax exemption under special laws and international agreements. sBIR Ruling No. 077, March 4, 1988; Lepanto Consolidated Mining Co. v. Commissioner, CTA Case No. 4629, December 21, 1998.

ol VA'l'

which l,ho l'hilippines is signatory, such as Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc', shall be effectiuely subject toVAT at zero percent'a (Jnder their respectiue law s - R.A. 7 9 1' 6 for PE ZA-registered enterprises and R.A. 7227 for SBMA-registered enterprises - their geographical tenitories are regarded as foreign soil by fiction of law, pursuant to the Supreme Court d'ecisions' Thus, in the case of Commissioner of Internal Reuenue u. Seagate Technology (Philippin'es), (G'R' No' 153866' February 11, 2005), and Commissioner of Internal Reuenue u. Toshiba Information' Equipmen't (Phils')' Inc. (G.R. No. 150154, August 9,2005), the Supreme Court ruled that as a special economic zone (ecozone or freeport zone), indubitably a geographical territory of the Philippin'es, is regarded in law as a foreign s;oil. Accord'ingly, all articles may be imported by an ecozone or freeport zone enterprise free ofcustoms and import duties and natiortq'l internal reuenue tcuces' except those articles prohibited under the PEZA or SBMA law ond' those absolutely prohibited by other general or special law. Articles which are admitted to the ecozone or fteeport zone frorn the Customs Territory und'er proper permit shall be considered as exported'

For purposes of zero-rating, the export sales ol'

b.

4lt9

Arrtrr';rr'l'A\ ( VA'l')

ll.rrt.r.rr

In said decision, the Court explained the clear legislative intent, uiz.: "For as long as the goods remain within the zone, whether we call it an tS"" 41064(c), Rev. Regs. No. February 7,2007.

16-05 was amended by Rev' Regs'

No'

4-2007

'

460

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(VA'l')

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economic zone or a freeport zone, fbr a$ long us w(l

pursuunt, [o VA'l' Ruling No. 378-88' which declared ihat sale of gold to the Central Bank of the Philippines (now BSP) was considered as export sale' BIR also issued. RMC 59-88 and no less than fiue subsequent rulings were issued', confi'rming the same position' On J aniary 2 3, 7 g g 2, the BIR is su'e d VAT RulinS No' 00 8 92, d,eciaring that sale of gold to BSP is subject to 70Vo VAT. Subsequently,VAT Ruting No.59-92 was issued, reiterating ihat the sale of gold to BSP is treated as a d.omestic sale. The Supreme Court ruled that the to petitioner by the retroactiue application prejudice 'of No. 008-92 is patentlv euident' By the Ruliig VAT claim its of d,enial for refund or tq'x credit, petitioner precluded been has from recouering its input tax costs sales of gold during said period, its to attributibte

that all goods entering this particular territory will be duty-free and tar-free, for as Long os they remain there, consumed there or re-exported or destroyed in thq.t place, then they are not subject to the duties and teres in accordance with the laws of the Philippines.' say in this law

Except for export sale under Section 4.106-5(a) and foreign currency denominated sale under Section 4.106-5(b), other cases ofzero-rated sales shall require prior applicatioru with the appropriate BIR office for effectiue zero-rating. Without an approved application

for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-rating.5

Should the tox,payer still apply for VAT zerorating on sales it made prior to the effectiuity of RA. 9337? - The contract ofsales ofindustrial gases to PEZA-registered enterprises entered into priorto the effectivity of R.A. 9337 are subject to zero percent (OVo) YAT and require no prior approval for zerorating by the BIR based on RMC 74-99.It must be noted that Revenue Regulations No. 16-05 amended RMC 74-99. Thus, under the new regulations, sales to PEZA-registered enterprises require prior application for effective zero-rating and approval by the BIR appropriate office. Without an approved application, the transaction is otherwise considered as exempt.

it could not pass on to the BSP the 10Vo would. be retroactiuely imposed on said which VAT,

because

transactions, not hauing passed the same q't the time the sales were noade on the assumption that said sales are subject to zero percent (07o) and rnay be refunded or credited later.T So as to encourdge the sale ofgold to the BSP, the d'oubt as to zero-rating of this transaction w&s remoued.by R.A.7716 beginning January 1, L996'

d.

jewelry, perfumes, toilet waters, yachts and other

vessels intended for pleasure or sports under Section

150 of the Tax Code, assembled or manufactured in the Philippines for delivery to a resident of the Philippines, paid for in acceptable foreign currency and accounted for under BSP rules are zero-rated'

However, since the taxpayer's contracts of sales were entered into prior to the effectivity of R.A. 9337 and

Revenue Regulations No. 16-05, their provisions requiring prior application for VAT zero-rating do not apply.6 c.

Sale of goldto L}re Bangho Sentrq,l ng Pilipiruqs (BSP).

of the VAT law by R.A. - Before the amendment 7716 (1996), gold sale of

to the BSP was zero-rated

6Sec. 4.106-6, Rev. Regs. No. 16-05, September 1,2005. This provision in Rev. Regs. No. 16-05 was amendedbyRev. Regs. No. 4-2007 datedFebruary 7,2007. 6BIR Ruling No. DA-735-06, December 19, 2006.

goods; except (a) automobiles under Section 149 of th" Tu" Code and (b) non-essential goods, such as

e.

The sale of good.s, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations' The same is limited to goods, supplies, equipment and fuel

pertaining to or attributable to the transport ofgoods and passengers from a port in the Philippines directly to a foreign port, or uice uersa, without docking or

TCommissioner v. Benguet Corporation, G'R' No' 145559, July 14' 2006'

462

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u^'"'i,li::,i''ll,''rli,l,un''''

or'l'nxA't'tor,r

stopping at any other port in the l)hilippincs, ltnloHH

the docking or stopping at any other Philippinc port is for the purpose of unloading passcngorn and/or cargoes that originated from abroad, or kt load passengers and/or cdrgoes bound for abroad:tr Prouided, further, That if a portion of such fuel,

goods or supplies is used for purposes other than that

mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 107o or 72o/o VAT. The phrase *without doching or stopping at any other port in the Philippines' has been interpreted under Reuenue Regulations No. 4-2007 to meqn an international airline that ma.kes a stopouer in a Philippine port to unload passengers and / or cargoes from foreign destination or to pick up passengers and / or cargoes for foreign destination is deemed not to haue docked or stopped at any other port in the Philippines. Seruice charges to foreign aessels engaged. in intenrational - The docking charges computed based on U.S. dollars and converted in its equivalent Philippine pesos received by petitioner for docking (luggage entrance) and undocking services (luggage departure) rendered to foreign vessels (foreign principals) is zero-rated, even if the company did not bill directly the foreign

paid may be refunded of its sales, then 100%' of'il's rrct input taxes Commis.sioner' CTA Ui"t" bonsolida.ted Mining Cirnpany u'2L' bie Nos.445,4629 ond' 4874, December 7998)' I

Zero Percent (0%) VAT on sale of services by VATThe following services performed in the Philippines

registered persons-shall be subject' to zero percent

1.

2.

shipping is zero-rated.

principal but billed only its local husbanding agent, and that the payments were not received in foreign currency but in pesos pursuant to Section lo2(a)(2) of the Tax Code and BIR Ruling No. 054-92 dated April 28, 1992 (Philippine Sinter Corporation a. Cornntissioner, CTA Case No.4447, January 26, 1995).

Effeetiuely zero-rated. sales to PEZA and. BOl-registered firms. -E.O. 226 falls within the meaning of "special law" as

contemplated by Section 100(aX2) of the Tax Code, as amended by 8.O.273. Notwithstanding the absence of actual exportation, sales to PASAR and PHILPHOS, being BOI and PEZA-registered and exportoriented enterprises, are effectively zero-rated pursuant to Articles 23 and 77 of the Omnibus Investments Code uis-d.-uis Section 100(a)

(2) of the NIRC (Atlas Consolid.ated Mining & Deueloptnent Corporation u. CTA and Commissioner, CA-G&. SPNo. 34752, February 6, 7998). The law does not require that IOOVo ofits sales be actually exported. For as long as an enterprise exports over 70Vo

46:l

3.

(O7o) rat'e"

other Processing, manufacturing or repacking goods for

persons aling business oottid" the Philippines which are goods u"" ,ob-r"qoently exported' where the services for accounted and currency ioreign [aid for in accepiable t'heBangko of regulations and rules in accordan." *ith th" Sentral ng PiliPinas (BSP)' or repacking Services other than processing, manufacturing

renderedtoup",ro"""g"gedinbusinessconductedoutside in the Philippinls or to a non-resident person not engaged services the when business *tto it outside the Philippines paid for in are performed, the consideration for which is accordance in for u"""ptubl" forelgn currency and accounted with the rules ind regulations of the Bangho sentral ng PiliPinas (BSP). Services rendered to persons or entities whose exemption which under special laws oi international agreements-to supply the subjects philippines effectively is a signatory the of such ,""oi"". to zeto percent (07o) tate' Transactions fallingwithinthisprovisionarecalledeffectivelyzero-rated provision is sales. The po"po," ofthe effective zero-rating from the relief complete such maintain to recogniJe and certain by enjoyed be to intended as tax burden ofindirect by agreements international or laws entities under special zero-rated' be to entities such to permitting sales Services rendered to persons engaged in international shipping or international air transport operations' i""f"ai"E leases ofproperty for use thereof' The services referredto herein shall not pertain to those made to carriers by air and sea relative to their transport in the "o--o" ;i;;;.;"g""r, good* or cargoes from- one place same the Philippines' Philippine-s to another place in the 108 Section under rate i"id t"U:"ct to the regular VAT ofthe Tax Code.

464

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Services perfbrmed by subcontractors and./or contntctonr in processing, converting, or manufacturing goods fbr an

enterprise whose export sales exceed

70a/o

of toLal annual

production.

6.

7.

465

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Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross receipts ofinternational air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to a percentage tax of three percent (3%) based on their gross receipts as provided for in Section 118 of the Tax Code, but shall not be liable to VAT. Sale ofpowerorfuel generatedthroughrenewable sources of energy, such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources suing technologies such as

fuel cells and hydrogen fuels. Zero-rating shall not apply strictly to the sale of power or fuel generated through renewable sources ofenergy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power.

All other taxable sales of services not entitled to zero-rating shall be subject to the regular VAT rate of I}Vo or l2%o. The purpose of applying zero percent (OVo) rate on a taxable transaction is to exempt the transaction completely from value added tax previously collected on purchases. This arises because the sales of the VAT-registered seller are subject to zero percent (07o) raIe, while the input taxes on his purchases passed on to him by the VATregistered suppliers may be recovered back from the BIR in the form oftax refunds or credits.

Seruices other than processing, manufacturing, or repacking of good.s must liheuise be perfonned. for persons d.oing business outsid.e the Philippines. - A foreign consortium entered into a contract with NAPOCOR for the operation and maintenance of the latter's power barges. Respondent subcontracted the actual operation and maintenance of the barges and other acts which have to be done in the Philippines, which was paid by the consortium in foreign currency inwardly remitted to the Philippines through the balking system. To ascertain the tax implications of the transaclion6, respondent secured BIR Ruling No. 023-95, which

the

declarecl that il'rcspotttlt'ltl' rcgisters as a VAT person and consideftrtion fbr its sr:rvic()s is paid fbr in acceptable foreign currency ofthe and accounted for in accordance with the rules and regulations at vAT to subject be shall Borgho sentrql ng Pilipina.s, the serwices taxpayer' VAT a as zero rate. Hence, respondent registered

In Decembe r, !997 , respondent availed of the BIR's Voluntary Assessment Program for the year 1996, interpreting Revenue Regulations No.

S--90

to mean that its sales of services to the consortium

VAT return wa"s subject to the lovaYAT.It filed an amended 1996 year. Thereafter, for the Iiability tax output its as arrd paia 56.9M BIR reconfirmed which 003-99, No. Ruling vAT secured subject are """porra"rrt services respondent's that held which Ruliing No. 028-95 toVATat,zetopercent(oVo).onthisbasis,respondentfiled'aclaim 1996 for the issuances of a tax credit certificate with the BIR on the outpot vAT it had erroneously paid when it availed of the VAT. The BIR argued that respondent's services are not destined for consumption abroad, and they are not of the same nature as project studies, information services, engineering and architectural d""igor, and other similar services mentioned in Section 4.L02-2(b) (07o) (2) oT Revenue Regulations No. 5-96 as subject to zero percent

VAT. Therefore, respondent's services cannot legally quali$r for zero percent (07o) VAT but are subject to the regular LDToYAT' The CTA ruled in favor ofthe respondent, stating that the latter (a) payment of complied with the requirements for zero-rating, to wit" fees in acceptable foreign currency; (b) foreign currency was "".rri"" remitted into th" Philippines; and (c) inward remittance is inwardly The CA accountLd for in accordance with BSP rules and regUlations. affirmed the decision of the CTA. The Supreme Court reversed the decision of the CTA and CA'

TheTaxCodenotonlyrequiresthattheservicesbeotherthan

processing, manufacturing or repacking of goods and that payment io, soch se-rvices be in acceptable foreign currency accounted for in zeroaccordance with BSP rules. Another essential condition for vAT outside business is doing services rating is that the recipient of such in the tfre ff,iUppines. While this requirement is not expressly stated first in the provided is clearly this second purugxuph ofsection 102(b), be must "for services listed the paragraph Jf Section 102(b) where Section When Philippines." the outside ith"r"p"rrons doing business under 102(b)i2) stipulatei payment in,,acceptable foreign currency'' of-services payer-recipient the BSP rules, the law clearly envisions

tobedoingbusinessoutsidethePhilippines,sinceonlythosenot

466

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doing business in the Philippines can be required undcr lJSl, rulos to pay in acceptable foreign currency fbr their purchase of'goods or services from the Philippines. Significantly, the amended Section 108(b) [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactionn subject to 0VoYNl are "[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."

Is Royal Mining's t:lrtitn ntcritorious? Explain. Suggested answer: Miningls claim is not meritorious because it is the sale not siluer) to the BSP that is considered as export sale subject to zero-rated VAT' No, Royal

of gotd. (and.

zero-rating dnes not require that the seroices be d.estined' Section for consumptioi abroad. or be erported,. - Note that while in services of the pa5rment requires only iOStgltZl of th" Tax Code acceptable foreign currency, accounted for in accordance with existing BsPregulations, vAT Ruling No. 040-98 requires that the s€rvices

However, the Supreme Court still favored the respondent. The implied revocation of BIR Ruling No. 023-95 and VAT Ruling No. 00399 cannot apply retroactively as the rulings were what respondent invoked in applying for refund of the output tax (Commissioner a.

be,,destined for consumption abroad" and'not rendered within the Philippines." In fact, said VAT ruling appears to digress eve-n from the very revenue regulations which it purports to interpret. section 4.102-2(b)(2) of Revenue Regulations No. 5-96 does not require that the services to be rendered by a vAT registered person be destined, consumed or rendered abroad.

As explained by the Supreme Court in the Burmeister case, "Ifthe provider and recipient ofthe'other services'are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) of the 1977 Tax Code can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient ofservices. To interpret Section 102(bX2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity ofthe taxpayer. The provider ofservices can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution." (Accenture u. CIR, G.R. No.790702, July 77,20L2).

In sum, it is very that VAT Ruling No. 040-98 not only expands the language of section 108(BX2) but also of Revenue Regulations No. s-90 which interprets said statute. The same cannot be countenanced. It is a settled rule of legal hermeneutics that the implementing rules and regulations cannot amend the act of Congress (National Tobacco Cirporation a. COA, 511 SCRA 755) for administrative rules and ."gllatiottr are intended to carry out, not supplant or modifr, the law (Grego u. COMELEC,274 SCRA 48L; Amcrican ExprLss International - Phitippine Branch a. Cotnrnissioner, CTA Case No.6099, APril L9,2002).

Burmeister and Wain Scand.inaaian Contraetor Mjndanao, Inc., G.R. No. 753205, Januany 22, 2OO7).

Bar Question (2006) Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being sold to the Bangko Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under

Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral are considered export sales subject to zero-rated VAT.

Source offoreign cutnency is not required by laut to be zero-rated.. - In urr.llittg of the zero-rating incentive provided by law for foreign currency remittance in our country, it is sufficient that foreign currency inwardly remitted in our economy. we do not give much ado as to where the money is sourced for as long as the foreign currency remittance in our country is tluly acco,unted for in .".ofoun"" with the rules and regulations of the BSP (Placer Dome Technical sertsiees [Philippines] a. commissioner, cTA Case No. 5685, March 79, 2002). Sale of serttiee to NPC is effectiaely zero'rated' - NPC is an entity with a special charter (R.A. 6395), which categorically makes it exempt from payment of all taxes, whether direct or indirect, including VAT. Hence, tyvirtue of the said charter, services rendered by a VAT-

46ft

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registered entity to NPC are effectively sub.jcct to zcro porcont, VA'l' (Mirant Nauotas Corporation a. Commissioner, CT'A Cate No. 6(M4, October 76,2002 citedin Kepco Philippines Corporation o. Commissioner, CTA Case Nos. 5675 and. 5704, March 18,2008). However, under R.A. 9337 (November 1, 2005), sale to government shall be subject Io 1Vo final VAT, such amount to be withheld by thc government agency, instrumentality or GOCC and remitted to thc

BIR.

Distinctions between automatically zero-rated and effectively zero-rated transactions Automatic zero rating:

1.

There is no need to file an application form and to secure BIR approval thereof; and

2.

The word "ZERO-RATED" is not required to be stamped on the face of the VAT invoice or receipt to be issued by the seller ofgoods or services. The reason for this requirement is that the buyer, as shown by his address in the sales invoice and shipping documents, is located outside the

Philippines.

Effectiuely zero-rated. transactions:

1.

An application for zero-rating must be filed and the BIR approval necessary before the transaction may be considered as effectively zero-rated;

2.

The word "ZERO-RATED" must be stamped on the face of the VAT invoice or receipt to be issued by the seller of goods or services. The reason for this requirement is that the buyer of the goods or services is located within the Philippines, or he is located outside the Philippines merely by fiction of law.

Foreign embassies in the Philippines Transactions of a VAT-registered person with the embassy of a foreign state and its personnel will be zero-rated, provided that they can submit to the Commissioner a copy of the special legislation or international agreement showing that said foreign government allows similar tax exemption privilege to the Philippine embassy and its personnel on their purchases ofgoods or services in that foreign

<:gurrlr.y.'I'hc cfl'ect,ivo zgt.6

4(;1)

ritl,ilg wJrich is trll<-rwed on [he basis of

tlade to the embassies in their official capacities. It does not applv to the individual purchases made by the members of their diplomatic staffs (VA? Rulin'g No. 382'88, Aug' 24, 1988, citing Art. 49[l]tal, Vienna Conuentioru on Consular Relations). rgt:ipr
limitetl

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Vlt,trl', Alll';l"l'nx (VA'l') l'lxorrtlrl'l'tttttstlt'l.tottg

47 I

rcsident citizcrrs trrtttirtg t.o rtrsettlc in the Philippines: Prouided' 'l'hat such goods arc exe nrpt I'rom customs duties under the Tariff and Customs Code of the Philippines;

CHAPTER

IfrI

(D)

EXEMPT TRANSAGTIONS The following transactions are exempt from the value-added trrx under Section 109 of the 2005 Tax Code, as amended by R.A. 1037u dated March 27,2013:

(A) Sale or importation

of agricultural and marine food products in their original state, livestock and poultry ofor king generally

change of residence is bona fide;

used as, or yielding or producing foods for human consumption

and breeding stock and genetic materials therefor; Products classified under this paragraph shall be considered

in their original state even if they have undergone the simple

(E) Services subject to percentage tax under

(F)

processes ofpreparation or preservation for the market, such as freezing, dryrng, salting, broiling, roasting, smoking or stripping.

Polished and./or husked rice, corn grits, raw cane sugar and molasses, and ordinary salt shall be considered in their original state;

"Original state" means simple processes ofpreparation or preservation for the market. The process is no longer simple, if it involves physical or chemical process that alters the exterior texture or form or inner substance ofthe product as to prepare it for a special use. Rice, corn grits, raw sugar, molasses, ordinary salt and copra are products in their original state (by express provision of law).

(C)

Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and non470

fitle

V of the Tax Code;

Services by agricultural contract growers and milling for others ofpalay into rice, corn into grits and sugar cane into raw sugar;

"Contract growing" includes poultry, livestock and agricultural and marine food products. (G)

Medical, dental, hospital and veterinary services except those rendered by professionals; Sale of medicines by the hospital pharmacy to in'patients is exempt from VAT, but sale to out-patients is subject to I27o VAT (St. Lukds Med'ical Center u. CTA and. CIR, 1998).

(H) Educational services rendered by private educational institutions, duly accredited by the Deparbment of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions;

(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture offinished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanylng such persons, or arriving within 90 days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the

Educational services rendered by private educational institutions accredited by DepEd, CHED, TESDA (Informatics Atabang Center u. CIR, CTA EB 593, FebruanA 28,2071), and those rendered by government educational institutions. (r) (J)

Services rendered by individuals pursuant to an employeremployee relationship; Services rendered by regional or area headquarters established

in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their

472

V^t,rr ADtrt,,l|'l'irx tVA'l't

llt,:vt t,twt,tti oN'l'Axn'r'rlr'r

propert.y lirr krw-cost, lnd srlcialized housing, residential lot valued at ?1.5 M ( increased to F1,919,500 beginning 2Ol2) or below, house and lot and other residential dwellings valued at P2.5 M (increased to F3,199,200 beginninS2012) or below (fteu. Regs. No. 16-2011, October 27, 2011; Reu. Regs. No. 3-2012' February 20,2012).

affiliates, subsidiaries or branches in the Asia-Pacific Rcgion and do not earn or derive income from the Philippines;

(K)

Tlansactions which are €xempt under international agreements

to which the Philippines is a signatory or under special laws, except those under P.D. 529 - Petroleum Exploration Concessionaires under the Petroleum Act of 1949;

(L)

Sales by agricultural cooperatives duly registered

This threshold is on a per transaction basis. This

with the

means that provided the selling price per sale document does not the threshold provided for in the law or regulation (i.e',

Cooperative Development Authority to their members, as well as sale oftheir produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and,/or processing oftheir produce;

F1,919,500 for residential lot, and F3,199'200 for residential house and lot), the transaction remains exempt from VAT'

aa one

from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development

Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Prouided, That the share capital contribution of each

member does not exceed Fifteen thousand pesos (P15,000) and

regardless of the aggregate capital and net surplus ratably distributed among the members; Export sales by persons who are not VAT-registered;

(P)

Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course oftrade or business or real property utilized for low-cost and socialized housing as defined by R.A. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (F1,500,000) and below, house and lot and other residential dwellings valued at Two million five hundred thousand pesos (F2,500,000) and below: Prouided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO).

Increased. threshold. effictiue January 7, 2072 Sale of real property not primarily held for sale to customers or for lease in the ordinary course oftrade or business, or real

residential area

Ssle of ad'iacent lots. - Sale within a 12-month period of two (2) or more adjacent residential lots, house and lots or other residential dwellings (like condominium unit) in favor of one buyer from the same seller for the purpose of utilizing the lots, house and lots or other residential dwellings as one residential area wherein the aggregate value of the adjacent properties exceed Fl,919,500, for residential lots and F3,199,200 lor residential house and lots or other residential dwellings, although covered by separate titles and/or separate Tax Declarations, shall be presumed as a sale of one residential lot, house and lot or residential dwelling. The sale shall be exempt from VAT only if sale did not exceed the threshold amounts stated in the regulations.

Authority;

(O)

units within a L2'm.onth period' and slots to the same buyer for purposes of utilizing

Sate of ad.iacent lots or

parking

(M) Gross receipts

(N)

47:l

l,lrcrrrlrl 'l't rttttrttt l itttts

Sale of pqrkirlg slots. - Sale of parking slot which may or may not be included in the sale of condominium units is a separate and distinct transaction not covered by the rules on threshold amount, not being a residential lot, house and lot or a residential dwelling; thus, should be subject to VAT, regardless of amount of selling price (Reu. Regs. No. 13'2012, October 12, 2012). (Q)

Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000); Prouided, That not later than

January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office INSO);

474

This threshold is on a per residential unit pr:r monllr basis. This means that the lease of a residential unit wil,h l monthly rental not exceeding ?10,000 (increased to ?l2,ll(Xl beginning 2012) is exempt from VAT (Reu. Regs. No. 16-201l, October 27,2011). Lease of commercial buildings are subject to VA'l', regardless of rental per month or unit, provided threshold ol' F1.5 M (F1,919,500 beginning 2012) is exceeded, or the lessor registered as a VAT person.

(R)

(S) (T)

V,rt.tt. Atrtrt tr'l'rr tVA'l't

Itt,:vr t';wr,;rr oN'l'rrxn'r'ror.r

Sale, importation, printing or publication of books (in hard copies per RMC No. 75-2012 dated Nouember 23, 2012) and any newspapet, rnagazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;

salcs or roctlipl,s tLr ttrtt, oxt:trtttl P l.l-r M (increased to F1,919,500 beginning ZOID (lltu' /&rgs. Mr. 16-2011, October 27,2011)'

sale of goods pertains to agricultural or marine food products in their original state or sale ofbooks, or sale ofservice relates to rental of residential unit not exceeding F10,000, transaction is exempt even if gross sales or receipts exceed ?1.5M (F1,919,500).

If

Tax d.ue on trantsaction

1.

for domestic or international transport operations; sale of international air carriers with respect to revenues from transport of passengers originating from the Philippines to foreign ports (R.A. 10378, as implernented by Reu. Regs. No. 15-20 13, September 20, 20 13) ;

ru) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; (v) Seryices of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries;

(w) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding

paragraphs, the gross annual sales and./or receipts do not exceed the amount of One million five hundred thousand pesos (F1,500,000): Prouided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the national Statistics Office (NSO). Sale or lease of goods or property or the performance of services other than transactions mentioned above, the gross

-

VAT or OPT?

Professional, classified as self-employed, refers to an individual or a group practicing his or their profession or calling, with or without license under a regulatory board or body.

Apart from applicable income taxes and withholding taxes, Le/she or they are subject to VAT' A professional is liable to VAT at the rate of l27o 1f his gross receipts/ professional fees for the past 12 months is more than F1,919,500 (RMC 64'2012, October 31,2012)'

Transport of passengers by international carriers; Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof

47lt

l'lxr,nrIl 'l't ttttttttt l.totts

2.

The sale or lease of goods or property or the performance of services other than transactions mentioned in section 109 of the Tax Code, where the gross sales or receipts for the preceding 12 months do not exceed F1'5 M (F1,919,500 beginning 2012) prescribed in Section 109(V) of the Tax Code is exempt from VAT. It is required that the seller registered as a non-VAT person and the reason for his exemption from VAT is that his gross sales or receipts for the preceding 12 months do not exceed F1'5 million (F1,919,500 beginning 2072)' However, he will be subject to the three percenl(37o) percentage tax under Section 116 ofthe Tax Code.

If sale of goods pertains to agricultural or marine food products in their original state or sale ofbooks, or sale of service relates to rental of residential unit not exceeding F12,800, the transaction is exempt from VAT, even if his gross sales or receipts exceed F1,919,500, and he is also exempt from the payment of the three percent $7o) percentage tax under Section 116 ofthe Tax Code' If the lessor has commercial stalls for lease and the amount of gross rental for the year is F1'5M (P1,919,500 beginning 2072) or less, he is (a) exempt from VAT if he

476

did not register as a VA'l'person, or (b) sub.iect to VA'l' il' he registered as a VAT person, or he issued a VAT receipt for the rent income. The transactions that are subject to VAT are those, which involve sale or exchange of goods, properties, or services that are used or consumed mainlyby the medium to high-income groups. Exemptions (partial relief) from VAT are granted to certain transactions for varying reasons of public policy. Thus, exemptions are granted, in some cases, to encourage agricultural production, and in other cases, for the personal benefit ofthe end-user rather than for profit motive. The law likewise declares that "exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incidence ofthe VAT, are expected to be relatively lower and within the reach of the general public."l

Bar Question (2009) Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from F8,000 to F10,000. His gross rental income for one year is F1,650,000. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why?

not included in thO e nurn(}ruli0n ol'taxable services in the vAT law. Our tax laws, past and present, did not adopt more specific terms for .,sale or exchange of services" to include showing of films in public

(CIR

u. SM

Prime Hold'ings,

R. No. 783505, February

G

The services subject to percentage tax under Title V ofthe Tax Code include the following:

Kind of Tax

Tax Base

Section

tax on persons exempt from VAT

Gross receipts

116

Gross receipts

tr7

receipts Gross receipts

118

Gross

receipts

120

receipts

tzl

37o percentage 37o common

carrier's tax

on domestic carriers by 37o common

land

carrier's tax

on international carriers

Franchise tax gas and water 27o - radio and TV 37o

Gross

-

107o overseas communica-

Gross

Since the rental income per unit per month of his apartment units (which ranges from F8,000 to ?10,000) does not exceed the threshold prouided for in the VAT law in the amount of ?10,000, his rental incorne is exempt from VAT under Section. 109(q of the 1997 To,x Code. In uiew thereof, it does not matter whether or not he hos exceeded the general threshold for the preceding twelue months of F1,500,000 prescribed in Section 109(V) of the Tax Code. Thus, my aduice is for him not to register as a VAT person. He will be exempt fromVAT under Section 109(q and from the 37o percentage ta"tc under

Gross receipts tax on finance companies

Gross receipts

Section 116 of the Tax Code.

Tax on winnings

Theater operators are exempt from VAT

Stock transaction tax and IPO tax

lTolentino, et al. v. Secretary of Finance and Commissioner, G.R No. 115455,

119

tions tax Gross receipts tax on banks

October 30, 1995.

26, 2070).

Services subject to percentage taxes

Suggested answer:

Gross receipts oftheatre owner or operator from sales oftickets to moviegoers are exempt from VAT. Theatres and movie houses are

477

tt,r At rt rt':t r'l'rrx t VA'l'l lrixr,trrIl'l't ttttgttt'l,iotts

Vrtt,t

Itt,:vl,lwt,:tt oN'l'Axrr't'ror'r

zEo premiu:m

tax on

722

Premiums collected

t23

life insurance companies Tax on agents ofinsurance companies Amusement taxes

Premiums collected 124 Gross

Winnings

receipts or dividends

I25 126

Gross selling price or gross value in money I27

Section 118 of the 2005 Tax Code was amended by R.A. 10378 (which grants income tax exemptions to international air carriers based on reciprocity) to read as follows:

478

Itt,:vil,;wr':rr r )N'l'nxn,r,roru

A.

International air carriers doing business in the philippines

their gross receipts derived from the transport ofcargo from the Philippines to another country shall pay ataxof Bvo of their quarberly on

gross receipts;

B. International shipping carriers doing business in the Philippines on their gross receipts derived from the transport ofcargo from the Philippines to another country shall pay ataxof Jvoof their quarterly gross receipts (RMC No. 40-2013, May 2, 201J).

CHAPTER

MII

INPUT TAXES There are five (5) categories of input taxes that may be credited against output tax, namelY: 1. Input tax credit on importation of goods and current local

2. 3. 4. 5.

purchases of goods' properties and services (Sec' 710, NIRC); Tlansitional input tax credit (Sec- 111[A], NIRC); Presumptive input tax credit (Sec' 111[8], NIRC); Final withholding tax credit (Sec- 114[C], NIRC); and Excess inPut tax credit.

Input tax credit arises from purchases ofgoods, properbies and who services-. Tlansitional input tax credit may be claimed by persons represent they time; first the for tax added become liable to value input tax on inventories goods, materials and supplies existing on the date of commencement of a person's status as a taxable person. Presumptive input tax may be claimed by: (a) persons engaged in business of processing sardines, mackerel and milk, manufacturing refined ,ogu, and cooking oil, and noodle-based instant meals, which are substalntially produced from primary agricultural and marine food products, the supply of which is exempt from value added tax' Final *itrrrrotaitrg tax credit is based on the amount paid to the supplier of by the government and is required to be withheld goods or ""irri"", by the government and remitted to the BIR'

Sources of inPut tax credits Input taxes passed on by the sellers of goods, properties or services may arise from any of the following:

1.

Any input tax evidenced by a VAT invoice or official ,""Lipt1r*oed in accordance with section 113 hereof on 479

480

the following transactions shall be credit*bl. rrgiri'sl, output tax:

(a)

(iii) (iv)

(v) (b)

For sale; For conversion into or intended to form part ol' a finished product for sale including packaging materials; For use as supplies in the course of business; For use as materials supplied in the sale ol' service; or For use in trade or business for which deduction for depreciation or amortization is allowed under this Code.

Purchase of services on which a value-added tax has been actually paid.

The input tax on domestic purchase of goods or properties shall be creditable:

(a) (b)

ll,,1''u.t

VA',r't

4tl

I

attributed to trattsuctiotts sulrjcct to value-added tax; and

(b)

A ratable portion of any input tax, which cannot be directly attributed to either activity.

Credits of input taxes from output taxes must be supported by VAT invoices or receipts which must be issued in the name of the buyer ofgoods, properties or serwices (Sec. 113[N in relationto Sec. 237, NIRC). Input tax on purchase of goods or properbies is creditable upon consummation of sale (or issue of the sales invoice by the VATregistered seller, although no payment thereof was made by the buyer) and on importation of goods or properties, upon payment of the value added tax prior to the release of the goods from customs custody. Input tax on purchase of services is creditable only when paid by the buyer to the seller thereofand evidenced by the seller's official receipt (Sec. 110[2], NIRC).

Refund or Tax Credit of Excess lnput Tax In proper cases, the Commissioner of Internal

Revenue shall

To the purchaser upon consummation of sale and on importation of goods or properties; and

grant a tax credit certificate or refund for creditable input taxes within 120 days from the date of submission of complete documents in support ofthe application fiIed in accordance with subparagraph

To the importer upon payment of the value-added

(a) above.

tax prior to the release ofthe goods from the custody of the Bureau of Customs.

Prouided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the 59 succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds F1,000,000: Prouided, howeuer, if the estimated useful life of the capital good is less than five (b) years, as used for depreciation purposes: Prouided, finally, That in the case ofpurchase ofservices, lease or use ofproperties, the input tax shall be creditable to the purchaser, lessee or licensee upon pa)'rnent ofthe compensation, rental, royalty or fee. 3.

"'',llllli

(a) 'lirlrtl inptrl, l,rrx which can be directly

l,lrr,

Purchase or importation of goods:

(i) (ii)

2.

u^'

lt,r.tvrr,:wr,;rt or,,r 'l',rxn,r,roN

A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows:

In

case of

full or partial denial of the claim for tax credit

certificate or refund as decided by the Commissioner of Internal Revenue, the taxpayer m.ay appeal to the Court of TaxAppeals (CTA) within 30 days from the receipt of said denial otherwise, the decision shall become final. However, if no action on the claim for tax credit certificate or refund has been taken by the Commissioner of Internal Revenue after the 120-day period from the date of submission of the application with complete documents, the taxpayer may appeal to the CTA within 30 days from the lapse of the 720-day period.l Being a derogation ofthe sovereign authority, a statute granting

tax exemption is strictly construed against the person claiming the exemption. When based on such statute, a claim for tax refund partakes of the nature of an exemption; hence, the same rule of strict interpretation against the taxpayer-claimant applies to the claim (WMPC u. CIR, tbid).

rSec. 112(c), NIRC.

482

I

d.

Categories of Refund.s or Tax Credits Refund or tax credit of excess input taxes is allowed by the Original VAT Law (8.O. 273), as amended by R.A. 7716,8241, and 8424, only on three (3) instances, namely: (1) zero-rated or effectively zero-rated sales ofgoods; (2) local purchase or importation ofcapital goods; and (3) cessation ofbusiness or dissolution ofthe corporation.

e. f.

However, the regulation also allows the refund or tax credit on unused

input tax on purchase of real property. Under R.A. gggT (200b), item (2) above was removed.

g.

Zero-rated. or effectiuely zero-rated. sales

It should be clear that claims for refund or tax credit under the zero-rated or effectively zero-rated sales ofgoods, properties or services, the seller ofthe goods is the one entitled to the refund or credit; in the purchase of capital goods, it is the purchaser that is entitled to the refund or tax credit.2ln order to be entitled to refund or tax credit of unutilized input tax payments directly attributable to zero-rated or effectively zero-ratedsales,spetitioner must prove that:

a.

The claimant must be a VAT-registered person. However,

it is not application for effective zero-rating that

c.

Claimant rrtust' tlctluct from its VAT quarterly return the input tax being claimed as refund or tax credit; The claimed input VAT payments are directly attributable to zero-rated or effectively zero-rated sales; For zero-rated sales under Section 106(AX2XaX1)' (2) and (b) and Section 108(BX1) and (2), the acceptable foreign currency exchange proceeds thereofhad been duly accounted for in accordance with the rules and reg:rlations of the Bangko Sentrq'l ng Pilipinas (BSP); The claimed input VAT payments are duly supported by VAT invoices oiofficial receipts in accordance with Section 4.I04-SofRevenueRegulationsNo'7-gS,inrelationto Sections I73 (inuoicing requiremertts) and 237 (issuu'nce of receipts or inuoices) of the Tax Code;5 and

h.TheVATreturnforthesucceedingquarterscoveredbythe claim for tax refund or credit must be submitted with the CTA.

ApersonisentitledtoVATrefundortaxcreditwhen:(a)the

or claimed input tax payments are duly supported by VAT invoices Regulations Revenue of 4.104-5 Section with receipts iriaccordancl

The application for the issuance ofa tax credit certificate or refund is filed with the BIR or the DOF Center within two (2) years afber the close of the taxable quarter when the sales were made, and with the CTA within 30 days from the date ofreceipt ofdenial from the CIR or in case of inaction by the CIR, from the lapse of the 120 days from date of filing of the complete documents in support of the administrative claim;

No.7.-g5inrelationtoSectionsll3and2STofLheTaxCode;(b)the claimed input tax payments are directly attributable to zero-rated against sales; (c) the claimldinput tax payments were not applied

The claimed input tax payments were not applied against any output tax during the period (quarter or year) covered

by the claim and in the succeeding periods, unless a separate claim covering succeeding such period is filed therefor;

any output tax nor carried over to the succeeding month(s)/quarter(s);

arri (a)totfr the administrative and judicial claims for refund or tax credit were filed within the two'year prescriptive period'6 s Excess input ta,x on purchase of real property ' - Pelitioner is code Tax 1997 the of reliance on the provisions of section 112(A) misplaced sinceihe transaction involved in this case is not zero-rated refund or ifectively zero-rated sale. However, petitioner's claim for

onthebasisofSection4.106.lofRevenueRegulationsNo.T-95is proper. In order that petitioner's claim for refund may prosper' said iection provides the following requisites: a. The applicant must be a VAT-registered person;

'?Commissioner v. Toshiba Information Equipment (phils.), G.R. No. 1b01b4,

_ffiGinesManufacturingv.Commissioner,CTACaseNos.5460and

3Sec. 112(At, NIRC. aCommissioner v. Seagate Technolory (Phil.), G.R. No. 158866, February 11,

No. 6291, March 10, 2003.

August 9,2005.

2005.

ttpttl 'l'rtxt's

is

indispensable to VAT refund or credit.a

b.

4tt:l

Anlt':l'l'nr (VA'l')

Vnt.rr,r

llt,rvt t,:wt,:tr oN'l'nxn'r'ror,l

Sg02,Februarys,zoozcitedinDynoNobelPhilippinesv.Commissioner,CTACase iLaziBay Resources v. Commissioner, CTA Case No' 6031' June

27

'2OO2'

484

V,rt,t

Itt,:vt t.:wt,:tt oN'l'nxn.r.ror.r

rt,: I

b. c.

The purchase of land is substantiated by sufficient evidence;

The input taxes have not been applied against the output taxes;

e.

The application for the refund of unutilized or excess creditable input tax arising from the purchase ofland has been made within two years after the close of the taxable quarter when the purchase was made;

f.

The land subject ofthe purchase was used by the applicant in his VAT taxable business (Concepcion CarcierBealty

c.

d.

Hold.ings a. Commissioner, CTA Case No. 6lBZ, Febnr.any 17,2003).

e.

Requirements for claims for refund or tax credit arising from zero-rated or effectively zero-rated sales It should be clear that claims for refund or tax credit under the zero-rated or effectively zero-rated sales ofgoods, properties or services, the seller ofthe goods is the one entitled to the refund or credit; in the purchase of capital goods, it is the purchaser that is entitled to the refund or tax credit.T In order to be entitled to refund or tax credit of unutilized input tax payments directly attributable to zero-rated or effectively zero-rated sales,8petitioner must prove that:

a.

The claimant must be a VAT-registered person. It is not the

application for effective zero-rating that is indispensable to VAT refund or credit.elt is the suppliers of the SBMAregistered enterprise who are the proper parties to claim the tax credit from the BIR. Accordingly, said suppliers shall refund to the SBMA-registered enterprise the VAT erroneously passed on to it (Contex Corporation a. Commissioner, GR, No.757735, July 2,2004);

b.

The application for the issuance ofa tax credit certificate or refund is filed with the BIR or the DOF Center within

TCommissioner v. Toshiba Information Equipment (phils.), G.R. No. 150154,

r't'nx ( VA'l')

trprtl.

'l\txtls

4

ltl-r

rtltcr Lhc close of the taxable quarter when made, and with the CTA within 30 days wcre the sales ofdenial from the CIR or in case ofreceipt date from the the lapse of the 120 days from from CIR, the by of inaction documents in support of the complete of the filing date of claim; administrative The claimed input tax payments were not applied against any output taxhuring ihe period (quarter or year) covered and in the succeeding periods' unless a by the "tti* siparate claim covering succeeding such period is fiIed therefor; Claimant must deduct from its VAT quarterly return the input tax being claimed as refund or tax credit; tw
There be a purchase ofland;

d.

AtrDt';l

C b.

h.

TheclaimedinputVATpaymentsaredirectlyattributable to zero-rated or effectively zero-rated sales; For zero-rated sales under Section 106(AX2XaX1)' (2) and (b) and Section 108(BX1) and (2), the acceptable foreign currency exchange proceeds thereofhad been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pitipinas (BSP); the recipient of ..doing business outside the Philippines', services should be for the transaction to be zero-rated under Section 108(B) (2) of the 1997 Tax Code (Accenture a' CIR, G"R' No' 7gO L02, July 7 L, 20 7 2, citing CIR a' BW SC Mind'anao' 2007); The claimed input VAT payments are duly supported by vAT invoices oiofficial receipts in accordance with section 4.104-5 of Reuenue Regulations No' 7-95, in relation to (issuance Sections 113 (iruuoicing requirements) and 237 and of receipts or inuoices) of the Tax Code;ro The VAT return for the succeeding quarters covered by the claim for tax refund or credit must be submitted with the

CTA.

ApersonisentitledtoVATrefundortaxcreditwhen:(a)the

or claimed input tax payments are duly supported by VAT invotces Regulations Revenue receipts in accordancl with Section 4.104-5 of

August 9, 2005.

8Sec. 112(A), NIRC.

eCommissioner v. Seagate Technology (Phil.), G.R. No. 1b8866, February 11, 2005.

phtlrppines Manufacturing v. commissioner, cTA Case Nos. 5_460 and s,-iooz cited in Dyno Nobel Philippines v. commissioner, cTA Case 10. 2003' -i;"l March No. 6291 , 5902, February

486

Vnt.ttt, Atrnt:lr'l',rx tVA'l't

lll,tvt t,twt,ltt oN'l'Axn'r'ror.r

I

No. 7-95 in relation to Sections 113 and 28? of the Tax Code; (b) the claimed input tax payments are directly attributable to zero-rated sales; (c) the claimed input tax payments were not applied against any output tax nor carried over to the succeeding month(s)/quarter(s); and (d) both the administrative and judicial claims for refund or tax credit were filed within the two-year prescriptive period.l1

In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim under substantive law. It must also show satisfaction of all the documentary and evidentiary requirements for an administrative claim for a refund or tax credit. Hence, the mere fact that WMPC's application for zero-rating has been approved by the CIR does not, by itseldjustify the grant ofa refund or tax credit. The person claim the refund must further comply with the invoicing and accounting requirements mandated by the Tax Code as well by revenue regulations implementing them. Under the Tax Code, a creditable input tax should be evidenced by a vAT invoice or officiar receipt. Section 4.108-1 of Revenue Regulations No. 7-9b requires, among others, that "if the sale is subject to zero percent (OVo)yy'jl, the term 'zero-rated. sale' shall be written or printed prominently on the invoice or receipt" (Western Mind.q.nao Power Corporation a. CIR, G.R. No. 787736, June 73,2072).

Imprinting of the u)ord "zero-rated" on the inuoices or receipts is required. - Section 244 of the Tax Code explicitly grants the Secretary of Finance the authority to promulgate the necessary

rules and regulations for the effective enforcement of the provisions of the Tax Code. Such rules and regulations "deserve to be given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields." In this regard, the Court has consistently held that the absence of the word "zero-rated" on the invoices and receipts of a taxpayer will result in the denial of the claim for refund. ln Panasonic Imaging Corporation u. CIR, the Court affirmed the decision of the CTA, ratiocinating that "... the appearance of the word 'zero-rated' on the face of Invoices covering zero-rated sales prevents buyers from falsely claiming input vAT from their purchases when no VAT was actually paid... Further, the printing of the word 'zero-rahed'on the invoice helps segregate sales that are subject to l0Vo (now l2%o)YAT from those sales that are zero-rated.', (Eastern Telecomtnunications Phil. a. CIR, GR. No.768856, August 2g,

Siticon Phit. u. CIH,6J'I.' No' 772378' January 77' 2O77; 37' Kepio Phil. Corporation u' CIR, G'R' No' 779967' Januan1 2077)' ioit; Microsoft Phil. u. CIR, G'R' No' L80773, April6' 2012;

Transitional inPut tax There are three (3) situations where a person may claim

goods' materials' transitional input tax on his beginning inventories of and supplies: first time 1. When he becomes liable to value added tax for the transactions taxable his under a new legislation or when (secs.236[G] and exceed the vAf_registration threshold [H] and 111, NIRC); person' 2. When he elects to register as a VAT-registered provided he is eligible (Sec' 236[I], NIEC); and

person and also deals is exempt' but it which of in goods or properties, the sale or amendatory new a under becomes a ta*aite transaction

3. If he is already a VAT-registered Iaw.

on Transitional input tax is entitled' to claim input VAT based of ualue the on also but the ualue not only in tand. inr,prouements The tor'.input of payment land. itself, regard.less of aciual ta'x the -S;p*;" tt ut on its face, there is nothing in Section 105 Court ",]t"d together orine old NIRC that prohibits inclusion of real properties, goods, of inventory with the improvement-s', thereon, in the beginning transitional the inventory materials and supplies, based on which it was input tax credit is-computed' It can be conceded that when drafted,sectiont05couldnothavepossiblycontemplatedconcerns were not specific to real properties, as- real estate transactions on transactions when originally subjecl to VAt. At the same time, R'A' with beginning rea"l properties were finally made subject to VAT Section 77!6, nocorresponding amendment was adopted as regards application the in 105 to provide io, a diff"rentiated tax treatment properties or ofthe transitional input tax credit with respect to real real estate dealers'13

4.10t1 of Rev.

Regs. No. ?-95 limited transitional input taxes on *tt"it" pavment of sales-tq lu19 po::*]I;1td"'

on lands Jv, 158885 and 170680, Bonifacio l"uuiop-""t corporation v. cIR, G.R. Nos. favor of taxpayer in credit tax -"" or refund grani the to aprit z, zoos. sc en banc fi.ied ln C.n. No. 173425, September 4,2012'

i-p.orru-"tt, 13Fort

l1Lazi Bay Resources v. Commissioner, CTA Case No. 6031, June 27 ,2002.

487

ttpttl 'l'ttxlr

488

u^'

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The amendments to the VAT law do not show any intention to make those in the real estate business subject to a different treatment from those engaged in the sale ofother goods or properties or in any other commercial trade or business. on the scope of the basis for determining the available transitional input VAT, the CIR has no power to limit the meaning and coverage of the term ,,goods,' in Section 105 of the Tax code without statutory or legal basis. The transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials or supplies.

Prior payment of input taxes is not required for a tua,payer to auail of the 8Vo transitional input tarc (TIT) credit. 105 - Section ofthe old rax code provides that for a taxpayer to avail of the 8vo TIT, all that is required is to file a beginning inventory with the BIR. It was never mentioned in Section 10b that prior payment of taxes is a requirement. To require it now would be tantamount to judicial legislation. Moreover, transitional input tax credit is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit is an amount subtracted directly from one's total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage investment. Also, in CIR u. Central Luzon Corporation (G.R. No. 159647, April 15, 2005), the Court declared that while tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the other hand, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed (Fort Bonifacio Deaelopment Corporation u. CIR, GR. No. 773425, September 4,2012).

Unutilized creditable input taxes ottributable to zero-rated, only be recouered through the applicatiort for refund or tax credit. The unapplied input taxes after the expiration of the two-year prescriptive period to file a claim for refund or tax credit may not be expensed outright and claimed as a deduction from gross

sq,les cqn

income. Section 110(B) of the 2005 Tax Code merely allows three (3) options to taxpayers, namely: (a) carry-over of excess input tax; (b) refund; and (c) tax credit ofunused input taxes directly attributable to zero-rated sales. Tax exemptions are strictly construed against the taxpayer, and deductions are in the nature of tax exemptions (BIR Ruling No. 123-2073, Mqrch 26,2013, RMC SZ-2075, August 23,2013).

' ',1;,ili

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4tt9

lnput taxes that may be refunded or credited Input tar attributahle to good's exported" - There is nothing to in the Ntnc hmiting or.defining the phrase "input tax attributable part which forrn to oily those input to.cces on purchases gourl"

The input tq'xes which were ignored by CTA ion"i"tnd of input taxes on localty purchased capital goods' ucp3nses janitorial repairi aid' maintenunce' security seruices, supplies'

Z/

ri" "*ported" fiinished. product.

for 'and.

which were clearly incurred in the course of 100vo of business of pefitionei. considering that petitioner exports to the its prod.ucts, the input taxes incurred. cannot but be attributed those than gooa, exported., since no other goods are produced other "erportei. Reuenue of The apportionment prouided for in Section 12 Rigutations No.8_AZ, as amend.ed, in cases of avAT,registeredperson operations iio it engaged' in both VAT-taxoble and VAT-exemptexports.7007o i" the case at bench because petitioner (Babcock ilo,el:s not "Vfiy henc", engaged' in purely zero-rated sales producis; ofits nitoini Phits.l u.Coi*is"ioner & CTA,CA-GJ.SPNo' 40703' Noaem.ber 27' 7996), Sale of rano materials to BOl-registered' enterprises uhose sot"r exceed'70Voof totalannualprod'uction' - To avail of is for it "*poi ze-ro-rating of input taxes, tle only requirement to be complied enterprises Bol-registered to sell its raw materials to export-oriented The law whose export sales exceed 707o oflotal annual production. of in excess sales local Hence, does not require a!\OVo export sales' ofthe contention the to contrary theT}Torequirement may be allowed, sold its respondent^. Likewise, p"titio''"., a Bol-registered enterprise, producer' export BOl-registered a .opp", concentrate to FASAR, also in the These copper concentrates have been used as raw materials pASAR, exported actually which p""a""ti6" of goods for export by i s.gsqoof its manufacturedgood s (Mq'rcopper Mining Cotporation o. Cornrnissioner, CTA Case No' 4950, July 23, 1996)' goods' Ercess input tax arising from purchase of capital (a) they have Goods or properties are classified capital goods if: -estimated useful life greater than one year; (b) treated as depreciable or sale of assets; and (c) used dlirectly or indirectly in the production taxable goods or services. On the other hand, property is considered aepre"iite only if it is: (a) used in a trade or business or held for It proao"tion of income; and (b) subject to exhaustion within a

ieliuery

seruices,

" determinableperiodoftime;thatis,ithasalimitedusefullife

(Chapter 23A.01 _ p. 2, Merten's Lqw on Federol Income Tq.xation). Records show that pltitioner is primarily engaged in the construction

490

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and repair of infrastructure/development projects covered in Ir.A. 7718, also known as the Expanded BOT Law and projects which are foreign-funded or assisted and required to undergo international competitive bidding and in the manufacture and production of concrete products and to sell the same on wholesale. Based on the description of the various equipment appearing in the invoices issued by MCRP Construction Corporation, the court is convinced that the same were to be used by petitioner in its business operations. They are assets subject to depreciation; hence, they are considered as capital goods (Italian-Thai Deaelopment public Cotnpany Ltd..-Philippine Branch a. Cotnrnissiiner, CTA Case No.6IZ2, Noaember 12,2002). INOTE: Effectiue Nouember j,2005, R.A. 7JSZ remoued excess input taxes arising from importation or purchase of capital goods from beirug claimed as refund or tarc creditJ

"Capital good.s or propetties' refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under section 29(f), used directly or indirectly in the production or sale oftaxable goods or services. Based on the foregoing definition, lthe court] findls] no reason to deviate from the findings of the CTA that training materials, office supplies, posters, banners, T-shirts, books, and other similar items are not capital goods

(Silieon Phil. v. CIR, G.R. No.7Z2BZ8, January IZ,2OII).

However, purchases made by petitioner for the improvement of the land do not qualifr as capital goods. contrary to the definition of capital goods, land and the improvements introduced therein are not subject to depreciation. This view finds support in the Law ofFederal Income Taxation upon which the Philippines based its laws on income taxation. Thus, "because land does not have a limited and determinable life, it is not subject to depreciation apart from the improvements or physical development added to it" (La Ftwtera u. Cotntnissioner, CTACase Nos.5898 and.5937, September IZ, Z0OI).

Excess input tar of d.issoluing unincorporated, joint aenture. - The excess input tax not used by MTOB Consortium, an unincorporated consortium, may be refunded pursuant to RMC No. 42-99 and VAT Review Committee Ruling No. 024-00 dated July 27, 2OO2 (Mitsubishi Corporation, et al.a. Comrnissioner, CTACase No. 6037, Nouernber 1 7, 2002).

Allocation of input tax A VAT-registered person may enter into (a) transactions

which are exempt from value added tax, or (b) transactions which

u^' ,,',llllll,,i,l',rrr

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(ovo). Input are subject to valuo uddtxl tux at l2oh or zero percent transactions to i"*", or purchases directly and entirely attributable to value added tax at l27o or zero percent QTo) are creditable "rrtl"ct ugui".t tfr" taxpayer's output taxes. Input taxes on purchases directly aid entirely aitributable to transactions exempt from value added of the tax become part of the cost of the asset or operating expens-e asset if the However' ta"paye, deductible only from his gross income' to or subject b" directly and entirely attributed to transactions "rrrrroi exemptfromvalueaddedtax,thetaxpayerhastoallocatetheinput gross- receipts taxes on these assets based on the gross selling price or implemented as (Sec' 110[3], NIRC, for the preceding taxable quart er by Reu. Regs. No.7-95, as amended)'

Glaim for refund or tax Gredit Thefilingoftheapplicationsfortaxcreditorrefundiswithin for the two-year ieriod cot sidetittg that the administrative claim sales export refund is reckoned, in case ofinput tax attributable to (Section106[a]),afterthecloseofthetaxablequarterwhensuchsales weremade,andincaseofcapitalgoods(Section106[b])'withintwo yearsafter.thecloseofthetaxablequarterwhentheimportationor "por.hu.* refund was made. The prescriptiveperiod in claiming for the filing of date if input tax in the judicial level is reckoned from the Philippine ortrrf quarterly VAT return (Nichimen corporation Branch a. Cornmissioner, CTA Case No' 5384, August 78' 7998; nii"i "U p ow er tPhitiwinesl Corporation a. Cornrnis sioner, CTA Case No. 5389, JanuarY 4, L999)'

Deadline for submission of claim oneofthecontroversialissuesrelatingtoclaimsforrefundortax

must credit for excess input taxes relates to the dates when the claims court Tax be fiIed with the BIR and the cTA. In earlier cases,la the refund is or credit tax for applications ofthe filing the that ""pi.i""a *ithin thu two-year period considering that the administratiue claim sales for refund is reckoned, in case ofinput tax attributable to export

(Sec.106ta]),afterthec]oseofthetaxablequarterwhensuchsales two years were made, and in case of capital goods (Sec' 106[b]), within

plrr"h.* ** *"d". Th" p."""riptive

period in claiming for the refund

laNichimenCorporationPhilippineBranchv.Commissioner,CTACaseNo. 5384,August13,1998;HopewellPower(Philippines)Corporationv'Commissioner' CTA Case No. 5389, January 4, 1999'

492

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I

input tax in the judicial leuel is reckoned from the date of filing ol' the quarterly VAT return. This is based on the strict interpretation of the law. of

In another case,ls the CTA ruled that the two-year period at the administrative level must be counted from the filing of the quarterly return. The CTA rationalizes its decision as follows: "In the cases of Comrnissioner of Internal Reuenue u. TIvD( Sales, Inc. and the Court of Appeals, G.,R. No. 83736, dated January 13, 1gg2 and ACCRA Inuestmeits Corporation u. Commissioner of Internal Reuenue (204 SCRA 957),the Supreme Court held that the two-year period should be counted from the filing of the final income tax return, because it is only during that date that the exact tax liability or refundability of the tax can be determined. In the same manner, it is only after the filing of the quarterly VAT return that we can determine the VAT liability or refundability of VAT. It should be noted that the basic requirement is that VAT refund can only be granted to the extent that the input taxes have not been applied against output tax. All these matters can only be determined if a return is filed. It is logical, therefore, that the two (2)-year period should not immediately be counted from the close ofthe quarter but from the prescribed date of filing of the VAT return."

Atlns Consolid.ated Mining Case (SC -2002) The prior interpretation was, however, changed by the Supreme Court in 2007 . On the basis of the 1997 Tax Code provisions and as now interpreted by the Courts, there are two (2) levels within which the claim for tax credit or refund of value added tax must be filed.

At the administrative (BIR) level, the two-year period for the filing of a written claim with the BIR is counted from the "close of the taxable quarter when the sales or imporbation or purchase were made" pursuant to Section 112(A) of the Tax Code.

At the judicial (CTA) level, the two-year period for the filing of a petition for review with the CTA shall be counted from the "date of filing of the VAT return and pa5rment of the tax" in accordance with the provisions of Sections 204(C) and229 of the 1997 Tax Code.16 T5JIDECO Manufacturing Philippines v. Commissioner, CTA Case No. 6b52, september 16,2004. since this legal issue is far from settled, the author suggests that the two (2) periods (administrative and judicial) be strictly followed by the taxpayer and his lawyer. It is safer to be conservative. r8Atlas Consolidnted Mining and Deuelopment Corporation u. CIR, G.R. Nos. I4llO4 and 148763, June 8, 2007 (6.24 SCRA 73).

Illirant Pagbilao Curc

49:]

Alut':t,'l'Ax (VA'l') ttlrrll. 'litxtrs

(SC -2OO8)

ln 2008, the Atlas consolidated Mining decision of the_supreme Court was reversed by another Supreme Court decision in the case of cIR u. Mirant Pagbilao corporation (G.R. No. 172129, September 72, 200g,565 SCRA7l4,*h.'-it ruled that "the reckoning point of the

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of

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nut*"ttt

o"

Aichi Forging ComPanY 6C -2010) Unutilized' input VAT must be claimed within two (2) years after the close of the tax,ibte quarter when the sa.les were made; the Ueno'trWe jhog il ntpond'entis claim for refund' I credit of input VAT before the 'CT.f *iorrints a d.ismissal inasmuch as no jurisdiction was acquired period for by the cTA. - In computing the two (2)-year prescriptive Division CTA the ciaiming a refund./cr"dit of unutilized input tax, into took bonc applied"section 112(A) of the NIRC, while the cTA en eru cTA the hence, consideration sections 114 and 229 of ltre NIRC; start (2)-year period should banc ntled.that the reckoning of the two from the date ofpayment oftax and not from the close ofthe taxable quarter when the ,.1"" *u"" made. The pivotal question has already ileen resolve dinCornmissioner u. Mirant Pagbilao Corporation,where the Court ruled that Section 112(A) of the NIRC is the applicable provision in determining the start of the two (2)-year period, and 2zg of the NIRC are inapplicable as "both ihat Sections 204(C) ^1,d, ptorritiottt apply only to instances -of erroneous payment or illegal collection ofir,tlr.tui"evenue taxes." To be clear, Section 112 ofthe NIRC is the pertinent provision for the refund/credit of input vAT. Thus, the two (2)-year period should be reckoned from the close of the taxable quarter when the sales were made'

In CIR u. Primetown Property Group, Inc', tlne Supreme Courb said that as between the civil code, which provides that a year is

equivalent to 365 days, and the Administrative code of 1987, which states that a year is iomposed of 12 calendar months, it is the latter that must prevail following the legal maxim, Lex posteriori derogat priori. Thus, [the court] holdtsl that respondent's petition (filed on April 14, 20OO) was filed on the last day of the 24th calendar

494

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49lt

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month from the date respondent filed its final adjusted return. The respondent's administrative claim was timely filed. However, notwithstanding the timely filing of the administrative claim, Ithe Courtl [is] constrained to deny respondent's claim for tax refund./ credit, for having been filed in violation of Section 112(D) of the NIRC. Section 112(D) clearly provides that the CIR has "120 days from the date of the submission of the complete documents in support of the application [for tax refund./credit]" within which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayer,s recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day period, the CIR fails to act on the application for tax refund./credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within B0 days. In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this reason, [the Court] findlsl the filing of the judicial claim with the CTA premature. The phrase "within two (2) years ... apply for the issuance ofa tax credit certificate or refund" in Section 1I2 of lhe Tax Code refers to applications for refund./credit filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of Subsection (D) of the same provision, which states that the CIR has "120 days from the submission of complete documents in support of the application filed in accordance with Subsections (A) and (B)" within which to decide on the claim. In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA. In fine, the premature filing of respondent's claim for refund,/credit of input VAT before the CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.17

Taganito Mining Case (CTA EB -2011) Following the Aichi case, the CTAen bonc dismissed the refund case for having been prematurelV filed by the petitioner, considering l7Commissioner v. Aichi Forging Company of Asia, lnc., ibid.

thattheadministrativeclrrirrrwasfiledonf)ecember30,2003,while The premature the judicial claim was filed on February 19, 2004'18 vAT before the input i-rG oir"*pondent's claim for refund/credit of jurisdiction was acquired cTA warrants a dismissal inasmuch as no by the CTA.

Whilethegeneralruleisthat..ajudicialinterpretationbecomes passed' a part of the fu* t, of the date that law was originally is court of this a doctrine when that s,ibiect only to the qualification is there when so more and adopted, is ouurrof"a and a different view prospectively applied be should doctrine u r"t""rul thereof, the new not apply to parties who relied on the old doctrine and arra "ftorrta ."t"J r" good faitlh,"it th" Sopt"me Court decisions in the Aichi and the Mirq.ntcases discussed above have been applied retroaciive]yby it' before pending cases credit tax or cTAen banc inseveral refund said the that pointed-ou! Tax practitioners and taxpayer-claimants o,",t'ul\,"longfiledonthebasisofapplicablejurisdictionatthetime offilingtheclaimsandweredecidedbytheCTADivisionsinfavorof in the irr"luJpuv"rs on that legal basis befolg the decisions ofthe sc recent the by covered be not should h"tt"e, Aichi and' Mirant "ur"rf e CTAen banc decision of the Supreme iourt. At any rate, some of thes Court' Supreme the before taxpayers the now on appeal by cases are

(SC -2013) San Roque, Ta'ganito and Phiter Cases Antonio T' The Suprem e Cot:u:t en banc, speaking through Justice to claims relating cr"fio, finally clarified and settled the legal issues follows: as for refunds or tax credit ofexcess input taxes L.

Premature or late filing of the claim for refund or credit &. CIR a. San Roque Power Corporation, GJB' No' 187485, Februa'ry 12, 2073

lsCommissioner v. Taganito Mining Corporation, CTA EB No' 559, April 18' giiOir' f" this case, five (5) justices v-o!-ed to denv the 2011; Resolution, eugust justir", to grant it,on-the ground that the failure to exhaust (3) uoLd three refund; of action which is waivable administrative remedy ."*"rt, o"& from lack of cause that the two (2)-year period maintained *frii" o"" iU:ustice ,"J1, ""t:".lsdictional, claims, and the Mirant should be applied and

.ppfi", U"ift to administralive

iuiicial

prospectivelY. leColumbia Pictures Corporation v' CA and Sunshine Home Video' Inc'' G'R' v' Fertiphil Corporation' G'R' No. 110318, August ZA, fSS6; ftanters Products' Inc' No. 156278, March 29,2004.

496

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oN'l'nxA'l'ron

I

April

altcr it filed its amended administrative claim with the OIll on On

10, 2003, a mere llJ days

March 28,2003, San Roque filed a Petition for Review with the CTA. From this, we gather two crucial facts: first, San Roque did not wait for the 120-day period to lapse before filing its judicial claim; second, San Roque filed its judicial claim more than four years before the Atlas doctrine, which was promulgated by the Court on June 8, 2007.

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by

law to the CIR to decide whether to grant or deny San Roque's application for tax refund or credit. It is indisputable that compliance with the l2}-d,ay waiting period is mandatory and jurisdictional. The waiting period has been in our statute books for more than 15 years before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxoayer's petition. Philippine jurisprudence is replete with cases upholding and reiterating these doctrinal principles. The charter ofthe CTA expressly provides that itsjurisdiction is to review on appeal "decisions ofthe Commissioner in cases involving refunds of internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the decision of the Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction has nojurisdiction over the appeal. The charter ofthe CTA also expressly provides that ifthe Commissioner fails to decide within "a specific period" required by law, such "inaction shall be deemed a denial" of the application for tax refund or credit. It is the Commissioner's decision, or inaction "deemed a

At,lt';tt'l',lr t VA'l') ttlrttl 'l'lrxt's

497

dcnirrl" l,ltrrt, thc t,axpayer can take to the CTA for review. Without a decision or an "inaction deemed a denial" of the Commissioner, the CTA has no jurisdiction over a petition for review' San Roque's failure to comply with the 120day mandatory period renders its petition for ,".ri"* with the CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws shall be void, except when ih" lu* itself authorizes their validity'" San Roque's void petition for review cannot be legitimized by the CTA or this Court because Riticte 5 of the Civil Code states that such void petition cannot be legitimized "except when the iaw itself authorizes [its] validity'" There is no law authorizing the petition's validity' It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or acquire any right from his void act' A right cannot spring in favor of a person from his own vo"id or illegal act. This doctrine is repeated in Article 2254 of tft" Ciuit Code, which states, "No vested or acquired right can arise from acts or omissions which against the law or which infringe upon the rights of olhers." For violating a mandatory provision of law in filing its petition with the CTA, San Roque cannot claim any rigtrt arising from such void petition' Thus' San Roque's petition with the CTA is a mere scrap of paper.

San Roque cannot also claim being misled' misguided or confused by the Atlas doctrine because San"Roque fiIed its petition for review with the CTA more than four yeais before Atlas was promulgated' Tihe Atlas doctrine did not exist at the time San Roque failed to comply with the 120-day period' Thus, San Roque cannot invoke Llne Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse' In any event ,theAtlas doctrine merely stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales involving

49rl

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the input VAT were made. The Atlus doctrirrc tlxrs not interpret, expressly or impliedly, thc 120+ll0 tlrr.y

h.

Like San Roque, Taganito also filed its petition for review with the CTA without waiting for the 120day period to lapse and it filed its judicial claim before the promulgation of the Atlcts docttine. However,

In fact, Section 106ft) and (e) of the Tax Oodc of 1977, as amended, which was the law cited by the Court in Atlas as the applicable provision of the

Whether the Atlas doctrine or the Mirq,nt doctrine is applied to San Roque is immaterial because what is at issue in the present case is San Roque's

non-compliance with the 120-day mandatory and jurisdictional period, which is counted from the date it filed its administrative claim with the Commissioner. The 120-day period may extend beyond the two-year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period. However, San Roque's fatal mistake is that it did not wait for the Commissioner to decide within the 120day period, a mandatory period whether t}reAtlas or t}:re Mirant doctrine is applied. At the time San Roque filed its petition for review

with the CTA, the 120+30 day mandatory periods were already in the law. Section 112(C) expressly grants the Commissioner 120 days within which to decide the taxpayer's claim. The law is clear, plain, and unequivocal. Following l}ne uerba legis docftrne, this law must be applied exactly as worded since it

is clear, plain, and unequivocal.

'l'ugtrnilo Mining Corporation v. CIR, G'R' No' 1961l$

periods.

law, did not yet provide for the 30-day period for the taxpayer to appeal to the CTA from the decision or inaction ofthe Commissioner. Thus, theAtle,s doctrine cannot be invoked to disregard compliance with the 30-day mandatory and jurisdictional period. Also, the difference between the Atlas doctrine, on one hand, and the Mirant doctrine, on the other hand, is a mere 20 days. The Atlas doctrine counts the twoyear prescriptive period from the date of payment of the output VAT, which means 20 days afber the close of the taxable quarter. The output VAT at that time must be paid at the time of filing of the quarterly tax returns, which were to be filed "within 20 days following the end of each quarter."

4t)9

Itrpttl 'l'ttxcr

Taganito can invoke BIR Ruling No. DA-489-03 dated December 10, 2003, which expressly ruled that the

"taxpayer-claimant need not wait for the lapse of the tZO-day period before it could seek judicial relief with the CTA by way of petition for review'" Since the petition was filed before the adoption of the Aichi doctrine, Taganito is deemed to have filed its judicial claim with the CTA on time.

c.

Phitex Mining Corporation. a. CIR, G.R' No' L97L56

Philex (1) filed on October 2I,2005 its original VAT return for the third quarter of taxable year 2005; (2) filed on March 20,2006 its administrative claim for refund or credit; (3) filed on October 17,2007 lts petition for review with the CTA. The close of the ihird taxable quarter in 2005 is September 30, 2005, which is the reckoning date in computing the two-year prescriptive period under Section 112(A). Philex timely filed its administrative claim on March 20, 2006, within the two-year prescriptive period. Even if the two (2)-year prescriptive period is computed from the date of payment ofthe outputVAT under Section 229, Philex still filed its administrative claim on time. Thus, theAtlas doctrine is immaterial in this case. The Commissioner had until July 17, 2006, the last day of the l2}-day period, to decide Philex's claim. Since the Commissioner did not act on Philex's claim on or before July 17, 2006, Philex had until August 17,2006, the last day of the 30-day period, to file its judicial claim. The CTA EB held that August l7 ,2006 was indeed the last day for Philex to fileltsludicial claim. However, it filed its petition for review with the CTA only on October 17 ,2007 , ot 426 days after the last day of fiIing. In short, Philex was

500

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pcriotl''l'h us' i l' t,hc taxpa.yer fi les his adminisirative claim on thc 61 lth dav, the Commissioner, with his fZO-aay period, will have until the 731st day to decidethe claim. if th" Co-*issioner decides only on the 731st day' or does not decide at all, the taxpayer can no longer file (2)-year his judicial claim with the CTA because the two lapsed' has days) (equivalent 730 to frescriptive period file an to taxpayer the to law bh" So-a.y period granted by if the even useless, utterly appeal Uuiot" tne CTAbecomes administrative his filing law tu"puyut complied with the claim within the two (:2)-yeat prescriptive period'

Prescriptive periods under Section 112(A) and (C)

There are three (3) compelling reasons why the 30-day period need not necessarily fall within the two (2)-year prescriptive period, as long as the administrative claim is filed within the two (2)-year prescriptive period. a.

Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "-.y, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance ofa tax credit certificate or refund ofthe creditable input tax due or paid to such sales." This means that the claim may be filed at anytime within two (2) years. It can even be filed on the last day of the two (2)-year period and it will strictly comply with the law. The two (2)-year prescriptive period is a grace period in favor ofthe taxpayer and he can avail ofthe full period before his right to apply for a tax refund or credit is barred by prescription.

b.

Section 1,12(C) provides that the Commissioner shall decide the application for refund or credit "within 120 days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A)." This means that the application in Section 112(.4') is the administrative claim that the Commissioner must decide the 120-day period. In short, the two (2)-year period in Section 112(4) refers to the period within which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise, the two (2)-year prescriptive period does not refer to the filing of the judicial claim with the CTA but to the fiIing of the administrative claim with the Commissioner.

c.

30-day period, or any part ofit, is required to fall within the two (2)-year prescriptive period (equivalent to 730 days), then the taxpayer must file his administrative claim for refund or credit within the first 610 days of the

Ifthe

two (2)-year prescriptive period. Otherwise, the filing of the administrative claim beyond the first 610 days will result in the appeal to the CTA being filed beyond the two (2)-year

5Ol

prt-.scri pt,ivc

late by 1 year and 61 days in filing its.iudicial clairn. ln any event, whether governed b.y jurisprudcncc bc{ilro, during, or afber theAtlas case, Philex's judicial cluim will have to be rejected because of late filing.

2.

Anlrt';l'l"rr tVt\'l't

Ittlrttl'l'rrxllr

The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing his administrative claim with the Commissioner' This Court cannot interpret a law to defeat, wholly or even partly' a r"-uav thafthe law expressly grants in clear, plain' and unequivocal language.

file his judicial claim with the CTA'

3.

Excess input VAT and excessively collected tax

TheinputVATisnot..excessively''collectedasunderstoodunder

amount section 229 because at the time the input vAT is collected, the of, and liability tax is a p"iJ i, correct and proper. The input v^AT or services properties goods, iegally paidby, aVAT-registered seller of u, inpui by another vAT-registered person in the sale of his even if the "ia own goods, propirties or services. This tax liability is true purchase part ofthe settei pu.r"" on tn" input VAT to the buyer as liable for legally not is pti.* ift" second VAT-registered person' who his creditfor as VAT [he input vAT, is the orru *ho applies the input collected "excessively" oltp"t vAT. If the input vAT is in fact

o*"

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thcn it is thc lirst VA'l'-rcgisl.orlrl person - the taxpayer who is legally liable and who is decmtrtl t,o ltttvl legally paid for the input VAT - who can ask for a tax rclu n
In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input VAT is not "excessively" collected as understood under Section 229. Al the time of paymenl, of the input VAT, the amount paid is the correct and proper amount. Under the VAT system, there is no claim or issue that the input VAT is "excessively" collected, that is, that the input VAT paid is morc than what is legally due. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere existence of an "excess" input VAT. The term "excess" input VAT simply means

that the input VAT available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is more than what is legally due. Under Section 229, the prescriptive period for filing a judicial claim for refund is two (2) years from the date of payment of the tax "erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." The prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the input VAT is in fact "excessively" collected, that is, the person liable for the tax actually pays more than what is legally due, the taxpayer must file a judicial claim for refund within two (2) years from his date of payment. Only the person legally liable to pay the tax can file the judicial claim for refund. The person to whom the tax is passed on as part of the purchase price has no personality to file the judicial claim under Section 229. Under Section 110(B) and Section 112(A), the prescriptive period

for filing a judicial claim for "excess" input VAT is two (2) years from the close of the taxable quarter when the sale was made by the person legally liable to pay the output VAT. This prescriptive period has no relation to the date of payment of the excess input VAT. The excess input VAT may have been paid for more than two (2) years but this does not bar the filing of a judicial claim for excess VAT under Section 112(A), which has a different reckoning period from Section 229. Moreover, the person claiming the refund or credit of the input VAT is not the person who legally paid the input VAT. Such person seeking the VAT refund or credit does not claim that the input VAT was excessively collected from him, or that he paid an input VAT that

l'l',rx tVA'l't Ittpttl'l'ttxln

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is rnorc lhan whaL is krgrrll.y rlrrc. paid the input VA'l'.

4. Effectivity

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is not, the taxpayer who legally

and scope of Atlas, Mirant and' Aichi

doctrines

The Atlas doctrine, which held that claims for refund or credits of input vAT must comply with the two (2)-year prescriptive period under Section 229, should be effective only from its promulgation on June 8,2007 until its abandonment on september 12,20o8inMirant.

The Atlas doctrine was limited to the reckoning of the two-year prescriptive period from the date of payment of the output vAT. Prior iothe Attas doctrine, the two (2)-year prescriptive period for claiming refund or credit of input vAT should be governed by section 112(A) following t}Ie uerbal legis rule. The Mirq.nt ruling, which abandoned tJoe Atlai doctrine, adopted the uerbal legis ruIe, thus applying Section 112(A) in computing the two (2)-year prescriptive period in claiming refund or credit of inPut VAT. The Atlas doctrine has no relevance to the 120+30 day periods

under section 112(C) because the application of the 120+30 day periods was not in issue inAtlq,s. The application of the 120+30 day periods was first rai sedinAichi, which adopted the uerbal legas rule in irolding that the 120+30 day periods are mandatory and jurisdictional. When Section 112(C) states that "the taxpayer affected may, within 30 days from receipt of the decision denying the claim or after the expiration ofthe 120-day period, appeal the decision or the unacted claim with the cTA," the law does not make the 120+30 day periods optional just because the law uses the word "may." The word "may" simply means that the taxpayer may or may not appeal the decision of the commissioner within 30 days from receipt of the decision, or within 30 days from the expiration of the 1.2}-day period' The old rule thatthe taxpayermayfile the judicial claim, without waiting for the commissioner's decision if the two (Z)-year period is about to expire, cannot apply because that rule was adopted before the enactmlnt of the 30-day period. The 30-day period was adopted precisely to do away with the old rule, so that under the vAT system, lh" t.*pry"r will always have 30 days to file the judicial claim even if the commissioner acts only on the 120th day, or does not act at all during the 120-day period. A claim for tax refund or credit, like a claim for tax exemption, is construed strictlv against the taxpayer.

*,r.

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..Head office"

CHAPTER

)0(III

COMPLIANCE REQUIREMENTS A person who is subject to pay internal revenue tax must comply with certain administrative requirements prescribed by the Tax Code. These are:

1.

Registration as a VAT taxpayer;

2.

Keeping and stamping of books of accounts, sales invoices and official receipts and other accounting records;

3. 4. 5.

Issuance ofinvoices and receipts;

Filing of tax returns and payment of taxes; and Withholding of tax on certain payments made to other persons.

I

(I

l(

))

rrrlirrs

t,0 t,[re

dcclared specilic or identifiable

principal place/heacl 0llictr 0l'business as stated in the Articles of irr.o.poruiion/Articles r-rf' Partnership/Articles of Cooperation /DTI Certificate of Registration, as the case may be, or, in the absence thereof, the place where the complete books of accounts are kept. It is the fixed place of business, whether rented or owned, and whether or not the products/services being sold are located or displayed thereat. For persons who conduct business in a nomadic or roving manner, suclras peddlers, "tiangges," mobile storeS Operators, COmmOn CarrierJ school bus operators without designated garages/terminals, etc., their place of residence shall be considered as the HO.2

"Branch" means a separate or distinct establishment or place

of business where sales transactions are conducted independently from the Ho. For purposes of these Regulations, branch shall include the following: (i) Sales outlet or establishment situated in another Iocation/address other than at the Ho; (ii) Facility with sales activity; (iii) Real properties for lease including car parks, with Administrative office stratt ue considered as a branch. If CRM/POS are used thereat, the same shall be registered under existing CRMIPOS policies and procedures prescribed under the regulations on secondary registration process, etc.

Registration Requ irements Any person who, in the course oftrade or business, sells, barters,

or exchanges goods or properties, or engages in the sale of services subject to VAT imposed in Sections LOG (sq,le of goods or properties) and 108 (sale of seruices) of the Tax Code, shall register with the appropriate revenue office,1 using the proper BIR forms, and pay an annual registration fee in the amount of Five hundred pesos (F500), using BIR Form No. 0605 (payment form), for every separate or distinct establishment or place ofbusiness (save a warehouse without sale transactions) before the start of such business and every year thereafter on or before the 31st day ofJanuary.

"Separate or distinct establishment" shall mean anybranch or facility where sale transactions occur.

"Facility" may include but not limited to place of production,

showroom, warehouse, storage place, gatage' bus terminal, or real property for lease with no sales activity. A facility shall be registered a" a bratr"h whenever sales transactions/activities are conducted thereat. Registration of the "facility" with no sales activity is not subject to payment of annual registration fee'

"Principal place of business" refers to the place where the

head or main offi"" ir lo"uted as appearing in the corporation's Articles

oflncorporation. In the case ofan individual, the principal place of business shall be the place where the head or main office is located and where the books ofaccounts are kept. "Warehouse" means the place or premises where the inventory of goods for sale are kept and from which such goods are withdrawn for delivery to customers, dealers, or persons acting in behalf of the business.

l"Appropriate revenue office" refers to the divisions under the Large Taxpayers Service (for large taxpayers) or to the Revenue District Offrce (for non-large taxpayers) which has jurisdiction over the principal place of business of the taxpayer.

504

Any person who maintains a head or main office and branches in different places shall register with the Large Taxpayers service zSee Rev. Regs.

No. 7-2012, April2'2OI2.

506

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(if officially designated and notified as a Large Taxpayer) or with tlro Revenue District Office (RDO) [if not designated as a Large Taxpayer l, which has jurisdiction over the place wherein the main or head office orbranch is located. However, the registration fee shall be paid to any accredited bank in the BIR national office or revenue district where the head office or branch is registered, provided that in areas where there are no accredited banks, the same shall be paid to the RDO, collection agent, or duly authorized treasurer of the municipality where each place ofbusiness or branch is situated. Each VAT-registered person shall be assigned only one Taxpayer Identification Number (TIN). The branch shall use the 9-digit TIN of the head offi.ce plus a 3-digit branch code.

'VAT-registered person" refers to any person registered in accordance with this section.

'VAT-registrable person" refers to any person who is required to register under the provisions ofthis section, but failed to register.

Registration is an indispensable requirement under our VAT law. However, registration does not determine taxability under the VAT law.3 Ordinarily, a person who is subject to any internal revenue tax must register with the BIR. If he is liable to value added tax (e.g., dealer of ready-to-wear clothes with gross sales over F1,919,500), he registers as a VAT person. If he is exempt from value added tax (e.g., sale of books or dealer of raw eggs, regardless ofhis gross sales), he registers as a non-VAT person. If he is engaged in transactions subject to value added tax and in other

transactions exempt from value added tax, he must both register as VAT and non-VAT person (e.g., dealer of books, magazines and school supplies; real estate developer who sells residential lots not exceeding F1,919,500 and/or residential houses and lots and other dwellings at prices not exceeding F3,199,200, real estate lessors of real properties at F12,800 or less per unit per month and at more than F12,800 per unit per month). However, a real estate dealer who sells real property on the installment plan at gross selling prices over the threshold need not register as a VAT person and as a non-VAT person, since he is engaged in one business subject to value added tax. However, he must issue non-VAT receipts or acknowledgment receipts whenever he receives installment payments from sales on a deferred payment basis not on the installment plan. 3Sec. 236, 2005

NIRC.

See Commissioner vs. Seagate Technology (Plrril.),

ibid.

ltl7

A person comrrr0rrt:irrl{ il tr(,w lrrrsincss becomes a taxable person,

sales or gross receipts in pl,g1g,b00 for the next twelve transactions Ltrxable {'r'nr excess oi gross receipts for the or gross sales a realize to months. Ifhe expects register as he should less, or F1,919,500 is that next twelve -on1hr as a VAT register to he opts person' unless exempt a non-VAT or who persons VAT-registered aII are cuslomers his person because persons so vAT-registered another with only deal might want to in person who A credits' tax ofinput benefits the thJt tney can enjoy (like or ofrattan sale business or trade in engaged 2O12 wis already lawyer) or (like medicine of a doctor profession of abaca) or exercise will be subject to value added tax, ifhe realizes or expects to realize a gross salLs or gross receipts for the next twelve months exceeding

if he expects to realizc irn irnnual gross

F1,919,500.4

Registration has recently been categorized into two (2) types (1) primary registration; and (2) secondary registration' "P-rimary rejistration" is the process by which a person, whether an individual, including estates and trusts, or a corporation and other juridical entities, upon application and full compliance with the registration requirements, is registered with and consequently included in the registration database of the BIR. Primary registration may involve t*'o .."ntrios depending on the purpose of the taxpayer applying (b) for registration as follows: (a) TIN issuance and registration; or Purely TIN issuance. "secondary registration" shall pertain to subsequent registration activities after the issuance of BIR certificate of Relgistration relative to the printing and issuance of official receipts/ sal-es invoices; keeping/registering of books of accounts and other accounting records; applying for certain accreditation requirements and securing other applicable registration-related permits's

Mandatory Registration Any person (natural or juridical) who, in the course of trade or business or profession, sells, barters or exchanges goods or properties' or engages in ttre sale or exchange ofservices shall be liable to register if:

a.Hisgrosssalesorreceiptsfromon-goingbusinessforthe

past twelve (12) months, other than those that are exempt

aSee Rev. Regs. sSee Rev. Regs.

No. 16-2011, October 27 '2017 No. 7 -2012, Aprll 2' 2012.

508

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under Section 109(1XA) to (U) of the Tax Code, havo exceeded One million nine hundred nineteen thousand five hundred pesos (F1,919,500); or

b.

Vnt,r

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input tax must be evidenced by a VAT invoice for purchase of goods or property or VAT official receipt for purchase of service, which is issued by a VAT-registered seller ofgoods, properties or services. Taxpayers previously registered as VAT taxpayers under R.A. 8424 or other VAT law are not required to register anew under R.A. 9337, while taxpayers who are previously registered as non-VAT taxpayers but are now covered by the VAT Law shall update their registration by filing BIR Form L9O5 (Application for Registration Information Update) at the RDO having jurisdiction over the taxpayer's Head Office.G The domestic shipping agent shall epply for a TIN for each principal it represents. - Each principal is by itself a taxpayer separate and distinct from the agent and the other principals of the same agent. For purposes

of registration and securing the TIN of the principal(s), the shipping agent must submit the Agency Agreement between him and his principal(s) which will suffice as the documentation requirement.T 6RMC 62-05, October 18,2005. ?Q39, RMC 31-08, April 11, 2008

509

ttcl l(r'rlttitttlrlttl.s

registration requircments:

1.

Professionals nttw covered by VAT pursuant to R'A' 9337 are required to update their registration using BIR Form 1905.

l.llftheirgrosssalesorreceiptsforthepasttwelve(12) months have exceeded the F1,919,500 threshold' they are required to register as VAT taxpayers by iegistering VAT as additional tax type of said taxpayers' They have to accomplish BIR Form No'

(F1,919,500).

a VAT-registered buyer, the

Atttrt,:lt'l'nx t VA'l't

[,'9r doctors 9f urcdici[o u1d lawyers, the fbllowing are their

There are reasonable grounds to believe that his gross sales or receipts in a new business for the next twelve (12) months, other than those that are exempt under Section 109(1XA) to (U) of the Tax Code, will exceed One million nine hundred nineteen thousand five hundred pesos Registration as a VAT taxpayer may be mandatory or directory. A person whose transactions exceed the prescribed registration threshold is a taxable person, regardless of whether or not he registers as a VAT person. In other words, non-registration as a VAT person does not exempt the seller from value added tax (output tax) liability. Based on existing law and regulations, the seller who did not register as a VAT person cannot claim any input tax passed on to him as a penalty for non-registration. To be creditable to

rt,;

( iotrtpl ttt

1905.

t.2 If their gross sales or receipts for the past twelve

months have not exceeded the Fl,919,500 threshold' they are still required to update their registration by registering Percentage Tax as tax type because they are now subject to percentage tax under Section 116

ofthe Tax Code. Apply for Authority to Print Receipts (ATP) using BIR Form 1906 to be able to have printed VAT receipts' Every person who becomes liable to be registered shall register with the Lipropriate revenue office (LTS or RDO), which has jurisdiction^*". th" head office or branch of that person, and shall pay the annual registration fee prescribed in subsection 9.236-1(a) irereof. Ifhe fails to register, he shall be liable to pay the output tax under sections 106 and/or 108 of the Tax code, as if he were a vATregistered person, but without the benefit ofinput tax credits for the p"riod in which he was not properly registered'

2.

Moreover,franchisegranteesofradioandtelevisionbroad-

year casting, whose gross annual receipts for the preceding calendar shall register within thirty (30) days from the

*".""JFt0,000,000,

end of the calendar Year.8

When to Register as Non'VAT Taxpayer Every person, other than those required to be registered as VAT p"r*t r, engaged in any business, shall, on or before the

of his business, or whenever he transfers to another

"o--"rriu-ent revenue district,

(a) register with the appropriate revenue office

sSec. 9.236-1(b), Rev. Regs. No. 16-05, September 1, 2005'

510

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within ten (10) days from the commencement of business or transf'er

in the manner prescribed under this section and (b) pay the applicable registration fee ofFive hundred pesos (Fb00.00) for every s-parate or distinct establishment or place of business, if he has not paid the registration fee in the beginning ofthe taxable year.

The head or main office and each of its branches located in different places must be registered with the Revenue District office where the head or main office or branch is located.e

(2)

as amended. (3)

Franchise grantees of radio and./or television broadcasting, whose annual gross receipts ofthe preceding year do not exceed Ten million pesos (F10,000,000) derived from the business covered by the law granting the franchise, may opt for VAT registration. This option, once exercised, shall be irrevocable.

(4)

Radio and TV broadcasting whose gross annual receipts do not exceed F10 million and which do not opt to be VAT registered;

(5)

PEZA and other ecozone registered enterprises enjoying the preferential tax rate of 5Vo, in lieu ofall taxes;

(6)

SBMA and other Freeport zone-registered enterprises enjoying the preferential tax rate of 57o, in lieu of all

Optional VAT Registration A VAT-registered person may, in relation to Section 9.286_1(c) of these Regulations, elect that the exemption in section 4.10g1(B) hereof shall not apply to his sales of goods or properties or services.l. once the election is made, it shall be irrevocable for a period of three (3) years counted from the quarter when the election was made, except for franchise grantees of radio and rv

do .tot

t"tr -illio.r p"ror (P-10,000,000),

becomes"""""d perpetually irrevocable. rl

*h"r" th" optioo

There are some taxpayers who are engaged in businesses that are exempt from value added under existing law (RA.9SSZ), but are given the option to register as VAT taxpayers. These include:

(1)

Any person who is VAT-exempt under Section 4.10g-1(B) (1XV) not required to register for VAT may, in relation to Section 4.109-2, elect to be VAT-registered by registering with the RDO that has jurisdiction over the head offi.ce of that person, and pay the annual registration fee ofF500 for every separate and distinct establishment.

eSec. 9.236-1, Rev. Regs. 10The business

No. 7-95, December 9, 199b.

ofan international sea carrier is exempt from VAT because this is a serwice subject to percentage tax. Ifthe main business (international shipping) is exempt from vAT, the vAT-exempt person cannot elect that its exempt business/ es be placed under the vAT system. The option to be subject to vAT on its exempt transactions is available only to a vAT-registered person (Az, RMc gl-200g, January 30r 2008). It cannot elect that said principal exempt business be subject to vAT even if its secondary businesses are subject to VAT (AgZ, RMC g1-200g u"a ae, RMC 46_ 2008' February 1' 2008). In determining main or principar business ofa taxpayer, we apply the predominance test (Elva or more of its gross receipts). If his main business is not within the vAT system, he can be considered as a vAT person eligible for election under Section 109(2) of the Tax Code. llSec.15, Rev. Regs. No.4-2002, February 7,2007.

Any pcrsort wlro is VA'l'-rcgistered but enters into transactions which arc cxcmpt from VAT (mixed transactions) may opt that thc VAT apply to his transactions which would have been exempt under Section 109(1) ofthe Tax Code,

taxes.

Any person who elects to register under subsections (1) and (2) above shall not be allowed to cancel his registration for the next three (3) years, counted from the quarter when the election was made, except for franchise grantees of radio and TV broadcasting whose annual gross receipts for the preceding year do not exceed F10 million, where the option becomes perpetually irrevocable.lz The above-stated taxpayers may apply for VAT registration not later than ten (10) days before the beginning ofthe taxablels quarter and shall pay the registration fee prescribed under sub-paragraph (a) of this section, unless they have already paid at the beginning of the year. In any case, the Commissioner of Internal Revenue may, for administrative reason, deny any application for registration. once registered as a vAT person, the taxpayer shall be liable to output tax ut d b" entitled to input tax credit beginning on the first day of the

month following registration.

12Sec. 15, Rev. Regs. No.4-2007, February 7,2007. 13The word "calendar" was replaced by "taxable" so as to cover

adopted fiscal year in computing their income and expenses'

corporations that

rf 512

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7. 8.

VAT Books of Accounts Notwithstanding the provisions of Section 233 (subsidiary boohs) and in addition to the regular accounting records required under Section 232 (keeping of booh,s of accounts) of the Tax Code for income tax purposes, all VAT-registered persons are required to keep a control subsidiary sales and purchase journals in the head office and additional subsidiary sales and purchasejournals for every branch or outlet where sales and,/or purchases are made.la

(a)

(b)

Subsid.iary sales journai. - The daily sales are recorded in this journal. Depending on the nature of the business, the subsidiary sales journal should at least contain separate columns for the following:

1. 2. 3.

Sales - Exempt

4.

Sales - Taxable

5.

Deemed Sales

6.

Output Taxes.

Sales - Export Sales - Zero-rated

Subsidiary purchase journal. - The daily purchases, both local and imported, and other transactions affecting purchases and input taxes are recorded in this journal. All purchases from VAT-registered persons shall be entitled to input tax credits. All local purchases from other persons who are not VAT-registered shall not be entitled to input tax credits. Depending on the nature ofthe business, the subsidiary purchase journal should at least provide the following:

1. 2.

Purchases of supplies.

3.

Purchases of raw materials.

4.

Purchases ofservices.

5.

Purchases of capital goods.

6.

Purchases from non-VAT persons.

Purchases ofgoods for sale.

(c)

rt,;

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t

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S

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lnPut'l'ttxcs. InPut tax dccmed Paid'

Subsid,iary recorcl of purchase or importation of capital In addition, a subsidiary record in ledger form good's.

tttult b" maintained for the acquisition, purchase or

importation of depreciable assets or capital goods which shallcontain,amongothers'informationonthetotalinput tax thereon as well as the monthly input tax claimed in VAT declaration or return.ls correctness of business transactions are not rendered inualid simply because they are record.ed in unregistered accounting records. liable to value added taxes are required to keep subsidiary - Purrorls joo"rrul and subsidiary purchase journal, where taxable sales ,ule, and purchases are to be iecorded. Books of accounts and other accounting records mustbe registered with the appropriate Revenue District office. However, the correctness of financial and business transactions are not rendered incorrect or invalid merely because they are recorded in unregistered accounting records'16

lnvoicing Requirements All persons subject to an internal revenue tax shall, for each sale twentyor transflr of merchandise or for services rendered valued at sales or or receipts registered duly five pesos (F25.00) or more, issue date the showing in duplicate, least commercial invoices, prepared at merchandise of description and cost of transaction, quan[ity, unit in the or nature ofserwice. In the case ofsales, receipts or transfers of regardless or (F100.00) more, or pesos amount of one hundred value to liable person a by made is amount, where the sale or transfer where added tax to another person also liable to value added tax, or commissions' rentals, as made payment the receipt is issued to cover .o*purrr'utions or fees, receipts or invoices shall be issued which shall sho* the name' business style, if any, and address of the purchaser' person, customer or client. where the purchaser is a vAT-registered receipt or invoice the required, herein in addition to the information (TIN) of the Number Identification shall further show the Taxpayer purchaser.lT

I6RMC 62-05.

l{lhompsonShirtFactoryv.Collector,CTACaseNo'377,August27'L963' taRev. Regs. No. 5-87, September 1, 1987

lil

r?Sec. 237,

NIRC.

ql 5t4

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Itt,:v t r':wr,:tr oN'l'nxn't'ror.r

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices charged therefore or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services.ls A "receipt" is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor and creditor, or person rendering services and client or customer.re

Cash register machineslPOs machines. VAT-registered - be allowed persons who have permits to use cash registers shall to continue using the same. The provisions of Revenue Regulations No. 4-80, as amended, shall continue to be in force insofar as they do not conflict with the provisions of this section. In addition to the data required to be reflected on the cash register receipts, the VAT registration number of the seller should also be shown. If a buyer desires that a regular sales invoice be issued in lieu ofthe cash register tape, the seller should issue such invoice. Exempt sales should be properly identified in the cash register tape.2' A manufacturer/dealer/ vendor/distributor must register - on behalf of the buyer/user the CRM/POS to be sold or distributed not later than five (5) days from the date of sale of the machine, and before it is actually used by the buyer/user. such registration shall be done manually with the RDo/ LTADI and II/LTDO, or electronically through the BIR's electronic mail (e-mail) or website (e-AccReg System).2l A VAT-registered person shall issue: (1) a VAT invoice for every sale, barter or exchange ofgoods or properties; and (2) a VAT official receipt for every lease ofgoods or properties and for every sale, barber or exchange of services.

A VAT-registered person may issue a single invoice or receipt

for VAT-taxable and VAT-exempt transactions, provided that the

invoice or receipt shall clearly indicate the break-down of the sales price between its taxable, exempt and zero-rated components and the calculation of the vAT on each portion of the sale shall be shown on the invoice or receipt. A VAT-registered person may also issue separate invoices or receipts for the taxable, exempt, and zero-rated 18Sec. 2(c), Rev. Regs. No. 2-73. lsSec.2(B), Rev. Regs. No. 7-78. 20Rev. Regs. No. 5-87, September 1, 198?. 21See Rev. Regs. No. 4-2OI3, December E, 20lZ which further amended Rev. Regs. No. 1L-2004 and 5-2005.

5ll-r

its saltls, provi
component


prominentlyontheinvoiceorreceiptandifthesaleissubjectlozeto SALE" shall be written iercent (o%)vLT,the term "ZERO-RATED or printed prominently on the invoice or receipt'

TheamountofthetaxshallbeshownaSaSeparateiteminthe invoice or receiPt'

Sales invoice v. Official receipt Petitioner offered in evidence vAT invoices to substantiate its zero-rated sales. cTA en banc denied petitioner's claim, stating that sinceitisengagedinsaleofservices,VATreceiptsshouldhavebeen presented.

Sectionllsofthelgg7TaxCodedoesnotcreateadistinction

between a sales invoice and an official receipt. sales invoices are recognized commercial documents to facilitate transactions. They .re iroof" that business transactions have been concluded. Thus, an met invoice would suffice, provided substantiation requirements are

(AT&TComrnunicationsSerwicesPhil'a'CIR,G'R'No'782364' iugust 3r 2070). However, the Court in a more recent case noted thal there is a fine distinction between a VAT invoice and a VAT

official receipt. "vAT invoice and vAT receipt should not be confused does the as referring to one and the same thing' Certainly, neither and invoice sales documents principal law intendlhe two - Phil' Corp' u' CIR'official GR' (Kepco alterttatively used receipts - to be

No. 781858, November 24,2070)'

Principal v. Supplementary invoices and receipts The principal and supplementary receipts and invoices of the head office and each of the branches shall have its own independent print (BIR series of serial number. The application for authority to Form 1906), together with the necessary documentary requirements' jurisdiction over the shall be submilted to the RDOILT Office having the old BIR Form However, head offrce of the taxpayer-applicant' available' becomes form revised 1906 shall still be usld-untiiihe printed be shall invoice invoice/commercial The official receipvsales following: the showing, among others,

a.ForNon-VATofficialreceipts/salesinvoicesandother commercial invoices (VAT or NV) such as delivery receipts, order slips, purchase orders, provisional receipts'

516

Vrr.lt,r Atrlt,:tr'l'nx t VA'l't

llt,rv I t,twt,:tt olt'l'nxn't,toru (

acknowledgment receipts, collection receipts, crcdiVdclril,

A.

memo, job orders and other similar documents, in ircldit,ion to applicable information, the phrase "THIS DOCUMIIN'I'

IS NOT VALID FOR CLAIM OF INPUT TAX" in lxrld letters, which shall be conspicuously printed at the I'ace ol' the document. b.

At the bottom of the official, sales invoice or commercial invoice, the phrase: "THIS IIMICE/RECEIPT STIALL BE VALID FOR FTVE (5) YEARS FROM THE DATE OF THE ATP."

c.

Buyers ofgoods on account or credit evidenced by Charge Sales Invoice shall be entitled to input tax. Upon collection by the seller, a Collection Receipt shall be issued to the buyer to evidence receipt ofpayment thereof.

d.

For taxpayers transacting with senior citizens and persons with disabilities, the following additional information shall be required: senior citizen TIN; OSCA ID/PWD ID No.; SC/ PWD discount;and signature of SC/PWD (RMO 72-2073, May 3,2013).

The validity of all unused./unissued principal and supplementary invoices/receipts printed prior to January 18, 2013, the effectivity date of Rev Regs No. 18-2012, from June 30, 2013 to August 30, 2013. However, the deadline for the filing an application for printing of new receipts to replace all unused./unissued principal and supplementary invoices/receipts shall be maintained as of April 30, 2013. Thus,

all applications received after said date shall be considered late

application and penalties for late filing shall be imposed. All unused./ unissued receipts/invoices shall be surrendered to the RDO where the taxpayer is registered on or before the 10th day after the date of printing. The date of new principal and supplementary receipts/ invoices is the date of expiration of the validity period of the unused./ unissued receipts/invoices referred to herein. After August 30, 2013, all principal and supplementary receipts/invoices printed prior to January 18, 2013 shall no longer be valid. Issuance ofsaid receipts/invoices shall be deemed an issuance of invalid receipt or as if no receipts were issued, in violation of Section 264 of the Tax Code. Transactions with such receipts are deemed not properly substantiated and may not be allowed as a deducti on (RMC 44-2073, June 17,2073). The use of receipts/invoices is further extended as follows:

ltlT

lotrrpltrr nrr, l(r't1tt irt'ttttrttLs

licccipts \vith ATI' prior to January-t-20!L - All receipts/ invoices with A'l'P prior to January l,2OII shall no longer be valid as of'August 31, 2013. The issuance of said receipts/ invoices starting August 31, 2013 constitutes a violation of the Tax Code, and considered as if no receipVinvoice was issued.

B.

Receipts with ATP dated January 1, 2011 up to January 17. 20Lg - They can be used until October 31, 2013, provided that the new ATP issued on or before August 30, 2013.

However, the application for new ATP filed after April 30, 2013 is deemed filed out of time subject to penalty of F1,000. The term "valid until October 31, 2013 only" shall be stamped prominently on the face of the receipts/ invoices (original and duplicate copies); otherwise, no deduction and input tax may be claimed using these invoices/rec eipts ( RMC 52 -20 7 3, Augu st 1 3, 20 7 3 ) . Only VAT-registered persons may print their TIN followed by the word'1/AT." - A VAT-registered person shall issue (a) a VAT invoice for every sale, barter or exchange ofgoods or properties, and (b) a VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoices or official receipts. Said documents shall be considered as a'VAT invoice" or "VAT official receipt." All purchases covered by invoices other than VAT invoice or official receipt will not entitle a VAT-registered purchaser to input tax. VAT invoice or official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part ofhis accounting records.22

Official receipts and. inaoices ca.nnot be used. inter'

- The input VAT on domestic purchases of goods or properties shall be allowed as tax credit to the purchaser only upon consummation of sale, which means upon issuance by the seller of the VAT sales invoice evidencing the sale. On the other hand, the input VAT on purchases of services shall be available as tax credit to the purchaser only upon issuance by the seller of the VAT official receipt. Considering that for the same transaction, the output VAT of the seller becomes the input VAT of the purchaser, the law requires that the input VAT be substantiated by the very same

changeably.

"Sec.4.113-1(4), Rev. Regs. No. 16-05, September 1,2005.

5tu

lit,:vil,;wt,:tr oN'l'rtxn'l'tott

Vnr,r nr Atrtrr,;tr'l'nx ( VA'l') ( iorrrplurrrcr, ll.rrlrr irctrrcttt,s

document on which the output VAT was based. Hence, thc in;rul, VAT on purchases of goods must be supported by VAT sales invoiccs, while the input VAT on purchases of services must be supportcd b.y VAT official receipts.23 The electronic statement of account and non-VAT receipl issutr
lnformation in VAT invoice or official receipt The following information shall be indicated in VAT invoice or offlcial receipt:

1.

A statement that the seller is a VAT-registered

person,

followed by his TIN;

2.

The total amount which the purchaser pays or is obligated

to pay to the seller with the indication that such amount

includes the VAT, provided that (a) the amount of tax shall be shown as a separate item in the invoice or receipt, (b) if the sale is exempt from VAT, the term'"VATexempt sale" shall be written or printed prominently on the invoice or receipt, or (c) ifthe sale is subject to zero percent (IVo)YAT, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt;25 (d) if the sale involves goods, properties or services, some of which are subject to and some of which are VAT-zerorated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its '3BASF Philippines v. Commissioner, CTA EB No. 47, January 5,2006. 'zaBIR Ruling No. DA-646-2006, October 31, 2006. 25The invoicing requirement set forth in Sec. 4.108-1 ofRev. Regs. No. ?-9b, particularly the printing of the word "zero-rated" on invoices or receipts, though not expressly provided in the law, was recognized as a reasonable and in accord with the efficient collection of VAT. When R.A. 933? took effect on November 1,2005, it included the invoicing requirement under Rev. Regs. No. 14-05. The conversion from regulation to law did not diminish the binding force ofsuch regulation with respect to acts committed prior to the enactment of that law (Panasonic communication Imaging Corp. of the PhiI. u. CIR, G.R. No. 178090, February 8,2010).

519

taxabler oxcmpt lrnd zero-rated components, and the calculation ol' lhc VAT on each portion of the sale shall be shown on thc invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.26

3.

In the case of sales in the amount of One thousand pesos (F1,000) or more, where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client, shall be indicated in addition to the information required in (1) and (2) of this Section.2T

Additional information in VAT invoice or receipt To establish the audit trail of sales and purchases needed in monitoring collections specifically from the value-added tax, the receipts, sales or commercial invoices must reflect the "name" ofboth the seller and the buyer as it appears in the Certificate ofRegistration for tax purposes. As such, all manufacturers, wholesalers and other sellers, in issuing receipts or invoices are required to accurately reflect

their registered name as well as their clients. Taxpayers who changed status from non-VAT to VAT or from VAT to non-VAT as a result of the implementation of R.A. 9337 should submit within thirty (30) days from effectivity of the law an inventory of unused invoices or receipts as of the day immediately preceding the effectivity of R.A. 9337, indicating the number of booklets and the corresponding serial numbers. Unused non-VAT invoices or receipts shall be allowed for use in transactions subject to VAT, provided the phrase "VAT-registered as of November I, 2005, effectivity date of R.A. 9337" is stamped on all copies thereof. Likewise, unused VAT invoices or receipts shall be allowed in VAT-exempt transactions, provided the phrase "Non-VAT-registered as ofNovember 1, 2005" is 26When

the VAT-registered seller chooses to issue mixed VAT invoices or

receipts, it is easy to reflect the breakdown of the sales into taxable at l27o or O7o or exempt from VAT, including the separate indication of thel2ToYAT in the invoice or receipt, because that is clearly shown therein. However, if the VAT taxpayer selects to issue separate VAT and non-VAT invoices or receipts, the RDO may not deny the request of the taxpayer if he chooses to issue non-VAT receipts to cover VAT-exempt transactions like collection of sales on credit from customers. See RMC 29-2005 and RMC 62-2005. 'z?Sec. 4.113-1(8), Rev. Regs. No. 16-05, September 1, 2005.

520

Vrr,r rr, Ar rlr,:rr'l'nx t VA'l't ('orrrlrlrrrrrrl ltr,rlrrirctttr,ttls

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stamped on all copies thereof. These unused invoices or receipts with the proper stamp shall be allowed for use in transactions subject to VATA.Ion-VAT up to December 31, 2005.28

lssuance of VAT lnvoice or Receipt for Non-VAT or

lt2l

Penalties The following penalties shall be imposed for violations of certain Tax Code provisions:

1.

Issuance ofVAT-inuoice or receipt for exempt trq.nsactions. Pursuant to Section 109 of the 1997 Tax Code, a VAT-

-

Exempt Sales

registered person whose sale of goods or properties or services which are otherwise not subject to VAT but who issues a VAT invoice or receipt for such transactions shall have the following consequences:

As provided under Section lI3 (inuoicing and accounting requirernenfs) of the Tax Code, a VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237 (issuance of inuoices or receipts), the following information shall be indicated in the invoice or receipt:

a.

Shall be liable to the payment of output tax due on such sale of exempt goods or properties or services computed at tf-l (for lj%o) or 1/9.33333 (for l2%o) of the total amount appearing on such issued VAT invoice/receipt;

to pay to the seller with the indication that such amount includes the value-added tax.

b.

No input tax credits shall be allowed to be claimed against the output tax due on such transactions; and

Corollary thereto, Section 4.108-1 of Revenue Regulations No. 7-95, as amended, in part, likewise provides that if a VAT-registered person is also engaged in non-VAT (exempt) transactions, the rule is that he is not allowed to issue VAT invoice or receipt on said non-VAT transactions. AVAT invoice or receipt shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 106 and 108 ofthe Code. Thus, he should use separate invoices receipts

c.

(1)

A statement that the seller is a VAT-registered

(2)

The total amount which the purchaser pays or is obligated

person, followed by his taxpayer's identification number (TIN); and

2.

"The foregoing exemptions to the contrary notwithstanding, any person whose sale of goods or properties or services which are otherwise not subject to VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his liability to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input tax credit, and such tax shall be recognized as input tax credit to the purchaser under Section 110, all of this Code."

2sTransitory provisions (unused invoices or receipts), Rev. Regs. No. 16-05.

Issuance of VAT inuoice or receipt without the required Non-inclusion of the required phrase shown above on the VAT invoice or receipt to be issued by a VATregistered taxpayer shall be subject to the administrative

phrase

penal sanctions provided for in the Tax Code and

for taxable and exempt transactions.

The ultimate paragraph of Section I09 (exempt transq,ctions) of the 1997 Tax Code cites the consequence of issuing a VAT invoice or receipt by a VAT-registered person for his exempt transactions, uiz.:

Shallbeliabletothe applicablepercentagetax,ifany, imposed under Title V of the Code;

implementing regulations.2e

Consequences of issuing erroneous VAT invoice or official receipt

If a person who is not VAT-registered issues an invoice or receipt showing his TIN, followed by the word "VAT," the erroneous issuance shall result to the following consequences imposed under R.A.9337:

1.

The non-VAT person shall be liable to (a) the percentage taxes applicable to his transactions; (b) VAT due on the transactions under Section 106 or 108 ofthe 2005 Tax Code, without the benefit of any input tax credit; and (c) a 5O7o surcharge under Section 248(8) ofthe Tax Code.

"RMC 61-03, October 8, 2003. This rule applies to transactions prior to the effectivity of R.A. 9337 (November 1,2005).

522

Vnr,rrr, Arrrrr,:rr'l'nx

l},:vrr,:wt,:tr oN'l'nx,,t't'tor.t

2.

VAT shall be recognized as an input tax credit to thc purchaser under Section Ll} (input tax credits) ofthe 2005 Tax Code, provided the requisite information required under Subsection 4.113(8) of these regulations is shown on the invoice or receiPt.so

If a VAT-registered person issues a VAT invoice or official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words'VAT-exempt sale," the transaction shall become taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase.sl

VAT inuoice or receipt must include TIN of taxpayer plus word 'VAf'. - The words "Taxpayer Identification Number-VAT" must be printed on the invoices and receipts to be considered as a'VAT invoice." In view thereof, all purchases covered by invoices other than 'VAT invoice" shall not give rise to any input tax. Where the suppliers still have unexpended or unissued invoices or receipts bearing the old Taxpayer Account Number (TAN)+VAT, the new Taxpayer Identification Number (TIN) shall be reflected or superimposed on all unexpended or unissued VAT or Non-VAT receipts or invoices to be valid as a VAT invoice. The supplier is allowed to use the same until they are used up or expended as long as the TINs are reflected thereon.32

A taxable person who is also engaged in exempt transactions must provide himself with and issue separate invoices or receipts for his taxable and exempt transactions. VAT invoices or receipts shall be issued for taxable transactions, while non-VAT invoices or receipts shall be issued for exempt transactions. If he uses a VAT invoice or receipt for an exempt transaction, such transaction will be subject to value added tax without the benefit ofinput tax credit. However, his customer who is VAT-registered is entitled to credit the input tax included in the VAT invoice or receipt covering the exempt transaction.3s

s0Sec.

4.113-4(4), Rev. Regs. No. 16-05, September 1' 2005. 31Sec.4.113-4(8), Rev. Regs. No. 1-6-05, September 1,2005. 32Central Azucarera Don Pedro v. Commissioner, CTA Case No. 5821, August 5,zo\2,citing Seagate Technology (Phil.) v. Commissioner, CTA Case No- 5999, July

26,200L. 33Sec. 109,

last paragraph, 1997 NIRC.

(

(

VA'l')

lt23

lrrrrplrrrrrr'r. ltrl;rr irr.nrcnl.s

Filing of Return and Payment of Tax VAT returns and declarations A taxable person is required to account for and pay value added

tax by reference to each accounting period consisting of three (3) months, referred to as a taxable quarter. A VAT declaration for the month must be filed within twenty (20) days after the end of the month concerned, and a VAT return covering the amount of his gross sales or receipts and purchases for the prescribed taxable quarter must be filed by the taxable person within twenty-five (25) days following the close of the quarter to which it relates (Sec. 114, NIRC). Only one consolidated return shall be filed for the principal place ofbusiness or head office and all branches of the taxpayer's business. A person whose registration has been cancelled must file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration.

Paym.ent of ta,x VAT must be paid every month. The taxable person must submit monthlyVAT declaration form (BIR Form 2550M) for the monthly sales and./or receipts as basis for paying the value added tax thereon within twenty (20) days following the end of the month to which it relates. The declaration must be accomplished only for each of the first two (2) months of each taxable quarter. The VAT return (BIR Form 2550Q) for the quarter must be filed not later than twenty-five (25) days after the close ofthe taxable quarter. a

The VAT payable for each calendar quarter shall be reduced by the total amount of tax(es) previously paid for the preceding two (2) months and/or the sum of the allowable excess input tax carried over and the value added tax withheld by the government.

The monthly declaration and quarter return shall be filed with, and the tax due thereon paid to, a bank duly accredited by the Commissioner located in the revenue district where such person is registered or required to be registered. The VAT must be paid every month. The taxable person must submit a monthly VAT declaration form (BIR Form 2550M) for the monthly sales and./or receipts as basis for paying the value added tax thereon within twenty (20) days following the end of the month to which it relates. The declaration must be accomplished only for each of the first two (2) months of each taxable quarter. The VAT return

524

ldl:vrr,rwt,lt oN'l'Ax,t't'tor.t

Vlt.r n Altrt,;tr'l',rx tVA'l't ('orrrlrl rrr rrr'r, l{.rr1rr irctttcttl"s

(BIR Form 2550Q) fbr the quartcr must bo liled not lrtt,er lhnn 26 da.yn after the close of the taxable quarter. 1'he right of'thtr gov(lrtttncnt, to assess deficiency value added tax generally sttrrts to run I'rrtttr lhtr

filing

of the VAT

quarterly return.

The VAT payable for each calendar quarter shall be reduced by total amount of tax(es) previously paid for the preceding two (2) the months and/or the sum of the allowable excess input tax carried over and the value added tax withheld by the government.3a

Illustration Month Sale

Output tax Purchases

Deadline

90

10 2.4

3

255

to.2

r.2 2550-M

20th day of following month

20th day

36.0

72.O

30.6 45

15

2550-M

Quarter 300

85 10.8

9.6 20

Month 100

12.0

12.o

VAT Pavable

BIR Form

Month 2 100

80

Inout tax Value added

I

100

5.4

1.8

None

2550-Q

25th day of following rnonth

The value added tax on the sale ofrefined sugar is payable in advance by the owner/seller to the BIR, through the sugar refinery.

The advance payment must be made prior to or upon issuance of the refi.ned sugdr release order or similar instruments. Howeuer, the owner-seller n1.&y withdraw his refined sugar from the sugor rnill or refinery warehouse without aduance payment of the tax, if it will not be locally sold but rqther for use erclusiuely as rq.w material in the manufacture of sugar-based food products intended for zero-rated export UAT Ruling No. 198-90, September 14, 1990).

Requirernent to pay in adaance VAT on sale of fl'our and' time of paytnent of ad.uance VAT. - The value added tax on the sale of flour milled from imported wheat shall be paid in advance prior to the withdrawal of the imported wheat from customs custody based on the formula prescribed in the regulation.35 Purchases by flour millers of imported wheat from traders shall also be subjected to advance VAT and shall be paid by the flour miller prior to delivery.36 3aSec. 4.114-1, Rev. Regs. 35Rev. Regs. No. 29-2003,

No. 7-95. October 30, 2003. 36Sec.4.114-1(BX2), Rev. Regs. No. 16-05.

52lt

Final Withholding Tax As a general rulc, with holding tax does not apply on transactions subject to value added lax. 'fhe exceptions to this rule are:

1.

Gross payments by the government shall be subject to the five percent (57o) final withholding tax;

2.

Gross payments by resident VAT-taxpayers to nonresident foreign persons of rentals, royalties, reinsurance premiums, and services done in the Philippines - l27o (Sec. 114[C], NIRC). However, if the payor of royalty is a PEZA-registered enterprise, the I07o value added tax may not be passed on to it. Since the enterprise is exempt from all direct and indirect taxes under a special law (R.A. 7916, as amended) and considering that the service (i.e., use of patent, trademark, trade name, etc.) is done in a foreign territory, it is not required to withhold and remit the value added tax(BIR Ruling No.009-98;VAT Ruling No. 005-2003). An ecozone is considered as a special customs area which is considered as a foreign territory by fiction of law.

Withholding of tax applies only to taxable transactions. Thus, payment for the sale of Iive dairy cows to a government agency, which

is an exempt transaction, is not subject to withholding tax UAT Ruling No.24-98, September 1, 1998). Beginning November 7,2005, when R.A. 9337 became effective,

all sales of goods, properties or services to the government shall be subject to the five percent (\Vo) finalwithholding tax. The government shall, before making payment on account of each purchase of goods and./or services taxed at lU%o (up to January 31, 2006) or L2Va YNI (starting February 1, 2006) pursuant to Sections 106 and 108 ofthe Tax Code, deduct and withhold a final VAT due at the rate of five percent (\Vo) of the gross payment thereof. The fiver percent (5Vo) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining fiue percent (SVo) or seuen percent (77o) effectiuely accounts for the standard input VAT for sales of goods or seruices to gouernment, in lieu of the actual input VAT directly attributable or ratably apportioned to such soles. Should actual input VAT attributable to sale to government exceed five percent (\Vo) or seven percent (77o) of gr.oss payments, the excess may form part ofthe sellers'expense or cost. On the other hand, ifactual

526

Rltvtuwun oru'l'axa'uott

input VAT attributable to sale to government is less than five percent (57o) of gross payment, the difference must be closed to expense or cost.37

PART V

The term "government" refers to the national government or any of its political subdivisions, instrumentalities or agencies, including

TAX REMEDIES

government-owned or controlled corporations.

CHAPTER

}frIV

INTRODUCTION

BIR Organizational Structure

The Bureau of Internal Revenue (BIR) is headed by

a

Commissioner of Internal Revenue and four (4) Deputy Commissioners (Sec. 3, NIRC), each of whom heads the Operations Group, Legal

and Inspection Group, Resource and Management Group, and Information Systems Group. The Commissioner and four (4) Deputy Commissioners, together with 13 Assistant Commissioners for the different services, comprise the senior level of administrative authority. Supporting them are the nineteen (19) Regional Directors (Sec. 10, NIRC), more than one hundred fifteen (115) Revenue District Officers (Sec.9, NIRC), two (2) Large Taxpayers Audit and Investigation Divisions and two (2) Large Taxpayers District Offices, and thousands ofrevenue officers conducting the audit oftaxpayers' books of accounts and accounting records. The revenue officers tasked to audit, develop and file criminal tax cases are assigned at the National Investigation Division, in the National Office, and at the Special Investigation Division, in the regional offices.

Agents in the Collection of National lnternal Revenue Taxes The BIR officials are charged with the assessment and collection of all national internal revenue taxes, fees and charges, including the VAT and excise taxes on imported goods as well as penalties and fines forviolations of certain provisions ofthe 2005 National Internal Revenue Code ("Tas Codc" for brevity) and special laws administered by the BIR. However, the following officials are constituted as agents 375ec.22, Rev. Regs. No.4-2007, February 7,2007

527

52tl

Itt,tvtt,:wt,;tr oN

'l'A\n

of the Commissioner of Internal Revenue in tho collcction ol'nrrtionrrl internal revenue taxes (Sec. 12, NIRC): (a) the Comnrissiorrcr ol' Customs and his subordinates, with respect to the collection ol'valuc added tax and excise tax on imported goods;l (b) the head of thc appropriate government office and his subordinates, with respect to the collection ofenergy tax; and (c) the authorized agent banks, with

respect to the receipt ofpa5rments ofinternal revenue taxes authorizcd to be made through banks. Any bank officer or employee involved in this task shall be subject to the same sanctions and penalties under Sections 269 (uiola.tions committed by gouernment enforcement officers) and.270 (unlawful diuulgence of trade secrets) of the Tax Code.

Aside from the above-mentioned persons, withholding agents constituted as such under the Tax Code and its implementing regulations are required to deduct and remit taxes within the prescribed dates to the BIR on payments of compensation income subject to creditable withholding tax on wages, certain income payments subject to expanded withholding tax, passive investment incomes and capital gains subject to final tax, and gross incomes paid to non-resident foreign persons subject to final taxes as well as payments by the government for goods and services subject to value added tax or other percentage tax. It will be noted that these withholding agents are required to strictly comply with their responsibilities under the law to deduct and remit to the BIR the taxes on certain transactions - without any compensation from - for any failure to comply with government, yet they are penalized such tax obligations as a withholding agent.

Powers and Duties of BIR The Tax Code enumerates the powers and duties of the BIR as follows:

1.

To assess and collect national internal taxes, fees, and charges;

2.

'l',\ \ l(r,:N4l';t )tt':rl I rrl lorltrcl tort

lror.r

To enforce all forfeitures, penalties and fines connected therewith;

rMany tax practitioners believe that the BOC has no power to assess deficiency value added tax and excise taxes on imported goods, which were earlier released by the Bureau of Customs after payment of the VAT and excise taxes. The assessment and collection of deficiency national internal revenue taxes properly belongs to the BIR, and the BOC, as the agent ofthe CIR, has no such power ofassessment and collection of deficiency taxes.

529

3.

'fo exocutc.jrrrlgrrrrrrrt in all cases decided in its favor by the CTA and thc ordintrry courts; and

4.

To effect and administer the supervisory and police powers

conferred upon (Sec.2, NIRC).

it by the Tax Code or other

special laws

The Commissioner of Internal Revenue has been given broad powers under the Tax Code in order to effectively enforce tax laws and collect the needed revenues. These powers include:

1. Power to interpret tax laws and to decide tax cases. - The power to interpret the provisions of the Tax Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance (Sec. 4, NIRC). Th.e provision was inserted in R.A. 8424,whichbecame effective on January 1, 1998, in order to avoid situations where different government agencies like the BIR, Department of Finance (DOF), Department of Justice (DOJ), Board of Investments (BOI), and even the Office of the Executive Secretary sometimes issue conflicting opinions on the proper interpretation ofcertain provisions ofthe Tax Code and other tax laws.

A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details

thereof. Interpretative rules are designed to provide guidelines to the law which the administrative agency is in charge of enforcing. Accordingly, in considering a legislative rule, a court is free to make three inquiries: (i) whether the rule is within the delegated authority of the administrative agency; (ii) whether it is reasonable; and (iii) whether it was issued pursuant to proper procedure ( Mi s amis Orie nt al As s o c i ation o f C oc o Tlad.er s a . D ep artnent of Finance Secretary cited in Commissioner of Customs a. Hypermix Feed.s Corporation, G.R. No. 779579, February 7, 2012).

In a leading case, the Supreme Court ruled that the jurisdiction to review rulings of the Commissioner, in particular RMO 15-91 and RMC 43-91, implementing the five percent (|Vo) lending investor's tax on pawnshops, belongs to the CTA, not to the Regional Trial Courts (RTC). The petition should have been fiIed with the CTA, not the RTC. Such revenue orders were issued pursuant to petitioner's powers under Section 245 (authority of the Secretary of Finance

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to promulgate rules and regulations) of the 'I'ax Codc. 'l'hus, l.lrc

court stated that "the authority of the Secretary of !'inanco ... shall be without prejudice to the power of the Commissioncr ol' Internal Revenue to make rulings or opinions in connection with thc implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes."2

Bar Question (2006) Mr. Abraham Eugenio, a pawnshop operator, after having been requested by the Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the Commissioner of Internal Revenue, filed with the Regional Trial

vests the power ol'.j ud it:i ir l rtrviow or lhe power to declare a law, treaty,

international
2.

(ibid.),the Supreme Court ruled that petitions involvingthe validity of a regulation or other administrative issuance must be filed with the regular courts and not with the CTA. In United. Cad.iz Suga,r Sugar Farmers Association Multi-Purpose Cooperative u. Commissioner, CTA Case No.7995, August 761 2077, where the petitioner assailed the validity of Revenue Regulations No. 13-2008, which provides for instances where withdrawal of sugar is exempt from VAT, the CTA chose not to rule on the legal issue, for lack of jurisdiction, being a court of special jurisdiction. The determination ofwhether a specific rule or set of rules issued by an administrative agency contravene the law or the constitution is within the jurisdiction of the ordinary courts. Indeed, the Constitution 2Commissioner v. Josefina Leal, G.R. No. 113459, November 18,2002.

,

and other matters arising under the Tax Code is vested with the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA) (n.A. 1125, as amended). The jurisdiction of the CTA has been enlarged under R.A. 9282 (April, 2004) to include collection of assessed deficiency taxes and criminal tax cases, where the basic tax assessed is F1 million or more.

Suggested answer:

Petitions inuoluing oalid.ity or constitutionality of law or regulations In British American Tobacco Corporation a. Camacho

Power to decide disputed assessments, refunds of taxes, fees or other charges, penalties. - The power to decide disputed assessments, refund I tax credit of toxes

Court an action questioning the validity of the RMO. If you were the judge, will you dismiss the case?

Yes. An RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the prouisions of the Tax Code dealing with the to.xability of pawnshops. The power to reuiew rulings issued by the Commissioner is lodged with the CTA ond not with the RTC. A ruling falls within the puruiew of 'other matters arising under the Tax Code," appealable only to the CTA (CIR u. Leal, 392 SCRA I t20021).

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The assessments issued by the Regional Directors, Assistant Commissioners, and Deputy Commissioners may be appealed administratively to the Commissioner.s This is necessary to give the Commissioner an opportunity to correct whatever mistake has been committed by his subordinates, pursuant to the doctrine of exhaustion of administrative appeal. This is also in conformity with the provisions of the Tax Code, which provides that the power to decide disputed assessments arising under the Tax Code or other laws or portions thereof administered by the BIR is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.a

While the Secretary of Finance has supervisory powers over the BIR, an appeal by the taxpayer of the Commissioner's decision on the disputed assessment to the Secretary of Finance or filing a motion for reconsideration with the Commissioner shall not stop the running of the 30-day period to make an appeal to the CTA. The power of review, which implies the power to reverse or modify, granted to the Secretary of Finance is limited only on rulings issued by the Commissioner which 3Sec. 3.1.6, Rev. Regs. No. 12-99. aSec. 4, NIRC; R.A. 1125, as amended

by R.A. 9282, April 25,2004

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are adverse to the taxpayer pursuant to his powcr to interprct'lhx Code provisions. The power to interpret the law is difl'erent f'nlnr thc power to decide on disputed assessments.

3. Power to examine books and other accounting records and obtain information. - In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person, or in collecting any such liability, or in evaluating

tax compliance, the Commissioner is authorized:

a.

To examine any book, paper, record, or other data which may be relevant or material to such inquiry;

b.

To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office

or officer of the national and local governments, government agencies and instrumentalities, including the Bangh,o Sentral ng Pilipinas and governmentowned or controlled corporations, any information;

c.

d.

To summon the person liable for tax or required to file a return, or any officer or employee of such person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; To take such testimony ofthe person concerned, under oath, as may be relevant or material to such inquiry;

and

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To cause revenue officers and employees to canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who maybe liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed (Sec.5, NIRC).

While the Supreme Court recognized the power of taxation of government, it however cautioned the government to exercise such power to minimize injury to the proprietary rights of a taxpayer (Roxas a. CTA,23 SCRA 276).

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Bar Question (2013) In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another I"A for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede's 2009 return was fraudulent. Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable year. Decide.

Suggested answer: The contention of Mr. Abced.e is not tenable. While the general rule is to the effect that for income tax purposes, a taxpayer must be subject to examination ond inspection by internal reuenue officers only once

in a taxable year, this will not apply if there is fraud, irregularity or mista.kes as d.etermined by the Commissioner. In the instant case, what triggered the second exam.ination is the findings by the BIR that Mr. Abcede's 2009 return was fraudulent. Accordingly, the examination is legally justified (Sec. 235, NIRC).

Bar Question (1999) "A" Co., a Philippine corporation, is a big manufacturer of consumer goods and has several suppliers of raw materials. The BIR suspects that some of the suppliers are not properly reporting their income on the sales to "A" Co. The CIR therefore:

a.

Issued an access letter to "A" Co. to furnish the BIR information on sales and payments to its suppliers.

. b.

Issued an access letter to a bank ("X" Bank) to furnish the BIR on deposits of some suppliers of "A" Co. on the alleged ground that the suppliers are committing tax evasion.

"A" Co., 'X" Bank and the suppliers have not been issued by the BIR letter of authority to examine. '.A" Co. and'1C'Bank believe that the BIR is on a "fishing expedition" and come to you for counsel. What is your advice? Suggested answer:

I

q.duise nA" Co.

and "Y Bank that the BIR is justifi.ed only in getting information from the former but not from the latter. The BIR is authorized to obtain information from other persons than those whose internal reuenue tax liability is subject to audit or

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a lbrcign tax authority of a contracting state to which the

inuestigation. Howeuer, th,is power slut,ll rutl he conslrtuttl es grenting the Commissioner the authority to inquire into banh deposits (Scc. 5, NIRC).

4.

Power to inquire into banks deposits of taxpayers. - The provisions of the foregoing paragraphs notwithstanding, nothing shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of the Tax Code (Sec. 5, NIRC). Notwithstanding any contrary provisions of R.A. 1405 (Bank Secrecy Law) and other general or special laws, the Commissioner is authorized to inquire into the bank deposits of: (1) a decedent to determine his gross estate; and (2) any taxpayer who has

filed an application for compromise of his tax liability under Section 204(A)(2) ofthis Code by reason offinancial incapacity to pay his tax liability. The application to compromise shall not be considered, unless and until the taxpayer waives in writing his privilege under R.A. 1405, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer (Sec. 6[F], NIRC).

Ifa bank has knowledge ofthe death ofa person, who maintained a bank deposit account alone or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the transfer taxes imposed thereon have been paid. However, the administrator of the estate or any one of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding F20,000 without the said certification. 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 (Sec. 97, NIRC).

Under RA. 70021, as impl.etnented. by Reaenue Regulations No. 70-2010 d.ated. October 6, 2070, Congress allows the CIR to obtain information relating to bank deposits and other related information held by financial institutions, as may be requested in writing by

535

Philippines has an effective tax treaty, subject to certain conditions.

Garnishment of bank deposits

Garnishment is an administrative remedy allowed by law to enforce a tax liability. Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfr the claim of the Government (Sec. 208, NIRC).

Bar Question (2012, 1998) Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so, does this power of the Commissioner conflict with R.A. 1405, Secrecy of Bank Deposits Law?

Suggested answer: The Commissioner of Internal Reuenue is authorized to inquire into the bank deposits of:

(1) (2)

A d.ecedent to determine his gross estate; Any taxpayer who has filed an applicationfor compromise of his tax liability by means of financial incapacity to pay his tax liability (Sec.6[F], NIRC).

The limited power of the Commissioner does not conflict with R.A. No. 1405 because the prouisions of the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a

later legislation. Furthermore, in case a taxpayer applies for an application to comprornise the payment of his tan liabilities on his claim that his financial position dernonstrates a clear inability to pay the ta.x assessed, his application shall not be considered unless and until he waiues in writing his priuilege under RA. 7405, and such waiuer shall constitute the authority of the Commissioner to inquire into the bank deposits of the tatcpayer.

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Bar Question (2003) X dies in year 2000 leaving a bank deposit of F2,000,000.00 under joint account with his associates in a law firm. Learning of X's death from the newspapers, the Commissioner wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain.

T'he Commissioner or his duty authorized representatiue may be allowed to inquire or looh into the bank deposits of a to,xpayer in the

lbllowing cases:

a) b)

Bar Question (2000) A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer's bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer?

Suggested answer: No, os this would be uiolatiue of R.A. 1405, the Bank Deposits Secrecy Law.

the purpose

ofdetermining the gross estate ofa decedent;

Where the taxpayer has fiIed an application for compromise liability by reason of financial incapacity to pay such tax liability (Sec. 6[F], NIRC);

of his tax

c)

Where the taxpayer has signed a waiuer authorizing the Commissioner or his duly authorized representatiues to inquire into the banh deposits.

5.

Powerto assess and collect the comect amount oftax. - After the return is filed, the Commissioner or his duly

Suggested answer:

No. The Commissioner has the authority to inquire into bank deposit accounts of a decedent to determine his gross estate notwithstanding the prouisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question rnay not refuse to disclose the amount of deposits on the ground of secretary of bank deposits (Sec. 6[F], NIRC). The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law mandates that if a banh has knowledge of the death of a person, who maintained q b(rnk deposit account alone or jointly with another, it shall not allow any withdrawal frorn the said deposit account, uruless the Commissioner has certified that the ta.xes imposed thereon haue been paid (Sec. 97, NIRC). Hence, to be able to giue the required certification, the inclusion of the deposit is imperatiue.

For

authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount oftax. The tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or his duly authorized representative (Sec. 6[A], NIRC).

After the return is filed, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount oftax. The tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or his duly authorized representative. However, failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. The tax or any deficiency tax so assessed shall be paid within the period fixed in the assessment notice and demand letter from the Commissioner or from his duly authorized representative.s

When a report required by law as a basis for assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. In case a person fails to file a required return or other

document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other

6Sec.6(A), NIRC.

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document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.6 Assessm"ent

of correct or proper taxes.

- It will

be noted from the above provisions that the Commissioner

is generally required to assess the correct amount of deficiency tax. However, when any of the circumstances mentioned in Section 6(8) of the Tax Code is present, the Commissioner may assess the proper deficiency tax based on the best evidence obtainable. The reason for the difference in the statutory provisions and the kind of assessment that may be made lies, among others, in the circumstances of the taxpayer (whether cooperative or uncooperative) as well as the availability of adequate books and records oftaxpayers for purposes ofascertaining the correctness of his declarations made in the tax returns. For reasons ofpublic policy and based on the lifeblood theory, the assessment made by the Commissioner isprimo facie presumed correct. The burden ofproofto show the incorrectness or inaccuracy ofsuch assessment or its details Iies on the taxpayer, contrary to the usual presumptions ofgood faith and innocence. The revenue officers are also presumed to have taken into consideration all the facts to which their attention was called.T Howeuer, the presumption of correctness of an assessment, being a mere presumption, cannot be made to rest on another presumption.s

Power to impute "theoretical interest' to taxpayefs tra,nsa,ctiorr.a. - BIR issued deficiency income tax assessment for 1997 against Filinvest Development Corporation, by imputing interest on advances made to its affiIiates, based on Section 50 of the Tax Code, authorizing the CIR distribute, allocate or apportion gross income or deductions between or among related taxpayers in order to determine their true income. In its protest, FDC contended that interests cannot be demanded in the absence of a stipulation to that effect. 6Sec.

6(8), NIRC. ?Collector v. Bohol Land Transportation Co., 107 PhiI. 965; Commissioner v. Avelino, 3 SCRA 570. sCollector v. Benipayo, 3 SCRA 182.

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'lhe sourt rulcd that dcspitc the broad paritttrct,crrs provided in Section 50 of the'lax Code, the CIR's power oI'distribution or allocation of gross income and deductions under the 'lax Code and Revenue Regulations No. 2 do not include the power to impute "theoretical interests" to the taxpayer's transactions. Pursuant to Section 28 (now 32) of the Tax Code, the term "gross income" is understood to mean all income from whatever source derived. While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under Philippine laws, the term "income" has been interpreted to mean "cash received or its equivalent," "the amount of money coming to a person within a specific time," or "something distinct from principal or capital." Otherwise stated, there must be proofofthe actual or, at the ver)' least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. In this case, there is no evidence ofactual or possible showing that the advances taxpayer

extended to its affiliates had resulted to interests subsequently assessed by the CIR. Even if the Court were to accord credulity to the CIR's assertion that taxpayer had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. Further, pursuant to Article 1959 of the Civil Code of the Philippines, no interest shall be due, unless it has been expressly stipulated in writinS rcIR a. Filinaest Deueloprnent Corporation, G.R. Nos. 763653 and. 767689, July 19,2017).

6. Power not to allow withdrawal of any return,

statement or declaration, although the same may be amended. - Any return, statement or declaration fiIed in any office authorized to receive the same shall not be withdrawn. However, the same maybe modified, changed, or amended within three (3) years from the date of such filing, provided that no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer. For purposes of this section, the term "aud.it notice" may refer to a letter of authority (LA), a tax verification notice (T'rtrN), or a letter notice (LN).

There is no provision in the 1997 Tax Code prohibiting the amendment of a return once a claim for refund has been filed. It is

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prohibited only if a notice fbr audit or investigation ol'stlch r(!t,tlrn, statement or declaration has, in the meantime, been actuallv servtxl upon the taxpayer (CIR a. Citicorp Capital Phils., CA-GR SP No. 6855, April 72,2002).

7.

Power to delegate powers to subordinate officials.

2.

ll4l

Substantive *- remediesprovidedfbrbylaworregulation; an essential part or constituent or relating to what is essential;

3. Procedural - remedies jurisdiction, etc.;

involving law of pleading,

evidence,

-

The Commissioner may delegate the powers vested in him underthe Tax Code to anyor such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the CIR. However, the following powers of the CIR shall not be delegated:

a.

The power to recommend the promulgation of rules and regulations by the Secretary ofFinance;

b.

The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the BIR;

c.

The power to compromise or abate any tax liability, but this power may be delegated to regional offices where the basic deficiency tax is F500,000 or less or if it involves minor criminal violations;

d.

The power to assign or reassign revenue officials to establishments where articles subject to excise tax are stored or kept (Sec. 7, NIRC).

4.

Administrative (BIR) level;

-

remediesavailableattheadministrative

5. Judicial - remedies that are enforced through judicial which may be civil or criminal. action,

Substantive Remedies 1. Imposition of withholding tax on certain income Pa5rments

The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/ persons as provided for by law, at the rate ofnot less than one percent (l7o) b:ut not more t}rran 327oro thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year (Sec. 57[BJ, NIRC).

2.

Issuance of revenue regulations by administrative agency The power to issue regulations is expressly conferred

in the Tax Code. Thus, the Secretary ofFinance, upon the recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the Tax Code (Sec. 244, NIRC). The rules and regulations ofthe Bureau oflnternal Revenue shall contain, among others, provisions specifying, prescribing or defining the time and manner of canvassing revenue regions, forms of labels, conditions to be observed by revenue officers respecting the institutions and conduct of legal actions (9ec.245, NIRC).

Definition of remedies "Rerned.y" is a method by which a cause of action can be enforced

It is the procedure or type of action which may be availed of by the plaintiff as the means to obtain the relief desired (Florenz D. Regalado, Remedial Law Compendium, Vol. I, p. 20). by law or equity.

Types of remedies under the 1997 Tax Code 1. Summary - remedies at the administrative level that are executed without ceremony or delay; short or concise;

eA Revenue

District Officer, who has an Item of Chief Revenue Officer [V, has

the same rank or level as a Division Chief.

towhere the debt instrument does not qualify as a "deposit substitute" under section 22(Y) ofthe 1997 Tax Code, the income therefrom shall be subject to t]ae 207o creditable withholding (income) tax pursuant to Rev. Regs. No. !4-2012, November

23,20t2.

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The rationale for the grant of power to issue regulations was explained by the court. Thus, administrative agencies are clothed with rule-making powers because the lawmaking body finds it impracticable, if not impossible, to anticipate

and provide for the multifarious and complex situations that may be encountered in enforcing the law. All that is required is that the regulation should be germane to the objects and purposes ofthe law and that it should conform to the standards that the law prescribes (Director of Forestry a. Munoz,23 SCRA 1183). The grant of the rule-making power to administrative

is a relaxation of the principle of separation of powers and is an exception to the non-delegation of legislative powers. Administrative regulations or agencies

3.

"subordinate legislation" calculated to promote the public interest are necessary because of "the growing complexity of modern life, the multiplication of the subjects of governmental regulations, and the increased difficulty of administering the law" (Calalang u.Williams,70 Phil. 726). The rule-making power must be confined to details for regulating the mode or proceeding to carry into effect the law as it has been enacted. The power cannot be extended to amending or expanding the statutory requirements or to embrace matters not covered by the statute. Rules that subvert the statute cannot be sanctioned (Del March u. Philippine Veterans Ad.ministrqtion, 57 SCRA 349).

It is a settled law that regulations promulgated by authority of law and not in conflict with the statute are binding upon everyone falling under any of their provisions (Commissioner a. Bishop ofthe Missionary Dis trict of the P hil. I s land.s, 1 4 S C RA 99-l). Reeulations have the force and effect of law, whenever they are found to be in consonance and in harmony with the general purposes and objects of the law, as if the regulations had been written in the original law itself (Interprovincial Autobus Co. a. Collector, gS Phil.29O). Administrative issuances may be distinguished according to their nature and substance: legislative and interpretative. A legislative rule is in the matter of subordinate legislation designed to implement a

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primary legisl.rtion by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing. When an administrative rule goes beyond merely providing for the means that can facilitate or render less cumbersome the implementation ofthe law and substantially increases the burden ofthose governed, it behooves the agency to accord at least to those directly affected a chance to be heard and, thereafber, to be duly informed, before the issuance is given the force and effect of law (BPI Leasing Corporation a- Court of Appeals and. Commissioner, G..R. No. 727624, Noaernber 78,2OOg). Failure to obey summons' including subpoenas Any person who, being duly summoned to appear to testifr, or to appear and produce books of accounts, records, memoranda or other papers, or to furnish information as

required under the pertinent provisions ofthe Tax Code, neglects to appear or to produce such books of accounts, records, memoranda or other papers' or to furnish such information, shall, upon conviction, be punished (Sec.266, NIRC). 4.

Declaration under penalties of perjury Any declaration, return and other statements required under the Tax Code, shall, in lieu of an oath, contain a written statement that they are made under the penalties of perjury. Any person who willfully files a declaration, return or statement containing information which is not true and correct as every material matter shall, upon conviction, be subject to the penalties prescribed for perjury under the Revised Penal Code (Sec. 267, NIRC).

Ad,rninistratiae interpretations should. be respected. The interpretation given by the administrative officer charged by reason of his office to carry out the provisions of a statute should be respected whenever such interpretation is assailed by someone who alleges no reasons of weight to contradict or weaken

it

(Commissioner u. Ledesma, Sl SCRA 95),

The law concedes to administrative bodies the authority to in accordance with their

act on and decide claims and applications

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judgment, in the exercise of their adjudicatory capacity. llecausc ol' their acquired expertise in specific matters within the purview of'thcir respective jurisdictions, the findings of these administrative bodies merit not only great weight but also respect and finality. There is a limit, however, to such a deference paid to the actuations of such bodies. Clearly, where there has been a failure to interpret and apply the statutory provisions in question, judicial power should assert itself. Under the theory of separation of powers, it is the judiciary, and to the judiciary alone, that the final say on questions of law in appropriate cases coming before it is vested (Begosa a. Philippine Veterans Ad,ministration, GR. No. L-25976, April30, 1970).

Principl.e of legislatiae a.pproaa.l by re-enactrtent The principle of legislative approval of administrative interpretation of a statute is to the effect that the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by Congress ofa prior executive construction. The principle applies with more cogency in a case where what is involved is not a mere opinion of the Commissioner of Internal Revenue or ruling rendered on a mere query, but a Revenue Memorandum Circular issued to "all internal revenue officials" by the Commissioner (ABSCBN Broad.casting Corporation u, Court of Tax Appeals and, Cornmissioner, 708 SCRA 142).

CIIAPIER IOO

ADMINISTRATIVE REMEDIES OF GOVERNMENT The power to tax is considered as the strongest of all the powers of government. It is described as unlimited, plenary, comprehensive

and supreme, in the absence of constitutional restrictions, the principal check on its abuse resting in the responsibility of Congress to their constituents. In enacting R.A.8424, Congress placed upon the Bureau oflnternal Revenue the duty to generate adequate national internal revenue taxes to defray the expenses ofgovernment. Because taxes are the lifeblood of the nation and their prompt collection is an imperious need, the BIR has been given ample powers to assess and collect national internal revenue taxes. The assessment of taxes must, however, be exercised within the ambit of the law and

its implementing regulations.

A-

Power to Assess

The power to assess and collect the correct amount of tax is vested with the Commissioner of Internal Revenue under the Tax Code. After the return is filed, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax (Sec- 6[A], NIRC). "Assess" means to impose a tax; to charge with a tax; to declare a tax to be payable; to apportion a tax to be paid or contributed, to fix a rate; to fix or settle a sum to be paid by way of tax; to set, fi'x or charge a certain sum to each taxpayer; to settle determine or fix the amount of tax to be paid (84 C.J.S., pp.749-750).

Presumption of correctness The assessments made by the Commissioner and his authorized

agents are presumed correct. The burden of proof to show the incorrectness or inaccuracy ofsuch assessments or the details thereof 545

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Iies on the taxpayer (Republic u. Marsman Deaeloprnent Co., 44 SCRA 478).The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but that the taxpayer is right (Tan Guan u. CTA and. Comrnissioner, 79 SCRA 9Og). The agents of the BIR will also be presumed to have taken into consideration all the facts to which their attention was called (Collector u. Aaelino, 3 SCRA 570). Unless rebutted, all presumptions generally are indulged in favor of the correctness of the assessment by the Commissioner against

taxpayer (Cyanamid 639).

Philippines

v. Cour-t

the

ofAppeals,322 SCRA

Basis of Assessment An assessment is issued by the BIR based on findings of fact and./or law. In fact, the factual and./or legal bases of the assessment must be stated; otherwise, the assessment is null and void.

lt47

Examples:

a.

Gross income for purposes of computing the minimum corporate income tax does not include miscellaneous or incidental income;

b.

Additional income tax paid per amended tax return subsequently fiIed by taxpayer before receipt ofaudit notice

is not subject to257a surcharge;

c.

fair market value over exercise price of a stock option is considered as additional compensation income and not as fringe benefit. Excess of

Assessment Process The assessment process starts with the self-assessment by the taxpayer of his tax liability, the filing of the tax return, and the payment of the entire tax due shown in his tax return in accordance with the methods and within the dates prescribed in the law and regulations (Secs. 51, 52, 56 [income tax], 90, 91 [estate tq'lc], 103

Question of Fact

[donoy's tq.x], 114 [ualue q.dded tcm], and 128 [percentage taxes], NIRC)

There is a question offact when the doubt or difference arises as to the truth or falsehood of the alleged facts (Commissioner a. Court of Appeals and.YMCA" 298 SCRA 83). Factual findings of administrative agencies which have acquired expertise in their field are binding and conclusive on the Supreme Cowt (Fortich u. Corna, G.8. IVo. 737457, April24, L998).

The role of the government in the assessment process includes the following:

Examples:

a.

Income from the sale of banana saplings was not included in the income tax return of the taxpayer;

b.

Representation expenses are not substantiated by invoices or receipts;

c.

Tax was paid after the deadline prescribed by law for the filing of return and payment of tax.

Question of Law There is a question of law when the doubt or difference arises as to what the law is on a certain state of facts (Commissioner a.

Court of Appeals and.YMCA, supra).

.

1. Examination of books of accounts and other

accounting records of taxpayers by revenue officers to determine correct tax liability. - In ascerbaining the correctness of any return' or in making a return when none has been made, or in determining the liability of any person, or in collecting any such liability, or in evaluating tax compliance, the Commissioner or his authorized

representative is authorized to examine any book, paper, record, or other data which may be relevant or material to such inquiry and to assess the correct tax liability (Secs. E[B] q,nd 6[A], NIRC). The books of accounts, accounting records or information (such as costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations) that may be examined by revenue officers may be in the possession of the taxpayer under examination or with third parties, including the national and local governments, government agencies and instrumentalities (e.g., Bangho Sentral ng Pilipinas), and government-owned or -controlled corporations (Sec. 5[B], NIRC).

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If said taxpayer or third parties do not submit the documents or information requested by the BIR, the person may be required to testify or the document may be summoned and required to be presented to the BIR (Sec. SICJ and [D], NIRC), Best evidence obtainable When a report required by law as a basis for the assessment of any tax shall not be forthcoming within the time fixed by laws or rules and regulations, or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes (Sec. 6[8], NIRC).

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reasonable allowance lbr living expenses for the period and plus or minus adjustments for other items, such as taxes paid, insurance

premiums, depreciation and others, represents the income of the taxpayer." The use of the net worth method is supported by Section 43 of the 1997 Tax Code which allows the Commissioner to use any method of computation or accounting which would more clearly reflect the income of the taxpayer (Collector o. Aaelino, S SCRA 57).

2. Preparation of tentative findings and holding of informal conference. - Soon after the completion of the revenue officer will render a written

carry great weight.

the tax audit, report, stating therein whether or not the factual and legal basis ofhis findings and whether or not the taxpayer agrees with his findings. If the taxpayer is not amenable, the taxpayer shall be informed in writing by the Revenue District Officer or by the Chief of Division (e.g., Special Investigation Division) concerned of the discrepancies in the taxpayer's payment of his taxes, for the purpose of informal conference, in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within 15 days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District

In one case, the court sustained the use ofthe doctrine ofbest evidence obtainable, where the conductor's daily reports were allowed to be used instead of the freight tickets issued by a common carrier,

Officer or the Chief of the Division shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Offrce or to the Commissioner or his

However, it is believed that the revenue officer's report should be complete and must indicate clearly the method(s) used in estimating

the tax liability, the particular method adopted in preference to some other methods, and additional circumstances supporting the correctness of his estimate of the tax liability, in order that it will

for purposes of computing the documentary stamp tax thereon (Interproaincial Autobus Co. a. Commissioner, 98 Phil.2g0).

Networth method of investigation In the leading U.S. case of Hollond u. U.S. (348 U.S. 121), the net worth method was described succinctly as follows: "If the government can prove with reasonable certainty the taxpayer's net worth, that is, the excess of assets and liabilities at a given date or starting point, generally December 31 of a given year if the taxpayer is on the calendar year basis, and if the government is then able to prove by independent evidence such as bank deposits or purchases of assets, that the taxpayer's net worth has increased at the end of the taxable year in question, then the inference is reasonable and therefore permissible that the increase in the net worth plus a

duly authorized representative, for appropriate review and issuance of deficiency tax assessment, if warranted (Sec. 3.7.1, Reu. Regs. No. 72'99, September 6, 1999). INOTE: Rev. Regs. No. 18-2013, November 28,2013, removed the informal conference stagel.

Administrative due process Due process demands that the person be duly informed of the charges against him. He cannot be convicted of an offense with which he was not charged. Administrative proceedings are not exempt from basic and fundamental procedural principles, such as the right to due process in investigations and hearings. The right to substantive and procedural due process is applicable in administrative proceedings (Ciuil Seraice Cornmission u. Lucas, GR. No. 727838' January 21, 7999). The essence of due process is that a party be afforded

550

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reasonable opportunity to be heard and to submit any evidence hc may have in support of his defense. In administrative proceedings, due process simply means the opportunity to explain one's sido or the opportunity to seek a reconsideration of the action or ruling complained of. A formal or trial-type hearing is not, at all timcs, necessary (Padilla a. Sto. Tomas, 245 SCRA rcil.

In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion oftaxes or clearly to reflect the income ofany such organization, trade or business (Sec. 50, NIRC). The purpose of such authority given to the Commissioner is to place a controlled taxpayer on tax parity with an uncontrolled

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I

as the standard.

3.

The error made by a tax official in the assessment of his tax liabilities does not have the effect ofrelieving the taxpayer from the obligation to pay the full amount of his tax liability, for taxes are fixed by law and the government is never estopped to collect the legitimate taxes because of errors committed by its agents (Commissioner u, Atlas Consolid.ated. Mining Co., 702 SCRA 24G). However, like other principles, the principle of estoppel also admits of exceptions in the interest ofjustice and fair play. The Commissioner is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer (Balmaced,a a. Corominas & Co.,66 SCRA 553).

Pou:er to allocate incorne and d.ed.uctions among affiIiated ta.rpayers

(k vcrnnre

taxpayer, by determining the true net income from the property and business ofsuch controlled taxpayer, using the uncontrolled taxpayers

Principle of estoppel

The principle is rooted in the notion of sovereignty formerly nutshelled in the ancient maxim that "The king can do no wrong." In this view of infallibility of the State, any mistakes committed by the agents of the sovereign, namely: government officials and employees, are their own and cannot bind the government, which cannot be placed in estoppel on account of the mistakes of its agents (Tax Practice end Procedure in the Philippines, T.P. Matic, Jr., p. 321).

il.'H'Jil:l:t

Issuance of Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, it is determined that there exists sufficient basis to assess the taxpayer for any deficiencytax(es), said office shall issue to the taxpayer, at least by registered mail, a PAN for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based, and it shall the taxpayer to reply to the findings within 15 days from the date of receipt of the PAN. If the taxpayer fails to respond within 15 days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by said office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties (5ec.3.1.2, Reu. Regs. No. 12-99).

4.

Reply.

-

Forpurposesofcontestinginwritingthefindings

of the revenue officers contained in a PAN, the regulations use the term"reply" to distinguish the written objection(s) against a FAN issued by the BIR, where the generic term

"protest," or the specific term "request for reconsideration" or "request for reinvestigation" is utilized.

Hereunder are the distinctions between "reply" antd

"protest!'

1.

A taxpayer is generally given under the regulations

fifteen days from the date of receipt of the PAN within which to make his written "reply" thereto, while he is given under the law 30 days from the date of receipt within which to file his "protest" against the FAN.

2.

Due to the shorter time given to the taxpayer to make the "reply," a taxpayer generally does not respond

in an adequate manner to the

specific findings of the revenue officer. On the other hand, the "protest" is usually sufficient and comprehensive to explain the legal and factual bases why the assessment is

552

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incorrect, and certain documentary ovidence nol presented during the preliminary assessment phasc and legal authorities andjurisprudence relcvant to the findings of the revenue officers are submitted or presented.

3.

4.

Most often than not, the taxpayer himself normally handles the aspect of the preliminary assessment process, hoping that he could still convince the revenue officer ofthe correctness or reasonableness of the taxpayer's position. However, they generally do sloppyjobs as taxation is a highly technical and complicated matter. It is best to leave tax matters in the hands of the professionals. During the formal assessment stage, a taxpayer is almost always represented by his tax agent or consultant.

Failure to reply to a PAN makes the taxpayer in default and authorizes the revenue official to issue the FAN. However, no liability for additional or deficiency tax arises from such failure to file a reply. In view ofthis principle, it can be said that the filing of a "reply" to PAN is directory on the part ofthe taxpayer. On the other hand, failure to file a timely "protest" to a FAN makes the formal assessment notice final and executory, and the taxpayer loses his right to contest the assessment, at the administrative and judicial levels, even if such assessment is weak or has no legal basis. Because of this tax consequence, it behooves upon the taxpayer to file such "protest" within 30 days from date of receipt of the assessment. In other words, the filing of a protest against an assessment is mandatory and

had to be made on a timely manner.

Tax amnesty as a defense Tax amnesty partakes of an absolute waiver by the government

of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor ofthe taxing authority.

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AIA is not liubl.e litr u,nv deficiency VAT and excise taxes because of' its auailment of tax amnesty. - AIA is a domestic corporation operating within the Subic special economic zone, engaged in the importation of used motor vehicles and heavy equipment which it sells to the public through auction. On August 25,2004,AIA received from the CIR a formal demand letter containing an assessment for deficiency VAT and excise tax, for auction sales conducted on February 5-8,2004. AIA protested, contending that it availed of tax amnesty under R.A. 9480 (Tax Amnesty Act of 2007) for the years 2005 and prior years. The CIR contends that AIA is disqualified under Section 8(a) of R.A. 9480 (withholding agents with respect to their withholding tax liabilities) because it is "deemed" a withholding agent for the deficiency taxes. This argument is untenable. The court ruled that tax amnesty program under R.A. 9480 may be availed ofby any person, except those who are disqualified under Section 8 thereof. The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to BIR. Indirect taxes, Iike VAT and excise tax, are different from

withholding taxes. In withholding tax, the Incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. In indirect taxes, the incidence of taxation falls on one person but the burden thereofcan be shifted or passed to another person (Asia International Auctioneers u. CIR, G.R. No. 779775, September 26,2072).

5.

Issuance of Formal Assessment Notice (FAN) and letter of demand. - The formal letter of demand and

assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax(es) shall state the facts, the law, rules and regulations, or jurisprudence on which assessment is based; otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his authorized representative shall acknowledge receipt thereofin the duplicate copy of the letter of demand, showing the following: (a) his name; (b) signature; (c) desigpation and authority to act for and

554

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inbehalfofthe taxpayer, ifreceived by a person other thtn

the taxpayer may be able to dispute the imposition or agree with it.3

the taxpayer himself; and (d) date of receipt thereofll

FAN (BIR Form 17.08) contains the following information: name, address, and TIN of the taxpayer;

2.

kind oftax; period covered; basic tax assessed, surcharge, interest, and compromise penalty, if any; and the date when such deficiency tax must be paid. Generally, the date of payment is about thirty days from the date of mailing or

The FAN and letter of demand should always go

The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.'?Applying the provisions of Section 228 of the Tax Code, the Tax Court was rather lenient in favor of the government in its earlier decisions. Thus:

1. If the assessment

notice is deemed insufficient insofar as compliance with Section 228 (protesting of assessrnent) of the Tax Code is concerned, such insufficiency can be cured, if the demand Ietter can show the legal and factual bases relied upon in the issuance of the assessment which the assessment notice failed to detail. The rule requiring the BIR to inform the taxpayer in writing of the laws and the facts on which the assessment is made runs parallel to the due process clause for it is believed that it is only through a detailed appraisal of its basis that

Absence of onshore income and of loarts in tax returns is tantarnount to omission to file return. - Since there was an absence of FCDU onshore income declaration in petitioner's quarterly percentage tax returns and considering that the loans made to residents and the certificate of time deposits made by resident depositors were not reflected on its DST declarations for 1998, then these are tantamount to omission to file the said returns. The said omissions warrant the application of the 10-year assessment period under the Tax Code, within which respondent can assess petitioner for deficiency GRT and DST. Assessments are prima facie presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of the correctness oftax assessments.s Failure to present proofoferror in the assessment will justify judicial affirmation of said assessment.6

3PNZ Marketing v. Commissioner, CTA Case No. 5726, December 14,200I. aArtex Development Co. v. NLRC, 187 SCRA 611; Manuel v. Villalena, 37 SCRA 745. See the latest decisions of the Supreme Court on the matter discussed in the succeeding Chapters. sStandard Chartered Bank v. Commissioner, CTA Case No. 7253, June 2b, 2010, citing Interprovincial Autobus Co., Inc. v. Collector, 98 Phil. 290; Sy Po v. CTA, et al., G.R. No. 81446, August 18, 1988; Dayrit v. Cruz, G.R. No. L-39910, September 26, 1988; Cagayan Robina Sugar Milling Co. v. CA, et al., G.R.No. 122451, October

t2,2000. rSec. 3.1.4, Rev. Regs. No. 12-99, September 6, 1999. 'zSec. 228,

NIRC.

Although petitioner did not receive the notice of assessment sent by respondent Commissioner, it may not complain of lack of due process. In one case, petitioner was given the opportunity to be heard and to present, as it did, its side of the controversy by respondent Court acting on petitioner's motion for reconsideration and modifying the decision to reduce petitioner's tax liability. Absence of previous notice is not itself a substantial defect; what the law abhors is the lack of opportunity to be heard.a

release of the formal assessment, although in some cases, there is a delay in the signing and release of such formal assessment notice.

together. The reason for this is that the information given in the FAN is inadequate for the taxpayer to make a good evaluation of the correctness of the formal assessment. Since the law requires that the factual and./or legal bases of the assessment must be stated, and this requirement is not satisfied by the issuance ofFAN alone, a letter of demand thus fills up the void and explains to the taxpayer how the deficiency assessment was arrived at, including the reasons and legal bases for the assessment.

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6Delta Motors Co. v. Commissioner, CTA Case No. 3782, May 2L, lg86; CL et al., G.R. Nos. 104151 and 105563, March 10, 1995.

Commissioner v.

556

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c.

The assessment notice must be personally delivered or mailed ttr the address shown in the income tax return covered by the assessment, unless a written notice ofthe change ofaddress duly received by the appropriate revenue omce was previously made by the taxpayer or his authorized representative. It is always important to indicate and stamp on the assessment notice, demand letter, and the envelope containing the assessment notice and demand letter the exact date of receipt by the person who received the same, and such receiving person must immediately forward the same to the official in charge

The taxpayer does not have to pay the deficiency tax assessment in filing the protest letter, but the 207o defrciency interest per annunT shall start to run from the date the tax is due up to the date of payment of the deficiency tax.

of tax matters. This will ensure the filing of a written protest against the assessment within thirty days from the date of receipt thereof by the office and not by the officer in charge of tax matters.

6. Filing of administrative protest by the taxpayer against the assessment. - The taxpayer or his duly authorized representative may protest administratively

It must also be noted that the final assessment notice must be protested by the taxpayer within the 30-day period, despite the fact that exactly the same issues were raised by the revenue officers in the preliminary assessment notice, which were objected to, adequately explained, and supported by factual and legal arguments submitted by the taxpayer or his authorized representative at the preliminary assessment stage. The protest against the final assessment notice is not the same as the reply to the preliminary assessment notice, in the same manner that the preliminary assessment notice does not ripen into a final assessment notice if not duly issued or deemed issued within the three-year period the BIR may make an assessment. Where the taxpayer is appealing on the ground that the assessment is erroneous, it is incumbent upon him to prove what the correct and just liability is by a full and fair disclosure of all pertinent data.7

The issuance of the FAN/DL legally creates tax liability the taxpayer which is being demanded in the accompanying letter

of of

demand.

b. If the taxpayer files a timely protest against the FANIDL, the assessment does not become final and executor. The taxpayer may file a supplemental protest, containing the additional or new evidence and arguments in support of its protest, within the next 60 days from the date offiling ofthe protest letter. ?Bonifacio Sy Po v. CTA, G.R. No. 81446, August 18, 1998.

against the aforesaid formal letter of demand and assessment notice within 30 days from date of receipt thereof. This period is known as the "30-d.ay period;' in this book. Ifthere are several issues involved in the formal letter of demand and assessment notice but the taxpayer only disputes or protests against the validity of some of the issues raised, the taxpayer shall be required

to pay the deficiency tax or taxes attributable to the undisputed issues, in which case, a collection letter shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and./

or interest. No action shall be taken on the taxpayer's disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to the said undisputed issues. The prescriptive period for assessment or collection of the tax or taxes attributable to the disputed issues shall be suspended.

Legal efficts of issuance of FANIDL

a.

d. The business of the taxpayer does not become illegal by non-reason of the non-payment of the assessed national internal revenue tax, unlike local business tax, which must be paid upon the filing ofthe protest.

The taxpayer shall state the facts, the applicable law, rules and regulations, or jurisprudence on which his protest is based; otherwise, his protest shall be considered void and without force and effect. If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some ofthe several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes

attributable thereto (Sec. 3.7.5, Reu. Regs. No. 12-99).

If the taxpayer fails to file a valid protest against the formal Ietter of demand and assessment notice within 30 days from date

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demandable.

Submissionofdocumentaryevidenceandarguments. - The taxpayer shall submit the required documents in support of his protest (1.e., request for reinvestigation) within 60 days from date of filing of his letter of protest; otherwise, the assessment shall become final, executory

9.

and demandable. This period is referred to as the "60-d.ay period.." The phrase "submit the required documents"

includes submission or presentation of the pertinent documents for scrutiny and evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his report ofinvestigation.

If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals within 30 days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable (Sec. 228, NIRC; Sec. 3.1.5, Reu. Regs. No. 12-99). However, the counting of the 180-day period will start to run from the filing ofthe protest letter (1.e., request for

!-rl-r9

Appeal by the taxpayer of the final decision of the Commissioner or his authorized representative on the disputed assessment to the Court of Tax Appeals. - If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within 180 days from date of submission, by the taxpayer, of the required documents in support ofhis protest, the taxpayer may appeal to the Court of Tax Appeals within 30 days from the Iapse ofthe said 180-day period, otherwise, the assessment shall become final, executory and demandable (5ec.228, NIRC).

B.

Power to Collect Taxes

Delinquency tax v. deficiency tax

reconsideration), and if the respondent failed to render his decision within 180 days from the filing of his protest letter, petitioner has 30 days therefrom to file an appeal with the CTA.8

A taxpayer is considered.d.elinquent inthe payment of his tax when (a) the self-assessed tax per return filed by the taxpayer on the prescribed date was not paid at all or was only partially paid; or (b) the deficiency tax assessed by the BIR became final and executory.

8. Denial of protest by the Commissioner or his authorized representative. - The decision of the Commissioner or his duly authorized representative shall

The term "d,efi.ciency" means: (1) The amount by which the tax imposed by law lTitle II (Income Tax)] as determined by the

(a) state the facts, the applicable law, rules and regulations, orjurisprudence on which such decision is based; otherwise, the decision shall be void; and (b) that the same is his final

decision (Sec. 3.1.6, Reu. Regs. No. 12-99).

In general, if the protest is denied, in whole or in part, by the Commissioner or his duly authorized representative,

the taxpayer may appeal to the Court of Tax Appeals within 30 days from date of receipt of the said decision; otherwise, the assessment shall become final, executory sOceanic Wireless Network v. Commissioner, CTA Case No. 6111, November 3,

2004.

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and demandable. flowever, if the taxpayer elevates his protest to the Commissioner within 30 days from date of receipt of the final decision of the Commissioner's duly authorized representative, the latter's decision shall not be considered fi,nal, executory and demandable, in which case, the protest shall be decided by the Commissioner.

of receipt thereof, the assessment shall become final, executor.y irn
7.

,ilffi::ll'|,

Commissioner or his authorized representative exceeds the amount shown as the tax by the taxpayer upon his return; or (2) If no amount is shown as the tax by the taxpayer upon his return, or ifno return

is made by the taxpayer, then the amount by which the tax

as

determined by the Commissioner or his authorized representative exceeds the amounts previously assessed (or collected without assessment) as a deficieney (See Sec.56[8], NIRC).

Distinction between remedies in the collection of deficiency tax and delinquency tax A delinquent tax can immediately be collected a. administratively through the issuance of the warrant of distraint and levy, and./or by judicial action, while a

560

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deficiency tax can be collected also through rrdministrul,ivc and,/or judicial remedies but has to go through the proccss offilingthe protest against the assessment by the taxpayer and denial of such protest by the BIR.

b.

The filing of a civil action for the collection ofthe delinquent tax in the ordinary court is a proper remedy, while the filing

ofa civil action at the ordinary court for the collection ofa deficiency tax during the pendency of the protest may be the subject of a motion to dismiss. In addition to the motion to dismiss at the ordinary court, a petition for review must be filed by the taxpayer with the CTA within the 30-day period prescribed in R.A. 1125, as amended to toll the running of the prescriptive period.

c.

A delinquent tax is subject to administrative penalties, such

as 25Vo surcharge, interest, and compromise penalty. A deficiency tax is generally not subject to the 2570 snrcharge, although subject to interest and compromise penalty. Afber a Final Assessment Notice and Demand Letter have been issued by the BIR, next stage is the collection thereof.

Administrative remedies of the government to collect assessed taxes The remedies of the government for the collection of national internal revenue taxes can be classified into administrative remedies and judicial remedies. The administrative remedies are:

1. 2. 3. 4. 5. 6. 7.

Tax lien;

Distraint ofpersonal property, or levy ofreal property, or garnishment of bank deposits; Sale ofproperty;

Forfeiture; Compromise and abatement;

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Tax lien "Tax lien" is understood to denote a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation (Hongh,ong & Shanghai Banking Cotporotion u. Commissioner, 39 Phil. 145). When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time assessment was made by the Commissioner until paid with interest, penalties and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer.

The lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the Register of Deeds of the province or city where the property ofthe taxpayer is situated or located (Sec. 219, NIRC). The claim of the government predicated on a tax lien is superior

to the claim of a private litigant predicated on a judgment. The tax claim must be given preference over any other claim of any other creditor, in respect ofany and all properties ofthe insolvent. There is no merit in the contention of the National Labor Relations Commission that taxes are absolutely preferred claims only with respect to movable or immovable properties on which they are due (Republic u. Peralta, 150 SCRA 37). The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due

and payable. The power of the court in execution of judgments extends only

to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such right as the judgment debtor had at the time of sale.

The sheriffis not authorized to attach or levy on property not

Penalties and fines; and

belonging to the judgment debtor.

Suspensionofbusinessoperations.

The term "tar" is used in a broad sense encompassing all government revenues collectible by the Commissioner under the Tax

The judicial remedies of the government are civil action and criminal action.

Code, whether or not involving taxes in the strict technical sense thereof (e.g., forest charges) (Commissioner u. National Labor

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Relations Comrnission ond. Maritim.e Company of the Phil., 238 SCRA 42).

BIR may collect the deficiency tax due from one heir only or from all the heirs in proportion to their inheritance receiued. - After the closure ofthe estate proceedings ofAtanacio Pineda and the distribution ofthe estate to his heirs, the CIR tried to collect from one of the heirs deficiency income tax due from the estate. The respondent appealed to the CTA alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the heirs." The CTA found respondent Pineda liable only for the payment corresponding to his share of the tax assessed. The CIR appealed to the Supreme Court and proposed to hold respondent liable not only for his share in the tax but for the payment of all the taxes found by the CTA to be due from the estate. The Supreme Court granted the petition and ruled that Pineda was liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir, he was individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a holder of property belonging to the estate, he was liable for the tax up to the amount of the property in his possession. The reason was that the government has a lien on the property received by him from the estate for unpaid income taxes for which said estate was liable (CIR v. Pined.a, G.R. No. L-22734, September 75, 1967).

Bar Question (1995) For failure of Oceanic Company, Inc. (OCEANIC) to pay deficiency taxes of F20 Million, the Commissioner of Internal Revenue issued warrants of distraint on OCEANIC's personal properties and

levy on its real properties. Meanwhile, the Department of Labor through the Labor Arbiter rendered a decision ordering OCEANIC to pay unpaid wages and other benefits to its employees. Four barges belonging to OCEANIC were levied upon by the sheriffand later sold at public auction.

The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and enjoin the sherifffrom disposing the proceeds thereof. The employees of OCEANIC opposed the motion contending that Article 110 ofthe Labor Code gives first preference to claims for unpaid wages. Resolve the motion. Explain.

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Suggested answer: The motion filed by the Commissioner should be granted because

the claim of the gouernment for unpaid taxes is generally preferced ouer the claims of laborers for unpaid wages. The prouision of Article 110 of the Labor Code, which giues laborers' claims for preference,

applies only in case of bankruptcy or liquidation of the employey's business. In the instant cq.se, OCEANIC is not und.er bankruptcy or liquidation at the time the warrants of distraint and leuy were issued; hence, the lien of the ernployees is unwarranted (CIR a. NLRC, Gn. No.74965, Notsember 9, 1994).

Distraint, levy, or garnishment Distraint of personal property Distraint is a remedy whereby the collection of delinquent taxes is enforced on the goods, chattels or effects and other personal property ofwhatever character ofthe taxpayer, including stocks and other securities, debts, credits, bank accounts and interests in and rights to personal property (5ec.205[a], NIRC).

a.

Actual d.istraint is resorted to when at the time required for payment, a person fails to pay his delinquent tax obligation (Sec. 207[A], NIRC). Distraint consists in the actual seizure and taking possession ofpersonal property ofthe taxpayer.

b.

Constructiae d,istrainf is issued where no actual tax delinquency of the taxpayer is necessary before the same It may be availed of when the taxpayer is retiring from any business subject to tax; he intends to leave the Philippines; he removes his property therefrom; or he performs any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. Constructive distraint shall be effected by requiring the taxpayer or any person having possession or control ofthe personal property to sign a receipt covering the property distrained and obligate himselfto preserve the same intact and unaltered and not to dispose of the same in any manner whatever, without the express authority of the Commissioner (Sec. 206, NIRC). It is a preventive remedy to forestall hiding or possible dissipation of the taxpayer's assets when tax delinquency takes place. is resorted to by government.

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"Garnishment" refers to a warning

t
in whose hands

the effects ofanother are attached, not to pay the money or delivcr the property or allow withdrawal of deposits of the defendant in his hands

Reliance Procorna, Inc. 57 SCRA 370). (see

a.

Phil-Asia Tobacco Corporation,

Levy of real property Levy is a remedy whereby the collection of delinquent taxes is enforced on the real property belonging to the delinquent taxpayer. Levy shall be effected by writing upon an authenticated certificate showing the name of the taxpayer and the amounts of the tax and penalty due, a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or ifhe be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question (Sec. 207, NIRC). The remedy by distraint ofpersonal property and levy on realty may be repeated if necessary, until the full amount due, including all expenses, is collected (Sec. 217, NIRC). The reason for this provision was succinctly explained by the court as follows: If a full discharge of the tax liability is to be the result of the distraint and levy, this would permit a clever taxpayer who is able to conceal most of the valuable part ofhis property from the revenue officers to escape payment of his tax liability, by sacrificing an insignificant portion of his holdings (Castro u. Collector,6 SCRA 886).

Distraint and leay proceedings are aalid,Iy begun or con.menced, by the issuance of the toanrant and seruiee thereof on the taxpayer. - Under Section 223(c) of the Tax Code, it is not essential that the warrant be fully executed so that it can suspend

the running of the statute of limitations on the collection of the tax. It is enough that the proceedings have validly begun and that their execution has not been suspended by reason ofthe voluntary desistance of the CIR. Jurisprudence establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the warrant and seryice thereof on the taxpayer (BPI u. Commissioner, G.R. No. 739736, October 77,2OO5).

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Bar Question (2004, 1998) Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and sale of real properties of the decedent without first securing the authority of the court sitting in probate court over the supposed will ofthe decedent? Suggested answer: Yes. The BIR is authorizedto collect estate tan deficiency through the summary remedy of leuying upon and sale of real properties of a decedent, without the cognition. q.nd authority of the court sitting in probate ouer the supposed will ofthe deceased, because the collection of estate tax is executiue in character. As such, the estate tox is exempted frorn the application of the statute of non-claims, and this is justified by the necessity of gouernment funding, immortalized in the mosim that taxes are the lifeblood of the gouernment (Marcos II a. CA and.

crR,273 SCRA 47). Bar Question (1998) Is the BIR authorized to issue a warrant of garnishment against the bank account ofa taxpayer despite the pendency ofhis protest against the assessment with the BIR or appeal with the Court of Tax Appeals?

Suggested answer: The BIR is authorized to issue a warrant of garnishment against banh account ofa taxpayer despite the pendency ofprotest (Yabes the Flnjo, 15 u. SCRA 278). Nowhere in the Tox Code is the Commissioner required to rule first ort the protest before he can institute collection proceedings on the tax assessed. The legislatiue policy is to giue the

Commissioner much latitude in the speedy and prompt collection of taxes because it is in tq.xation that the Gouernment depends to obtain the means to carry on its operations (Republic u. Lim Tian Teng Sons, 16 SCRA 584).

The Commissioner is not authorized to issue the warrant of garnishment during the pendency of appeal with the Court of Tax Appeals because the assessment is not yet fi.nal and unappealable.

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Sale of property The Revenue District Officer or his duly authorized representativc shall, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two public places in the municipality or city where the distraint is made, specifying the time and place of sale and the articles distrained. The time of sale shall not be less than twenty days after notice to the owner or possessor of the property and the publication or posting of such notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained.

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and penalties so duo rrnd the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by payrng the taxes, penalties and interest. Ifhe does not do so, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify (Sec.213, NIRC).

Forfeiture Forfeiture of property for want of bid.d.er. - In case there

At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges.

no bidder for the real property in the public sale or if the amount of the highest bid is insufficient to pay the taxes, penalties and costs, the property shall be declared forfeited to the Government. The Register

In the case of stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereoffurnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities.

Within one year from the date of such forfeiture, the taxpayer or anyone for him, may redeem said property by paying the full amount oftaxes, penalties, interests and costs ofsale, but ifthe property is not thus redeemed, the forfeiture shall become absolute (Sec. 215,

is

of Deeds concerned shall, upon registration of the declaration for forfeiture, transfer the title ofthe property to the Government without the necessity of an order from a competent court.

NIRC).

Gompromise and abatement

Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses ofseizure and preservation of the property pending the sale, and no charge shall be imposed for the services ofthe local internal revenue officer or his deputy (Sec. 209, NIRC).

revenue tax when (a) a reasonable doubt as to the validity of the claim against the taxpayer exists, or (b) the financial position ofthe taxpayer demonstrates a clear inability to pay the assessed tax.

Within twenty days after levy, the officer conducting the proceedings shall proceed to advertise the property or a usable

The compromise settlement of any tax liability shall be subject to the following minimum amounts:

portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of at least thirty days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in a public and conspicuous place in the barrio or district in which the real estate lies and by publication once a week for three (3) weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain a statement of the amount of taxes

1. For cases of ftnancial ineapacity , a minimum

Cornprornise

The Commissioner may compromise any national internal

compromise rate equivalent to l07o of the basic tax assessed; and

2.

For other cases, a minimum compromise rate equivalent to 407o ofthe basic tax assessed.

Where the basic tax involved exceeds F1,000,000 or where the settlement offered is less than the prescribed minimum rates, the

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compromise shall be subject to the approval of the National Evaluation Board which shall be composed of the Commissioner and the Deputy

e.

Commissioners.

All criminal violations may be compromised, except (a) those already filed in court, or (b) those involving fraud (Sec. 204[A], NIRC).

The taxpayer's offer to compromise shall not be considered, unless and until he waives in writing his privilege under R.A. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into his bank deposits (Sec.6[F], NIRC). Should the BIR formally accept the offer of compromise based on doubtful validity of the assessment made by the taxpayer, the remainingbasic tax (i.e.,607o ofthe basic tax) plus aII the surcharges and deficiency interests shall be deemed waived and cancelled. In the case of offer to compromise based on financial incapacity, if accepted by the CIR, the remaining 9OVo of thebasic tax plus all penalties shall be waived.

Effective after 15 days from publication in a newspaper of May gxanting Board, Evaluation 10, 2013, all decisions of the National request of taxpayer to compromise, shall have the concurrence of the Commissioner of Internal Revenue. The compromise offer shall be paid first by the taxpayer upon filing ofthe application for compromise settlement. No application for compromise shall be processed without the full settlement of the offered amount. In case of disapproval, the amount paid upon filing shall be deducted from the total outstanding tax liabilities. general circulation ofRevenue Regulations No.9-2013 dated

Bar Question (2006) State and discuss briefly whether the following cases may be compromised or may not be compromised:

a. b.

Delinquentaccounts;

administrative protest, afber issuance of the final assessment notice to the taxpayer, which are still Cases under

pending;

c. d.

Criminal tax fraud cases; Criminal violations already filed in court;

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Cascs whcrc linal rcports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form.

Suggested answer:

a.

Delinquent q.ccounts may be compromised, if either of the two conditions is present: (1) the assessment is of doubtful ualidity, or (2) the financial position of the taxpayer demonstrates a clear inability to pay the tox (Sec,204[A], NIRC; Sec.2, Reu. Regs. No.30-2002);

b.

These may be compromised, prouided that it is premised upon doubtful ualidity of the q.ssessment or financial

incapacity to pay;

c.

These may not be compromised, so that the totcpayer may not profit from his fraud, thereby discouraging its commission;

d.

in order that the taxpayer profit his criminal acts; will not from

e.

Cases where final reports ofreinuestigation or reconsideration haue been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form, cannot be compromised. By giuing

These may not be comprornised

his conformity to the reuised assessment, the taxpayer admits the ualidity of the assessment and his capacity to pay the same (Sec.2, Reu. Regs. No.30-2002).

Bar Question (2004) After the tax assessment had become final and unappealable, the Commissioner of Internal Revenue initiated the filing of a civil action to collect the tax due from NX. After several years, a decision was tendered by the court ordering NX to pay the tax due plus penalties and surcharges. The judgment became final and executory, but attempts to execute the judgment award were futile. Subsequently, NX offered the Commissioner a compromise settlement of 50Vo of the judgment award, representing that this amount is all he could really afford. Does the Commissioner have the power to accept the compromise offer? Is it legal and ethical? Explain briefly.

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Suggested answer: Yes. The Commissioner has the power to accept the offer of compromise, if the financial position of the taxpayer clearly dernonstrates a clear inability to pay the tox (Sec. 204, NIBC). As represented by NX in his offer, only 507o of the judgment award is all he could really afford. This is an offer for cornpromise based on financial incapacity which the Commissiorrcr shall not accept, unless accompanied by a waiuer of the secrecy of bank deposits (Sec.

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1

'I'he tax or &ny portion thereof appears to be unjustly or excessiuely assessed; or

2)

The administration and collection costs inuolued do not justify the collection of the amount due (Sec. 204[8], NIRC).

Bar Question (1998) An Information was filed in court for willful non-payment of

the financial position of the ta.xpayer, although the inquiry need not be limited only to the bank deposits of the taspayer but also as to his

income tax, the assessment of which has become final. The accused, through counsel, presented a motion that he be allowed to compromise his tax liability subject of the information. The prosecutor indicated his conformity to the motion. Is this procedure correct?

financial position as reflected in his financial statements or other records upon which his property holdings ca.n be ascertained.

Suggested answer:

6[F], NIRC). The waiuer will enable the Cornmissioner to ascertain

indeed the financial position of NX as determined by the Commissioner demonstrates a clear inability to pay the tax, the acceptance of the offer is legal and ethical because the ground upon which the compromise utas anchored is within the context of the law andthe rate of com.promise is wellwithin andfar exceeds the minimum prescribed by law, which is only 107o of the bq.sic ta.x, assessed.

No. Crirninal uiolations, if already filed in court, may not be compromised (Sec. 204[8], NIRC). Furthermore, the payment of the tq.x due after apprehension shall not constitute a ualid defense in any prosecution for uiolation ofany prouisions ofthe Tax Code (Sec. 247[a], NIRC). Finally, there is no showing that the prosecutor in the problem is a legal officer of the Bureau of Internal Reuenue to whom the conduct of crimirual actions is lodged by the Tose Code.

Bar Question (2000)

Bar Question (1998)

If

Under what conditions may the Commissioner of Internal Revenue be authorized to:

a)

Compromise the payment of any internal revenue tax?

Suggested answer: The Commissioner of Internal Reuenue maybe authorized to compromise the payment of any internal reuenue ta,x, where:

1) 2)

A reasonable doubt as to the ualidity of the clairn against the taxpayer exists; or The fi,nancial position of the ta.xpayer demonstrates a clear to pay the assessed ta.tc.

inability

b)

Abate or cancel a tax liability?

Suggested answer: The Commissioner of Internal Reuenue may abate or cancel a ta"x

liability when:

May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax?

Suggested answer: No. Ataxpayer who is constituted as withholding agent who hqs deducted and withheld at source the tax on the income payment made by him holds the taxes as trust funds for the gouernment (Sec. 58[D], NIRC) and is obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay I remit the tax withheld is not a ground for compromise; becq.use the withholding tax is not a to.x upon the withholding agent but it is only a procedure for the collection of a tax.

Power of Commissioner to comprotnise is nat absolute, - In one case, a fine was imposed on the original appraisement of certain jewelry. This was questioned by the taxpayer in the CTA, but the governmentwon. The decisionbecame final for failure ofthe taxpayer

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to appeal the same. However, the Commissioner of Customs, with the approval of the Department of Finance, subsequently ordered a reappraisal of the article in question and entered into a compromise. The Supreme Court ruled that the compromise was improper because the Commissioner acted as a mere agent of the Government, the Commissioner of Customs, is not authorized to accept anything less than what is adjudicated in favor of the Government. By virtue of such final judgmenl the Government had already acquired a vested righL (Roaero u. Arnparo,9T Phil.228).

tax wq.s paid thereon in 1997 so that my client may be allowed to pay only the ciuil penalties for non-withholding pursuant to Reuenue Memorandum. Order No. 38-83. B

.

Bar Question (2002)

Will the BIR's action for collection prosper? As counsel of Minolta, what action will you take? Explain.

B.

May criminal violations of the Tax Code be compromised? If Minolta makes a voluntary offer to compromise the criminal violations for non-filing and non-payment oftaxes for the year L998, may the Commissioner accept the offer? Explain.

Suggested answer:

A.

Yes. BIR's action for collection will prosper because the assessment is already fi.nal and executory. It can already be enforced through judicial action.

AII criminal uiolations of the Tux Code may be compromised except those already fi.Ied in court or those inuoluing fraud (9ec.204, NIRC) Accordingly, if Minolta makes a uoluntary offer to cornpromise the criminal uiolations for non-fi'Iing and nonpayment of taxes for the year 1998, the Commissioner tlay accept the offer which is allowed by law. Howeuer, if it can be established that a tax has not been paid as a consequence of non-fi.Iing of the return, the ciuil liability for taxes may be dealt with independently of the criminal uiolations- The compromise settlement of the criminal uiolations will n'ot relieue the taxpayer from its ciuil liability. But the ciuil Iiabitity for taxes may also be compromised if the financial position of the taxpayer demonstrates a clect'r inability to pay the tax.

L15 SCRA 290). But a compromise agreement entered into by government lawyer without authority of the Board of Directors is null and void (Republic u. Plan, 116 SCRA 7O).

A.

fr73

As utunsel of Mirutl'ta, I will introduce euidence that the income payment was reported by the payee and the income

Compromise agreement entered into without authority is not void, but unenforceable and may be ratified (Lim Pin u. Liao Tan,

Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax treatment under a special law. After investigation of its withholding tax returns for the taxable year L997 , the BIR issued a deficiency withholding tax assessment in the amount of F150,000.00. On May 15, 1999, because of financial difficulty, the deficiency tax remained unpaid, as a result of which the assessmentbecame final and executory. The BIR also found that, in violation of the provisions of the NIRC, Minolta did not file its final corporate income tax return for the taxable year 1998, because it allegedly incurred net loss from its operations. On May 17,2002, the BIR filed with the RTC an action for collection of the deficiency withholding tax for 1997.

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Abatement When the tax or any portion thereof appears to be unjustly or excessively assessed, or when the administration and collection costs involved do not justify the collection of the amount due, the tax may be abated ; i.e., l]ne entire tax liability of the taxpayer is cancelled (Sec. 204[B], 1997 Tax Code). The power to compromise or abate shall not be delegated by the Commissioner, except in the following cases: (a) assessments issued by regional offices involving basic taxes of F500,000 or less; and (b) minor criminal violations. These cases may be compromised by a regional evaluation board (Sec. 7, NIRC).

Penalties and fines Compromise and compromise penalty compared:

Similarities:

1.

They both imply mutual agreement. A compromise penalty cannot be imposed in the absence of a showing that the

574

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taxpayer consented thereto. If the Commissioner's offer of compromise is rejected by the taxpayer, the Commissioner cannot enforce it but he may file a criminal action against the taxpayer for the tax violation (Commissioner a. Fireman's Fund.Insurance Co., 748 SCRA 315). 2.

3.

The Commissioner has no power to impose and collect the compromise penalties in the absence of a compromise agreement validly entered into between the taxpayer and the Commissioner (Mithi ng B@yan Cooperatiue Marheting Association u. Araneta, 2 SCRA 879). However, where in an appeal to the CTA, the taxpayer has expressed his willingness to pay compromise penalties, said amounts may be collected as part of the judgment (Commissioner u. Guerrero, 19 SCRA 205). The right to enter into an agreement, including the amount to be paid in settlement of a tax violation, is discretionary

to the Commissioner or the taxpayer.

Distinctionsz 1.

Definition and nature of uiolation being comprontised: A compromise penalty is an amount of money paid by a taxpayer to compromise a tax violation that he has committed, which may be the subject of criminal prosecution, while a compromise is an amount of money paid by the taxpayer to settle his civil liability for tax assessed by the government.

2.

Basis of amount paid: In compromise, the basis of the amount paid is the basic tax assessed; in compromise penalty, the basis is the gross sales or receipts during the year or the tax due.

3.

Minimum amount prescribed: In compromise, the law sets a limit as to the amount that may be accepted by the government, depending on the legal grounds used by the taxpayer; in compromise penalty, the amount set depends on the nature of the tax violation and the minimum amount is generally not less than F1,000.

Bar Question (2000) A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by a non-resident foreign

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corporation. In addition to the civil penalties provided for under the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty? Suggested answer: No. There is no showing that the comprornise penalty was imposed by the Commissioner of Internal Reuenue withthe agreement and conformity of the taxpayer (Wond'er Mechanical Engineering

Corpora,tion a. Court of Ta* Appeals, et al., 64 SCRA 555).

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'Iax Appeals, the rcspondent is the Commissioner of Internal Revenue' not the Republic of the Philippines.

CIIAPTER

}CffI

JUDICIAL REMEDIES OF GOVERNMENT The main function of the BIR is to raise revenues for the operations of government. To effect collection of delinquent taxes, the BIR may resort to judicial actions under the Tax Code. Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other laws enforced by the BIR shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the BIR, but no civil or criminal actions for recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner (Sec. 220, NIRC). No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Tax Code (Sec. 218, NIRC). However, the Court of Tax Appeals is given the power to restrain the collection of national internal revenue taxes, subject to certain conditions (Sec. 7, R.A. 1125).

Jurisdiction over civil actions Civil action is available to and initiated by the government only when a tax liability becomes delinquent and collectible. Effective April, 2004, jurisdiction over civil actions for the collection of delinquent taxes with basic tax amounting to Fl million or more shall be filed with the CTA. The RTC retains jurisdiction over basic tax in the amounts up to less than Fl million.

When collectibility of tax liability arises 1. Self-assessed. tax shoun in the return was not paid. within the d.ate prescribed. by law Internal revenue taxes are self-assessing and no further

assessment by the government is required to create the tax liability, where the taxpayer merely filed his tax return showing an amount of tax due, without paying the same or payrng only a portion thereof. In such a case, the taxpayer is immediately considered as delinquent with respect to the unpaid amount of tax.

Bar Question (1998) When is an internal revenue tax considered delinquent?

Givil action There are two (2) ways by which the civil tax liability of a taxpayer is enforced by the government through civil actions. These are: (1) by filing a civil case for the collection of a sum of money with the proper regular cotrt (i.e., Municipal Court or Regional Trial Court), if basic tax assessed is less than Fl million, or with the CTA, where the basic tax assessed amounts to F1 million or more; and (2) by filing an answer to the petition for review filed by the taxpayer with the Court of Tax Appeals. When the Commissioner of Internal Revenue files a civil action for the collection of taxes, it is the Republic of the Philippines that is the party plaintiff, not the Commissioner of Internal Revenue. But when it is the taxpayer that files a petition for review in the Court of

576

Suggested answer:

An internal reuenue tax is considered delinquen't when it is unpaid after the lapse of the last day prescribed by law for its

it could also be considered as delinquent where an assesstrlent for defi.ciency tax has become final and the taxpayer has not paid it within the period giuen in the notice of assessment.

payment. Lihewise,

A"d.elinquent accouttt" refers to the amount of tax due from a taxpayer who failed to pay the same within the time prescribed for its payment arising from (a) a self-assessed tax, whether or not a tax

return was filed, or (b) a deficiency assessment issued by the BIR, which has become final and executory. Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such return was due, and in availing of the compromise, a tax return shall be fiIed as a basis for computing the amount of compromise to

578

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be paid (Reu. Regs. No. 17-86; PNOC u. CA, et al., and. PNB a. CA, et al., G..R. Nos. 109976 and. 772800, April26,2OO5).

2. Final @ssessnlent is not protested. administratiaely within 3O d.ays

from d.ate of receipt

The assessment may be protested administratively by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Otherwise, the assessment shall become final (Sec. 229, NIRC). The filing of the protest within the 30-day period is mandatory and is not extendible, and if the BIR imposes certain conditions for the approval of such protest, said conditions must be satisfied with by the taxpayer. Failure to question o;ssesan crlt served. upon the d.eced.enf,s heirs. - Apart from failing to file the required estate tax return, petitioner and the other Marcos heirs failed to question the assessments served on them as heirs of the late President Ferdinand Marcos, thereby allowing said assessments to lapse into finality. Said assessments having become final and executory, the same may be collected by summary remedy of distraint or levy (Marcos II v. Court ofAppeals,273 SCRA 47).

3.

Non-compliance with the cond.ition laid. in the approual ofprotest

The protest letter filed by the taxpayer or his authorized agent, provided it is not considered as pro forma, is generally approved by the Commissioner. In some instances, the Commissioner imposes certain conditions or requires the filing of position papers in granting the request for reinvestigation or reconsideration, in order to adequately evaluate the validity of the arguments and documents mentioned in the protest letter. Thus, failure of the taxpayer to comply with such condition within the time granted him is construed as if no protest was filed by him.

Estate and inheritance taxes were assessed against the estate of spouses Marba Teodoro and Don Toribio Teodoro. The heirs then filed a request for reconsideration ofthe assessments and asked that they be given 30 days within which to submit their position paper in support of their claim. The position paper was not submitted. When the Government sought to collect the tax liabilities in the settlement proceedings on the estate, the heirs interposed the defense that the assessments have not become final and executory. The Supreme Court

'l',rr l(t,:ltt,:t rtl,rs rrrll'url llr,ttrrrlrcs rtl' ( lovt'rtttttcttl

579

ruled that the request tirr reconsideration cannot be considered as a protest against the assessment. The failure of the heirs to substantiate their claim against the assessment due to the non-submission of their position paper justified the Commissioner's action in collecting the tax in the court settlement proceedings (Dayrit a. Cruz, 165 SCRA 571).

Bar Question (1991) Antonio Cruz was appointed by the Regional Trial Court as administrator in the testate proceedings for the settlement of the estate of his deceased father. On12 February 1987 the Commissioner of Internal Revenue issued a deficiency estate tax assessment for the estate. The notice of deficiency assessment was received by the Administrator on 19 February 1987. In his letter to the Commissioner, dated 21 February 1987, which was received by the latter's office two (2) days later, the Administrator requested for a reconsideration of the assessment on the ground that the same is contrary to law and is not supported by sufficient evidence. He also requested for a period of fifteen (15) days within which to submit the estate's position paper. On 4 August 1988, not having received the promised position paper, the Commissioner filed with the Court a motion for allowance ofclaim and for an order ofpayment ofestate taxes, praying therein that the administrator be required to pay the BIR the aforementioned deficiency tax. The Administrator opposed the motion alleging that by reasons of the pendency of his request for reconsideration the deficiency assessment has not become final and executory and, therefore, the absence of a decision on the disputed assessment is a bar against collection of taxes. He further argued that it is the Court of Tax Appeals, and not the Regional Trial Court, which has exclusive jurisdiction over the claim. Resolve the motion and issues raised.

Suggested answer: Euidently, the request for reconsideration referred to did not

express or specify the grounds therefor. Arequest for reconsideration

in the tenor stated in the problem is insufficient, not being substantiated, to stop the running of the 30-day period utithin which the assessment may be disputed (Dayrit a. Cruz, G.,R. No. 39979, September 26, 1988). The failure of the taxpayer to submit the promised position pqper within the said 30-day period had the effect of rendering the assessment final and executory. In addition,

580

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the pendency of a decision oru a disputed qssessment does not bar the collection of the taxes, and no injunction mcry be issued. by any court (except by the court of rax Appeals as an incident to a timely petition for reuiew). In the absence of a petition for reuiew with the court of rax Appeals which may be brought by a taxpayer within J0 days from the receipt of the final decision of the commissioner, the court of rax Appeals has no jurisdiction to take cognizance thereof (See Sec. 11, R.A. 1125). Premises considered, the action taken by the commissioner with the Regional rriol court was appropriate and in accordance with law.

The taxpayefs failure to dispute the ussessment effectiuely by complying with the conditions loid downby the BIR, such as specr.fyins under oath the grounds of his protest, paying one-half of the crmount

putting up a bond for the balonce, prouid,ed. a legal basis the Gouernment to collect the taxpayer's tiability by ord,iiary ciuit for sssessed and

action (Republic u. Led.esnta., G.R. No. L-IBZ1|, FebruanTt 2g, 1967).

4. Failure to file a timely appeal to the CTA on

the

d.ecision of the Commissioner or his o.uthorized representative on the disputed assessntent. Taxpayer filed with the BIR a request for reinvestigation after -he was assessed

final

deficiency income tax. subsequently, a letter-decision demanding payment was issued by BIR. Since the taxpayer did not appeal, a civil action for collection was filed by the Government. The court ruled that the taxpayer's failure to appeal the decision to the Court of Tax Appeals deprived him of the right to question

the Commissioner's authority to collect the tax within the prescriptive period provided by law (Basa a. Republic, IBg

scRA34).

Where the taxpayer failed to comply with a condition laid down

by the commissioner for the reinvestigation of the case and its failure to appeal to the crA made the assessment final and executory, so that if an action to collect the tax assessment is filed by the government in the ordinary court, this is akin to an action to enforce a judgment such that no inquiry can be made thereon as to the merits of the original case or the justness of the judgment relied apon

(Mambulao Lumber Co. a. Republic, 132 SCRA 1). TNOTE: A ciuil action to collect an qssessment that hqs become final and executory is now required, to be filed with the crA under R.A. 9282, where the basic tar assessed, is Fl million or more.l

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Collection of tur through the filing of the BIR'I a.nswer in the petition fbr reuiew fiIed. by the taxpayer with the CTA. - The fact that no civil action to collect the taxpayer's tax liability

was filed by the Government (in the RTC) is no ground for claiming that the right of the Government to collect said liability had already prescribed. The Supreme Court ruled that prescription had not set in inasmuch as the Government's answer in the CTA was filed well within the prescriptive period prescribed by law (Fernand'ez Hermanoq Inc. u. Commissionerr 2g SCRA 552).In other words, the answer filed by the government in the Court of Tax Appeals was tantamount to the filing of a civil action for collection in the regular court. Incidentally, when action for collection is filed in the regular courts, prescription is tolled.

When to go to court? As a general rule, the BIR can file a civil action for the collection of a tax that has become delinquent or collectible within five (5) years from the date of assessment. Thus, in the leading case of Republic u. Lim Tiq.n Teng Sons (16 SCRA 584), Lhe Supreme Court held that

nowhere in the Tax Code is the Commissioner required to rule first on the taxpayer's request for reinvestigation before he can go to court for the purpose ofcollecting the tax assessed. The legislative

policy is to give the Commissioner much latitude in the speedy and prompt collection of taxes because it is on taxation that the Government depends to obtain the means to carry on its operations. The Court further said that when the Commissioner did not reply to the taxpayer's request for reconsideration and instead referred the case to the Solicitor General forjudicial collection, this was indicative of his decision against reinvestigation. Failure on the part of the taxpayer to fiIe the appeal to the CTA makes the final decision of the Commissioner on the disputed assessment final and executory. Distraint and levy proceedings are ualidly begun or comrnenced by the issuance of the warrant and seruice thereof on' the tonpayer. - Under Section 223(c) of the Tax Code, it is not essential that the warrant be fully executed so that it can suspend the running of the statute of limitations on the collection of the tax. It is enough that the proceedings have validly begun and that their execution has not been suspended by reason of the voluntary desistance of the CIR. Jurisprudence establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the warrant and service thereof on the taxpayer (BPI u. Cotnrnissioner, G.R. No. 739736, October 17, 2005).

582

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However, the filing of a civil action in the regular court (RTC) to collect a tax which was the subject of apending protest in the BIR was a justifiable basis for the taxpayer to appeal to the CTA and to move for a dismissal in the trial [regular] court of the Government,s action to collect the tax liability under dispute (Yabes u. Ftojo, 175

SCRA278).

Another exception relates to an action to collect on the bonds, which is an action separate and distinct from an action to collect taxes. Article 1144 of the civil code which provides that actions upon a written contract must be brought within ten (10) years from the time the right of action accrues, finds a fitting application (Repubhc a. Dorego, GR. No. L-76594, April 26, 1962).It appearing that said bonds were executed on June 12 and2g,1946, the right of the government to collect the amounts covered thereby, prescribed on June 12 and29,1956. The complaint was filed on February 18, 1959.

Who approves the filing of civil action? No civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall without the approval of the Commissioner (5ec.220, NIRC). However, a Regional Director may also approve the filing of civil actions for collection of delinquent tax, if this power is expressly delegated to him by the Commissioner under an appropriate revenue memorandum lor administrative] order on the matter (Republic a. Hizon,320 SCRA 574). be filed in court

Complaints in civil actions for the collection of delinquent taxes are required to be approved by the Solicitor General before they are filed. However, BIR legal officers deputized as Special Attorneys and stationed outside Metro Manila may file verified complaints without

the approval of the Solicitor General, provided that the Solicitor General is furnished a copy of the complaint, and thereafter, the solicitor General files a notice of appearance in the court where the action is filed. If the complaint is found to be improperly filed, a motion to dismiss is filed with the coarl(Repuhlic a.Domecillo, CA..-GR.

SPNo. 77676, Februany 9,7990).

Respondents in a civil action for the collection of tax Parties who are not included in an assessment made by the Commissioner of Internal Revenue cannot be made respondents in an appeal from a particular assessment, and no judgment can be

,,:::I,ii:Ilii'iirvcr..r.'r

583

rendered against such parties because any such judgment would be an encroachment on the prerogative of the Commissioner to make an assessment and would further violate the rule on due process and the exhaustion of administrative remedies. Moreover, under Section 7 of R.A. 1125, only the Commissioner of Internal Revenue and the Commissioner of Customs may be sued before the Court of Tax Appeals in appropriate cases (Gotannco & Sons a. Commissioner,

CTA Case No. 765, August 72, 7965).

The stockholders of a corporation that has tax delinquency cannot be made liable for the obligations of the corporation. The obligations ofthe corporation are not those ofthe stockholders, for it is a basic rule that a corporation is vested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related (Sunio a. National Labor Relations Commission, 727 SCRA 390).Itis, however, possible for stockholders to be held personally liable for the unpaid tax liabilities of a defunct corporation as when the assets of the corporation have passed into the hands ofits stockholders (Tan Tiong Bio u. Cornmissioner, 100 Phil.86). Also, a stockholder who has unpaid subscriptions is liable for the debts of the corporation

(Lumanlan

u.

Cura,59 Phil.746).

Criminal actions A- Under the 1997 Tax Code Two common crimes punishable are filed by the BIR are as follows:

under the Tax Code which

1. Attempt to eaad.e or defeat tax. -

Any person who

willfully attempts in any manner to evade or defeat any tax imposed under the Tax Code or the payment thereof, in addition to other penalties provided by law, upon conviction thereof, be punished. The conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes (Sec. 254, NIRC). To establish the existence of fraud, the following requisites must be present and established by competent evidence:

a.

The end. to be achieued' - the objective is to pay an amount of tax that is less than that known by the taxpayer to be legally due;

584

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b.

The accompanying state of mind,

-

the state of

mind is variously described as being evil, in bad faith, deliberate and not accident, or willful; and

c.

The oaert act d.one or schetne used. by the taxpayer, which must be tinged with some element of deceit, misrepresentation, trick, device, concealment or dishonesty ("Fraud under Tax," Balter).

2. Failure

to file return, supply corcect and, accurate informntiont pa! tar, withhold. and. rernit tax and. refund. eficess taxes withheld on contpensation. -

Any person required under the Tax Code or by rules and regulations promulgated there under to pay any tax, make a return, keep any record, or supply correct and accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply such correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished.

In Criminal Case No. 0-013 (for non-filing of tax return under Section 255 of the Tax Code), the elements that must be established are: (a) the accused was a person required to make or file a return; (b) the accused failed to make or file the return at the time

required by law; and (c) the failure to make or file the return was willfirl. As to the first element, It has been established that the accused is a resident Filipino citizen and that he is the sole proprietor of "Mendez Body and Face Salon and Spa" in Quezon City. The accused was earning income for 2001 to 2003 through the ad placements, the vehicles registered in his name, and the numerous travels he took in said years. As to the second element, he did not file his ITR with RDO 39, South Quezon and there were no records of returns filed for said years as certified by the RDO. As to the third element, although the accused did not earn any income in 2002, his purchases and expenditures prove that he has knowledge that he has substantial income, which was used on such, and his denial of income connotes his attempt to conceal said Income by not filing his tax return. Also, the habitual failure to file his ITR for 2001 and 2002, despite findings that he was earning income, then shows the willfulness of his nonfiling for 2002.

ln Criminal Casc No. O-Ol5 (for failure to supply correct information), the elcments that must be established are: (a) the accused is a person required under the Tax Code or by rules and regulation to pay any tax, make a return, keep any record or supply correct and accurate information; (b) the accused failed to supply correct and accurate information at the time or times required by law or rules and regulations; and (c) such failure to supply information is willful. The prosecution has already the first element. Regarding the second element, the accused filed his ITR for 2003 with RDO Calasiao, Pangasinan for his "Mendez Weight Less Center" located at Dagupan City. However, it was discovered that there are several other branches registered with the BIR under the name of the accused as the sole owner. Taking into consideration the bulk of circumstantial evidence proving the accused's ability to spend on the previously mentioned expenditures and purchases during 2003, the accused earned substantial income during said year. These findings contradict the declaration made by the accused in the ITR he fiIed that he suffered a net loss during the year. The accused also failed to file his ITRs for his income earned from the operation of the other branches of his business for 2003. As to the third element, the accused is considered to have knowledge that he has the obligation to declare and file ITR for taxes from all sources, and despite his knowledge, he failed to file his ITR on his income from other businesses, making it appear that his only source of income was from the operation of his branch in Dagupan City (People a. Mend.ez, Crim Case No.0-073' January 5, 2077; People u. Wong Yan Tak, et al. [Pin Itl Pac Martl, CTA Crim. Case No. O-090, October 17,2072).

For failure of the State Prosecutor to submit the records of preliminary investigation, the CTA dismissed the case without prejudice (People a. Tambunting, Crim. Case No.0-200, May 77, 2011).

The accused, as President of Jadewell Parking Systems Corporation, should at the very least have been aware of who is authorized to sign Jadewell's income tax returns and other tax filings. Accused, as president and general manager ofJadewell, could not even explain how a certain Via Aguas was able to sign some tax returns and payment forms, despite the allegation of the defense that said Via Aguas is not an employee of Jadewell. Accused also submitted into evidence Income tax returns which were unsigned. Knowing all these, accused did not even inquire as to whether Jadewell's income tax returns were being properly filed and whether the information contained therein is true and accurate. This "deliberate avoidance"

586

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or "omission" on the part of the accused leads this court to concludo that the supply of false and incorrect information was willful and done with the knowledge of the accused (People a. Rogelio A. Tan, CTA Crim. Case No. O-O64, June 27,2012).

Any person who attempts to make it appear for any reason that return or statement, or actually files a return or statement and subsequently withdraws the same return or statement after securing the official receiving seal or stamp of receipt of an internal revenue office where the same was actually filed shall, upon conviction therefor, be punished (Sec. 255, NIRC). he or another has in fact filed a

Although the accused may have failed to file the estate tax return, the accused should be exempted from criminal liability as she was prevented to do so due to an insuperable cause made by no less than the government. From February 1986, the accused and her family were forcibly placed on exile in Hawaii until November 1994, when they returned to the country. The properties of President Marcos were sequestered and placed under the control and possession ofthe

587

;;"

the court ., ;;,","1u""" totuuy isorated ""-,0,"1.;t,.ll.-. from the rest of the world. They were not afforded means of communication and transportation for the accused to have complied with the requirement of filing of return and payment of tax. From the foregoing facts, the forcible expulsion ofthe accused from the country was a form of disability similar to the exculpatory cause enumerated in the Tax Code. Accordingly, the court found the accused's failure to file the return and to pay the estate tax due was not willful, and the prosecution's scanty evidence failed to establish the element of criminal intent (People u. Imeld.a R. Marcos, Crim. Case No. q-9L24-38283, April 20, 20OZ ).

Important principles on criminal actions Some important principles in the collection of taxes through criminal action are:

1.

government after which forfeiture proceedings were filed before the Sandiganbayan Cuurl Why would the government require accused to comply with her obligation when it had taken away the means by which she could comply with the requirements of the law. Logically, a legal heir who does not possess knowledge or information regarding the total value ofthe estate ofthe decedent would not dare execute a return under oath under pain of criminal liability. In the same manner, the accused cannot be expected or pay the tax due on the estate of her deceased husband during the time she had no record in her possession and control with which she could assess the value of the gross estate and the deductions allowed thereto to determine the estate tax liability.

Under Section 83 of the Tax Code, the law presumes that the person filing the return has personal knowledge regarding the extent and value ofthe properties ofthe decedent. Otherwise, the requirement that the return must contain the itemized list of his assets under oath serves no purpose. In order to establish a willful violation of said provision, it is incumbent upon the prosecution to prove that on 28 September 1998 and within 90 days thereafter, the accused while in Hawaii personally knew the extent and total value of the estate of the late president. At the time of the filing of the criminal complaint against the accused, the latter was not yet in any way the executor or administrator of the estate and only after the filing of the complaint that the accused was designated by

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No criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture shall be filed in court without the approval of the Commissioner.l The Commissioner, through administrative issuances, has delegated this power to file criminal actions against delinquent taxpayers to his subordinate officials in the legal service. For failure ofthe State Prosecutor to comply with the order to submit to the CTA the written approval issued by the CIR to file the case and the records of the preliminary investigation, the case was dismissed, without prejudice

(People a. Renne Samala, September 1,20LL).

2.

Crim. Case No. 0-274,

Criminal actions instituted on behalf of the Government under the authority of the Tax Code or other laws, enforced by the BIR, shall be brought in the name of the Government of the Philippines and shall be conducted by the legal officers of the BIR.2 However, it does not preclude the BIR from seeking the assistance ofexperienced litigators from the Department of Justice in the prosecution of the criminal action. Criminal cases are fiIed in the name of "People of the Philippines versus the accused taxpayer" in order to differentiate it from civil cases for the collection of

rSec. 220, NIRC. '9Sec. 220,

NIRC.

588

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The Solicitor General is the principal law officer and.legal d.efend.er ofthe governmcnt. - In its resolution dated 15 November 2000, the Supreme Court denied the Petition for Review onCertiorarl submitted by the Commissioner of Internal Revenue for non-compliance with the procedural requirement of verification explicit in Section 4, Rule 7, of the 1997 Rules of Civil Procedure

1997 (R.A.8424 effectiue

I January

Aware that the dismissal of the petition could have lasting effect on government revenues, the lifeblood of the state, the Court heeds the plea ofpetitioner for a chance to prosecute the case. Relative to the lack ofverification required of petitions, the Supreme Court has held in a number of instances that such a deficiency can be excused or dispensed with in meritorious cases, the defect being neither jurisdictional nor always fatal. Verification is mainly intended to ensure that the allegations in the pleadings are true and correct and not mere speculations (Commissioner u. La Suerte Cigar and. Cigarette Fa,ctory, G.E. No. 744942, July 4,2002). 3.

The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which "shall be conducted by tegal officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of lhe Tax Reform Act must not be understood as overturning the long established procedure before this

Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings. This pronouncement finds justification in the

The grant of a motion to dismiss a criminal case must be based upon the judge's own personal conviction that there

was no case against the accused. The trial judge must himself be convinced that there was indeed no sufficient evidence against the accused, and this conclusion can be arrived at only after an assessment of the evidence in the possession ofthe prosecution. What is imperatively required is the trial judge's own assessment of such evidence, it not being sufficient for the valid and proper exercise ofjudicial discretion merely to accept the prosecution's word for its supposed insufficiency of evidence.s

1998).

Ordered to comment, the Office of the Solicitor General expressed the view that under Section 220 of the Tax Reform Act, amending Section 227 of the 1993 Tax Code, the primary responsibility to conduct civil and criminal actions lies with the legal officers of the BIR, such that it is no longer necessary for BIR legal officers to be deputized by the Office of the Solicitor General or the Secretary of Justice before they can commence any action under the 1997 Tax Code.

l-ltl9

various laws defining the Office of the Solicitor General, beginning with Act No. 135, which took effect on 16 June 1901,, up to the present Administrative Code of 1987.

delinquent taxes which are filed in the name of "Republic of the Philippines versus the delinquent taxpayer."

and, furthermore, because the appeal was not pursued by the Solicitor General. When the motion for reconsideration fi.Ied by petitioner was likewise denied, petitioner filed the instant motion seehing an elucidation on the supposed discrepancy between the pronouncement of this Court, on one hand, that would require the participation of the Office of the Solicitor General and pertinent prouisions of the Tax Code, on the other hand, that a.Ilow the legal officers of the BIR to institute and conduct uction in behalf of the Gouernment under Section 220 of the Tax Reform Act of

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4.

The acquittal of the taxpayer in a criminal action under the Tax Code does not necessarily result in exoneration of said taxpayer from his civil liability to pay taxes. In ordinary criminal cases, the civil liability in incurred by reason of the offender's criminal act. Article 100 of the Revised Penal Code provides that every person criminally liable for a felony is also civilly liable. In tax cases, the civil liability to pay taxes arises not because ofany felony but upon the taxpayer's failure to pay taxes. Criminal liability in taxation arises as a result ofone's failure to pay his tax liabilities. Moreover, while Section 73 of the old Tax Code has provided the imposition ofthe penalty ofimprisonment or fine, or both, for refusal or neglect to pay income tax or

3Martinez v. Court of Appeals, cited in People v. Lucio Tan, et al., ibid.

590

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to make a return thereof, it failed to provide the collection of said tax in criminal proceedings. The only civil remedies provided for the collection oftaxes are distraint or goods,

I

of the ciuil cu.se may be made under this new law, unlike that of a felony under the Reuised Penal Cod,e. Accordingly, not only are the indiuiduals but also the corporations who participated in the comm.ission of the offense are included in the inforrnation, although the corporations can only be held ciuilly liable.

The acquitta.l of the taxpayer in a criminal actionund.er the Ta.x Cod.e dnes not necessari$t result in exoneration of said. ta,rpayer from his ciail liability to pay tares. - With regard to the tax proper, the

filing of the criminal aetion implies the filing also of the ciuil action, and' no reseraation The

acquittal in the criminal case could not operate to discharge the petitioner from the duty to pay the tax, which the law requires to be paid, since that duty is imposed by statute prior to and independent of any attempt on the part of the taxpayer to evade payrnent. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from a crime that would be wiped out by the judicial declaration that the criminal acts charged did not exist.5

thereto may be mad.e. - As to the civil aspect, the same is deemed instituted with the criminal case, and shall be jointly determined in the same proceedings by the CTA pursuant to Section 7(bX1) of R.A. 9282. Corollarily, there is the rule that an accused acquitted of a criminal charge may, nevertheless, be held in the same case civilly liable, where the facts established by the evidence so warrants.T

Under existing provision of law, the judgment in the criminal [tax] case shall not only impose the penalty but shall also order payment of the taxes subject ofthe criminal case as finally decided by the Commissioner.c

provision of law, the remedies for the collection of national internal revenue taxes resulting from delinquency shall be by civil or criminal action, and the judgment in the criminal [tax] case shall not only impose the penalty but shall also order pa5rment of the taxes subject of the criminal case as finally decided by the Commissioner.s Also, under R.A.

However, the Court said: "While the accused is guilty beyond reasonable doubt for violation of Section 255 (Failure to fiIe return or to supply corcect information) , this court will not impose the alleged tax liabilities, considering that there was no assessment issued against the accused. The computations presented by the prosecution to prove civil liabilities may not be used because the BIR did not follow the assessment procedures provided for in the Tax Code, and the civil liabilities for the non-payment of tax may not be determined and imposed" (People u. Jose Mend.ez, CTA Crim. Case No.073 and 075, January 5,2011).

aRepublic v. Patanao, 20 SCRA 712. sCastro v. Collector, G.R. No. L-L2174, 20

I'lg

6undernol,"-ii)),,",';'::;,';:,',;;^)"',)),'),,,","aseimpriesatso the fi.Iing ofthe ciuil cese. In fact, no reseruation for the filing

chattels, etc., or by judicial action, which remedies are generally exclusive in the absence ofa contrary intent from the legislator.a

5.

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scRA 712. 6Sec. 205,

Deficieney and. dclinquent ta'xes may be collzcted. through ciuil or criminal actions. - Under existing

9282,the filing of the criminal case implies also the filing of the civil case. In fact, no reservation for the filing of the civil case may be made under this new law, unlike that of a felony under the Revised Penal Code. Accordingly, not only are the individuals but also the corporations who participated in the commission of the offense are included in the information, although the corporations can only be

held civilly liable. T

{iWful" n eans not merely aoluntary, but with a bod' putpose; corntptly; a aoluntany act is a free, intelligent, and' intentional act. - The assessment notices were issued by the BIR to the taxpayer. The accused admitted during the hearing on

Apil20,1962, cited in People v. Patanao,

TPeople

v. Estelita Delos Angeles, CTA Crim. Case No. 0-027, November 25,

2009. NIRC.

8Sec. 205,

NIRC.

592

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December 7, 2000 the existence of the assessment notices, which were proven to have been sent by registered mail. He also admitted that he received the Warrant of Distraint and Levy and Demand Letter, demanding the payment of the deficiency taxes stated in the assessment notices. He admitted too that he ignored the demand for the payment of the deficiency taxes. There is no other conclusion that can be drawn, except that the accused willfully did not pay his deficiency tax liabilities. The word"willful," ir: a statute, means "not merely voluntary, but with a bad purpose; in other words, corruptly." A voluntary act is a free, intelligent, and intentional act. Furbhermore, the accused admitted that he paid F50,000 to two BIR regional office employees to settle his tax liabilities without asking for any receipt. This reveals a conscious effort to evade his 1993 tax liabilities. The act of bribing the BIR employees constitutes an overt act on the part of the accused that showed his deliberate and willful refusal to pay his deficiency tax liabilities to the government.e The accused)s mere reliance on the representations rnade

by his accountant, with deliberate refasal or aaoid.ance to uerifu the contents of his income tax return and to inquire on its authenticity constitutes'Toillful blind.ness."t0 "Wilfulness" was characterized as a state of mind that may be inferred from the circumstances of the case. Thus, proof of willfulness may be, and usually is, shown by circumstantial evidence alone. Another circumstance which convinced this Court to infer the presence of "willfulness" on the part of the accused not to file his income tax returns is his admission that he signed the income tax returns but failed to read all the contents, and that he did not personally file his income tax returns, and did not verify from the BIR if his income tax returns were actually filed.l1 Petitioner's sole reliance on her husband to file their income tax returns is not a valid reason to justify her non-filing, considering that she knew from the start that she and her husband are mandated by law to file their income tax returns. The petitioner testified that she does not even know how much was her tax obligation, nor did she bother to inquire or determine the facts surrounding the filing of her income tax returns. Such neglect or omission, as aptly found by the ePeople v. Mallari, CTA Crim. Case Nos. A-1 and A-2, September 4,20O6. roPeople v. Benjamin Kintanar, CTA Crim. Case No. 0-030,

August 11, 2010.

Appeal to CTA en banc was dismissed for having been filed out of time (Kintanar v. People, CTAEB CrimNo.011, Resolutions dated February 16,20ll andJuly 27,2011). lrPeople v. Benjamin Kintanar, CTA Crim. Case No. 0-031 and 0-032, September

27,2010.

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593

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former Second l)ivision, is tantamount to "deliberate ignorance" or "conscious avoidance."l2

The Marcoses u)ere totally isolated. f-rom the rest of the world.; they utere not afford.ed. the tneans of comrnunication and, transportation and, were not alloused. to receiue aiaitora in Hawa.ii; thus, it was impossible for the accused. to haue complied. uith the requirement of filing and. paying any of her ta.x obligations. - The BIRfiled criminal complaints against Imelda Marcos for failure to pay income tax; failure to give a written notice of death; failure to pay estate taxes; and failure to file income and estate tax returns. Mrs. Marcos, in her counter-affidavit, stated that the Marcoses were forcibly evicted from the country and brought to Hawaii in 1986, leaving most of their personal and real properties under the possession and control ofthe government. Finding probable cause, the DOJ filed information against Imelda Marcos. The court took iudicial notice of the forcible eviction of the totally isolated from the rest of the world. They were not afforded the means of communication and transportation and were not allowed to receive visitors in Hawaii. Thus, it was impossible for the accused to have complied with the requirement of filing and paying any of her tax obligations. Likewise, even though she wanted to do so, their sudden departure from the country prevented the accused from bringing her personal record and documents with which she could assess or determine her income for the year 1985 to prepare her income tax return. Consequently, failing on the part of the prosecution to substantiate through competent evidence that the accused willfully, unlawfully and feloniously neglected to file and pay her income tax return for the year 1985, she could not be held criminally liable. Marcoses out of the country. The Marcoses were

The court finds merit in the argument that the failure on the part ofthe accused to file the estate tax return and to pay the estate tax is not willful. Although the accused may have failed to comply with what is required by law, the accused should be exempted from criminal liability as she was prevented to do due to an insuperable cause made by no less than the government;i.e., as early as February, 1986, accused and her family were forcibly placed on exile in Honolulu, Hawaii until November, 1991, when they returned to the country; the properties of President Ferdinand Marcos were sequestered and l2People v. Gloria Kintanar, CTA EB Crim No. 006; CTA Crim. Case Nos. P-033 and 0-034, December 3, 2010.

594

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placed underthe control and possession of the govcrnnlclrt all,r:r wlrit:lr

7.

With regard to the tax proper, the acquittal in the criminal case could not operate to discharge the petitioner from the duty to pay the tax, which the law requires to be paid, since that duty is imposed by statute prior to and independent of any attempt on the part of the taxpayer to evade payment. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from a crime that would be wiped out by the judicial declaration that the criminal acts charged did not exist.la

All violations of any [penall provision of the Tax Code shall prescribe after five (5) years. Prescription shall begin to run from the day of the commission of the violation of the

When the civil action arising out of a tax delinquency

punishment.rT 8.

In a criminal action that was instituted against the taxpayer for having filed a false and fraudulent return and for failure to pay taxes, the subsequent satisfaction ofthe tax liability by payment or prescription will not operate to extinguish the taxpayer's criminal liability. Whether under the Tax Code or Revised Penal Code, the satisfaction of civil liability is not one of the grounds for extinction of criminal action.18

9.

Ifa person convicted for violation ofany ofthe provisions of the Tax Code has no property with which to meet the fine imposed upon him by the court, or is unable to pay such fine, he shall be subject to a subsidiary personal liability.te This provision corrected the lack ofauthority for the courts

15Sec.281,

l3People v. Imelda Marcos, CTA Crim. Case Nos. Q-91-24382-89, 91-24388-89, and.9I-24392, April 20, 2007. laCastro v. Collector, G.R. No. L-12174, April 20, 1962, cited in Republic v. Patanao, 20 SCRA 712.

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is extinguished by prescription, considering that under the law, the Government has only five years from date of assessment of tax within which to collect the tax, it is still possible for such tue to be collected by criminal action inasmuch us actions of this kind prescribe only after the lapse of fiue years counted from the discouery of the crime and,the institution of proceedings for its inuestigation and

accused's

6.

o1 (

law, und il'Llro same be not known at the time, from the discovery thereof and the institution ofjudicial proceedings for its investigation and punishment. The prescription shall be interrupted when proceedings are instituted against the guilty persons and shall begin to run again if the proceedings are dismissed for reasons not constituting jeopardy. The term of prescription shall not run when the offender is absent from the Philippines.ls However, a petition for reconsideration of an assessment may affect the suspension ofthe prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of law.16

forfeiture proceedings were filed before the Sundiganheyutt ( jourl. As pointed out by the defense, why would the government requirc accused to comply with her obligations when it had taken away the very means by which she could comply with the requirements of the law? Logically, a legal heir who does not possess a knowledge or information regarding the total value of the estate of the decedent would not dare execute a return "under oath" under pain of criminal liability. In the same manner, it is error to expect that the accused would pay the tax due on the estate of her late husband during the alleged time under which she was made to pay when she had no records in her possession and control with which she could assess the gross value of the late president's estate at the time of his death and the deductions allowed from the gross estate to determine the estate tax liability. On the whole, underscoring the flnding of the Court that failure to comply with her tax obligation was due to causes beyond her control, there is no doubt that the element of "wilfullness" for crimes involving the violation of the NIRC, as alleged in the information in these fi.ve criminal complaints, is lacking. In short, the prosecutor's evidence did not pass the test of moral certainty that there was "willful disobedience" on the part of the accused with the intention to evade and defeat the payment of the tax.13

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NIRC.

l6People v. Ching Lak, G.R. No. L-10609, May 23, 1958. 17Sec. 281, NIRC. rsPeople v. Tierra, 12 SCRA 666. rsSec. 280, NIRC; see People v. Balagtas, 105 Phil. 1362.

596

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to impose subsidiary penalty in case of insolvcnc.y on thc part of the taxpayer, which he is sentenced to pa.y. 10.

Any person convicted of a crime penalized by the Tax Codc shall, in addition to being liable for the payment of the tax, shall be subject to the penalties imposed herein. Payment of' the tax due after apprehension shall not constitute a valid defense in any prosecution for violation ofany provision ofthis Code or in any action for the forfeiture ofuntaxed articles.20

11.

If the Commissioner is convinced that the taxpayer

is

criminally liable, he should institute criminal proceedings and not arbitrarily impose a penalty.2l However, if the BIR official accepts the payment of compromise penalty offered by the taxpayer for violation ofa specific provision oflaw

imposing criminal liability, the criminal liability of the taxpayer for such violation shall be obliterated.

t2. Taxes are the lifeblood of government and every citizen is duty bound to pay taxes and to pay taxes in the right q.mount. Therefore, technicalities will haue to yield to the gouernntent interest of the nation to enforce its laws against tax euasion, especially where the amounts inuolued are huge. Procedurctl rules should not be applied with rigidity especially when to do so would result in manifest failure ar miscarriage ofjustice. Ru.les of procedure should not be applied in a uery technical sense, for they are adopted to help secure, not ouercide, sub stantial j ustice.22

13.

The guilt of the accused must be estqblished beyond reasonable doubt. - Joseph Typingco is the alleged President and authorized officer of Fiesta Pack, Inc. He was charged for violation ofSection 255 (Failure to file return and to supply correct information), in relation to Sections 253(d) [Officers of corporation on whorn penalties may be imposedl and 256 (Penalty liability of corporations) of the

zoSec. 2b3(a),

NIRC. zlCollector v. University of Sto. Tomas, 104 Phil. 1062. 22See People v. Lucio C. Tan, et al., G.R. No. 144?07, July 13, 2004; Piglas-Kamao v. NLRC, 357 SCRA 640.

1997 'l'ax Oode, under lnfbrmation filed by the Assistant City Prosecutor on March 3, 2009.

On September 6, 200I, a letter of authority for 2000 was issued by the BIR. The investigation led to the issuance of PAN for deficiency income tax, EWT, and VAT. FAN and

demand letters were issued on June 28,2004. Fiestapack purportedly failed to pay despite the demand and until the above assessments became final; hence, this case.

Apparently, to be liable for the alleged crime, the following elements have to be proven by the prosecution beyond reasonable doubt: (a) the corporation taxpayer is required to pay tax and it failed to pay such tax at the time required by law; (b) TVpingco is the president, general manager, branch manager, treasurer, officer-incharge or employee responsible for the violation of the corporate taxpayer; and (c) Tlrpingco willfully fails to pay the corporate taxes. For 2000, Fiestapack filed its ITR reflecting a net loss. The BIR conducted an investigation and disallowed the loans payable and interest expense for failure to present documentation, resulting in the deficiency tax assessments. Typingco disputed the purported receipt or knowledge of the assessment notices or, at least, receipt thereofby Fiestapack and the propriety ofthere issuance by invoking the ground of prescription. In the case of CIR u. Metro Star Superama, the SC ruled on the importance of issuing a PAN uis-d.-uis the validity of the assessments, which are the requirements of due process that must be satisfied by the BIR. Section22S of the Tax Code requires that the taxpayer must be informed in writing about the factual and legal bases of the assessments; otherwise, the assessments are void. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence. After a scrutiny of the parties allegations and pieces ofevidence, this Court finds the prosecution cannot prove

the actual sending of the PAN through ordinary mail. The ITR of Fiestapack shows that the name of Joseph

598

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Tlpingco appears above the caption "President/VP/Auth Representative." However, the same is not conclusive evidence that Typingco is actually the President, in the absence of other conoborating proofs for 2000. The word "fort preceded the actual signature and the name "Joseph Tlpingco" was only typewritten. This means that someone signed on behalfor in representation ofJoseph Tlpingco. Ttre prosecution failed to authenticate the said signature and to show that the person who signed the ITR was really authorized by Tlpingco. With respect to the General Information Sheet (GIS), said GIS was sworn, certified and signed by Joseph Tlpingco on April 20,200L.It bears stressing that the taxable year under scrutiny is 2000. On the other hand, Tlpingco offered in evidence various notices of conference, decisions and orders of NLRC and memo from Fiestapack's employees union, showing Alvin T! as the President of Fiestapack. Moreover, an act or omission is "willfully' done, if done voluntarily and intentionally and with specific intent to do something the law forbids, or with specific intent to fail to do something the law requires to be done. A willful act may be described as one done intentionally, knowingly, and purposely, without justifiable excuse. It connotes the existence of"knowledge" and "voluntariness." Undoubtedly, it becomes necessary for the prosecution to prove beyond reasonable doubt that Tlpingco, in representation of Fiestapack, received the assessment notices or was aware of its tax liabilities in order to impute upon him the required elements of "willfulness" in this case. The BIR witness testified that PAN was mailed by ordinary mail and the FAN, by registered mail. Finally, considering that the prosecution failed to prove that the PAN was sent and actually received by Fiestapack, the assessment made by the CIR is void. A void assessment bears no fruit; hence, no civil liability arises in this case (People a. Typingeo, CTA Crim. Caee No. 0-I 74, Moy 76, 20L2).

t4.

Based on the allegations in the Information, accused Paz Abad Santos is charged for violation of Section 49(b) now Section 106(A), Sections 57(B), 175 and 24(8)(2) ofthe 1997 Tax Code, allegedly due to her failure to pay tax liabilities, for the period 2005. The CTA ruled that a determination of probable cause cannot be made when the evidence do not

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substant,irrl,o l,ho accused to have perpetrated the crime.

Notably, the tax liabilities are corporate tax liabilities of Vicente Singson-Encarnacion Corporation, but it is misleadingly stated therein that "the above-named accused did then and there willfully, unlawfully and feloniously fail and refused to fail tax liabilities" without stating that these are corporate tax liabilities. The supporting documents do not substantiate or prove that the accused is indeed the Treasurer and,/or responsible officer of the corporation. The offense fails to relate its commission with Sections 253(d) and 256 of the Tax Code, which will provide the legal basis to charge the accused for non-payment of corporate tax liabilities. Finally, the basis of the deficiency tax assessments was not attached to the records of the case ( Peopl.e a. Paz Abad. Sa,ntos, CTA Crim. C ase No. 0 - 2 7 0, April 7 3, 2 O 7 2 ; P eop l.e u. Beqj amin Hian Tek C o Cua, CTA Crim. Case No. 0-262, May 78,2012; People a. Eliseo Co, CTA Crim. Case No. 0-708, October 3, 2012).

B.

Under the Tariffand Customs Code

The Information filed by the DOJ with the CTA failed to specifr the amount of taxes and fees claimed. The CTA has no jurisdiction. The jurisdiction is with the regular courts and the case should be dismissed by the CTA. Pursuant to Section 7 of R.A. 9282, t}i'e CTA has exclusive jurisdiction over all criminal offenses arising from violations of the Tariff and Customs Code, where the principal amount of taxes and fees, exclusive of charges and penalties claimed is Fl million or more. If it is less than Fl million or no specific amount is claimed, the case should be tried by the regular courts and the jurisdiction of the CTA shall be appellate (Peopln o. Med.ina, Crim. Case No.0-209, May 4, 2011).

The accused are charged in an Information for violation of Section 3602 of the Tariffand Customs Code in relation to Article]-T2 of the Revised Penal Code. On April 18, 2011 and on May 25,2011,

the CTA promulgated resolutions ordering the State Prosecutors to submit clear and legible copies; otherwise, the case shall be dismissed for failure to comply with a lawful order of the Court. Records show that despite notice and receipt ofthe resolution, the prosecutors failed to comply with the resolution; hence, case was dismissed (Peopl.e a. Parungo, CTA Crirn. Case No. O-798, June 28,2077).

600

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tol

The conuiction of the accused rnust rest, not on the weakness ol' the defense, but on the strength of the prosecution.

- Valic, et al. were charged for conspiring with other respondents in violation of Section 3602 of the Tariff and Customs Code in relation to Article L72 of the Revised Penal Code by declaring with the use of fraudulent documents. - Valid is acquitted for failure ofthe prosecution to establish the guilt ofthe accused beyond reasonable doubt. The prosecution has the onus probandi to show beyond reasonable doubt that (1) There was an imported article, which, according to the Information, is the 9,667 prilled urea in bulk with the equivalent duty of ?t,829,496, represented by Import Entry No. C-95-2001; (2) The accused, in conspiracy with the other accused, made or attempted to make an entry of the alleged imported article through the filing of said import entry at BOC La Union on June 25,2001; (3) The same was done by means of any false or fraudulent declaration or by means of any fake statement, which is the Certificate of Eligibility purportedly issued by the Philippine Carabao Center in favor of Norsk Hydro, making it appear that the subject shipment is exempt from paSrment of duties and taxes; (4) The Certificate of Eligibility was falsified in violation of Article 172 of the Revised Penal Code; and (5) The Certificate of Eligibility was filed by accused Valic to defraud the government by avoiding the payment of rightful duties and taxes. In this case, the prosecution failed to prove conspiracy as well as the existence ofthe import entry. Necessarily, the prosecution failed to prove that there was an item imported in the amount stated in the Information. The original of the Certificate of Eligibility was not presented before the Court (People a. Valic, et al., CTA Crim. Case No. 0-758, July 23,2072).

Filing of criminal action under the Tax Gode during the pendency of protest The filing of a criminal action during the pendency of a protested assessment will depend on whether or not a crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all ofthe tax. In other words, for criminal prosecution to proceed before or during the pendency of an assessment, there must be aprima facle showing of a willful attempt to evade taxes.

In the case of Ungab u. Cusi, 97 SCRA 877, lhe Supreme Court ruled that the criminal action is legally proper where the taxpayer deliberately did not declare his income from sales of banana

601

saplings. Wha[ is involved in the criminal action is legally not the collection oI'ttrxes where the assessment of the Commissioner may be reviewed by the Court of Tax Appeals but a criminal prosecution for violations of the Tax Code which is within the cognizance of the Court of First Instance (now Regional Trial Court). While there can be no civil action to enforce collection before the assessment procedures in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution. The protest of the petitioner against the assessment cannot stop his prosecution for violation of the Tax Code.

In another case, the Supreme Court stated that, "We share the view of both the trial court and Court of Appeals that before the tax liabilities of Fortune are first determined, it cannot be correctly assessed that private respondents have willfully attempted to evade or defeat the taxes sought to be collected from Fortune. In piain words, before anyone is prosecuted for willful attempt to evade or defeat any tax under Sections 253 and 255 (now Secs,254 and 256, NIRC), the fact that a tax is due must first be proved. Suppose the Commissioner eventually resolves Fortune's motion for reconsideration of the assessments, pronouncing that the taxpayer is not li(rble for any deficiency assessment, then the criminal complaints filed against priuate respondents will haue no leg to stand on."

"In view of the foregoing reasons, we cannot subscribe to the petitioner's thesis citing Ungab u. Cusi, that the lack of a final determination of Fortune's exact or correct tax liability is not a bar to criminal prosecution, and that while a precise computation and assessment is required for a civil action to collect tax deficiencies, the Tax Code does not require such computation and assessment prior to criminal prosecution. Reading Ungab carefully, the pronouncement therein that deficiency assessment is not necessary prior to prosecution is pointedly and deliberately qualified by the Court with the following statement quoted from Guzik u. U.S..' 'The crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax.' In plain words, for criminal prosecution to proceed before assessment, there must be aprima facie showing of a willful attempt to evade taxes. There was a willful attempt to evade tax in Ungab because of the taxpayer's failure to declare in his income tax return 'his income derived from banana saplings.' In the mind of the trial court and the Court of Appeals, Fortune's situation is quite apart

602

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factually since the registered wholesale price of'the goods, approved by the BIR, is presumed to be the actual wholesale price, therefore, not

fraudulent. Unless and until the BIR has made a final determination ofwhat is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution. Herein lies a whale of difference between Ungab and the case at bar (Commissjoner a. Court of Appeals and. Fortune Tobacco Corporation, gT SCRA 799; Resolution on Motion for Reconsid.eration, February 6, 1997).

In Corn mis sioner u. Pascor Realty and Deu elopment Corporation, G.R. No. 128315, June 29, 1999, tllre Supreme Court reiterated the general rule that an assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of failure to file a required tax return and such fact need not be proved by an assessment. The issuance of an assessment must be distinguished from the

filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the Commissioner is satisfied, an assessment signed by him or her is then sent to the taxpayer, informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the Department ofJustice. Thereafter, the taxpayer is notified that a criminal case had been fiIed against him, not that the Commissioner

has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation ofthe Tax Code.

Bar Question (2010) Based on the affidavit of the Commissioner of Internal Revenue (CIR), an Information for failure to file income tax return under Section 255 of the National Internal Revenue Code was filed by the Department of Justice with the Manila Regional Trial Court (RTC) against )O(, a Manila resident. )O( moved to quash the Information on the ground that the RTC has no jurisdiction in view of the absence of a formal deficiency tax assessment issued by the CIR. Is the prior assessment necessary before an Information for violation of Section 255 of the Tax Code could be filed in court? Explain.

Suggested anawor: No, prior assessment of deficiency ta,x by the BIR is not required before a criminal action may be filed against a ta.rpayer. The case fi.led by tlrc DOJ with the nrc against )Q( is a criminnl actinn for rnn-filitW of irrcomc ta* return undcr Section 255 of the 1997 Tu Codc, using the ffidnuit of the CIR as basis for the fi.ling of said erirninal actinn, and, thc case daes twt inuolue assessmpnt of a dcftcicncy ta'x li,ability for such uialation of a Tax Code prouision. In CIR u. Pascor Rcalty and, Deuelnpmnnt Corporation, the SC ruled that thz criminal charge nced

only be proued ly a prim,a facie shouting of failure to file a requircd' tax return and such fact need rwt be proued by an assessm'ent.

Bar Question (2005) In 1995, the BIR filed

before the Department of Justice (DOJ) a criminal complaint against a corporation and its officers for alleged evasion of taxes. The complaint was supported by a swonn statement of the BIR showing the computation of the tax liabilities of the erring taxpayer. The corporation filed a motion to dismiss the criminal complaint on the ground that there has been, as yet, no assessment of its tax liability; hence, the criminal complaint was premature. The DOJ denied the motion on the ground that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint and thatin anyevent, thejointaffidavitofthe BIR examiners may be considered as an assessment of the tax liability of the corporation.

Is the ruling of the DOJ correct? Explain.

Suggested answer: Yes. The ruling of the DOJ in denying the motinn to di'smiss is correct, The issuante of the defi,ciency assessrnent notiae prinr to prosecution is nnt necessary because the facts ofthe case show that the crim.e of euasion is cornpl.ete, since the uiolator has knowingly and willfully fi,l.ed a fraudulent return with intent to eua.d.e or d'efeat a part or all of the tas (Ungob o . Cuei, 97 SCRA 877) . What is inuolued here is not the colLection of tases but a criminal prosecution for uinlation of the Tax Code.

Howeuer, the contention that the joint affidauit of the BIR uannirrcrs showing tlw computatinn of ta^r linbiliti.es may be considzred an assessment is erroneous, It is not an assessment which may entitle tlw to.rpayer to protest (CIR a . Paneor Rcol$ & Developnent Corp ,

604

605

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that the criminal acts charged did not exist (Castro a. Colkctor of Internal Reaen'tte, G.8. No. L'1"2774, April

Bar Question (1998)

26,7962).

Is assessment necessary before a taxpayer may be prosecuted for willfully attempting in any manner to evade or defeat any tax imposed by the Internal Revenue Code?

b.

No. Assessment is not necessary before a taxpayer may

be

ta,xes, the to,xpa,yer should not be placed in the crucible of crirninal prosecution (CIR u. Fortune Toboeco Corp., G.R. No, 7L9322, June 4,7996).

Bar Question (2012)

a. The acquittal of the taxpayer in a criminal action under the Tax Code does not necessarily result in exoneration ofsaid taxpayer from his civil liability to pay taxes. Explain your answer. b. Should the accused be found guilty beyond reasonable doubt for violation of Section 255 of the Tax Code (for failure to file tax return or to supply correct information), the imposition of the civil liability by the CTA should be automatic and no assessment notice from the BIR is necessary. Explain your answer. Suggested answer:

a.

In ta.xation, the taxpayer becornes criminally liable because of a ciuil liability. While he may be acquitted on the criminal case, his acquittal could not operate to discharge him from the duty to pay ton, since that duty is imposed by statute prior to and independent of any attempt on the part of the

No. White the accused is guilty beyond reasonable doubt for uiolation of Section 255, the CTA will not irnpose the alleged

tax liabilities, considering that there was no assessrnent issued against the accused. The cornputations presented by the prosecution to proue ciuil liabilities may not be used becq.use the BIR did not follow the assessment procedures prouided for in the Tax Code and in the implementing regulations ( P eople a. Mendcz, CTA C rim - C aee No. O 7 3 and, 0L5, Januan! 5, 207L).

Suggested answer prosecuted if there is a prima facie showing of a willful atternpt to euade taxes as in the ta.xpayefs failure to declare a specifi.c item of tanable income in his income ta,x returns (Ungab a. Cusi, 97 SCRA 877) . On the contrary, if the ta^x alleged to haue been euaded is cornputed based on reports approued by the BIR, there is a presumption of regularity of the preuious payment of tanes, so that unl,ess and until the BIR has made a final deterntination of what is supposed to be the correct

'.jlll.li:illl;'il,vt'r..rrr..(.

taxpuyer kt euude payment. The obligation to pay the ta'x is ruil u mere consequence of the felonious acts charged in the Information, nor is it a mere ciuil liability deriued from crime that would be wiped out by the judicial declara'tion

3Og SCRA 402). An assessment is a formal notice to the ta^tepayer stating that the a,nxount thereon is due as a tuc and containing a demand for the paynxent thereof (Alhambra Cigar & Cigorette Mfg. Co. a. Collector, 705 Phil. 1.337 t1959D.

Persons liable for criminal prosecution Penalty shall be imposed on partner, president, general manager, treasurer, or officer responsible for violation, in case of violations committed by associations, partnerships or corporations (Sec. 253[d], NIRC). A corporation can act only through its officers and agents and where the business itself involves a violation of the law, the correct rule is that all who participate in it are liable. Here, as the filing of the false return constitutes a violation of the law, defendant as the author ofthe illegal act, must necessarily answer for its consequences provided that the allegations are proven (People a. Tan Boon Kong, 54

Phil.607).

Bar Question (2013) You are the retained tax counsel ofABC Corporation. Your client informed you that they have been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official) on the tax matter they have referred to you for handling. The BIR insider's proposal is to settle the matter by significantly reducing the assessment, but he will get SOVo of the savings arising from the reduced assessment.

What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance ofeach ofthese considerations.

606

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Suggeeted answer:

I will aduise my client not to accept the settlernent proposal but instead pay the entire annount of ta* that is legally due to the

gouerntnent.

CIIAPTER ICryII

On the tox aspeet,I will tell my cli.ent that a proposed assessntent couering deftciency ta.res which are legally due must be fully paid to ernnerote the ta.spayer frorn further tax liabilities. The unwananted rcduction of thn prcposed assessm,ent into lnlf and the payment thercof will not close the case, but can be re-opened anytirne within ten years from discouery so as to collect the correct annount of taxes from ABC Corporation. The act of deliberately paying an amount of to^x, that is less than what is known by my client to be legally due through a cause of action that is unlawful is consid.ered as ta.r euasion. I will aduise my cli.ent thut conniuing with a BIR insider to reduce the proposed assessment for afee is unlawfal whirh can expose the officers of the corporatianto crirninnl liability. Likewise,the paymentto be mad,e tothe BIRofftrinl of50% ofthe sauings constitutes direct bribery punishabk under the Revised. Penal Code.

On ethical grounds, agreeing to the settlement schzrne being prcposed by the BIR insider is agreeing to the perpetration of a dishonest act. Since ta,rotion is symbiotic relationship, fair d,ealing on both si.dcs is of paramount irnportance. I will remind rny clicnt that ta.xpoyenE oue honcsty to gouernmcnt just e.s gouernment owes fairness to ta*payer (CIR v. Tohyo Shipping Co., Ltd., G..8. No.

ffi262,Moy

261 1996).

CIVIL PENALTIES The term "ciuil penalties" is a generic term used to refer to surcharges, deficiency and delinquency interests, and compromise penalties for violation ofcertain provisions ofthe Tax Code.

Surcharges There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to25Vo of the amount due, in the following cases:

l-.

Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed;

2.

Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed;

3.

Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or

4.

Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.

In case of willful neglect to fiIe the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be 50Vo of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery ofthe falsity or fraud. A substantial under-declaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the 607

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rules and regulations to be promulgatod by thc SccreLary ol'1.'inarrcc, shall constihfte prima facie evidence of a false or fraudulent return. Failure to report sales, receipts or income in an amount exceeding

Is Danilo liable fbr the deliciency tax and the penalties thereon? What is the liability, if any, of the accountant? Discuss.

307o

Suggested ansu/er:

of that declared per return, and a claim of deductions in an amount exceeding 30Vo of actual deductions, shall render the taxpayer liable for substantial under-declaration of sales, receipts or income or for overstatement of deductions, as mentioned herein (9ec.248, NIHC).

It is patently unfair for the government to require the payment of 25Vo surcharge inasmuch as the taxpayer acted in good faith in payrng the franchise tax at the lower rates fixed by its franchises (Guagua Electric Light Plant Co. a. Commissioner, Ig SCRA 790). Construing the provisions of the old Section 51(d) and (e) of the Tax Code, as amended by R.A. 2343,the interest and2\Vo surcharge on deficiency taxes are imposable upon failure of the taxpayer to pay the tax on the date fixed in the law for the payment thereof (Commissioner u. Connel Bros. Co. tPhil.l, 40 SCRA 416). The time prescribed for the payment of tax was fixed, whether or not a notice of the assessment was given to the taxpayer (Central Azucarera Don Ped.ro a. CTA, G.R. No. L-2329G, May JI", 196Z). The rule has to be so because a deficiency tax indicates non-payment of the correct tax, and such deficiency exists not only from the assessment thereof to pay the correct amount of tax when it should have been paid; and the imposition thereof is mandatory even in the absence of fraud or willful failure to pay the tax in full (Abad. u. CTA and. Cornmissioner, L-20834, October 79, 7g6G). In another case, the taxpayer understated his income by 227Vo for 7946,564Vofor L947 ,957ofor 1948,4867o for lg4g,2,g4GVo for 19b0, and 49ovo for 1951. The court said these substantial under-declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with intent to evade the payment of tax. Hence, the imposition of the fraud penalty is proper (Perez u. Court of Tax Appeals, G.R. No. L-7OSOZ, May 50, L958, cited in Aznar a. Collector, supra).

Bar Question (2006) Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his income tax return and the payment ofthe tax due. The accountant fiIed a falsified tax return by underdeclaring the sales and overstating the expense deductions ofDanilo.

Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. Howeuer, he is not liable for the fraud penalty because the accountant acted beyond the limits of his authority- Atax return which does not correctly reflect tq.xable income may only be false but not necessarily fraudulent, where it appears that the return was ruot prepared by the taxpayer hirnself but by his accountant. Accordingly, the 50Vo surcharge for fraud could not be imposed (Aznar u. CTA, 58 SCRA 719 t1s74l). On the other hand, the accountant may be held criminally liable for uiolation of the Tax Code, whert he falsified the tox return by underdeclaring the sa.Ie and ouerstating the ercpense deductions (Sec. 257,

NIRC). If Danilo's accountant is a Certified Public Accoun'tant, his certificate as CPA sholl automatically be reuoked or cancelled upon conuiction.

Bar Question (1995) Businessman Stephen Yang filed an income tax return for 1993 showing business net income of F350,000.00 on which he paid an income tax of F61,000.00. After filing the return, he realized that he forgot to include an item of business income in 1993 for F50,000.00. Being an honest taxpayer, he included this income in his return for 1994 and paid the corresponding income tax thereon'

In the examination of his 1993 return, the BIR examiner found that Stephen Yang failed to report this item of F50,000.00 and assessed him a deficiency income tax on this item, plus a 50Vo ftatd surcharge.

(1) (2)

Is the examiner correct? Explain.

If you were the lawyer of Stephen Yang, what would you have advised your client before he included in his 1994 return the amount of F50,000.00 as 1993 income to avoid the fraud surcharge? ExPlain.

(3)

Considering that Stephen Yang had already been assessed a deficiency income tax for 1993 for his failure to report the F50,000.00 income, what would you advise him to do to avoid the penalties for tax delinquency? Explain.

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(4)

What would you advise Stephen Yang to do with regard to the income tax he paid for the F50,000.00 in his 1994 return? In case your remedy falls, what is your other recourse? Explain.

Suggested answer:

(1)

The examiner is correct in assessing a deficiency income ta^tc for taxable year 1993 but not in irnposing the E}Vo fraud

surcharge. The amount of aII items of gross income must be included in gross income during the year in which receiued

or realized (Sec. 38, NIRC). The 50Vo fraud surcharge ottaches only if a false or fraudulent return is willfully

made by MnYang (Sec. 248, NIRC). The fact that Mr.Yang included the income in his 1994 return belies any claim of

(2)

willfulness but is rather indicatiue of an honest mistake which was sought to be rectified by a subsequent act, that is the filing of the 1994 return. Mr.Yang should haue amended his lgg7 income tax return to allow for the inclusion of the F50,000.00 income during the taaable period it was realized.

(3) Mr. Yang should file a protest questioning the S|Vo surcharge and ask for the abatement thereof.

(4)

Mr. Yang should file a written clqim for refund with the Commissioner of Internal Reuenue of the toees paid on the F50,000.00 income included in 1994 within two years from

payment pursuant to Section 204(3) of the

Ta"tc

Code.

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collected from the date prescribed for its payment

611

year period.

Deficiency and delinquency interests A. In general. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (2O7o) per annu.nl, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.

Deficiency interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection'4" hereof, which interest shall be assessed and

until the full

payment thereof.

C.

In case of failure to pay: (1) the amount of the tax due on any return required to be filed; or (2) the amount of the tax due for which no return is required; or (3) a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount' interest at the rate prescribed in Subsection "A" hereof until the amount is fully paid, which interest shall form part of the tax(9ec.249, NIRC).

Delinquency interest.

-

The surcharge and./or interest shall apply to all taxes, fees and charges imposed under the code which shall be collected at the same time, in the same manner, and as part of the tax. In case the tax due from the taxpayer is paid on a partial or installment basis, the interest on the deficiency tax or on the delinquency tax liability shall be imposed from due date of the tax until full payment thereof. The interest shall be computed based on the diminishing balance of the tax, inclusive of interests (Sec. 2, Reu. Regs. No. 12-99, September 6, 1999).

Bar Question (1995)

(1)

What is a "deficiency interest" for purposes of the income tax? Illustrate.

(2)

What is a "delinquency interest" for purposes of the income tax? Illustrate.

Should

this remedy fail in the adrninistratiue leuel, a judicial claim for refund can be instituted before the expiration of the two-

B.

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Suggested answer:

(1)

Deficiency interest for purposes of the incotne tux is the

interest due on any arnount of tax due or installment thereofwhich is not paid on or before the date prescribed for its payment cornputed at the rate of 20Vo per annurn or the Monila Reference Rate, whicheuer is higher, from the date prescribed for its payrnent until it is fully paid. If for example after the audit of the books of XYZ Corp. for taxable year 7993 there was found to be due a deft'ciency incorne tax of P125,000.00 inclusiue of the 25Vo surcharge imposed under Section 248 of the Ta.x Code, the interest will be cornputed on the ?125,000.00 frotn April 15' 1994 up to its date of PaYment.

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(2)

Delinquency interest is the interest of20o/o or the Manila Reference Rate, whicheuer is higher, required to be paid in case offailure to pay:

(a)

the amount of the tuc due on ony return required to be

(b)

filed; or

the amount of the tax due for which return is required;

or

(c)

the deficiency ta^r or any surcharge or interest thereon, on the due date appearing in the notice and demand of the Commissioner of Internal Reuenue.

If in the aboue illustration the assessrnent notice was released on December 3 7 , 1994 and the amount of deficiency tax, inclusiue of surcharge and deficiency interest, was computed up to January 30, 1995 which is the due date for payment per assessment notice, failure to pay on this lotter date will render the tax delinquent and will require the payrnent of delinquency interest.

The imposition of lVo monthly [now 207o annuq.I] interest is but a just compensation to the State for the delay in paying the tax, andfor the concomitant use by the taxpayer of funds that rightfully should be in the gouernment's hands (U.5. u. Goldstein, 189 Ft2dl 752). The fact thq,t the interest charged is made proportionate to the period of delay constitutes the best euidence thq.t such interest is not penal but compensatory (Aguinaldo Ind.ustries

Commissioner and

CT{

Corporation

a.

L-29790, Februany 25, 7982).

Gompromise penalties Nature of cornpromise penalty.

-

A compromise penalty is

a certain amount of money which the taxpayer pays to compromise

a tax violation that may be the subject of criminal prosecution. A compromise implies mutual agreement. Hence, a compromise penalty cannot be imposed in the absence of a showing that the taxpayer

consented thereto. If the Commissioner's offer of compromise is rejected by the taxpayer, the Commissioner cannot enforce it but he may file a criminal action against the taxpayer for the tax violation.

A penalty can be imposed only on a finding of criminal liability (Commissioner a. Firernan's Fund. Insurance Co., supra).The Commissioner has no power to impose and collect the compromise

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penalties in the absence ol'a compromise agreement validly entered into between the taxpayer and the Commissioner (Mithi ng Bq'ya'n Cooperatiae Marheting Association a. Araneta, supra). However, where in an appeal to CTA, the taxpayer has expressed his willingness to pay compromise penalty, said amounts may be collected as part of the judgment (Commissioner a. Guerrero, supra).

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CIIAPIER }ONIN REMEDIES OF TAXPAYERS

Bar Question (1996) (1) Compare the taxpayer's remedies under the National Internal Revenue Code and the Tariffand Customs Code.

615

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toxpuyer, he arn rtolily tlrc ColLcctor within 15 days from receipt of said decision of his desire to haue his case reuiewed by the Commissioner. The decision ofthe Collector on the tarpayet's protest, ifaduerse to the Gouernment, is automatically eleuated to the Cornmissioner for reuiew; and if such decision is affirmed by the Commissioner, the same shqll be automatically eleuated to and fi'nally reuiewed by the Secretary of

Finance. Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the Secretary of Finance (for cases subject to automatic reuiew) within 30 days from the promulgation of the aduerse decision to the CTA.

Suggested answer:

Administrative remedies

The taspayey's rernedies under the National Internal Reuenue Cod.e may be categorized into remedies before payment and remedies after payment. The remedy before payment consists of adm.inistratiue remedy which is the filing of protest within 30 days from receipt of assessment, and judicial remedy which is the appeal of the aduerse d.ecision of the Commissioner on the protest with the Court of Tax Appeals, thereafter to the Court of Appeals and finally with the Supreme Court.

The legal remedies available to taxpayers at the administrative level will depend on whether or not payment of the deficiency tax assessment was made.

The remedy after payment is auailed of by paying the assessed tas within 30 days from reeeipt of assessment and the filing of a clairn for refund or tas credit of these toxes on the ground that they are enoneously paid within two years from date of payment. If there is a dznial of the claim, appeal to the CTA shall be mad.e within 30 days ftnm receipt of denial but within two years from date of payment. If the Commissioner fails to act on the claim for refund or ta.r credit and the two-year period is about to erpire, the ta,xpayer should consider the continuous inaction of the Comntissioner as a denial and eleuate the case to the CTA before the expiration of the two-year period.

After payment of the deficiency tax assessment was made, his remedy is to file a written claim for refund or tax credit with the appropriate government agency - the Bureau oflnternal Revenue or the Department of Finance One Stop Shop Center. The taxpayer need not pay the deficiency tax assessment under protest nor is he required to write a letter to the BIR protesting said assessment at the time of payment (Secs.204[C] and 229, NIRC).

under the Tariff and. Customs Cod.e, tanpayefs rerned.ies arise only after payment of duties. The adrninistratiue rernedies consist of filing a clairn for refund which may take the form of abatement or drowback. The ta.xpayer can also file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs regarding the Legality or correctness of the assessment of customs duties. If the decision of the Collector is aduerse to the 6L4

Before payment of the deficiency tax assessment, the taxpayer's remedy is to file a written protest within 30 days from date of receipt of the formal assessment notice. The timely fiIing of the written protest against the assessment is mandatory; otherwise, the assessment will become final (Sec. 228, NIRC).

Judicial remedies If the protest is denied in whole or in part, or is not acted upon within 180 days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within 30 days from receipt of the said decision, or from the lapse of the 180-day period; otherwise, the decision shall become final, executory and demandable (Sec. 228, NIRC). When one speaks of due process, a distinction must be made between matters of procedure and matters of substance' In essence, procedural due process refers to the method or manner by which the

616

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Substantive remedies Examples of substantive remedies are:

1.

Questioning the constitutionality oraalidity oftax statutes - The provisions of the Constitution on the exercise ofthe taxing power are not construed as grants ofsuch power but are merely limitations on a power otherwise absolute. Tax statutes, like other legislation, enjoy the presumption of validity and constitutionality. To doubt is to sustain (Yu Cong u. Trinidad,4T Phil. 385). Atax statute may be attacked in the courts not only by reason ofnon-observance or violation ofthe constitutional limitations on the exercise ofthe taxing power, but also on account ofviolation or non-observance ofthe procedure laid down by the fundamental law on the enactment of legislation (Maniln Electric Co. u. Public Seraice Com.tnission, 73 Phil.

or regulations.

128).

Imposition of the minirnum corporate income tar is constitutional; it is a tar on incorne (not on capital). -

MCIT is a new concept devise as a relatively simple and effective revenue raising instrument and as a corrective measure to put a stop to the practice of corporation, which while having large turnovers, report minimal or negative net income resulting to minimal or zero income taxes year-in and year-out through under-declaration of income or over-declaration of expenses otherwise called "tq^r shelters." Safeguards were incorporated into the law, to wit:

6)

imposition of MCIT only on the fourth year after commencement of operations; (b) carrying forward of any excess of MCIT paid

over the normal income tax which shall be credited against the normal corporate income tax for three (3) immediately succeeding years; and (c) to address the genuine repeated losses

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that busincs$(!!r nrir.y incur, the Secretary of Finance is authorized to suspend the imposition of MCIT, if a corporation suffers loss due to prolonged labor dispute, force majeure and legitimate business reverses . ". MCIT is a tax on income as it is imposed on gross income (sales less cost of sales)'1

Iaw is enforced, while substantive due process requires the law itscl l, not merely the procedures by which the law would be enforced, is lir i r, reasonable, and just (Corona a. United. Harbor Pilots Association of the Philippines,2TS SCRA 540).

Mand.amus dnesnot he againstthe d.iscretionary powers of the Commis sioner. In one case, the court ruled that the Commissioner of Internal Revenue may not be compelled to issue an assessment by a tax informer who filed confidential information against the taxpayer (Meralco Securities Corporation u. Saaellano, 777 SCRA 804).

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2.

Non-retroactiaity of rulings. - BIR rulings may be modified' reversed or revoked by the Commissioner at anytime, but such modification, reversal, or revocation shall not be given retroactive application to the prejudice of taxpayers who relied on the previous ruling, except: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith (Sec. 246, NIRC). On July 25,1987, President Corazon Aquino signed E.O. 2?3, imposingVAT effective January 1, 1988' On December 10, 1987, respondent wrote CIR, asking if it is exempt from VAT. On June 8, 1988, CIR issued VAT Ruling No. 231-88 exempting respondent from VAT. On April 22,1994, BIR Director Umali

confirmed ruling. On January 1-, 1996, R.A. 7716 (EVAT Law) became effective. On October l-, 1996, BIR sent PAN for deficiency VAT and DST to respondent. On October 20,1999, respondent filed its protest. On September 2I,2000, it filed the appeal to the CTA. The Court ruled that it is not necessary that the person who entered into a contract to perform service for another in the course oftrade or business should personally render the service. The service may be performed by another as a sub-contractor. Health Maintenance Organizations (HMO) are not actually rendering medical serwices. They merely act as conduits between the members and their accredited recognized hospitals and clinics. Those exempt from VAT are taxpayers engaged in the performance of medical, dental, hospital and veterinary services.

For providing and arranging for provision ofhealth care services to its members, HMOs are liable to VAT. The basis for computing the VAT shall be payments for medical plans and lChamber of Real Estate and Builders'Association (CREBA) v. Exec. Secretary, G.R. No. 160756, March 9, 2010.

618

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d. Verification of capital gains tax liabilities; and e. In the exercise of the Commissioner's power to obtain

application fees, undiminished by amount paid for payuble to owners/operators of hospitals, clinics and medical and dcntul practitioners. Respondent's failure to describe itself as HMO is not tantamount to bad faith. HMO was first recorded in Philippine statute books upon the passage of R.A. 7875 (National Health Insurance Act of 1995). In 1988, when VAT Ruling No. 231-88 was issued, HMO was yet unknown or had no significance for tax purposes. "Good. faith" is that state of mind denoting honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry. The CIR is precluded from adopting a position contrary to one previously taken, where iqiustice would result to the taxpayer (ABS-CBN Brcad.ca,sting Corp. a. CTA, G.R. No. 52306, October 72, 1987). Applying the ruling retroactively would be prejudicial to the taxpayer (Commissioner u. Benguet Cotporation, G.F,. No. 734587, July 8, 2005, cited. in Phil. Healthcare Proaiders v. Commissioner, GR. No. 768729, April 24, 2OO7).

3.

Failure to inform the taxpayer in usriting of the legal and, factual bases of a,s s es s mcnt mahes it a oid. - The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void (Sec.228, NIRC).

4. Preseruation of boohs of accounts and, once-a-year examinatiorr. - All books of accounts, includingthe subsidiary books and other accounting records ofcorporations, partnerships,

or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection by internal revenue officers. For income tax purposes, such examination and inspection shall be made only once in a taxable year, except in the following cases:

a.

Fraud, irregularity or mistakes, as determined by the Commissioner;

b. c.

The taxpayer requests reinvestigation;

Verification of compliance with withholding tax laws and regulations;

information from other persons in which case, another or separate examination and inspection may be made (Sec. 235, NIRC).

b.

Publication of RMC and RMO. - In the absence of publication, Revenue Memorandum Order (RMO) No. 15-91 and Revenue Memorandum Circular (RMC) No. 43-91, imposing the five percent (57o) lending investors tax on pawnshops, are not valid. While the rule-making authority of the Commissioner of Internal Revenue is not doubted, Iike any other government agency' the Commissioner may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers. The due observance ofthe requirements ofnotice' hearing, and publication should not have been ignored (Commissioner u. Miehel Lhuillier Pawnshop, G.R. No. 750947, July 75, 2003).

6.

Power of CIR to d'istribute or allocate I'ross incotne ond d.ed.uetions d'oes not includ.e the power to impute

ntheoretical interesta' to the controlled' taxpayefs

transoctiont. - Sec.43 ofthe Tax Code authorizes the CIR to distribute, allocate or apportion gross income or deductions between or among controlled corporations in order to prevent evasion of taxes. Despite the broad parameters, however, the power of the CIR does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. There must be proofofthe actual or at least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed or allocated by the CIR. However, the CIR had adduced no concrete proofthat said funds were, indeed, the source of the advances the former provided its affiliates. While admitting FDC obtained interest-bearing loans from commercial banks, FDC clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as the sale of investment in Bonifacio Land in 1997. Article 1956 of the Civil Code provides that no interest shall be due, unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the rule is likewise settled that tax statutes must be construed strictly

620

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against the government and liberally in favor of the tux;ru.ycr (CIR u. Filinuest Deaelopment Corporation, G.ll. No. 763653, 7.

July

79, 201"L).

Availment of tax amnesty The recording in the Official Registry Booh of the BIR of the information fi,led by an informer is a mandatory requirernent before the taxpayer may be excluded from the couerage of theVAP.

- An interesting issue regarding the availment by a taxpayer of the Voluntary Assessment Program (VAP) was clarified by the Supreme Court. In this case, an informer filed an Affidavit with the Special Investigation Division (SID), Davao City, statingthat no income tax returns were filed by the taxpayer for the years 1994-1996. Pursuant to a Mission Order, the revenue officers reporbed and confirmed the non-filingofthe returns to the Chief SID. When the CIR offered VAP under Revenue Memoranduni Circular No. 59-97, taxpayer availed of the benefits under said VAP for the years 1993-1996. Thereafber, the BIR issued letter of authority for 1993-1996 and after tax audit, issued FAN. The FAN was timely protested, but was denied, so taxpayer filed an appeal to the CTA, which rendered a decision cancelling the assessment. Upon appeal, the CA affirmed the CTA decision. The SC ruled that the recording in the Official Registry Book of the BIR of the information filed by an informer is a mandatory requirement before the taxpayer may be excluded from the coverage of the VAP. The court explained that where the language of the law is clear and unequivocal, it must be given its literal application and applied without interpretation. Revenue Memorandum Order Nos. 59-97, 60-97, and 63-97 consistently provided that "persons under investigation ... as a result ofverified information filed by an informer under Section 281 of the NIRC, and duly recorded in the Official Registry Book (ORB) of the Bureaubefore the date ofavailment underVAP" are excluded from the coverage of the VAP." This denotes that in addition to the filing of verified information, the same should also be duly recorded in the ORB of the BIR. The conjunctive word "and" is not without legal significance. It means "in addition to." The word "and," whether it is used to connect words, phrases or full sentences, must be accepted as binding together and as relating to one another. It implies conjunction or union. The interpretation is bolstered by the fact that the BIR issued RR 18-2005 and reiterated the same provision in the implementation of the

,,,,,,,,lllJlliTjl],'ll;,".,,.,'

621

Enhanced VAP. When a [ax provision speaks unequivocably, it is not the province of a Court to scan its wisdom or its policy. The more correct course of dealing with a question of construction is to take the words exactly what they say. Moreover, the findings of facts of the CTA are final and binding upon the SC, especially if these are similar findings of the CA, which is the final arbiter of questions of fact.2

The law presumes that the BIR had sufficiently passed upon the taxpayer's compliance before acceptance oftax amnesty payment. - The law presumes that the BIR had sufficiently passed upon the taxpayer's compliance, much more the details of the Statement of Assets, Liabilities and Networth (SALN), before the acceptance of the applicable amnesty tax payment. In the instant case, the CIR even failed to file a timely motion for reconsideration when the Court in Division resolved PMC's availment of the tax amnesty. Thus, he cannot raise at this point in time that the CTA can inquire into the correctness of PMC's SALN, when the CIR itself could have easily denied the acceptance of PMC's availment of the tax amnesty.s

The original law, R.A. 6426 (Foreign Currency Deposit Act of the Philippines), as amended by P.D. 1035 and 1246, exempts from all taxes all foreign currency deposits made under the foreign currency deposit system, including interest and all other income of such deposits, irrespective of whether or not these deposits were made by residents or non-residents. Thereafter, the Tax Code of 1977 was enacted, which also granted tax exemption to FCDU's foreign currency transactions, but with certain exceptions (i.e., income from foreign currency

transactions with non-residents, OBUs in the Philippines, local commercial banks, including branches of foreign banks). Subsequently, R.A. 8424 (Tax Reform Act of 1997) was enacted on January L, 1998 deleting the phrase "exempt from all taxes" from Section 27(DX3) of the law. The court treats such deletion of the phrase as withdrawal of the exemption previously granted by the prior law. However, the availment of the petitioner of the tax amnesty under R.A. 9480 entitled it to the immunities and privileges provided in Section 6 thereof. It is evident from Revenue Memorandum Circular No. 69-2007 that DST is included in the coverage of the tax amnesty law, and it has 2Commissioner v. Ariete, G.R. No. G.R. No. 164152, January 2l,2OlO. 3Commissioner v. Philex Mining Corporation, CTA EB 578, June 29,20LO.

622

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been established that petitioner sufficiently complied with thc requirements of R.A. 9480, DOF Order No. 29-07, and Revenuc

Memorandum Circular No. 69-07.a Furthermore, the taxpayer may also question the amount

oftax and/or penalty being collected as too high, confiscatory or excessive in violation of the provision of the Constitution. To prove this point, documentary evidence, data and statistics must be submitted.s

b.

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Chiet, Assessment l)ivision prepares assessment notice and demand letter for approval by the Regional Director. a

As a general rule, a pre-assessment notice is required to be issued by the BIR. However, a pre-assessment notice shall not be required in the following cases:

1.

When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face ofthe return; or

Procedural remedies

2.

To give meaning to the due process clause of the Constitution involving tax cases and to implement the provisions of the Tax Code, Revenue Regulations No. 12-99 prescribes the following procedural requirements in the issuance of deficiency tax assessments:

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

3.

When a taxpayer who opted to claim a refund or tax credit ofexcess 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 ofthe succeeding taxable year; or

4.

When the excise tax due on excisable articles has not been paid; or

5.

When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles,

1.

Notice of informal conference Revenue Officer

a.

Revenue officer informs the taxpayer of his findings as well as factual and legal bases after the completion of his tax

audit in an informal meeting;

b.

He then prepares report ofexamination based on the results

of meeting with taxpayer, afber considering factual and legal explanations of taxpayer;

c. 2.

He submits written report to Revenue District Officer.

Post-reportingnotice Revenue District Officer

a. b.

-

15 days

Taxpayer submits written explanations on findings; Revenue District Officer forwards report to Assessment

Division.

3.

Preliminary Assessment Notice (PAN) Chief, Assessment Division - 15 days

a.

Taxpayer submits written explanations on findings;

alnternational Exchange Bank (now Union Bank of the Phil.) v. Commissioner, CTA Case No. 7848, May 6, 2010. 5PLDT v. Public Service Commission, 34 SCRA 609; MERALCO v. PSC, 34 SCRA 609.

capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons (Sec. 228, NIRC). Section 228 oflhe 1997 Tax Code requires that the taxpayer be informed of the law and facts on which assessment is made. The objective is to give the taxpayer the opporbunity to refute the findings of the examiner and give a more accurate and detailed explanation regarding the proposed assessment. It

is sufficient that computations are attached to the pre-assessment notice clearly showing the specific provisions of the law from which the assessments were based and the facts on how the amounts of the

deficiency taxes were arrived at. The requirement shall be deemed to have been complied with if, during the informal conferences, the taxpayer is able to submit a written comment on the issues raised in the report of investigation which he could not have done

624

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if he had not been informed ol'the law und thc lirr:l,s upon which the assessments were based (Philippiru: Stock Exchange u. Commissioner, CTA Carc No. 5995, Oetober 75, 2002).

Bar Question (2010) 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 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 25,20L0, 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? Explain.

Suggested answer: No. Failure to file a Reply to PAN mahes the taxpayer in default and authorizes the reuenue official to issue the FAN. Howeuer, no Iiability for additional or deficiency tax qrises from such failure. Indeed, Reuenue Regulq.tions No. 12-99 mahes the filing of such Reply

to PAN merely directory, i.e., the taxpayer may or may not reply to the PAN. The only legal consequence of such failure to fiIe the Reply to the PAN is for the CIR to issue a FAN. Since the corporation timely filed the protest against the FAN, it cannot be said that the final assessment notice had already become fi.nal and executory.

The issuance of PAN is mandatory The importance of the due process guaranteed under the Constitution was emphasized by the Supreme Court in a very recent case, where the taxpayer was assessed based on the best evidence rule. The BIR allegedly sent the PAN for deficiency taxes which the taxpayer denied. The taxpayer, however, acknowledged receipt of the FAN. The SC ruled that "Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a Preliminary Assessment Notice. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal requirement. The sending of a PAN to the taxpayer to inform him of the assessment made is but part ofthe'due process requirement

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in the issuanco'ol'a dc(icicncy tax assessment, the absence of which renders nugatory any assessment made by the tax authorities." The use of the word "shall" in Subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness ofthe right to due process reaches both substantial and procedural rights and the failure of the CIR to strictl)' comply with the requirements laid down by law and its own rules is a denial ofMetro Star Superama's right to due process. Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A. 8424. the assessment made by CIR is void. CIR tried to justify his position by citing

Clft u. Menguito, where requirement that an assessment that "the stringent the court stated notice be satisfactorily proven to have been issued and released or, if receipt thereof is denied, that said assessment notice have been served on the taxpayer, applies only to formal assessments prescribed under Section 228 of the Tax Code, but not to post-reporbing notices or pre-assessment notices... A post reporting notice and pre-assessment notice do not bear the gravity of a formal assessment notice. The postreporting notice and pre-assessment notice merely hint at the initial findings ofthe BIR against the taxpayer and invites the latter to an informal conference or clarificatory meeting." However, the Supreme Court said that the case of CIR u. Menguito (G.R. No. 167560, September 17,2008), cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot apply to this case, because the issue herein was the non-compliance with the provisions of RR 12-85, which sought to interpret Section 229 of lhe old tax law. R.A. 8424has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer ofthe CIR's findings was changed in 1998 to informingthe taxpayer of not only the law, but also of the facts on which an assessment would be made.6

Assessrnent is null and. uoid. for haaing been issued. on the the PAN was receiaed. by the petitioner. - Records show that the PAN dated January 9, 2003 was received by petitioner on January 24,2003. On the other hand, the FAN was issued on January 24,2003. Given that the FAN was issued on the same day petitioner received the PAN, it is evident that respondent violated the provisions of d.ay

GCommissioner v. Metro Star Superama, Inc., G.R. No. 185371, December 8, 2010.

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Ittrmodies of Taxpayere

Section 228 af bhe 1997 NIRC, as well as of'the provir.tions ol'lttrvenuc Regulations No. 12-85 and 12-99 and Revenue Memorandum Order No. 37-94, which give the taxpayer a period of 15 days within which

to reply to the PAN. Even assuming that there was an informal conference that took place between petitioner and respondent, and that during the conference and even thereafter, petitioner, through its counsel, requested a copy of the FAN, the fact remains that as indicated in the FAN, it was issued on the same day the PAN was received by petitioner. Clearly, petitioner was denied of its right to Formal (or Final) Assessment Notice (FAN) and Letter of Demand - Regional Director - three (3) years ftom date of filing of return or 10 years foom date of filing false or foaudulent return

a.

Regional Director signs assessment notice and demand letter;

b.

He causes to be released and mailed assessment notice and demand letter, or personal service thereofto taxpayer.

If the assessment notice was deemed insufficient insofar as compliance with Section 228 of the Tax Code is concerned, such insufficiency can be cured if the demand letter can show the legal and factual basis relied upon in the issuance of the assessment which the assessment notice failed to detail. The rule requiring the BIR to inform the taxpayer in writing of the laws and the facts on which the assessment is made runs parallel to the due process clause for it is believed that it is only through a detailed appraisal of its basis that the taxpayer may be able to dispute the imposition or agree with it (PNZ Marketing u. Commissioner, CTA Co,se No. 5726, December 74,200L). 5.

Protest letter must be filed by taxpayer within 30 days foom date of receipt of assessment notice and demand letter; submits documentary evidence within 60 days from submission of protest letter

TPuratos Philippines, Inc. v. Commissioner, CTA Case No. 6g80, October 4,2OI0, citing Estate of the Late Juliana Diez Vda. De Gabriel, G.R. No. 155541, Jan:uary 27, 2004; BPI Data Systems Corporation v. Commissioner, CTA Case No. 4580, January 12, 1994; Tupas v. CA, 193 SCRA 597; Banco Espanol v. Palanca, 37 Phil. 921; Morales v. Collector, 17 SCRA 1018; Commissioner v. Reyes, G.R. Nos. 1b9694 and 168b81,

January 27,2006.

Taxpayer files request for reinvestigation or motion for reconsideration;

b.

He submits additional documentary evidence and"/or arguments as well as legal authorities.

6.

due process.T

4.

a.

Reinvestigation

a.

BIR evaluates the legal and factual arguments, including documentary evidence submitted by taxpayers;

b.

Reiterates original findings or revise report of examination

and submits

it to RDO until it

reaches the Regional

Director. 7.

Denial of protest by Regional Dircctor - 180 days from date of filing of protest or submieeion of documentary evidence by taxpayer

8. Administrative

appeal to Comnrissioner of decieion of Regional Director

9.

Denial of protest or inaction by Commissioner within 180 days frrom date of proteet or supplemental proteat

10. Appeal to CTAby taxpayer -

30 days

from date ofrecelpt

Bar Question (2000, 1992) Describe separately the procedures on the legal remedieg under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels.

Suggested answer: The legal remedies of an aggrieued taxpayer under the Tas Cod.e, both at the adrninistratiue and judi.cial Leuels, may be clnssifi.ed into those for assessment, collection and refund,, The procedures

for the administratiue remedies for assessrnent

are as follows:

a.

After receipt of the Pre-Assessm.ent Notice (PAN), he rnust within 15 days from. receipt explain why no additional tases should be assessed against him.

628

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b. If

the Commissioner of Internal Reuenue

issue-s

o.rt

assessment notice, the taxpayer rnust administroti.uel,y protest or dispute the assessment by fi.ling a motion fbr reconsideration or reinuestigation within 30 days frorn receipt of the notice of assessment (4th par., Sec. 228, NIRC).

Within 60 days from filing of the protest, the toxpayer shall submit

q.ll releuant supporting documents. The

judicial remedies of an aggrieued taxpayer relatiue to an

assessment notice &re as follows:

&.

Where the Commissioner of Internal Reuenue has not acted on the taxpayet's protest within a period of 180 days from

subrnission of all reLeuant documents, then the taxpayer has a period of30 days from the lapse ofsaid 180 days within which to interpose a petition for reuiew with the Court of Tax Appeals.

b.

Shoutd. the Commissioner deny the ta,xpayey's protest, then he has a period of 30 days from receipt of said denial within which to interpose a petition for reuiew with the Court of Tox Appeals.

In both cases, the taxpayer must apply with the Court of Tox Appeals for the issuance of an injunctiue writ to enjoin the Bureau of Internal Reuenue fTom collecting the disputed tax during the pendency of the proceedings. The aduerse decision of the Court of Tatc Appeals is appealable to the Cou.rt of Appeals by means of a petition for reuiew on certiorari

within a period of 15 days from receipt of the aduerse decision, extendible for another period of 15 days for compelling reasons, but the extension is not to exceed a total of 30 days in all. INOTE: Under R.4.9282, decisions of the CTAdiuision shall be appealed to the CTA en banc, and decisions of the latter, to the Supreme Courtl. The aduerse decision ofthe Court ofAppeals is appealable to the Supreme Court by means of a petition for reuiew on certiorari within a period of 15 days from receipt ofthe aduerse decision ofthe Court of Appeals.

The employment by the Bureau of Internal Reuenue of any of the administratiue remedies for the collection of the tax, such as distraint and leuy, m.ay be administratiuely appealed by the ta.xpayer to the Commissioner, whose decision is appealable to the Court of

Tax Appeals under other matter arising under the prouisions of the National Internol Reuenue Code. The judicial appeal starts with the Court of Tax Appeals, and continues in the sanle manner as shown aboue.

Should the Bureau of Internal Reuenue decide to utilize its judicial tax remedies for collecting the taxes by ntectns of an ordinary suit fi.led with the regular courts for the collection of a sum of money, the taxpayer could oppose the same going up the ladder of' jud.i<:ial processes from the Municipal Trial Court (as the case n'Lay be) to th,e Regional Tri.al Court, to the Court of Appeals, thence to the Suprerne. Court. [NOTE: Ciuil actions for the collection of delinquent taxe,s amounting to Pl milliorl or n'Lore shqll now be filed with the CT'A under R.A.92821. The remedy of an aggrieued taxpayer on u claim for refund is

to appeal the aduerse decision of the Commissioner to the CTA sd,nte nxanner outlined aboue.

in the

Types of taxes Self-assessing ta*es which da not require issua.nce of arssessn cnt

Internal revenue taxes are self-assessing and no further assessment by the government is required to create the tax liability (Tfu.paz u. Ulep, 316 SCRA 118).T}rre taxpayer himself assesses his tax liability, files the tax return and pays the tax within the prcscribed dates. The collection of such unpaid tax (like income tax) shown in the tax return filed may proceed without any further assessment, and the

five (5)-year prescriptive period to collect the unpaid delinquent tax applies. This is so because the date of the assessment in the cast: of self-assessed taxes would be the date of the actual filing of the rclturn as it is on such date when the tax is said to have been assessed. ln other words, the assessment made by the taxpayer of his tax liabilil,.y is adopted by the government (See Sec. 222[c], NIRC).

Tares which require

o,ssessn

cnt to establish hability

The general rule is that taxes are self-assessing and thus do not require the issuance of an assessment notice in order to establish thc tax liability ofa taxpayer. The exceptions are:

1.

Tax period of a taxpayer is terminated

it shall come to the knowledge of the Commissioner taxpayer is retiring from business subject to tax, or is

When

that

a

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intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property, or is performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year, or to render the same totally or partly ineffective unless such proceedings are begun immediately, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice ofsuch decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner (Sec. 6[D], NIRC). 2.

Deficiency tax liability arisingfrom by the BIR

a

tax audit conducted

The tax return filed and the tax paid by the taxpayer is presumed to be correct and is not false or fraudulent. In order

to determine the correctness of the computation of the tax liability made by the taxpayer, the BIR is granted the right to conduct a tax audit within the prescriptive period. The tax audit

generally requires examination of the books of accounts and accounting records ofthe taxpayer under audit, or the records of third parties who are suppliers or customers of the taxpayer under audit, or the government. The tax audit may also refer to a "no contact" audit whereby the tax liability of a taxpayer is determined by comparing the tax returns filed by the taxpayer with the other documents or information obtained by the BIR from third parties. Theterm"d,eficiency" means: (1) The amount by which the tax imposed by law as determined by the Commissioner or his authorized representative exceeds the amount shown as the tax by the taxpayer upon his return; or (2) If no amount is shown as the tax by the taxpayer upon his return, or ifno return is made by the taxpayer, then the amount by which the tax as determined by the Commissioner or his authorized representative exceeds the amounts previously assessed (or collected without assessment) as a deficiency (See Sec.56[8], NIRC).

:].

631

Tax lien Ifany person liable to pay an internal revenue tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner until paid, with interests, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer. However, the tax lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located (Sec. 219, NIRC).

4.

Dissolving corporation Every corporation shall, within 30 days after the adoption by the corporation ofa resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible

involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the SEC of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the BIR which certificate shall be submitted to the Securities and Exchange Commission (Sec. 52[cJ, NIRC).

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CHAPTER }OflX

ASSESSMENT AND PROTEST

4.

5.

The FANIDL mustbe issued withinthe original prescriptive period prescribed by law or within the extended prescriptive

period

as validly agreedbetween the BIR and the taxpayer; and served by personal delivery or by registered mail; and

An assessment is the notice to the effect that the amount therein stated is due from a taxpayer as a tax with a demand for payment of the same within a stated period of time (Comrnissioner u. CTA,27 SCRA 1159).It also refers to the official action of an administrative officer in determining the amount of tax due from a taxpayer (Bisaya Land. Tlansportation Co. a. Collector, 705 Phil. 1338).

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to pay. An assessment is a notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. Assessments made beyond the prescribed period would not be binding on the taxpayer (Tupaz u. Ulep,316 SCRA 118).

6.

To be valid, an assessment must comply with the following essential requisites:

The FAN (BIR Form 17.08) contains the name, address, and TIN ofthe taxpayer; the kind oftax, period covered, basic tax and penalties; signed by the authorized BIR official, and the date of payment of the tax. The demand letter (DL) contains the computation of the deficiency tax, including penalties, if any, the factual and legal bases of the assessment, and the demand for payment of the tax. Thus, the FAN and DL must always go together; The FAN/DL must be issued on account of or covered by a

validly issued letter of authority; 632

The FANIDL must be addressed and served to the correct person in his/its registered or duly notified new address.

Bar Question (2008) After examining the books and records of EDS Corporation, t}:'e 20O4 final assessment notice, showing basic tax of F1,000,000, deficiency interest of F400,000, and due date for payment of April 30,2007, but without the demand letter, was mailed and released by the BIR on April 15, 2007, The registered letter, containing the tax assessment, was received by the EDS Corporation on April 25,2007.

a.

What is an assessment notice? What are the requisites of a valid assessment? Explain.

b.

As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain.

Essential requirements for valid assessment

2.

The FAN/DL must be signed by the Commissioner or his

duly authorized representative;

What is an assessment?

1.

'I'hc l'AN/I)I, nrust s[ate the factual and legal bases of the asscssment and jurisprudencel on which it is based; otherwise, the assessment shall be void;z

Suggested answers:

a.

The assessment notice, without the demand letter, is uoid. Section 228 of the Tqx Code expressly prouides that "the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the ussessment shall be uoid." Since the assessment notice merely contains the bctsic tox, interest q.nd due date for payment, it does not comply with the requirernents of the law that it must state the factual and legal bases; hertce, it

is uoid.

b.

The demand letter is important not only because in such Ietter does the BIR mahes a demand for the payment of the

rRev. Regs. No. 12-99 'Sec. 228, NIRC.

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defi,ciency to;r but more inxportantly, because the lindinlqs of' facts and computations of the d.efi.ciency tcr^r.es by the reuenu.e

officers as well as the legal basis for such assessmcnts ure ade q uately exp lained t her ein.

Assessment based on Presumption Per taxpayer's books and records, its purchases for the fourth quarter of 2002 was only P5,682. Based on the quarterly report submitted to the BIR by taxpayer's suppliers, it is F3,121,769. Due to the discrepancy, the BIR assessed deficiency taxes based on the higher amount.

The CTA cancelled the deficiency assessments and ruled that the summary list of purchases received by the BIR were not verified with other externally sourced data to check the integrity of the information gathered. Indeed, the Integrated Tax System of the BIR can only check or validate the format and possible viruses in the computer program, but certainly not the content or substance of encoded summary lists of purchases, according to the witness of the BIR. The court concluded that while it is true tax assessments have the presumption of correctness and regularity in its favor, it is equally true that assessments should not be based on mere presumptions, no matter how reasonable or logical the presumption might be (CIR u. Hanex T?ad.ing; Far N Parcel u. CIR, CTA Case No.7475, Noaernber 22,2011).

The whole income tax assessment and part of the VAT assessment rest on the finding that there is under-declared input tax in the amount of ?L2,71.5,371.17. Simply put, the theory of CIR is that since there is an under-declaration ofinput tax and correspondingly, of purchases, the same should translate to taxable income for income

tax purposes, and taxable gross receipts, for VAT purposes. In the imposition of VAT, what is critical to be shown is that the taxpayer received an amount of money or its equivalent, and not when there are under-declared input taxes on purchases. Since it was erroneous for respondent to impose a deficiency income tax on the basis of an under-declared input tax, the income tax return cannot be treated as false. Such being the case, the prescriptive period to be applied is the three-year period. In this case, the CIR failed to offer proofthat the first, second, and third waivers were executed in three copies; hence, the assessments are cancelled and set aside (Phil. Daily Inquirer a. CIR, CTA Case No. 7853, February 76,2072).

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6:15

Notilication by OIR ol'his asscssment to taxpayer is not enough; t:rxpayer must be infbrmed of factual and legal basis. Tancinco died leaving a house and lot. The BIR received a sworn statement for reward filed by an informer, prompting it to conduct an investigation on the estate. Without the required preliminary findings, BIR issued a letter of authority, which was received by one of the heirs, Reyes. On February 72,1998, the BIR issued a PAN against the estate for F14.58 M. On May 19, 1998, the heirs received a final estate tax assessment and a demand letter, both dated April22, 1998, for F14.91 M, inclusive of penalties. On June 1, 1998, Sumbillo protested the assessment on behalfofthe heirs on the ground that the property had already been sold by the decedent in 1990. The CIR issued a preliminary collection letter to Reyes, followed by a Final Notice Before Seizure dated December 4, 1998. WDL was served upon the estate, followed by notices of levy and tax lien against it. Reyes protested the notice of levy. The heirs proposed a compromise settlement of F1 M. In a letter to CIR dated January 27 ,2OO0, Reyes proposed to pay 507o of the basic tax due, citing the heirs'inability to pay the assessment. The CIR rejected the offer, since the estate tax is a charge on the estate and not on the heirs; hence, the latter's financial incapacity is immaterial, as in fact the gross value of the estate (P32.42 M) is more than sufficient to settle the tax liability. CIR demanded payment of F18.03 M; otherwise, notice of sale of property would be published. On April 11, 2000, Reyes proposed to pay L$OVo of the basic tax due. As the estate failed to pay the liability within April 15, 2000 deadline, BIR notified Reyes on June 6, 2000 that the property would be sold at public auction on August 8, 2000. On June 13, 2000, Reyes filed a protest with the BIR Appellate Division and offered to file the estate tax return and pay the correct amount of tax without surcharge or interest. Without acting on the protest and offer, CIR instructed the Collection Enforcement Division to proceed with the auction sale; hence, Reyes filed a petition for review with the CTA. The CIR filed a motion to dismiss on the grounds that the CTA no longer had jurisdiction because the assessment is already final, and the petition was filed out of time. The CTA denied the motion.

During the pendency of the case with the CTA, BIR issued RR 6-2000 and Revenue Memorandum Order No.42-2000, offering cerbain taxpayers with delinquent accounts and disputed assessments an opportunity to compromise their tax liability. On November 25,2000, Reyes filed an application for compromise settlement and paid the

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amount of F1.06 M. While waiting for the approval of'thc Naliunul Evaluation Board, Reyes filed a motion to declare application as a perfected compromise with the CTA, which denied such motion, since such application needs NEB approval. Reyes filed a motion for judgment on the pleadings, which was granted. The CTA denied the petition. Upon appeal, the CA granted the petition, saying that the assessment notice and demand letter should have stated the facts and the law on which they were based; otherwise, they were deemed void. Since the assessment and demand letter were void, the proceedings emanating from them were likewise void, and any order emanating from them could never attain finality. The Supreme Court ruled that Section 228,paragraph2, of the Tax Code is clear and mandatory - the taxpayer shall be informed in writing of the law and the facts on which the assessment is based; otherwise, the assessment shall be void. Reyes was not informed in writing of the law and the facts on which the assessment of the estate tax had been made. Reyes was merely notified of the findings by the CIR, who had simply relied upon the provisions offormer Section 229 prior to its amendment by R.4.8424. The general rule is that statutes apply prospectively. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule. Clearly, Section 228 of the Tax Code provides for the procedure in case an assessment is protested and does not create new or take away vested rights. In both instances, it can surely be applied retroactively. Moreover, R.A. 8424 does not state that pending actions are excepted from the operation ofSection 228, or that applying it to pending proceedings would impair vested rights (Commissioner a. Reyes, and. Reyes u. C ommis sioner, G.R. No s. I 59 6 94 and. 7 63 5 8 7, J anu ary 2 7, 2006) .

The assessment notice and letter of demand calling for payment of the taxpayer's deficiency tax(es) shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based; otherwise, the forrnal letter of demand and assessment notice shall be void (Sec. 228, NIRC, as implemented by Sec. 3, Reu. Regs. No. 12-99, September 6, 1999). formal letter of demand failed to state the legal and factual for the assessment. - By reproducing the document verbatim, the demand letter only stated the computations and discrepancies, but there was really no statement regarding the legal bases. The evidence that the CIR tried to show to prove that he apprised the taxpayer of such legal bases was a memorandum that was actually a The

bases

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mere internal memorundum issued tr-r the BIR's regional director, and not to the petitioner, UPS. ln the present case, it is the Regional I)irector's decision, which is being appealed before the CIR. The regulation implementing Section 228 of the Tax Code, specifically states that if the taxpayer appeals the Regional Director's decision with the CIR, the former's decision does not constitute a final decision appealable to the CTA. UPS correctly appealed the decision of the CIR, and not that of the Regional Director before the court, and it timely filed its petition on August 23,2007 , after receipt of the WDL on July 25, which act can be considered as a denial of its protest (UPS International u. CIR, CTA Case No. 7675, August 4, 2077). The la.w requires that the factual and legal bases be stated in the Demand Letter q.nd Finctl Assessment Notice; the requirement for issuing a preliminary or final assessrnent, informing a taxpayer of the ercistence of defi.ciency tax assessment is marhedly different from the Enron is a domestic requirement of what such notice must contain.

-

corporation registered with the Subic Bay Metropolitan Authority (SBMA); hence, subject to the five percent (57o) final tax on its gross income earned. Enron filed its income tax return for 1996, showing a net loss. BIR conducted an audit ofits books and records for 1996, and the revenue officers disallowed certain deductions and costs without indicating the factual and the legal bases. During the PAN stage, the BIR informed the taxpayer thru preliminary 5-day letter and furnished Enron with a copy of the audit working paper. Then, CIR assessed the deficiency five percent (57o) final tax on its gross income earned. Enron disputed the protested the deficiency tax assessment. Due to the non-resolution of the protest within the 180-day period, Enron filed a petition for review with the CTA and it argued that the deficiency tax assessment disregarded Section 228 of the 1997 Tax Code and Section 3.1.4 of Revenue Regulations No. 12-99, by not providing the legal and factual bases of the assessment. It also questioned the substantive validity of the assessment. CTA granted Enron's petition and ordered the cancellation ofthe void assessment. Motion for reconsideration was filed but was denied by the CTA' CIR appealed to the CA, but the CA affirmed the decision of the CTA. It held that the audit working paper did not substantially comply with Section 228 of the Tax Code and RR 12-99 because they failed to show applicability of the cited law to the facts of the assessment. CIR appealed to the Supreme Court (SC). The SC decided in favor of Enron. The use of the word "shall" in Section 228 of the Tax Code indicates the mandatory nature of the requirements laid down therein. In the issuance of FAN, the revenue

ti38

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officers did not provide Enron with written bases of the law and thc facts on which the assessment is based. CIR did not bother to explain how it arrived at such assessment. He failed to mention the specific provision of the Tax Code or rules and regulations not complied with by Enron.

The SC ruled that the preliminary 5-day letter and audit working paper were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharge of the CIR's duties

in correctly assessing a taxpayer. The requirement for issuing a preliminary or final assessment, informing a taxpayer of the existence of deficiency tax assessment is markedly different from

the requirement of what such notice must contain. Just because the CIR issued an advice, preliminary letter and final notice does not mean that taxpayer was informed of the law and facts on which the assessment was made. The law requires that the factual and legal bases be stated in the Demand Letter and Final Assessment Notice. Otherwise, the express provision ofSection 228 ofthe 1997 Tax Code and Revenue Regulations No. 12-99 would be rendered nugatory. The alleged "factual bases" in the advice, preliminary letter and audit working paper did not suffice. Moreover, due to the absence of a fair opportunity to be informed of the legal and factual bases of the assessment, the assessment is void. The old law merely required the taxpayer to be notified of the assessment. This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts on which the assessment is made. Such amendment is in keeping with the constitutional principle that no person shall be deprived ofproperty without due process.3 Section 228 of the 1997 Tax Code, as amended by R.A. 8424, does not state that pending actions are excepted from the operation thereof. - On May 19, 1998, the heirs of Tancinco received a FAN and DL for deficiency estate tax in the amount of F14.91 M, inclusive of penalties. The assessment was duly protested within the 30-day period from date of receipt, on the ground that the property was

already sold in lf)90.'l'lrc llllt tricd to collect thc ttssossed tax thru administrative remedies, and the taxpayer ofl'ered to settle the same thru compromise by paying SOVo of thebasic tax assessed, but the CIR denied the offer and increased the total tax to F18.03 M, inclusive of penalties. The offer oftaxpayer was later on increased to 1007o ofthe basic tax assessed. As the tax was not paid, BIR then set the property for public auction sale; hence, petitioner filed petition for review with the CTA. BIR filed a motion to dismiss because the assessment was already final and execution and that the petition for review was filed out of time. CTA denied the motion to dismiss.

In the meantime, BIR issued Revenue Regulations No. 6-2000 and Revenue Memorandum Order No. 42-2000, offering taxpayers with disputed assessments to compromise cases. On Novembet 25, 2000, Reyes filed the application for compromise and paid F1.06 M. While waiting for the approval by the BIR National Evaluation Board, Reyes filed a motion to declare the application as a perfected compromise, which the CTA denied since the NEB approval is needed. Reyes filed a judgment on the pleading, which the CTA granted. However, the CTA eventually denied the motion. Reyes then filed an appeal to the Court of Appeals (CA). The CA granted the appeal, saying that the FAN/DL should have stated the facts and the law on which the assessment was based, and since the FANIDL did not state the facts and the law, the assessment was void and could not attain finality and the proceeding emanating from them were also void. Thus, the BIR appealed to the SC. The Supreme Courb ruled that Section 228 of the 1997 Tax Code is clear and mandatory - the taxpayer shall be informed in writing of the law and the facts on which the assessment is based; otherwise, it is void. Reyes was only notified of the findings by the CIR, who merely

relied on the provisions of the former Section 270 of the l-977 Tax Code prior to its amendment by R.A. 8424. The SC added that the general rule is that laws apply prospectively. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule. Since Section 228 of lhe 1997 Tax Code, as amended by R.A. 8424, does not state that pending actions are excepted from the operation of Section 228, or that applying it to pending proceedings would impair vested rights, said law may be applied retroactively.a

3Commissioner v. Enron Subic Power Corporation, G.R. No. 166387, January 19, 2009; see United Salvage and Towage (Phils.), Inc. v. Commissioner, CTA Case No. 6606, March 12,2010; UPS International, Inc. v. CIR, CTA Case No. 7675, August 4, 2011.

aCommissioner v. Reyes, and Reyes 163581. January 27, 2006.

v. Commissioner, G.R. Nos. 159694 and

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The inserted. sentence waa not an q.fft.rmation of uhat the laut required.; the amend.ment by R.A.8424 was an innouation and. could. not be reasonably inferced. from the old.law. - On October 28, 1988, CIR assessed petitioner (BPI) for deficiency percentage tax and documentary stamp tax for 1986. On December 10, 1988, BPI replied stating "[Y]our deficiency assessments are no assessments at all ... As soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer's decision on whether to pay or protest the assessment." On June 27,1991, BPI received a letter from BIR, stating "... Your letter failed to qualify as a protest under Revenue Regulations No. 12-85 ... still we obliged to explain the basis of the assessment." On July 6, 1991, BPI requested a reconsideration of the assessments and on December 12, 1991, BIR denied the protest, which was received on January 2I,Igg2.On February L8, 1992, BPI filed a petition for review at the CTA. On November 16, 1995, CTA dismissed the petition for lack ofjurisdiction; the assessments had become final and unappealable. On May 27,1.996, CTA denied reconsideration. On appeal, the CA reversed the CTA decision. It ruled that the October 28, 1988 notices were not valid assessments because they did not inform the taxpayer ofthe legal and factual bases therefor. It declared the proper assessments were those in May 8, 1991 letter, which provided the reasons for claimed deficiencies. CIR elevated the case to the Supreme Court. The Supreme Court ruled that CIR did not inform BPI in

writing

of the law and facts on which the assessments were made. He merely

notified BPI of his findings, consisting of the computation of the tax liabilities and a demand for payment within 30 days from receipt thereof. He relied on former Section 270 of the Tax Code, prior to its amendment by R.A. 8424.InCIR u. Reyes, G.R. No. 159694, January 27,2006, the only requirement was for the CIR to "notify" or inform the taxpayer of his findings. Nothing in the old law required a written statement to the taxpayer of the law and the facts. The Court cannot read into the law what obviously was not intended by Congress; that would be judicial legislation. Jurisprudence simply required that the assessments contain a computation of tax liabilities, the amount to be paid plus a demand for payment within a prescribed period. The sentence "the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void" was not in the old Section 27o,btl was only inserted in Section 228 in

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the 199? Tax Codc (lt.A. U424).'l'he inserted sentence was not an aflirmation of what the luw required; the amendment by R.A. 8424 was an innovation and could not be reasonably inferred from the old law. The October 28, 1998 notices were valid assessments, which BPI

within 30 days from receipt. The December to BIR did not qualify as a protest, since the BPI sent reply 10, 1998 "we shall inform you of the taxpayer's decision stated letter itself protest pay the assessment." Thus, BPI's failure to or to on whether protest the assessment made it final and executory. The assessment is presumed to be correct (Commissioner u. BPI, G.R- No. 734062, April 77,2007). should have protested

In a long line of cases, the Supreme Court has ruled that the requirement of the law to inform the taxpayer of the basis of the assessment does not necessarily mean that it be a full narration of the facts and laws on which the assessment is based. The purpose of the assessment is to enable the taxpayer to know the law and the facts on which the assessment is made, and to afford him his right to due process once it is served and received. Thus, so long as the parties are notified and given the opportunity to explain their side, the requirements of due process are satisfactorily complied with. In this case, the petitioner has intelligently made its protest by stating that its sales of pharmaceutical items in favor of its in-patients are exempt from VAT. This circumstance proYes that petitioner was sufficiently informed of the facts and the law as to why assessment has been issued against it(Hermano MiguelFebres Cord'ero Med'ical Found.ation a. CIR, CTA Case No. 8194, January 9,2012).

lssuance of LA for discrepancy noted in LN The issuance of an issue-based letter of authority to cover specifically "income tax, VAT, percentage tax, and withholding taxes due to discrepancy reflected in the letter notice" must be issued by the BIR. A Notice for Informal Conference, together with the letter of authority, shall be served to the taxpayer (Big AA Corporation o. CIR, CTA Case No.7O93, February 22,2006; RMC No. 55'2070,

June 77,2070).

lssuance of valid LA The examiners were authorized to examine petitioner's books of accounts and accounting records for the period "1997 and unverified

642

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prior years." The CIR's basis for the deficiency VAT fbr the year lggz was the year 1998. In this case, the court ruled that the deficiency assessment issued without a valid authority is a nullity. Also, the issuance of a letter of authority for "one taxable year and all unverified prior years" or similar statement is prohibited (CIR u. Sony Philippines, GR. No. 778697, Noaember IZ,2OIO).

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taxpayer.'l'ltus, whe n thc deliciency assessments were sent to the old address (b.y the tlllt by mail) despite proper notification of the new address, the running ofthe three-year prescriptive period to assess was not suspended. The law on prescription, being a remedial measure, should be interpreted in a way conducive to bring about the beneficient purpose of affording protection to the taxpayer.T of the

Since no assessment was serued on the trustee of the Estate, it can said that there was no assessment of the tax, and no proceed,ings could be initiated in court for the collection of said tax. Due process - received. In requires at the very least that such notice actually be Commissioner of Internal Reuenue u. Pqscor Realty and Deuelopment Corporation, the Court had occasion to say:

As there are no notices sent to the petitioner-BASF, the InCIR u. Reyes, the SC ruled that if there is no valid notice sent, the assessment is void. The reason for this is that "the law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in

An assessment contains not only a computation oftax liabilities, but also a demand for pa5rment within a prescribed period. It also

administrative investigations that taxpayers should be able to present their case and adduce supporting evidence' x x x." A void assessment cannot give rise to an obligation to pay deficiency taxes, and it divests the taxing authority of the right to collect them.8

be

signals the time when penalties and interests begin to accrue against

the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received b)' the taxpayer.5

The final assessment notice for the alleged underpayment of the estate tax, which was issued by the CIR, was established to have been served on the trustee of the Estate of the late Juliana DiezVda. de Gabriel, whose relationship with the trustor had been severed when the latter died. Since no assessment was served on the Estate, it can be said that there was no assessment of the tax, and no proceedings could be initiated in court for the collection of said tax. The claim for collection filed with the probate court was barred for having been made beyond the five-year prescriptive period to collect set by law.6 The failure of the BIR to note where to send the PAN and FAN should not be taken against BASF where there is proper notice of new address. - It has been established that Notices of Dissolution

were published in the Malaya newspaper on three (3) successive weeks - August 22, 29, and September 5, 2001, wherein the new address in Laguna was included. Also, the tax audit for another year (1999) was done by another revenue officer in the Laguna address sEstate of the Late Juliana Diez vda. de Gabriel v. commissioner, 41g scRA 266, cited in BASF Coatings + Inks Phil v. Commissioner, CTA Case No. 712b, February

t7,20ro.

cEstate of the late Juliana Diez vda de Gabriel v. Commissioner, G.R. No. 1bb541, January 27,2OO4 (419 SCRA 266).

assessments are void.

Forms of assessment 1. Forrnal Assesstnent Notice (FAN).

-

Generally, an

assessment refers to the formal assessment notice (BIR Form

No. 1708), which is a serially numbered, accountable form of the government. Thus, a pre-assessment notice issued by a revenue official preparatory to the issuance of a formal or final assessment notice as part ofprocedural due process is not, legally speaking, an assessment, even if it contains a computation of the tax liabilities of a taxpayer and a demand for payment of the computed tax liabilities.

2. Informal written

notice. - An assessment may also be in the form of a letter or other less formal communications to the taxpayer. In order to constitute an assessment, the notification must contain an outright demand for payment of the amount alleged to be due. Thus, it was ruled that a letter containing a computation of supposed tax liabilities, giving the taxpayer an opportunity to show the incorrectness ofthe findings ofthe examiner, or urging the taxpayer to produce his books or records for verification or to present his side is not an assessment TBPI v. Commissioner, G.R. No. L-174942, March 7, 2008. sBASF Coatings + Inks Philippines v. Commissioner, CTA Case No. 7125,

February 17,20IO.

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(Lantin a. Commissioner, CTA Case No.

7957,

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1969).

A demand for payment of franchise tax, representing the difference between the tax computed at five percent (57o) pursuant to Section 259 of the Tax Code and the tax at one percent (l7o) or

two percent (2Vo) under its franchises covering the period, which was previously refunded erroneously by BIR is an assessment for deficiency tax (Guagua Electric Light Plant Co. u . Cornmissioner, supra).

A letter of the Commissioner demanding the amount of a rubber-check previously paid by a taxpayer, should be deemed to be an assessment, ifit declares and fixes the tax to be payable against the party liable thereto and demands the settlement thereof. However, an affidavit which was executed by revenue officers, stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the CTA (Commissioner a. Pascor Realty and Deaeloprnent Corporation, supra).

Significance of assessment An assessment is a preliminary and essential step towards the initiation of administrative proceedings or judicial action to collect taxes. It is not altogether inconsequential; it establishes the basic tax liability ofa taxpayer. It is relevant (a) in the proper pursuit of judicial and extrajudicial remedies to enforce taxpayer liabilities and certain matters that relate to it, such as the imposition of surcharges and interest, (b) in the application of statutes of limitations, (c) in the establishment of tax liens, and (d) in estimating the revenues that may be collected by government in the coming year.

When must an assessment be made? Except as provided in Section 222 of the 1997 Tax Code, taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration ofsuch period. In a case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. For purposes ofthis section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day (Sec. 203, NIRC).

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cvade tax or ol'ltrilure to file a return, the tax may be assessed' or a proceeding in court for the collection of such tax may be filed without assessment , at any time within 10 years after the discovery of the falsity, fraud or omission. In a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof (9ec.222[a], NIRC).

If the date on which the assessment is due to prescribe falls on a Saturday, the following day being a Sunday, it is understood that the Government has until the next succeeding business day or Monday within which to assess the tax (Com'm'issioner a.Western Pacific Corporation, T4 SCRA 105).ThLe computation of the prescriptivo period is that the first day shall be excluded but the last day ofthe period so computed is to be included, unless it is a Saturday, a Sunda.y, or a legal holiday, in which event the time shall run until the end ol' the next day which is neither a Sunday nor a holiday.

In counting the three (3)-year period where there is a leap year (which has 366 days), the Supreme Court ruled that thtr Administrative code explicitly ordains that the term "year" shall bc understood to have 365 days (National Marketing Corporation u ' Tecsonr 29 SCRA 70). Applying the ruling to tax assessment cases, the BIR may, therefore, assess the deficiency tax only within 1,091r (365 times 3) days. A "year" shall be understood to be twelve calendar months; "month" of thirty days, unless it refers to a separate calendar month, in which case, it shall be computed according to the number

of days the specific month contains; "duy," to a day of twenty-four hours (Administratiue Code of 1987). However, in 1987, Executive OrderNo. 292 (Administrative Code of 1987) was enacted. Section 31 of said law provides that a"vear" shall be understood to be 12 calendar months; "month" of 30 days,

unless it refers to a specific calendar month. Applytttg EO 292, the Supreme Court in the case of Cotnmissioner of Internal Reuenue u' Primetown Property Group, G.R. No. 162155, August 22, 2007, ruled that the Administrative code of 1987, being the more recent law than the Civil Code, governs the computation of legal periods.

Basis of assessrnent The deficiency tax assessments issued against Luang originated

from the computerized matching conducted by the BIR on information or data provided by Luang's suppliers against Luang's

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declarations per vAT returns filed coverin g2oo5. said cornputeriztxl

matching supposedly disclosed that Luang did not declure his purchases in the total amount of F40,048 ,304.72, and as such, l,uang

had under-declared his purchases by gg.6%o. As a result, the llilt issued Letter Notice dated April 30, 2OO7 against Luang. RMO 422003 provides the guidelines governing assessment oftrxes covered by LNs, while RR 12-99 provides that "If after review and evaluation . . ., it is determined that there exists sufficient basis to assess the taxpayer, the said Office shall issue to the taxpayer, at least by registered mail, a PAN for the proposed assessment, showing in detail, the facts and the law, rules and regulations, orjurisprudence on which the proposed assessment is based."

BIR witness testified that the post reporting notice was sent by registered mail, but during the cross examination, the witness confirmed that he has no document or evidence to prove that the pAN was actually received by Luang. Jurisprudence is replete with cases holding that if the taxpayer denied receiving an assessment from the BIR, it is incumbent upon the BIR to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi is therefore shifted to CIR. InCIR u. Metro Star Superama, the High rribunal declared that failure to strictly comply with notice requirements prescribed under Section 228 of lt,e Tax Code and RR 12-99 is tantamount to a denial of due process. Thus, Luang was not accorded due process, and the undated PAN and FAN dated October 30, 2008 are void (Luang u. CIR, CTA Case No. Zg6Z, January E, 2072; see Next Mobile, Inc. a. CIR, CTA Case No. 2g65, December 77,2072; Phil. AerospcLce Deuelopment Corp. a. CIR, CTA Case No. 7830, December 1 7, 2072). Effect of excess tqx credit claim on subsequent tctxable periods. BIR issued a deficiency income tax assessment for 2006, which is attributed to prior year's excess tax credits claimed and based on disallowed creditable tax withheld. The assessment was protested on the ground that it had no effect because the assessed amount was has already been deducted in its 2008 annual ITR, by reducing the excess credit in its 2008 ITR, and it was not paid. When the taxpayer received the FDDA from the BIR, it filed a petition for review with the CTA. The CIR contends that the adjustment made by the taxpayer should be disregarded, given the adjustment affected the succeeding taxable year 2007, which is still under investigation.

The CTA ruled that the assessed income tax of P1.5 million due to excess tax credits would not give rise to deficiency income tax

647

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When is a tax assessment made or deemed made? There are three (3) important dates to be considered in cases of assessments. These are: (a) date of issue or preparation; (b) date of service or mailing; and (c) date of receipt.

1.

Issue date

The "issue date" is necessarily anterior to the date ofthe actual release or mailing of the demand letter. It is not the issue date of the demand letter and/or notice of assessment that is the reckoning point in prescription, but rather, the date when said demand letter or notice of assessment is released, mailed or sent to the taxpayer that constitutes actual assessment (Repubhc a. Limaco & De Guzman Commercial Co., 5 SCRA 990).

648

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Date of service or mailing Assessment is d,eemed made when notice is released or

ma.iled. to correct ta.xTtayer. - An assessment is deemcd madc whcrr the notice to that effect is released, mailed or sent to the taxpaycr firr

the purpose of giving effect to the assessment (Bautistq qnd Tsn a. Collector, G.R. No. L-72259, May 27, 1959). However, when an estate is under administration, the notice of assessment must be sent to the administrator. Since the administrator had not received the notice of assessment, he could not appeal the assessment to the CTA within 30 days from date of mailing of notice (Republic u. Leonor d.eln Rama' GR. No. L-2L708, Nouember 29, 7956). Mere notations of mailing cannot suffice. - While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer aft,er its expiration (Bautista and. Tan u. Collector, G R. No. L- 7 2 2 59, May 2 7, 7 I 59 ), this ruling makes it the more imperative that the release, mailing, or sending of the notice be clearly and satisfactorily proved. Mere notations on the records of the tax collector of the mailing of a notice of deficiency tax assessment to a taxpayer, made without the taxpayer's intervention, notice or control, and without adequate supporting evidence, cannot suffice to prove that such notice was sent and received; otherwise, the taxpayer would be at the mercy of the revenue of!ficers, without adequate protection and defense. The fact that Nava acknowledged receipt ofthe second final notice personally delivered to him is no proof that he received the first notice by mail. There is a difference between receiving a second final notice and receiving a final notice for the second time (Naua a. Commissioner, 13 SCRA 104).

Presurnption of receipt in the course of mail; burd.en of proof in case of d,enial of receipt. - When an assessment notice is sent by mail, the rule is that it is prima facie presumed that the taxpayer received the mailed notice within the period of time when mail of such kind are ordinarily received so that if such presumed receipt is still within the prescriptive period, the taxpayer's contention that the Government's right to assess the tax has already prescribed cannot be given credit (Republic u. Tan Kim En, CA G.R, SP No. 28743, Febrwary 29, 7964). However, where the taxpayer-addressee makes a direct denial of receipt of a mailed demand letter, such denial shifts the burden to the Government to prove that such letter was indeed received by the taxpayer. Significantly, it should be noted that the party favored by the presumption of receipt under Rule 131, Section 3(v) of the Rules of Court is the Government. It is important

(i49

though that thc corrct:t, irdrlrcss 0l'thc tuxpayer is indicated in the demand letter or not,ice. Records, however, show that petitioner wrote private respondent a follow-up letter dated September 19, 1g55, reiterating its demand for the payment of taxes as originally demanded in petitioner's letter dated July 16, 1955. This follow-up letter is considered a notice of assessment in itself which was duly received by private respondent in accordance with its own admission (Republic a. Court of Appeals and' Nielson & Co., 149 SCRA 351).

Requiremcnts to mahe presumption of receipt in the course Deficiency income tax assessments cannot be - collector cannot prove that said assessments tax the where enforced were served on the taxpayer within the period ofprescription provided by law. The presumption that a letter duly directed and mailed was received in the regular course of mail cannot apply where none of the required facts to raise this presumption, i.e., that the letter was properly addressed with postage prepaid and that it was mailed, have Leen shown. Once these facts are proved, the presumption is that the Ietter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mails. But if one of the said facts fails to appear, the presumption does not lie (Enriquez u. Sun Life Assurance of Canad.ar 4T Phil.269).

of

mail applicable.

3.

Date of receiPt

An assessment is deemed made on time when notice to this effect is released, mailed or sent by the Collector to the taxpayer, even though the same is actually received by the taxpayer upon the expiration of the prescriptive period (Basilan Estatesr lnc' u' Collector,2l SCRA l7).Ihelaw does not require that the demand or notice be received within the prescriptive period (Republic u.Tqn Kim En, CA-G,R. SP No. 28743, Februany 29, 1964). Receipt of the tax notice by the taxpayer's attorney-in-fact is binding upon the taxpayer (Gibbs a. Cornrnissioner, 15 SCRA 318).

Who may sign an assessment notice? Since it is the Commissioner that is specified in the law

as

the one empowered to make assessments, the question of whether the power may be delegated by him or exercised by lesser officials in the BIR has arisen. It has been held that the signing of a notice of assessment may be delegated to subordinate officers (villamin u. Court of Tax Appeals, G.R. No. L-77536, October 31,7960)'

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^"",."l'11.:l;lll,li"ii.,,,,,-, An assessment signed by the Chief of the Income Tax l)ivision or by a Provincial Revenue Officer with delegated powers is a vulid assessment (Collector u. Bohol Land. Tlansportation Co, 707 Phit.965).

Revised assessment

making asscssments, and even while the appeal of the taxpayer from the original assessment is still pending in the Court of Tax Appeals so as to avoid multiplicity of suits (Collector u. Batangas

Tlansportation Co., 102 Phil. 822).

Section l-5 [now Sec. 6(8)] of the NIRC provides "[W]hen a report required by law as a basis for the assessment of any national internal

The change of assessment from EWT to FWT in the FDDA is considered as a neu) assessment. The concept of "Iicense generating royalty income'in RMC 44-05 is nowhere to be found in RMC 77-03; hence, the retroactiue application by the CIR of RMC 44-05 has no leg to stand on. - The CIR rendered a Final Decision on the Disputed Assessment (FDDA), wherein he treated the software maintenance seryice fees as "license generating royalty income" under Section 5 of RMC 44-05 that should be subjected to a final withholding tax and not expanded withholding tax. Accordingly, the tax rate that shall be applied is72%o on the income pa5rment remitted to the foreign affiliate. But taking into consideration the tax treaty between the U.S. and the Philippines, the tax rate to be applied is reduced to l\Vo.

revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous' the Commissioner shall assess the proper tax on the best evidence obtainable." Clearly, Section 15 does not provide an exception to the Statute of Limitations on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best evidence obtainable. Having made its initial assessment in the manner prescribed, the Commissioner could not have been authorized to issue, beyond the five (5!year prescriptive period, the second and the third assessments under consideration (Commissioner a. B.F. Goodrich Phils., 303 SCRA 546).

In the case at bench, Fluor argues that the change in the classification of the assessed deficiency tax from EWT in the demand letter to FWT in the final decision on disputed assessment should be considered as a new assessment.

reconsideration and the revised assessment must be subtracted from the total prescriptive period prescribed in Section 318 (now Sec.223, NIRC) (Ta.n Guan o. Nable,24 SCRA 93).

The CTA agreed with Fluor. The change of assessment from EWT to FWT in the FDDA is considered as a new assessment on the following grounds: (1) CIR's FDDA is primarily anchored on Section 5 of RMC 44-05. However, after reviewing the provisions of said Circular, this Court finds that the same is not applicable in this case in view ofthe non-retroactive application ofthe Circular. It is very clear under Sec. 9 of RMC 44-05 that such Circular only covers software pa5rments paid or payable from date of effectivity of the same, which is September 6,2005. This assessment involves the year 2004. Regulations and circulars would have no retroactive application, ifto so apply them would be prejudicial to the taxpayers. (2) The concept of "license generating royalty income" in RMC 44-05 is nowhere to be found in RMC 77-03; hence, the retroactive application by the CIR of RMC 44-05 has no leg to stand on (Fluor Daniel Phil a. CIR, CTA Case No.7793, April 17,2072).

The Commissioner has the authority to make subsequent assessments or modify or revise the original assessment to collect additional sums covered by the original assessment as long as the modification or revision is done within the prescriptive period for

The period between the request for reinvestigation or

When an assessment is reconsidered, it is the date the reconsidered assessment is notified to the taxpayer that tolls the five-year period of limitation, on the theory that an assessment that has been set aside or cancelled is no assessment at all (Querol a. Collector,6 SCRA 304).

Forms of protest There are basically two (2) types of protest against an assessment. These are (a) the request for reconsideration, where the protest is anchored on documents, arguments, and legal authorities

already submitted or presented to the BIR, or (b) the request for reinvestigation, where the protest is grounded on new or additional documents, arguments, and legal authorities not yet submitted or presented to the BIR(Reu. Regs. No. 12-85). The period to file the protest is described as the "30'day period." The written protest, which may be a request for reconsideration or request for reinvestigation, shall be accompanied by a waiver of the

Statute of Limitations in favor of the government. "Request for reconsid.eration" tefers to a plea of re-evaluation of the assessment

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Assessment Division and Regional Director; hence, the original higher

It

may involve a question of fact or of law, or both. "Request for reinaestigatiort" refers to a plea ofre-evaluation ofan assessment on the basis ofnewly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law, or both.e

assessment for deficiency EWT for F1-,617,910.13 remains valid, and the motion lacks basis. The cTA ruled that the revised audit report is valid and the payment of the revised assessment settled in full the deficiency EWT. The revised report, being the work product

of the revenue officers in the performance of their official duties, enjoys the presumption of regularity. The revenue officers have the competence and authority to determine the amount of deficiency tax and issue an audit report stating the same. Here, the cIR failed to adduce evidence that the report was invalid and not yet final (UPSI Property Hold'ings a. CIR, CTA Case No. 7702, June 2L,201L)'

The filing of the protest against the FAN/DL within the 30day period from date of receipt is MANDATORY; otherwise, the assessment would become final and executory. The date ofreceipt by the taxpayer ofthe assessment notice and letter of demand is crucial to his present and future tax remedies. In some cases, the mailed envelope containing the assessment notice and letter of demand is received by a clerk or a security guard of the taxpayer, and is delivered to the President or other responsible person ofthe corporation at a later date. This leaves such President or other responsible officer to file his protest within a few days to comply with the 30-day period. If there is truly no more time to consult a tax counsel or agent regarding the assessment, the taxpayer must file his written protest against the formal assessment on best efforts and based on the best evidence obtainable within the remaining few days ofthe 30-day period, citing the factual and legal bases for objecting to

Request for reinoestigation may toll prescriptiae period" The issue of prescription raised by petitioner is baseless. The -assessments were predicated on the fact that his income tax returns, if not fraudulent, were false because he under-declared his income. In such a case, the deficiency assessments may be made within ten (10) years after the discovery of the falsity or omission. The courb action should be instituted within five (5) years after the assessment, but this period is suspended during the time that the commissioner is prohibited from instituting a court action. As explained in the solicitor General's memorandum, Basa's request for reinvestigation tolled the prescriptive period of five (5) years within which court action may be Lrought.lo Moreover, the issue of prescription should have been raised in the Tax Court.11

the deficiency assessment. He can then subsequently hire the serwices of a tax counsel or agent who can assist him in defending his case before the BIR and later on, with the CTA. In this connection, it is best that the company has a written memorandum regarding the receipt and handling of BIR communications, especially FAN/DL, in order to prevent or avoid assessment notices becoming final and executory and resulting in the possible bankruptcy of the company.

Ad.ministratiue appeal must be fil.ed. with the Commissioncr' Afinal decision of the commissioner's subordinate official shallbe not be considered as final, when an administrative appeal on the final decision of the subordinate official is filed before the commissioner under Section 3.1.5 of Revenue Regulations No. 12-99. Thus, when the taxpayer filed the request for reconsideration ofthe final decision on the disputed assessment (FDDA) with the Assistant commissioner Large Taxpayers service (and not to the commissioner), it did not toll the iunning of the 30-day period to appeal the FDDA to the CTA'12

The BIR issued. a Final Assessment Notice for d.eficiencat expand.ed. withhold.ing to.r against the tarpayer, u:hich was tim.ely protested. by the tarpayer. - Taxpayer filed petition for review with the CTA, and later on filed an Omnibus Motion for the cancellation of the assessment, alleging that the CIR during the pendency of the proceedings, issued a Revised Audit Reporb which reduced and recomputed the EWT in the amount of F78,076.03,based on the revised report signed by Revenue Officer Quevedo and Group Supervisor Rimando, and RDO Salita. On this basis, taxpayer paid the lower deficiency EWT. CIR filed a Comment stating the Report was not final as the same was not approved and signed by the Chief,

The taxpayer's failure to appeal in due time makes the assessment in question final, executory and demandable. Thus, loCommissioner v. Capitol Subdivision, Inc., 119 Phil' 1051; Collector v' Suyoc Consolidated Mining Co., 104 Phil. 819. rrBasa v. Commissioner, G.R. No. L-45277, August 5, 1985. lzCollege Assurance Plan Phils, Inc' v. Commissioner, CTA EB No' 475, June 1, 2010; see Fishwealth canning corporation v. commissioner, G.R. No. 179343, January

eRev. Regs. No. 5-87 was amended by Rev. Regs. No. 12-99.

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respondent is now barred from disputing the correctness ol'l,hc assessment or from invoking any defense that would reopcn th() question of its liability on the merits.l3 However, a motion for reconsideration filed by the taxpayer at the Commissioner's level, afber he denied the protest filed by said taxpayer on August 4,2005, does not toll the 30-day period to appeal to the CTA. And since the petition for review was filed before the CTA only after the 30-day period of appeal has lapsed (i.e., on October 20, 2005), it was filed out of time (Fishu:ealth Canning Corporation v. CIR, G.R. No. 179343, January 21,2010).In other words, what is appealable to the CTA is the decision of the CIR on the disputed assessment (not the decision of a subordinate official on the protest of the taxpayer), pursuant to the express provisions ofSections 4 and228 ofthe 1997 Tax Code. It is this disputed assessment that is appealable to the CTA for review (CIR a.Isabela Cultural Corporation, GR. No. L35270, July 77,2OO1).

It is important to know whether the protest filed is valid or pro forma. If it is a valid protest, coupled with the written waiver of the statute of limitations duly signed by the taxpayer and the Commissioner or his authorized representative, the protest suspends the running of the statute of limitations.

Bar Question (1992) What are the requisites before a taxpayer's request for reinvestigation may be granted by the BIR? Discuss briefly.

Suggested answer: A request for reinuestigation refers to a plea for re-eualuation of an assesament on the basis of ruewly discouered euidence or additional euidence the taxpayer intends to present in the re-inuestigation. Request for copy of the cornputation is not a request for reinaestigation. - Ifthe letter does not ask for a reinvestigation or reconsideration, it does not suspend the prescriptive period. In one case, the court ruled that "All that the letter asks is that the taxpayer be furnished a copy of the computation. Nowhere does the letter imply a demand or request for a different or new and distinct reinvestigation from that already requested and, therefore, the said LsRepublic v. CA

& Nielson & Co., G.R. No. L-37061, September 5, 1984.

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letter may not be interpreted to authorize or justify the continuance of the suspension of the period of limitations" (Republic a. Ablaza,

Phil.1105). Letter which states that it is not a request for reinuestiga' tion. - A letter which reads: 108

"On behalf of our client, ACMDC for short, we file this protest under the provisions of law requiring taxpayers to protest deficiency assessments within 30 days from receipt else they become final and executory. This is not a request for reconsideration or reinvestigation or a plea for accommodation in any sense. It should not therefore be interpreted to estop our client from invoking the defense of prescription whenever this becomes available."

is not a request for reinvestigation. otherwise, there would be no need for the legal requirement that an extension of the original period can be agreed upon by the parties in writing (Commissioner u. Atlas

Consolid.ated.

Mining & Deuelopmnnt Corporation, CA-G-R. SP

No.47979, Septem.ber 30, L999),

Bar Question (2012) The BIR issued in 2010

a final assessment notice and demand deficiency income tax for the year covering Ietter againstx corporation X corporation earlier requested million. 2008 in the amount of F10 it should file a request for not or whether the advice of a lawyer on

reconsideration or a request for reinvestigation. The lawyer said it does not matter whether the protest filed against the assessment is a request for reconsideration or a request for reinvestigation, because it has the same consequences or implications. (a) What are the differences between a request for reconsideration and a request for reinvestigation? (b) Do you agree with the advice of the lawyer?

Suggested answers:

a.

Request for reconsid'eration is a plea for eualuatiort of the assessment on the basis of existing records withrtut the need of presentation of additional euidence (Reu. Regs' No. 12-99). It does not suspend the period to collect the defi.ciency tq.x (Sec. 223, NIRC). The 180-day period within which the BIR shall act on the protest starts frorn the fi'ling of the request for reconsideration ( Sec. 228 , NIRC) - On the other hand, a request for reinvestigation is a plea for

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submission 0r presenlation oI'the pertinent documents for scrutiny and evaluation by the Revenue officer conducting the audit. The said Revenue officer shall state this fact in his report of investigation'

re-eualuation of the assessment on the basis of'ud.ditilnu.l or newly discouered euidence which ore to be introduced lbr ucanlination for the first time. It suspends the running of' the prescriptiue period to collect. The 180-day period within which the BIR shall act on the protest starts only from the date of submission of the additional or newly discouered euidence (Sec. 228, NIRC; RCBC u. CIR, cited' in Royal Banh of Scotland. IPhil.l a. CIR, CTA EB Case No.446,

a valid protest against the formal letter of demand and assessment notice within 30 days from date of receipt thereof, the assessment shall become final, executory and

If the taxpayer fails to file

demandable.

If the protest is denied, in whole or in part, by the commissioner, the taxpayer may appeal to the court of Tax Appeals within 30 days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable' In general, if the protest is denied, in whole or in part, by the commissioner or his duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals within 30 days from date of t"""ipt of the said decision, otherwise' the assessment shall become hnal, executory and demandable. However, if the taxpayer elevates his protest to the commissioner within 30 days from date of receipt of tie final decision of the Commissioner's duly authorized representative, the latter's decision shall not be considered final, e>recutory and demandable, in which case, the protest shall be decided by the Commissioner. If the commissioner or his duly authorized representative fails ttr act on the taxpayer's protest within 180 days from date of submission, by the taxpayer, ofthe required documents in support ofhis protest, the taxpayer may appeal to the court of Tax Appeals within 30 days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable (Sec' 228, NIRC)' Interpreting the above provision, the CTA ruled that the taxpayer has the option to either (a) fite an appeal with the cTA witirln the 30-day period after the lapse of the 180-day period, or (b) wait for the final decision of the commissioner on the disputed assessment and file an appeal with the cTA within thirty days after receipt of such decision (Lascona Land. co. v. commissioner, CTA Case No. 5777, January 4,2000). On appeal, the decision of the cTA was reversed by the court of Appeals. The cA decision was appealed to the Supreme Court, where it is still pending'

October 23,2OOg).

b.

No, in uiew of the aforesaid dffirences between the request for reconsideration and the request for reinuestigation.

When to file administrative protest? The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within 30 days from date of receipt thereof. If there are several issues involved in the formal letter of demand and assessment notice but the taxpayer only disputes or protests against the validity of some of the issues raised, the taxpayer shall be required to pay the deficiency tax or taxes attributable to the undisputed issues, in which case, a collection letter shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and./or interest. No action shall be taken on the taxpayer's disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to the said undisputed issues. The prescriptive period for assessment or collection of the tax or taxes attributable to the

disputed issues shall be suspended. The taxpayer shall state the facts, the applicable law, rules and or jurisprudence on which his protest is based; otherwise, his protest shall be considered void and without force and effect. If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some ofthe several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto.

regulations,

On April 2,2004, the President of the Philippines signed R'A' 9282, whereby the inaction of the commissioner of Internal Revenue during the 180-day period is construed as a denial of the protest. Hence-, the taxpayer must file his appeal with the cTA within 30 days

The taxpayer shall submit the required documents in support

of his protest within 60 days from date of filing of his letter of protest; otherwise, the assessment shall become final, executory and demandable. The phrase "submit the required documents" includes

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from the lapse of the 180-day period in order to protcct his irrtcrcsl,.

Bar Question (2009) A final assessment notice was issued by the BIR on June

13,

2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the CIR in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the CTA, but the CTA dismissed the same. (a) Is the CTA correct in dismissing the petition for review? (b) Assume that the CTA's decision

dismissing the petition for review has become final. May the CIR legally enforce collection ofthe delinquent tax?

Suggested answers:

a.

b.

Yes. The CTAis corcect in dismissing the petition for reuiew because the q,ssessment had already become final and executory by the time the protest was filed on July S 1 , 2000. The fact that the petition for reuiew was filed by the to.tcpayer before the CTA within 30 days from the date of receipt of the CIR's final decision on the disputed assessnlent, this is not, howeuer, releuant in this case becq,use the toxpayer filed its protest against the assessment after the S}-day period mandated by law.

Since the assessment had already become final and executory for failure of the taxpayer to file a timely protest against the assessment, particularly where the decision of the CTA also became finq,l and excecutory, the CIR can legaUy enforce the collection of the delinquent tax by administratiue

remedies through the issuance of warrants of distraints / garnishments and leuy and /or by judicial remedies through the fiIing of ciuil octions or criminal actions within the time prescribed by law.

The option granted. to the taxpayer in case of inaction of the CIR is m.utual\t erclusiue and. resort to one option bars the application of the other. - Petitioner maintains that its counsel's neglect in not filing the petition for review within the reglementary period due to the fault of the counsel's secretary was excusable. Since the petition for review was filed out of time (more than B0 days after the lapse of 180 days), and petitioner did not file the motion for reconsideration or appeal, the disputed assessment became final

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and executory. The court ruled that the 30-day period to appeal is jurisdictional and failure of the petitioner to comply thereon would bar the appeal and deprive the cTA of its jurisdiction. such period is mandatory and it is beyond the power of the courts to extend the same

(Chan Kian u. CTA, 705 Phil.906 t19591),

The option granted to the taxpayer in case of inaction by the cIR is mutually exclusive and resort one option bars the application of the other. After availing of the first option (filing the petition for review with the cTA), petitioner cannot successfully resort to the second option (awaiting final decision of the cIR) on the pretext that there is yet no final decision on the disputed assessment because of the cIR's inaction. Moreover, assessments are presumed to be correct, unless otherwise p roven (Rizal Cornmnrcial Banking Corporation a. Cornrnissioner, G.R. No. 768498, April24,2007).

Administrative appeal to the Commissioner Pursuant to Section 3.1.5 of Revenue Regulations No. 12-99, a taxpayer may still elevate his protest to the comrnissioner within ll0 dayi from date of receipt of the final decision of the Commissioner's duly authorized representative, and the latter's decision shall not be considered final, executory and demandable. Applying the foregoing, considering that the Final Decision on the Disputed Assessment (FDDA) dated May 8, 2009 was issued by Zenaida Garcia, OIC-Asst Commissioner, LTS, this Court finds that Belle Corporation's appeal to the then commissioner is with legal basis. Therefore, the Regional FDDA dated September 2, 20!0, issued by Nestor Valeroso, Asst Commissioner, LTS, is a final decision which is appealable to the CTA within 30 days from receip tthereof (Belle Corporation a. CIR, CTA Case No.8775, September 18,2072).

Motion for reconsid.eration on the Final Decision on Disputed Assessmnnt

The petitioner was assessed by BIR, which deficiency tax

assessment was timeiy protested by the petitioner. The protest was, however, denied by the CIR and received by the taxpayer on August 4,2OO5.The taxpayer filed a motion for reconsideration with the cIR onAugust 31, 2005. subsequently, the taxpayer received a collection

letter from the BIR; hence, it filed a petition for review on october 20, 2005. The cTA denied the petition for review, for being filed out of time. The petitioner filed a motion for reconsideration but was denied by the CTA in division, so it filed an appeal with the CTA en banc,

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which appeal was also denied; hence, this appeal 1,, lhtr Sulrr.rrr. Court.

The High Court ruled that since the petition was filcd bclirrc the CTA only on October 20,2005, it was filed out of'timc bcca's. the denial of protest was received on August 4,2OOE. A motion fbr reconsideration filed by the taxpayer at the cIR level does not toll the 30-day period to fiIe appeal to the CTA (Fjshwealth Canning Corp a. CIR, G.R, No. L79343, January 2I,2OI0).In a case where the protest was denied by the Regional Director who subsequently denied such protest, the reply letter/motion for reconsideration filed by the taxpayer with the Regional Director did not suspend the running of the 30-day period to appeal to the CTA; hence, petition was dismissed because the assessment had already become final, executory and demandable and the court has no jurisdiction to act on the instant petition (Misnet, Inc. a. CIR, CTA Case No. gS7S, March 27,2012).

Meaning of CIR (decisionsu appealable to CTA After conducting the tax audit on the books and records ofthe bank, the CIR issued deficiency tax assessments. In the Demand Letter accompanying the assessment notice, it states: ,,... This is our final decision based on investigation. If you disagree, you may APPEAL the FINAL DECISION within B0 days from receipt hereof. Otherwise, the assessment shall become final and executory....,' On the basis of this, the taxpayer filed an appeal with the CTA within 30 days from the date of receipt. The petition was denied by the CTA, and the taxpayer filed an appeal with the Supreme Court.

The court ruled that the word "d.ecisions" in R.A. 9282 means decisions of the commissioner of Internal Revenue on the protest of the taxpayer against the assessment that is appealable to the CTA. Strictly speaking, the dismissal of the petition by the CTA was proper. However, a careful reading of the demand letter and the assessment notices leads the supreme court to agree with the petitioner. The statement of the cIR led the petitioner to conclude that only a final judicial ruling in her favor would be accepted by the BIR. Thus, the final assessment notice and demand letter may be considered as the

final decision appealable to the crA. Although there was no direct reference to bring the matter directly to the CTA,"appeal,'refers to petition for review with the CTA. The terms "protests" and,,request for reconsid.eration or reinaestigation" refer to administrative

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remedies belirrc the Cllt (Allied. Banhing G.R. No. 775097, February 5,2O7O).

Corporation a. CIR,

Bar Question (2012) In the examination conducted by the revenue officials against the corporate taxpayer in 2010, the BIR issued a final assessment

notice and demand letter which states: o'It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on

investigation. If you disagree, you may appeal this decision within 30 days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable." The assessment was immediately appealed by the taxpayer to the Court of Tax Appeals, without filing its protest against the assessment and without a denial thereof by the BIR. If you were the judge, would you deny the petition for review filed by the taxpayer and consider the case as prematurely filed? Suggested answer: No, the petition for reuiew should not be denied. The case is an exception to the rule on exhaustion of administrq,tiue remedies. The BIR is estopped from claiming that the filing of the petition for reuieut is premature because the to.xpayer failed to exhaust all administratiue remedies. The stq,tement of the BIR in its final assessment notice and demand letter led the toxpayer to conclude that only a final judicial ruling in his fauor would be accepted by the BIR. The taxpayer cannol be blamed for not filing a protest against the assessment since tht: language used and the tenor of the dernand letter indicate that it is the final decision of the BIR on the matter. The CIR should indicqte, in a clear and unequiuocal language, whether his acti"onan a di.sputed assessment constitutes his final determination thereon in order for the taxpayer concerned to deterrnine when his or her right to appeal tut the tax court qccrues. Although there was no direct reference for th.e taxpayer to bring the matter directly to the CTA, it cannot be denied that the word "appeal' under preuailing tax laws refers to the filing of a petition for reuiew with the CTA (Allied. Bank Corporation u.

CIR, G.R. No.775097, Februany 5,2010).

Denial of protest Denial of protest can take so many forms. The denial can be direct or indirect, express or implied. Indirect or implied denial of protests

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caused confusion not only to revenue oflicials who administer tax laws

but also to taxpayers who want to comply with their tax obligations under the Tax Code and other special laws.

A-

Direct denial of protest Ad.ministratiue d.ecisiorl

I

- The or his duly authorized representative on. & d,isputed, asseastnerr.f.

decision of the Commissioner shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based; otherwise, the decision shall be void, in which case, the same shall not be considered a decision on a disputed assessment, and (b) that the same is his final decision (9ec.3.1.5, Reu. Regs. No. 12-99). There is nothing in the Tax Code prouisions defining the powers of the RDO, which would show thq.t an RDO can issue decisions that

are appealable to the CTA. - While it is undisputed that the CTA may review the decisions of the CIR, in this case, the questioned decision was merely issued by the Revenue District Officer (RDO), and not the CIR herself. And while it is undisputed that Section 7 of the Tax Code, as amended, allows the CIR to delegate her vested powers, except those enumerated therein, to any subordinate official with the rank equivalent to a division chief or higher, the petitioners have failed to demonstrate that the RDO issued the same under the authority of the Commissioner. There is nothing in the Tax Code provisions defining the powers of the RDO, which would show that an RDO can issue decisions that are appealable to the CTA; hence, the subject petition must be dismissed for being premature (GiS-A Snacksr lnc. a. CIR, CTA, October 21, 2011).

Bar Question (2006) On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency documentary stamp tax in the amount of 55 million. On June 30, 2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Global Bank a warrant of distraint to collect the deficiency tax. If you were the counsel, what will be your advice to the bank? Explain.

Suggested answer: The denial of the request for reconsideration is a fi.nal decision of the Commissioner of Internal Reuenue. I would aduise Global Bank to

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appeal the (]omnt.issiotrcr's denial to the Court of Tax Appeals (CTA) within 30 days t'rom receipt, if the remedy of appeal is still auailable. I will further aduise the bank to file a motion for injunction with the CTA to enjoin the Com.missioner from enforcing the assessment pending resolution of the appeal. While an appeal to the CTA will not suspend the payment, leuy, distraint and / or sale ofany property ofthe taxpayer for the satisfaction of its ta.x liability, the CTA is authorized to giue injunctiue relief if the enforcement would jeopardize the interest of the taxpayer, as in this cq,se where the assessm.ent has not become

final.

I

B. Indirect Denial li It

{ rf

of Protest

While the existing regulation requires that the Commissioner or his authorized representative shall state in the letter of denial that it is his final decision on the disputed assessment, jurisprudence is replete with cases where this requirement is not followed by the Commissioner or his authorized representative. Based on the old law and regulation, the court considered the following cases as indirect denial ofthe protest filed by the taxpayer.

Commissioner d.id. not rule on the ta,xpa,yefs mation for reconsid.eration of the o,asessr,rterr,t. - There is no dispute that the Commissioner did not rule on respondent's motion for reconsideration

and thus left respondent in the dark as to which action is the decision appealable to the Court of Tax Appeals. Had he categorically stated that he denies respondent's motion for reconsideration and that his action constitutes his final determination on the disputed assessment, respondent without needless difficulty would have been able to determine when his right to appeal accrues and the resulting confusion would have been avoided. Under the circumstances, the Commissioner, not having clearly signified his final action on the disputed assessment, the period to appeal has not legally commenced

to run. It was only when respondent received the summons on the civil action for the collection of deficiency income tax that the period to appeal commenced to run (Commissioner a. Union Shipping Corporation, L85 SCRA 547).

Referral by the Commissioner of request for reinuestigation to the Solicitor General. - The Collector of Internal Revenue did not reply to the request for reinvestigation. Instead, he referred the case to the Solicitor General for collection of the tax. The lower court interpreted this action of the Collector as a denial of defendant's request for reinvestigation. According to the Supreme Court, the

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lower court committed no error. For what is more indicative o1'thc Collector's decision against reinvestigation that his insistence to collect the tax? This decision was communicated to defendant in a Ietter dated September 20,1957 of the office of the Solicitor General which must have been received by defendant not later than October 8, 1957 for on said date, it acknowledged receipt thereof. It had 30 days from October 8, 1957 within which to appeal to CTA (Republic a. Lim Tian Teng Sons, supra).

I

Preliminary collection letter rnay serae as assessrnent notice. - A preliminary collection letter presupposes the existence of a valid assessment notice. The preliminary collection letter shall serve as the assessment notice if it was the initial notice received by the taxpayer regarding his internal revenue tax liabilities, and if it can be proven that the taxpayer did not receive any assessment notice

and no follow-up letter was sent or no preliminary conference was arranged. The 30-day period provided for by Section 228 ofthe Tax Code, within which an assessment maybe protested, shall commence from the date of receipt of said preliminary collection Ietter (United' International Pictures a. Conxrnissioner, CTA Case No. 5884, June 5,2002). nno return Seruice of FDDA through registered mail on a card" basis is insufficient. - Evidently, the Final Decision on the Disputed Assessment to the taxpayer sent through registered mail on a "No Return Card" basis. To the mind of the court, why would an important document like the FDDA be sent by registered mail on a "no return card" basis, when the receipt of the same, or completeness

of'servicc of'mail mrrltcrs in accordance with legal requirements, is very vital, as it carries legal consequences on the rights of the taxpayer to be informed of any tax burden imposed by the BIR, and of the government to collect the correct taxes imposed upon a taxpayer? The service of the FDDA is thus insufficient (Estate of Dr. Felisa Vd.a. d.e San Agustin a. CIR, CTA Case No. 8359, October 70,2072).

Bar Question (2006)

Reiterating the d.emand. for immed.iate payment of the d.efi.ciency tax d.ue to taxpayef s continued. refusa,l to execute waiaer. - The letter was tantamount to a denial of the reconsideration or protest of the respondent corporation on the assessment made by the petitioner, considering that the said letter was in itself a reiteration of the demand by the BIR for the settlement of the assessment already made, and for the immediate payment of the tax in spite ofthe vehement protest ofthe respondent corporation. This was a clear indication of the disputed assessment, in view of the continued refusal ofthe respondent corporation to execute the waiver of the period of limitation upon the assessment in question. This being so, the letter amounted to a decision on a disputed or protested assessment and, therefore, the respondent court did not err in taking cognizance of the case (Commissioner v..fiyala Securities Corporation and. CTA, 70 SCRA 204).

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A taxpayer received a tax deficiency assessment of 51.2 million from the BIR demanding payment within 180 days; otherwise, it would collect through summary remedies. The taxpayer requested for a reconsideration stating the grounds therefor. Instead ofresolving the request for reconsideration, the BIR sent a Final Notice Before Seizure to the taxpayer.

May this action of the Commissioner of Internal Revenue be deemed a denial ofthe request for reconsideration ofthe taxpayer to entitle him to appeal to the CTA? Decide with reasons.

Suggested answer: Yes. The action of the CIR is deem.ed a denial of the request

for

reconsideration of the taxpayer, thus entitling him to appeal to the CTA. The Notice was the only response receiued by the ta'xpayer and its content and tenor supports the theory that it was the BIR final act regarding the request for reconsideration.. The uery title of the Notice indicated that it was o "Final Notice Before Seizure" which rneans that the taxpayet's properties will be subjected to seizure to enforce the deficiency assessment. Thus, in one decided case, the Supreme Court ruled that the Final Notice Before Seizure is a final decision of the Commissioner on the disputed assessment (CIR u.Isabela Cultural Corp.,361 SCRA 71 t2001l).

Bar Question (2004) RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the Commissioner of Internal Revenue, filed an appeal with the Court of Tax Appeals. While the appeal is pending, the BIR served a warrant of levy on the real properties of RR to enforce the collection of the disputed tax. Granting arguendo that the BIR can legally levy on the properties, what could RR do to stop

the process? Explain briefly.

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Suggested answer:

R.

RR should file a motion for injunction with the CTA to stop the administratiue collection process. An appeal to the CTA shall not suspend the enforcentent of the tax liability, unless a motion to that effect shall haue been presented in court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Gouernment (Piroaano u. CIR, 14 SCRA 532 t19651).

Bar Question (2002) On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 7997 against the Valera Group of Companies (Valera) in the amount ofF10 million. Counsel forValera protested the assessment and requested a reinvestigation of the case. During the investigation, it was shown that Valera had been transferring its properties to other persons. As no additional evidence to dispute the assessment had been presented, the BIR issued on June 16,2000 warrants ofdistraint and levy on the properties and ordered the filing of an action in the Regional Trial Court for the collection of the tax. Counsel forValera filed an injunctive suit in the Regional Trial Court to compel the BIR to hold the collection of the tax in abeyance until the decision on the protest was rendered.

A. B.

Can the BIR file the civil action for collection, pending decision on the administrative protest? Explain. As counsel for Valera, what action would you take in order to protect the interest ofyour client? Explain your answer.

Suggested answer:

A.

Yes, because there is no prohibition for this proced,ure considering thot the filing of q. ciuil action for collection during the pendency of an administratiue protest constitutes the final decision of the Commissioner on the protest (CIR a. Union Shipping Corp,85 SCRA 548 t1990l).

util.L utuit fbr t.h.e liLir4; ol'lhe L:iuil action fbr collection and consider the same es an appealable decision'. I will not file

I

an injunctiue suit because it is not an auailable remedy. would then appeal the case to the Court of Appeals and moue for the dismissal of the collection case with the RTC. Once the appeal to the CTA is fi.led on time the CTA has exclusiue jurisdiction ouer the case. Hence, the collection case in the RTC should be dismissed (Yabes o. Flajo, 775 scRA 278 [1e82]).

I

The CTA is ernpowered to suspend the collection of interna.I reuenue tctxes and custorls duties in cases pending appeal only when: (1) in the opinion of the court the collection by the BIR wiII jeopardize the interest of the gouernm.ent and / or the taxpayer; and (2) the tax,payer is willing to deposit the amount being collected or to fi.le a surety bond for not more than double the amount of the tax to be fixed by the court (Sec. 11, R.A. 1125).

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Bar Question (1998) CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received a letter from the BIR assessing it for delinquency income taxes. CFB filed a letter of protest. One month after, a warrant of distraint and levy was served on CFB

Corporation.

If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what steps will you take for your client?

Suggested answer:

I

shall immediately file a motion for reconsideration of the *in clear and unequiuocal Comm.issioner a dertial of the protest language." This is so because the issuance of a warrant of distraint issuance of the warrant of distraint and leuy and seek from the BIR

and leuy is not considered as a denial by the BIR ofthe protest filed by CFB Corporation (CIR a. Union Shipping Corp., 185 SCRA 547).

Within 30 days from receipt of such deniq.l "in clear and unequiuocal language," I shall then file a petition for reuiew with the Court of Tax Appeals.

Inaction of the GIR on the protest against assessment may be deemed a denial of protest or taxpayer may wait for CIR final decision on the disputed assessment On March 27,I998,the ClRissued an assessment notice against respondent for deficiency income tax for 1993 in the amount of ?753,266.56. On April 20, 1998, Lascona filed a protest. Said protest was denied by the Regional Director on March 2, 1999 because the case was not elevated to the CTA within the 180-day period provided

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for in the Tax Code; hence, the assessment had becomc final. On Agrril 12,1999, Lascona appealed to the CTA. Lascona had until L)cccmbcr 16, 1998 or January 1-6, 1999 to elevate its appeal to the CTA. Sincc Section 228 of the Tax Code provides that a delinquent taxpayer m{ry nevertheless directly appeal a disputed assessment, ifits request for reconsideration remains unacted upon 180 days after submission thereof, the taxpayer need not await the outcome of its protest with the CIR before it can question the propriety of the assessment before the CTA. The CTA nullified the assessment and ruled that the taxpayer has the following options: (a) wait for the final decision of the Commissioner on the disputed assessment and file the petition for review with the CTA within 30 days from date of receipt of such denial; or (b) file a petition for review within 30 days after the lapse of the 180 days provided for in the law. The CTA stressed that the wordings of Section 228 of the Tax Code clearly provide that it is only the decision not appealed by the taxpayer that becomes final, executory and demandable.

The government appealed to the Court of Appeals, which reversed the CTA decision. The CA ruled that from Section 228 of the Tax Code, it can be inferred that if the protest was not acted upon

within 180 days from the submission of documents, such inaction allows the taxpayer to appeal to the CTA. If there is no appeal within 30 days after the lapse of the 180-day period, the matter/decision under protest becomes final. Consequently, the word "decision" in the last paragraph of Section 228 cannot be strictly construed as referring 6nly to the decision per se of the Commissioner as found by the CTA but should be considered as sSrnon)'rnous with the disputed assessment. As held in the case of Commissioner of Internal Reuenue u. S.C. Johnson and Sons,Inc.,'olaws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which gramMarch may lay down. It is the duty of the courts to look to the objective to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose." However, the CA decision was reversed

by the Supreme Court. Citing its earlier decision in RCBC u. CIR, the SC has held that in case of inaction of the CIR within the 180-day period from the date of the filing of the protest and the submission of documents, the taxpayer can either file an appeal with the CTA within 30 days after the expiration of the 180-day period or wait for the final decision of the CIR on the disputed assessment and appeal

(;(;1t

such {inal decisiOn 0n l,lrc rlisprrLOd assessment t() thO ()'l'A within 30 days af'ter receipt ol'such tlccision (Lascona Land' Co. a. CIR, G.R.

No. 171251, March 5,2012).

Bar Question (2011, 2009) Spanflex Intl, Inc. received a notice of assessment from the BIR. It seasonably filed a protest with all the necessary supporting

documents, but the BIR failed to act on the protest. Thirty days from the lapse of 180 days from the filing ofits protest, Spanflex still has not elevated the matter to the CTA. What remedy, if any, can Spanflex

take?

Suggested answer: Spanflex may wait for the final decision on the disputed BIR and appeal it to the CTA within 30 days from

assessment of the

receipt of such decision.

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CHAPTER

}Cfr

PRESCRIPTION

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thc contemplation ol'[hc 'l'ax Commission which recommended the approval of'the ltrw. Just zrs the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation fbr tax purposes after the expiration of a reasonable period of time (Republic u. Ablaza, 108 Phil. 1105).

Tax Gode provisions prevail over Civil Gode provisions Prescription, sometimes referred to as the Statute of Limitations, is the legal term used to describe time limitations or passage of time that produces legal consequences. It may refer to (a) the acquisition

or accrual of certain substantive rights or the loss or deprivation

thereof, ifalready possessed, or (b) the loss or forfeiture ofthe right to bring an action to demand or enforce such substantive rights, on account of failure to bring the action within the prescribed time. The public policy on prescription is founded on the ancient Latin maxim "Vigilantibus et non dormientibus jure subueniunt" (i.e.,thelaw serves those who are vigilant, not those who sleep).

Under the Civil Code, substantiue aspect is referred to as acquisitive prescription, while procedural aspect is referred to as extinctive prescription. The terrn "Statute of Limitatiotns" is commonly used in our jurisdiction as the equivalent of all statutory provisions on prescription.

Purpose of Statute of Limitations The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because the tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription, citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take advantage ofevery opportunity to molest peaceful, law-abiding citizens. Without such a legal defense, taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose ofaffording protection to the taxpayer within 670

on prescription The Tax Code, a special law, shall prevail over the Civil Code, a general law. Thus, in an interesting case, the court ruled that since the demand on the taxpayer to pay the tax is in effect an assessment for deficiency franchise tax, the right to assess or collect the same is governed by Section 331 of the Tax Code, rather than by Article ll45(2),in relation to Articles 1154 and 1155, of the Civil Code, which allows six (6) years from date of refund within which to file an action ( Guagua Electric Light Plant Co. v. Collector and. Court of Tax

Appeals, supra). However, when the Government proceeds by court action to forfeit a bond, the action is for the enforcement of a contractual obligation, the prescriptive period for which is ten years under Article ll44(I) of the Civil Code (Republic a. Arcache, 70 SCRA 337).

Gonstruction of law on prescription (Bar Question [20101) The law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. Moreover, negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind. For the purpose of safeguarding taxpayers from unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes (Com'missioner a. B.F. Good.rich Phils, 303

SCRA546).

Bar Question (2011) Mia, a compensation income earner, filed her income tax return for the year 2007 on March 30, 2008. On May 20,20LL, Mia received an assessment notice and letter of demand covering the year 2007, but the postmark on the envelop shows April 10, 2011. Her return

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prescription?

Suggested answer: No. The S-year prescriptiue period stq.rted to run only on April 15,2008 (and not on March 30,2008). Internal reuenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). Accordingly, the period to assess the deficiency tax for 2007 has not yet expired on April 10, 20L1.

b.

California, USA. Every December 15 of the year, DEF Corporation paid annual royalties to DEF, Inc. for the use of the latter's software, gross royalty payments. The withholding tax return is filed and the tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering

a. b.

As a BIR lawyer handling the case, would you raise the defense of prescription in your Answer to the claim for tax credit? Explain. Can the BIR lawyer raise the defense that DEF Corporation

is not the proper party to file such claim for tax credit? Explain.

Suggested answers:

cL.

No credit or refund of taxes shall be allowed, unless the taxpayer files in writing with the Commissioruer a claim for credit or refund within two (2) years after the payment of the tax. (Sec. 204, NIRC). No suit or proceeding shall be maintq,ined in aruy court for the recouery of any totc hereafter alleged to haue been emoneously or illegally assessed or collected, until o claim for refund or credit has been duly filed with the Commissioner. In any case, no such suit or

67',.]

t

The proper person to claim refund or tq'x credit is the person on whorn the tox is imposed by the statute. In one case, the

Supreme Court ruled thq't the BIR should not be allowed to defeat q'n otherwise ualid cluim for refund by raising the question of the withholding agent's alleged incapacity to fite the claim for refund for the first time on appeaL The Gouernment must follow the same rules of procedure which bind, priuate parties (Commissioneru.Procter & Gamble PMC,204 SCRA 377),

for which the former, as withholding agent of the government, withheld and remitted to the BIR the l57a final tax based on the

the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the Court of Tax Appeals involving the tax credit claim for 2004 and 2005.

rtlls

proceeding shuLl be fiLed alter the expiration of two (2) years I'ntm the date of'payment of the tax, regardless of any superuening cause thut may arise after payment (9ec.229, NIRC). Based on the foregoing, the BIR lawyer can raise the defense of prescription for the year 2004, but not for the year 2005. Since the withholding tax return for 2004 was filed on January 70, 2005, and considering that the clairn for refund or credit was fi'Ied only on April 70, 2007, more than two years haue elapsed between the date of payment and the date of filing the written claim for refund or credit.

is not a false and fraudulent return. Can she raise the defense of'

Bar Question (2008) DEF Corporation is a wholly owned subsidiary of DEF, Inc.,

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Bar Question (1997) Taxes were generally imprescriptible; statutes, however, may provide otherwise. state the rules that have been adopted on this score by:

(a) (b) (c)

The National Internal Revenue Code; The Tariffand Customs Code; and The Local Government Code.

Suggested answers: The rules that haue been adopted on prescription are as follows: (a) National Internal Revenue Code - The Statute of Limitation (3) for assessment of tax if a return is filed is within three years frorn the lost day prescribed by law for the fiIin'g of' the return, or if filed after the last day, within three years from date of actual fi.ling. If no return' is fi.led or the return

674

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fi,led is false or fraudulent, the period ro osses$. is within ten years from discouery of the omission, fraud or falsity.

period to collect the tar is within three years from date of assessment. In the c&se, howeuer, of omission to file or if the return filed is false or fraudulent, the period to collect is within ten years from discouery without need of an assessment. The

(b)

(c)

TariffandCustoms Code - It does not express any general Statute of Limitation. It prouided, howeuer, that "when articles hque entered and passed free of duty or final adjustment of duties made, with subsequent deliuery, such entry and passage free of duty or settlement of duties will, after the expiration ofone (7) year, from the dote ofthe finat payment of duties, in the absence of fraud or protest, be ft.nal and conclusiue upon all parties, unless the liquidation of import entry was merely tentatiue" (Sec. 1603, TCC). Local Gouernment Code

- Localtaxes,fees, or charges shall within fi,ue (5) years from the date they became offraud or intent to euade the payment oftaxes, fees or charges, the same maybe assessed within ten years frorn discouery of the fraud or intent to euade payment. They sholl also be collected either by administratiue or judicial q.ction within fiue (5) years from date of assessment (Sec. be assessed due. In case

194, LGC).

Prescriptive periods under the Tax Gode As a general rule, the assessment of national internal revenue taxes prescribes within three years or ten years, depending on whether or not a tax return was filed or the tax return filed was false or fraudulent with intent to evade the payrnent of the tax(Secs. 205 and 222, NIRC). However, where the law does not provide for any particular prescriptive period of assessment, such as the 257o st;.lltax on improperly accumulated surplus of the corporation (before its elimination in 1986 by E.O. 37), then the rule is that the tax sought to be assessed becomes imprescriptible (Commissioner u, Ayata Securities, supra).

There are three (3) important prescriptive periods relating to assessment and collection of taxes, namely: (a) period to assess the tax; (b) period to collect the tax; and (c) period to file criminal action.

1.

Period to assess the tax

The prescriptive period to make an assessment depends upon whether or not a tax return was filed and whether or not the tax return filed was false or fraudulent' If there was a tax return filed that is not false or fraudulent, the BIR has three (3) years from the date of filing of return within which to make an assessment, and if the return was filed before the last day prescribed by law for the filing thereof, the three (3!year period shall be considered as filed on such last day (Sec' 203, NIRC). On the other hand, if the return filed was false or fraudulent with intent to evade tax, the BIR is given 10 years from the date ofdiscovery ofthe falsity or fraud (Sec. 222[a], NIRC). was filed, the BIR has 10 years from the date of discovery of the omission within which to make an assessmenL(Sec. 222[q], NIRC).

If no return

Bar Question (2006) The Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year 2000 last July 31, 2006 in the amount of F10 million, inclusive of surcharge and interests. Ifthe delinquent taxpayer is your client, what steps will you take? What is your defense?

Suggested answer: Since rny client has already lost his right to protest (the assessment hauing been. issued on July 3 1 , 2006 , and that he is already categorized as a delinquent taxpayer), I will q.duise him to wait for a collection q.ctiorl to be instituted by the Commissioner. Once collection is pursued,

I will fiIe a petition for reuiew with the CTAto question the ualidity of the Commissioruet's action. My defense would be prescription. Since the assessment was issued beyond the prescriptiue period to assess, the q.ssessment is inualid and any action to collect an inualid q.ssessment

is not warrant @hil. Journo,lists, Inc. u. CIR, 447 SCRA 274

t2004D.

Bar Question (2002) Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manage their business, filed a joint income tax

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return for 1997 on March 15, 1998. After an audit of'the return, the BIR issued on April 20,200I a deficiency income tax assessment for the sum of F250,000, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy to enforce collection ofthe tax.

Ifyou are the lawyer of Mr. and Mrs. Sebastian, what possible will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraint and levy? Explain your defense or defenses

answer.

Suggested answer:

I will

raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed ontime (Sec. 203, NIRC). The lost day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on Apri|20,2001, the BIR's right to assess has already prescribed.

Bar Question (2002) Mr. Castro inherited from his father, who died on June

10,

1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on December 6, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for F1,250,000.00, inclusive of b\Vo surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment, on the ground of prescription. Decide Mr. Castro's protest.

Suggested answer The protest should be resolued against Mr. Castro. What was filed is a fraudulent return mahing the prescriptiue period for assessment 70 years from discouery of the fraud (Sec. 222, NIRC). Accordingly, the qssessment wqs issued within the prescriptiue period to mq,ke an

assessment based ort a fraudulent return.

Burden of proof It is incumbent upon a taxpayer, who wants to avail of the

benefits ofsection 331 (now Sec. 203) ofthe Tax Code by setting up prescription as an affirmative defense, to prove he submitted a return' If he fails to do so, the conclusion should be that no such return was filed, in which case, the government has 10 years within which to make the corresponding assessm ents (Tan Guan a. Nable, supra) .

For the 1O-year period of limitation of assessment of taxes under Section 332 lnow Sec.222(a)lof the Tax Code to aPPlY, it is not enough that fraud is alleged in the complaint; it must be established and proved by clear, convincing proof (Republic u- Lirn d.e Yu, 7O SCRA 737).

2.

Period to collect the assessed tax

Any internal revenue tax which has been assessed within the period of limitation may be collected by distraint or levy or by a proceeding in court within five (5) years from date of assessment. The period of limitation to collect is counted from the assessment of the tax, NOT from the time the income tax return was filed (Gutierrez a, Collector, G.R. No. L-79537, May 20, 1965). Where a withholding agent fails to file a withholding tax return, in court for the collection of such tax may be begun proceeding "a at any time within ten years after the discovery assessment, without In the case at bar, the failure to file a return was ... omission." of the suit was initiated on January 16, 1953 1949. Judicial in discovered was included as party defendant in Corporation Jai-Alai the when four (4) years had elapsed from the As only complaint. amended the to file a return to the filing of a the omission of discovery of the time judicial action, the right to collect the withholding tax through the assets had not vet prescribed (Republic u. Razon and. Jai-Alai Corporation, 20 SCRA 234).

The fact that court action for the collection of fixed tax was instituted more than five (5) years after the period to which it refers, does not afl'ect either the validity of any revised assessment made or the right to enforce it by court proceedings, where no return for said tax had been filed (Collector a. Pined.a, 2 SCRA 401).

Bar Question (1993) On September 19, 1973, the BIR sent a notice of assessment to X to pay P300,000.00 as forest charges for the years 1970-1973. X

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made a partial payment of P100,000.00 on September 28, 1g?3. X died in November 1977 . OnJaly 29,1979, the BIR filed in the Testate Estate Proceedings of X a claim for F200,000.00, the unpaid forest charges left by X. The administrator of the estate opposed the claim on the gtound of prescription. Decide.

Suggested answer: Where assessment was made, the tax may be collected within fiue from the d.qte of assessment (Collector

(5) years (now three [3] years)

2 SCRA 4OI). In the case qt bar, X, on the basis of the notice of assessment,

a. Pined.a,

uolurutarily made partial payment to the Bureau of Internal Reuenue in the amount of One Hundred Thousqnd Pesos (F100,000.00). However, it took the BIR almost more than five (5) years to tq.he the necessary legal action to collect the remq,ining amount of taxes due. This is clearly beyond the fioe (5) (now three [3] yeqr) period for the collection of toxes. Hence, the claim filed by the BIR against the Estate of X for the payment of Two Hundred Thousand Pesos (fl00,000.00) has prescribed.

(NOTE: Under RA.8424 [1998],the periodto collect an assessed tax is five years from the date of the assessrnent.)

What is a tax return? "Tar return" refers to the form

prescribed by the BIR showing basic information about the taxpayer and the computation of his tax liability, which is required to be filed within the period prescribed by law and used as the basis for payment of tax assessed by the

taxpayer. The BIR prescribes a separate form for each kind of tax. For example, income tax return for salaried individuals is BIR Form 1700; for individuals engaged in trade or business, BIR Form 1701; for corporations, BIR Form 1702; VAT return is BIR Form 2550. There are two (2) types of tax returns, namely: (a) original return; and (b) amended return. In filing an amended return properly described as such, a copy ofthe original return is attached thereto. To be considered as a tax return, it is not always required that the prescribed BIR forms be used and filed by the taxpayer. A document containing all the necessary information that would allow

ili

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the IltR t0 conrputc ancl to assess the tax Iiability ofthe taxpayer is considered as a tax return. There was no omission to file a tax return on the part of the taxpayer where it failed to include certain items and the non-inclusion of these items is not due to anywillful omission or fraud (Escud.ero Electric Seruice Co. a. Dotningo, CTA Case No.7026, Decernber 26, 1963). A tax return based on tentative financial statements prepared by an independent certified Public Accountant is a tax return that siarts the running of the period within which the BIR may make an assessment.

In the following instances, the court did not consider the return or document prescribed by the BIR for certain transactions as appropriate tax returns; hence, the l0-year prescriptive period shall applv.

Transcript sheets are not returns -information necessary and required the because they do not contain taxes like the specific of assessment and to permit the computation 137). SCRA (Alca 26 u. Cornmissioner, tax

1.

Transcript sheets.

2. Income tax return for percentage tax return' An income tax return cannot be considered as a return for

compensating tax (which was replaced by the value added tax). The taxpayer must file a return for the particular tax law. If he does not file such return, an assessment may be made within ten years from and after the discovery of the omission to file the return. Even if an income tax return which happens to be the wrong return had been filed and even considering that the income from said sales were all reflected therein, still this would not take the place of the

correct return which for purposes of the tax in question should actually be the percentage tax return (Butuan Sawmill, Inc' u' CTA,76 SCRA 755). When there is no provision in the law requiring the filing of a return but the tax is such that its amount cannot be ascertained without the data that is pertinent thereto, the commissioner may, by appropriate regulations, require the filing ofthe necessary returns. In any event, with or without such regulations, it is to the interest of thetaxpayer to file said return if he wishes to avail himself of the benefits of the three-year prescriptive period. If this notwithstanding, he does not file a return at all, then an assessment may be made at any time within the ten-year prescriptive period (Bisaya Land. Transportq'tion Co. a. Collector, 705 Phil. 1338).

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Effect of filing an amended return The taxpayer is granted the right to file an amended return, statement or declaration, subject to the following conditions: (a) the amendment shall be made within three years from the date of filing of the original return, statement or declaration, and (b) no notice of audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer (Sec. 6[A], NIRC). The prescriptive period for assessment starts to run from the

filing of the original return, if the same is sufficiently complete to enable the Commissioner to intelligently determine the proper amount of tax to be assessed. The fact that amended returns were filed later neither starts anew the running of the statute of limitations nor extends the prescriptive period (AL. Ammen Tlansportation Co.r Ine. v. Collector, CTA Case No. 540, Nouember 70, 1965). However, where the amended return is substantially different from the original return, the right of the BIR to assess the tax is counted from the filing of the amended return. As pointed out by the court, if the assessment is counted from the filing of the original return, this would permit taxpayers to evade taxes by simply reporting in their original return, heavy losses and amending the same after the lapse of the prescriptive period when the Commissioner has already lost his authority to assess the tax. In the original return, taxpayer declared a net loss after deducting head office expenses allocable to the Philippine business. The objective of the Tax Code is to impose taxes, not to enhance tax avoidance to the prejudice of the Government (Cornmissioner n. Phoeni"x Aasurance Co., 74 SCRA 52).

Bar Question (1999) A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR) on April 15, 1996 showing a net loss. On November 10, 1996, it amended its 1995 ITR to show more losses. Afber a tax investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co. in a net income position. As a result, on August 5, 1999, the BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that it has prescribed. Decide.

Suggested answer: The right of the BIR to ossess the tax has not prescribed. The rule is thq.t internal reuenue taxes shull be assessed within three

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years after lh.e lnst tlu,\, prt'scribed by law lbr the filing of'the return (Sec. 203, NIITC). Howeuer, if'the return originally filed is amended substantially, the counting of'the three-year period starts from the date the amended return was filed (CIR a, Phoenir Assurance Co-, 74 SCRA 52). There is ct substantial amendment in this case because u new return was filed declaring more losses, which can only be done either (1) in reducing gross income, or (2) in increasing the items of deductions claimed.

False or fraudulent tax return In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment at any time within 10 years aft'er the discovery of the falsity' fraud or omission (Sec. 222[a], NIRC). The proper and reasonable interpretation ofSec. 332 (now Sec. 222tal) ofthe Tax Code should be that in the three different cases of (a) false return, (b) fraudulent return with intent to evade tax, (c) failure to file a return, tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission. The stand of the court that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return

is strengthened immeasurably by the last portion of the provision

which aggregates the situations into three (3) different classes, namely "falsity," "fraud," and "omission." That there is a difference between "false return" and "fraudulent return" cannot be denied. While false return merely implies deviation from the truth, whether intentional or not, fraudulent return implies intentional or deceitful entry (in the books) with intent to evade the taxes due. Whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax, or failure to file returns, the period of ten years from the time of discovery or omission even seems to be inadequate and should be the one enforced (Aznar a. Cornmissioner, 58 SCRA 519).

In the case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be 50Vo of the tax or of the deficiency tax, in case any payment has been

682

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made on the basis of such return before the discovery of the f'algitv or fraud. A substantial under-declaration oftaxable sales, receipts or income, or a substantial overstatement of deductions, as determined

by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie eidence of a false or fraudulent return. Failure to report sales, receipts or income in an amount exceeding SOVo of that declared per return, and a claim of deductions in an amount exceeding B\Vo of actual deductions, shall render the taxpayer liable for substantial under-declaration of sales, receipts or income or for overstatement of deductions (Sec. 248[8], NIRC).

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683

The Commissioner may also abate or cancel a tax liability when (a) the tax or any portion thereof appears to have been unjustly or excessively assessed; or (b) the administrative and collection costs involved do not justify collection of the amount due (Sec. 204, NIRC).

Bar Question (2002) What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a SOVo stncharge on the deficiency tax due from a taxpayer? Explain.

Suggested answer:

Bar Question (1996)

(1)

Distinguish a false return from a fraudulent return.

Suggested answer: The distinction between a false return and a fraudulent return is that the fi,rst merely implies a deuiation from the truth or fact whether intentional or not, whereas the second is intentional and deceitfut with the sole aim of euading the payment of the correct tae due.

(2)

Explain the extent of the authority of the Commissioner of Internal Revenue to compromise and abate taxes?

Suggested answer: The authority of the Commissioner to compromise encompasses both ciuil and criminol liabilities of the ta"xpayer. The ciuil comprornise is allowed only in cq,ses (a) uhere the tax assessment is of doubtful ualidity, or (b) when the financial position of the tox,payer demonstrq,tes a clear inability to pay the tax. The compromise of the tax liability is possible at any stage of litigation and the amount of compromise is Ieft to the discretion of the Commissioner, except with respect to final ossessrlents issued against large taxpayers wherein the Commissioner

cannot compromise for less thon 507o. Any compromise inuoluing large taxpayers lower than 50Vo shall be subject to the approual of the Secretary of Finance. INOTE: This requirement had been deleted in R.A.8424.1

All criminq.l uiolations ercept those inuoluing fraud, can be

compromised by the Commissioner but only prior to the filing of the information with the Court.

There is

a

prirna facie euidence of false or fraudulent return when

the taxpayer substantially under-declared his taxable sales, receipts or income, or substantially ouerstated his deductions. The taxpayef s failure to report sales, receipts or income in an amount exceeding 307o of that declared per return, and a claim of deduction in an amount exceeding 307o ofactual deduction shall render the taxpayer liable for substantial under- declara,tion and ouer-declaration, respectiuely, and will justify the imposition of the 50Vo surchq.rge on the deficiency tctx due from the taxpayer (Sec. 248, NIRC).

Bar Question (1998) What constitutes prima facie evidence of a false or fraudulent return?

Suggested answer: There is prim.a facie euidence of a false or fraudulent return when the to,xpayer has willfully and hnowingly filed it with the intent to euade a part or all of the tax legally due from him (Ungab u. Cusi, 97 SCRA 877). There must appear a design to mislead or deceiue on the part of the taepayer, or at least culpable negligence. A mistake, which is not culpable in respect of its ualue, would not constitute ct false return (Words ond Phrases, VoL 16, page 173).

Cases: There is fraud in the following decided cases:

1.

Fraud. must be the prod.uct of a d.eliberate intent to eaad.e taxes. - Fraud, in order to justify an assessment based on the ten-year prescriptive period, must be the

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Simple statemcnt that return filed. was not fraud.ulnnt d.oes not d.isproue existence of fraud. - The income which was reported by the taxpayer in his return was the income from the rents. Substantial income derived from other sources was not included. The Court held that a simple statement in the letter that the returns were not fraudulent is not sufficient to overthrow the findings ofthe Commissioner as to the reason for the omission. Hence, the tax may be assessed within ten years from the discovery of the fraad (Tayengco a. Collector, CTA Case No.57, July 37,1964).

a.

Sate of real property for a price less than its fair market ualue is not necessarily a false return. - The fact that private respondent's property was sold for a price less than its declared fair market value alone did not by itselfjustifu a finding of false return which contains wrong information due to mistake, carelessness or ignorance. The Court reasoned out that "it is possible that real property may be sold for less than adequate consideration for a bona fide brsiness purpose; in such event, the sale remains an'arm's length transaction'." Private respondent declared the sale in its 1974 return submitted to the BIR (Commissioner a. B.F. Good'rich Phils.' supra).

3.

Fraud, is a question of fact and' the circumstonces constituting fraud. must be alleged and' proued, in the trial court. - The finding of the trial court as to its non-existence is final and cannot be reviewed, unless clearly shown to be erroneous. Fraud is never lightly to be presumed because it is a serious charge (Commissioner a. Ayala Securities Co., 70 SCRA 204). Fraud. is neuer imputed. and' the courts neuer sustain find.ings of ftaud'upon circum"stances that only create suspicion. - The Supreme Court held that it is persuaded considerably by the private respondent's (Javier's) contention that there is no fraud in the filing of the return and agree fully with the CTA s interpretation of Javier's notation in his income tax return filed on March 15, 1978,

und.er-d.eclarations of income for six (6) consecutiae yea,rs d,ernonstrate fraud,ulence of return. - Substantial under-declarations of income for

4.

Presenee of fi.ctitious expenses, with no eaid.ence presented., proaea eristence of fraud.. - The

Commissioner's determination based on the circumstances of the case that fraud is present stands if no evidence is presented by the taxpayer to show that the return filed by him was not fraudulent. The Supreme Court upheld the Commissioner's findings of fraud brought about by the presence of fictitious expenses, which were claimed by the taxpayer as deductions from gross income (Tan Guan a.

Commissioner, supra). However, the courts did not consider the tax returns filed as false or fraudulent with intent to evade the payment of the tax in the

4.

Mere und.erstatetnent in the tar return will not necessarily imply fraud. - Mere understatement in the tax returns ofseven property subject to estate tax will not necessarily imply fraud. It appears that three of the seven

thus: "The taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an'error and is now subject of litigation,'that it was an 'error or mistake of fact or law'not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally'laid his cards on the table."'

lots alleged to have been excluded were actually included in the returns; that one lot was not included because it

findings of fraud upon circumstances which, at most create

following cases:

l-.

Republic, supra).

I

3. Substantial

six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax. Hence, the imposition of the fraud penalty is proper (Perez u. Court of Tax Appeals, L-70507, May 30,1958).

685

belonged tu one of'the heirs; and that the three remaining lots were already declared in the return submitted by the husband as part ofthe conjugal property for purposes of income tax. The omission, therefore, was not deliberate and did not amount to fraud indicative of an intention to evade payment of the proper tax due the government (Jalnndani

product of a deliberate intent to evade taxes (Jalandoni u. Republic, L5 SCRA 57).

2.

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Fraud is never imputed and the courts never sustain

686

only suspicion and the mere understatement of a tux is not itselfproofoffraud for the purpose oftax evasion. A "fraudulent retu.rn" is always an attempt to evade a tax, but a merely "false return" may not be (Commissioner u. Jauier, 199 SCRA 824).

5.

Mistakes of reaenue officers on three (3) d.ifferent occasions rerru)ae elemcnt of fraud. - The presence of fraud was held quite unlikely in an assessment where the BIR itself appeared "not too sure" as to the real amount of the taxpayer's net income, as where the BIR had on three different occasions arrived at three highly different computations (Republic u. Lim d.e Yu, supra). The lower court in three instances supported petitioner's stand on the wrong inclusions in his lists of assets made by the Commissioner, resulting in the very substantial reduction of petitioner's tax liability by the lower court. The foregoing shows that it was not only Mr. Aznar who committed mistakes in his report of income but also the respondent Commissioner who committed mistakes inhis use ofthe inventorymethod. The mistakes of the Commissioner which also involve very substantial amounts were also repeated yearly, and yet we cannot presume therefrom the existence of any taint of official fraud. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and ifboth petitioner and respondent committed mistakes in making entries in the returns and in the assessment, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good failh (Aznar a. CTA and. Collector, supra).

When must fraud be raised by government? The Commissioner claims that fraud attended the filing of the return; that this being so, Section 332(a) (now Sec. 222lal) of the Tax Code would apply. It may be well to note that the assessment

letter itself did not impute fraud in the return with intent to evade payment of the tax. Precisely, no surcharge for fraud was imposed. In his answer to the petition for review fiIed by Yusay in the CTA, the Commissioner alleged no fraud. Instead, he broached the insufficiency of the return as barring the commencement of the running of the Statute of Limitations. He raised the point of fraud for the first time

687

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in the proceedings, only in his memorandum fiIed with the Tax Court subsequent to resting his case. Said Court rejected the plea offraud for lack ofallegation and proof, and ruled that the return, although not accurate, was sufficient to start the period ofprescription. Fraud is a question of fact. The circumstances constituting it must be alleged and proved in the court below. The CFI acting as a settlement court is not the proper tribunal to pass upon the defense of prescription; therefore, it would be but futile to raise it therein. Moreover, the Tax Code does not bar the right to contest the legality ofthe tax afber a taxpayer pays it. Under Section 306, he can pay the tax and claim a refund therefore. Afortiori,his willingness to pay the tax is no waiver to raise defenses against the tax legaliW (Commissioner u. Gonzales, 18 SCRA 757).

Gonsequence of failure to prove fraud The Commissioner's failure to prove fraud can be fatal to the assessment as when a tax liability is assessed beyond the usual three-year prescriptive period. The fact that the Commissioner did not include the fraud penalty in his deficiency assessment which was issued after the fiIing of the taxpayer's return is an indication that the Commissioner himself does not believe that there was fraud. There was no fraud if the Commissioner merely relied upon an alleged substantial under-declaration of income tax resulting from his own computation of the cost basis of the lands and improvements sold by the taxpayer to the Government. It appeared that the taxpayer honestly believed in a different cost basis and had explained the nature of the improvements introduced on the lands. The mere understatement of income in itself does not prove fratd(Yutiuo Sons Hard.ware Co. a. CTA, 7 SCRA 160).

Bar Question (2008) Maria Suerte,

a

Filipino citizen, purchased

a

lot in Makati City

1980 at a price of Phpl" million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing

in

paper products, owned 997oby Maria Suerte. In October, 2007' EIP Corporation, real estate developer, expressed its desire to buy the Makati properby at its fair market value of F300 million, payable as follows: (a) F60 million down payment; and (b) balance, payable

equally in 20 months. Upon the advice of a tax lawyer, Maria Suerte transferred her Makati property for shares of stocks of MAS Corporation. A BIR ruling, confirming the tax-free exchange of

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property for shares of stocks, was secured from the BIR Nationul Office and a Certificate Authorizing Registration was issued by thc Revenue District Officer (RDO), where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for F300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of F29,895,000 (F100,000 x 5Vo plus F298,900,000 x lOVo), instead of the corporate income tax of F104,650,000 (35Vo on F299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to?

Suggested answers: The contention of the RDO that Maria Suerte committed tax eucrsion by selling shares of stocks, rather than real property, is not tenable. The facts of the case show that Mariq. transferred the real property by uirtue of a tax-free exchange of property for shares of stochs

of MAS Corporation. Irudeed, the tatc-free nature of the transaction was confirmed by the BIR when it issued a ruling and the RDO issued the corresponding Certifi,cate Authorizing Registration on the transaction. Inthe case of Dolpher Trad.es Corporation u.Intermediate Appellate Court, 157 SCRA 349 (1988), the Supreme Court said "[T]he transfer of properties to a corporation in exchange for shares of stock ofthe corporation pursuant to Section 35(c)(2) (now Sec. 40[c] [2]) of the Tax Code, as amended, where the transferors gain control of the said corporation, does not constitute q. sale of properties. The transaction merely inuolues a change in the nature of the ownership of properties from unincorporated to incorporated entity. Ownership ouer the properties remains the same."

"Tax aaoid,ance" is the tax sauing deuice within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arm's length. "Ta* euasion,," on the other hand, is a scheme used outside of those lawful means und when auailed of, it usually subjects the tanpayer to further or qdditional ciuil or criminal liabilities. Tax eussion connotes the integration of three factors: (1) the end to be achieued; i.e., the payment of less than that hnown by the taepayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an acconxparuying state of mind which is described as being "euil," in "bq.d faith," "willful," or "deliberate and not accidental;" and (3) a course of action or failure of action which

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is unlawluL (Commissioner of Internal Reaenue u. Estate of Benigno Tod'a, Jr., et al., G.R. No. 147788, September 74r 2004)'

Prescription The three (S)-year period to assess cornn'Lences from the date of actual filing of the return or from the last day prescribed by law for the fiIing of such return, whicheuer comes later. - According to Sections 203 and 114(A) of the Tax code, the three (3)-year period to assess commences from the date of actual filing of the return or from the Iast day prescribed by law for the fiIing of such return, whichever

later. In the case of vAT, the filing of quarterly VAT returns must be made within 25 days after the close of each taxable quarter prescribed by each taxPaYer. Considering that the PAN and FAN and Final Decision on Disputed Assessment for deficiency vAT covering the period September t,2}O4to August 31, 2005 were issued only on September g, ZOO8, September 25,2008 and September 10' 2009, respectively, the deficiency vAT for the 2nd, 3rd, and 4th quarter ofFY 2005 are already barred by prescription. on the issue of whether or not the BIR may assess deficiency vAT, despite the fact that the taxpayer has excess unutilized input taxes of ?23,125,L25.98, the cTA ruled that it cannot be assessed any deficiency output tax for the period (cargill Philippines a. CIR, CTA Case No. 7928, August 23,2017)' comes

When must issue on prescription be raised? Issue of prescription rnust be raised' at the ad'ministrative

The issue as to the right of the government to assess collect must be raised. at the administrative level, and evidence to

leael.

and

prove prescription ofthe right to assess and collect mustbe introduced

by the taxpayer.

Inualid.ity of uaiuer m'ay still be raised. d'uring the trial at cTA. - The contention of the respondent that failure ofthe petitioner to raise the issue ofprescription in its letter-protest, precluded it from invoking the same for the first time before this court is untenable. In the firstplace, the petitioner cannot raise the issue ofprescription in its letterlprotest filed on July 15, 1993 because ofits prior execution

of a supposedly valid "waiver of the defense of prescription" on August was only after a careful perusal of the records of the BIR

fi,Iggr.It

that the petitioner discovered the invalidity of the waiver signed by its representative. such knowledge prompted the petitioner to file a

690

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Motion to Allow Petitioner to Adduce Additional llebuttal llvidcrrcc where it invoked the defense of prescription (Central Cement Corporation a. Commissioner, CTA Case 5024, June 13, lgg7). When gouernmcnt ad.mitted. allegation of prescription in its answer, ta*payer need. not introd.uce eaid.ence. - When thc taxpayer assailed the right of the government to assess and collect, alleged the facts constituting prescription, supported by annexes (in its petition for review), and the government admitted the allegation in its answer, there was no need for the taxpayer to present further evidence on this point... The demand on the taxpayer to pay the amount erroneously refunded is in effect an assessment for deficiency franchise tax. And being so, the right to assess or collect the same is governed by Section 331 ofthe Tax Code, rather than by Article 1145 of the Civil Code (Guagua Electric Light Plant Co. a. Collector and. Court ofTax Appeals, supra).

Waiver of the defense of prescription Well-settled is the rule that prescription as a defense is waived

perird lbr assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration ofa reasonable period of time. cases where the

Thus, in the execution of the waiver, the following procedures should be followed: The waiver must be in the form identified in RMO 20-90. This form may be reproduced by the Office concerned but there should be no deviation from such form. The phrase should be filled up. "but not after

b.

c. if

not seasonably interpose d (Visayan Electric Co. a . Cornmissioner, 39 SCRA 43). The plea of prescription is also deemed waived by the failure to allege it in the answer (Mambulao Lurnber Co. v. Republie, supra), by failing to raise the issue of prescription in the petition for review fiIed in the CTA (Sy Chiuco a. Collector, 7OZ Phil. 428), or by acknowledgment of the obligation (Sannbrano a. CTA and. Collector, 101 Phil. f), or renunciation of the benefit of prescription already obtained (Republic u. Lim d.e Yu, 10 SCRA 737).

A waiver of the Statute of Limitations signed by Comptroller of a corporation is valid, even without a letter or certificate of authority to execute the waiver. Revenue Memorandum Order No. 20-90 clearly provides that, in case the taxpayer is a corporation, the waiver must be signed by any of its responsible officials. Without doubt, the Comptroller is a responsible official of a corporation within the purview of the law. The law merely requires that the waiver be signed by any ofa corporation's responsible officials, not necessarily an authorized representative or offi.cer. However, to be valid and binding upon the taxpayer, the waiver must conform to RMO 2090, which implements Sections 203 and 222 of the Tax Code. Said sections provide for the Statute of Limitations on the assessment and collection oftaxes to safeguard the interest ofthe taxpayer against unreasonable investigation. IJnreasonable investigation contemplates

691

Soon after the waiver is signed by the taxpayer, the CIR

or the revenue official authorized by him shall sign the waiver indicating that the BIR has accepted and agreed to -,l9-" date of such acceptance by the BIR should the waiver. The be indicated. The waiver must be executed in 3 copies; the second copy

is for the taxpayer. The date of receipt by the taxpayer must be indicated in the original copy. Without the date, it cannot be determined whether the waiver was accepted by BIR before the expiration of the three-year period.

The waiver of the Statute of Limitations is a derogation of the taxpayer's right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed (against the government). The waiver of the Statute of Limitations is not a waiver of the right to invoke the defense of prescription, but is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. Being a remedial measure, the law on prescription should be liberally construed in order afford such protection to the taxpayer (Phil. Journalists a. Cornrnissioner, G.R. No. 1"62852' Decetnber 7 6, 2 OO4 ; Pfizer, I nc. a. C omrnis sioner, CTA C ase N o. 6 7 3 5, April 27,2OO3; FMF Dea. Corp. a. Commissioner, CTA Case No.6753, March 20,2003). Due to infirmities in the execution of the waiuer, the assessment is null and uoid. - Union Cement was involved in a two-step merger.

Pursuant to law, Union Cement, as the surviving corporation, assumed all the rights and obligations of the merged corporations.

The assessment here pertains to the business operations of BMC. On March 28, 2003, Union Cement received from CIR a PAN dated March L2,2OOS,pertaining to the business operations of Bacnotan Marketing

692

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Corporation (BMC

),

informing Union Cemen t ol' ll M O's ir l cgcrl l

i

r

rtr

rr

rr

t,

tax and VAT liabilities for 1999-2000 in the aggrcgutc amount, ol' PI07,439,917.94. On April 14, 2003, Union Cement protesLcd thc PAN for lack of factual and legal bases. At the same time, it signud a waiver form extending the period to assess up to June 30, 200:1. On the part of CIR, a certain Ms. Flor Mercado signed the waivcr fbr

Atty. Edwin Abella, ACIR (LTS). On June 30, 2003, Union Cenrent, received a Formal Letter of Demand with "Details of Discrepancies," all dated June 16, 2003, for deficiency income tax signed by DCIR Estelita Aguirre. The total assessment amounts to P97,698,105.26, inclusive of penalties.

RMO 20-90 provides the guidelines on the proper execution of waivers and in relation thereto, RDAO No. 5-01 provides that "Revenue officials authorized to sign the waiver: The following revenue officials are authorizedto sign the Waiver of the Defense of Prescription under the Statute of Limitations prescribed in Sections 203, 222 and other related provisions of the Tax Code of 1997." Considering the requisites provided in the BIR issuances, there are infirmities in the execution of the subject waiver as follows: (1) The waiver was signed by Ms. Flor Mercado for then ACIR of LTS, Atty. E. Abella; (2) The original copy of the waiver does not indicate the fact ofreceipt by the taxpayer ofhislher file copy ofthe waiver; and (3) The subject waiver failed to indicate the specific kind of tax and the amount of tax due. In Scandinauian Motors Corporation u. CIR andinDole Philippines u. CIR,this Court explained the reason for the requirement: "The purpose of stating the specific kind of tax and the arnount of tax due is for the Union Cement to pinpoint which among the proposed tax assessments may subsequently be issued without the Union Cement invoking the defense of prescription (Pfizer, Inc. u. CIR, CTACase No. 6L35, April21,2003),If the amount and kind of tax were not indicated in the said waiver, logically, there was no agreement to speak of (Solid Cernent Corporation u. CIR, CTA Case No. 5420, May 27, 1999).It should be emphasized that RMO 20-90 requires specific information; hence, to substitute the same with general statements is a departure from RMO 20-90." Since the waiver was improperly issued, the prescriptive period was not toll ed (Union Cemcnt a. CIR, CTA Case No.6842, January 18,2012).

Prescription in relation to acts or delays of taxpayer Petitioner contends that respondent may not avail himself of the plea of prescription, the delay in making the revised assessment

li.t,ll.,tt,;t rt t,ls

69:l

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having bs:n duc mainly to his protest againstthe original assessment, thereby inducing petitioner to order several reinvestigations, the first of which was made by examiner Espinosa who submitted her report August 27, t953, upon which the income tax assessment notice of October 19, 1953, must have been based. Petitioner relies, in support of his pretense, upon the case of Collector u. Suyoc Consolidated Mining Co., L-71527, Nouember 25, 1958, in which we held that "... there are cases however where a taxpayer may be prevented from setting up the defense ofprescription even ifhe has not previously waived it in writing as when by his repeated requests or positive acts, the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government." The Suyoc case is not in point, for respondent had not requested,

or induced the petitioner by positive acts to delay the making of the revised assessment notice of October 19, 1953. Up to that time, respondent merely contended that the amounts sought to be collected by petitioner were not due from the estate ofthe deceased and gave his reasons therefor. Petitioner had a perfectly legitimate right to do this and the same does not suffice to stop him from invoking the Statute of Limitations. The rule applicable to the case at bar is that laid down in Collector u. Solano, L-11"475, July 31, 1958 (Collector a. Pined.a,2 SCRA 401).

Effect of fraud assessments which are final and execu-

tory Section 222(a) of the Tax Code provides that "x x x in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action

for the collection thereof." The effect of this provision is to placc within the scope ofjudicial notice under Section 1, Rule 129 of the Rules of Court, and thus dispense with the need for proof therefor, those fraud assessments which have become final and executory under the law. However, in Republic u. Ker & Co., suprd, the Commissioner maintained that the taxpayer filed a false return and since the fraud penalty of 50Vo surcharge was imposed in the deficiency income tax assessment, which has become final and executory, the finding of the Commissioner as to the existence of fraud has also become final and need not be proved. This contention suffers from a flaw in that it fails to consider the well-settled principle that fraud is a question of fact,

694

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I

which must be alleged and proved. Fraud is a serious chargo ittttl, to be sustained, it must be supported by clear and convitrcing prtxrl. Accordingly, fraud should have been alleged and prr-rved in the lowcr court. On these premises, we sustain the ruling of the lower court on the point ofprescription. Ker & Co. raised the defense ofprescription in the proceedings below and the Republic, instead of questioning the right ofthe defendant to raise such defense, litigated on it and submitted the issue for resolution of the court. By its actuation, the Republic should be considered to have waived its right to object to the setting up ofsuch defense.

Extension of the prescriptive period Differences between extension and interruption

of

period. The period to assess or collect mentioned in the law is not extended. However, in the case of extension, the period stated in the law within which the Commissioner may assess or collect is extended by the agreement signed by both parties. Cases: 1.

prescriptive

In extension ofthe prescriptive period, the taxpayer and the Commissioner or his authorized representative sign a written waiver extending the period within which the BIR may assess or collect the tax. In suspension or interruption of the prescriptive period, the contracting parties do not sign any written agreement interrupting the period. Either the taxpayer requested for a reinvestigation which was granted by the Commissioner, or a warrant of distraint or levy was issued by the Commissioner or his authorized representative and no property of the taxpayer could be located.

2.

n-

4.

is that it does not authorize extension by agreement of the Commissioner and the taxpayer once prescription has attached; i.e., after expiration of the original period (Republic a. Lint. d.e Yu, supra).

To

In extension and suspension ofthe prescriptive period, the effect is to extend or prolong the period within which the Commissioner may assess or collect the tax. In suspension

A waiuer is ineffectiue if it is erecuted. beyond. the prescriptive period.. - Section 222(b) and (d), 1997 Tax Code authorizes the taxpayer and the Government to extend by mutual agreement in writing the prescriptive period for the assessment and collection of taxes. It is necessary that the waiver be executed by the parties before the lapse of the five-year prescriptive period. A waiver is ineffective if it is executed beyond the original three-year (now five-year) period of prescripti on (Republic a. Acebed.o,22 SC&A 856). The rule is in accord with the general law on prescription that requires a written acknowledgment of the debtorto renew the cause of action or interrupt the running of the limitation period (Act 790, Sec.50; New Ciuil Code, Art. 1155; Collector a. Pined.a, supra). There can be no extension ofthe prescriptive period once prescription has set in. The law does not authorize the extension ofthe prescriptive period once prescription has set in. The waiver of the statute oflimitations executed by the taxpayer cannot be deemed to include taxes which had already prescribed. The clear import of Section 223(b)

The grounds for extension of the prescriptive period are provided for in Section222(b) to (e), while the grounds for the interruption of the prescriptive period are given in Section 223,both of the Tax Code.

validly extend the prescriptive period, the waiver must be signed by the contracting parties before the expiration of the time prescribed to assess or to collect (or before the issuance, release and mailing of the assessment notice and demand letter). In the case of suspension or interruption ofprescriptive period, the actions ofthe taxpayer and the BIR are taken after the issuance, release and mailing of assessment notice and letter of demand.

695

grl.iorr

of'thc prcscriptivc pcriod, the period during which any of the enumerated condition exists is deducted from the total

periods

1.

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2.

Waioer, uthere no period. BIR may trssess tar is ind,icated., is inualid.. - A close scrutiny of the waiver revealed that no period was agreed upon within which the respondent may validly assess the petitioner after the regular three-year period ofprescription provided by law. This Court, therefore, holds that the said waiver is invalid and without any binding effect on the petitioner for the reason that there was no consent by the respondent (CIR) and no period was set or agreed upon for subsequent

696

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ol't,lro Oivil (lode) is clearly applicable to the case at bench. RClIlC, through its partial payment of the revised assessments issued within the extended period as provided

RDO who attested. in the u)aiaer d.id not sign it for the Commissioner. - A close scrutiny of the waiver of the statute of limitation shows that RDO Sixto Javier had merely attested the aforesaid waiver; that aforesaid officer did not sign the waiver either for or by virtue of the authority of the Commissioner. Clearly, for all legal intents and purposes of the above law, Section 332 of the NIRC, there was no valid waiver executed by the CIR and petitioner to stop the running of the period within which to validly assess the tax in question. Moreover, it is only the Commissioner, who is specially named by said provision of Section 332(b) of the Tax Code, as the one who can sign the waiver of the statute of limitation, and since the Commissioner has not signed the waiver, there is, therefore, no consummated or valid waiver which may suspend the running of the period within which to assess the tax in question (Collector a. Solano, G.R. No. L-77475, July 37, 1958).

4.

for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioners believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should nothave paid the reduced amount of taxes in the revised assessment. RCBC's subsequent action effectively belies its insistence that the waivers are invalid. To hold otherwise and allow a party to gainsay its own act or deny rights which it had previously recognized would run counter to the principle of equity which this institution holds dear.l

Rules in cases of more than one (1) waiver signed 1. Waiaer must be in writing and signed. by both the Commissioner and, the tarpayer. - The CTA held that the three waivers signed by Carnation have no binding effect for lack of consent on the part of the BIR Commissioner. Upon the other hand, BIR Commissioner maintains that the waivers are valid although not signed by the CIR because (a) when the BIR examiners extended the period to audit and investigate Carnation's tax returns, the BIR gave its implied consent to such waivers; (b) the signature of the CIR is a mere formality and the lack of it does not vitiate the binding effect of the waivers; and (c) that a waiver is not a contract but a unilateral act of renouncing one's right to avail ofthe defense ofprescription and remains binding in accordance with the terms and

Filing of bond. is tantannount to a uritten toaiaer.

- Only written agreements can suspend the running of the period of limitation (Republic u. Ret, 4 SCRA 783). The filing of the bond has been held to be tantamount to a written waiver which interrupts the period of limitation (Republic a.Xauier Gun Tlad.ing Co.,4 SCRA 1133). The filing of a chattel mortgage to secure the tax obligation is tantamount to a written waiver of the statute of limitations (Sannbrano o. CTA,101 5.

PhiI.l).

conditions set forth in the waiver. The court did not go along

Waiaers extend., not red.uce, prescriptiue period.s proaided.by law. - Tax waivers are supposed to extend,

with CIR's theory. Section 319 is clear and explicit that the waiver must be in writing and signed by both the CIR and the taxpayer (Comrnissioner u. Carnation Phil. [nou rnerged with Nestle Phils.l and. CTA" CA-G.R. SP No. 30220, May 31,1994).

not reduce, the prescriptive periods provided by law. Hence,

the Commissioner cannot validly agree to reduce the prescriptive period to less than that granted by law to the detriment of the State since it diminishes the Government's opportunities to collect taxes due the Republic (Republie a. Lopez, 7 SCRA 566). 6.

697

l4lll

assessment (Pelican u. Commissioner, CTA Case No. 5997, May 76,2003). 3.

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Had petitioners believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount oftaxes in the revised assessment. - Estoppel (underArt.

2.

Waiaer tnust be signed. by reuenue official who is d.uly authorized.. - Petitioner filed its 1989 annual income tax return on April 11, 1990 and so, the BIR has until April 15, 1993 to assess. On March 16, 1993, Petitioner executed a

'RCBC v. Commissioner, G.R. No. 170257 , September 7 ,

20II

698

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waiver was instead signed by the Assistant Revenue Service Chief, Special Operations Service, ofthe BIR. Since the amount involved in the assessment is F16,259,617 .67 ,

the waiver was invalid insofar as the said assessment was concerned and consequently did not suspend the running of the three-year prescriptive period. Thus, when Respondent issued the aforesaid assessment on July 27, 1993, his right to assess has prescribed(Philippine Bank of Communications u. Comrnissioner, CTA Case 5257, Nouernber 7,1999). 3.

Unsigned. first utaiaer is not a aalid. agreetnentl period to assess was not suspend.ed,by the erecution of first utaiuer. - The first waiver extended the period of assessment up to December 31, 1992 and the second waiver extended it up to June 30, 1993. However, these waivers have no binding effect. The first waiver was not valid because the Commissioner (or his duly authorized representative) did not give his consent as evidenced by the fact that he did not sign the document. The fact that it was left unsigned by the Commissioner signifies that there was no valid agreement to stop the running of the period of limitations. Section 223(b) of the NIRC clearly provides that both the Commissioner and the taxpayer must agree in writing on the period agreed upon. Since the Commissioner did not affix her signature, the document is ineffective... The fact that the waiver executed on September 30, 1992 was signed by the representative of the petitioner and not by the Commissioner, the period to assess was never extended. The waiver was not consummated and therefore was invalid and void. As regards the second waiver executed by the petitioner, the same was of no consequence since the first waiver was

699

1rl,iotr

to assess was not suspended by potitioner's execution of the first waiver, more so by the second waiver. As required by Section 223,the second waiver must be executed before the expiration of the period previously agreed upon. Inasmuch as there is no valid waiver previously agreed upon, no valid extension can be made. The law bars the respondent in issuing the subject assessment (Luzon Packaging Prod,ucts a. Comrnissioner, CTA Case 5076, June 23, 1997). rrol, vrrlid. 'l'hus, Lhe period

waiver consenting to the assessment andlrr c
signature is required in waivers for tax cases involving more than one million pesos under RMO 20-90. The subject

)rr.scrt

4.

Amount and. kind. of tax, and. date of acceptance of waiaer by BIR and. d.ate of fact of receipt by taxpayer must be ind.icated. in the waiaer. - If the amount and kind of tax were not indicated in the first waiver, logicallv, there was no agreement to speak of. An agreement is "the expression by two or more persons of a common intention to affect their legal relations; it consists in their bcing of the same mind and intention concerningthe mattcr agrccd upon" (Philippine Law Dictionary, Moreno, Srd. I'kt.., p. 46). Moreover, the date of the acceptance of said wirivrrr by the respondent and the fact of receipt by the pe[iliorrt:r of its copy of the accepted waiver were not indicated in said waiver. Therefore, having ruled that the first waivcr was invalid, the three (3)-year reglementary period wrrs not interrupted. In other words, the assessment issucd orr March L4,L996,for alleged liability incurred in 1990 alrcitrl.y prescribed. Considering that the first waiver is not vulitl, there can be no basis for the second waiver... In sum, ttvctt supposing that the two waivers were valid, the assessmcnl, issued on March 14, 1996 is still void simply becattsc it, does not correspond to the original assessments nor l,rt l.Jtc same assessments in a reduced amount. As evinced b.y l.lrc records, the subject assessment is entirely separa{,c itntl distinct from the assessment issued on November 2lt, 1994. The assessment issued on March 14,l996,which givcs risc to the instant petition, pertains to deficiency incomc tax for 1990 in the amount of P'85,282,456.L7,by reason of the disallowance by respondent of certain interest expenses. However, the assessment notices above-mentioned relate to different tax liabilities of herein petitioner. In fact, the memorandum issued by the Revenue Officer who conducted the reinvestigation recommendation for the cancellation of the same assessments for lack of factual and legal basis

700

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(Solid. Cement Corporation. u. Comrnissioner, CTA Case 5420, May 27,1999).

lnterruption of the prescriptive period The running of the prescriptive periods for assessment and collection of taxes is suspended under any of the following circumstances:

a.

When the Commissioner is prohibited from making the assessment or beginning distraint and levy or a proceeding in court and for 60 days thereafter;

b.

When the taxpayer requests for the reinvestigation which is granted by the Commissioner;

c.

When the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected; Prouided, That if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended;

d.

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When the warrant of distraint and levy is duly served upon

Insurance Corporutittn, et Ql. u. CA, et al., G.-R. No. 772675' January 25,1999). The service of a warrant of distraint or levy to a taxpayer's authorized representative, who has always acted in behalf of the taxpayer, is sufficient to toll the running of the prescriptive period (Palanca a. CIR, G.R. No. L'76667, Januany 31, 7962). Also, the court allowed the suspension of the prescriptive period since the enforcement of the warrant was not implemented because of the pending protests ofthe taxpayer and its requests for withdrawal of the warrant (Ad.aertising Assoeiates a. CA, et al., G.,R. No. 79758, Deeernber 26, L984).

Prescriptive period is not suspended

1.

2.

the taxpayer, his authorized representative or a member of his household with sufficient discretion and no property could be located; and

e.

When the taxpayer is out of the Philippines (Sec. 223, NIRC).

In order that the pendency ofother proceedings shall have the effect of tolling the Statute of Limitations on a cause of action, the proceedings must be of such nature as to prevent enforcement of remedy by action. Where one has a choice of remedies, the fact that he selects one remedy does not toll limitations as against an action based on another. Since the Commissioner is empowered to pursue administrative and judicial remedies simultaneously to collect taxes, it is necessary to show that he is barred from exercising all remedies available to him, and not only one which he chooses to avail of. The prescriptive period will be suspended only "If the taxpayer informs the Commissioner of any change in the address." Since the "pool" (of insurance firms assessed as a taxable partnership) changed its address without notice to the BIR, and indeed, the pool could not be located at the address given in the information return filed and for which reason there was delay in sending the assessment, the right of the government to assess and to collect had not prescribed (Afi.sco

701

The prescriptive period to collect is not suspended during the period that the property ofthe taxpayer is in custotlio

legis (under judicial custody) because it may still btr distrained subject to the prior lien of the attachmcnt creditor (Collector a. Codinera, 102 Phil. 1L65). When the taxpayer partially paid the deficiency tax, thtr prescriptive period to collect is not suspended because lhtr government is not prevented from collecting the tax tror does it constitute as a waiver "in writing" of the defensc ol' prescription (Cord'ero a. Gond.a,8 SCRA 331 [L966]).

3.

The pendency of a criminal case does not suspend thc running ofthe prescriptive period to collect the tax assesstxl in the absence of any court order prohibiting its collection. A criminal action for a tax violation is distinct from thtr civil action (Republic u. Ret, GR. No. L-73754, March 3L,1962).

4.

The CIR

s

decision orderingthe taxpayerto paythe assessed

tax was issued more than 13 years from the issuance ol' the assessment. While the taxpayer specifically requested for reinvestigation and submitted additional documents in support thereof, BIR did not act thereon' In order effect suspension of the statute of limitations, the request for reinvestigation must first be granted by the Commissioner. The court added that the burden ofproofthat the request for reinvestigation had been actually granted shall be on the Commissioner. Such grant may be expressed in its communications with the taxpayer or implied from

702

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the action ofthe CIR or his authorized represcntative in response to the request for reinvestigation (BPI u. CIR, G.R. No. 174942, March 7,2OO8).

Bar Question (2002) OnAugust 5,1997,Adamson Co.,Inc. (Adamson) filed a request for reconsideration of the deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings, the original assessment of F150,000.00 was reduced to F75,000.00 and a modified assessment was thereafter issued on August 5, 1999. Despite repeated demands, Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an action for collection in the RTC on September 15, 2000. Adamson moved to dismiss the action on the ground that the government's right to collect the tax by judicial action has prescribed. Decide the case.

Suggested answer: The right of the Gouernment to collect by judicial action has not prescribed. The filing of the request for reconsiderqtion suspended the running of the prescriptiue period and commenced to run again when a decision on the protest was made on August 5, 199g. It must be noted that in qll cases couered by ant. assessment, the period to collect shq.ll be fiue (5) years from the dqte of the assessment but this period is suspended the filing of a request for reconsideration which was acted upon by the Commissioner (Commissioner u. Wyeth Suaco Laboratories, 202 SCR:I 125 [ 1991 ]).

Bar Question (1993) Fitness, Inc. is a domestic corporation engaged in the manufacture and sale of nutritional products. It pays royalties to its foreign licensor. After investigation, the BIR on December 17,1g74, sent a notice of assessment to Fitness, Inc. for allegedly failing to remit withholding tax at source for the fourth quarter of 19ZB on its royalties. It demanded payment of F3,000,000.00. The notice was received by Fitness, Inc. on December 19,I974. On February 8,1975, Fitness, Inc., through its counsel, protested

the assessment and requested its cancellation or withdrawal on the ground that it lacked factual and legal bases. On December 10, 1979, the Commissioner of the BIR rendered a decision reducing the

assessment to P1,500,000.00.

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70:i

Fitness, Inc. was not satisfied and on January 18, 1980, it filed a petition for review of the decision in the CTA to enjoin the enforcement of the assessment. On February 7, 1980, the BIR issued a warrant of distraint against Fitness, Inc. The CTA enjoined the collection of the deficiency taxes by virtue of the warrant of distraint. It was argued by Fitness, Inc. that the right of the BIR to collect its alleged deficiency taxes had already prescribed. Rule on the argument.

Suggested answer: The warrant of distraint wa's serued on the taxpayer within the prescriptiue period (then fi.ue [5] years, now three [3J years). In Commissioner u. Wyeth Suaco (202 SCRA 125), the court ruled' that the prescriptiue period prouided by law to mahe collection by distraint andl or leuy or by a proceeding in court is interrupted once a taxpayer protests the assessrnent and requests for its cancellation. Thus, when the taxpayer protested the assessment on February 8, 7975, the prescriptiue period to collect was interrupted and resumed on December 10, 1979. When the Commissioner issued the warrant of' distraint on Februa.ry 7, 7980, it was well within the fi.ue-year (now ll years) prescriptiue period to collect. The right of the BIR to collect the defi'ciency taxes has not prescribed, as the prescriptiue period is rechoned from the date of the reduced assessn'Lent, which is December 10, 1979. The BIR has three (3) years from said date to collect.

Alternative suggested answer: The reduced assessment is in the nature of a cornpromise assessment, the first q.ssessment receiued by Fitness on December 79, 1974, and protested only on February 8, 1975, hauing already become

final and binding on Fitness. Applying the present prouisions of the NIRC, Fitness should haue protested the q.ssessment within thirty (30) days frorn receipt of the sanrle. Failing to do so, the assessment became final and was presumably merely compromised. The date of such compromise assessment should then be the basis for computing the prescriptiue period of three (3) years. (NOTE: Beginning 7984, the prescriptiae period' of the right of the goaernrnent to assess and. collect internalreuen'ue ta'res

was red,uced. from fiae to three years.)

704

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Period. the Commissioner is prohibitecl fronr. mahing beginning d.istraint and leay, or proeeed.ing in court and for 6O d.ays. - The running of the prescriptive period t
collect deficiency taxes shall be suspended for the period during which the Commissioner is prohibited from beginning a distraint and levy or instituting a proceeding in coult, and for sixty days thereafter. In this case, the pendency ofthe taxpayer's appeal in the CTA and in the Supreme Court had the effect of temporarily staying the hands of the Commissioner. If the taxpayer's stand that the pendency of the appeal did not stop the running ofthe period because the CTA did not have jurisdiction over the case is upheld, taxpayers would be encouraged to delay the payment of taxes in the hope of ultimately avoiding the same. Under the circumstances, the running of the prescriptive period was suspended. The reason for such prohibition is that when a case is on appeal to the CTA, the Commissioner is prevented from filing an ordinary action to collect the tax in the regular courts (Repubtjc u. Ker & Co., Ltd., 78 SCRA 207).

Request for Reinvestigation is granted by BIR The only agreement that can suspend the running of the prescriptive period for the collection of taxes is a written agreement between the taxpayer and the Collector, entered into before the expiration of the five (5)-year period, extending the period of limitation prescribed by law. The rule is in accord with the general law on prescription that requires a written acknowledgment of the debtor to renew the cause ofaction or interrupt the running ofthe limitation period (New Ciuil Code, Art. 1155; Collector u. Solano, G.R. No. L-11475, July 31, 1958). A mere request for reinvestigation or reconsideration of an assessment does not have the effect of suspension. The ruling is logical; otherwise, there would be no point to the legal requirement that the extension of the original period be agreed upon in writing." The "legal requirement" above adverted to obviously refers to Section 319(c) of the Tax Code, whereunder the 5-year period therein fixed to enforce collection of a tax, either by distraint or levy or by a proceeding in court, may be extended if, prior to the expiration thereof, another period is "agreed upon in writing by the Commissioner of Internal Revenue and the taxpayer" (Commissioner u. Atlas Consolid.ated Mining & Deaeloprnent Corporation, CA-GR. SPNo. 47979, September SO,Iggg).

Where the reinvestigation requested by appellant was not conducted because neither the appellant nor his counsel appeared, the prescriptive period remains suspended until the BIR issued

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705

t

a warrant ol'distraint and levy, which was the first clear and unequivocal act on the part of the Government which showed that as far as it was concerned, the old assessment of the deficiency taxes was final, and hence collection of the amount assessed would proceed.

The interruption began on September 2, 1954, when the appellant's request for reinvestigation was granted, since the grant in effect tied the hands of the appellee from filing the action (Republic a. Aquias, 33 SCRA 607). On June 6, 1985, BPI sold $500,000 to the Central Bank for $1M. On October 10, 1989, BIR assessed BPI for deficiency documentary stamp tax (DST) on the sales. The assessment contained a

computation, which stated that the foreign bills of exchange amounted to F18.48M, and the tax due based on Section 182 of the Tax Code was computed at ?27 ,720. BPI received the assessment on October 20, 1989. On November 17, 1989, BPI protested the assessment, but there was no immediate reply. On October 15, t992, BIR issued a warrant of distraint and./or levy, but it was served only on October 23,1992. On September 11, 1997, BPI received a letter from the CIR dated August 13, 1997, denying its request for reconsideration and addressing the points raised in the protest letter. BPI filed a petition for review with the CTA on October 10, 1997, raising the ground of prescription. CTA held that the period to collect has not yet prescribed, but it cancelled the assessment as the sales were tax exempt. CIR appealed to CA, which sustained sustained that the period to collect has not yet prescribed, but held that the sales were subject to DST. The Supreme Court ruled that under Section 223(c) of the Tax

Code, it is not essential that the warrant be fully executed so that it can suspend the running ofthe Statute of Limitations on the collection

ofthe tax. It is enough that the proceedings have validly begun and that their execution has not been suspended by reason ofthe voluntary desistance of the CIR. Jurisprudence establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the warrant and service thereof on the taxpayer. Moreover, BPI's protest did not constitute a request for reinvestigation which could have suspended the running of the period to collect. Revenue Regulations No. 12-85 provides for the procedure for protesting and assessment and distinguishes between (a) request for reconsideration, which refers to a plea for a reevaluation of an assessment on the basis of existing records without need of additional evidence; and (b) request for reinvestigation, which refers to a plea for re-evaluation of an assessment on the basis of

706

Itr,:vrr,:wr,:rr

newly-discovered or additional evidence that a taxpayer intends kr present in the reinvestigation. Section224 of the Tax Code provides that only a request for reinvestigation may suspend the running of the prescriptive period. Taxpayer's protest letter did not specifically request for either reconsideration or reinvestigation, but its contents would show that it did not present any new evidence. The BIR itself referred to it as a request for reconsideration. Even ifit was considered as a request for reinvestigation, it may only validly suspend the running of the period, when it has been granted by the CIR. Such grant need not be express, but may be implied from the acts of the Commissioner or his authorized representative in response to the request for reinvestigation (BPI u. Comrnissioner, Gf,. No. 739736,

October 17,2005).

Bar Question (2000) Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. Aiter the investigation of said return, the BIR issued a notice of deficiency income tax assessment on April 15, 1998. Mr. Reyes returned to the Philippines as a balihbayan on December 8, 1998. Finding his name to be in the list of delinquent taxpayers, he filed a protest against the assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed. Will the protest prosper? Explain.

Suggested answer: No. Prescription has nnt set in because the period of lirnitations for the Bureau of Internal Reuenue to issue an assessment was suspended during the tirne that Mr. Reyes was out of the Philippines or from the period December 15, 1995 up to December 8, 1998 (Sec. 223 in relqtion

to Sec.203, NIRC).

3.

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Period to file criminal action

Prescription shall begin to run from the day of the commission of the violation ofthe law, and ifthe same be not known at the time, from the discovery thereofand the institution ofjudicial proceedings for its investigation and punishment. The prescription shall be interrupted when proceedings are instituted against the guilty persons and shall begin to run again if the proceedings are dismissed for reasons not constituting jeopardy. The term prescription shall not run when the offender is absent from the Philippines (Sec.2B1, NIRC).

The phrase "institution of

707

judicial proceedings for its

investigation and punishment" may be either disregarded

as

surplusage or should be deemed preceded by the word "until" (People a. Duque, G.R. No. 700285, August 13, 1992).

There must be a judicial proceeding for the investigation and punishment of the crime in addition to the fact of discovery before the five-year period begins to run. The referral ofthe case to a public prosecutor for preliminary investigation constitutes the "institution ofjudicial proceedings" contemplated by law (see Lim, et al. u. CA, G.R. Nos. 48734-37, October 18, 7990).

If the nature of the crime is such that it could only be committed after service of notice and demand for payment of the deficiency taxes upon the taxpayer, like those violations committed under Section 255 of the Tax Code for failure to file return and to supply accurate information), the prescriptive period shall be counted from the date when the final notice and demand is served on the taxpayer. This is so because prior to the receipt of the letter-assessment, no violation has yet been committed by the taxpayer. The crime is committed only after its receipt coupled with the willful refusal to pay the taxes due within the allotted time (Aguina.ld.o Industries Corporation u. CIR, G.R. No. L-29790, February 25, 1982). Bar Question (2006) Gerry was being prosecuted by the BIR for failure to pay his liability for Calendar Year 1999 despite several demands by the BIR in 2002. The Information was filed with the RTC only last June 2006. Gerry filed a motion to quash the Information on the ground of prescription, the Information having been filed beyond the 5-year reglementary period. If you were the judge, will you dismiss the Information? Why? income tax

Suggested answer:

trial court cqn exercise jurisdiction. Prescription of a action begins to run from the day of the comm.ission of the criminal The criminal uiolation was committed when Gerry of law. uiolation willfully refused to pay despite repeated demands in 2002. Since the Information. was filed in June 2006, the crimirtctl case u)as in'stituted within the fiue-year period required by law (Tfupaz a. UIep,316 SCRA 719991; Sec. 281, NIRC). No. The

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Bar Question (2002) TY Corporation filed its final adjusted income tax return for April 1-2, 1994 showing a net loss from operations. After investigation, the BIR issued a pre-assessment notice on March 30, 1996. A final notice and demand letter dated April 15, 1997 was issued, personally delivered to and received by the company's chief accountant. For willful refusal and failure of TY Corporation to pay the tax, warrants of distraint and levy on its properties were issued and severed upon it. On January 10, 2002, a criminal charge for violation of the Tax Code was instituted in the Regional Trial Court with the approval of the Commissioner. 1993 on

The company moved to dismiss the criminal complaint on the ground that an act for violation of any provision of the Tax Code prescribes after five (5) years and, in this case, the period commenced to run on March 30, 1996 when the pre-assessment was issued. How will you resolve the motion? Explain your answer.

Suggested answer: The motion to dismiss should not be granted. It is only when the assessment has become final and unappealable that the S-year period to file o criminal action commences to run (T\tpaz a. Ulep, 316 SCRA 118 [1999]). The pre-assessment notice issued on March 30, 1996 is not a final assessment which is enforceable by the BIR. It is the issuance of the final notice and demq,nd letter dated April 15, 1997 and the failure of the taxpayer to protest within 30 days from receipt thereof that made the q.ssessment final and unappealable. The earliest dq.te th&t the assessment has become final is May 16, 1997 and since the criminal charge was instituted on January 10,2002, the same was timely fi.led.

CIIAPTER

NOfl

TAX CREDIT OR REFUND

All national internal revenue taxes, except VAT Every corporation liable to income tax shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments' including the creditable withholding taxes, made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either (a) pay the balance oftax still due; or (b) carry over the excess credit; or (c) be credited or refunded with the excess amount paid, as the case may be. case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return maybe carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters ofthe succeeding taxable years. Once the option to carry-

In

over and apply the excess quarterly income tax against income tax due for the taxable quarters ofthe succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance ofa tax credit certificate shall be allowed therefor (Sec. 76, NIRC).

A "tax cred.it" is a claim for the issuance of a tax credit

certificate, showing an amount owing from the goYernment to the taxpayer which the latter is legally authorized to credit or offset against national internal taxes payable by him, except withholding taxes. On the other hand , a "refu,n'd'" is claim for the payment of cash for taxes erroneously or illegally paid by the taxpayer to the government. A "Tax Credit Certificate" means a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR accountable form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer is legally entitled a tax credit, the money value of which may be used in payment of any of his internal revenue 709

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tax liability (except those excluded), or may be converted as rr cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by

the provisions of these Regulations (Sec. 7, Reu. Regs. No. 5-2000, August 15,2000).

The Commissioner may credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proofofdestruction. No credit or refund oftaxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years aft,er the payment of the tax or penalty. A return filed showing an overpayment shall be considered as a written claim for credit or refund.

A Tax Credit Certificate validly issued under the provisions of the Tax Code may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. Any request for conversion into refund of unutilized tax credits may be allowed, subject to the provisions of Section 280 of this Code. The original copy of the Tax credit certificate showing a creditable barance is surrendered to the appropriate revenue offrcer for verification and cancellation. In no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made (Sec,204[C], NIRO. No suit or proceeding shall be maintained in any court for the recovery ofany national internal revenue tax alleged to have been erroneously or illegally assessed or collected, or ofany penalty to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) 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 upon which payment was made, such pa;rment appears clearly to have been erroneously paid (Sec. 229, NIRC).

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717

The rechoning ol'the two (2)-year prescriptiue period would be the d.ate of'monthly remittqnce of the clairned creditable withholding to*es. - Since the claim pertains to creditable income tax erroneously withheld, Sections 204(c) and 229 of the Tax Code must be read

together with Section 2.58 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 17-2003' Based on these regulations, the reckoning of the two-year prescriptive period would be the date ofmonthly remittance of the claimed creditable withholding taxes for January to December 2006. The last month covered by the claim is December 2006, which under Revenue Regulations No' 2-98, must be paid on or before January L5,2007 , or not later than January 20,2007,in case of availment of EFPS. Therefore, counting the twoyear period from these dates, LISP had only until January 1'5, 2009 or January 2O,20Og at the most, to file its claim for refund for December 2006, both with the CIR and the CTA. Since the claim was filed only on March 4,2OOg and the subsequent appeal was filed with the CTA on April 13,2009, LISP's claims forthe months of Januaryto December 2006 had already prescribed

(LISP'il I'acatord Association

a. CIR,

CTA Case No.7906, September 22,2077).

Value Added Tax (VAT) Any VAT-registered person, whose sales are zero-rated or

effectively zero-rated, may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund ofcreditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. In the case of zero-rated sales under Section 106(A)(2XaX1)' (2) and (B) and Section 108(BX1) and (2), the acceptable foreign currency exchange proceeds thereofhad been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas @SP) ' Where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or serrrices, and the amount of creditable input tax due or paid cannotbe directly and entirely attributed to any one ofthe transactions, it shall be allocated proportionately on the basis of the volume of sales.

A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter

712

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when the importation or purchase was made (Sec. I l2lAl urut lRl, NIRC).

In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from the date of submission of complete documents in support of the application filed in accordance with subsections (A) and (B) hereof. In case offull or partial denial ofthe claim for tax refund or tax credit, or the failure on the part of the commissioner to act on the application within the period prescribed above, the taxpayer affected may, within 30 days from the receipt of the decision denying the claim or after the expiration ofthe 120-period, appeal the decision or the unacted claim with the Court of Tax Appeals (Sec. 112[D], NIRC). The proper party to question or seek a refund, of the tax is the statutory toxpayer, the person on whom the tax is imposed by law and who paid the same, euen when he shifts the burden thereof to another. Thus, in Contex Corporation a. CIR, the Supreme Court held -that while it is true that petitioner corporation should not have been liable for the vAT inadvertently passed on to it by its supplier since their transaction is a zero-rated sale on the part ofthe supplier, the petitioner is not the proper party to claim such vAT refund. Rather, it is the petitioner's suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter (Silhair fSingapore] pTE Ltd, a. CIR, Gi. No. 166482, Januany 25, 2OI2). The Commissioner may not grant the refund when there is a deficiency tax assessment against the claimant-taxpayer. To award such refund despite the existence of the deficiency assessment is an absurdity and a polarity in conceptual effects (comrnissioner

u. Court of Appeals and. Citytrust Banking Corporation,2B4 scRA848).

Tax credit certificates are valid and effective from there issuance and are not subject to a post-audit as a suspensive condition for their validity. The implication of the instant case of the earlier rulings in Petron u. CIR (2010) and, Shell u. CIR is that petron has the riglt to

rely on the validity and effectivity ofthe tax credit certificates that

were assigned to it. The validity ofthose certificates should not depend on the results of the DoF's post-audit findings. As found earlier, the

parties entered into a joint stipulation offacts statingthat petron did not participate in the procurement or issuance of those certificates.

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Thus, thr.l SC aflirms the CTA en banc's ruling that Petron was an innocent transferee for value (CIR u. Petron Corporation, G.R. No. 785568, March 21, 2012).

Petitioner-manufacturer who sold its oxygen and acetylene entity, cannot claim exemption from the payment of sales tax simply because its buyer (NPC) is exempt from taxation. Pursuant to our ruling in Philippine Acetylene u. CIR, a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer-seller of the goods for any tax due to it as manufacturer-seller. The excise tax imposed on petroleum products is the direct liability of the manufacturer who cannot invoke the excise tax exemption granted to its buyers who are international carriers. In the case ofinternational air carriers, the tax exemption granted under Section 135(a) ofthe Tax Code is based on "a long standing international consensus that fuel used in international air services should be tax exempt." The provisions of lhe 1944 Convention of International Civil Aviation, which form binding international agreement, requires the contracting parties not to charge duty on aviation fuel already on board any aircraft that has arrived in their territory from another contracting state. Between Individual countries, the exemption of airlines from national taxes and duties is a standard element of the network of bilateral "Air Service Agreements." Later, a resolution of the International Civil Aviation Organization expanded the provision as to similarly exempt from taxes of all kinds of fuel taken on board for consumption by an aircraft from a contracting state in the territory of another State departing for the territory of any other State. The tax exemption now generally applies to fuel used in international travel by both domestic and foreign carriers (CIR v. Pilipinas Shell Petroleum Corporation, G.R. No. 788497, April25,2072). gases to National Power Corporation, a tax-exempt

Tax Credit v. Tax Deduction

A"tar cred.it"

refers to an amount that is subtracted directly from one's total tax liability. It reduces the tax due, including the income tax that is determined after applying the corresponding tax rates to taxable income. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits. On the other hand, a "tafi d,ed.uction" is an amount allowed by law to reduce income prior to the application of the tax rate to arrive at taxable income. A tax credit is used only after the tax has been computed; a tax deduction, before.

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Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. However, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will be no tax liability against which any tax credit can be applied. Nevertheless, under R.A. 7482, Congress has granted without conditions a tax credit benefit to all covered establishments. While a tax liability is essential to the use of any tax credit, prior tax payments are not essential on estate taxes, donor's taxes, and value added taxes.

The provisions of the implementing regulations that withdrew or modified the unconditional gtant of a tax credit to all covered

entities are void. Revenue Regulations No. 2-94 defined "tax credit" as discount to be deducted from gross income. The regulation is still subordinate to R.A. 7432, and in case of conflict, the implementing rule will not prevail over the law it seeks to implement. Accordingly, despite incurring a net loss, taxpayer may still claim the 2OVo discount as a tax credit pursuant to R.A. 7482 (Cornmissioner v. Central Luzon Drug Corporation, GR. No. 15g64Z, April 75, 2OO5; Commissioner a. Bicoland.ia Drug Corporation, GR. No. 748083, July 27,2006). TNOTE: RA. 9257 amend,ed R,A. 24J2. The term *tqrc credit' is no longer used. The cost ofthe discount shail be allowed as d'eduction fronx gross income for the sanne ta*able year that the discount is granted.l

1. Ifin a taxable year a bookstore has no tax due on which to enjoy the tax credit, can the bookstore claim from the BIR a tax refund

2.

Can the BIR require the bookstores to deduct the amount of the discount from their gross income? Explain.

3.

If a bookstore closes its business due to losses without being able to recoup the discount, can it claim reimbursement of the discount from the government on the ground that without such reimbursement, the law constitutes taking of private property for public use without just compensation? Explain.

Suggested answer:

1.

a TCC may be held liable if proven to have been a party to the fraud or to have had knowledge ofthe fraudulent issuance ofthe subject

TCC (CIR a. Petron Corporation, GR. No. 785568, Mareh 2I, 20L2).

Bar Question (2006) Congress enacts a law granting grade school and high school students alUvo discount on all school-prescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit.

No, The lqw is clear that bookstores can only cluim the

discount as a tax credit. The term "tqx credit" connotes that the amount, when claimed, shq'll only be treq'ted as a reduction from any tax liability, plain and simple. There is nothing in the law that grants a refund when the bookstore has no tax liability against uthich the tqx credit can be used (CIR u. Central Luzon Drug Corpu 456 SCRA 414 t20051).

2.

No, Tax credit, which reduces the tqrc liability, is dffirent from a tax deduction, which merely reduces the income to arriue at the tax base. Since the law q'llowed boohstores to

claim in full the discount as a tax credit, the BIR is not allowedto expand or contract the legislatiue mandate (CIR u. Central Luzon Drug Corp, ibid).

Tax credit certificates (TCC) are valid and effective from their issuance and are not subject to a post-audit as a suspensive condition

for their validity. The implication of this statement is that the taxpayer has the right to rely on the validity and effectivity of the TCCs that were assigned to it. However, the transferee/assignee of

in lieu of tax credit? Explain.

3.

No, the bookstore cannot cleim reim'bursement. The tax credit priuilege giuen to it is the compensation for the subsidy taken by the gouernment for the benefit of a class of taxpayers to which the students belong. Howeuer, the priuilege granted is limited only to the reduction of a present or future tax liability, because by its nature, it is the existence of a lach of a tax liability that determines whether the discount can be used as a tax credit. Accordingly, if the business continues to operate at a loss and no other ta.xes are due, compelling the business to close shop, the credit cctn neuer be applied and will be lost altogether (CIR a. Central Luzon Drug Corp., ibid.).

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Options of Taxpayers fbr Excess Quarterly Tax Paymenls and Creditable Withholding Taxes The phrase *succeed.ing tarable yearu in the TSZZ I'ax Code is a limitation that applies only to a tax cred.it, not to tax refund.. - Under Section 69 of the L977 Tax Code, as amended, it provides that a taxable corporation is entitled to a tax refund when the sum of the quarterly income taxes it paid during a taxable year exceeds its total income tax due also for that year. Consequently, the refundable amount that is shown on its final adjustment return may be credited, at its option, against its quarterly income tax liabilities for the next taxable year. Since the taxpayer was unable to use the excess income taxes paid in 1995 against its tax liabilities in 1996, it may claim the refund in 1997. A tax refund may be claimed even beyond the taxable year following that in which the tax credit arises. There is no law limiting such entitlement, other than the requirement that the filing of the administrative claim for it be made by the taxpayer within a two-year prescriptive period under Section 204(3) ofthe 1977 TaxCode. The phrase "succeeding taxable year" in the L977 Tax Code is a limitation that applies only to a tax credit (Calamba Steel Center a. Comrnissioner, G.R. No. 157857, April 28,2005).

Option to camy oaer erceas quarterly ineome tar is irreuocable for that tqrable year, once the tarpayer has exercised. such option under 7997 Tax Cod.e. - Under Section 76 of R.A. 8424, otherwise known as the 1997 Tax Code, which became effective on January 1, 1998, the taxpayer is allowed any of the following options, if the sum of its quarterly tax payments made during the taxable year is not equal to the total tax due for that year: (a) pay the balance ofthe tax still due; (b) carry-over the excess credit; or (c) be credited or refunded the amount paid. Ifthe taxpayer has paid excess quarterly income taxes, it may be entitled to a tax credit or refund as shown in its final adjustment return which may be carried over and applied against the estimated quarterly income tax liabilities for the taxable quarbers ofthe succeeding taxable years. However, once the taxpayer has exercised the option to carr;r-over and to apply the excess quarterly income tax against income tax due for the taxable quarters ofthe succeeding taxable years, such option is irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. The purpose ofthe law in requiring taxpayers to elect whether to carry over their excess tax credits or claim for refund thereof

is to guide tax authorities, at the earliest stage, irr the proper treatment of tax credits. In making that option irrevocable, the law aims towards a more efficient system of tax administration (Commissioner a. Cebu Holdings,Inc., CA-GR SP No. 75424, February 78,2005). Election to file claim' for refund is not final a'nd' prior aerification and. approual by CIR is required'. - While a taxpayer is given the choice whether to claim for refund or have its excess taxes

applied as tax credit for the succeeding taxable year' such election is not final Prior verification and approval by the Commissioner of Internal Revenue is required. The availment of the remedy of tax credit is not absolute and mandatory. It does not confer an absolute right on the taxpayer to avail of the tax credit scheme, if it so chooses. Neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion ofthe taxpayer.

Ilnd,er Section 76, the exercise of an option is irreuocable and, a d.ecision to earry'oaer and' appl! tor oaerpayrnent eontinues until the oaerpoyn 'ent has been fally applied' to ta.r tiabilities. - Section 76 of the 1997 NIRC wrought two (2) changes to its predecessor, Section 69 of t]ne1977 NIRC: first, it mandates that the taxpayer,s exercise ofits option to either seek refund or crediting is irrevocable; and second, the taxpayer's decision to carry-over and apply its current overpayment to future tax liability continues until the overpayment has been fully applied, no matter how many tax cycles it takes. [The Court] explained in Asiaworld Properties Philippine Corporation u. Cont'missioner of Internal Reuenue: Under this old provision, the option to carry-over the excess or overpaid income tax for a given taxable year is limited to the immediately succeedingtaxable year only. In contrast, under Section 76 of the NIRC of 1997,the application ofthe option to carry-over the excess creditable tax is not limited only to the immediately following taxable year but extends to the next succeeding taxable years. The clear intent in the amendment under section 76 is to make the option, once exercised, irrevocable for the "succeeding taxable years." Thus, once the taxpayer opts to carry-ouer the excess income tax against the taxes due for the succeeding taxable years, such option is irreuocable for the whole amount of the excess income tax, thus, prohibiting the taxpuyer from applying for a refund for that saul.e uccess income tax in the next succeeding taxable years. T}re unutilized excess tax credits will remain in the taxpayer's account

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and will be carried over and applied against the taxpayer's inconrtr tax liabilities in the succeeding taxable years until fully utilized.l

In our (earlier) Decision, we denied petitioner's claim for refund because it has earlier opted to carry over its 19gz excess income tax payments by marking the tax credit option box in its lgg7 income tax return. We must clari$', however, that while petitioner may no longer file a claim for refund, it properly carried over its 1992 excess income tax pa5rments by applying portions thereof to its 19gg and 1999 Minimum Corporate Income Tax in the amounts of p2b,596,210 and F14,185,874, respectively. Pursuant to our ruling, petitioner may apply the unutilized excess income tax payments as a tax credit to the succeeding taxable years until fully utilized. Thus, as of the taxable year 1999, petitioner still has an unutilized excess income tax pa;rments of P92,261,444 which may be carried over to the succeeding taxable years until fully utilized.2 To avoid confusion, this Court has properly explained the phrase "for that taxable period" InCIR u. BPI, where the Court held that the phrase merely identifies the excess income tax, subject of the option, by referring to the "taxable period when it was acquired by the taxpayer." Section 76 remains clear and unequivocal. Once the carryover option is taken, actually or constructively, it becomes irrevocable. It mentioned no exception or qualification to the irrevocability rule. Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option, and once it had already done so, it could no longer make another one (Ilnited International Pictures a. CIR, G.R. No. 76833I, October II, ZOI2).

The Court ofAppeals mistakenly understood the phrase ,,for

that

taxable period" as a prescriptive period for the irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998, and BPI opted to carry it over to 1g99, then the irrevocability ofthe option to carry over expired by the end of1999, leaving BpI free to again take another option as regards its 1g98 excess income tax credit. This construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the 1997 Tax Code, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and complication

rCommissioner v. McGeorge Food Industries, G.R. No. 17 4187, Octaber 2O, 2OL0; Belle Corporationv. Commissioner, G.R. No. 181298, January2O,Z}ll;Commissioner v. Phil-American Life and General Insurance co., G.R. No. 175124, september 29, 2010. 2Belle Corporation v. Commissioner, G.R. No. 181298, January 10, 2010.

as regards said taxpayer's excess tax credit. The interpretation of the court of Appeals only delays the flip-flopping to the end of each succeeding taxable period. The supreme court similarly disagrees in the declaration of the court of Appeals (in the cIR a.BPl case) that to deny the claim for refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the part ofgovernment. The court addressed

the very same argument in Philam, where it elucidated that there would be no unjust enrichment in the event of denial of the claim for refund under such circumstances, because there would be no forfeiture of any amount in favour of the government. The amount being claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable years, as provided in section 76 of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess income tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period for the carrying over of th-e same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over, may be repeatedly c,arried ovJr to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited to a tax liability of BPI. Prescription did not bar the taxpayer from applying the amount as tax credii, considering that there was no prescriptive period for the carrying over of the amount as tax credit in subsequent taxable years.3

Submission of ta'xtrtoyet' s ta'r return is required' and' grant of refund, is found.ed. on the assumption tha,t ta,r return is ualid4 since the taxpayer opted to apply its aggregate excess credits as tax -credit or refund for 1990, it was incumbent upon it to present its 1990 income tax return to show that the claimed tax credit or refund had not been automatically credited and applied to its 1990 taxliabilities. The grant of a refund is founded on the assumption that the tax return is valid; i.e., that the facts stated therein are true and correct. without the tax return, it is error to grant a refund since it would be virtually impossible to determine whether the proper taxes have been assessed and paid. Failure of the taxpayer to present sufficient evidence to p"orr" itr claim for refund is fatal to its cause. The claimant has the Lurden ofproofto establish the factual basis ofhis or her claim for tax credit or refund (Paseo Realty & Deaelopmcnt corporation o. Court of Appeals, GR. No. 779286, October 73' zO(M)'

to"-*tt"t""er April 4, 2011.

v. PL Management International Phil, Inc', G'R' No' 160949'

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illicitty withhold. from tarpayere them. - when it is undisputed that a taxpa.ycr is entitled to a refund, the state should not invoke technicalities, keep the money not belonging to it. once a taxpayer elects to carry over and apply its excess tax to the following year's tax liability, it could not have this excess refunded until the entire duration ofthat taxable year has lapsed or expired. In any case, the law was not couched in such a way as to authorize the state to forfeit the unutilized excess tax credits (Raytheon Ebasco Ouerseas Ltd.-phitippjne Branch a. Cornmissioner, CA-G.R. SPNo. 80296, Aprit 11,2005).

statute. 'Ihe claim fbr refund should be filed with the Commissioner as a pre-requisite before court action on tax refund cases can be commenced and that the suit for refund must be filed within two (2) years from date of payment oftax. When the two (2)-year period is about to prescribe and the claim for refund with the Commissioner had not been acted upon, the taxpayer should file a petition for review with the CTA within the two (2)-year period; otherwise, if the Commissioner's decision is adverse, the taxpayer could no longer appeal to the CTA (Commissioner o. United' International Pictures, CA G.ft. SP No.

Refunds are in the nature of tax exemptions and are construed strictly against the tax payer claiming the same

He who claims a refund or exemption from taxes has the burden ofjustifuing the exemption by words too plain to be mistaken and too categorical to be misinterpreted (Compagnie Financiere Sucres et Denrees u. Cornmissioner, G.R. No. 733834' August 28,2006).

The government cannot

what

is justly d'ue

The petition for review for erroneously paid taxes for 1998 was filed by petitioner, as trustee of various retirement plans, on october 9, 1995. At this time, petitioner had a pending petition before the crA involving the same legal issue but covering a previous taxable period. Hoping to comply with the two-year period within which to file an action for refund, petitioner filed a motion to admit supplemental petition in the crA case to include the tax refund claimed for 1998. The CTA denied the motion, saying that the case had already been pending for more 2-l/2years and the admission of the suppremental petition would further delay the proceedings. Thus, separate petition for review for refund was filed.

While income from employees trust funds were exempt from

income taxes, the claims for refund had already prescribed insofar as they covered the first, second and third quarters of1993 as well as for october 1 to 8, 1993. The claim for refund for october 9 to December 31, 1993 was also denied, the evidence being insufficient to establish the fact that the money or assets of the trust funds were used or placed in money market placements, bank deposits, other deposit substitute instruments and government securities. The burden of proving the claim for refund necessarily falls on the taxpayer and petitioner failed

to discharge the necessary burden of proof (Far East Banh and, Tlust Co. u. Commissioner, G.R. No, IB8g1g, May 21 2006). Denial by the Cornmissioner of the claim for refund. is not required. - rt is unnecessary for the commissioner of Internal Revenue to act unfavorably on the claim for refund before the crA may acquire jurisdiction, because of the positive requirement of section 280

of the Tax code and the doctrine that delay of the commissioner in rendering decision does not extend the peremptory period fixed by the

652L 7,

Januany 31, 2005).

Bar Question (2013, 20121 On April 6, 2012, the corporation filed its annual corporate income tax return for 2011, showing an overpayment of income tax of FL million, which is to be carried over to the succeeding year(s). On May 15, 2012,the corporate sought advice from you and said that it contemplates to file an amended return for 2OL1, which shows that instead of carryover ofthe excess income tax pa5rment, the same shall be considered as a claim for tax refund and the small box shown as "refund" in the return will be filled up. Within the year, the corporation

will file the formal request for refund for the excess payment.

(a)

Will

you recommend to the corporation such a course of action and justifu that the amended return is the latest official act of the corporation as to how it may treat such overpayment of tax or should you consider the option granted to taxpayers as irrevocable, once previously exercised

by it? (b) Should the petition for review filed with the CTA on the basis of the amended tax return be denied by the BIR and the CTA, could the corporation still carry over such excess payment of income tax in the succeeding years, considering that there is no prescriptive period provided for in the income tax law with respect to carry over of excess income tax payments?

Suggested answers:

a.

No. Once the option to carry ouer and apply the excess quarterly income tox, against the income taa due for the tq.xable quarters of the succeeding tarable years has been nrade, such option shall be considered irreuocable for the

722

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taxable year &nd no applic(rtion lbr tax rcf'untl or issuutx,e

of tax credit certifr,cate shall be allowed therelnr (Sec. 76, NIRC).

b.

Yes. The carry-ouer of excess income tanc payments is no longer limited to the succeeding taxable year. Unutilized eJccess income tan payments may now be carried ouer to the succeeding taxable years until fully utilized. In addition,

the option to carry ouer ex,cess income tax payments is now irreuocable. Hence, unutilized etccess Income tax payments rlay no longer be refunded (Belle Corporation o. CIB, G*R. No. 787298, January 70,201,7; CIR a. PL, Management Inf,l. Phils.,Inc., G-R. No. 760949, April 4,2077).

Bar Question (2006)

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i rtlt:rt.ls o.tul lt u, r ptxt:s.'I'hus, by any reaso nuble s tandarcl, such person shouLd be regarded as a party-in-interest to bring suit for refund of taxes (Commission'er u. Procter

& Gamble PMC and' CTA,2O4 SCRA 377 t19911).

Bar Question (2004) On March 12,2OOl, REN paid his taxes. Ten months later, he realized that he had overpaid and so he immediately filed a claim for refund with the Commissioner of Internal Revenue.

On February 27, 2003, he received the decision of the Commissioner, denying REN's claim for refund. On March 24,2003, REN filed an appeal with the CTA. Was his appeal filed on time or not? Reason.

Suggested answer:

a.

State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize the refund or credit oftaxes erroneously or illegally received.

b.

Does a withholding agent have the right to application for tax refund? Explain.

file

an

Suggested ansryer: The conditions are: (1) a written claim for refund is filed by the taxpayer with the Commissioner of Internal Reuenue (Sec. 204, NIRC); (2) the claim for refund must be a categorical d,emq,nd for reimbursement (Bennejo u. Coll.ector of Internal Beaenue, ST Phil96 t1950l); (3) the claim for refund or tax credit m.ust be filed with the Commissioner, or the suit or proceeding therefor rnust be commenced in court within two years from date of payment ofthe tax or penalty, regardless ofany superuening cause (Sec.229, NIRC). b.

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Yes. A withholding agent should be allowed to claim for tax refund, because under the law, said agent is the one who is held liable for any uiolation of the withholding tax law should such uiolation occur (Commjssioner a. Wand.er Philippines, 760 SCRA 57O [1988]). Furthermore, since the withholding agent is made personally liable to deduct and withhold any ta&, under Section 53(c) of the Tax Cod.e, it is imperatiue that he be considered the taxpayer for all legal

limitation pursuing the limitation only a not refund is for for fiting a claim for appealing limitation also a but leuel clairn at the administratiue for the case to the CTA. The law prouides that "no suit or proceeding shall be fi.led after the expiration of two years from the date of the payment of the tanc. or penalty, regardless of any superuening cause that may arise after paynrent" (Sec. 229, NIRC). Since the appeal was only macle on March 24,2003, more than two (2) years had already elapsed lrom the time taxes were paid on March 12,2003' Accordingly, REN had lost his judicial remedy because of prescription. The appeal was not filed on time. The two-year period of

Bar Question (1991) Apple Computer Corp. (ACC) is a foreign corporation doing business in the Philippines through a local branch located at Makati, Metro Manila. In 1985, the local branch applied with the Central Ban k for authority to remit to ACC branch profits amounting to F8,000.00. After payingthe L57o branch remittance tax of F1,200,000.00, tlrc branch office remitted to ACC the balance of P6,800,000.00. In January 1986, the branch office was advised by its, legal counsel that il, overpaid the branch remittance tax since the basis of the computation thereof should be the amount actually remitted and not the amount, applied for. Accordingly, the branch office applied for a refund in thtr amount of F180,000.00.

If you were the Commissioner of Internal Revenue, would ytlu grant the claim for refund?

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Suggested ansvrer:

If I were the Commissioner

of Internul Reuenue,I woukl alktut th.a be computed on the amourtt Cotporation u. Commissioner, G.R.

claim for refund. The remittance tax should

actually remitted (Marubeni No. 76573, September 74, 7989). In the refund of taxes, the claim therefor can be fi.led within two (2) years from the time of payment so long as the tax paynxent was made before an assessment by the Commissioner has become final (Sec. 230, NIRC).

Principle of Exhaustion of Administrative Remedies It is a well-settled rule in tax law, as in other fields of law, that the taxpayer who feels aggrieved by actions taken by tax authorities may not seek redress in the courts ofjustice without first exhausting available administrative remedies, except for certain well-recognized exceptions. It is the policy ofthe law and good practice to discourage

court litigations and encourage resort to administrative action whenever the latter is feasible, adequate and speedy. For another thing, the respect and consideration due to each branch of the government demand that the judicial department abstain, whenever possible, from interfering in the acts of the other departments, except when the latter transcend their respective spheres ofaction and suitable remedies cannot be obtained from them (Bagatsing u. Ramirez, T4 SCRA 306). However, the principle of exhaustion of administrative remedies

is not applicable "where the question in dispute is purely a legal one" (Tapales a. Presid.ent and the Board. of Regents of II.p., 7 SCRA 553), or where the controverted act is patently illegal or was performed without justification or in excess of jurisdiction (Mangubat u. Osmefia, G.R. No. L-12832, April 80, IgSg), or where the respondent is a Department Secretary, whose acts as an alter ego of the President bear the implied or assumed approval of the latter (Marind.uque lron Mines Agents a. Secretary of Public Works, GR. No. L-75982, May 37, 796g), or where there are circumstances indicating the urgency of judicial intervention (Gonzales a. Hechanoua, I SCRA 230).

lnaction of the Commissioner on a claim for refund or tax credit must be construed as a denial of the claim While the Tax Code authorizes a taxpayer to claim for the refund or credit of any taxes alleged to have been erroneously or

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illegally collecled from him, nowhere and in no wise does the law imply that the Commissioner must act upon the claim. Inaction of the Commissioner on the claim for refund must be construed as a reaffirmation of the original action taken by him and an implied denial of the claim for refund or credit (Muller & Phipps [Manila] a. Callector, 703 Phil. L45). Therefore, if no decision is received from the Commissioner on the claim for refund or credit and the two-year period for instituting court action is about to expire, the taxpayer must file the court action without waiting for the action of the Commissioner on the administrative claim, if he is not to lose the right to judicial remedy, since the written claim for refund does not toll the statutory limitation of two years (Gibbs u. Collector, L-73453, 107 PhiI. 230). The time for an action for a refund of income tax is fixed by statute and is not extended by the delay of the Commissioner in giving notice of the rejection of such claim (Koppel tPhil.] a. Collector, 3 SCRA 17).

Starting date for counting the two-year period As a general rule, the two-year period will be counted from the date ofpayment ofthe tax or penalty, regardless ofany supervening cause that may arise after payment. Exceptions to the rule are as follows:

lncome Tax 1. Corporate income tax.

- Where a corporation paid quarterly corporate income taxes in any of the first three quarters during the taxable year but incurs a net loss during the taxable year, the two (2)-year period for the filing of claim for refund or credit shall be counted from the date of the filing of the annual corporate income tax return (Commjssioner a. TITIX Sales,205 SCRA 184).

2.

Income tax paid.

in installments. -

Where the tax

had been paid in installments, the taxes are deemed paid,

for purposes of determining the commencement of the two-year period for filing a written claim for the refund or credit therefor on the date the last installment was paid (Commissioner a. Palanca, 18 SCRA 496).

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Bar Question (1994) XCEL Corporation filed its quarterly income tax return firr the first quarter of 1985 and paid an income tax of F500,000.00 on May l-5, 1985. In the subsequent quarters, XCEL suffered losses so that on April 15, 1986 it declared a net loss of ?1,000,000.00 in its annual income tax return. After failing to get a refund, XCEL filed on March 1, 1988 a case with the Court of Tax Appeal store cover the F500,000.00 in taxes paid on May 15, 1985. Is the action to recover the taxes filed timely? Suggested answer: The action for refund was fiIed in the Court of Tu.x Appeals on In the case of Comrnissioner u. TIvI)( Sales, Inc., 205 SCRA 184, which is sirnilar to this case, the Supreme Court ruled that in the cq'se of ouerpaid quarterly corporate income tox, the two (2)-year period for filing claims for refund in the BIR as well as in the institution of an tim.e-

action for refund in the CTA, the two (2)'year prescriptiue period for ta^tc refunds (Sec, 230, NIBO is counted from the fr'lin{ of the final, adjustment return under Section 67 of the Tax Code, and not from the filing of the quarterly return and payment of the quarterly to.x. The CTA action on March 1, 1988 was clearly within the reglementary two (2)-year period from the fi.ling of the fi.nal adjustm.ent return of the corporation on April 15, 1986.

Bar Question (1997) A corporation files its income tax return on a calendar year basis. For the first quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of F3.0 million. On 20 August 1993, it paid the second quarterly income tax of F0.5 million. The third quarter resulted in a net loss, and no tax was paid. For the fourth and final return for 1993, the company reporbed a net loss for the year, and the taxpayer indicated in the income tax return that it opted to claim a refund of the quarterly income tax payments.

On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for the refund of F3.5 million.

BIR failed to act on the claim for refund; hence, on 2 March 1996, the corporation filed a petition for review with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993 quarterly income tax. BIR, in its answer to the petition, alleged that the claim for refund was filed beyond the reglementary period.

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Suggested anawer: The claim for refund has prescribed. The counting of the two-year prescriptiue period for fiIing a claim for refund is counted not from the dote when the quarterly income ta.xes were paid but on the date when the fi.nal adjustment return or annual income tax return was fi.led (CIR a. TMX Sales, G.B. No. 83736, January 15, 1992; CIR a. Philam Life Insurance Co., Ine., Gf,. No. 105208, May 29,

1995).It is obuious that the annual income ta,x return was fi.led before January 10, 1994 because the written clairn for refund was filed with the BIR on January 10, 1994. Since the two-year prescriptiue period is not only a limitation of action in the administratiue stage but also a limitation of action for bringing the ca,se to the judicial stage, the petition for reuiew filed with the CTA on March 02, 1996 is beyoncl the reglementary period.

Withholding Tax In the case of creditable withholding taxes, the three (3)-year period within which to assess shall be counted from the last day required by law for filing a monthly remittance return. Each monthly return on creditable taxes withheld is already a complete return. The Annual Information Return submitted to the BIR is just an annual report of income payments and taxes withheld and it is not in the nature of a Final Adjustment Return (HPCO Agrid.eo Corporation a. Cornmissioner, CTA Case No.6355, July 78,2002; Continental Micronesia, Inc. - Phil. Branch a. Cornmissioner, CTA Case No.6797, March 22,2006). The counting of the three-year period to assess expanded withholding tax should not start from the filing of petitioner's annual income tax return. Foremost because the deficiency expanded withholding tax is not an income tax on the part of petitioner. It is a penalty imposed by law for failure to perform an obligation as a withholding agent ofthe government(Comrnissioner u. CA, CTA and. A. Soriano Corpu G.R. No. 708576, January 20, 1999).

Some expressed the view that in the case of creditable withholding tax, the two (2)-year period to file a claim for tax refund or credit shall be counted from the date of fiIing of the annual income tax return to which the creditable income tax relates. However, in the case of final withholding tax, the two (2)-year period shall start to run from the filing of the final withholding tax return and paSrment of the final income tax.

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Value Added Tax Claims for tax credit or refund of erroneously or illegally collected value added tax arising from zero-rated or effectively zero-rated sales shall be filed within two (2) years after the close of the taxable quarter when the sales or importation or purchase were made (Sec. 112[Al, NIRC). On the basis of the codal provisions, there seems to be two (2) levels within which the claim for tax credit or refund of value added tax must be filed. At the administrative level, the two (2)-year period for the filing of a written claim with the BIR is counted from the close of the taxable quarter when the sales or importation or purchase were made. At the judicial level, the two-year period for the filing of a petition for review with the CTA shall be counted from the date of filing of the VAT return and payment of the tax. The CTA, however,

ruled that the two-year period at the administrative level shall be counted from the filing of the quarterly return. The rationale for this was explained in the case of Atlas Consolidated Mining and Deuelopntent Corporation u. Commissioner, CTA Case No. 5296, JuIy

729

the invoices or rcr:tri;lts rct;uired by ltegulaLions No.3-88 and CTA Circular No. l-95, as amended by CTA Circular No. 10-97, and such omission is fatal to its cause. Cases filed in the CTA arelitigated. de nouo (Atlas Consolid.ated. Mining & Deuelapmcnt Corporation u. Cotnmissioner of Internal Reuenue, G.R. No. 745526, March 76,2007).

Bar Question (2002)

A.

What must a taxpayer do in order to claim a refund of, or tax credit of, taxes and penalties which he alleges t
B.

Can the Commissioner grant a refund or tax credit even without a written claim for it?

Suggested answer:

A.

20, 1998 as follows: "x x x. This will harmonize Section 106 with Section 230 of the Tax Code which was interpreted by the Supreme Court in the cases of Comrnissioner u. TMX Sales and the

Court of Tox Appeals, G.R. No. 83736, January 75, 1992; and, ACCRA Inuestntents Corporation u. Commissioner, 204 SCRA 957 that the two (2) year period should be counted from the fiIing of the final income tax return, because it is only during that date that the exact tax liability or refundability can be determined. In the same manner, it is only after the filing of the quarterly VAT return that we can determine the VAT liability or refundability of VAT. It should be noted that the basic requirement is that VAT refund can only be granted to the extent that the input taxes have not been applied against output tax. All these things can only be determined if a return is filed. It is logical, therefore, to conclude that the two (2!year period should not immediately be counted from the close of the quarter but from the date of filing of the VAT return." The well-entrenched rule is that those seeking tax refunds or credits bear the burden of proving the factual books of their claims and that the legislative intended to entitle them to such claims. The CTA and CA correctly obserwed that Atlas never submitted any of

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The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes and penalties which he alleges to haue been erroneously, illegally or excessiuely assessed or collected:

1.

He should file a written claim for refund with the Commissioruer within two years after the date ol' payment of the tax or penalty (Sec. 204, NIRC);

2.

The claim fi.led must state a categorical demand for reimbursement (Bermejo a. Coll.ector, 87 Phil. 96

t1e50l);

3.

The suit or proceeding for recouery must be commenced in court within two years from date of payment of the tasc or penalty regardless ofany superuening euent that will arise after payment (Sec. 229, NIRC).

INOTE: If the answer giuen is only number 7, it is suggested that the sq.me shall be giuen full credit, considering that this is the only requirement for the Commissioner to acquire jurisdiction ouer the claim.l B

.

Yes. When the taxpayer files a return uthich on its face shows an ouerpayment of the tq.x and the option to refund /claim a tax credit was chosen by the tarpayer, the Commissioner

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shall grant the relund or lurc cre.dit withou.t the ruted fitr o written claim. This is so, because a return ftled showittg dn ouerpaynxent shall be considered as a written claim for credit or refund (Secs. 76 and 204, NIRC). Moreouer, the law prouides that the Commissioner may, euen without a written claim therefore, refund or credit any tax where on the face of the return upon which payment was made, such payment appears clearly to haue been erconeously paid (Sec. 229, NIRC).

lnterpretation of phrase "regardless of any supervening cause that may have arisen after payment" The claim must be in writing and must be instituted within two (2) years from the date ofpayment ofthe tax or penalty, regardless of any supervening cause that may have arisen after payment. The phrase "regardless ofany supervening cause that may have arisen after payment" inserted into the section by P.D. 69, on its face, appears to cast doubt on several cases wherein it had been ruled that the period of two (2) years should commence not from the date the tax was paid but from the happening of the supervening cause which entitled the taxpayer to a refund (Commissioner a. National

Power Corporation, ST SCRA 772).

prescriptiae period. of two (2) years should. corwnence to run only from the time that the refund, is ascertained., uhich can only be detennined after a fi.nal adjushnent return is accomplished., regardless of any superuening cause that may arise thereafter. - The Tax Code provides that all suits or proceedings shall be filed before the expiration of two (2) years from the date of payrnent of the tax or penalty, regardless of any The

supervening event that may arise after pa;rment. This means that the two-year prescriptive period is reckoned from the filing of the final adjusted return.a At first glance, it would appear that prescription has set in as the claim for refund for the taxable years 1994 to 1998 and 2000, both in the administrative level (Novernber 27,2003) and judicial level (May 4, 2005) were both filed beyond the two (2)-year reglementary period from the filing of the final adjusted return.

aCommissionerv. Primetown Property Group, Inc., G.R. No. 16215b, August 28, 2007; Philippine Bank of Communications v. Commissioner, G.R. No. II2024, January 28, 1999.

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llowtrver, thc spet:iitl cin:trtnsl,irn<:c in t,he instant case demands that it be given a diff'erent treatment. While MERALCO diligently filed its final adjustment return and paid the income tax thereon, it is beyond cavil that neither the right to claim for refund can be determined nor there was basis for MERALCO to know that the income tax pa5rments for the taxable years 1994-1998 and 2000 were

erroneous and excessive. Such fact arose only when the Supreme Court's Decision in G.R. Nos. 141314 and 141369 became final and executor on May 5,2003. MERALCO aptly relied in the case of CIR u. Philippine American Life Insurance Co. (244 SCRA 447) , where the Supreme Court ruled that "The prescriptive period of two (2) years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished, regardless of any supervening cause that may arise thereafter." This is so because at that point, it can already be determined whether there has been an overpayment by the taxpayer.s We are aware that equity is available only in the absence of law and not as its replacement.6 Indisputably, at the time MERALCO filed its final adjustment return and paid the income tax thereon, the amount being claimed for refund cannot be said to be "excessively and wrongfully collected." It was only on May 5,2003, that the income tax payments for the taxable years 1994-1998 and 2000 being claimed for refund were determined as "excessively and wrongfully collected." Equity as the complement of legal jurisdiction seeks to reach and do complete justice where courts of law, through the inflexibility of their rules and want of power to adopt their judgments to the special circumstances of cases, are incompetent to do.7 To reckon the running of the prescriptive period from the filing of the final adjustment return and payment of the tax thereon for the taxable years 1994-1998 and 2000 when the excess payments and the right to recover the same came about only on May 5, 2003 would be iniquitous. The law on prescription being remedial measure should be interpreted in a way conductive to bringing about the beneficent purpose ofbalancing the taxpayer and the government's interest. That is, if the circumstances warrant, the interpretation on the law on prescription may be relaxed for equitable reason.

sCommissioner v. CA, et al.,G.R. No. 117254, January 21,1999. GAguila v. CFI ofBatangas, 160 SCRA 352. TTamio v. Ticson, G.R. No. 154895, November 18, 2004, citing Air Manila v. Commissioner, 83 SCRA 579.

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In the

case of CIR u. Mirq,rut Pagbilao Corporation, thc S(l hcld that: "... The return of what was erroneously paid is foundcd on thc principle of solutio indebiti, a basic postulate that no one should unjustly enrich himself at the expense of another. The caveat against unjust enrichment covers the government. And as decisional law teaches, a claim for tax refund proper, as here, necessitates only the preponderance ofevidence threshold, like any ordinary civil case."8

Suggested answer:

for refund or credit tha.t has been duly filed with the Cornmissioner of Internal Reuenue which is required before a suit or proceeding can be filed' in any court (Sec. 229, NIRC). The denial of the claimby the Commissioner is the one whichwilluest the Court of Tox Appeals jurisdiction ouer the refund case should the Yes. There was no claim

taxpayer decide to appeal on tirne.

Filing of written claim is mandatory

b)

The taxpayer must first file a claim for refund or tax credit before maintaining a suit or proceeding in any court for the recovery of any

internal revenue tax alleged to have been erroneously or illegally assessed or collected. This provision in Section 306 ofthe Tax Code is mandatory and a condition precedent to the prosecution of a suit for the recovery of said taxes, non-compliance with which bars the

necessary?

Suggested answer: The filinq of an administratiue claim for refund with the BIR is necessary in order:

action and subjects the claim to dismissal for lack of cause of action (Repubhc a. Lima.co & De Guzman Cornmcrcial Co. a,nd. Visayan Surety & Insurance Corporation, supra).

Bar Question (2000) On June 76,t997, the Bureau of Internal Revenue (BIR) issued

against the Estate ofJose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor ofthe Estate ofJose de Ia Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a Petition with the Court of TaxAppeals (CTA) prayrng for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR.

a)

Is the stand of the Commissioner correct? Reason.

SMERALCO v. Commissioner, CTA Case No. 7242,December 7,2010.

Why is the filing of an administrative claim with the BIR

1)

To afford the Commissioner an opportunity to consider the clq,im and to haue a chance to correct the errors of subordinate officers (Gonzales u. CTA' et al., 14 SCRA 79); and

2)

To notify the Gouernment that such taxes haue been questioned and the notice should be borne in mind in estimating the reuenue auailable for expenditures (Bertneio a. Collector, GJ-. No. L-3028, July 29, 1950).

Bar Question (1996) Is a protest at the time of payment oftaxes/duties a requirement to preserve the taxpayers'right to claim a refund? Explain.

Suggested answer: For tuces imposed under the NIRC, protest at the time of payment is not required to preserue the taxpayers' right to claim refund. This is clear under Section 230 of the NIRC which prouides thq't a suit or proceeding may be maintq,ined for the recouery of national internal reuenue ta,lc or penalty alleged to haue been erconeously assessed or collected, whether such tax or penalty has been paid under protest or not.

For duties imposed under the Tariff and Customs Code, a protest qt the time of payment is required to preserue the taxpayers' claim for refund. The procedure under the TCC is to the effect that when a ruling or decision of the Collector of Customs is made whereby liability for

734

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duties is determined, the party &duersely affected may protest sucll ruling or decision by presenting to the Collector, at the time when. payment is made, or within fi.fteen days thereafter, a written protest setting forth his objections to the ruling or decision in question (Sec. 2308, TCC). Had. petitioners belieaed. that the waiuers were inao.lid that the assessmcnts were issued. beyond. the prescriptiue period., then it should. not haae paid. the red.uced amnunt of taxes inthe reuised. assessm.ent. Estoppel (underArt. 1431 of the and.

Civil Code) is clearly applicable to the case at bench. RCBC, through

its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioners believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC's subsequent action effectively belies its insistence that the waivers are invalid. To hold otherwise and allow a party to gainsay its own act or deny rights which it had previously recognized would run counter to the principle of equity which this institution holds dear.e

Letter tend.ering payment of tax is not a clairn. - The letter dated March 14,1955 cannot be considered as claim for refund, because it merely informed the Collector that it was tendering payment of the sum of F3,000 so that defendant-surety might be removed from the black list. The law governing an action for the recovery oftaxes is Section 306 ofthe Tax Code, whether or not the recovery is by counterclaim or a separate action (Republic u. Limaco & De Guzman Cornmcrcial Co. and,Visayan Surety & Insurance Corporation, supra). Where the assesstnent by BIR was paid by taxpayer to forestall WDL, latter need not file a separate claim for refund. or cred.it. - Where a taxpayer, from the time that he received the tax assessments, had protested the same and paid the disputed assessment under protest only to forestall the sale ofhis properties that had been placed under distraint by the Commissioner of Internal Revenue, to hold that he has lost the right to appeal from the ruling of the Commissioner on the disputed assessment but must prosecute his appeal under now Section 292 of ttre Tax Code which requires a taxpayer to file a claim for refund ofthe taxes as a condition precedent

right to appeal to the'fax Court would in effect require of him to go through a useless and needless ceremony that would surely disallow the protest against the assessment. The law should not be interpreted as to result in absurdities (Roma.nCatholic Archbishop of Cebu u. Collector,4 SCRA 279). of his

Appeal of final d'ecision of Commissioner to Secretary of Finance d.id. not interru.pt running of period. to mnke an appeal to CTA. - An appeal of the final decision of the Commissioner to the Secretary of Finance will not interrupt the running of the period for appeal to the Court ofTax Appeals, since the Secretary ofFinance is not the officer designated by law to pass upon the merits of motions for reconsideration or protests of disputed assessments (Tang Ho a. Collector, CTA Case No.279, May 78, 1957).

Proper person to claim refund' or cred'it.

7,2011

The proper

Bar Question (2009) ABCD Corporation is a domestic corporation with individual and corporate shareholders who are residents of the U.S. For the 2nd quarter of 1983, these U.S.-based individual and corporate shareholders received cash dividends from the corporation. The corresponding withholding tax on dividend income - SOVo for individual, and357o for corporate nonresident stockholders - was deducted at source and remitted to the BIR. On May 15, 1984, ABCD filed with the CIR a formal claim for refund, alleging that under the RP-US Tax T?eaty, the deduction ofwithholding tax on dividends was fixed at 25Vo of said,income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim.

On January 17, 1985, ABCD filed a petition with the CTA, reiterating its demand for refund. (a) Does ABCD Corporation have the legal personality to fiIe the refund on behalfofits non-resident stockholders? (b) Is the contention of ABCD Corporation correct? Suggested answers: a.

'gRCBC v. Commissioner, G.R. No. 170257, September

-

person to claim refund or tax credit is the person on whom the tax is imposed by the statute Mestern Minolco Mining Corporation a. Plana, CTA Case No. 3077, May 27, 1982).

In Procter & Gomble PMC, supra,, inuoluing the refund of alleged ouer-withheld final withholding tuc on diuidends paid out to a non-resident foreign corporation, the defense

736

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such refund, was not interposed by the Gouernment in the Iower court but was raised only for the first time on appeal. The Supreme Court sustained the Gouernment's position and ruled that estoppel does not preclude the Gouernment from its right to bring up such defense euen for the first time on appeal. Howeuer, the Supreme Court, in a subsequent

resolution, ruled that the BIR should not be allowed to defeat an otherwise ualid claim for refund by raising the question of the withholding agent's alleged irucapacity to file the claim for refurud for the first time on appeal. The Gouernment must follow the same rules of procedure which bind priuate parties (Commissioner a. Procter & Gamble PMC,2O4 SCRA 377).

b.

Yes, ABCD Corporation is cotect. The applicable final withholding income tax rqte on the cash diuidends paid it to non-resident shqreholders is only 25%, of the gross diuidend, pursuant to the RP-US Tax Treaty. Considering that the final withholding tutes deducted and remitted to BIR are 307o (for indiuiduals) and 35Vo (for corporations),

there was ouerpoyment of income tax.

Bar Question (2006) Lily's Fashion, Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under Republic Act No. 7227and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During its operations, it purchased various supplies and materials necessary in the conduct of its manufacturingbusiness. The suppliers of these goods shifted to Lily's Fashion, Inc. the lOVo VAT on the purchased items amounting to F500,000.00. Lily's Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If you were the Commissioner of Internal Revenue, will you allow the refund?

Suggested answer: No. The exemption of Lily's Fashion, Inc. is only for taxes for which it is directly liq.ble; hence, it cannot claim exemption for a tax shifted to it, which is not at all considered ct. tq,x to the buyer but a part of the purchase price. Lily's Fashion,Inc. is not the taxpayer irusofar as the passed-on tax is concerned and therefore, it cannot claim a refurud

it. Only taxpayers are q,Ilowed to file a clairn (Phil. Acetylene Co. a. CIR, 20 SCRA 1056 t19871). refund for ot''a tax merely shilled to

Bar Question (1999, 1992) A Co. is the wholly owned subsidiary of B Co., a non-resident German company. A Co. has a trademark licensing agreement with B Co. On February 10, 1995, A Co. remitted to B Co. royalties of F10,000,000.00, which A Co. subjected to a WT of 257o or F2,500,000.00. Upon advice of counsel, A Co. realized that the proper WT rate is !}Vo. On March 20,1996, A Co. filed a claim for refund of F2,500,000.00 with the BIR. The BIR denied the claim on November 15, 1996. On November 28, 1996, A Co. filed a petition for review with the CTA. The BIR attacked the capacity of A Co., as agent, to bring

the refund case. Decide the issue.

Suggested answer:

A Co., the withholding agent of the non-resident foreign corporation, is entitled to claim the refund of excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding agent, it is the one held liable for any ui'olatiort of the withholding tox law should such a uiolation occur. In the same uein, it should be allowed to claim a refund in case of ouer-withholding (CIR u. Wand.er Phils., Inc., GR No. 68378, April 75, 7988, 760 SCRA 573; CIR u. Procter & Gamble PMC,204 SCRA 377). Proced.urq.l laws can be applied retrospectiuely. - Laws prescribing the method of obtaining a tax refund or credit and the requirements for entitlement to said remedy are procedural laws and, therefore, can be applied retrospectively to actions still pending and undetermined at the time of their passage. Hence, the provisions under the 1997 Tax Code that the filing of an amended individual income tax return with the BIR, indicating an income tax overpa;rment was sufficient compliance with the requirement of a written claim for refund or credit for an overpayment filed on October 8, 1997, if the petition for review was instituted at the time when the 1997 Tax Code is already in effect (Acostaa. Commissioner, CA'G.R. SPNo. 55572, February 73, 2002).

Failure to filn tim.ely appeal to CTA; answer of Cornrnission er to taxpayet's petition for reuiew is equiaalent to iud'icial action for collection of tar. - The assessment becomes final and executory for failure of the taxpayer to protest such assessment

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within 30 days from receipt thereof, or if protested, the final ruling of the Commissioner on such protest is not appealed to the Court of Tax Appeals within 30 days from receipt of such final ruling. Where such assessment is appealed by the taxpayer to the Courb of Tax Appeals, the answer of the Commissioner to the taxpayer's petition for review is equivalent to a judicial action for collection (Alhannbra Cigar & Cigarette Manufacturing Co. a. Collector, .Ay'os. 12026 and. 72 737, May 29, 7959).

PART VI LOCAT GOVERNMENT CODE CHAPTER IOOilI

Threat to enforce one's legal claim thru competent authority does not uitiate consent. - Defendant-surety claimed

that the sum of F3,000 was illegally or erroneously collected and payment thereof was involuntary, having been allegedly made under duress. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent (Art. IJJS, Ciuil Code). Having been made by the defendant-surety to preserve its credit and enable it to carry on its business with the BIR, the said payment cannot be considered involuntary (Republic a. Limaco &

De Guzman, supra).

LOCAL BUSINESS TAXES

Gonstitutional basis Each local government unit shall have the power to create its own sources ofrevenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local goveraments (Sec. 5,

Art. X, 1987 Constitution).

However, local governments have no power to tax instrumentalities of the National Government. PAGCOR, being an instrumentality of

the Government, is exempt from local taxes. This doctrine emanates

from the "supremacy of the National Government over local governments." The U.S. Supreme Court said: "No state or political subdivision can regulate a federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them." Otherwise, mere creatures ofthe State can defeat national policies thru extermination of what local authorities may perceive to be undesirable activities or enterprises using the power to tax as a "tool for regulation" (U.S. u. Sanchez,340 US 42).The power to tax which was called by Justice Marshall as the "power to destroy" cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it (Basco u, PAGCOR' supra).

Bar Question (2001) Congress, after much public hearing and consultations with various sectors of society, came to the conclusion that it will be good for the country to have only one system oftaxation by centralizing 739

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the imposition and collection of all taxes in the national government. Accordingly, it is thinking of passing a law that would abolish the taxing power of all local government units. In your opinion, would such a law be valid under the present Constitution? Explain your answer.

No. The law centralizing the imposition and collection of all taxes in the national gouernment would contravene the Constitution which rnandates that: "Each local gouernment unit shall houe the power to creqte their own sources ofreuenue and to leuy toxes, fees, and charges subject to such guidelines and limitu.tions as Congress may prouide consistent with the basic policy of local autonomy." It is clear that Congress can only giue the guidelines and limitations on the exercise by the local gouernments of the power to tax but what was granted by the fundamental law cannot be withdrawn by Congress.

Local Government Code (R.A. 7160) To implement the above constitutional provision, Republic Act No. 7160, otherwise known as the "Local Government Code (LGC) of 1991," was signed into law and became effective on January l, Lggz.

The plenary nature of the taxing power thus constitutionally delegated is not in itselfconfiscatory and oppressive. In delegating the authority, the State is not limited to the exact measure of the power which is exercised by municipalities and the like; it is meant that there may be delegated such measure of power to impose and collect taxes as may be deemed expedient. Thus, municipalities may be permitted to tax subjects, which for reasons of public policy, the State has not deemed it wise to itself tax for more general purposes

Bottling

741

Scope of Taxing Power of LGUs Each local government unit shall exercise its power to create its own sources ofrevenue and to levy taxes, fees, and charges, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall exclusively accrue to it (Sec. 129, LGC).

All local government units are granted general powers to levy

Suggested answer:

( P ep si- C ola

''i:l,iilI:lilll);1;l;:ll'

C omp

any of t he Phil.

a.

Mun. of T anau an,

69 SCRA460). Local government has been described as a political subdivision of a nation or state which is constituted by law and has substantial control oflocal affairs. In a unitary system ofgovernment, such as the government under the Philippine Constitution, local governments can only be an intra sovereign subdivision ofone sovereign nation, it cannot be animperium in imperio (it does not rnake local gouernments souereign within the stq,te). Local government in such a system can only mean a measure of decentralization ofthe function of government (Basco u. PAGCOR, 197 SCRA 52 t19911).

taxes, fees or charges on anybase or subject not otherwise specifically

enumerated herein or taxed under the provisions of the National Internal Revenue code, as amended, or other applicable laws. The levy must not be unjust, excessive, oppressive, confiscatory or contrary to a declared national economic policy (Sec. 786, LGC). No such taxes, fees or charges shall be imposed without a public hearing having been held prior to the enactment of the ordinance (Sec. 187, LGC)' copies of the provincial, city, and municipal tax ordinances or revenue measures shali be published in full for three consecutive days in a newspaper of local circulation or posted in at least two conspicuous and publicly accessible places (Sec. 788, LGC). Section 186 ofRA 7160 provides that an ordinance levying taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose. The lack ofa public hearing is a negative allegation essential to petitioner's cause ofaction in the present case. Hence, as petitioner is the party asserting it, she has the burden of

proof. since petitioner failed to rebut the presumption of validity in favor of the subject ordinances and to discharge the burden of proving that no public hearings were conducted prior to the enactment thereof, we are constrained to uphold their constitutionality or legality (Figueras a. Court of Appeals and. City Assessor of IWandaluyong, supra). The rule is that taxes may not be imposed by implication; and a tax statute is to be construed strictly against subjection to a tax Iiability specifically where it carries penal provision (Marind.uque Iron Mines Agents u. Mun. Council of Hinabangan, Sanno,r, 77 SCRA416). A tax, fee, or charge or to generate revenue under the Local Government code shall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance (sec. 132, LGC). Local taxation, like national taxation, is legislative in nature (Vittegas a.Hiu Chiong Tsai,86 SCRA270).The legislative nature of taxation was held not violated when a tax ordinance created a market committee whose function is purely recommendatory. Its

742

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prior acquiescence to an intended or proposed city ordinance is not a condition sine qua nonbefore the Municipal Board could enact such ordinance. The native power of the Municipal Board to legislate remains undisturbed even in the slightest degree. It can move its own initiative and the Market committee cannot demur (Bagatsing a. Ramirez, T4 SCRA 306).

d. 3.

The collection of local taxes, fees, charges and other impositions shall in no case shall be let to any private person;

A municipal ordinance is not the same as a resolution of the municipal council. Legislative acts passed by the municipal council in the exercise of its lawmaking authority are denominated ordinances. A resolution is less solemn and formal than an ordinance (Maccunana a. Verdeflor, 79 SCRA 399).

4.

Bar Question (2003)

5. It

In order to raise revenue for the repair and maintenance of the newly constructed city Hall of Makati, the city Mayor ordered the collection of F1.00, called "elevator tax," every time a person rides any of the high-tech elevators in the city hall during the hours of g:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the ,,elevator Lax,, a valid imposition? Explain. Suggested answer: No. The imposition of a tax, fee or charge or the generation of reuenue under the Local Gouernment cod,e shail be eiercised by the sanggunian ofthe local gouernment unit concerned, through an

appropriate ordinance (sec. 732, LGC). The city mayor alone could. not order the collection of the tax. As such, the "eleuqtor tax" is an inualid

2. 3.

Taxes on estates, inheritance, grfbs, legacies and other acquisitions m.ortis cQllsa, except as otherwise provided in ihe Code (1.e., tax may be levied on the transfer of real property owned by provincesfsec. 135, LGCI and by cities

fGC]);

4.

Customs duties, registration fees of vessel (except the fee that may be imposed on the issuance of licenses for the operation offishing vessels ofthree tons gross or less by municipalities under Section 149, and by cities under Section 151 ofthe Code), and wharfage on wharves, tonnage dues, and all otherkinds ofcustoms fees, charges and dues, except wharfage on wharves constructed and maintained by the local government unit concerned;

5.

Taxes, fees, 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

Taxes, fees, and charges shall: be equitable;

not be unjust, excessive, oppressive or confiscatory;

progressive system oftaxation (Sec'

Documentary stamP tax;

fSec. 151,

Taxation shall be uniform in each local government unit;

be levied and collected for public purposes;

a

Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: 1. Income tax, except when levied on banks and other financial institutions;

units:

a. b. c.

shall be the responsibility of each local political

Common Limitations

Fundamental Principles

1. 2.

The revenue collected under the Code shall inure solely to the benefit of, and subject to disposition by, the local government unit levying the tax, fee, charge, or other imposition, unless otherwise specifically provided for in the Code; and subdivision to evolve 130, LGC).

imposition.

The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government

not be contrary to law, public policy and national economic policy, nor in restraint of trade;

744

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6.

Sec. 133(e), R.A. 7160 prohibits the imposition, in the guise of wharfage, of fees - as well as all other taxes or charges in any form whatsoeuer - on goods or merchandise. It is irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing thru the territorial jurisdiction of the municipality is clearly prohibited by section 133(e). Under Section 131(y), wharfage is defined as a fee assessed against the cargo ofvessel based on quantity or weight. It is apparent that a wharfage does not lose its basic character by being labeled as a service fee "for police surveillance on all goods" (Palma Dea. Corp'

Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively, from the date ofsuch

Excise taxes on articles enumerated under the National Internal Revenue Code and taxes, fees or charges on

petroleum products. However, the LGU may not impose a tax on the business of importing, manufacturing or producing said products (Petron a. Pililla, 198 SCRA 82),

9.

Percentage tax or value added tax on sales or exchanges ofgoods or services or similar transactions thereon except as otherwise provided herein;

10.

Taxes on the gross receipts oftransportation contractors and persons engaged in the transportation ofpassengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

11. 12.

thru territorial

Taxes, fees and charges on agricultural and aquatic products when sold by the marginal farmers or fisher-

registration;

8.

rnerchand,ise passing

Tar on good.s jurisd.ictions

men;

7.

or

other taxes, fees or charges in any form whatsoever upon such goods or merchandise;

Taxes on premiums paid for 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;

13.

Taxes, fees or charges on Philippine products actually exported, except as provided by the Code;

14.

Taxes, fees or charges on Countryside and Barangay Business Enterprises and on cooperatives duly organized and registered under R.A. 6810 and R.A. 6938; and

15. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local governments (Sec. 133, LGC). The phrase "legacies and other acquisitions mortis ce.usa" refers to acquisition ofproperty by reason ofdeath or after the death ofthe donor or person (Blach's Lq,w Dictionary, Sth ed.).

o.Mun. of Malangas, Zambo d'el Sur,473 SCRA 572 t2OO9l). Ercise tar on petroleurn prod'ucts Section 133 prescribes the limitations on capacity of LGUs to exercise their taxing powers. Paragraph (h) of section 133 mentions

two (2) kinds of taxes which cannot be imposed by LGUs, namely: (a) excise tax on articles under NIRC, and (b) taxes, fees or charges on petroleum products.

Article 232 of IRR enumerates list of businesses subject to

business taxes and paragr:aph (h) thereof does not allow imposition of local business taxes "on any business not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax," but subject to this qualification "any business engaged in the production, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax imposed on this article."

Petron argues that business taxes on its sale of diesel fuels partakes of an excise tax, which is a tax upon the performance' carrying on, or the exercise of an activity. Malabon Mayor argues that what the provision prohibits is the imposition of excise taxes on petroleum products, but not the imposition of business taxes on the same, relying on the Court statement that "a tax on business is distinct from a tax on the article itself." The meaning of "ercise tax" has undergone a transformation, morphing fr omb]ne AmJur definition to its current signification which is a tax on certain specified goods or articles. As Nolledo pointed out, excise taxes are imposed directly on certain specified goods; they are taxes on property. An excise tax is not excise where it does not subject

I

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directly the produce or goods to tax but indirectly as an incident to, or in connection with, the business to be taxed.

It

is this concept of excise tax which we can reasonably assume that Congress had in mind and actually adopted when it crafted the Code.

On second issue, the Court said there is no doubt that following the 1987 Constitution and the LGC, the fiscal autonomy of LGUs has received greater affirmation than ever. Thus, respondent cites that in City Gouernment of San Pablo u. Reyes , the SC stated "in interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations." Such policy is also echoed in Section 5(a) of the LGC, which states that "any provision on a power of LGU shall be liberally interpreted in its favor, and in case ofdoubt, any question thereon shall be resolved in favor ofdevolution of powers and of the lower LGIJ."

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upward spiral in its price shakes our economic foundation. There is an inevitable link between the fluctuation of oil prices and the prices of every other commodity.

Subjecting petroleum products to business taxes apart from the taxes already imposed by Congress in this age of deregulation would lead to the same result had they been taxed during the era of oil deregulation. While Section 133(h), LGC does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC - tobacco, alcohol, mineral and miscellaneous products, it specifically prohibits LGUs from extending the levy of any kind of taxes, fees or charges on petroleum products (Petron u. Malabon

City,2009).

Bar Question (2008)

However, Section 5(b) proceeds that "in case of doubt, any tax ordinance or revenue measure shall be construed strictly against the LGU enacting it, and liberally in favor of the taxpayer." Evidently, local fiscal autonomy should not necessarily translate into abject deference to the power of local government units to impose taxes.

The City of Manila enacted an ordinance, imposing a 57o tax on gross receipts on rentals of space in privately-owned public markets.

Congress has the constitutional authority to impose limitations on the power to tax of LGUs, and Section 133 of LGC is one such limitation. The provision is the explicit statutory impediment to the enjoyment of absolute taxing power by LGU, not to mention the reality that such power is a delegated power. Another example is Section t33(g), where LGUs are disallowed from levying business taxes on enterprises certified by BOI.

Suggested answer:

The phrase "taxes, fees or charges on petroleum products" does not qualify the kind oftaxes, fees or charges. The absence of such qualification leads to the conclusion that all sorts oftaxes on

petroleum products, including business taxes, are prohibited by Section 133(h), LGC. Where the law does not distinguish, we should not distinguish.

The earlier reference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation (all excisable products), while the later reference to "taxes, fees or charges"

pertains only to one class ofarticles, specifically petroleum products. Oil is a commodity whose supply and price affect the ebb and flow of the lifeblood of the nation. Its shortage of supply or a slight,

BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? ExpIain.

I

do not agree with the position of BAT Corporation' The SVo tax on gross receipts on rentals of space in priuately-owned public marhets irnposed under the ordinance of the City of Manila is not an income tax, which may not be imposed by the city gouernment, but a ualid license tax or fee for the regulation ofbusiness (Progressiae Deuelopment Corporation u, Quezon City, G.R.No.36081' April 24,1989). No,

Ordinances which would prohibit the free flow of goods into, or out of, the territorial jurisdictions of local governments are invalid (Panaligan a. City of Tacloban, G.,R. No. L-9379, September 27, 1957).

The six (6)-year tax holiday provided in Section 133(g) of the Code should commence on the date of its registration with the Board of Investments, not from the commencement of its actual operations as certified to by the Board of Investments (Batangas Power Corporation a. Batangas City,428 SCRA 250 t20041).

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Bar Question (2010) XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and the West Coast of

the U.S. The company's vessels load and unload cargoes at the port of Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch in Makati which is also the company's principal office. The City of Manila enacted an ordinance levying a2Volaxon gross receipts ofshipping lines using the Port of Manila. Can the city government of Manila legally impose said levy on the corporation?

Suggested answer: The situs is the place or incident of an euent or the location of property, qnd the situs of a tax is, therefore, the place where the tax hes to be paid. Section 150 of the LGC prouides for the situs of the tax imposed on taxpayers enumerated therein. The recording of sales of goods and seruices subject to the local business tares shall be made in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the rnunicipality or city where such branch or sales outlet is located. In cases where there is no such brq,nch or sales outlet in the city or municipality where the sale or transaction is rnade, the sale shall be duly recorded in the principal office and the tqxes due shall accrue and shall be paid to such city or municipality (Sec. 150[oJ, LGC). In this case, the principal offi.ce in Mq.kati City which issued the bills of landing and the inuoices to the customers has no brq,nch in the City of Manila, where the business trqnsactions take place. In uiew thereof, the sales allocation shall be made as follows: 30Vo to the sales recorded in the principal office in Makati City shall be taxoble by the city where the principat office is located, and 707o of the total sales record,ed in Mu,kati City shall be taxable by the City of Manila, where transaction is had (Sec. 150[b], LGC).

Taxes that may be imposed by provinces The province may levy only the following taxes, fees, and charges (Sec. 134):

1. 2. 3.

Tax on transfer ofreal property ownership (Sec. 155); Tax on business of printing and publication (Sec. 156); Franchise tax(Sec. 137);

I

4. 5. 6. 7.

7

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'I'ax on sand, gravel and other quarry resources (Sec. 138);

Professionaltax(Sec. 139); Amusement tax(Sec. 140); and'

Annual fixed tax for every delivery truck or van of manufacturers or producers' wholesalers of, dealers, or retailers in, certain products (Sec. 141).

Press As a general proposition, the press is not exempt from the taxing power of the state and that what the constitutional guarantee of free press prohibits are laws which single out or target a group belonging to the press for a special treatment or which in any way discriminate

against the press on the basis of tlre content of the publication (Tolentino o. Secretary of Finance,249 SCRA 628).

Franchise tax Under Sections 137 and 193 of the Code, franchise taxes may be imposed by provinces despite any exemption enjoyed under special laws. section 193 ofthe code prescribes the general rule: Tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the code, except with respect to those entities expressly enumerated (cify Goat of San Pablo u. Re3/es, 305 SCRA 353 t19991). However, section 137 does not state that it covers future exemptions. Indeed, the grant of taxing powers to local government units under the constitution and the Local Government code does not affect the power of congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect ofthe constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in iavor of municipal corporations (PLDT a- City of Daaao,363 SCRII 522 t20011). Transco is not liable for franchise taxes. The two requirements before a taxpayer may be held liable to a franchise tax are: (a) it has a franchise in the sense ofa secondary or special franchise; and (b) it is exercising its rights or privileges under this franchise within the territory of the local government unit concerned. In this case, it is clear that Transco exercises its franchise within the Province and the city. It is uncontroverted that it has erected poles and strung

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wires to distribute electricity in both the province and thc cit.y. l,ir. this, it is liable to franchise taxes. However, the remaini'g qucstirn is whether it is liable to pay to the province or to the city. Under section 226 (franchise tax), the province may impose a tax on business enjoying a franchise at Sova of lva of the gross annual receipts, which shall include both cash sales and sales on account realized during the preceding calendar year within Its territorial jurisdiction, excluding the territorial limits of any city located in the province. The province shall not impose the tax on business enjoying franchise operating within the territorial jurisdiction of any city located within the province. Thus, the Province of Bataan is not authorized to impose franchise tax on Transco's gross receipts from pENELCO. The one authorized, to impose such franchise tax is the City of Balanga (National Transmission Corporation a. proa. of Bataan, CTA Case No. . December 76,2011). The low dnes not mahe q.n exemption from the payment of franchise

tax merely because Transco's customer, ANECO, has its principal office located in Butuan City, which is a separate local gouernment unit. - Transco does not dispute the fact that ANECo's satellite offices are located and operating within the territorial jurisdiction of the Province, and the sources of revenues from such locations are incoming receipt and,/or realized within the LGU's territorial jurisdiction, which is what the law requires. The situs of taxation clearly does not depend on where the head office of rransco's customer

is located. There is nothing on record which shows that Transco's

high voltage transmission facilities, including grid inter-connections and ancillary services in operating the business to its customer is not within the territory of the Province of Agusan del Norte. Thus, Transco's allegation that the gross annual receipts are realized within the City of Butuan where ANECO's head office is located, although the remittances come from the different municipalities of Agusan del Norte because the principal office is where the gross receipts are realized, lacks legal and factual bases (Nofional rransmission C orporation u. Proa. of Agu san, CTA Case No. Z S, June S, 20 7 2 ).

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quorty resources extracted from ptiPgtc (Lee 145 SCRA 408) in uiew of the limitations Pres Jud.ge, a. lq.nd 151 of the NIRC (Za'mboanga Electric and 133 imposed by Sections 47). SCRA Coop. u. Buat,243 hus no powt:r kt im1xxt: krx rtn

Tax on amusement Places The term "arrur'sen 'ent places" includes theaters, cinemas, concert halls, circuses, and other places of amusement where one seeks admission to entertain oneself by seeing or viewing the show or performance (Sec. 13L[c], LGC). This means that the amusement place, to be subject to the amusement tax of 30Vo, needs only to be a place where one seeks admission to entertain himself by seeing or viewing the show or performance.

Section 13 of Local Tax Code mentions "other places

of

a,nruserrnrr.lfr" professional basketball games are definitely not within its scope. The principle of ejusdem generis means that general words are to be held as applying only to persons or things of the same kind or class as those specifically mentioned. one must refer to the prior enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their common characteristics. Basketball

caters to sports and gaming. Even up to the present, category of amusement taxes on professional basketball games as a national tax(Sec. 125, NIRC) remains the same. Section 140 of LGC retains the same areas where provinces may levy amusement tax without including professional basketball games (Philippine Basketball Association o. Court of Appeals, 337 SCRA 358 tzOOOl)-

Taxes that may be imposed by municipalities and cities Municipalities may levy taxes, fees, and charges not otherwise levied by provinces (Sec. L42):

1.

Tax on business:

a.

Tax on quarry resources Before any tax, fee or charge may be collected from a taxpayer, the same must first be levied under a duly enacted tax ordinance of the local government concerned. Hence, in the absence of a tax ordinance levying a fee on quarry resources extracted from private lands, there will be no basis for the collection of said fee (prou. of Bulacan a. Court of Appeals, G,R. No. 726232, Nouember ZZ, IggS). prouince

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Manufacturers, assemblers, repackers' processors' etc. of any article of commerce of whatever kind or nature (Sec. 143[a]); Wholesalers, distributors, or dealers in any article of commerce (Sec. 143[b]);

c.

Exporters, and manufacturers, millers, producers, wholesalers, etc. of essential commodities (Sec. t43[c]);

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Retailers ( Sec. I 4iildl );

e.

Contractors ( Sec.

f.

Banks and other financial institutions (Sec.

C b.

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Peddlers of any merchandise or article of commerce (Sec. 143[sD;

h.

Any business, not otherwise specified in the preceding paragraphs. On any business subject to excise, value

added tax, or percentage tax under the National Internal Revenue Code, the rate shall be 2Vo ofgross sales or receipts (Sec. 143[h]).

2.

Fees and charges.- The municipality may impose and collect such reasonable fees and charges on business and occupation and, except as reserved to the province in Section 139 ofthis Code, on the practice ofany profession or calling, commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling (Sec. 147, LGC).

The municipalities within the Metropolitan Manila Area may

Ievy taxes at rates which shall not exceed by fifty percent (SOVd ftre maximum rates prescribed for municipalities (Sec. 144, LGC).

Double Taxation The nullity of the questioned

ordinances (City Ordinance No. 7988) has already been established in the case of CCBp u. City of Manila, for non-compliance with the posting requirements. More importantly, registered businesses in the City of Manila already taxed under section 19 may no longer be taxed under section 21, as the same constitutes double taxation. section 19 provides for a tax on banks and other financial institutions of 0.75vo of the gross receipts for the preceding calendar year. on the other hand, Section 21 provides: "on any of the following businesses and articles of commerce subject to the excise, value added or percentage taxes under NIRC, as amended, ataxof 50vo of rvo per annum onthe gross sales or receipts of the preceding calendar year is imposed: (a) On persons who sell goods and services In the course oftrade or business, and those who import goods, whether for business or otherwise, as provided for in sections 100 to 103 of the NIRC, administered and determined by the BIR pursuant to the pertinent provisions of the said Code.,'

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imposes local business tax on a bank or financial institution under Section 143(0, the same municipality may no longer subject the same bank or financial institution under section 143(h) of the same code. In the same manner, banks already made liable to local business tax under section 19 of the MRC, which is based on section 143(0 of the LGC, may no longer be subjected to local business tax pursuant to Section 21 of the MRC, which is based on Section 143(h) of the LGC

( City Tleasurer of Manila a. China Banhing Corporation, CTA Case No. 87, December 78,20L2). In City of Manila u. Cocq'-Cola Bottlers, the Court declared Ordinance Nos. 7988 and 8011 as null and void, for failure to satisfy the requirement that the ordinance must be published for three consecutive days; hence, the tax imposed under Section 21 of Ordinance No. 7794 upon the taxpayer who is already burdened under Section 14 becomes illegal, as mandated before the passage of the invalidated ordinance No. 7988. In said case, the court stated that it is ordinance No. 7988 that allowed petitioner to impose taxes under section 21 simultaneously with section 14. There is no escaping the reality that the declaration of nullity of the amendatory ordinances revived or once again breathed life into the exempting proviso of Section 2l of Ordinance No. 7794, proscribing its imposition ofbusiness tax on top of that under section 14. Moreover, the court also ruled there was double taxation (Treasurer of City of Manila u. (Jnileaer Philippines, CTA Case No. 74, Decernber 6,2012). While R.A. 7160 covers almost all governmental functions delegated to local government units all over the country, P.D' 921 embraces only the Metropolitan Manila Area and is limited to the administration of financial services therein (Ty a. Tlannpe' 250 SCRA 5OO). It is true that Section 534 of the LGC has a repealing clause which repeals "[a]11 general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative

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regulations, or part or parts thereof'which arc inconsist,cnt wit,h any of the provisions of [the] code." However, a repcaring crause of' such nature cannot be considered as having the effect ofan express repeal for it does not only fail to identify or designate the act or acts that are intended to be repealed but it predicates the intended repeal upon the condition that a substantial conflict must be found on existing prior acts, and such being the case, the presumption against implied repeal applies ex proprio uigore (Iloilo palay and. Corn Planters Association a. Feliciano, IS SCRA SZD,In the absence ofan express repeal, the rule is that the general law and special on the same subject matter are deemed statutes in pari materia and should accordingly, be read together and harmonized, if possible, with a view to giving effect to every provision thereof (City of Naga a. Agna, 71 SCRA IZ6). Cases:

a.

the Sangguniitttg l)anlerlawigan [tesolution "prohibiting the catching, gathering, possessing, buying, selling and shipment of live marine coral dwelling of aquatic organisms

d.

e.

A local government unit may, in the exercise of police power

under the general welfare clause, order the closure of a bank for failure to secure the appropriate mayor's permit -ninn and business licenses (Rurat of Makati r. Mun. of Makati, G.R. lVo. 750ZGB, July 2,2004). b.

However, a local government unit may not regulate the subscriber rates charged by CATV operators within its territorial jurisdiction. More than two decades ago, the national government, through the National Telecommunications Commission (NTC) assumed regulatory powers over the CATV industry. This was reinforced by P.D. I572,8.O.546, andE.O. 205. This is also clear from President Fidel V. Ramos'E.O. 486, mandating that the regulation and supervision of the CATV industry shall remain vested "solely" in the NTC. Considering that the CATV industry is so technical a field, NTC, a specialized agency, is in a better position than the local government units to regulate it. This does not mean, however, that the LGU cannot prescribe regulations over CATV operators in the exercise of the general welfare clause (Batangas CATV a. Court ofAppeals, GR. No. I\88IO, September 29,2004).

The Puerto Princesa Ordinance "banning the shipment of all live fish and lobster outside Puerto princesa City from January 1, 1993 to January 1, 1998,,' as well as

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for a period of five years, coming from Palawan waters," were upheld as legitimate exercise of police power (Tano a. Socrates, G.R. No. 779249, August 21, 1997). The ordinance prohibiting the issuance of a business permit to, and cancelling anybusiness permit of any establishment allowing its premises to be used as a casino' and the ordinance prohibiting the operation of a casino, were declared invalid for being contrary to P.D. 1869 (Charter of PAGCOR), which has the character and force of a statute (Magtojas o. Pryce Properties, supra). The Manila Ordinance No. 7065, which grants Associated

Development Corporation a franchise to conduct jaialai operations, is void and ultra-uires. What Congress delegated to the City of Manila in R.A. 409 (Revised Charter of Manila) with respect to wagers and betting was the power "to license, permit or regulate," not the power "to franchise." This means that the license or permit issued by the City of Manila to operate wager or betting activity, such asjoi-alai,wortld not amount to something meaningful, unless the holder of the license or permit was also franchised by the National Government to so operate

(Lirna. Paquing,240 SCRA 649).

f.

The power of municipal corporations is broad and has been said to be commensurate with but not to exceed the duty to provide for the real needs ofthe people in their health, safety, comfort and convenience, and consistently as may be with private rights. Ordinance is not unconstitutional

merely because it incidentally benefits a limited number of persons. The support for the poor has long been an accepted exercise of the police power in the promotion of the common good

o b.

(Binay

a. Dom.ingo,2O7 SCRA 508).

A Dagupan City ordinance, requiring all proposed subdivision plans to be passed upon by the City Engineer, and imposing a service fee of F0.30 per square meter on every resultant lot, was declared invalid, as it effectively amends a general law (Villacorta a. Bernard'o, 743

SCRA4sO).

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The ordinance of Bayambang, pangasin:u), appoitr[ing Lacuesta manager of fisheries for 2b years, ronewabltr for another 25 years, was held invalid. The municipality cannot grant exclusive fishing privileges without prir_rr public bidding and for a period of more than five years, because it violates the fisherieslaw (Terrad.o u. Court ofAppeals, 137 SCRA g7g).

An ordinance imposing F0.90 police inspection fee per sack of cassava flour produced and shipped out of the municipality was held invalid. It is not a license fee but a tax, which is unjust and unreasonable, since the only service of the municipality is for the policeman to verify

from the drivers of trucks ofpetitioner the number of sacks actually loaded (Matalin Coconut a. Mun. Council of Malabang, Lanao d.el Sur, l4S SCRA 404).

j.

Where the police power is used to discourage non-useful occupations or enterprises, an annual permit/license fee of F100, although a bit exorbitant, is valid, (physical

Therapy Organization of the phit. Manila, ibid.).

a. Mun. Board,

of

k.

The power to issue permits to operate cockpits is vested in the Mayor, in line with the policy of local autonomy (Philippine Gamefoutl Commission a.IAC, 746 SCRA 294; Deang u.IAC, supra).

L

The Bocaue, Bulacan ordinance, prohibiting the operation

of night clubs, was declared invalid, because of its prohibitory, not merely regulatory, character (Dela Cruz a. Paras, 123 SCRA SG9).

Bar Question (2010) What is the basis for the computation of business tax on

contractors under the Local Government Code?

Suggested answer: "Gross sales or receipts" ln clude the total qmount of money or its equiualent representing the contract price, cornpensation or seruice fee, including the q,mount charged, or rnaterials supplied with the seruices and deposits or aduance payments actually or constructiuely receiued during the taxable quarter for the seruices performed or to be performed for another person, excluding discounts if determiruable at

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and ualue q.dded tax (Sec.

131[n], LGC).

Bar Question (2013) ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends

from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? Suggested answer: No. The corporation cannot be considered as a contractor'

because it does not render seruices for a fee. A contractor is one whose actiuity consists essentially in the sale of all kinds of seruict:s for a fee, regardless of whether or not the performance of the seruicc calls for the exercise or use of the physical or mental faculties of' such contrctctor or its employees. To be considered q.s a contractor,

the corporation must deriue income from doing actiue business of' selling seruices and not from deriuing purely passiue income. Only income arising from the performance of seruices to its custorners is subject to local business tq.x. Accordingly, a mere holding conxpany cannot be assessed by the City of Makati as a contractor (Sec. 131[h], LGC; Orlyete Company tPhil. Branchl u. City of Makati, CTA, Noaember 74,2012).

Bar Question (2009, 2005) Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-Lawyer engaged in the practice ofhis two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City.

a.

May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain.

b.

May Quezon City, where he has his residence and where he also practices his two professions, go afber him for the payment of his professional tax as a CPA and a lawyer? Explain.

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Suggested answer:

a,

No. Mr. Fermin is giuen the option to pay either in the city where he practices his profession or where he mq.intains his principal office in case he practices his profession in seueral

places. The professional ton paid as a lawyer in Pasig City, a place where he practices his profession, will entitle him to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession (Sec. 739, in relation to Sec. 151, LGC).

b.

No. The professional to.x shall be paid only once for euery ta,tcable year and the payment shall be made either in the city where he practices his profession or where he maintains his principal office. The city of residence cannot require him to pay his professional ta.xes (Sec. 139, in relation to Sec. 151, LGC).

Accrual and payment of tax Local taxes, fees and charges accrue on the first day of the calendar year; however, in case the effectivity of any new tax ordinance falls on any date other than the beginning ofthe quarter, the same shall be considered as falling at the beginning of the next ensuing quarter and the new tax levy or revised rate due shall begin to accrue therefrom (Sec. 166, LGC).

The tax period of local taxes, fees and charges shall be the calendar year, except when otherwise provided in the Code (Sec. 165, LGC), and such levies may be paid on quarterly installments within twenty days of each subsequent quarter. The time for pa5rment may be extended by the Sanggunian concerned, without surcharges or penalties, but only for a period not exceeding six months (Sec. 167, LGC) . For any delinquency , the Sanggunian may impose surcharges of not exceeding twenty-five percent of the amount due and interest at a rate not exceeding two percent per month until the delinquent

amount is fully paid but not to exceed a total interest corresponding to thirty-six months (Sec. 168, LGC). The non-payment of the tax liability on its due date subjects the taxpayer to corresponding surcharges and interest. The execution of a promissory note by a taxpayer and its acceptance by the City Treasurer did not relieve the taxpayer from its liability to pay surcharges and interest. The promissory note binds the taxpayer

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but does nol, t:orrsl,it,rrt,e a contract so as to bar the city government {'rom suing the tzrxpayer for suing the taxpayer for collection of the tax liability (Pqjaro u. Sand.iganbayan, 160 SCRA 763). The City of Pasig is authorized to levy business taxes under Section 143 in relation to Section 151 ofLGC on contractor based on "g?oss receipts," which includes money or its equivalent actually or constructively received in consideration ofservices. Thus, when the city assessed deficiency business tax based on taxpayey's gross reuenue as reported in its financial statements, it committed a palpable error. It would result on double taxation (Ericson Tel,ecornmunications a.

City of Pasig, GR. No. 776667, Noaember 22,2007).

Bar Question (2008) MNO Corporation was organized on July 1, 2006 to engage in trading of school supplies, with principal place of business in Cubao, Quezon City. Its books of accounts and income statement show the following data:

JuIy 1, 2006 to December 31, 2006 January I,2007 to June 30,2007 JuIy 1,2007 to December 31,2007

F 5,000,000 10,000,000 15,000,000

Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it paid its 27o business tax for fiscal year ended June 30, 2007 based on gross sales ofF15,000,000. However, the Quezon City Treasurer assesses the corporation for deficiency business tax for 2007 based on gross sales ofP25,000,000, alleging that local business taxes shall be computed based on calendar year.

a. b.

Is the position of the city treasurer tenable? Explain.

May the deficiency business tax be paid on installments without surcharge and interest? Explain.

Suggested answers:

cL.

Yes, the

City Treasurer is correct in using the gross sales

for the calendar year of F25 million for purposes of

computing the 27o local business tax for the year 2007. The tax period of local taxes, fees and charges is the calendar year, elccept when otherwise prouided in the Code (Sec. 165, LGC). The use of the fiscal year by corporations for purposes of computing tqxes is allowed only under the

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National Internal Reuenue Code, but rutt under the ltrcal

ln cirscs wlrcre a nrtrnul'acturer, assembler, producer, exporter or contractor has two or more factories, project offices, plants, or plantation located in different localities, the 707o sales allocation above shall be pro-rated among the localities where the factories, project omces, plants and plantations are located in proportion to their respective volumes of production during the period for which the tax is due.

e.

The foregoing sales allocation shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant or plantation is located.

The local leuies may be paid on quarterly installments (Sec. 165, LGC) within the first twenty (20) days of each quarter.

The time for payment rnay be extended by the Sanggunian concerned, without surcharges or penalties, but only for a period not exceeding six (6) months (Sec. 167, LGC).

Situs of Taxes

For purposes of collection of the taxes under Section 143 of this Code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other businesses maintaining or operatingbranch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality. b.

The following sales allocation shall apply to manufacturers,

assemblers, contractors, producers, and exporters with factories, project offices, plants, plantation in the pursuit 307o of all sales recorded

in the principal office shall be

taxable by the city or municipality where the principal office is located; and

2. c.

In

Principal office v. branch "Principal office" refers to the head or main office of the business appearing in the pertinent documents submitted to the SEC or DTL The city or municipality specifically mentioned in the articles ofincorporation shall be considered as the situs thereof.

"Branch office" means a fixed place in a locality which conducts operations of the business as an extension of the principal office. Offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received thereat, are not branch or sales offices. A warehouse which accepts orders and./or issues sales invoices independent ofa branch with sales office shall be considered as a sales office (Art.243,IRR of LGC),

MNTC is a contractor subject to local business tax on its branches in Guiguinto, Bulacan. - Manila North Tollways Corporation (MNTC) is a domestic corporation. It received from the Treasurer of Guiguinto, Bulacan an assessment for Mayor's permit for the years 20O4to 2008, and a month later, another assessment for local business tax for 2005 to 2007. The Treasurer stresses that the toll plazas and customer service centers situated within Guiguinto, Bulacan are actually performing the functions of a branch or sales outlet. Imposition of fees and the requirement to secure a permit are part of the police power of an LGU. Separate protests were fiIe, but were denied. Separate complaints with the Malolos RTC were failed, but the RTC ruled against MNTC regarding its petition for preliminary Injunction. locq.ted

oftheir business:

1.

761

d.

Gouernment Code.

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70Vo of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant or plantation is located.

case of a plantation located at a place other than the place where the factory is located, said 70Vo mentioned above shall be divided as follows: (i) 607o to the city or municipality where the factory is located; and (ii) 40Vo to the city or municipality where the plantation is located.

The Court ruled that the business activities and operations in its Tabang and Sta. Rita toll plazas and

conducted by MNTC

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customer service centers partake the nature of branches, "which is a fixed place in a locality which conducts operations of the business as an extension of the principal office." However, the computation of petitioner's local business tax liability for the years 2005 to 2007, which was made on the basis of gross revenues, is erroneous. MNTC is engaged in the sale of services for a fee. It is classified as a contractor. The CTA is bound to follow the doctrine laid down by the Supreme Court in Ericsson Telecom.munications u. City of Pasig, where the courb cancelled the local business tax assessment for lack of basis due to the fact that the assessment, Iike in this case, was based on gross revenue as appearing in its audited financial statements, rather than on gross receipts. Also, mayor's permit or license fees are charges imposed under the LGU's exercise of police power which are intended to cover the cost of regulating business activities and privileges (MNTC a. Mun. of Guiguinto, Bulacan, CTA Case No. 82, Decetnber 3r 2012).

Bar Question (2010) Ferremaro, Inc.,

a

manufacturer ofhandcrafted shoes, maintains

its principal office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City, where most of its workers live. Its principal office in Quezon City is also a sales office. Sales of finished products for 2009 in the amount of F10 million were made at the following locations: (i) Cebu - 25Vo; (ii) Davao l57o; and (iii) Quezon City 60%. Where should the applicable local taxes on the shoes be paid?

Suggested answer: The sales made in the Cebu Branch (25Eo) and Dauao Bronch shall be reported by the respectiue branches in their books and the local taxes due thereon wiII be paid to the city of Cebu and Dauao, (15Eo)

respectiuely. Howeuer, the sales recorded in the books in Quezon City to the extent of 60Vo shall be ollocated as follows: 307o of 607o shall be paid to the Quezon City gouernment, while the 70Vo of 60Vo, shall be allocated a.nd paid to the Marikina City gouernment, where the factory is located.

Tax Ordinances An ordinance is presumed ualid, unless declared otherwise by a Court in an appropriate proceeding. - The Regional Trial Court (RTC) did not err in ruling that the RTC case is a repetition of the

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Oourt of'Appeals case or th.rt the elements of litis pendentia are extant in the RTC case. "Litis pend.entia" is predicated on the principle that a party should not be allowed to vex another more than once regarding the same subject matter and for the same cause of action. This principle is founded on public policy. RTC did not err in the ruling that the RTC case was premature and that the Mindanao Shopping should have first awaited the outcome of the Court of Appeals case. The claim for refund Iodged with the RTC is hinged on the alleged unconstitutionality of the new Tax Ordinance, which is the very same issue pending for determination by the Court of Appeals (Mind.anao Shopping u. Daaao City, CTA Case No. , January 27,2011). The tests of a

valid ordinance

are:

1. It must not contravene the Constitution or any statute; 2. It must not be unfair or oppressive; 3. It must not be partial or discriminatory; 4. It must not prohibit but may regulate trade; 5. It must be general and consistent with public policy; and 6. It must not be unreasonable (Magtajas u. Pryce Properties Corporation, 234 SCRA 225).

Effectivity of ordinances (Sec, 59, LGC) Unless otherwise stated in the ordinance, the same shall take effect after 10 days from date a copy thereofis posted in all bullctin board at the entrance of the provincial capitol or city, municipal, or barangay hall, and in at least two (2) other conspicuous places in the LGU concerned. The secretary to the sanggunian shall cause the posting not later than five (5) days after approval thereo{l The text of the ordinance shall be disseminated and posted in Filipino or English and in the language or dialect understood by the majority of the people in the LGU, and the secretary shall record such fact in a book kept for the purpose.

Gist of all ordinances with penal sanctions shall be published in a newspaper of general circulation within the province where the local legislative body belongs, and in its absence, posting shall be made in all municipalities and cities of the province where the sanggunian of

origin is situated.

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In the case of highly urbanized and independent component cities, the main features of the ordinance duly enacted shall, in addition to being posted, be published once in a local newspaper of general circulation within the city: Prouided, That in the absence thereof, the ordinance shall be published in any newspaper ofgeneral circulation. Appeal to Secretary of Justice Any question on the constitutionality or legality oftax ordinances or revenue measures may be raised on appeal within thirty days from

the effectivity thereofto the Secretary ofJustice who shall render a decision within sixty days from the date of receipt of the appeal. The appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and pa5,'rnent of the tax, fee or charge levied therein. Within thirty days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction (Sec. 187, LGC).

Review of tax ordinances Within three days after its approval, copies of the approved tax ordinance of the municipality or a component city shall be furnished to the provin cial S anggunian; and, in the case of barangay ordinances, within ten days from enactment, copies thereof shall be forwarded to the municipal Sanggunian, or the city Sanggunian as the case may be, for the review of the ordinance (Secs. 56-57, LGC).

The provincial or the city or municipal Sanggunioz shall review the tax ordinance within thirty days after receipt of a copy thereof. The provincial Sanggunloz shall examine the ordinance or require the provincial attorney or prosecutor to provide it with his written comments or recommendation which may be considered by t}ne Sanggunian in making its decision. It may declare the ordinance invalid, in whole or in part, if it finds such ordinance to be beyond the power conferred upon the city or municipal Sanggunian (Sec. 56, LGC).

In the case of barangay ordinances, the city or municipal Sanggunian, if its finds the ordinance inconsistent with law, shall return the same for adjustment, amendment or notification that would thereby render the ordinance suspended until such time or the revision called for is effected(5ec.57, LGC).

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If, within the afbresaid thirty days, the provincial, municipal or Sanggunian, as the case may be, takes no action, the tax ordinance shall be deemed approved (Sec.57, LGC). ciLy

Section 187, R.A. 7160, which authorizes the Secretary of Justice to review the constitutionality or legality ofa tax ordinance - and, if warranted, to revoke it on either or both grounds - is valid, and it does not confer the power of control over local government units in the Secretary ofJustice, as even ifthe latter can set aside a tax ordinance, he cannot substitute his own judgment for that of the local government :unit (Drilon a. Lim, GR. No. 172497, August 4, 7994).

Bar Question (1991) The Municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals practicing in the municipality to pay a tax equivalent to two percent (2Vo) of their gross income. A certified true copy of the ordinance was sent to the Secretary of Finance for review on 1 March 1989 and was received by him on the same day. On 15 August 1989 even as the tax ordinance remained unacted upon by the Secretary of Finance, the municipality started collecting the tax to question. The members of the Philippine Bar in the municipality questioned the legality of the ordinance and sought the suspension of the collection of the tax, but the municipality argued that since the Secretary has not taken any action on the ordinance for more than one hundred twenty days after his receipt thereof, the legality ofthe ordinance can no longer be questioned and insisted on the collection ofthe tax. Is the tax ordinance in question legal?

Suggested answer: No, the tux ordinance is not legal as the Local Tax Code allows prouinces and cities, to the exclusion of municipalities, to impose an annual occupation tq"x, on all persons engaged in the exercise or practice of their profession or calling in specified amounts which in the case of lawyers is P75.00 per annurl (Secs. 17 and 12 in relation to Sec. 23, Local Tax Code). A person ctuthorized to practice his profession or calling shall pay the tax to the prouince where he practices his profession or calling or maintains his office. No local gouernment unit can impose q tar on income (Sec. 5, Local Tax Code).

2)

Is the Municipality correct in insisting on collecting the tax?

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Suggested answer: No, the Municipality was incorrect in insisting on the collection ofthe tax. Once the tax on occupation is paid as stated in paragraph (a), aboue, the lawyer is entitled to practice his profession or calling in all parts of the Philippines without being subject to any other national or local tax,, license or fee for the practice of such profession or calling.

3) Will

the inaction of the Secretary of Finance bar the professionals in the Municipality from questioning the legality of that ordinance?

Suggested answer: The inaction of the Secretary of Finance does not bor the professionals in the Municipality from questioning the legatity of the ordinance. While it is true that the Secretary of Finance may himself suspend the tax ordinance within a 120-day period from receipt thereof, his failure to do so, howeuer, has no preclusiue effect on taxpayers who may be aduersely affected by the ordinance.

4)

What remedies are available to the taxpayer to enable him to question the legality ofthat ordinance?

Suggested answer: The taxpayer mqy pursue his remedies either administratiuely judiciall,y. or He may, as the cclse u)arrants, file a formal protest with the Secretary of Finance or query with the Prouinciol Fiscal whose opinion is appealable to the Secretary of Justice whose decision may be contested in the proper court. The other remedy would be to file a special ciuil action for declaratory relief (if circumstances still warront) or to pay the tax and thereafter to file an action for refund within six (6) fnow two (2)] years after such payment.

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The appeal shall not have the effect of suspending the effectivity ofthe ordinance and the accrual and payment ofthe tax, fee or charge levied therein.

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Within 30 days ultcr rtlceipt ol'the decision or the lapse of 60-day period without the Secretary ofJustice acting upon the appeal, the aggrieved party may file the appropriate proceedings with a court of competent jurisdiction (Sec. 187, LGC). In a case decide before the effectivity ofthis Code, it was held that the 120-day period for review ofordinances in Section 44 ofthe Local Tax Code is merely directory and the Secretary of Justice may still review the ordinance and act accordingly even after the lapse ofsaid period, provided that he acts within a reasonable time (Estanislao u. Costales, 196 SCRA 853 t19911). The Secretary ofJustice can only review the constitutionality or legality of the tax ordinance. If warranted, he can revoke it on either or both grounds, but he cannot substitute his own judgment for the local government (Drilon u. Litn,235 SCRA 135).

The three (3) periods in Section 187, LGC are mandatory (Hagonoy Marhet Vend.ors Asso. u. Mun of Hagonoy, G.R. No. 73702L, Februany 6,2002). The power to tax is the most effective instrument to raise needed revenue. Any delay in implementing tax measures would be to the detriment of the public; hence, protests over tax ordinances are required to be done with certain time frames (Mactan Cebu Intl Airport a. Marcos,267 SCRA 667). The three (3) separate periods are prerequisites before seeking redress in court (Reyes a. CL G.R. No. 1,78233, December 70' L999) and are set to prevent delays as well as enhance the orderly and speedy discharge ofjudicial functions.

Remedies of Taxpayers Against Tax Ordinance 1. In general, where the law provides for remedies against the action of an administrative body, relief to the courts can be sought only after exhausting all remedies provided therein. The reason rests upon the presumption that the administrative body, if given the chance to correct its mistake or error, may amend its decision on a given matter and decide it properly.

Appeal of ordinances to Secretary of Justice Any question on the constitutionality or legality oftax ordinances or revenue measures may be raised on appeal within 30 days from the effectivity thereof to the Secretary of Justice, who shall render a decision within 60 days from the date of receipt of the appeal.

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2.

With regard to questions on the legality of a tax ordinance, the remedies available to a taxpayer are provided in the following provisions:

a.

Section 187 provides that the taxpayer may question the constitutionality or legality oftax ordinance on appeal within 30 days from the effectivity thereof,

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to the Secretary of Justice. The petitioner, altur finding that his assessment is unjust, confiscatory or excessive, must have brought the case before the Secretary of Justice for questions of legality or constitutionality of the tax ordinance.

b.

Under Section 226, an owner of real property who is not satisfied with the assessment of his property may, within 60 days from notice of assessment, appeal to the Board of Assessment Appeals.

c.

Should the taxpayer question the excessiveness ofthe amount of tax, he must first pay the amount due, in accordance with Section252. Then, he must request

the annotation of the phrase "paid under protest" and accordingly appeal to the Board of Assessment Appeals by filing a petition under oath, together with his appeal (Lopez a. City of Manila, 303 SCRA 448

Remedies for the collection of tax Bar Question (1997) 1. Tax lien. - Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exercise of privilege with respect to which the lien is imposed. The lien may be extinguished upon full payment of the delinquent local tax fee or charge, including related surcharges or interest (Sec. L73, LGC).

2.

Distraint and levy. - The civil remedies for the collection of local taxes, fees or charges, including the applicable surcharges and interest, fees or charges, may either be (a) by the administrative remedies of distraint of personal property of whatever kind, including securities and bank accounts, and levy ofreal property and interest therein, or (b) by judicial action. Either of these remedies, or both, may be pursued concurrently or simultaneously at the discretion of the local government unit concerned (Sec. 174, LGC).

3.

Judicial action. - The local government may institute an ordinary civil action with the regular courts of proper jurisdiction for the collection of delinquent taxes, fees, charges or revenues (Sec. 183, LGC). The term "ciail aetion" would preclude a criminal case as a proper remedy for collection of delinquent local taxes (Republic a. Patanao,20 SCRA 712).

tleeel). Section 195 of the Local Gouernment Code does not enumerate

nor restrict a protest of assessment to specific grounds; thus, respondent has the right to raise qs an issue the constitutionality of the tax ordinance, which becqme the sole basis of the disputed assessment - Section 195 of the LGC merely provides that the taxpayer shall have 30 days within which to appeal with the court of competent jurisdiction, without specifying the court which has exclusive jurisdiction over appeals from the denial or inaction of the local treasurer on local tax cases. In such a case, the RTC has the exclusive originaljurisdiction as duly conferred by Section 19 of Batas Pambansa BIg. 129; hence, the RTC properly had jurisdiction over the case.

As to the propriety of canceling the assessment, it is undisputed that a previous case before the Supreme Court has invalidated Section 7C.06 of the RMRC insofar as it withdrew the privileges granted by law to Regional Operating Headquarters. This has not been denied by the parties. Further, the City failed to seasonably appeal the decision of the Secretary of Justice, nullifying the subject provision. Hence, there is no legal basis for the City to impose such taxes on Chevron, and the questioned assessment, having no basis in law, is null and void (Sangguniang Panglungsod. ng Mahq.ti v. Cheuron Hold,ings, CTA Case No. , October 27,2011).

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The taxing authority and the taxpayer should stand on reasonably equal terms and that the power of the State and the remedies of the citizens are and should be reciprocal (Vd.a. y Hijas d.e Ped.ro P. Roxas u. Rafferty, 37 Phil.957). The prescribed procedure in auction sales of property for tax delinquency should be followed punctiliously as they are in derogation of property rights. Strict adherence to the statutes governing tax sales is imperative not only for the protection of the taxpayer, but also to allay any possible suspicion of collusion

770

between the buyer and the public officials called upon to enfbrce such laws. Notice of sale to the delinquent land owners and to the public in general is an essential and indispensable requirement of law, the non-fulfillment of which vitiates the sale (Serfi.no v. Court of Appeals, 754 SCRA 19 t19871). Also, lack of proper notice invalidates an auction sale (Estate of the late Merced.es Jacob u. Court ofAppeals,283 SCRA 474 t19971).

Bar Question (2010) How are retiring businesses taxed under the Local Government Code?

Suggested answer: Upon terminq.tion of business subject to tax under Section 143 of the Local Gouernrnent Code, it is required to submit a sworn stq.ternent of its gross sq.les or receipts for the curcent year. If the tax paid during

the year be less than the tar due on said gross sales or receipts of the current year, the difference shq.ll be paid before the business is considered officially retired (Sec. 145, LGC).

Prescriptive Periods

a.

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Period to assess local taxes and fees

Local taxes, fees, or charges shall be assessed within five (5) )rears from the date they became due. No action for the collection of such taxes, fees, or charges whether administrative or judicial, shall be instituted afterthe expiration of such period without said assessment having been made. In case of fraud or intent to evade the payment of taxes, fees, or charges, the same ma)' be assessed within ten (10) )zears from discovery of the fraud or intent to evade payment. Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration ofsaid period (Sec. 194, LGC). The running ofthe periods ofprescription shall be suspended for the time during which (a) the treasurer is legally prevented from making the assessment or collection; (b) the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and (c) the taxpayer is out of the country or otherwise cannot be located (Sec. 794, LGC).

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In summary, to assess local taxes, the LGU has, withoutfraud, (5) years from the date they became due. In case of fraud, the LGU five years from discovery offraud or intent to evade payment. This has 10 period may be suspended when (a) the Treasurer is legally prevented from making the assessment or collection; (b) taxpayer requests for

reinvestigation and executes a waiver in writing before expiration of period; and (c) taxpayer is out ofthe country or otherwise cannot be located (Sec. 194[d], LGC). The right of Cagayan to assess local taxes for 1998 fourth quarter had already prescribed at the tirne assessrnent was issued in 2004. - Section 166, LGC provides that all local taxes, fees and charges shall accrue on the first day of January each year, and Section 167, LGC provides for the payment of local taxes, fees and charges within the first 20 days ofJanuary or ofeach subsequent quarter, as the case may be, and for local taxes for the fourbh quarter of 1998, which includes franchise tax, they accrued on January 1, 1999 and became payable within the first 20 days of January, the same year. In this case, the assessment was issued only in 2004. Thus, PLDT is entitled to a refund or issuance of TCC. Furthermore, the BLGF's interpretation oflocal tax law is not authoritative, since its function is merely to provide consultative services and technical assistance to local governments and the general public on taxation and real property assessment (Prov. of Cagagan u. PLDT, CTA Case No. , Januar! 27r 2017).

b.

Period to Collect the Assessed Tax

To collect the assessed tax, the rule is that no action for collection ofthe tax shall be instituted after the expiration ofsuch period (five

[5] years) without such assessment having been made.

Bar Question (2010) On May t5, 2009, La Manga Trading Corporation received a deficiency business tax assessment of F1,500,000 from the Pasay City Treasurer. One June 30, 2009, the corporation contested the assessment by filing a written protest with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing it to file on October 25,2009 an appeal against the assessment before the Pasay Regional Trial Court. (a) Was the protest of the corporation filed on time? (b) Was the appeal with the Pasay RTC filed on time?

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Suggested answers:

q,.

Yes. Since the business tax assessment wqs receiued on May 15, 2009 qnd the protest thereto was filed on June 30, 2009,

or a total period of 46 days, the taxpayer thus timely filed such protest. The law allows the taxpayer to fiIe its protest within 60 days from tlte date of receipt of'the qssessment.

b.

The toxpayer shall, within 30 days from receipt of the deniol of the protest or from the lapse of the 60-day period prescribed within which to appeal with the court of competent jurisdiction; otherwise, the q.ssessment beconxes conclusiue and unappealq.ble. The fifth sentence of Section 195 of the

LGC of 1991 does not prouide for any administrq,tiue appeal. Hence, the totcpayer can only appeal to q. court of competent jurisdiction. In this case, the local treasurer is acting as a quasi-judicial agency. Under Section 49 of the 1997 Rules of Ciuil Procedure, appeals from quasi-judicial agencies, in the exercise ofjudicial functions, shall be brought to the Court of Appeals. In this case, the appeal was brought by the corporation to the Pasay RTC, which is not the court of competent jurisdiction. Thus, the appeal was not fi.led on time.

Remedies of Taxpayers Prior to assessment

1. 2.

Administrative appeal to the Secretary of Justice; and Action for declaratory relief.

After an assessment

1. 2.

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Protest of the assessment; or Action for refund.

Protest of assessment When the correct tax, fee or charge is not paid, the local treasurer shall issue a notice of assessment within the applicable prescriptive period (Sec. 194, LGC), stating the nature of the levy, amount of deficiency, surcharge, interest and penalty.

Taxpayer may file a written protest against the assessment with the local treasurer; otherwise, the assessment shall become final and executory.

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'lhe trezrsur.er shall dccide the protest within 60 days from the date of its filing. If the treasurer finds the assessment to be wholly or partly correct, he shall deny the protest with notice to taxpayer. The taxpayer shall have 30 days from date of receipt of the denial of the protest or from the lapse of the 60-day period within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable (sec. 195, LGC) . Note that this provision does not require payment under protest to contest the assessment for local business, unlike section 252 of the LGC which requires the payment under protest of real property taxes. However, should the local government officer not issue the mayor's permit due to the non-payment of the local business tax, the business of the taxpayer becomes illegal and may be closed by the local government officer.

lnjunction available against collection of taxes Unless such a suit is forbidden by statute, a court of equity

generally will interfere, where some ground of equitable jurisdiction

is presented, to prevent, by injunction, the collection of wrongful taxes by a municipality, provided that there is no adequate remedy to redress the iniury to property which would be inflicted by enforcing payment of the tax (Valley T?ad'ing Co. a. CFI, et al., 77L SCRA 501 t19891). The City of Makati cannot impose local business tq'x' for sales of branches or sales outlets located in other local gouernrnent units. Nippon Express (NEPC) is in the business of freight forwarding -conducted through three branches in Paraflaque, Makati and cebu. For 2000 and 2001, it paid Makati business taxes in the amounts of P2,349,468.80 and F3,051,529.84, respectively. On September I!,2002, Makati issued a Notice of Assessment to Nippon Express, assessing it for deficiency local business tax and penalties in the amounts of F3,I70,296.07 and F1,020,856 for the years 2000 and 2001, respectively. Respondent City Treasurer assessed NEPC by taking into account its gross revenue for the years 1-998 to 2000 as tax base. Nippon Express filed its protest on the ground that there was no factual and legal bases, since the imputed gross revenue used by the petitioner exceed the actual gToss revenue ofrespondent for its ocean cargo Branch located in Makati city, and Makati has no right to assess for any deficiency local business tax due to the territorial

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character of taxation. since there was no action on the part of the ()ity within 60 days from date of filing, Nippon Express filed the case with the Makati RTC, pursuant to Section lgb of the LGC. On September

22,2010, the Makati RTC found for Nippon Express. petition firr review was filed by the City of Makati with the CTA. The CTA ruled in favor of Nippon Express. The Makati Revenue Code provides the situs of tax and the sales allocation. Thus, ,,All sales made by a branch or sales office or warehouse located in the municipality shall be taxable herein. In case the principal office

and the factory are located in this municipality, all sales recorded in the principal office and those in other localities where there is no branch or sales office or warehouse shall be recorded in the principal office and taxable by the municipality." The court is mindful of the doctrine in statutory construction stating that where the language

of the law is clear and unequivocal, it must be given its literal application and applied without interpretation. Here, all of the aforequoted provisions are clear in stating that establishments stating or operating branch or sales outlet elsewhere shall record the sale in the branch or sales making the sale or transaction, and the tax thereon' shall accrue and shall be paid to the municipality where such branch or sales outlet is located. Similarly, the Court a quo aptly observed that even assuming that there was under-declaration or mis-declaration of the total taxable earnings of respondent in its Paranaque City branch, thereby depriving the government of its lawful dues, the City Treasurer of Makati, through the revenue examiner, attempted to collect what under the Revenue code and the Local Government Code properly belongs to the City of parafraque. The action of the City of Makati is impermissible, because to do so would be sanctioning or encroaching upon the prerogatives of another co-equal and autonomous local government (City of Mahati u. Nippon Express Philippines Corporation, CTA, February 17,2072).

Bar Question (2003) X, a taxpayer who believes that an ordinance passed by the City council of Pasay is unconstitutional for being discriminatory against him, wants to know from you, his tax lawyer, whether or not he can file an appeal. In the affirmative, he asks you where such appeal should be made: the Secretary ofFinance, or the Secretary ofJustice, or the Court of Tax Appeals, or the regular courts. What would your advice be to your client, X?

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Suggested answer: The appeal should be made with the Secretary of Justice. Any question on the constitutionality or legality of a tax ordinance rnay be raised on appeal with the Secretary of Justice within 30 days from the effectiuity thereof (Sec. 187, LGC; Hagonoy Market Vend,or Association a. Mun. of Hagonoy, G.E. No. 737627, February 6' 2002).

Protest When the correct tax, fee or charge is not paid, the local treasurer shall issue a notice of assessment within the applicable prescriptive period (Sec. 194, LGC), stating the nature of the levy, the amount of deficiency, the surcharges, interests and penalties. The taxpayer may file a written protest the assessment with the local treasurer contesting the assessment within 60 days from the receipt of the notice of assessment; otherwise, the assessment shall become final and executor)'. The local treasurer shall decide the protest within 60 days from the time of its filing. If the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. The taxpa)'er shall have 30 days from the receipt ofthe denial ofthe protest or from the lapse ofthe sixty-day period prescribed herein within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable (Sec. 195, LGC).

Claim for refund The filing of a written claim for refund with the local treasurer is a condition precedent for maintaining a court action. If the local treasurer does not act on the written claim for refund and the twoyear period is about to expire, the taxpayer should forthwith initiate the court action for refund and consider the treasurer's inaction as a denial of his claim for refund. The Code failed to specifically provide for a period of appeal in the event a decision is made by the treasurer on the claim for refund, similar to that obtaining in the case of a denial on a written protest of an assessment. It would seem, therefore, that the Court may entertain the appeal so long as the case for refund is filed with it within the two-year period and a written claim for refund or credit had earlier been submitted to the local treasurer. The applicable statute of Limitations for claims for refunds, not having been specifically provided for by that law, could

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be filed within six (6) years from the payment thereof as a case of solutio indebiti (Art. 7745, Ciuil Cod.e of the philippinee; puyot & Sone v, City of Monilo, 7 SCRA 9ZO).

CIIAPTER

}CfrIII

REAL PROPERTY TAX Nature of Real Property Tax The real property tax is a tax on property. It has been considered as a national, not a local, tax. The realty tax is enforced throughout the Philippines and not merely in a particular municipality or city, but the proceeds of the tax accrue to the province, city, municipality and barrio where the realty taxed is situated (Sec. 86, P.D. 464).ln contrast, a local tax is imposed by municipal or city council by virtue of the Local Tax Code, P.D. 231 which took effect on JuIy 1' 1973

rcg O.G. 6197) (Meralco Securities Ind'ustrial Corporation a. Central Board. of Assessment Appeals, G.R. No. L'46245, May 31, 7982).It has always been imposed by the national lawmaking body. It is enforced through the Philippines and not in a particular political subdivision, although the bulk of the tax proceeds accrue to the various local government units where the property is located (Secs.233 and 271, LGC).

Accrual and Payment of Tax The real property tax for any year shall attach and become dutr and payable on the first day ofJanuary and the said basic and any other tax levied under the title on real property taxation shall, fronr

the date of accrual, constitute a lien upon the property subject trr such tax. Said lien shall be superior to all other liens, mortgages' or encumbrances of any kind whatsoever, shall be enforceable against thtr properby, by administrative or judicial action, whether in the possession ofthe delinquent or any subsequent owner or possessor, and shall btr removable only by the pa5rment of the delinquent taxes and the related interest and expenses (Sec. 246, relation to Sec. 257, LGC).

Real property taxes may, in the discretion of the taxpayer, btr paid without penalty in four equal installments, the first installment to be due and payable on or before March 31; the second installment, on or before June 30; the third installment, on or before September 777

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30, and the fourth installment, on or before December 31, except thc special levies which shall be governed by the local ordinance imposing

b.

the levy. Payments of real property taxes shall first be applied t' prior year delinquencies, interests, and penalties, if any, and only after said delinquencies are settled may tax payments be credited t
thereof and non-agricultural lands, including residential lots in subdivisions, of more than 1,000 square meters at least one-half of which remain unutilized or unimproved by the owner or owners thereo0. Regardless of land area, this section shall likewise apply to residential lots in subdivisions

Bar Question (20121 Mr. Jose Castillo is a citizen, who purchased a parcel of land in Makati city in L970 ata consideration of Fl million. In 2011, the land, which remained undeveloped and idle, had a fair market value of ?20 million. The Assessor of Makati re-assessed in 2011 the property at F10 million- when is Mr. castillo liable for real property tax on the land based on the re-assessed fair market value, beginning 2011 or

duly approved by proper authorities, the ownership of which has been transferred to individual owners, who shall be liable for the additional tax; and

c.

2012?

be

liable to the real property tax based. on the

re-assessed

fair marhet ualue of P10 million beginning 2012. Att reassessments made after the first day of any year shall tahe effect on the first of January of the succeeding year (Sec. 21, LGC). The fair market ualue of flO million as determined by the comrnissioner shall be used only for purposes of

acquiring land and other real property in connection thereof. However, the special levy shall not apply to lands exempt from basic real property tax and the remainder of the land portions of which have been donated to the local government unit concerned for

national internal reuenue tanes.

the construction of such projects or improvements

Types of Real Property Tax

1.

Annual ad ualorem tax that is levied by a province, city or municipality within the Metropolitan Manila Area on real property not hereinafter specifically exempted, at the following uniform rates:

a. b.

Provinces - not exceeding one percent (LVo) of the assessed value; Cities and municipalities in the Metropolitan Manila

Area

- not more than two percent (2Vo) of the assessed value (Sec. 2SS, LGC).

2. In addition to the basic real property

tax, special levies may be imposed by the same local government units on said real property, such as:

a.

Additional one percent Education Fund;

Special levy or assessment that may be imposed by provinces, cities or municipalities, including those outside the Metropoiitan Manila Area, on property

especially benefited by certain infrastructure developments or improvements undertaken by said governments to defray a part, not exceeding 6OVo, of t}rre actual cost thereof, including the cost of

Suggested answer: Mr. Castillo shall

Additional five percent (57o) tax on idle lands (i.e., agricultural lands at least one-half of which remain uncultivated or unimproved by the owner or owners

(LEo)

tax for the Special

( Secs.

232, 233, 235-237, LGC),

Bar Question (2005) A city outside of Metro Manila plans to enact an ordinance impose a special levy on idle lands located in residential will that

subdivisions within its territorial jurisdiction in addition to the basic real property tax. Ifthe lot owners ofa subdivision located in the said city seeks your legal advice on the matter, what would your advice

be? Discuss.

Suggested answer: My aduice would be that the city's plan to enact a'n ordinance that will irnpose such special leuy on idle lands is not legally allowed, unless these lands are specially benefited by a public worhs projects or improuements funded by the city gouernment (Sec. 240, LGC). I will lihewise aduise them that before the city coun'cil could enact an

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ordinance imposing a speciel leuy, it shall conduct a public lrcuring thereon; notify in writing the owners of the real property to be affet:ted or the persons hauing legal interest therein as to the date and place thereof and afford the latter the opportunity to ercpress their positions or objections relatiue to the proposed ordinance (Sec. 242, LGC).

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Suggested answer: Not all local gouernment units may do so. Only prouinces, cities, and municipolities within the Metro Manila area (Sec. 232, LGC) may irnpose an ad. valorem tu.x not exceeding fiue percent (57o) of the assessed ualue (Sec. 236, LGC) of idle or uacant residential lots in a subdiuision, duty approued by proper authorities regardless of area

Bar Question (1991)

(5ec.237, LGC).

In view of the street widening and cementing of roads and the improvement of drainage and sewers in the district of Ermita, the City Council of the City of Manila passed an ordinance imposing and collecting a special levy on lands in the district. Jose Reyes, a landowner and resident of Ermita, submitted a protest against the special levy fifteen (15) days after the last publication ofthe ordinance alleging that the special levy was exorbitant since the rate thereof was more than the maximum rate of two percent (2Vo) of ttre assessed value of the real properties allowed by Section 39 of Presidential Decree No. 464, as amended.

Real Property Subject to Tax The real property tax is imposed on real property such

Assuming that Jose Reyes is able to prove that the rate of the special levy is more than the aforesaid percentage limitation of 2Vo,

will his protest prosper? Suggested answer: The special leuy under the Real Property Tax Code on lands, specially benefited by the proposed infrastru.cture, may not exceed 60Vo of the cost of said improuement. AII lands comprised within the district benefited are subject to the special leuy except lands exempt from the real property tax (Sec. 47, Real Property Tax). The protest shall be fiIed not later than 30 days after the publication of the ordinq.nce and may be submitted to the City Sanggunian signed by a majority of the landowners affected by the proposed work. If no such protest is fiIed in the manner q.boue specified, the city ordinqnce shall become final and effectiue. The leuy imposed under the ordinance should be within the limit of 607o of the total cost of the proposed improuement. The rate oftwo percent (2Vo) ofthe assessed ualue under Section 39 of P.D. 464 refers to the real property tq.x q.nd not to special leuies.

Bar Question (1991) May local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential

subdivisions within their respective territorial jurisdictions?

as

land, buildings, machinery and other improvements not otherwise specifically exempted under the Code (Sec.232, LGC).

The term "machinery" embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily to the real property. It includes the physical facilities, for production, the installations and appurtenant service facilities; those which are mobile, self-powered or self-propelled and not permanently attached to the real property but are actually, directly and essentially used to meet the needs of the particular industry, business or activity, and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, commercial, industrial or agricultural purposes (Sec. 199[o], LGC). The term "improvements" refers to valuable addition made to a property or an amelioration in its condition, amounting to more than a mere repair or replacement of parts involving capital expenditures and labor which is intended to enhance the value, beauty or utility or to adopt it for new or further purpose (Sec. 199[m], LGC).

Bar Question (2009) Republic Power Corporation (RPC) is a GOCC engaged in the supply, generation and transmission of electric power. In 2005, In order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC's power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates

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that all real estate taxes and asscssmenLs, r:ltes and othcr (:hilrg()s, in respect of the power barges, shall be for the account of'RI)O. In20O7, JEC received an assessment ofreal property taxes on the power barges from the Assessor of Batangas City. JEC sought reconsideration ofthe assessment on the ground that the powerbarges are exempt from real estate taxes under Section 284(c) of R.A. 7160, as they are actually, directly and exclusively used by RpC, a GOCC. Furthermore, even assuming that the power barges are subiect to real property tax, RPC should be held liable therefor, in accordance with the terms of the lease agreement. Is the contention of JEC correct?

Suggested answer: Power barges, which are floating and mouable, are real property subject to real property tax. Article 415(a) or the New Ciuil Cod.e prouides that "docks and structures which though floating, are intended by their nature and object to remain at a fixed place on a riuer, lake, or coast' are considered immouable property ... The mere understanding of petitioner NPC under the Agreement that it shart be resporusible for the payment of real estate taxes and assessments does not justify its exception. The priuilege granted to NpC cannot be extended to FELS. The couenant does not bind third persons not priuy thereto (FELS Energy,Inc. u. The Proa. of Batangas, G.R. No. 168557, February 16, 2007).

Bar Question (2003) Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, the pieces must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil companies install underground tanks in the gasoline stations located on land leased by the oil companies from the owners of the land where the gasoline stations are located. Are those underground tanks, which were not placed there by the owner of the land but which were instead placed there by the lessee ofthe land, considered real property for purposes ofreal property taxation under the Local Government Code?

Explain.

Suggested answer:

It is a familiar phenomenon to see things classed as real property for purposes of ta"tcation which on general principles might be considered personal property. For similar ree,sons, machinery and

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equiprnent, consisting of underground tanks, eleuated tanks, water tanks, gasoline punnps, computing pumps, water pumps, cd.r utasher,

car and truck hoists, air compressors and sirnilar articles, installed by Caltex, in its gasoline stations, located on leased land, haue been held to be real property subject to the to'x (Calter Phils. o. Central Boa,rd. of Assessmcnt Appeals, L14 SCRA 296).

BOT Agreement is not merely a Financing Scheme Under the BOT Agreement, can the GOCC NPC) be deemed the actual, direct and exclusive user of machinery and equipment for tax exemption? If not, can it pass on its tax-exempt status to its BOT partner, a private corporation, thru the BOT agreement? GOCC is exempt from RPT when it owns and/or actually uses the machinery and equipment for generation and transmission of electric power. In this case, it is BPPC, a non-government entity, which owns' maintains and operates the machinery and equipment. Using these,

generates electricity, which it then sells to NPC. NPC is not the registered owner of machinery and equipment' This is confirmed by BOT Agreement. Thus, Section 234(c) does not apply.

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Liability for pa5rment of RPT is determined by law and not by agreement of the parties. It must be expressly granted by law. Tax exemption is also not transferable. And it is strictly construed. u . Prou of Batangas, where it was provided real estate taxes and assessments. pay of FELS' all shall that NPC since it was not the actual, recognized not was of NPC Exemption barge. ofthe user exclusive direct and

SC cited FELS Erwrgy

ThatBOTfureementis merely afinancing scheme, where BPPC is the financier and NPC is the actual user of properties is belied by the BOT Agreement itself. The proponent wiII construct the project at its own cost and subsequently operates and manages it. At the end of 1"5 years, the proponent transfers the ownership of the facility to NPC. Thus, BPPC has complete ownership-bothlegal andbeneficial - of the project (NPC v. CBAA, LBAA'La Union, G.R. No. 777470,

Januan1 30,2009).

For purposes of taxation, the term "real property" may include things which generally should be regarded as personal property (84 C.J.S. 171, Note). It is a familiar phenomenon to see things classed as real property for purposes oftaxation which on general principle might be considered personal property (Standard Oil Co. of New York u. Jararnillo, 44 PhiI.630). Thus, while the two tanks are not

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embedded in the land, they may, nevertheless, be considered as taxable improvements on the land, enhancing its utility and rendering it useful to the oil industry as defined under section B(k) of the Real Property Tax code. It is undeniable that the two tanks have been installed with some degree of permanence at receptacles for the considerable quantities of oil needed by Meralco for its operations. The case of Board of Assessment Appeals u. Manilq Electric company ( 1 1g Phil. 328), wherein Meralco's steel towers were held not to be subject to realty tax, is not in point because in that case the steel towers were regarded as poles and under its franchise, Meralco's poles are exempt from taxation. Moreover, the steel towers were not attached to any land or building. They were removable from their metal frames (Manila Electric Co. u. Central Board. of Assessment Appeals, G.1?. IVo.

L-47943, May 37, 1982).

The pipeline of Meralco Securities does not fall within any of the classes of exempt real property enumerated in section 3 of the Assessment Law and section 40 of the Real property Tax code (Meralco Securities Ind.ustrial Corporation u. CBAA, supra). The appellee constructed a road on a public land under lease contract. Appellant assessed real property tax thereon, which was protested by the appellee, claiming that the road is exempt from tax because (a) the road belongs to the national government by right of accession; (b) the road cannot be removed or separated from the land on which it is constructed and so it is part and parcel of the public land; and (c) according to the evidence, the road was built not only for the use and benefit ofthe appellee but also ofthe public in general. The court ruled that the government has practically reserved the rights to use the road to promote its varied activities. since the road in question cannot be considered as an improvement which belongs to the appellee, although in part is for its benefit, it is clear that the same cannot be the subject of assessment within the meaning of section 2 of commonwealth Act No. 470. It is well settled that a realty tax, being a burden upon the capital, should be paid by the owner ofthe land and not by a usufructuary (Mercado u. Rizal, 6T phit. 608; Art. Sg7, New ciuil code). Appellee is but a partial usufructuary of the road in question (Board of Assessmcnt Appeals of Zannboanga del Sur a. Samar Mining Co., GR. No. L-28084, February 22, I|ZI).

Bar Question (2001) Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, they must be placed by the

owner of the land and, in addition, must tend to directly neet the needs of the industry or works carried on by the owner. Oil companies, such as Caltex and Shell, install undergtound tanks in the gasoline stations located on land leased by the oil companies from others. Are those underground tanks which were not placed there by the owner of the land but which were instead placed there by the lessee of the Iand, considered real property for purposes ofreal property taxation under the Local Government Code? Explain your answer.

Suggested answer: Yes, the underground tanks although installed by the lessee, Shetl and Caltex, are considered as real property for purposes ofthe imposition of real property taaes. It is only for purposes of executing a final judgrnent that these machinery and equipment, installed by the lessee on a leased land, would not be considered as real property. But in the irnposition of the real property tax, the underground tanks are ta.xable us necessary fix,tures of the gasoline station without which the gasoline station would not be operational

(Coltex Phils.r lnc-

a-

CBAA,114 SCRA296).

Fundamental Principles Bar Question (2000, 1997) The appraisal, assessment, levy and collection ofreal property for taxation purposes shall be guided by the following fundamental

principles:

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 ofits actual use;

3.

ReaI properby shall be assessed on the basis ofa uniform classification within each local political subdivision;

4.

The appraisal, assessment and levy of real property for taxation purposes and the collection ofthe real property tax shall not be let to any private persons; and

5.

The appraisal and assessment of real property shall be equitable (Sec. 198, LGC).

willing but not compelled to buy would pay an owner of the property, and

"Fair market value"

is the amount which a purchaser

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the latter willing but not compelled to sell w'ulcl ircccpt :rs the consideration or price therefor (Sec. 19g, LGC; Army and No;ay Club u. T?inid.ad,44 Phil.383). The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capital or other places as required by law (Lopez a. City of Manila, 803 scRA 448 t19e9l). Basis of real property tax. - The basis of real property taxation under the Assessment Law was ownership or interest tantamount to ownership. The ReaI Property Tax Code changed the basis ofreal property taxation and adopted the policy oftaxing real property on the basis ofactual use, even ifthe user is not the owner (Prov. of Nueua Ecija o. Imperial Mining Co., II8 SCRA 632 t19821). This policy is still followed in the Local Government Code.

For assessment purposes, the term "actu.al u se" refers to the principal and predominant utilization of the property by the person in possession thereofpursuant to section lgg(b) ofthe code (Testate Esta,te of Lim a. City of Manila, lBZ SCRA 488).Inlg74, anew Real Property Tax Code came into being when P.D. 464 was issued. It changed the basis ofreal property taxation. It adopted the policy oftaxing real property on the basis ofactual use, even ifthe user is not the owner. Thus, even ifthe user is not the owner ofthe property, government property covered by mining leases is subject to real property tax(Nueva Eeija u.Imperial Mining Corporation, GR. No. L-59463, Noaember 79, 1982).

In appraising the current and fair market value of the property, the criterion is that which is prevailing in the locality where the

property is situated (Sec.207, LGC). However, in preparing a general schedule of value for a province or city and in determining the classes of property for assessment levels, real property shall be classified, valued and assessed on the basis ofits actual use, regardless ofwhere located, whoever owns it, and whoever uses it (Secs. 217 and, 212, LGC).

The Municipality of Pasig increased the real estate taxes effective for the year 1994, which assessment was protested by the taxpayer. The court ruled that whether the assessment is made before or after the effectivity of R.A. 7160, the observance of, and compliance with, the explicit requirement of P.D. 921 is strict and mandatory, either because P.D. 921 was not impliedly repealed by

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R.A. 7160 and is therefore still the applicable statute, or because the Supreme Court, in three related cases promulgated on 16 December 1993, after the Local Government Code of 1991 already took effect, ruled that a schedule ofvalues and the corresponding assessments based thereon "prepared solely by the city assessor ... failed to comply with the explicit requirement (of collegial and joint action by all the assessors in the Metropolitan Manila Area under P.D. 921) '.. and are on that account illegal and void." R.A. 7160 has a repealing provision (Section 534) and, if the intention of the legislature was to abrogate P.D. 921, it would have included it in such repealing clause, as it did in expressly rendering ofno force and effect several other presidential decrees. The repeal in R.A. 7160 partakes of the nature ofa general repealing provision. It is basic rule ofstatutory construction that repeals by implication are not favored (Ty and' MVR Picture Tube u.Tlampe and.Mun.Assessor of Pasig, G.R. No.177577, December 7,7995; Figuenes u. Court of Appeals, 305 SCRA 206 tLgeel). The decision ofthe CBAA shall become final and executory after the lapse of fifteen days from the date of receipt of the decision'.. To continue collecting real property taxes based on valuations arrived at several years ago, in disregard ofthe increases in the value ofreal properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be

adequate to meet government expenditures and their variations (Chavez a. Ongpin, supra).

Bar Question (2002) The real property of Mr. and Mrs. Angeles, situated in a commercial area in front of the public market, was declared in their

Tax Declaration as residential because it had been used by them as their family residence from the time of its construction in 1990. However, since January 1997, when the spouses left for the Unitcd States to stay there permanently with their children, the properby has been rented to a single proprietor engaged in the sale ofappliances and agricultural products. The Provincial Assessor reclassified thrt property as commercial for tax purposes starting January 1998' Mr. and Mrs. Angeles appealed to the Local Board ofAssessment Appeals

contending that the Tax Declaration previously classifying thtrir property as residential is binding. How should the appeal be decided?

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Suggested answer: The appeal should be decided against Mr. and Mrs. Angek:s. The law focuses on the actual use of the property for classification,, ualuation and assessment purposes regardless of ownership. section 217 of the Local Gouernment Code prouides that *real property shalt be classified, ualued and assessed on the basis ofits actual use regardless of where located, whoeuer owns it, and whoeuer uses it." The prouincial, city or municipal qssessor shall undertahe o general reuision of real property assessrruents within two (2) years after the effectiuity of this Code and euery three (3) years thereafter (Sec. 21g, LGC). The assessment of real property shall not be increased, oftener than once euery three (3) years, except in case of new improuements substarutially increasing the us,lue of said property or of any change in its actual use (Sec. 220, LGC).

accomplishlnenI ol'said purposes.'I'hus, CHHMAC should be under the same speciaL assessment level as that of CHH (City Assessor of Cebu a. Assoc. of Beneuola d.e Cebu, G..R. No. 752904, June 8, 2007).

Exemptions foom real property tax Bar Question (2006, 20021 What properties are exempt from real property tax? Suggested answer: The following are exernpted from payment of the real property

tax:

1.

Classes of real property For purposes ofassessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland, or special. The city or municipality within the Metropolitan Manila Area, through their respective sanggunian, shall have the power to

2.

Chq.ritable institutions, churches, parsondges or conuents

3.

appurtenant thereto, n'Losques, non-profit or religious cemeteries, and all lands, buildings and irnprouements actually, directly q.nd exclusiuely used for religious, charitable, or educational purposes ; All machineries and equipment that are actually, directly

classify lands as residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance with their zoning ordinances (Sec. 215, LGC).

All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and government-owned or -controlled corporations rendering essential public services in the supply and distribution of water and/or

Real property owned by the Republic of the Philippines or any of its political subdiuisions, except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;

and exclusiuely used by local water districts and gouernment owned- or controlled corporations engaged in the supply and distributioru of water and / or generation and transmission of electric power;

generation and transmission of electric power shall be classified as special (Sec. 216, LGC).

4.

Chong Hua Hospital Medical Arts Center (CHHMAC) is an integral part of CHH. The doctors and medical specialists holding clinics are those duly accredited by CHH, i.e., they are consultants of the hospital who can treat CHH's patients confined in it. The fact that the doctors are holding office in a separate building, like at CHHMAC, does not take away the essence and nature oftheir serwices uis-d,-uis the overall operation, of the hospital and the benefits to the hospital's patients. The exemption from this is not limited to property indispensable for charitable or educational purposes, but extends to facilities which are incidental to and reasonably necessary for the

5.

All real property owned by duly registered cooperatiues as prouided for under R.A. 6938; and Machinery and equipment used for pollution control and ruu iro nment al p r ote ctio n.

e

Except as prouided herein, any exemption from payment of real property tctx preuiously granted to, or presently enjoyed by, all persons, whether nstural or juridical, including all gouernment-owned or controlled corporations, are hereby withdrawn upon the effectiuity of this Code (5ec.234, LGC). The exemption of government-owned or controlled corporations from national and local taxes was withdrawn by P.D. Nos. lI77 and

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193I (Nationa.l Pou)er Corporation u. Court of Appealr, G.R. No. L-73477, October 76, 7990). Commonwealth Act No. 1f12, which created the National Development Company, contains no provisirtn exempting it from the payment of real estate tax on properties it may acquire. Besides, these properties are not devoted to public use but were acquired for resale to qualified persons. Also, National Development Company does not come under the classification of municipal or public corporations in the sense that it may sue and be sued in the same manner as may other private corporations. Unlike the government, National Development Companymaybe sued without its consent, and is subject to taxation (National Deaeloprnent Co. u. Proa. of Nueaa Ecija, G.R. No. L-47223, Noaernber 25, 1983). A national government instrumentality is exempt from real property tax (Phil. Fisheries Deaelnpment Authority u. CA, et al., G.R. No. 769836, July 3 7, 2007).

Bar Question (2013) Mr. Arnaldo leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on the property for his business operations. The Municipal Assessor assessed Mr. Arnaldo for real property taxes on the land and the warehouse. Mr. Arnaldo objected to the assessment, contending that he should not be asked to pay realty taxes on the land since it is municipal property. Was the assessment proper?

Suggested answer: Yes, the assessment is proper. The land, although owned by the Municipality, is not exempt from real property tax because the beneficial use has been granted to a taxable person (Sec. 234[a], LGC).

Bar Question (2010) "A" inherited a two-storey building in Makati from his father, a real estate broker in the'60s. A group of Tibetian 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 Pl million for the whole year. The following year, the City Assessor issued an assessment against "a'for non-pa)rment of real property taxes. Is the assessorjustified in assessing A's deficiency real property taxes?

Explain.

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Suggested answcr: No. The ossessor made an error in assessing the deficiency real property tax on the land owned by "4" but being leased and used by the Tibetian monks for their religious rituals q.nd ceremonies. Section 198 of the Local Gouernrnent Code prouid.es that real property shall be classifi.ed for assessment purposes on the basis of actual use. Moreouer, charitable institutions, churc hes, parsonages or conuents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improuements actually, directly a.nd ercclusiuely used for religious, charitable, or educational purposes, are eJcempt from the payment of real property tax (Sec. 234, LGC).

Supreme Gourt decisions on real property taxes

1. Manila International Airport Authority

(MIAA)

a. Paraft.aque City (2006). - The Manila International Airport Authority (MIAA) owns airport lands and buildings located in Paranaque City. MIAA is not a GOCC under Section 2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MIAA a GOCC under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the text of economic viability. MIAA is a government instrumentality vested with corporate powers and performing essential public services pursuant to Section 2(10) of the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of LGC. The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the LGC. Such exception applies only if the beneficial use of real property owned by the Republic is given to a taxable entity. The airport lands and buildings of MIAA are properties devoted to public use and thus are properties ofpublic opinion, owned by the State or the Republic (MIAAv. CA and. Pasoy City,2OOG).

2.

MIAAv. Pasay City (2009). and buildings located in Pasay City.

-

MIAA owns airport lands

"Ittstrurnentality" refers to any agency of the national government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with

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some

if not all corporate

powers, administering special funds, and

enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and GOCC. "Instrumentality" includes ... GOCC (Sec. 2[10], Administrative Code). This means that a government instrumentality may or may not be a GOCC. Obviously, the term government instrumentality is broader than the term GOCC. " Gotsernrt .ent-Owned. or Controlled, Corporation" (GOCC) refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations to the extent of at least 577o of rts

For an entit,.y to be considered as GOCC, it must either be organized as a stock or non-stock corporation. Two (2) requirements

are need to create a stock corporation: (1) it has capital stock divided into shares; and (2) it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for nonstock corporations, they must have members and must not distribute any part of their income to said members. PFDA is not a GOCC. It has capital stock but it is not divided into shares ofstocks. It has no stockholders or voting shares; hence, it is not a stock corporation. Neither is it a non-stock corporation because it has no members (PFDA a. CA & Iloiln City, G.R. No. 769836, July 37,2007).

capital stock. Since MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions, MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers. When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police authority and the levying of fees and charges. At the same time, MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the provisions of this E.O. Hence, MIAA is not liable to pay RPT (G.R. No. 763072, April2, 2009).

3.

Philippine Fisheries Deaelopm.ent Authority (PFDA) a. CA & Ilniln City. - PFDA is not a GOCC but an instrumentality of the national government which is generally exempt from RPT. However, said exemption does not apply to the portions of the IFPC, consisting of breakwater, a landing quay, a refrigeration building,

market hall, municipal shed, an administration building, water and fuel oil supply system and other port-related facilities and machineries; title to the land and buildings of the IFPC remained with the Republic, which PFDA leased to private entities. Nonetheless, the IFPC, being property of public dominion, cannot be sold at public auction to satisfy the tax delinquency.

4. Light Rail Transportation Authority (LRTA) a, Central Board. of Assessment Appeals (CBAA). - Real

property is classified for assessment purposes on the basis ofactual use, which is defined as "the purpose for which the property is principally or predominantly utilized by the person in possession of the property."

Unlike public roads which are open for use by everyone, the LRT is accessible only to those who pay the required fare. It is thus apparent that petitioner does not exist solely for public service, and that the LRT carriageways and terminal stations are not exclusively for public use. Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those carriageways and terminal stations in its public utility business and earns money therefrom. Real property owned by the government or any of its political subdivisions and any GOCC so exempt by its charter is exempt from RPT, but this exemption shall not apply where the beneficial use has been granted, for consideration or otherwise to a taxable person. Records of the Constitutional Commission reveal that what is exempted is not the institution itself;those exempted from real estate

taxes are lands, buildings and improuements actually, directly and exclusively used for religious, charitable or educational purposes.

What is meant by actual, direct and exclusive use of the propertlz for charitable institutions is the direct and immediate and actual application ofthe property itselfto the purposes for which the charitable institution is organized. It is not the use of the income

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from the real property that is determinative of whether the property is used for tax-exempt purposes.

In sum, SC ruled the portions of the land leased to private entities as well as those parts of the hospital leased to private indi'niduals are not exempt from taxes (Lung Center of the Phil u. QC Asseasor, GR. No. 7447O4, June 29,2004).

5.

Goaernment Seruice Insurance System (GS/S) u. Assessor of Manila (2OOg). - The GSIS was created under P.D. 1146, which granted tax exemption to it. In19g2,R.A. ?160 removed all tax exemptions from real property, except those specifically mentioned in the law. In June, 1997, R.A. 8291 was enacted and it

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pntpertv toxolinrt is lxt.sctl on use ancl rutt on outncrship; hence, the same rule must also be applied for real property tax exemptions.

Bar Question (2011) Tres Personas Solo Dios, The head priest of the religious sect as the corporation sole, rented out a 5,000 sq.m. lot registered in its

-

name for use as school site of a school organized for profit. The sect used the rentals for the support and upkeep ofits priests. Is the rented lot subject to real property tax?

Suggested answer:

restated the exemption of GSIS, among other provisions. In this case, GSIS leased some of its properties to private persons. Consideringthat GSIS leased some of its real properties, the property must be subject to the real property tax, such tax to be paid by the lessee thereof.

No, the lot is exempt from real property taxes, since it is actually, directly and exclusiuely used by the school for educational purposes. The corporation sole is also exempt from real property tax und.er Section 234(b) of the LGC.

Bar Question (2000) Article VI, Section 28(3) of the 1987 Philippine Constitution provides that charitable institutions, churches and parsonages or

Civil remedies for the collection of tax

convents appurtenant thereto, mosques, 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.

a)

To what kind of tax does this exemption apply?

Suggested answer: This exemption applies only to property ta^tc,es. What is exempted is not the Institution itself but the lands, buildings and improuements actually, directly and exclusiuely used for religious, charitable and educational purposes (Commissioncr of Internal Reuenue o. Court

of Appeals and.YMCA, GR. No 724043, October 14, L998).

b)

Is proofofactual use necessary for tax exemption purposes

under the Constitution?

Suggested answer: Yes, because tax exemptions are strictly construed against the taxpayer. There must be euidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real

Bar Question (1997) Give the remedies available to local government units to enforce the collection oftaxes, fees, and charges?

Suggested answer: The remedies for collection may be categorized into (a) the extrajudicial remedy of leuy, and (b) judicial action (Sec. 256, LGC). Leuy may be repeated if necessary until the full amount due, including aII expenses, is collected (5ec.265, LGC). The local gouernment unit concerned may enforce the collection of the basic real property tot or any other tq.x leuied under this Title by ciuil action in any court of competent jurisdiction. The ciuil qction shall be filed by the locul treasurer within the period prescribed in Section 270 of this Code (Sec. 266, LGC).

Moreouer, the basic real property tax and any other tax leuied under this Title constitute a lien on the property subject to tax,

superior to all liens, charges or encuntbrances in fauor of any person, irrespectiue of the owner or possessor thereof, enforceable by administratiue or judicial action, and may only be extinguished upon payment of the tax and the relqted interests and expenses (Sec. 257, LGC).

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Bar Question (1999) A Co., a Philippine corporation, is the owner of machinery, equipment and fixtures located at its plant in Muntinlupa City. The City Assessor characterized all these properties as real properties subject to the real property tax. A Co. appealed the matter to the Muntinlupa Board of Assessment Appeals. The Board ruled in favor of the City, in accordance with R.A. 1125 (An Act creating the Court of Tax Appeals). A Co. brought a petition for review before the CTA to appeal the decision of the City Board of Assessment Appeals. Is the Petition for Review proper? Explain.

Suggested answer: No. The CTA is deuoid ofjurisdiction to entertain appeals from the decision of the City Board of Assessment Appeals. Said decision is insteq.d appealable to the Central Board of Assessment Appeals, which under the Local Gouernment Code, has appellate jurisdiction ouer decisions of Local Board of Assessment Appeals (Caltex Phils. a. Central Board. of Assessment Appeals, GR. No. L-50466, May

37,7982). The collection of the tax may be enforced through either or both

the aboue administratiue and judicial remedies, alternatiuely or simultu.neously, and the use or non-use of one remedy shull not be a bar against an auailment of the other (Sec. 258, LGC). A formal demand for the payment of the delinquent tctx is not required for the initiation of either remedy. It is enough that a notice of delinquency is caused to be posted and published as required under Section 254 of the Code. The remedy of leuy can be pursued by putting up for sale only the req,l property subject to tax (i.e., the delinquent property upon which the tox lien uttaches), regardless of the ou)ner or possessor thereof. The personal liability for the tux delinquency, upon the other hand, is generally on whoeuer is the owner of the real property at the time the tax accrues. Where, howeuer, the tax liability is imposed on the benefi.cial use of the real property, such as those owned by leased to priuate persons by the gouernment (Sec. 234, LGC), or when the assessment is made on the basis of the actucr.I use thereof (Sec. 199 and 217, LGC), the personal liability is on any person who has such benefi.cial or actual use at the time of the accrual of the tax (Nueaa Ecija u.Imperial Mining Co., 778 SCRA 632).

7e7

Ilegion.ol,'l'rio,l. (kru.rl,s hote.iurisdicti,on ouer cl'ses inuoluing the ent'brceme.nt and t:
for administratiue settlement or adjudication of disputes, claims and controuersies between or among gouernm.ent offices, agencies and instrumentalities, including gouernment-owrued or controlled

corporations) and P.D. 464 (Real Property Tax Code) should be resolued in fauor of the latter law, since it is a special law and of later enq,ctment (National Pouser Corporation a. Court of Appeals,

supra).

Bar Question (1992) Ms. Edna Dinoso is the registered owner of a residential lot with house situated in Naga City. The lot with an area of 328 two-storey a is described and covered by TCT No. 4739 of the Registry meters sq. Naga City. Deeds of of

On September \2, 1977, a 115 sq. meter portion of Edna's property was expropriated by the Republic of the Philippines for the sum of F6,?00.00 representing the assessed value of the aforesaid portion. This amount was deposited by the Government in Edna's account. For almost ten (10) years, Edna failed to pay her real estate taxes on the same property. Thus, on November 5, 1977 her property was sold at public auction by the City Treasurer of Naga City to satisfy her real estate tax delinquencies amounting to F5,800.00. The highest bidder for the property was Angel Chua.

Edna was not present at the public auction although she later admitted having received the notice of hearing for the petition for entry of a new certificate of title by Angel Chua (Both the auction sale and the final bill of sale were annotated at the back of TCT No. 4739by the Register of Deeds.) On March 15,1979, Edna filed a complaint to annul the auction sale which was denied by the CFI Judge of Naga City. In fact, the CFI Judge ordered the TCT #4739 ofEdna be cancelled and that a new title be issued to Angel Chua.

On appeal, the Court of Appeals affrrmed the CFI decision in toto.

Edna then elevated the case to the Supreme Court citing several grave errors of law, among which are:

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1)

2)

of law; 3)

That the public auction made on her property is void.

Discuss the merits of the appeal.

Suggested answer: 1)

The decision of the Court of Appeals affirming the CFI decision must be affirmed. On the procedural aspect, it has not been shown as required under the Reol Property Tax Code that plaintiff has paid the amount for which the real property has been sold plus interest.

On the claim of extinction of tax liability by legal is jurisprudence to the effect that the doctrine of equitable recoupnxent does not apply in this jurisdiction. Assuming it does, the facts of the case bear out that the Gouernment does not owe the plaintiff any compensation, there

q,mount.

2)

3)

huue irrtpu,i,n'
That her tax delinquencies (involving F5,800.00) for nonpayment of real estate taxes were offset by the sum of F6,700.00 which the government of the Philippines owed her. She claims that her tax delinquencies have been extinguished by legal compensation; That the price of F5,800.00 paid by Angel Chua was grossly inadequate and that because of its inadequacy, the same is tantamount to deprivation of property without due process

On the claim that the price for the property was grossly inadequate, the ReaI Property Tax Code specifically mentions that the sale of real property at public auctions is "to satisfy all the taxes and penq.lties due and cost of sale" (Sec. 73, LGC). Thus, the selling price is ba.sed not on the fair marhet ualue of the property sold at public auction but the amount ofreal property taxes due thereon. In any case, the delinquent taxpayer is giuen one year from the date of registration of the sale within which to redeem the property by paying the tqx due plus costs q,nd interest. On the claim that the public ouction mude on the property is uoid, the Req,l Property Tax Code prouides (Sec. 83,2nd par., LGC) that q. court shall not declared a sale inuqlid due to irregularities in the proceedings unless, such irregularities

,se

petition lbr entry of a new certifi,cate of title during which she could haue questioned any irregularity in the conduct ofthe sale.

Power to subpoena does not include contempt power Since the existence of the contempt power in conjunction with the subpoena power in any government body inevitably poses a potential derogation ofindividual rights, the law cannot be liberally construed to have impliedly granted such powers (Negros Oriental II Electric Cooperatiue a. Sang guniang Panglungsod' ng Dumaguete, 7 5 5

scaA

421 [1987]).

Prescriptive periods The basic real property tax and any other tax levied shall be collected within five (5) years from the date they become due. No action for the collection of the tax, whether administrative or judicial, shall be instituted after the expiration ofsuch period. In case offraud or intent to evade payment of the tax, such action may be instituted for the collection thereofwithin 10 years from the discovery ofsuch fraud or intent to evade payment.

The period of prescription within which to collect shall be suspended for the time during which: 1. The local treasurer is legally prevented from collecting the tax; 2. The owner of the property or the person having legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and 3. The owner of the property or the person having legal interest therein is out of the country or otherwise cannot, be located (9ec.270, LGC).

Bar Question (2011) Ka Tato owns a parcel of land in Batangas declared {irr real property taxation as agricultural. In 1990, he used the land fbr a poultry feed processing plant but continued to declare the property as agticultural. In March 2011, the local tax assessor discovered Ka

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Tato's change of use of his land and inlbrmed the local treasurer who demanded payment of deficiency real property taxes from 1990 to 2011. Has the action prescribed?

Suggested answer: No. The deficiency real property taxes for the period 1990 up to 2011 may still be collected within 10 years from March 2077 counting

bachward.

Taxpayer's Remedies Where an assessment is illegal or void, the remedy of the taxpayer who has already paid the tax under protest is to sue for refund in the competent CFI. Where the assessment is merely erroneous, his recourse is to file an appeal in the Provincial Board of Assessment Appeals within 60 days from receipt of the assessment. An assessment is illegal and void, when the assessor has no power to act at all. It is erroneous when the assessor has the power but errs in the exercise of that power (Victorias Milling Co. u. Court of Tar Appeals, ibid.). Any owner or person having legal interest in the property, who is not satisfied with the action of the provincial, city or municipal assessor may, within sixty days from the date of receipt by him of the written notice of assessment, appeal to the local Board ofAssessment Appeals ofthe province or city concerned by a petition under oath, together with copies of the tax declarations and such affidavits or documents in support of the appeal (Sec. 226, LGC; Chaaez a. Ongpin, 186 SCRA 337).The failure to appeal within the statutory period renders the assessment final and unappealable (Victorias Milling Co. a. Court of Tax Appeals, 22 SCEA 1OO8). The Board ofAssessment Appeals shall decide the appeal within 120 days from receipt of the appeal. The decision of the Board of Assessment Appeals, which must be based on substantial evidence presented at the hearing or at least contained in the records may be appealed within 30 days from receipt thereofby the taxpayer to the Central Board of Assessment Appeals, whose decision shall be final and executory (5ec.229, LGC).

Appeal on assessments of real property made under the provisions of this Code shall, in no case, suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city assessor, without prejudice to subsequent

rioI

adjustment depending upon thc final outcome of the appeal (Sec.231, LGC).

Exhaustion of Administrative Remedies Before seeking the intention of the courts, it is a pre-condition that petitioner must first avail of all the means afforded by the administrative processes. Thus, the denial of request for exemption from real property tax by assessor may be appealed to the LBAA as it concerns classification of property. Parties cannot bypass the authority of the concerned administrative agencies and directly seek redress from the courts even on the pretext ofraising a supposedly pure question of law without violating the doctrine of administrative remedies. However, judicial review may be resorted to via an action for refund or reimbursement without exhausting administrative remedies before the LBAA, where the plaintiffalleges that he is not the owner or user ofthe property assessed. This is because the issue is not as to the amount of tax assessed, but the imposition of the tax assessed and who should shoulder the burden of the tax (Estate of Concord'ia

T.Limu.City of Manila,l82 SCRA483 t199ol).

As this provision

was adopted from Section 30 of the RPTC, the case is still good law.

No Motion for Reconsideration is Allowed Before the Assessor's Office Under Section 22 of t}re Real Property Tax Code (RPTC), there are only three (3) occasions when assessments of real properties may be made by the local assessor: (1) upon discovery ofthe real property; (2) during the general revision ofproperty assessments as provided in Section 21 of the RPTC; and (3) at anytime when requested by the person in whose name the property is declared. After an assessment has been conducted, the assessor shall within 30 days issue a written notice of such new or revised assessment to the person in whose name the property is declared. If the owner is not satisfied with the action of the assessor in the assessment of his property, he may appeal with 60 days from receipt of the notice of assessment to the Local Board of Assessment Appeals.

Under Section 226 of R.A. 7160, the last action of the local assessor on a particular assessment shall be the notice of assessment;

action which gives the owner of the property the right to appeal to the LBAA. The procedure does not permit the property

it is this last

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owner the remedy of filing a motion for reconsideration befbre the local assessor. To allow this procedure would invite corruption in the system ofappraisal and assessment. It conveniently courts a graftprone situation where values of real property may be initially set unreasonably high, and then subsequently reduced upon the request of the property owner ( Callanta a. Office of Ombudsman, JanuanSr 30, 7998, cited. in FELS Energy u. Prov, ofBatangas,2007).

Caltex cases. When the issue, however, is one that centers on who should bear the burden of the tax between two private parties, the regular courts, not the assessment boards, have jurisdiction over the case (Testate Estate of Concord.ia T. Lim u. City of Manila, 182 SCRA482).

The special civil action of certiorari would be proper to question

Quezon City published on January 30, 2006 a list of delinquent real property taxpayers in 2 newspapers ofgeneral circulation and posted this in the main lobby of the City Hall. The notice requires all owners ofreal properties in the list to pay the real property tax due within 30 days from the date of publication; otherwise, the properties listed shall be sold at public auction.

the decision of the Central Board of Assessment Appeals. The recognized rule is that the underlying power in courts to scrutinize the acts of administrative agencies exercising quasi-judicial power on questions of law and jurisdiction, even where no review is given by statute, exists. When R.A. 1125 created the Tax Court in 1954, there was as yet no Central Board of Assessment Appeals. Section 7(3) of R.A. 1125, in providing that the Tax Court had jurisdiction to review by appeal decisions ofprovincial or city boards ofassessment appeals had in mind the local boards of assessment appeals, but no the Central Board ofAssessmentAppeals, which under the Real Property Tax Code has appellatejurisdiction over decisions ofsaid local boards of assessment appeals and is, therefore, in the same category as the Tax Court (Caltex u. Central Board of Assessmcnt Appeals, LL4 SCRA296). Certiorari was properly availed of in this case. The rule is that as to administrative agencies exercising quasi-judicial power there is an underlying power in the courts to scrutinize the acts of such agencies on questions oflaw andjurisdiction even though no right of review is given by the statute (73 CJS 506).The purpose ofiudicial review is to keep the administrative agency within its jurisdiction and protect substantial rights ofparties affected by its decisions (73 CJS 507, Sec. 165). The review is a part ofthe system ofchecks and balances which is a limitation on the separation of powers and which forestalls arbitrary and unjust adjudications (Meralco Securities Ind.ustrial Corporation a. CBAA, supra). The legislative intent on the Local Government Code appears to that any issue relating to real property taxation that a taxpayer is minded to raise against the government, whether it be a question on the validity of the assessment or of the imposition and collection of the tax, should be resolved via the administrative route until it may ultimately reach by way of appeal, the Central Board of Assessment Appeals. From the latter's decision, judicial recourse should still be appropriate following the ruling in the Meralco and be

Bar Question (2006)

Joachin is one of those named in the list. He purchased a real property in 1996 but failed to register the document of sale with the Register ofDeeds and secure a new real property tax declaration in his name. He alleged that the auction sale of his property is void for lack of due process considering that the City Treasurer did not send him personal notice. For his part, the City Treasurer maintains that the publication and posting of notice are sufficient compliance with the requirements of the law.

1. 2.

If you were the judge, how will you resolve this issue? Assuming Joachin is a registered owner, will your answer be the same?

Suggested answer:

1. I will resolue the issue in fauor of the City Treasurer.

For

purposes of the real property tq.tc, the registered outner of the property is deemed the taxpayer. Hence, only the registered ou)ner is entitled to a notice of tax delinquency q.nd other proceedings relatiue to a tq.x sq.le (Talusan' u. Tayag and. Hernand.ez,356 SCRA 263 t20011). Not being the registered owner of the property, Joachin cannot claim to haue been depriued of such notice. In fact, he was not entitled

to it. He brought the misfortune upon himself, becq.use he did not register the Deed of Sale with the Register of Deeds upon its execution or secure a tax declaration in his name. He did not tahe the necessary steps to protect ond legitimize his interest. The auction sale of his property is, therefore, ualid.

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2.

No, my answer will not be the same. The law requires a notice of the a.uction s&le must be properly sent to the registered owner. A mere publication of the notice of delinquency would not suffice, considering that the procedure in tax sales is in personam. An auction sale, although preceded by aduertisement and publication but without q.n qctual notice to the delinquent taxpayer, is uoid (Tan a. Bantegui,473 SCRA 663 [2005]; Estate of Merced.es Jacob a. CA,283 scRA 474 t19971).

Bar Question (2002)

A.

Aside from the basic real estate tax, give three (3) other taxes which may be imposed by provincial and city governments as well as by municipalities in the Metro Manila Area.

B.

An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of basic real property tax fromO.006Vo to IVo of t}ne assessed value of the real property effective January 1, 2000. Residents ofthe municipalities of the said province protested the Ordinance on the ground that no public hearing was conducted and, therefore, any increase in the rate ofreal property tax is void. Is there merit in the protest? Explain your answer.

Suggested answer:

A.

The following real property tq.xes aside from the basic real property ton may be imposed by prouincial and city

gouernments as well as by municipalities Manila area:

1.

in the Metro

Additional leuy on. real property for the Special Education Furud (9ec.235, LGC):

2.

Additional ad ualorem tux on idle lands (Sec. 236, LGC); and

3.

Special leuy (Sec. 240, LGC).

fNote: Other taxes may comprise the enumeration because many other laws haue cr.uthorized them to be

imposed by LGUs.J

B.


The ltnttest is tleuoirl

Yes, there is merit

in

the protest prouided that sufficient

proof could be introduced for the non-obseruance of public hearing. By implication, the Supreme Court recognized that public hearings are required to be conducted prior to the enactment of an ordinance imposing real property toxes. Although

by the highest tribunal that presumption of ualidity of a tq,lc ordinance c&n not be ouercome by bare assertions if procedural defects on its enactment, it would seern that if the taxpayer had presented euidence to support the allegation that no pubtic hearing was conducted, the Court should haue ruled that the tax ordinance is inualid (Figuenes u. Court of Appeals, G.R. No. L-779772, March 25, 1999).

it was concluded

Bar Question (1991) The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of real property located within the municipality at a rate of one-fourth(Il4) of one percent (IVo) of the total consideration of such transaction. X sold a parcel of land in Malolos, which he inherited from his deceased parents and refused to pay the aforesaid tax. He instead filed appropriate case asking that the ordinance be declared null and void since such a tax can only be collected by the national government, as in fact he has paid BIR the required capital

gains tax. The Municipality countered that under the Constitution, each local government is vested with the power to create its own sources ofrevenue and to ievy taxes, and it imposed the subject tax in the exercise ofsaid constitutional authority. Resolve the controversy.

Suggested ansvver: The ordinance passed by the Municipality of Malolos imposing a tax on the sale or transfer of real property is uoid. The Local TQx Code only allows prouinces and cities to impose a tax oru the transfer of ownersltip of real property (Secs. 7 and 23, LGC). Municipalities are prohibited from imposing suid tax that prouinces are specifically authorized to leuy (Sec. 22, LGC). has giuen broad powers of tqxatioru to local gouernment units, this delegation, howeuer, is subject to such limitations &s nxay be prouided by law (Sec. 5. Art. X, 1987

While

it is true thqt the Constitution

Constitution)

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Payment of tax under protest No protest shall be entertained unless the tax is first paid. When a taxpayer desires for any reason to pay his tax under protest, he shall indicate the amount or portion thereof which he is contesting and such protest shall be annotated on the tax receipts by writing thereon the word "paid under protest." The protest shall be confirmed in writing, with a statement of the ground therefor, within 30 days. The written protest shall be filed with the provincial, city or municipal treasurers within the Metropolitan Manila Area, who shall decide the protest within sixty (60) days from the receipt ofthe protest. In case of payments under protest, the amount or portion of the tax contested shall be held in trust by the treasurer and the difference shall be treated as revenue.

In the event that the protest is finally decided in favor ofthe

After asscssrncn[ lly the City Assessor, the City Treasurer of Manila required X to pay the real estate taxes due on the lot for the years 1977 and 1978. X paid under protest. On September 5, 1979, X sent a demand letter to the City Treasurer for refund. The demand was refused.

X then filed with the Regional Trial Court a complaint against the City of Manila for a "sum of money and./or recovery of real estate taxes paid under protest." The City questioned the jurisdiction of the

Court. Decide.

Suggested answer: Section 62 of the Real Property Tax Code prouides thq.t:

*$ec.62. Payment under protest.

*a)

protestant, the amount or portion of the tax protested against may either be refunded to the protestant or applied as tax credit to any other existing or future tax liability of the said protestant. If the protest is denied or upon the lapse of 60 days without the protest being finally decided, the taxpayer may avail of the remedies (i.e., appeal may be taken to the Board of Assessment Appeals) (Sec, 252, LGC).

Protest is not a requirement in order that a taxpayer, who paid under a mistaken belief that it is required by law, may claim for refund. Section 54 of C.A. 470 does not apply to petitioner which could conceivably not have been expected to protest a payment it honestly believed to be due. The same refers only to the case where the taxpayer, despite his knowledge of the erroneous or illegal assessment, still pays and fails to make the proper protest, for in such case, he should manifest an unwillingness to pay, and failing so, the taxpayer is deemed to have waived his right to claim a refund (Ramie Textiles u. Mathay,89 SCRA 586).

Bar Question (1993) On February 13, 1969, X, obtained a loan of F800,000.00 from the GSIS secured by the mortgage of a parcel of land including its improvements. X failed to pay the loan. The lot was foreclosed and sold at public auction to the GSIS as the highest bidder. X failed to redeem the lot and the GSIS consolidated its title to the lot in 1972. In 1979, however, the GSIS allowed X to repurchase the lot.

u07

"b)

-

When q. taxpayer desires for any reo.son to pay his tq.xc under protest, he shall indicate the amount or portion thereof he is contestirug and such protest shall be q.nnotated on the tax receipts by writing thereon the words'paid under protest.'Verbal protests shall be confirmed in writing, with a statement of the ground therefor within thirty days. The tar may be paid under protest, and in such case it shall be the duty of the Prouincial, City or Municipal Treasurers to q.nnotate the ground or grounds therefor on the receipt.

payments under protest, the amount or portion of the tax contested shall be held in trust by the treasurer

In

cctse of

und the dffirence shall be treated, as reuenue.

"c)

In the euent that the protest is finally decided in fauor ofthe gouernment the arnount or portion of the tax held in trust by the treasurer shall accrue to the ret)enue account, but if the protest shall be decided finally in fauor ofthe protestant, the amount or portion of the tax protested or applied as tax credit to any other existing or future tox liability ofthe said protestant."

If

the owner is not satisfied with the action of the prouincial or city assessors in the assessment of his property, he may fi.le an. appeal to the Board of Assessrnent Appeals of the prouince on city, within sixty (60) days from the receipt of the decision (Sec. 30, RPTC).

If the owner is not satisft.ed with the decision of the Board of Assessment Appeals, he may appeal the said

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decision to the Central Board of Assessment Appeals within thirty (30) days after the receipt of the decision (Secs. 34 and 36, RPTC).

As enunciq,ted in the case of Victorias Milling Co. Court ofTax Appeals,22 SCRA 1008 (1968):

PART VII

u.

TARIFF AND CUSTOMS CODE

"It is settled in our jurisdiction that

where an assessrnent is illegal and uoid, the remedy of a taxpayer, who has already paid the realty tctx under protest, is to sue or refund in the competent court of first instonce. On the other hand, where the assessment is rnerely erroneeuE, his recourse is to fi.Ie an appeal in the Prouincial Board of Assessment Appeals within 60 days from receipt of the d,ssessm,ent,"

In

X is to appeal the decision of the City Tleasurer to the Board of uiew of the foregoing, the legal recourse of

Assessrnent appeal, and not to file an actionfor sum of monny and / or recouery of real estq.te taees. Herrce, the Regional Tlial Court has jurisdiction ouer the complaint filed by X.

Bar Question (2004) RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and adverse economic conditions, an ordinance is passed by MM City, granting a 50Vo discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties or fines resulting from the late payment.

Arguing that the ordinance rewards delinquent taxpayers and discriminates against prompt ones, RC demands that he be refunded an amount equivalent to one-half of the real estate taxes he paid. The municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not provide for such reimbursement. RC files suit to declare the ordinance void on the gtound that it is class legislation. Will his suit prosper? Explain your answer briefly.

Suggested answer: The suit

will

not prosper. The remission or condonation of taxes

due and payable to the exclusion oftares already collected does not constitute unfair discrimination. Each set of taees is a class by itself and the lq.w would be open to attack as clqss legislation only if all taxpayers belonging to one class were not treated alike (Juna Luna

Subd.iaision, Inc. a. Sarmiento,9T Phil.371 t19521).

CIIAPTER }OO{N FU NDAM

ENTAL PRI NCIPLES

Customs Duties "Customs d.uties" is the name given to taxes on the importati
Phils.

o.

Court ofAppeals, supra).

Customs duty attaches when goods are imported, or when they are brought within customs jurisdiction with intention t
lmported Articles Subject to DutY All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in other laws(Sec. 101, TCC).

Prohibited lmportations The importation into the Philippines of the following articles is

prohibited:

a.

Dynamite, gunpowder, ammunitions and otherexplosives, firearm and weapons ofwar, and detached parts thereof, except when authorized by law. 809

810

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b.

Written orprinted arbicle in any form containing any matter advocating or inciting treason, rebellion, insurrection or sedition against the Government of the Philippines, of forcible resistance to any law of the Philippines, or containing any threat to take the life of or inflict bodily harm upon any person in the Philippines.

Written or printed articles, photographs, engravings, lithographs, objects, paintings, drawings or other representation of an obscene or immoral character. d.

Articles, instruments, drugs and substances designed, intended or adapted for preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly

l,ilii:il,llil,l;ll.';t,:ll,i;,1,'l j. k.

Any adulterated or misbranded article of food or any adulterated or misbranded drug in violation of the

a.

Marihuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, any compound, manufactured salt, derivative,

or preparation thereof, except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue, for medicinal purposes only.

Animals andplantsforscientific, experimental, propagation,

botanical, breeding, zoological and national def'cnse purposes: Prouided, That no live trees, shoots, plants and moss, and bulbs, tubers and seeds for propagation purposes may be imported under this section, except b.y order of the Government of the Philippines or other dul.y authorized institutions: Prouided, further, That the lrec entry of animals for breeding purposes shall be restricted to animals of a recognized breed, duly registered in the btxrk of record established for that breed: andProuided, finally, That certificate of such record, and pedigree of such animal duly authenticated by the proper custodian ofsuch book of record, shall be produced and submitted to the Collector of Customs, together with affidavit of the owner or importer, that such animal is the identical animal described in said certifi.cate of record and pedigree.

b.

Aquatic products (e9., fish, crustaceans, mollusks, marine animals, seaweed, fish oil, roe), including preparations or manufactures thereof, caught or gathered by vessels of Philippine registry: Prouided, That they are imported in such vessels or in crafts attached thereto: and Prouided, further, That they have not been landed in any foreign territory or, ifso landed, they have been landed solely for transshipment without having been advanced in condition.

c.

Samples of the kind, in such quantity and of such dimensions or construction as to render them unsaleable

provisions of the "Food and Drugs Act." 1.

All other articles the importation of which is prohibited by law (Sec. 102, TCC).

The following articles shall be exempt from the payment of

Lottery and sweepstakes tickets except those authorized bythe Philippine Government, advertisements thereof and lists of drawings therein.

h.

Opium pipes and parts thereof, of whatever material.

imporb duties upon compliance with the formalities prescribed in, or with the regulations which shall be promulgated by the Commissioner of Customs with the approval of the department head:

Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances.

Any article manufactured in whole or in part of gold silver or other precious metal, or alloys thereof, the stamps brands or marks ofwhich do not indicate the actual fineness or quality of said metals or alloys.

I

Conditional$t Free Importations

information where, how or by whom human conception is prevented or unlawful abortion produced.

o b.

r| I

or of no appreciable commercial value, models not adapted for practical use and samples of medicine properly marked "physicians' samples not for sale."

Commercial samples, except those that are not readily and easily identifiable (e.g., precious and semi-precious

812

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stones, cut or uncut, and jewelry set with precious or semiprecious stones), the value of any single importation of which does not exceed ten thousand pesos, upon the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for the exportation of said samples within six months from the date of the acceptance of the import entry, or in default thereof, the payment of the corresponding duties, taxes and other charges. Ifthe value ofany single consignment of such commercial samples exceeds ten thousand pesos, the importer thereof may select any portion of same not exceeding in value ten thousand pesos for entry under the provisions ofthis subsection, and the excess of the consignment may be entered in bond, or for consumption, as the importer may elect. d.

Articles, including binnacles, propellers, and the like, the character of which, as imported, prevents their use for other purposes than the construction, equipment, or repair of vessels and aircraft, and life-preser-\rers and life buoys, related equipment and parts and accessories thereof, which are necessary for the take-offand landing and for the safe navigation of vessels and aircraft.

e.

Equipment for use in the salvage of vessels or aircraft, upon identification and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six months from the date of acceptance of the import entry: Provided, That the Collector of Customs may extend the time for exportation or payment ofduties, taxes and other charges for a term not exceeding six months from the expiration ofthe original period.

f.

Cost of repairs made in foreign countries upon vessels or aircraft documented, registered or licensed in the Philippines, upon proof satisfactory to the Collector of Customs (1) that adequate facilities for such repairs are not afforded in the Philippines, or (2) that such vessels or aircraft, while in the regular course of her voyage or flight was compelled by stress of weather or other casualty to put into a foreign port to make such repairs in order to secure

ri

l3

the saf'ety seaworthiness or airworthiness of the vessel or aircraft to enable her to reach her port ofdestination. C b'

Articles brought into the Philippines for repair, processing or reconditioning to be re-exported upon completion of the repair, processing or reconditioning: Prouided, That the Collector of Customs may, in his discretion, require the giving of a bond in an amount equal to 1 1/2 times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six (6) months from the date of acceptance ofthe import entry.

h.

Medals, badges, cups and other small articles bestowed as trophies or prizes, or those received or accepted as honorary

distinctions. l.

Wearing apparel and household effects, including those articles provided for under subsections "j" and "k," and belonging to residents of the Philippines returning from abroad, which were exported from the Philippines by such returning residents upon their departure therefrom or during their absence abroad, upon the identity of such articles being established to the satisfaction of the Collector of Customs; personal and household effects brought into the Philippines by returning residents, the export value ofwhich does not exceed five hundred pesos, solely for personal or household use but not imported for the account of any other person nor intended for barter, sale or hire: Prouided, That such returning residents have not received the benefit ofany exemption hereunder within one hundred and eighty days from and after the date of the last exemption granted: andProuided, further, That in the event the total export value of the imported article or articles exceeds the amount of five hundred pesos, such article or articles shall be subject to duty only on the amount in excess of five hundred pesos; articles of the same kind and class purchased in foreign countries by residents of the Philippines during their absence abroad and accompanying them upon their return to the Philippines, or arriving within a reasonable time which in no case shall exceed ninety (90) days before or after the owner's return, upon proof satisfactory to the Collector of Customs that same have been in their use abroad for more

814

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than one year; articles in any single shipmenl, cxrnsigrrcrl to any single person when the total export value of'such shipment does not exceed one hundred pesos: Pnnithrl, finally, That when the export value exceeds the amount of one hundred pesos, only the amount in excess of one hundred pesos shall be subject to duty. J.

I.

Wearing apparel, articles of personal adornment, toilet articles, portable tolls and instruments, theatrical costumes, and similar personal effects, accompanying travelers or tourists in their baggage or arriving within a reasonable time, in the discretion of the Collector of Customs, before or after the owners, in use of and necessary

and appropriate for the wear or use of such persons according to their profession or position for the immediate purposes of their journey and their present comfort and convenience: Prouided, That this exemption shall not be held to apply to articles intended for other persons or for barter, sale or hire: Prouided, further, That the Collector of Customs may, in his discretion, require a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges upon articles classified under this subsection, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges, within six months from the date of acceptance of the import entry: and Prouided, finally, That the Collector of Customs may extend the time for exportation or payment ofduties, taxes and other charges for a term not exceeding six months from the expiration of the original period. k.

Vehicles, horses, harness, bed and table linen, table serwice, furniture, musical instruments and personal effects oflike

character, owned and imported by travelers or tourists for their convenience and comfort, upon identification and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment ofthe corresponding duties, taxes and other charges within six months from the date of acceptance of the import entry: Prouided, That the Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding six months from the expiration ofthe original period.

Professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal and household effects, including those ofthe kind and class provided for under subsections 'f " and "k" and belonging to persons coming to settle in the Philippines, in quantities and of the class suitable to the profession, rank or position of the person importing them, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time, in the discretion of the Collector of Customs, before or after the arrival oftheir owners, upon the production ofevidence satisfactory to the Collector of Customs that such persons are actually coming to settle in the Philippines, that the articles are brought from their former place of abode, that change of residence is bona fide, and that the privilege of free entry under this subsection has never been previously

granted to them: Prouided, That neither merchandise of any kind, nor machinery or other articles for use in manufacture, shall be classified under this subsection. m,

Animals, vehicles, portable theaters, circus and theatrical equipment, including musical instruments, sceneries, panoramas, properties, saddlery, wax figures and similar objects for public entertainment, and other articles for display in public expositions, or for exhibition or competition for prizes, and devices for projecting pictures and parts and appurtenances therefor, upon identification and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and other charges within six months from the date of acceptance of the import entry: Prouided, That the Collector of Customs may extend the time for exportation or payment ofduties, taxes and other charges for a term not exceeding six months from the expiration of the original period; and technical and scientific films when imported by technical, cultural and scientific institutions, and not to be exhibited for profit: Prouided, That if any of the said films is exhibited for profit, the proceeds therefrom shall be subject to confiscation, in addition to the penalty provided under section three thousand six hundred and ten of this Code.

816

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o.

p.

Articles (e.9., photographic, sound rccording, olectricul and other equipment, vehicles, animals, costumes, appilr(!1, properties, supplies, unexposed motion picture films) brought byforeign producers for making or recording motion pictures on location in the Philippines, upon identification and the giving of a bond in an amount equal to one and onehalf times the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and charges within six months from the date of acceptance of the import entry. Unexposed motion picture films allowed free entry under bond for exportation falling within this subsection and subsequently exposed, whether or not developed, may be re-exported free ofimport duties, taxes and other charges.

q.

Negative films, undeveloped, exposed outside the Philippines by resident Filipino citizens or by producing companies of Philippine registry where the principal actors and artists employed for the production are Filipinos, upon affidavit by the importer that such exposed films are the same films previously exported from the Philippines. As used in this paragraph, the terms oa.ctors' and "artists" include the persons working the photographic camera or other photographic and sound recording apparatus by means of which the film is made.

r.

Costumes, regalia and other articles, including office supplies and equipment, imported for the official use of members and attaches of foreign embassies, legations, consular officers and other representatives of foreign government: Prouided, That the country which any such person represents accords like privileges to corresponding officials of the Philippines.

Articles imported for the personal or family use of the members and attaches of foreign embassies, legations, consular officers and other representatives of foreign governments: Prouided, That such privilege shall be accorded under special agreements between the Philippines and the countries which they represent: and Prouided, further, That the privilege may be granted only upon specific instructions of the Department of Finance in each instance which will be issued only upon request of the Department of Foreign Affairs.

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Regalia, gems, statuary, specimens or casts of sculptures imported for the bona fi.de use and by the order of any

society incorporated or established solely for religious, philosophical, educational, scientific or literary purposes, or for the encouragement of the fine arts, or for the use and by the order of any institution of learning, public library, museum, orphan asylum or hospital, and not for barter, sale or hire: Prouided, That the term"regalio" shall be held to embrace only such insignia of rank or office or emblems as may be worn upon the person or borne in the hand during public exercises or ceremonies of the society or institution, and shall not include articles of furniture or fixtures, or ordinary wearing apparel, nor personal property of individuals.

Musical organs imported for the bona fide use and by the owner of any society incorporated or established for religious or educational purposes, or, expressly f
Bibles, missals, prayer books, koran, ahadith and other religious books of similar nature and extracts therefrom, hymnal and hymns for religious uses, specially prepared books, music and other instrumental aids for thtr

818

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Newsprint, whenever imported by or for publishers for the exclusive use in the publication of newspapers.

v.

Articles donated to public or private institutions established

v.

solely for educational, scientific, cultural, charitable, health, relief, philanthropic or religious purposes, for free distribution among, or exclusive use of, the needy. w.

Food, clothing, house-building and sanitary-construction materials, and medical, surgical and other supplies for use in emergency relief work, when imported by or directly for the account of any victim, sufferer, refugee, survivor or any other person affected thereby, or by or for the account of any relief organization, not operated for profit, for distribution among the distressed individuals, whenever the President shall, by proclamation, declare an emergency to exist by reason of a state of war, pestilence, cholera, plague, famine, drought, typhoon, earbhquake, fire, flood and similar conditions: Prouided,That the importation free ofduty ofarticles described in this herein subsection shall continue only during the existence of such emergency, or within such limits and subject to such conditions as the President may, by his proclamation, deem necessary to meet the emergency.

Philippine articles previously exported from the Philippines and returned without having been advanced

in value or improved in condition by any process of manufacture or other means, and upon which no drawback

or bounty has been allowed, and foreign articles when returned after having been loaned and exported for use temporarily abroad solely for exhibition, examination or experimentation, for scientific or educational purposes, and foreign containers packed with exported Philippine articles and returned empty if imported by or for the account of the person or institution who exported them from the Philippines and not for sale, subject to identification: Prouided, That any Philippine article falling under this subsection upon which drawback or bounty has been allowed shall, upon re-importation

I 1)

thereof, be subject to a duty under this subsection equal to the amount of such drawback or bounty.

deaf, mute or blind, and textbooks prcscribcd filr uso irr any school in the Philippines; Prouided, That complcte books

published in parts in periodical form shall not be classified

r',t

Large containers (e.g., demijohns, cylinders, drums, casks and other similar receptacles of metal, glass or other material) which are, in the opinion of the Collector of Customs, of such a character as to be readily identifiable may be delivered to the importer thereof upon identification and the giving of a bond in an amount equal to one and onehalf times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereofon payment ofthe corresponding duties, taxes and other charges within one year from the date ofacceptance ofthe import entry.

Supplies or ship stores listed as such for the use of the vessel; supplies which are intended for the reasonable

requirements of the vessel in her voyage outside the Phitippines, including such articles transferred from a bonded warehouse in any collection district to any vesscl engaged in foreign trade, for use or consumption of Lhc passengers or its crew on board such vessel as sea storcs; or articles purchased abroad for sale on board a vesscl as saloon stores or supplies: Prouided, That any surplrts or excess of such ship, sea or saloon stores arriving from foreign ports shall be dutiable according to thtr corresponding heading or subheading. aa. Arbicles and salvage from vessels recovered after the period of two years from the date of filing the marine protest or the time when the vessel was wrecked or abandoned as determined by the Collector of Customs, or such part ol' Philippine vessel or her equipment, wrecked or abandoned in Philippine waters or elsewhere: Prouided, That articles and salvage recovered within the said period of two years shall be dutiable according to the corresponding heading or subheading. bb.

Articles of easy identification exported from the Philippines for repairs abroad and subsequently reimported: Prouided, That the cost of the repairs made to any such article shall pay a rate of duty of twenty-five percent od ualorem. Coffins or urns containing human remains, bones or ashes, and all articles for ornamenting said coffins or urns and

u20

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accompanying same; used personal and houscholrl cllirr:1,$, not merchandise, of deceased persons, upon idcnt,ilit:irl,iolr as such, satisfactory to the Collector of'Customs.

Bar Question (2008) JKL Corporation is a domestic corporation engaged in lhc importation and sale of motor vehicles in the Philippines and is duly registered with Subic Bay Metropolitan Authority (SBMA). ln

December, 2007, it imported several second-hand motor vehiclos 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.

a. b.

o..

No. Jqcob

The bringing in of motor uehicles from Japan end Korect to the Subic Freeport zone does not cottstitute importation. By fiction of law , areas declared by lq.w as special economic zones or Freeport zones haue been treated for to,x purposes as foreign tercitories. Therefore, no customs duties, ualue added tax ond excise tax shall be due thereon while they remain within the special economic zone or Freeport zone

will

be exempted, prouided he complies

with the

requirements under Section 105 of the Tariffand Customs Code. These requirements are:

a.

The car must haue been ordered or purchased prior to the receipt by the Philippine rnission or consulate in Jakarta of Jacob's recall order;

b. c. d.

The car is registered in Jacob's n&rLe;

If they are taxable, when must the duties and taxes be paid?

Suggested answers:

rrrlrrrrrcnl.rrl Prirrr:iplrrs

Suggested answer:

Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? Explain.

What are the bases for purposes of computing customs duties and VAT? To whom must the duties and VAT be paid? Explain.

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The exemption shall epply to the ualue of the car;

The exemption shall apply to the d,ggregate ualue of his personal q.nd household effects (including the personal computer) not exceeding 30Vo of the total amount receiued by Jacob as salary and allowances during his assignment in Jakarta, but not to exceed four (4) years; Jacob must not haue auailed of the exemption more often than once euery four years (last paragraph, Sec. 105 , TCC) .

Bar Question (2003) X and his wife, Y, Filipino living in the Philippines, went on a three-month pleasure trip around the world during the months of June, July and August 2002. In the course of their trip, they accumulated some personal effects which were necessary, appropriate and normally used in leisure trips, as well as souvenirs in noncommercial quantities. Are they "returning residents" for purposes of Section 105 of the Tariffand Customs Code? Explain.

(See

b.

R.A. 7916 - PEZA Law and R.A. 7227 - BCDA Law). Yes, the sale and deliuery of the imported motor uehicles from the Freeport zone to the customs tercitory is subject to customs duties and ualue added tox, which must be paid to the Bureau of Custorns, as agent of the Commissioner of Internal Reuenue in the collection of national internal reuenue taxes on imported goods.

Suggested answer: No. The term

nreturning resid,ents" refers to nationals

Bar Question (2005) Jacob, after serving a five-year tour of duty as

military o ttach| in Jakarta, returned to the Philippines bringing with him his personal effects, including a personal computer and a car. Would Jacob be liable for taxes on these items? Discuss fully.

utho

in a foreign country for a period of at least six (6) month (Sec. 105[fl, TCC). Due to their limited duration of stay abroad, X q,ndY are not considered as "returning residents" but they are merely considered as trauelers or tourists who likewise enjoy the benefit of conditionally -free importation ( Sec. 1 05[g], TCC). haue stayed

T[hen importation begins and ends Bar Question (1995) When does importation begin and when does

it

end?

822

Suggested answer: "Importation" begins from the time the carrying uessel or aircraft jurisdiction with the intention to unload therein and ends at the time the goods are rel,eased or utithdrawn ftom the customhouse upon payrnent of the custonxs duties or with legal permit to withdraw (Vid'uya a. Berd.iago, 73 SCRA 553). enters Phitippine territorial

As long as the irnportation has not been terrninated, the imported goods rerncr.in under the jurisdiction of the Bureau of Customs. Importation is d.eerned terminated only upon the payment of the duties, taxes and other charges upon the articles, or secured to be paid, at the port of entry and the legal permit for withdrawal shall haue been granted. The payment of the duties, taxes, fees and other charges must be in

'l'i\tll't,

RgvtrwnH
full.

Merchandise, the importation of which is effected contrary to Iaw, is subject to forfeiture, and that goods released contrary to law are subject to seizure and forfeiture.

Bases of Assessment of DutY Whenever an imported article is subject to an ad ualorem rate of duty, the duty shall be assessed upon the market value or price at which, at the time of exportation, the same, like or similar article is freely offered for sale in the principal markets ofthe exporting country for exportation to the Philippines, in the usual wholesale quantities and in the ordinary course oftrade (excluding internal excise taxes to be remitted or rebated), plus ordinary expenses prior and incidental to the lading ofsuch article on board the vessel or aircraft at the port of export (including taxes or duties, if any) and freight paid as well as insurance premium paid covering the transportation of such article to the port of entry in the Philippines. When the value ofthe article cannot be ascertained in accordance

with the preceding paragraph, the value shall be the domestic wholesale market value or selling price of the same, like or similar

imported article in the principal market of the Philippines on the date of exportation of the article under appraisement, in the usual wholesale quantities and in the ordinary course of trade, minus the import duty and other taxes as well as a commission not exceeding sixper centum if any has been paid or contracted to be paid on goods secured otherwise than by purchase, and profits not to exceed eight per centum and a reasonable allowance for general expenses not to exceed eight per centum on purchased goods, and aII other expenses

ANrr (

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(Se<:. 20

principal

I, 7'(:(:).

'fhc term "transaction value" means the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding: (a) commissions and brokerage fees; (b) cost of containers; (c) cost of packing, whether for labor or materials; (d) value of materials, components, parts and similar items incorporated in the imported goods; (e) amount of royalties and license fees related to the goods; (0 cost oftransport ofthe imported goods from the port of exportation to the port of entry in the Philippines; (g) loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Philippines; and (h) cost of insurance (R.4. 9135, as irnplemented by Customs Adrninistratiue Order No. 004-04, Nouember 8,2004). Bar Question (2004) State and explain the basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code.

Suggested answer: The basis of dutiable ualue of an imported a,rticle subject to an tq"x, under the Tariff and Customs Code is its transaction u alue ( Sec. 2 0 1 [N, TC C, as amended by R.A. I 1 3 5). If s uch u alue could not be determined, then the following ualues are to be utilized in their sequence: (a) transaction ualue of identical goods (Secs. 201[8] , ibid.; Sec. II, C.1, CAO 4-2004); (b) transaction ualue of similar goods (Sec. 201[C], ibid.; Sec. II, D.7, CAO 4-2004); (c) deductiue ualue (Sec. II, 8.1, CAO 4-2004); (d) computed ualue (Sec. II, F.l, CAO 1-2004); and (e) fallback uqlue (Sec. 201[F], ibid.).

ad ualorem

Entry Withdrawal from Warehouse, for Gonsumption Imported articles shall be deemed "entered" in the Philippines for consumption when the specified entry form is properly filed and accepted, together with any related documents required by the provisions of this Code and/or regulations to be filed with such form at the time of entry, at the port or station by the customs official designated to receive such entry papers and any duties, taxes, fees and./or other lawful charges required to be paid at the time ofmaking such entry have been paid or secured to be paid with the customs

u24

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(b)

official designated to receive such monies, provided that the article has previously arrived within the limits of the port of entry. Imported articles shall be deemed "withdrawn" from warehouse in the Philippines for consumption when the specified form is properly filed and accepted, together with any related documents required by any provisions of this Code and/or regulations to be filed with such form at the time of withdrawal, by the customs official designated to receive the withdrawal entry and any duties, taxes, fees and./or other lawful charges required to be paid at the time of withdrawal have been deposited with the customs official designated to receive such payment (Sec. 206, TCC).

(c)

I

used in the

Suggested answer The term "flexible

I

tariff

cla,use" refers the authority giuen to the Presiderut to adjust the tariffrates under Section 401 of the Tariff u.nd Customs Code, which is the enabling law that made effectiue the d.elegation of the taxing power to the Presid.ent under the Constitution.

I h

I I'

Bar Question (2005, 1997) Under the Tariffand Customs

(a) (b) (c) (d)

i I

Code, what are:

dumping duties

countervailingduties marking duties

"Counteruuiling dutier"

u.re speciu.l duties imposed by the Secrelary of' I"inurrce upon prior inuestigation and report of'the I'ariff'Commission to ollbet (i) an excise or internal reuenue tar upon articles of the same class manufactured at home, or (ii) subsidies to foreign producers or manufacturers

! I ll

"Marhing d.uties" are special duties equiualent to SVo ad ualorem imposed on articles not properly marhed. These

(d)

"Discriminatory d.uties" are special duties collected in an amount not exceeding 1007o ad ualorem, imposed by the President of the Philippines against goods of a foreign country which discriminates against Philippine commerce or agairust goods coming from the Philippines and shipped to a foreign country.

Due Process Due notice and hearing, besides being an inherent element of due process, which requires the Collector to give the owner or importer

of the property written notice of the seizure and an opportunity to be heard in relation to the delinquency which was the occasion for such seizure, as well as Section 2601, which directs that seized property, other than contraband, shall be subject to sale after liability to sale shall have been established by proper administrative or judicial proceedings in conformity with the provisions of said Code (Commissioner of Customs u. Alihpala, supra).

discriminatoryduties

Suggested answer:

(a)

n2r-,

are, collected by the Commissioner of Customs except when the irnproperly marhed articles are exported or destroyed under customs superuision and prior to final liquidation of the corresponding entry. These duties are designed to preuent possible deception of the customers.

I

What do you understand by the term "flexible tariffclause" as Tariffand Customs Code?

i,',u,"'

by their respectiue gouernments.

T

Bar Question (2001)

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"Dumping d.uties" are special duties irnposed by the Secretary of Finance upon recommertdation of the Tariff Commission when it is found that the price of the imported articles is deliberately or continually fixed at less thun the fair marhet ualue or cost of production, and the importation would ccluse or likely cause an injury to local industries engaged in the manufacture or production of the sarrc or similar q,rticles or preuent their establishment.

Automatic Review Taxes being the lifeblood of the Government, Section 12, which the Commissioner of Customs in his Customs Memorandum Order No. 20-87, enjoined all collectors to follow strictly, intended to protect the interest of the government in the collection of taxes and customs duties in those seizure and protest cases which, without the automatic review provided therein, neither the Commissioner of Customs nor the Secretary of Finance would probably ever know about. Without the automatic review by the Commissioner of Customs and the Secretary of Finance, a collector in any of our country's far-flung ports, would

826

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have absolute and unbridled discretion to detcrmine whether g<xds seized by him are locally produced, hence, not dutiable, or oflbreign origin, and therefore subject to payment of customs duties and taxes. His decision, unless appealed by the aggrieved party (the owner of the goods), would become final with no one the wiser except himself and the owner ofthe goods. The owner ofthe goods cannot be expected to appeal the collector's decision when it is favorable to him. A decision that is favorable to the taxpayer would correspondingly be unfavorable to the government, but who will appeal the collector's decision in that? Certainly, it is not the collector (Yaokasin u. Cornmissioner of Customs, 180 SCRA 59L).

Bar Question (2002) What is the basis of the automatic review procedure in the Bureau of Customs? Explain your answer. Suggested Answer:

Automatic reuiew is intended to protect the interest of the Gouernment in the collection of taxes and customs duties in seizure and protest cases. Without such automatic reuiew, neither the Commissioner of Customs nor the Secretary of Finance would know about the decision laid down by the Collector of Customs fauoring the ta.xpayer. The power to decide seizure and protest cases may be abused if no chechs are instituted. Automatic reuiew is necessary because nobody is expected to appeal the decision of the Collector of Customs which is fauorable to the tatcpayer q.nd aduerse to the Gouernment. This is the reason why wheneuer the decision of the Collector of Customs is aduerse to the Gouernment, the said decision is affirmed by the Commissioner of Customs. The same shall be autornatically eleuated to ctnd be finally reuiewed by the Secretary of Finance (Yaokasin v. Commissioner of Customs,lSO SCRA 591 t19891).

Publication Article 2 of the Civil Code, which requires laws to be published in the Official Gazette, does not apply to CMO No. 20-87 which is only an administrative order of the Commissioner of Customs addressed to his subordinates, the customs collectors. C.A. 638 (an Act to provide for the uniform publication and distribution ofthe official gazelte) enumerates what shall be published in the Official Gazette besides legislative acts and resolutions ofa public nature ofthe Congress ofthe Philippines. Executive and Administrative orders and proclamations,

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t127

shall also be published in the Oflicial OazetLe, "except such as have no general applicability." CMO No. 20-87 requiring collectors of customs to comply strictly with Section 12 of the Plan, is an issuance which is addressed only to particular persons or a class of persons (the customs collectors). It need not be published, on the assumption that it has been circularized to all concerned (Tafi.ad.a a. T\tuera, 136 SCRA 27; Yaokasin u. Cornrnissioner of Customs, ibid,.).

Bar Question (1991) In view of the unfavorable balance of payment condition and the increasing budget deficit, the President of the Philippines, upon recommendation of the National Economic and Development Authority, issues during a recess of Congress an Executive Order imposing an additional duty on all imports at the rate of ten (t0%o)

percentadualorem. The Executive Order also provides that the same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the Executive Order on the grounds that only Congress has the authority to fix the rates of import duties and, in any event, such an Executive Order can take effect only thirty (30) days after promulgation and the President has no authority to shorten said period. Are the objections of Mr. San Miguel tenable?

Suggested answer: No, the objections are not tenable as the Executiue Order cannot take effect'immediately." Being o.n "external" law and hauing the effect of law, the Executiue Order cq.nrlot become effectiue without publication, a requirement of due process (Tafi,ad.a u. Tlttsera, L36 SCRA 27;8.O.202).

Claim for Refund

In all claims for refund of customs duties, the Collector of Customs to whom such customs duties are paid and upon receipt of such claim is mandated to verify the same by the records of his office. If such claim is found correct and in accordance with law, the Collector shall certify the same to the Commissioner of Customs with his recommendation together with all the necessary papers and documents. This is precisely one of the reasons why the Court of Appeals upheld the dismissal of the case on the ground that the CTA s jurisdiction under the Tariffand Customs Code is not concurrent with that of the respondent Commissioner of Customs due to the absence

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of any certification from the Collector of Customs of'Manila (Nestl6 u. Court of Appeals, supra).

Phils.

Seizure and forfeiture proceedings Property subject to forfeiture und,er Tariff and. Custom.s Laws. - Atry vehicle, vessel or aircraft, cargo, arbicles and other objects shall, under the following conditions, be subject to forfeiture:

a.

Any vehicle, vessel or aircraft, including cargo, which shall be used unlawfully in the importation or exportation of articles or in conveying and./or transporting contraband

or smuggled articles in commercial quantities into or from any Philippine port or place. The mere carrying or holding on board of contraband or smuggled articles in commercial quantities shall subject such vessel, vehicle, aircraft, or any other craft to forfeiture: Prouided, That the vessel, or aircrafb or any other craft is not used as duly authorized common carrier and as such carrier, it is not chartered or leased (Sec. 2530, Tariff and Custorns Code of the Philippines [TCCP]).

b.

Any article the importation or exportation of which is effected or attempted contrary to law, or any article of prohibited importation or exportation, and all other articles which, in the opinion of the Collector, have been used, are or were entered to be used as instruments in the importation or exportation of the former;

c.

Any article sought to be imported or exported without going through a customs house, whether the act was consummated, frustrated, or attempted.

There is no illegal importation when u non-motorized uessel, being towed by a tugboat, that entered the jurisdiction of the Philippines only for emergency bunkering needs of the tugboat, which principally nauigates and controls the route. - As duly approved by Commissioner of Customs, the documentary exhibits clearly point to the conclusion that the tugboat was bound for Malaysia and would have arrived thereat, were it not for the damage sustained by it while in transit from Palau to Malaysia, necessitating emergency repairs in the Port of Surigao, the nearest port. Evident from the Tow Hire Agreement entered into by and between OSM Shipping Phil., the owner of the tugboat, and petitioner, as owner of the

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bargc, catogorizcd as a Contruct of'Allreightmont, the owner of the tugboat mans the vessel with its own people and retains the possession, command and navigation of the said ship. The barge, being a non-motorized vessel that contains used oil from Palau and only towed by the tugboat, makes the tugboat the principal and the barge, a mere accessory, necessarily has no means of controlling its route or destination. The Court finds the element of intent on the part of the barge wanting (Barge a. Comtnissioner of Custom's, CTA, Februanlt 77, 201 1). No sufficient euidence was submitted to substantiate allegation that the uessel entered the country only for repairs. - On Sept 4,2007 , the vessel owned by C&C Marine A/S and flying a Panamanianflag, arrived at the Porb ofBatangas. After 20 days, the vessel and Esteban Tajanlangit, as representative ofthe buyer, 7107 ISC, a corporation

still to be formed, entered into a Memorandum of Agreement for the sale of the vessel. On November 15, 2007, a Bill of Sale was executed where C&C Marine conveyed its l00%o shares in the vessel to ISC. After 12 days, the vessel secured a "Clearance of Vessel to a Foreign Port" from Batangas to sail to Bataan, for repairs. Then, it was brought to the Port of Manila allegedly for further repairs and upgrading. On January 27,2008, a subpoena was issued by the Chief, RATS Group ofthe BOC. On March 4,2008,the District Collector of Manila issued a Warrant of Seizure and Detention (WSD) for the vessel. After seizure and forfeiture proceedings, the District Collector resolved to Iift the WSD and ordered the release of the vessel, which decision was later upheld by the Commissioner of Customs on August 21,2008.

The authority to acquire was approved by MARINA on May 6, 2008. While the papers and registration were being processed by MARINA, it registered itself with the Subic Bay Metropolitan Authority and was issued the Certificate of Registration and Tax Exemption on January 22,2009. On February 4,2009, petitioner finally executed an Import Entry and Internal Revenue Declaration, declaring itself as the importer of the vessel but with a notation "tax and duty free importation under R.A.7227, as amended." On automatic review, the Secretary of Finance reversed and set aside the lifting of the WSD and ordered the forfeiture of the vessel based on the records of the Philippine Ports Authority. ISC filed a

motion for reconsideration to the Secretary of Finance, who denied the motion.

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The CTA ruled that the Secretary of Finance has sullicicntly established that an illegal fraudulent importation, or at least an attempt thereof, has been committed. Forfeiture proceedings under the Tariffand Customs laws is not penal in nature, since it does not result In the conviction of the wrongdoer nor in the imposition upon him ofa penalty; proofbeyond reasonable doubt is not required in order tojustify the forfeiture ofthe goods. The degree ofproofrequired is merely substantial evidence, which means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.

Importation consists of bringing an article into the country from the outside. Importation is complete when the taxable, dutiable

commodity is brought within the limits of the port of entry. Entry through a customs house is not the essence of the act. Simply stated, to imporb is to bring goods into a domestic port from a foreign country. The pieces ofevidence presented by ISC indicate that the vessel was really intended to be delivered for purchase. The repairs done were to prepare the vessel for its Intended use in the Philippines (7707 Iel.and. Shipping Corporation a. Secretary of Finance, CTA, March 6,2072). Subject uessels made an illegal entry that warcants forfeiture

thereof. - Sometime in 2007, Cornelio Q. Casido, President of Heritage Resources and Mining Corporation (HRMC), a domestic corporation engaged in mine exploration, hired and contracted the services of Kanny I Tugboat and Kanny II Dumb Lighter owned by Kanny Industrial Company, a corporation organized under the laws of Hong Kong. When the two vessels arrived at Homonhon Island, Eastern Samar, its captain and officials as well as Casido failed to go to the nearest customs house upon entry as required by Section 250 of TCCP. BOC initiated forfeiture of the vessel. The CTA found that the Republic and BOC Commissioner have presented substantial evidence to establish that an illegal importation has been committed by Casido, with the illegal entry of the subject vessels, warranting the forfeiture thereof. The court cannot countenance the position of Casido that the vessels were merely for administrative find under Sections 2519 and 252I of the TCCP, since they did not carry any contraband or smuggled items (Cosid.o u. Repubhc, CTA Case No.8087, Februany 8,2012).

judicial

in the Court of First Instance but in the Court of Tax Appeals, and only after The

recourse of the property owner is not

exhausting administratiue remedies inthe Bureau of Custom,s. - The Court of First Instance (now Regional Trial Court) should yield to

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thc .j u risd iction ol' thc ( )o l lcclor ol' ( j usturns bccausc thc j urisdiction of thc latter is providcd lbr in R.A. 1937 which took effect on July 1, 1957, much later than the Judiciary Act of 1948. It is axiomatic that a later law prevails over a prior statute. Moreover, it is reasonable to conclude that the legislators intended to divest the Court ofFirst Instance ofthe prerogative Lo repleuin a property which is a subject

of a seizure and forfeiture proceedings for violation of the Tariff and Customs Code. Otherwise, actions for forfeiture of property for violation of customs laws could easily be undermined by the simple device of repleuin. Furthermore, Section 2303 of the TCC, which requires the Collector of Customs to give to the owner of the property sought to be forfeited written notice of the seizure and to give him the opportunity to be heard in his defenses, clearly indicates the intention of the law to confine in the Bureau of Customs the determination of all questions affecting the disposal ofproperty proceeded against in a seizure and forfeiture case. The judicial recourse of the property owner is not in the Court of First Instance but in the Court of Tax Appeals, and only afber exhausting administrative remedies in the Bureau of Customs (Pacis a. Aueria, supra). The preuailing doctrine is that the exclusiue jurisdiction in seizure and forfeiture coses uested in the Collector of Customs precludes a court of first instance from assuming cognizance ouer such a matter. - It is a settled rule that the Bureau of Customs acquires exclusive jurisdiction over imported goods, for the purposes of enforcement of the customs laws, from the moment the goods are actually in its possession or control, even ifno warrant ofseizure or detention had previously been issued by the Collector of Customs in connection with seizure and forfeiture proceedings (Republic a. CFI and. Mayer Steel Pipe Corporation,2TS SCRA 222).

Bar Question (2008) William Antonio imported into the Philippines a luxury car worth US$100,000. This car was, however, declared only for US$20,000

and corresponding customs duties and taxes were paid thereon. Subsequently, the Collector of Customs discovered the underdeclaration and he initiated forfeiture proceedings of the imported car.

a.

May the Collector of Customs declare the imported car forfeited in favor of the government? Explain.

b.

Are forfeiture proceedings of goods illegally imported criminal in nature? Explain.

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Suggested answers:

a.

b.

No, the Commissioner of Customs ualidly cannot accept the fi.ne in case of forfeiture. Section. 2307 of the Tariff q,nd Customs Code prouides that subject to approual of the Comrnissioner, the district collector may, while the case is still pending, except when there is fraud, accept the settlement of any seizure case prouided that the owner, intporter, exporter, or consignee or his agent shall offer to pay to the collector a fine imposed by him upon the property, or in case of forfeiture, the owner, exporter, importer or consignee or his agent shall offer to pay for the dornestic marlzet ualue of the seized orticle. The Commissioner may accept the settlement of any seizure case on appeal in the saale manner. Upon payment of the fine as determined by the district collector, which shq.ll be in q.mount not less thun 207o nor more than B07o of the landed cost of the seized imported article or the FOB uqlue of the seized article for export, or payment of the domestic market ualue, the property shall be

forthwith released and all liabilities which may or

might attq.ch to the property by uirtue of the offense which was the occasion of the seizure and all liability might haue been incurred under any cash deposit or bond giuen by the owner or agent in respect to such property shall thereupon be deemed to be discharged. Settlement of any seizure case by payment of the fine or redemption of forfeited property shall not be allowed in any case, where the importation is absolutely prohibited or where the release of the property would be contrary to law.

Bar Question (1991) Sometime in 15 September 1990, a shipment of 150 packages of imported goods and personal effects arrived and was unloaded at the Port of Manila. After the amount of F15,887.00 was paid by the consignee as customs duties, internal revenue taxes, fees and other charges, the packages were released from the Customs house. As the packages were being transported from the Customs area to their destination, the truck carrying them was intercepted at T.M. Kalaw St., Ermita, Manila by agents of the Economic Intelligence & Investigation Bureau (EIIB). In a formal communication, EIIB informed the Collector of Customs that the packages were released

from the customs zonc without proper appraisal to the damage of the Government and requested for the issuance of the necessary warrant of seizure. Seizure proceedings (S.I. No. 796) were then instituted and the Collector of Customs issued a warrant of seizure and detention.

During the progress of the search and seizure, and while the goods were being removed by the Customs agents from the bodegas where they were stored, the consignee filed a Petition (Civil Case No. 234) with the Regional Tlial Courb of Manila asking that the Collector

of Customs and all his agents be restrained from further enforcing the aforesaid warrant and from proceeding with the trial of S.I. 796, and that said warrant be declared null and void since the Collector no longer had jurisdiction to issue the same considering that the customs duties and taxes had already been paid and the goods had left the control and Jurisdiction of the Bureau of Customs.

1)

Did the Collector of Customs have jurisdiction to issue the warrant ofseizure and detention?

Suggested answer: On the assumption that the goods were releqsed from custorns custody without proper appraisal q's contended by EIIB, the Collector

of Customs had jurisdiction to issue the warcant of seizure and detention. This remedy is generally auailable in importations tainted

with irregularity ($ec.2537, TCC;Viduya a. Berd'iago, 73 SCRA 553).

2)

Did the payment of the customs duties, taxes, etc. render itlegal and improper the issuance of said warrant?

Suggested answer: the payment of customs duties, tanes, ircegular and improper the issuance render as etc., does not necessa.rily deterltion. und of a warrant of seizure

In seizure and forfeiture,

What is legally consequential is whether there utas, irt fact, an

irregularity committed in the importation of the articles and their release from. customs.

3)

Has the Regional T?ial Court jurisdiction to hear and decide

Civil Case No. 234?

834

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has no jurisdiction ouer the petition for reuiew and writ of' prohibition (Cornmiasioner of Custorns v. Alikpala, 36

Suggested answer: No, the Regional Trial Court has no jurisdiction. In the case of seizures and forfeitures, an ordinary court nxqy not tahe cognizance of the case and. therefore, said courts would be bereft ofjurisdiction to hear q,nd decide the same. The jurisdiction of the Collector of Customs in seizure and forfeiture proceedings is exclusiue of all other courts. The proper remedy would be to go through with the hearing of the case with the Collector of Customs from whose decision an appeal may be made to the Commissioner of Customs and, thereafter, if the taxpayer still feels aggrieued, to the Court of Tax Appeals.

scRA 208lle70l).

b.

of the CTA.

A.

jurisdiction over the petition for review of prohibition? Explain.

Does the CTA have

and

writ

B. Will an appeal to the CTA for tax refund be possible? Explain.

Suggested answer:

a.

No, because there is no decision as yet by the Commissioner

of Customs, which can be appealed to the CTA. Neither the remedy of prohibition would lie because the CTA has not acquired any appellate jurisdiction ouer the seizure case. The writ of prohibition being merely ancillary to the appellate jurisdiction, the CTA has no jurisdiction ouer it until it has acquired jurisdiction on the petition for reuiew. Since there is no appealable decision, the CTA

No, because the Commissioner of Customs has not yet

rend.ered a decision onthe claim for refund. The jurisdiction of the Commissioner and the CTA are not concurren't in so far as claims for refund are concerned. The only exception

is when the Collector of Customs has not acted on the

protested payment for a long time, the continued inaction of the Collector or Cornmissioner should not be allowed to prejudice the taxpayer (Nestl6 Phils.a.Court ofAppeals,

G.R. No. 734774,

Bar Question (2002) The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the importation of machineries and equipment by LLD Import and Expert Co. (LLD) for alleged non-payment of tax and customs duties in violation of customs laws. LLD was notifi.ed of the seizure but, before it could be heard, the Collector of Customs issued a notice of sale of the articles. In order to restrain the Collector from carrying out the order to sell, LLD fiIed with the CTA a petition for review with application for the issuance of a writ of prohibition. It also filed with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss the case for lack ofjurisdiction

Itill-r

July 6,2OOI).

Bar Question (1992) Under Section 2523 of the Tariffand Customs Code the duty of verifying the correct weight of a cargo shipment is imposed upon the vessel's master, owner or employee if a discrepancy between the actual gross weight and declared gross weight of manifested cargo exceeds 20Vo and "the Collector shall be of the opinion that such discrepancy was due to the carelessness or incompetency of the master or pilot in command, owner or employee of the vessel, a fine of not more than LSVo of lhe value of the article may be imposed upon the importing vessel."

ABC Corporation's vessel was found, after appropriate administrative proceedings, to have violated the said provision far exceeding t}ire 20Vo statutory limitation. The Collector of Customs imposed a fine of ?22,600.00 (representing 157o of the value of the discrepancy) which was amrmed by the Commissioner of Customs. On appeal by ABC Corporation, the Court of Tax Appeals found the fine of ?22,600.00 harsh and unreasonable for a first offense and reduced the same to F5,000.00. The Commissioner of Customs questions the scope of authority of the Court of Tax Appeals in the determination of the fine imposable under Section 2523 of the Tariff

and Customs Code. Whose judgment should prevail under the circumstances of the case? Explain fully.

Suggested answer: The

judgment of the Court of Tax Appeals should preuail.

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The CTA has exclusive appellate jurisdiction over decisions of the Commissioner of Customs in cases involving the imposition of fines, forfeitures or other penalties.

Remedies under the Tariff and Customs Code Bar Question (2013) On October 15, 2005, ABC Corporation 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 Tariffand Customs Code on postaudit, investigated and assessed ABC Corporation for deficiency customs duties and VAT. Is the Bureau of Customs correct? Suggested answer: No. The Bureau of Custorns has lost its right to assess deficiency customs duties and VAT. The imported steel ingots in 2005 haue been entered and the customs duties andVAT had been paid, thereby making the liquidation of the importation fi.nal and conclusiue upon the parties after the erpiration ofthree (3) years from the date offinal payment of duties and ta,xes (Sec. 1603, TCC, as amended by R.A. 9135).

Bar Question (2006) The Collector of Customs issued an assessment for unpaid customs duties and taxes on the importation of your client in the amount of F980,000.00. Where will you file your case to protect your client's right? Choose the correct courts/agencies, observing their proper hierarchy.

1. 2. 3. 4. 5. 6. 7.

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I

witt fi.le a protest with the Collector of Custom's (Sec. 2308, TCC). Shoutd the Collector prornulgate a decision aduerse to my client, I witl giue a written notice to the Collector, copy furnished the Commissioner of Customs, of my clienfs desire to haue the rnq,tter reuiewed by the Commissioner (Sec. 2313, TCC). If the Cornmissioner affirms the decision of the Collector, I will fiIe an appeal with the Court of Tan Appeals within 30 days from receipt of the decision ( 1997 Rules

Bar Question (1997) The Tariffand Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported lien, and to the judicial remedy of filing an action in courb. when does the Bureau of customs normally avail itself a. of the administrative, instead of the judicial remedy, or

b.

Metropolitan Trial Court Court ofAppeals Supreme Court

of the latter, instead of the former, remedy?

Suggested answer:

a.

The Burea'u of Custorns nortnally auails itself of the administratiue rernedy of seizure, such as by enforcing the tax lien on the imported articles, instead of the judicial remed,y when the goods to which the tax lien attaches, regard.Iess of ownership, is still in the custody or control of the gouernment. In the case, howeuer, of importations which are prohibited or undeclared, the remedy of seizure and forfeiture rnay still be exercised by the Bureau of Customs euen if the goods are no longer in its custody.

b.

When the goods are properly released and thus beyond the reach of tax lien, the gouerntnent can seeh payment of the tax liability through iudicial action since the tax

Collector of Customs

Regional Trial Court

If the CTA

issues a decision aduerse a uerified petition for Court to my client, I witl fiIe with the Suprerne (R.4. 9282). 45 reuiew on certiorari pursuant to Rule

of Ciuit Procedure, R.A. 9252).

Court of Tax Appeals

Commissioner of Customs

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Iiability of the im,porter constitutes a personal debt to the gouernment; therefore, enforceable by action. In this case, judicial remedy is normally availed of instead of the adrninis t r atiu e re rnedY.

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Bar Question (1992)

Suggested answer:

A disgruntled employee of Apache Corporation reported to the Commissioner of Customs that the company is illegally importing electronic equipment by way of unlawful "shipside" activities thereby evading payment of customs duties and taxes on the goods.

No. The choice of remedy assu.rnes want of authority and jurisdiction. Warrantless searches and seizures are, hou)euer, authorized under Tariff and Custorns Code. Such searches and

Accordingly, the Commissioner of Customs, upon the request of the Economic Intelligence and Investigation Bureau (EIIB), issued warrants ofseizure and detention and directed EIIB to seize the goods

listed in the warrants.

After the seizure of the goods and considering the magnitude ofthe value of the goods, counsel for Apache corporation filed a petition with the supreme court for c ertiorari,prohibition and. mandomus tnenjoin the commissioner of customs and his agents from continuing further with the forfeiture proceedings and praying that the commissioner return the confiscated articles on the ground that the warrants were in violation of the Rules of Court and the Bill of Rights.

1) If you are a newly-appointed Solicitor in the office of the Solicitor General representing the Commissioner of Customs, how would you defend the latter? Give the specific defenses.

seizures are ruot considered unreasonable c

ons

within the meaning of the

titutional guar antee.

Bar Question (1991) Dagat-dagatan Shipping Corporation (DSC) brought into the country two (2) non-propelled foreign barges which DSC charbered for use in the Philippine coastwise trade under a Temporary Certificate of Philippine Registration, to be returned to the foreign owner upon termination of the charter period but not beyond 1999, pursuant to P.D. No. 760, as amended. Upon their arrival, the barges were subjected to duty by the Bureau of Customs. DSC refused to pay any customs duty contending that the charter or lease ofthe barges, which wiII be returned to the foreign owner when the charter expires, is not an importation and. therefore cannot be subjected to any customs duty.

1)

Is DSC's refusal with or without legal basis?

Suggested answer:

Suggested answer:

Appurtenant to its power und,er the Tariff and Custorns Code to enforce the prouisions of such la.w, the Bureau of Customs may conduct searches and seizures euen without the benefit of a warcant issued by ajudge upon probable cause. This is historically considered an exemption from the constitutional guarantee against unreasonable searches and seizures. There is probable cause whenthe correct amount of customs duties was not paid by the importer.

nirnportation" DSC's refusal is without legal basis. The term includes the entry into the country of any article from a foreign country. The fact that imported goods are to be re-exported does not mean that the customs duties rnay not be imposed, although in certain cases and subject to limitations prescribed by the Tariff and Customs Code, a drawbach may be auailable to the tarpayer so as to be able to obtain their refund. An example of which are articles which are used in the manufacture of products for export within three (3) years after the importation.

2)

Assuming that the enforcement of the warrant had been extended to the residence of the president of Apache Corporation, is such enforcement valid? Explain.

2)

On what is the dutiable value of any imported article based?

Suggested answer: No. The Tariff and Customs Code authorizes custom officials and agents to seqrch any building, except dwelting houses.

3)

Do you think the petition for certiorarl, prohibition, and mandamus filed by Apache Corporation will prosper in the Supreme Court? Discuss.

Suggested answer: dutiable ualue of imported articles is the home consumption ualu,e, i..e., the cost or fair marhet ualue or price of the imported articles i,n wlutlesale quantities in the prin'cipal market of the exporting country or
840

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ex,cluding internal excise toxes. In case such ualue is unascertainable, the commissioner rnay also determine the horne consurnption uarue front any reliq,ble and available data (Sec. 201, TCC, as arnended; Commissioner a. Court of Tar Appeals. G.R. No. 22069, May 21, 1988).

Wheneuer the decision of the Collector of Customs is aduerse to it is automatically eleuated to the Commissioner for reuiew and, if it is affirmed by him, it is autornatically eleuated to the Secretary of Finance for reuiew. the gouernment,

INOTE: Under RA. 9135, the basis for computing custorns duties is the transaction ualue.l

Bar Question (1993) IWV Floria, a vessel ofPhilippine registry, was hired to transport beans from Singapore to India. The vessel was allegedly hijacked at sea and found its way to Bataan. It is also alleged that said beans

are now with the List Co. and fake documents were used to show that the beans were imported from Japan. The collector of customs seized the IWV Floria and its cargo. The owner of IWV Floria filed a complaint in the Regional rrial court to obtain possession of the vessel and the beans. Does the RTC havejurisdiction over the case?

Suggested answer: jurisdiction. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusiue jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. The RTC has no jurisdiction to pass upon the ualidity or regularity ofthe seizure and forfeiture proceedings conducted by the Bureau of Custorns (Commissioner of Custorns o. Mokasio4 L77 SCRA 27, 33-34 t19891 eiting Po,cis a. Averia, 1g SC&A g|z The RTC has no

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jurisdiction in sitting when forfeiture controls. The Collector of'Custorns, proceed,ings, constitutes a tribunal upon which the law confers jurisdiction to heq.r and determine all questions touching the forfeiture and further disposition ofthe subject rnatter. The exclusiuejurisdiction in seizure and forfeiture cases uested in the Collector of Customs the RTC from assuming cognizance ouer such matter. The preclud,es -RTC is thus deuoid of competence to act on the matter (Republic a. CFI of Manila, 2L3 SCRA 222). of Customs. 'I'his is u liel
Bar Question (1996) On January 1, 1996, armed with warrants of seizure and detention issued by the Bureau of customs, members of the customs enforcement and security services coordinated with the Quezon City police to search the premises owned by a certain Mr. Ho along Kalayaan Avenue, Quezon City, which allegedly contained untaxed vehicles and parts. while inside the premises, the members of the customs enforcement and security services noted articles which were not included in the list contained in the warrant' Hence, on January 15, 1996, an amended warrant and seizure was issued. On January 25,Igg6,the customs personnel started hauling the articles pursuant to the amended warrant. This prompted Mr' Ho to file a case for injunction and damages with a prayer for a restraining

order before the Regional Trial court of Quezon city against the Bureau of Customs on January 27,1996. On the same date, the trial court issued a temporary restraining order' A motion to dismiss was filed by the Bureau of Customs on the ground that the Regional Trial court has no jurisdiction over the subject matter of the complaint and that it was the Bureau of customs that has exclusive jurisdiction over it. Decide.

t1e661).

Suggested answer:

Neither has RTC reuiew powers ouer actions concerning seizure and forfeiture proceedings conducted by the Collector of Customs which is reuiewable by the comrnissioner of custorns whose decision, in turn, is reuiewable by the Court of Tar Appeals (Ibid.).

The rnotion to dismiss should be granted. Seizure and forfeiture proceed.ings q.re within the exclusiue jurisdiction of the collector of Customs to the erclusion of regular courts. Regional Trial Courts ure deuoid of cornpetence to pass upon the ualidity or regularity of seizure and. forfeiture proceedings conducted by the Bureau of Customs and to enjoin or otherwise interfere with these proceedings (Republic a' CFI of Manila, G.P.. No,43747, September 2, 7992; Jao u. CA,

Alternative suggested answer: No. The question of seizure and forfeiture is for the Collector of customs to determine in the fi,rst instance and then the commissioner

G..R.

No. 704604, October 6,7995).

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Bar Question (1994) In smuggling a shipment of garlic, the smugglers used an

with intention to unload and is deemed terminated upon payment ofthe duties, taxes and other charges due upon the articles and the legal permit for withdrawal has been issued, or where the articles are duty-free, once the articles have left thejurisdiction

eight-wheeler truck which they hired for the purpose of taking out the shipment from the customs zone. Danny, the truck owner, did not have a certificate ofpublic convenience to operate his trucking business. Danny did not know that the shipment of garlic was illegally

of the Philippines

of the customs.

The second type of smuggling refers to any degree ofparbicipation

imporbed.

in the commission of unlawful importation.

Can the Collector of Customs of the port seize and forfeit the truck as an instrument in the smuggling?

The third type of smuggling is committed when the accused is found to have possession of dutiable arbicles while inside the premises of the

airport (Tomas Saloador a. Peopl.e of the Philippines).

Suggested answer: Yes, the Collector of Custorns of the port can seize and forfeit the truck as an instrument in the smuggling actiuity, since the sanle was used unlawfully in the importation of smuggled articles. The mere carrying of such articles on board the truck (in commercial quantities) shall subject the truck to forfeiture, since it was not being used as q duty authorized comrnon carrier, which was chartered or lea,sed. q,s such (Sec. 2530[a], TCC).

will not be effected the ou)ner thereof had no knowledge of or participation in the unlawful act, there arises a prima facie presumption or knowledge or participation if the owner is not In the business for which the conueyance is generally used. Thus, not hauing a certificate of public conuenience to operate a trucking business, he is legally deetned not to houe been engaged in the trucking business Moreouer, although forfeiture of the uehicle

if it is established that

(Sec. 2531, TCC).

Smuggling Smuggling is committed by any person who (1) fraudulently imports orbrings into the Philippines any article contrary to law; (2) assists in so doing any article contrary to law; or (3) receives, conceals, buys, sells or in any manner facilitate the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law (Sec. 3601, TCCP). The first t5rye of smuggling pertains to fraudulent importation. To constitute fraud, there must be intentional fraud, consisting of deception, willfully and deliberately dared or resorted to In order to give up some right. While importation is defined as "consisting of bringing an article into the country from the outside," importation commences when the carrying vessel or aircraft enters the jurisdiction

Bar Question (2013) There is smuggling when new motor uehicles were declared as parts. - There is no doubt that smuggling of' the first type was committed when the shipments of 3 x 40 container vans arrived at the Port of Cebu from Korea on board a vessel with declared cargo: Used truck replacement parts, when in truth and in fact, it contained units of Sportage and Gallope. used truck replacement

Under Section 1203, TCCP, the owner of the imported articles is the consignee. In the instant case, all of the bills of lading provide that the consignee is Trex Eve Auto Sales and Services, the owner of the imported articles. Nevertheless, a further review of the records reveals that Trex Eve Auto Sales and Services is a sole proprietorship, which is neither a natural person, nor a juridical person. The sole

proprietorship lacks juridical personality; thus, it Is the owner/ proprietor who is personally liable for all the debts and obligations of the business. Section 1203, TCCP provides that "all imported articles shall be the property of the person to whom it is consigned." From the foregoing, the law created

a

presumption of ownership.

That ownership is vested with the consignee. Whether or not the accused parbicipated in the preparation ofthe bill ofland is immaterial to disprove ownership, for the law created a presumption of ownership.

Therefore, it was imperative for Sayson to disprove ownership of said articles by showing proof to the contrary, which he failed to do (People u. Soyson, CTA Critninal Case, December 72r 2012).

Bar Question (2013, 1994) The Collector of Customs instituted seizure proceedings against a shipment of motor vehicles for having been misdeclared as second-

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hand vehicles. state the procedure for the review ofthe decision up to the supreme court of the collector of customs adverse to the

importer.

Suggested answer: The procedure

in seizure coses may

be summarized. as

follows:

The collector issues a warrant for the detention or forfeiture

of the imported articles (Sec. 2J01, TCC);

Suggested answer: Motion granted. The Court of Tax Appeals has jurisdiction only ouer decisions of the Commissioner of Custorns in cases inuoluing seizures, detention or release of property affected. (Sec. 7. R.A. No. 1125). There is no decision yet of the Commissioner which is subject to reuiew by the Court of Tax Appeals.

b)

Under the same facts, could the Importer fiIe an action in the Regional Trial Court for repleuin onl}r'e ground that the articles are being wrongfully detained by the Collector of Customs since the importation was not illegal and therefore exempt from seizure? Explain.

The Collector giues the irnporter a written notice of the

seizure and fires a hearing date to giue the importer an opportunity to be heard (Sec. 2J05, TCC);

Aformal hearing is conducted (5ec.2512, TCC); The Collector renders a declaration offorfeiture (9ec.2J12,

rCC); The importer aggrieued by the action of the Collector in any case of seizure rnay appeal to the Commissioner for his reuiew within fifteen (15) days from written notice of the Collectoy's decision (Sec. 2515, TCC);

Suggested answer: No. The legislators intended to diuest the Regional Trial Courts a property which is a subject of seizure and forfeiture proceedings for Ltiolation of the Tariffand Customs Code otherwise, actions for forlbiture of property for uiolation of the Custom,s Iaws could easily be underminul by the simple deuise of repleuin. (De

ofthejurisdiction to repleuin

la Fuente

a. De

Veyra, et al., 120 SCRA 455).

The irnporter aggrieued by the action or ruling of the Comrnissioner in any case of seizure may appeal to the Court of Tax Appeals (Sec. 2402, fCe;

There should be no u.nne(.st;ery hindrance on the gouernmenl.'s driue to preuent smuggling an,d, olh,er frauds upon the Customs. Furthermore, the Regional 'I'riu.l (lourt do not haue jurisdiction in

The importer aduersely affected by the decision of the Court of Tox Appeals may appeal to the Court of Appeals within

order to render effectiue and effick:n.l llrc utllection of import and export duties due the State, which enu.blt:s lhe gouernment to carry out the

fifteen (15) days which may be extended for another fifteen (15) days or such period as the Court of Tax Appeals may decide.

Bar Question (2000)

a)

n45

On the basis ofa warrant ofseizure and detention issued by the collector of customs for the purpose of enforcing the Tariff and customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the collector of customs on the confiscation of the articles, the importer filed a petition for review with the court of rax Appeals. The collector moved to dismiss the petition for lack ofjurisdiction. Rule on the motion.

functions it has been instituted h y'rfitrm. (Jao, et al. u. Court Appeals, et a1.,249 SCRA 35, 4:l).

of

I'he Collector of Customs has.juris
action hefitre the CFI (Deln Fuente o. De Veyra, supra).

Refund of customs duties ( i rrr

rr
Industrial Steel Produr:t,s is rr
appliod lirr ir lctter of credit and paid thc prc-rcrltt isite advance deposit amounl.irrg t,o ?156,101withMetrobank on l.lrc shipment of tool steel from (iorlnrur.y. However, the imporl,rrl.iorr rlirl rrot, materialize, the

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letter of credit remains unutilized; hence, subsequcntl.y cancclltrcl Metrobank.

h.y

Grandteq filed a claim for refund on February 16, 2002. tsOC recommended and approved the claim, but when elevated to the Secretary ofFinance, the latter denied the claim for failure to pay the required processing fee within the statutory limit.

The CTA held that the records submitted by Grandteq have shown that the period required under CAO 2-gb and Section 1Z0g of the TccP was followed by Grandteq. The provisions of law cited by the Secretary of Finance (Secs. 3301 and SB0S, TCC?) does not mention that the refund processing fee should be paid within the one year period under CAO 5-92, in order to be entitled to a claim for refund of customs duties.