Taxation Law Cabaneiro

for

Atty. Nicasio C. Cabaneiro, CPA

1. Differentiate tax exemption of non-stock, non-profit educational institutions from that of propriety educational institutions  Privilege

granted to non-stock, non-profit educational institutions is conditioned only on actual, direct and exclusive use of their revenues and assets for educational purposes

 In contrast, proprietary educational institutions, including

those cooperatively owned, may be entitled to such exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment (Const. Art. XIV, Sec. 4(3))

1. Differentiate tax exemption of non-stock, non-profit educational institutions from that of propriety educational institutions – cont.  A proprietary educational institution is entitled only to the

reduced rate of 10% corporate income tax  This rate is applicable only if the proprietary educ’al institution

is non-profit and its gross income from unrelated trade, business or activity does not exceed 50% of its total gross income  Consistent with Art. XIV, Sec. 4(3) of the Constitution, these

limitations do not apply to non-stock, non-profit educ’al institutions (CIR vs. De La Salle University, Inc., G.R. No. 196596, Nov. 9, 2016)

2. BIR assessed D (a non-stock, non-profit educational institution) for deficiency income tax on its rental earnings from restaurants/ canteens and bookstores operating within the campus; deficiency DST on loans and lease contracts. D protested and anchored its petition on Art. XIV Sec. 4(3) that exempts all revenues and assets of non-stock, non-profit educ’al institutions used actually, directly and exclusively for educ’al purposes from taxes and duties. On the other hand, CIR posits that Sec. 30 (H) of Tax Code qualified the tax exemption granted to non-stock, non profit educ’al institution such that the revenues and income they derived from assets or from any of their activities conducted for profit are taxable even if these revenues and income are used for educ’al purposes. Decide.

 I will rule in favor of D  Tax exemption granted to non-stock, non-profit educ’al

institutions is conditioned only on the actual, direct and exclusive use of their revenues and assets for educ’al purposes  A plain reading of Constitution would show that it does not

require that revenues and income must have also been sourced from educ’al activities or activities related to the purposes of an educ’al institution  The phrase all revenues is unqualified by any reference to the

source of revenues  Thus, so long as the revenues and income are used actually,

directly and exclusively for educ’al purposes, then said revenues and income shall be exempt from taxes and duties

 Note: Taxation of revenues differs from taxation of assets  When

a non-stock, non-profit educ’al institutions is conditioned only on the actual, direct and exclusive use of their revenues and assets for educ’al purposes, it shall be exempted from income tax, VAT and Local Business Tax

 On the other hand, when it also shows that it uses its assets in

the form of real property for educ’al purposes, it shall be exempted from RPT  Proving the actual use of taxable item will result in an

exemption, but the specific tax from which the entity shall be exempted from shall depend on whether the item is an item of revenue or asset (CIR vs. De La Salle Univ. Inc. G.R. No. 196596, Nov. 9, 2016)

3. ABC is the owner and operator of the only canteen in DEF College, where the latter charges the former Php100K monthly rental fee. The income derived from said agreement is used by the latter in its school operations, including but not limited to staff and faculty dev’t., scholarships, and purchase of library equipment. However, BIR assessed DEF College for deficiency income tax from its rental income in 2009. School protested on the ground that under the Constitution, all revenues and assets of non-stock, non-profit educ’al institutions used actually, directly and exclusively for educ’al purposes shall be exempt from taxes and duties. Is the school’s contention correct?

 Yes. To come with the ambit of constitutional exemption,

income must be used actually, directly and exclusively for educ’al purposes by an educ’al institution which is non-stock and non-profit although a concessionaire operates the canteen  Where the same income from cafeteria concession fees is

commingled with the other funds that maje up the school’s “other educational income” and income is made available for school operations (e.g. salaries, utilities, scholarship, etc., lease income is exempt from income tax (CIR vs. ADMU, Inc. CTA Case Nos. 7246 & 7293, Mar. 11, 2010)

4. NPC is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Rep. of the Philippines. It is thus, an instrumentality of the Nat’l Gov’t. which is exempt from local taxation. As such, it is not a private corporation engaged in “business enjoying franchise” Is such contention meritorious?

 No. The LGC has withdrawn all tax exemptions previously

enjoyed by all persons and authorized LGUs to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them  Thus. A LGU has the authority to impose and collect a local

franchise tax (PLDT vs. City of Davao, et. Al, G.R. No. 173867, Aug. 22, 2001)

5. Distinguish withholding taxes from indirect taxes  Indirect taxes like VAT and excise tax are different from

withholding tax  In indirect taxes, incidence of taxation falls on one person but

the burden can be shifted to another such as when tax is imposed on goods before reaching the consumer who ultimately pays for it  In case of withholding taxes, incidence and burden of taxation

falls on the same entity, the statutory taxpayer  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 to gov’t. (ING Bank NV vs. CIR, G.R. No. 167679, Apr. 20, 2016)

6. HK Co., a HK Corp. not doing business in the PH, holds 40% of the shares of A Co., a PH Co, while the 60% is owned by a Filipinoowned PH Corp. HK Co. also owns 100% of the shares of B Co., an Indonesian co. which has a duly licensed PH branch Due to worldwide restructuring of the HK Co. Group, HK Co. decided to sell all its shares in A and B Cos. and the negotiations for the buy-out and the signing of the Agreement of Sale were all done in the PH Agreement provides that the purchase price will be paid to HK Co’s. bank account in the US and that title to A and B Cos. Shares will pass from HK Co. to P Co. in HK where stock certs. will be delivered. P Co. seeks your advice as to whether or not it will subject the payments of purchase price to withholding tax (1999 Bar Exam)

 Yes, payments of purchase price will be subject to withholding

tax  Considering that all the activities (including consummation of

sales) occurred within the PH, income is considered as income from within, subject to PH income taxation  HK Co. being a foreign corp., is to be taxed on its income

derived from sources within the Philippines (1 Domondon, 2013, p.189)

7. NDC, a domestic and resident corp., entered into a contract with several Japanese shipbuilding cos. for construction of vessels, purchase price was to come from proceeds of bonds issued by the CB NDC remitted to the shipbuilding cos. the total interest on the balance of the purchase price However, not tax was withheld by NDC Hence, CIR held NDC liable on such tax NDC argues that Japanese shipbuilders were not liable on interest remitted to them because all related activities were done in Tokyo Is NDC’s contention liable

 No, gov’ts right to levy and collect income tax on interest

received by foreign corps. Not engaged in trade or business within the PH is not planted upon the condition that the activity or labor and the sale from which the interest income flowed had its situs in the PH  Residence of the obligor who pays the interest rater than the

physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income.  Interest remitted on the unpaid balance of purchase price of

vessels is interest derived from sources within the PH (National Dev’t. Corp. vs CIR, G.R. No. L-53961, June 30, 1987)

8. Municipal Board of the City of Manila enacted an Ordinance imposing business taxes on manufacturers, importers or producers, doing business in the City of Manila Mayor approved the said ordinance. Allied Thread Co., Inc. claims exclusion from said ordinance on the ground that it does not maintain an office or branch office in the City of Manila, where the subject ordinance only applies However, it admits that it does business in the City of Manila through a broker or agent, Ker & Co., Ltd doing business in the City of Manila

Is Allied Thread Co., Inc. exempt from the coverage of the enacted Ordinance?

 No, the power to levy an excise upon the performance of an

act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise nor upon the physical location of the property and in connection with the act or occupation taxed, but depends upon the place in which the act is performed or occupation engaged in  Thus, the gauge for taxability under said Ordinance does not

depend on the location of the office but attaches upon the place where the respective sale transaction is perfected and consummated  Since Allied Thread sells its products in the City of Manila

through its broker, Ker & Co. Ltd, it cannot escape tax liability imposed by the ordinance (Allied Thread Co., Inc. vs. City of Mayor of Manila, G.R. No. L-40296, Nov. 21, 1984)

9. An Asian employee of ADB who is retiring has offered to sell his car to M which was imported tax free for his personal use The privilege of exemption from tax is granted to qualified use under the ADB Charter which is recognized by the tax authorities If M decides to purchase the car, is the sale subject to tax? (2005 Bar Exam)

 Yes, tax exemption does not flow to subsequent transfers of

the car to non-exempt persons  Tax exemptions are to be construed strictly and are not

considered transferable in character  Transfer of car to M, a non-exempt tax person is subject to tax

(1 Domondon 2013 p.113)

10. S, an American international shipping co. doing business in PH, entered into a contract with US gov’t. to transport military household goods and effects of US military personnel assigned to Subic Naval Base From said contract, S derived an income for the year 1984 amounting to Php58M and paid income tax due thereon of 1.5% amounting to Php870K Claiming that it paid income tax by mistake because under Art. XII (4) of RP-US Military Bases Agreement, PH gov’t agreed to exempt from payment of PH income tax nationals of the US, or corps. of the US, residents in the US in respect of any profit derived under a contract made in the US with the gov’t. of the US in connection with construction, maintenance, operation and defense of base, a written claim was filed with the BIR, will the claim for refund proper?

 No, law does not look with favor on tax exemptions and that he

who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted  It’s obvious that the transport or shipment of household goods

and effects of US military personnel is not included in the term “construction, maintenance, operation and defense of bases under Art. XII (4) of RP-US Military Bases Agreement nor could the performance of this service to the US gov’t be interpreted as directly related to the defense and security of PH territories  Considering that the income of S is not exempt from tax, his

claim for refund will not prosper (Sea-Land Services Inc. vs. Court of Appeals, G.R. No. 122605, Apr. 30, 2001)

11. RA 9504 was approved and signed into law. It granted MWEs exemption from payment of income tax on their minimum wage, holiday pay, overtime pay, night differential pay and hazard pay BIR issued rev.reg. to implement RA 9504. It provided that MWEs receiving other income such as from conduct of trade, business, practice of profession except income subject to final tax in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year SMW, holiday pay, overtime pay, night differential pay and hazard pay shall still be exempt from w/holding tax Mr. X assails provision of RR and argues that prorated application of personal and addl exemptions under RR is not the legislative intendment in this jurisdiction. Is it correct?

 Yes. RA 9504 must be liberally construed. We are mindful of

the strict rule when it comes to interpretation of tax exemption laws  The canon, however, is tempered by several exceptions one of

which is when the taxpayer falls within the purview of the exemption by clear legislative intent  In this situation, rule of liberal interpretation applies in favor of

grantee and against the gov’t.  There is a clear legislative intent to exempt minimum wage

received by an MWE who earns additional income on top of minimum wage  Intent can be seen from both law and deliberations. We see no

reason why we should not liberally interpret RA 9504 in favor of taxpayers (Soriano vs. Sec. of Finance, G.R. No. 184450, Jan. 24, 2017)

12. City of Manila assessed and collected taxes from A & B pursuant to Sec. 15 (Tax on Wholesalers, Distributors or Dealers) and Sec. 17 (Tax on Retailers) of the Revenue Code of Manila It imposed addl taxes pursuant to Sec. 21 (Tax on Business subject to Excise, VAT or Percentage Taxes under NIRC) of the same law as a condition for renewal of their business licenses A & B paid under protest the tax assessed under Sec. 21 but requested for tax credit or refund. They asserted that enforcement of Sec. 21 constitutes double taxation because the local business taxes under Secs. 15 and 17 were already being paid by them. Is their contention tenable?

 Yes. Double taxation means taxing the same property twice

when it should be taxed only once. 2 taxes were imposed on the same subject matter for the same purpose by the same taxing authority within the same jurisdiction during the same taxing period and taxes must be of same kind or character  All taxes were imposed on the same subject matter (privilege

of doing business) and for the same purpose (in order to make taxpayers contribute to the city’s revenues) by the same taxing authority (City of Manila) and within the same jurisdiction in the same taxing period (per calendar year) and taxes were all in the nature of local business taxes  Thus, enforcement of Sec. 21 constitutes double taxation

(Nursery Care Corp., et. al vs. Anthony Acevedo and City of Manila, G.R. No. 180651, July 30, 2014)

13. A purchased a lot in Makati in 1980 at a price of P1M, which has been leased to B, a domestic corp. owned 99% by A. In 2007, A exchanged his Makati property for shares of stocks of B which BIR confirmed as a tax-free exchange of property for shares of stock and subsequently sold his entire stockholdings in B to C for P300M In view of a tax advice, A paid only the CGT of P29,895,000 (P100,000 x 5% + P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (35% on P299M gain from sale of real property) After evaluating the CGT payment, RDO wrote a letter to A, stating that he committed tax evasion. Is the contention of the RDO tenable? (2009 Bar Exam)

 No. The exchange of the real state property for the shares of

stocks is considered as a legitimate tax avoidance scheme (Sec. 40[C2)]  The sale of the shares of stocks of domestic corp., which is a

capital asset, is subject to a final tax of 5% on the 1st P100K and 10% on the amount in excess of P100K Sec. 24 [C] NIRC). Therefore A did not commit tax evasion  Note: The subsequent transaction after the tax-free exchange

transaction is in reality a taxable transaction since Sec. 40(C)(2) is merely a deferment of recognition of income  It is tax free for as long as property remains with the corp.

established under Sec. 40 (C)(2) but the moment the corp. sells the same it is already subject to 6% CGT if what was sold is a capital asset or the 30% regular corporate income tax if what was sold is an ordinary asset

14. TPC, a VAT entity engaged in business of power generation and sale of electricity, filed a claim for refund of its unutilized input VAT under Sec. 112 of NIRC CTA rendered a decision partially granting TPC’s claim. On its Petition for Review with SC, TPC claims that it is entitled to the full amount of tax refund or credit. On the other hand, CIR contends that TPC’s claim for refund should fail since it is still liable for deficiency VAT for its sales of electricity to some companies which were denied VAT zero-rating

Can the tax refund claimed by TPC be offset with liability for deficiency VAT?

 No. While as a rule, taxes cannot be subject to compensation

because the gov’t. and taxpayer are not creditors and debtors of each other, the Court have allowed the offsetting of taxes where the determination of the taxpayer’s liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes under Sec. 229 of NIRC  TPC filed a claim for tax refund or credit under Sec. 112 of

NIRC, where the issue to be resolved is whether TPC is entitled to a refund or credit. Since it is not a claim for refund under Sec. 229 of the NIRC, the correctness of TPC’s VAT returns is not an issue  Thus, offsetting of taxes cannot be allowed in the instant case

(CIR vs. Toledo Power Co., G.R. No. 196415, Dec. 2, 2015)

 Note: Sec. 112 of the Tax Code that refers to refund of input

tax attributable to zero rated sales is not considered refund of an erroneous tax since refund of the same is a matter of right  Refund of erroneously paid taxes falls under Sec. 204 and Sec.

229 of NIRC

15. BIR sent a letter to P asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123M P protested the demand for payment of tax liabilities stating that it has pending claims for VAT input credit/ refund for taxes it paid for the years 1989 to 1991 in the amount of P120M plus interest, thus, these claims for refund should be applied against the tax liabilities. Are taxes subject to set-off?

 No. A distinguishing feature of a tax is that it is compulsory

rather than a matter pf bargain, thus a taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the gov’t. or that collect of tax is contingent on the result of lawsuit it filed against the gov’t.  P’s theory that would automatically apply its VAT input credit/

refund against its tax liabilities can easily give rise to confusion and abuse, depriving the gov’t. of authority over the manner by which taxpayer credit and offset their tax liabilities  Thus, P cannot set off his claim for refund to his tax liability

(Philex Mining Corp. vs. CIR, G.R. No. 125704, Aug. 25, 1998)

16. Can an assessment for a local tax be the subject of set-off or compensation against a final judgment for a sum of money obtained by a taxpayer against the local gov’t. that made the assessment?  No. Taxes and debts are of diff. nature and character  Taxes are assessed or the obligation of the taxpayer arising

from law while the money judgment against the gov’t. is an obligation arising from contract, whether express or implied  Inasmuch as taxes are not debts, it follows that the 2

obligations are not susceptible to set-off or legal compensation  Hence, no set-off or compensation between the 2 diff. classes

of obligations is allowed (Francia vs. IAC, G.R. No. L-567649, June 28, 1988)

17. On various dates, certain municipalities of Laguna province issued resolutions through their respective municipal councils granting franchise in favor of MERALCO for the supply of electric light, heat and power within their concerned areas. After the LGC took effect, the province enacted an ordinance imposing a franchise tax on businesses enjoying a franchise. On the basis thereof, the Provincial Treasurer sent a demand letter to MERALCO for the corresponding tax payment. MERALCO assails the constitutionality of the said ordinance. Is the imposition of franchise tax under the assailed ordinance violative of the non-impairment clause of the Constitution?

 No. The non-impairment clause of the Constitution can rightly

be invoked in contractual tax exemptions agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws in which the gov’t. acting in its private capacity, sheds its cloak of authority and waives its governmental immunity  These contractual tax exemptions 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 nonimpairment clause of the Constitution  Art. XII, Sec. 11 of the 1987 Constitution is explicit that no

franchise for the operation of a 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

 Considering that the franchise granted to MERALCO is not

strictly contractual in nature and thus falls outside the purview of the non-impairment clause, the imposition of franchise tax was valid (MERALCO vs. Province of Laguna, G.R. No. 131359, May 5, 1999)  Note: What constitutes as an impairment of obligations of

contracts is the revocation of an exemption which is founded on a valuable consideration, because it takes the form and essence of a contract (Manila Railroad Co. vs. Insular Collector of Customs, 12 PHIL 146, 1915)

18. X Corp. relied on the implementing gen. circular issued by CIR in w/holding 30% of ½ of rentals it paid for use of films. After 3 years of relying on said circular, the CIR revoked the same for being “erroneous for lack of legal basis” by issuing a new circular which based the tax prescribed on the gross income instead of on half of the income. X was issued an assessment for the deficiency. As counsel for X, what legal action would you take?

 I would contest the validity of retroactive application of the

new circular  Tax code provides that any revocation, modification or reversal

of any of the rule and regulations or any rulings or circulars promulgated by the CIR shall not be given retroactive application if it will be prejudicial to the taxpayers  In the interest of justice and fair play, rulings and circulars

promulgated by the CIR have no retroactive application where to so apply them would be prejudicial to taxpayers, who relied in good faith and religiously complied with no less than a circular issued by the highest official of the BIR and approved by the Sec. of Finance (ABS-CBN Broadcasting Corp. vs. CTA G.R. No. L-52306, Oct. 12, 1981)

19. X Corp. is engaged in insurance business. Part of its activities is lending money to its policy holders. CIR imposes addl percentage tax on the said activity because the former believes “X” is also a lending investor. Is the tax official correct?  No, when a co. is taxed on its main business, it is no longer

taxable further for engaging in an activity or work which is merely a part of incidental to and is necessary to its main business  To require X to pay addl percentage tax fixed again for an

activity which is necessarily a part of the same business, CIR must prove that there is a law expressly requiring X such addl payment of tax because unless a stature imposes a tax clearly, expressly and unambiguously what applies is the equally well settled rule that imposition of tax cannot be presumed

 (CIR vs. The Philippine American Accident Insurance Co., Inc. et.

Al, G.R. No. 141658, March 18, 2005)  Note: A statute will not be construed as imposing a tax unless

it does so clearly, expressly and unambiguously.  As a consequence, in case of doubt, the statute is to be

construed most strongly against the gov’t. and in favor of the taxpayer CIR vs. CA, CTA, ADMU, G.R. No. 115349, Apr. 18, 1997)

20. 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 the school run by the church itself. The southeastern side by some commercial establishments, while the rest of the property, in particular, the northwestern side, is idle or unoccupied. May the church claim tax exemption on the entire land?  No, the portion of the land occupied and used by the church,

convent and school run by the church are exempt from real property taxes while the portion of the land occupied by commercial establishments and the portion which is idle are subject to real property taxes. Usage or property and not ownership is the determining factor whether or not the property is taxable (Lung Center of the Phils. vs. Quezon City, G.R. No. 144104, June 29, 2004)

21. Mactan-Ceby Int’l is a GOCC which operates the Mactan Int’l Airport and Lahug Air Port. Under its charter, RA 6958, it was exempted from RPT. Cebu City however assessed it for RPY on the theory that tax exemption of the MCIAA was deemed withdrawn by LGC. Should the MCIAA pay RPT?  Yes, last paragraph of Sec. 234 of LGC unequivocally withdrew

upon its effectivity, exemptions from payment of RPT granted to natural or juridical persons including GOCCs except as provided in said section  Since Petitioner is undoubtedly a GOCC, it follows that its

exemption from such tax granted it in Sec. 14 of its Charter, RA 6958, has been withdrawn.

 As a GOCC, it does not enjoy automatic exemption from

taxation.  Thus, when the LGC withdrew its tax exemption and required it

to pay RPT, it should undoubtedly pay the tax (Manila Int’l Airport Authority vs. City of Paranaque, G.R. No. 155650, July 20, 2006)  Note: The decision rendered in 1996 by the SC considering

Mactan Cebu Int’l Airport Authority as GOCC was already reversed in 2015 by SC in the case of MCIAA vs. Lapu Lapu City and just like MIAA, they are both not gov’t instrumentalities exempted from RPT under Sec. 234 of RA 7160

22. XYZ entered into an alleged stimulated sale of a 16 story commercial building. XYZ authorized A, its President to sell the building and the 2 parcels of land on which the building stands. A purportedly sold the property for P100M to B who in turn sold the same property on the same day to QRS for P200M evidenced by Deed of Absolute Sale notarized on the same day. For the sale of property to QRS , B paid CGT of P10M. BIR sent an assessed deficiency income tax arising from sale alleging that XYZ evaded the payment of higher corporate income tax of 35% with regard to the resulting gain. Is the scheme perpetuated by A, a case of tax evasion or tax avoidance?

 It is a tax evasion scheme. It is resorted to by X in making it

appear that there were 2 sales of the subject properties i.e. from XYZ to B and then B to QRS cannot be considered a legitimate tax planning (one way of tax avoidance)  Such scheme is tainted with fraud. In this case, it is obvious

that the objective of sale to B was to reduce the amount of tax to be paid especially that the transfer from the objective of sale to B was to reduce the amount of tax to be paid especially that the transfer from him to QRS would then subject the income to only 5% individual CGT and not the 35% corporate income tax (CIR vs. Benigno Toda Jr., G.R. No. 147188, Sept. 14, 2004)

23. Discuss the nature of tax amnesty. Can the withholding agents with respect to their withholding tax liabilities availed of tax amnesty?  No. Under RA 9480, they are specifically excluded from the

coverage of the tax amnesty program. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the gov’t.  Liability for the tax remains with the taxpayer because the gain

was realized and received by him  Since liability for tax belongs to the taxpayer and not to the

withholding agent, only the former may avail of the tax amnesty (LG Electronics Phils., Inc. vs. CIR, G.R. No. 165451, Dec. 3, 2014)

24. The City of Manila entered with LBP 2 loan agreements to finance the redevelopment of a public plaza. However, a group of residents led by C, invoking their right as a taxpayer, filed a complaint against LBP and various officers of the City, assailing the validity pf the subject loans and praying that the commercialization of public plaza be enjoined. Does C have the right to institute taxpayer’s suit?

 Yes. Taxpayer is allowed to sue if: 1)Public funds derived from

taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and 2)Petitioner is directly affected by the alleged act  In this case, proceeds from subject loans had already been

converted into public funds by the City’s receipt. Funds coming from private sources become impressed with the characteristics of public funds when they are under official custody  Since public plazas are of public dominion, C need not to be

privy to the loans. As long as taxes are involved, people have a right to question the contracts entered unto by the gov’t. (Land Bank of the Phils. Vs. Cacayuran, G.R. No. 191667, Apr. 17, 2013)

25. Y corporation engaged the services of the M law firm in 2010 to defend the corporation's title over a property used in its business. For the legal services rendered in 2015, the law firm billed the corporation only in 2016. Y corporation claimed that since it is using the accrual method, said expense could only be claimed as a deduction from gross income in its 2016 return, because the exact amount of the expense was determined only in 2016. Is Y's claim proper? Reasons.

 No. The expense is deductible in the year all the requisites for

the all-events test were complied with. The test is considered met if the liability is fixed and the amount of such liability can be determined with reasonable accuracy.  From the nature of the claimed deductions and the span of

time during which the firm was retained, Y can be expected to have reasonably known the amount of the fees charged by the firm. Hence, deduction should have been claimed in 2015 and not 2016 (CIR vs. Isabela Cultural Corp., G.R. No. 172231, Feb. 12, 2007)  Note: In accrual method of accounting, income is reported in

the year it is earned while expense is deducted in the year it is incurred regardless of receipt or disbursement of cash. In cash method of accounting, income is reported in the year payments are received while expenses are deducted in the year paid (2 DIZON, Taxation Law Compendium 2015 p. 1006)

26. Ms. A is the loyal store keeper of Mrs. Z who had the habit of granting small loans to her employees at 0% interest. Ms. A obtained a loan amounting to P90K from Mrs. Z in 2016, because Mrs. Z won in the lottery and in consideration of her loyal service and assistance in making Mrs. Z’s business bloom, Mrs. Z decided to condone the entire amount. Ms. A soon received an assessment from the BIR which included the P90K in her gross income because it is compensation income.

Is the BIR correct?

 Yes. NIRC provides in Sec. 32(A)(1) that gross income includes

compensation for services in whatever form paid. This includes any condonation of a debt.  Considering that the condonation was made in consideration

of Ms. A’s loyal service and assistance in Mrs. Z’s business, the same was granted as a form of compensation covered by gross income.  Thus, BIR’s assessment covering the P90,000 condonation is

correct.

27. ABC Corp. paid insurance premiums on the life insurance policy of Mr. Cruz, the head of its human resource dept. with the company as its beneficiary. Are the insurance premiums subject to compensation income?  No. Sec. 33 of the Tax Code imposes a final tax on life insurance

premiums in excess of what the law allows.  Since Mr. Cruz is a managerial employee, whose life was

insured for the benefit of the company, the life insurance premiums are not subject to compensation income but to a final tax on fringe benefits.

28. Dr. N purchased a parcel of land in 1997 for P10M. Having no productive use for it, he sold it for P8M in 2017. BIR sent him an assessment for CGT arising from sale of said property, which he contested for the reason that no gain had been derived, and there was instead a loss. Is Dr. N correct?  No. In Sec. 24(D) of the NIRC, the CGT is imposed on “gains

presumed to have been realized.” This is known as Gain by Legal Fiction and is recognized by our jurisdiction even though no gain may actually have been realized.  Even though Dr. N incurred a loss from the sale of his real

property, under the law he is still presumed to have derived some gain from the sale thereof.  Hence, the 6% CGT is still demandable from him.

29. Y, A Japanese citizen, regularly visits the PH and stayed with his relatives “on and off” for a period of 200 days in 2015. Despite the fact that he is merely a regularly visiting tourist and is in no way engaged in trade or business, he still earned money from the Philippines. His cousin, a lawyer, told him that he have to declare income earned from within the PH and pay the corresponding taxes. His cousin helped him prepare his tax return and claimed the appropriate deduction as a Non-Resident Citizen not engaged in Trade or Business.

Is the BIR correct?

 No. As a non-resident citizen not engaged in trade or business,

who has resided in the PH for an aggregate period of more than 180 days for the taxable year, Y is by operation of law deemed a “nonresident alien doing business in the PH” and is taxable as such.  Given that he stayed in the PH for an aggregate period of 200

days, he is declared by Sec. 25 (A)(1) to be subject to income tax in the same manner as an individual citizen and a resident alien thus entitled to deductions.  Y can claim the corresponding deductions

30. While in Manila, Ms. A, a non-resident Korean citizen sold her house and lot in Seoul to Mr. X for P5 Million. Upon the agreement of the parties, Mr. X should pay up front in full amount. BIR considered the P5 Million as income derived within the PH since it was made in Manila thus subject to 25% gross income tax. Is the BIR correct?

 No. Under the Tax Code, a NRA-NETB is taxable for the entire

income received from all sources with the PH. Here, the source of income is derived from the sale of real property.  Following the concept of situs of taxation, income derived from

sale of real property is considered as income within the PH if such property is located in the PH.  Considering that the subject property is outside of the PH and

the corresponding income is from sources without the PH, the income is not taxable.

31. J Corp. grants all its employees 5% discount of the purchase price of its products. During an audit investigation made by the BIR, the BIR assessed the corp. for failure to withhold the corresponding tax on the amount equivalent to the courtesy discount received by all the employees, contending that the courtesy discount is considered as addl compensation for the R&F employees. J Corp. contends that the amount is considered as de minimis benefits and should not be taxed. Is there legal basis for the assessment by the BIR?

 Yes. RR 5-2011 enumerates the de minimis benefits exempt

from taxation  The list is an exclusive list. All other benefits given by

employers which are not included in the enumeration shall not be considered as de minimis benefits hence, shall be subject to income tax as well as withholding tax on compensation income.  Since courtesy discount is not one of the benefits provided

under the said enumeration, the same is taxable (RR 5-2011, Sec. 1)

32. A tax assessment was sent to Mr. A, an employee of XYZ Co. earning minimum wage. In addition, XYZ granted Mr. A an apartment unit amounting to P90K, near the premise of the former for its convenience. BIR, in interpreting RA 9504 (exempting MWE receives income from whatever source other than his wages in excess of the P82K threshold for other benefits, such person would transcend as a R&F subject to income tax. The BIR Officer contends that Mr. A is not exempted to pay income tax since he falls squarely on the said BIR ruling. a. Is BIR ruling valid? b. Is Mr. A liable to pay income tax? c.

Assuming that in the middle of 2015, Mr. A was granted increase in wages higher than the minimum wage, is he still exempt from payment of income tax for year 2015?

a. No. In Soriano vs. Sec. of Finance (2017), Court ruled that the

proper interpretation of RA 9504 is that it imposes taxes only on the taxable income received in excess of minimum wage but MWEs will not lose their exemption as such. They remain MWEs entitled to exemption but the taxable income they received other than as MWEs may be subjected to appropriate taxes In this case, there is a clear legislative intent to exempt MWE who earns addl income on top of the minimum wage. Liberal interpretation applies in favor of the grantee and against the gov’t. (Soriano vs. Sec. of Finance, G.R. No. 184450, Jan. 24, 2017)

b. No. If the benefits furnished by the employer are for its

convenience, or is necessary for its trade or business, these benefits are not income on the part of the employee. The lodging, being a supplement, provided by XYZ to Mr. A inures for the convenience of XYZ. The P90K worth of lodging does not form part of income of Mr. A. Thus, Mr. A is exempted to pay income tax since he is a Minimum Wage Earner. c.

No. When one is an MWE during a part of the year and later earns higher than the minimum wage and becomes a nonMWE, only earnings for that period when one is a non-MWE is subject to tax. Improvement of one’s lot, however, cannot justly operate to make the employee liable for tax on income earned as an MWE.

 Note: The proper interpretation of RA 9504 is that it imposes

taxes only on the taxable income received in excess of the minimum wage but the MWEs will not lose their exemption as such.  Workers who receive the statutory minimum wage remain

MWEs. The receipt of any other income during the year does not disqualify them as MWEs.  They remain MWEs, entitled to exemption as such but the

taxable income they receive other than as MWEs may be subjected to appropriate taxes.

33. Mr. X, a Canadian citizen, was employed by Kimchi Inc., a multinational co. engaged in food industry and designated him at the regional headquarter in the PH. What is the appropriate tax rate?  On the assumption that Mr. X holds managerial and technical

positions in the said establishments, he is subject to 15% final income tax (RR 02-98)  The term “technical position” is limited only to positions which

are: a. highly technical in nature b. where there are no Filipino who are competent, able and willing to perform the services for which aliens are desired (RMC 41-2009)  However, if Mr. X is a Rank & File employee, he is subject to

graduated rate of 5% to 32% as a resident alien or he is a NRANETB, the 25% gross income tax shall apply

34. May a corporation, domestic or resident foreign, registered with the BIR in the year 2015 be held liable for income tax even if it is sustained a net loss during the taxable period?  Yes. A MCIT of 2% of the gross income is imposed on a

domestic and resident foreign corp. beginning on the 4th taxable year immediately ff. the year in which such corp. commenced its business operations (NIRC, Secs. 27 (E)(1) and 28(A)(2)). Thus, even if the deductible expense exceed gross income, the corp. is still liable for the MCIT  Note: Corps. that were registered in 1994 and earlier years are

covered by MCIT beginning Jan 01, 1998; Corps. which were registered with the BIR in 1998 and the succeeding years will be covered by MCIT after the lapse of 3 calendar years (i.e.2002)

35. ABC Inc., a domestic corp. reported net loss in its 2010 ITR. It paid MCIT amounting to P100K. ABC reported a net loss in its 2011 ITR. The MCT for 2011 amounted to P150K. May ABC Inc. deduct the amount paid as MCIT for 2010 so that it would only pay P50K for 2011?  No. Under Sec. 27(E)(2) of the Tax Code, any excess of MCIT

over the normal income tax shall be carried forward and credited against the normal income tax  Thus, the excess MCIT carried from the previous taxable year

cannot be credited against the current taxable year’s income tax if the corporation is only liable for MCIT

36. Z Films Denmark, a corp. based in Denmark, leased its film Bjorn Legacy to SC Corp. in PH for showing. BIR sought to collect 25% tax imposed by NIRC but Z films sought to reduce its tax liability invoking deductions in NIRC. May Z file claim deductions?  No. NIRC provides for special rates for Special Non-Resident

Foreign Corps such as Z films. In its case as Cinematographic Lessor, Sec. 28(B)(2) of the NIRC provides a tax of 25% of its gross income from all sources within the PH.  Given that the tax imposed on corporation’s gross income, Z

films cannot claim deduction since gross income taxation deals with the whole income of the taxpayer without considering the deductions.  Thus, the 25% is to be imposed on the total gains of Z films

from PH Sources

37. YMCA is a non-stock, non-profit institution organized exclusively for charitable purposes. It leases out portion of its premises to small shop owners like restaurants and canteen operators and from parking fees collected from nonmembers. YMCA utilizes the receipts from rentals exclusively in furtherance of its charitable purposes. Are the rentals exempt from income tax?

 No. While YMCA may qualify as a corporation exempt from

income tax as a “civic league or organization not organized for profit but operated exclusively for the promotion of social welfare under Sec. 30 (G) of the Tax Code, the rentals are still subject to income tax pursuant to the last paragraph of said Section, to wit:  “Notwithstanding the provision in the preceding paragraphs,

income of whatever kind and character of the foregoing organization from 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 (CIR vs. CA, G.R. No. 124043, Oct. 14, 1998)

38. X Inc. is a hospital organized as a non-stock and nonprofit corporation. Hospital caters not only non-paying patients but also those who are willing to pay for their service. BIR assessed X Inc. for deficiency income tax. It argued that since X Inc. accommodates paying patients, the 10% preferential tax rate on income of proprietary non-profit hospitals should apply and removing the tax exemption granted under Sec. 30(E) and (G). Is BIR correct?

 No. X Inc. is subject to 10% income tax insofar as its revenues

from paying patients are concerned. To be clear, for an institution to be completely exempt from income tax, Sec. 30(E) and (G) of NIRC require said institution to operate exclusively for charitable or social welfare purpose  But in case an exempt institution under Sec. 30(E) or (G) of the

said Code earns income from its non-profit activities, it will not lose its tax exemption  However, its income for profit activities will be subject to

income tax at preferential 10% rate pursuant to Sec. 27(B) CIR vs. St. Luke’s Medical Center Inc., G.R. No. 203514, Feb. 13, 2017)

39. Air Canada is a foreign corp. and an offline int’l air carrier engaged in selling airline tickets in the PH through Aerotel Ltd. Corp. as its general sales agent On the assessment made by the BIR, Air Canada claims that the regular corp. income tax does not apply to “international carriers” because the income it derived from sale of airline tickets was income from services and not income from sales of personal property Is Air Canada subject to income tax?

 Yes. An offline int’l air carrier (IAC) selling passage tickets in the

PH through a local general sales agent is considered a resident foreign corp.  A resident foreign corp. refers to a foreign corp. engaged in

trade or business in the PH. Applying the doctrine in CIR vs. British Overseas Airways Corp., an int’l air carrier with no landing rights in the PH is a resident foreign corp. if its local sales agent (“agent”) and issues tickets in its behalf.  In the IRR of Rep. Act No. 7042, doing business includes

appointing representatives or distributors, operating under full control of the foreign corp. (Air Canada vs. CIR, G.R. No. 169507, Jan. 11, 2016)  Note: If IAC maintains flights to and from PH, it shall be taxed

at 2 ½ of Gross Phil. Billings, while IAC that don’t have flights to and from PH but earns income from other activities in PH will be taxed at 30% rate

40. JJ Corp. together with Mr. Song, Ms. Ji, Ms. Hyo, resident citizens, formed X Joint Venture to engage in the construction business. X Joint Venture profited P100M during its 1st year of operations. Mr. Song, Ms. Ji, Ms. Hyo and JJ Corp. divided the earnings equally. a. Discuss the tax implications b. Assuming that X Joint Venture is engaged in food business

and not in construction. Will your answer be the same?

a.

X joint Venture us not subject to corporate tax because it is not considered as corp. under Sec. 22 of NIRC. Song, Ji, and Hyo’s shares are not subject to the 10% final tax on dividends but to the graduated rates for individual taxpayers while JJ Corp’s. share is subject to the corporate income tax of 30%

b. No. In this case, X Joint Venture will be subject to the 30%

corporate income tax. Likewise, when income is distributed the same shall be considered as dividends. Accordingly, Mr. Song, Ms Ji and Ms. Hyo’s shares are subject to the 10% final tax on dividends while JJ Corp. shall be exempt because it received the same from a domestic corp.

41. M Drug Corp. granted a total of P2M of Senior Citizen discounts out of its P40M profits in taxable year 2006. It attempted to claim the P2M amount as a tax credit resulting in a P10M tax liability. BIR, however, countered this saying that the P2M is a tax deduction rather than a tax credit, resulting in a tax liability of P11.4M based on the Corporate Rate of 30% Is BIR Correct?

 Yes. Under RA 9997 or the Expanded Senior Citizen Act of

2010, the senior citizen discounts are considered as a tax deduction rather than a tax credit  Tax credit reduces the taxpayer’s liability, compared to a

deduction which reduces taxable income upon which tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed.  As such, the amount of P2M must first be deducted from the

taxable income before the corporate rate of 30% is to be applied.  Thus, arriving at a tax liability of P11.4M

42. JM Industries Inc., a car manufacturer, leases a land and a factory building owned by LF Realty Inc. JM Industries claimed its rental payments to LF Realty as deductible expenses in its 2012 ITR. BIR disallowed the rental payments as deductible expenses and assessed JM industries for deficiency income tax on the ground of failure to withhold the required amount from the lessor. JM Industries made a request for reconsideration. Pending its request, JM Industries paid BIR the amount of withholding tax corresponding to the rental payments. May JM Industries claim the rentals as deductible expense?

 No. Any amount paid or payable which is otherwise deductible

from, or taken into account in computing gross income shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR (NIRC, Sec. 34(K)).  No deduction will be allowed notwithstanding payments of

withholding tax at the time of audit investigation or reinvestigation/ reconsideration.  Since no withholding of tax was made, JM Industries cannot

claim the rentals as deductible expense (R.R. No. 12-2013, Sec. 2, RMC 63-2013)

43. J Corporation filed its ITR wherein it claimed as advertising expense the amount of P10M, 50% of which was used for the protection of J’s brand franchise for its juice product. CIR disallowed said 50% and assessed the corp. for deficiency income taxes. CIR maintains that the subject advertising expense was not ordinary and thus, not deductible. Decide.

 CIR was correct. To be deductible, an ad expense should not

only be necessary but also ordinary. The deductible expense must meet 2 conditions: First, reasonableness of the amount incurred and Second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or business.  Otherwise, expense must be considered a capital expenditure

to be spread out over a reasonable time. The subject expense for the ad of a single product is inordinately large and is a capital expenditure since it was intended for the maintenance of its goodwill.  Thus, it cannot be considered an ordinary expense deductible

under the Tax Code. (CIR vs. General Foods Inc., G.R. No. 143672, Apr. 24, 2003)

44. Differentiate Net Operating Loss Carry Over (NOLCO) from Net Capital Loss Carry Over (NELCO). NELCO

NOLCO NATURE

Excess of capital loss over capital gains

Excess of allowable deductions over gross income

LIMITATION ON THE AMOUNT OF CARRY OVER Amount not to exceed the net taxable income for the year the loss was incurred

No such limitation

ALLOWABLE YEARS TO CARRY OVER

Can be carried over in the succeeding taxable year

Can be carried over the next 3 consecutive taxable years immediately ff. the year of such loss

45. Mr. D, a businessman and a doctor with his own clinic, incurred an aggregate capital loss of P400K for the taxable year 2016. In 2017, he sought to deduct the said loss from his entire gross income of P1.2M. Can he do the same?  No. Sec. 39 (C) of NIRC is clear that losses from sales or

exchange capital assets shall be allowed only to the extent of the gains from such sales or exchanges.  In keeping with the Principle of Matching Costs against

Revenues, capital losses can only be deducted from capital gains.  Given that rule, Mr. D cannot apply the Net Capital Loss Carry-

Over as losses to business gains

46. MLB Corp. owns 100% of JKB Corp. JKB Corp. owns 100% of DDB Corp. DDB Corp. has NOLCO. DDB Corp. is merged into JKB Corp. Will the NOLCO of DDB Corp. be transferred to JKB Corp.?  Yes. NOLCO shall be allowed only if there has been no

substantial change in the ownership of the business in that not less than 75% of the paid-up capital of the corporation is held by or on behalf of the same persons.  The term “by or on behalf of the same persons” shall refer to

the maintenance of ownership despite change as when no actual change in ownership is involved as in the case of merger of the subsidiary into the parent company.

 Prior to the merger, JKB Corp. already indirectly owned DDB

Corp. i.e. DDB’s Corp’s shares were held by JKB Corp. “ on behalf” of MLB Corp.  After the merger, JKB Corp. already directly owns DDB Corp,

the absorbed corp., which continues to exist in JKB Corp.  Hence, the NOLCO of DDB Corp. should be retained and

transferred to JKB Corp. (R.R. No. 14-2001)

47. X took out a life insurance policy on his own life in the amount of P2M. He designated his wife Y as irrevocable beneficiary to P1M and his son Z to the balance of P1M but in the latter designation, reserving his right to substitute him for another. X died and his wife and son went to collect the proceeds of the life insurance policy. Are the proceeds of the insurance subject to income tax?  No. The law explicitly provides that the proceeds of life

insurance policies paid to the heirs and beneficiaries upon the death of the insured are excluded from gross income and is exempt from income taxation.  Proceeds of life insurance received upon the death of the

insured constitute a compensation for the loss of life, hence a return of capital, which is beyond the scope of income tax (Tax Code, Sec. 32 (B)(1)

48. L is a known advocate for cultural preservation in the PH. Without action on his part, he was selected as recipient of a cash award in recognition of his cultural achievement. Is the cash award excluded from L’s gross income?  No. The exclusions from gross income under Sec. 32(B)(7)(c) of

the Tax Code only cover prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement.  L’s award in recognition of his cultural achievement is not

covered. Hence, his cash award shall form part of his taxable income.

49. May an asset originally classified as ordinary asset be reclassified into a capital asset?  As a general rule, a property purchased for future use in the

business, even though this purpose is later thwarted by circumstances beyond the taxpayer’s control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of active use of property, change its character previously established as a business property (R.R. No. 7-2003, Sec. 3(a)(4)).  However, Sec. 3(e) of RR No. 7-2003 provides that properties

classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing proof that the same have not been used for more than 2 years prior to consummation of taxable transactions involving …

 … properties (BIR Ruling No. 142-2011, May 04, 2011)  The conversion of assets from ordinary to capital assets is

allowed only if the taxpayer is not engaged in real estate business.

50. Differentiate Capital Gain from Ordinary Gain. CAPITAL GAIN

ORDINARY GAIN AS TO SOURCE

Derived from property not used in trade or business

Derived from property used in trade or business

AS TO ADJUSTMENT Can be adjusted by the holding period

Not adjusted

AS DEDUCTIBILITY OF ORDINARY LOSSES Ordinary losses may be deducted from certain types of capital gains

Only ordinary losses may be deducted from ordinary gains

51. Cite the rules on capital gains and losses from disposition of property.  Holding period – the percentages of gain or loss to be taken

into account shall be the ff.:  100% - if the capital asset has been held for 12 months or less

(short-term assets) and 50% - if the capital asset has been held for more than 12 months (long-term assets). Holding period applies only to individuals (NIRC, Sec. 39 (B))  Non-deductibility of Net Capital Loss (Loss Limitation Rule) –

capital losses are allowed only to the extent of capital gains. Hence, net capital loss is not deductible (NIRC, Sec. 39(C))  This is to ensure the matching of costs against revenues is

consistent with the rule that only business expenses are deductible from gross income. Capital loss is not a business expense.

52. A owns several real properties for rent. Subsequently, he inherited from his mother parcels of land divided into 29 lots which are subject to lease contracts. In addition to his other real properties under lease, the rent from inherited lots was the substantial source of A’s income. 3 years after the expiration of the existing lease contracts, he sold the lots to the respective occupants on installment basis. In his tax return, A treated his income from sale of 29 lots as capital gains and paid the corresponding CGT. Is the tax paid by A correct?  No. Income from sale of lots should be considered as ordinary

income. Transaction involves transfer of ordinary asset since the lots formed part A’s rental business. Thus, it is not subject to CGT. (Tuason Jr. vs. Lingad, GR. No. L-24248, July 31, 1974)

53. J voluntarily surrendered several properties to the Rep. of the Phils. Pursuant to its mandate, PCGG scheduled the disposal of said properties to private individuals through a public bidding. Is the transfer of properties by PCGG to private individuals in a sale at public auction subject to CGT?  No. Sec. 32(B)(7)(b) of the Tax Code expressly excludes from

gross income and exempts from income tax, income derived from the exercise of any essential governmental function accruing to the Gov’t. of the Phils. or to any of its political subdivisions.  Since the subject properties are presumptively owned by the

Rep. of the Phils. and the said PCGG is mandated by law to dispose of these properties, the sale at public auction of these properties is exempt from CGT (BIR Ruling No. 360-2014)

54. Ms. U inherited an agricultural land from her deceased father. She subdivided the land into lots and introduced improvements such as good roads, concrete gutters, drainage and lighting system to make the lots saleable. Soon after, lots were sold to the public for profit. Is the sale subject to CGT?  No. Sale of inherited real property usually gives capital gain or

loss even though the property has to be subdivided or improved or both to make it saleable. However, if the inherited property is substantially improved or very actively sold or both, it may be treated as held primarily for sale to customers in the ordinary course of the heir’s business (Calasanz vs. CIR, GR. No. L-26284, Oct. 8,1986)  Improvements introduced by Ms. U are considered substantial

which effectively converted the real property from capital into ordinary asset. So, sale of lots is not subject to CGT.

55. Distinguish subject of Capital Gains Tax on the sale of real properties by an individual and a corporate taxpayer. TAXPAYER

CAPITAL GAINS TAXABLE

a. Citizen (Resident or Nonresident) Sec. 24 (D)(1), NIRC

Capital gains presumed to have been realized from sale, exchange or other disposition of real property located in the PH, classified as capital assets

b. Resident Alien Sec. 24 (D)(1), NIRC

Capital gains presumed to have been realized from sale, exchange or other disposition of real property located in the PH, classified as capital assets

c. NRAETB or not within the PH Sec.25 (B), NIRC

Capital Gains realized from sale, exchange or other disposition of real property

TAXPAYER

CAPITAL GAINS TAXABLE

d. NRAETB or not within the PH Sec.25 (B), NIRC

Capital Gains realized from sale, exchange or other disposition of real property

Domestic Corporation Sec. 27 (D)(5), NIRC

Gains presumed to have been realized on the sale, exchange or other disposition of lands and/or buildings which are not actually used in the business of a corp. and are treated as capital assets. NIRC does not impose the 6% CGT on gains realized from sale of machineries and equipment (SMI-Ed PH Tech., Inc. vs. CIR, GR No. 175410, Nov. 12,2014)

56. X Co., a PH corporation, sold through the local stock exchange 10,000 PLDT shares that it bought 2 years ago. It sold the shares of P2M and realized a net gain of P200,000. Determine the tax liability of X Co.  X Co. is liable for stock transaction tax amounting to P12,000

which is 6/10 of 1% or .006 of the gross selling price or gross value in money (P2M) of shares sold. This used to be ½ of 1% or .005 before the TRAIN law was passed  Before the TRAIN law, if shares are not traded through local

stock exchange, 5% of net capital gains (not over P100K) and 10% of net capital gains (in excess of P100K) shall be imposed  After the TRAIN Law, CG from sale of shares of stock not traded

in the local stock exchange is now subject to 15% final tax

57. 6 Foreigners were employed in the US Naval Base in the PH. They refused to file their ITR claiming that they cannot be considered resident aliens required to file ITR. On the other hand, BIR contended that even if exempt from paying income tax, said aliens were not excused from filing ITR. Are they required to file ITRs?  Yes. What the law requires is merely physical or bodily

presence in a given place for a period of time, not a the intention to made it a permanent place of abode. An alien present in the PH who is not a mere transient is a resident of PH for purposes of income tax.  Whether he is a transient or not is determined by his

intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient. (Garrison vs. CA, GR. Nos. L4450105, July 19, 1990)

58. Discuss the Kinds of Withholding Taxes  Withholding of final tax on certain incomes – tax prescribed

on certain income payments and is not creditable against the income tax due of the payee on other income subject to regular rates of tax for the taxable year (i.e. final tax of 20% on royalties) Note: Under the FWT system, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income due from the payee on the said income. The liability for payment of the tax rates primarily rests on the payor as the withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, deficiency tax shall be collected from the payor/ withholding agent. Paye is not required to file an ITR of that particular income (RR No. 2-98, Sec. 25(A), Par. (1))

58. Discuss the Kinds of Withholding Taxes – cont.  Creditable Withholding Tax – Withholding taxes on ordinary

business income which is still subjected to income tax and therefore, it is deductible as tax credit (i.e. income derived from the exercise of a profession)

59. G, a domestic corp. increased its authorized capital stock. R Co., a foreign co. solely subscribed all the preferred shares of G. The Board of Directors of G authorized the redemption of the said preferred shares. R withheld and remitted to the BIR the amount representing 15% FWT computed based on the difference of the redemption price and aggregate par value of the shares. Claiming exemption from the payment of the 15% FWT based on the US-RP Tax Treaty, R filed a claim for refund with the BIR. However, the same was denied.

Was the gain derived by R subject to 15% FWT on dividends?

 No. The FWT of 15% is imposed on dividends received from a

domestic corp. by a nonresident foreign corp. (Sec. 28(B)(5)(b)).  The term “dividends” mean any distribution made by a

corporation to its shareholders out of its earnings of profits.  The amounts paid to R was not in the nature of a recurring

return of stock, but rather a payment for the redemption of the preferred shares (CIR vs. Goodyear Phils. Inc., GR No. 216130, Aug. 03, 2016)

60. ING Bank was assessed by the BIR for deficiency withholding tax on compensation for the year 1996 and 1997. ING insists that the bonus accruals in 1996 and 1197 were not yet subject to w/tax because these bonuses were actually distributed only in the succeeding years of their accrual (i.e. in 1997 and 1998) when the amounts were finally determined. a. Discuss the nature of withholding tax on compensation b. Is the contention of the bank correct?

a.

Under the creditable withholding tax system, the tax on compensation income is withheld at source. The tax withheld is intended to equal or at least approximate the tax due of the payee on the said income. The employer is required to collect the tax by deducting and withholding the amount from the employee’s compensation as when paid, actually or constructively

b. No. The obligation of the payor/employer to deduct and

withhold the related w/holding tax arises at the time the income was paid or accrued or recorded as an expense in the payor/employer’s books, whichever comes first. ING Bank already recognized a definite liability on its part considering that it had deducted as business expense from its gross income the accrued bonuses due to its employees.

b. In this sense, there was already a constructive payment for

income tax purposes as these accrued bonuses were already allotted or made available to its officers and employees. Hence, ING Bank is liable for the withholding tax on the bonuses since it claimed the same as expenses in the year they were accrued (ING Bank N.V. vs. CIR, GR No. 167679, July 22, 2015)

61. C, who had no other means of livelihood other than his fairly recent employment with X Corp., was paying taxes under the System of Substituted Filing. Unbeknownst to C who was very bad at math and had no knowledge of tax laws. X Corp.’s accounting dept. committed an error and a higher amount had been deducted from C’s salary for purposed of paying his taxes of the past 10 months. Upon realizing this, X Corp. immediately sought to rectify the error by filing a refund on behalf of C. Can X Corp. do the same?

 Yes. A Withholding Agent is not only an agent of the gov’t. in

the withholding and collection of taxes but it is also an agent of the taxpayer in the filing of ITR as well as the payment of tax.  Being an agent as well of the taxpayer, it was deemed that the

Withholding Agent also has the legal personality to act on behalf of the taxpayer in the filing of refund for taxes erroneously paid.  As such, X Corp. may file a petition for refund based on the fact

that it is the agent of C as well. (Procter & Gamble Phils. vs. CIR, G.R. No. L-66838, Dec. 2, 1991)

62. On June 30, 2000, X tool out a life insurance policy on his own life in the amount of P2M. He designated his wife Y as irrevocable beneficiary to P1M and his son Z, to the balance of P1M but in the latter designation, reserving his right to substitute him for another. On Sept. 1, 2003 X died and his wife and son went to the insurer to collect the proceeds of X’s life insurance policy. a. Are the proceeds of the insurance subject to income tax

on the part of Y and Z for their respective shares? Explain. b. Are the proceeds of the insurance to form part of the

gross estate of X? Explain.

a.

No. The law explicitly provides that the proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income and is exempt from taxation. Proceeds of life insurance received upon death of the insured constitute a compensation for the loss of life, hence a return of capital, which is beyond the scope of income taxation (Sec. 32 B (1), NIRC)

b. Only the proceeds of 1M given to the son Z, shall form part of

the gross estate of X. Under the Tax Code, proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the amount receivable by the beneficiary designated in the policy of the insurance except when it is expressly stipulated that the designation of beneficiary is irrevocable.

b. As stated in the problem, only the designation of Y is

irrevocable while the insured/ decedent reserved the right to substitute Z as beneficiary for another person. Accordingly, proceeds received by Y shall be excluded while the proceeds received by Z shall be included in the gross estate of X (Sec. 85 (E), NIRC)

63. Is a donation mortis causa to non-stock, non-profit educational institutions exempt from estate tax?  No. Although Art. XIV, Sec. 4(4) of the Constitution provides

that all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax, the foregoing Constitutional provision is not self-executing as it requires legislative enactment providing certain conditions for exemption. Sec. 87 of NIRC does not include non-stock, non-profit educational institutions in the list of exempt institutions, donation to them is thus NOT EXEMPT from estate tax  Note: Sec. 101(a)(3) of NIRC declared that these donations are

EXEMPT from Donor’s Tax

64. X, single but head of the family, Filipino and resident of Pasig City, died intestate on Nov. 15, 2009. He left the ff. properties: House and lot (family home in Pasig) P 800,000 Vacation house and lot in Florida 1,500,000 Agricultural land in Naic, Cavite which he inherited from his father 2,200,000 Car which is being used by his brother in Cavite 500,000 Proceeds of life insurance where he named his estate as irr. Beneficiary 1,000,000 Household furniture and appliances 1,000,000 Claims against a cousin who has assets of P10K and liabilities of P100K 100,000

64. X, single but head of the family, Filipino and resident of Pasig City, died intestate on Nov. 15, 2009. He left the ff. properties – cont.: Shares of stock in ABC Corp., a domestic enterprise Expenses & Charges on estate are as follows: Funeral Expenses Legal fees for settlement of estate Medical expenses of last illness Claims against the estate

P 100,000

P 250,000 500,000 600,000 300,000

65. Compulsory heirs of X approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the ff. questions. a. What are the properties and interests that should be

included in the computation of gross estate of the decedent? Explain. b. What is the net taxable estate of the decedent? Explain.

(2010 Bar Question)

a.

All properties and interest enumerated in the problem should be included in the gross estate of the decedent. The decedent is a citizen of the Phils. and the law requires that the composition in the gross estate of the decedent shall include all kinds of properties wherever situated and to the extent of the interest that he has therein at the time of his death.

b. Net taxable estate of the decedent is P3.7M. From the gross

estate of P7M, the ff. deductions are allowed: 1. Funeral expenses of P200K which is the max allowed by law; 2. Legal fees amounting to P500K; 3.Medical expenses not to exceed P500K incurred 1 year prior to death and substantiated with receipts; 4. Claims against the estate P300K 5. Family home equivalent to its FMV (not to exceed P1M) of P800K and 6. Standard deduction of P1M or a total allowable deduction of P3.3M…

b. Claim against the cousin amounting to P100K although

included in the gross estate cannot be claimed as a deduction because the debtor is not yet declared insolvent. Likewise, the inherited property cannot give rise to a vanishing deduction for want of sufficient factual basis. (Prior to TRAIN Law)

66. Mr. Z inherited an apartment in California, USA from his father. He died within 5 years from the death of his father. The gross estate of his father included said apartment. Despite having shown proof that the estate tax thereon was paid, BIR disallowed the claim for vanishing deduction by the estate of Mr. Z. Is the disallowance in accord with the Tax Code?  Yes. Under Sec. 86 of NIRC, vanishing deduction may be clamed

only if the property is situated in the PH.  Since the apartment in this case is situated in the US, property

cannot be the subject of vanishing deduction  Disallowance was proper

67. Miguel, a citizen and resident of Mexico, donated $1,000 worth of stocks in Barack Motors Corp., a Mexican co., to his legitimate son, Miguelito, who is residing in the Phils. and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property. a.

Is Miguel entitled to claim a dowry exclusion? Why or why not?

b. Is Miguel entitled to the rule of reciprocity in order to be

exempt from the Philippine donor’s tax? Why or why not?

a.

No. Under Sec. 101(A)(1) of the NIRC, dowries or gifts made by a citizen or resident of the PH to the extent of P10,000 is exempt from donor’s tax. Since Miguel is a non-resident alien, he is not entitled to claim a dowry exclusion. (This was removed after the TRAIN law was passed.) Note: In case of dowries made by spouses who are citizens or residents of the PH, each spouse can claim separate exemption in case of their child’s marriage (BIR Ruling No. 670039; Tang Ho vs. Board of Tax Appeals, GR No. L-5949, Nov. 19, 1955)

b. No. As provided under Sec. 104 of NIRC, rule of reciprocity

applies only if the property transferred by non-resident alien is an intangible personal property situated in PH. Rule will not apply because donation is not subject to tax since donor is non-resident alien and property donated is not situated in PH

68. Spouse Jose 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 real property to them. At the time of donation, the real property has a FMV of P2M. 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. (2008 Bar Question) • Yes, because the value of the gift exceeds P10,000 (Sec. 101

(A1), NIRC). However, they are each entitled to a deduction of P100,000 for the net value of the gift (Sec. 99(B), NIRC) • Each spouse shall be liable for a taxable gift worth P890,000

each at the progressive rate of 2-15% since the donee is a relative (Prior to TRAIN Law)

69. A Corp., in a competitive bidding, acquired the Class A shares of B in C Health Care Systems and subsequently applied for an application for a certificate authorizing registration/ tax clearance with the BIR to facilitate transfer of the shares. Thereafter, it was informed that it needed to secure a BIR Ruling in connection with said application due to potential donor’s tax liability and in compliance thereto, A Corp. requested a ruling that the sale was not subject to donor’s tax since there was no donative intent. BIR denied the request on the ground that the sale was subject to donor’s tax under Sec. 100 of NIRC. Did the CIR rule correctly?

 Yes. The price difference between the selling price of the

shares and their book value as contained in the FS is subject to donor’s tax. The absence of donative intent, if that is the case, does not exempt the sales of stock transaction from donor’s tax since Sec. 100 of NIRC categorically states that the amount by which the FMV of the property exceeded the value of the consideration shall be deemed gift.  Therefore, even if there is no actual donation, the difference in

price is considered a donation by fiction of law (Phil. American Life and Gen. Insurance Co. vs. Sec. of Finance and CIR, GR. No. 210987, Nov. 24, 2014)

70. A, Filipino and resident of the PH, wants to give his sister a gift of P200K. He seeks your advice, for purposes of reducing if not eliminating the donor’s tax on the gift, on whether it is better for him to give all of the P200K on Christmas 2001 or to give P100K on Christmas 2001 and the other P100K on January 2002. Please explain your advice. • I would advise him to split the donation. Giving the P200K as a

one time donation would mean that it will be subject to higher tax bracket under the graduated tax structure necessitating payment of donor’s tax • Splitting the donation into 2 equal amounts given on 2 diff.

years will relieve payment of donor’s tax since the 1st P100K donation in the graduated brackets is exempt (Sec. 99, NIRC). While donor’s tax is computed on cumulative donations, aggregation of all donations made by donor is allowed only over 1 calendar year.

71. A is a candidate in the upcoming Senatorial elections. B, believing in the sincerity and ability of A to introduce much needed reforms in the country, contributed P500K in cash to the campaign chest of A. In addition, B purchased tarpaulins, t-shirts, umbrellas, caps and other campaign materials that he also donated to A for use in his campaign. Is the contribution of cash and campaign materials subject to donor’s tax?

• Answer must be qualified. Sec. 99(C) of NIRC explicitly provides

that any contribution in cash or kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by Election Code, as amended • On the other hand, Sec. 13 of Rep. Act No. 7166 specifically

states that any provision of law to the contrary notwithstanding, any contribution in cash or kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to COMELEC shall not be subject to payment of any gift tax • Thus, if B reported his campaign contributions of P500K in

cash, tarpaulins, t-shirts, umbrellas, caps and other campaign materials to the COMELEC, then BIR cannot impose donor’s tax on such contributions. Conversely, if B failed to report these contributions to COMELEC, such contributions would be subject to donor’s tax

72. A non-stock, non-profit school always had cash flow problems, resulting in failure to recruit well-trained administrative personnel to effectively manage the school. In 2010, Don Leon donated P100M to the school, provided the money shall be used solely for paying the salaries, wages and benefits of administrative personnel. Donation represents less than 10% of Don Leon’s taxable income for the year. Is he subject to donor’s tax?

• Yes, because the donation is to be wholly used for

administration purposes. Under Sec. 101 of the NIRC, gifts or donation shall be exempt if made in favor of an educ’al and/or charitable, religious, cultural or social welfare corporation, institution, accredited non gov’t. organization, trust or philanthropic org. or research institution or organization: • Provided, however, that not more than 30% of said gifts shall

be used by such donee for administration purposes. In this case, donation made is to be wholly used for administration purposes which is beyond the 30% limit provided by law to be exempt. Thus, Don Leon is subject to donor’s tax. • Note: Under Sec. 101 of NIRC, to be exempt from Donor’s tax,

it is required that the donee must be duly accredited by PCNC before being accredited by the BIR.

73. 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. BIR determined that there was a taxable gift and thus assesses Mrs. Barbera as a donor. Was the BIR correct?  BIR is not correct in imposing donor’s tax on the renounced

inheritance of Mrs. Barbera from Mr. Barbera. Accdg. to Sec. 11 of RR No. 2-2003: ”General renunciation by an heir, including the surviving spouse of his/her share in the hereditary estate left by the decedent is not subject to donor’s tax, unless specifically and categorically done in favor of identified heirs to the exclusion or disadvantage of other co-heirs in the hereditary estate.”

 On the other hand, BIR is correct in imposing donor’s tax on

the renounced conjugal share of Mrs. Barbera. Sec. 11 of RR No. 2-2003 provides that “renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor’s tax.”  Proceeds from the rule that the share of conjugal property is

the share of the surviving spouse. Thus, surviving spouse is effectively donating property when he or she makes a renunciation.

74. X Co. is engaged in the maintenance and operation of a geothermal power plant. Subsequently, X Co. sold a fullydepreciated Nissan patrol car which was previously used in its operations. CTA found that X Co. was entitled to a refund of its accumulated input tax credits but deducted therefrom the output tax from the sale of Nissan patrol car. X Co. asserts that the sale of said car is an isolated transaction, not made in the course of its business, hence should not be subjected to the 12% VAT. Is the sale of the car subject to VAT? (2014 Bar Question)

 Yes. Under Sec. 105, the phrase “in the course of trade or

business” means the regular 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 of the disposition of its net income and whether or not it sells exclusively to members or their guests), or gov’t. entity  Here, Nissan patrol car was used as part of X Co’s. property,

plant and equipment. Hence, its sale is considered as an incidental transaction which is subject to VAT (Mindanao II Geothermal Partnership vs. CIR, GR. No. 193301, Mar. 11, 2013)

75. G Condominium Corp. is an existing non-stock non-profit association of unit owners. To be able to reduce the association dues being collected from unit owners, the Board of Directors of the corporation agreed to lease part of the ground flr. condominium bldg. to DEF Savings Bank for P120K a month. Is the non-stock, non-profit association liable to VAT? If answer is in the negative, is it liable to another kind of business tax? (2008 Bar Question)

 No. G Condominium Corp. is not subject to VAT because its

gross rental income for the year will be 1,440,000.  Under Sec. 109 (V) of NIRC, sale of lease or goods or properties

or the performance of services where the gross annual sales and/or receipts do not exceed Php1,919,500 shall be exempt from VAT.  However, it would be subject to the 3% percentage tax on its

gross rental income under Sec. 116 of the Tax Code

76. Mr. A is engaged in the business of leasing out residential condominium units, which he owns, in Trump Tower, Makati City. Monthly rental for each unit ranges from P8K – P12K. His gross rental income for 1 year is P3M. He consults you on whether it is necessary for him to register as a VAT taxpayer. What would be your legal advice and why? (2009 Bar Question)  I will advise Mr. A that he is not required to register as a VAT

taxpayer. Under Sec. 109 (1)(Q) of NIRC in relation to RR 162011, lease of residential units with a monthly rental per unit not exceeding P12,800, regardless of the amount of aggregate rentals received by the lessor during the year is exempt from VAT.  Note: If monthly rental is more than P12,800 but aggregate

rental did not exceed Php1,919,500 threshold, taxpayer shall be liable to pay 3% percentage tax under Sec. 116 of NIRC

77. C Corp. is a VAT and PEZA registered domestic corp. engaged in the manufacture of nickel and cobalt located within an ecozone. It filed for a tax credit or refund for its unutilized input tax from its domestic purchases of capital goods, which was not acted upon by CIR. Is Coral Bay Nickel Corp. entitled to the refund of unutilized input taxes incurred before it became a PEZA-registered entity?  No. An ecozone is a foreign territory separate and distinct

customs territory. Accordingly, sales made by suppliers from a customs territory to a purchaser located within an ECOZONE will be considered as exportations.

 Following the PH VAT system’s adherence to the Cross Border

Doctrine and Destination Principle, VAT implications are that “no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority.”  Since the purchases of goods and services by C Corp. that were

destined for consumption within the ecozone is free of VAT, no input VAT was paid on such purchases.  Hence, C Corp. is not entitled to claim a tax refund or credit

(Coral Bay Nickel Corp. vs. CIR, GR. No. 190506, June 13,2016)

78. DBP Inc. is a tax exempt entity which imported high-end computers and office equipment into the PH. After 1 year of use, DBP Inc. sold dome of the said computers to APA Institute of Technologies, a non-exempt entity. Who shall be liable to pay for the VAT? Who shall be entitled to claim the creditable input tax?  APA would be liable for the VAT. Sec. 107(B) states that in case

of tax-free importation of goods into the PH by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the PH to nonexempt persons or entities, the latter shall be considered the importer who shall be liable for any internal revenue tax on the importation.

 When a person who was exempt from VAT on his importation

subsequently sells in the PH such imported article to a nonexempt person or entity, the purchaser will be required to pay the VAT.  Here, APA is the purchaser of the items DBP imported.

Therefore, APA would be liable for the VAT (INGLES, Tax Made Less Taxing [2015], p. 302)

Note: The transfer of goods imported by tax exempt persons or entity is called technical importation.

79. MEDICARD, a HMO, primarily acts as an intermediary between purchaser of healthcare services (its members) and the healthcare providers for a fee. Members may also choose to directly avail the medical services of MEDICARD. 80% of the membership fees were earmarked for medical utilization to be paid to the healthcare providers and the remaining 20% comprises its service fee. Is the total amount actually received by MEDICARD from its members formed part of its gross receipts and thus, subject to VAT?

 No. Gross receipts as defined in Sec. 4.108-4 of RR No. 4-2007

refers to the total amount of money or its equivalent xxx actually or constructively received xxx for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated 3rd party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor.  Accordingly, amounts earmarked and eventually paid by

MEDICARD to medical service providers do not form part of gross receipts for VAT purposes.  As to the 20% service fees, MEDICARD’s sale of its services is

exempt from VAT under Sec. 109(g) of the NIRC (MEDICARD vs. CIR, GR No. 222743, Apr. 5, 2017)

80. C Corp., an affiliate of P Corp., was organized by the latter to perform collection, consultative and other technical services for P Corp. and its other affiliates. BIR issued an assessment against C Corp. for deficiency VAT for the services it rendered. C Corp. contends that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT. It submits that it is operating “only on reimbursement of cost basis, without any profit” and as such it is not liable for VAT. Is C Corp. liable for VAT?

 Yes. Contrary to C’s contention, VAT is a tax on transactions

imposed at every stage of the distribution process even in the absence of profit attributable thereto.  Moreover, Sec. 108 of the NIRC defines the phrase “sale of

services” as the “performance of all kinds of services for others for a fee, remuneration or consideration.”  As long as the entity provides service for a fee, remuneration

or consideration, then the service rendered is subject to VAT (CIR vs. CA, G.R. No. 125355, Mar. 30, 2000)

81. Assuming that you were appointed as the BIR Commissioner. A Sugar Farmers Association Multi-purpose Cooperative requested you to issue a ruling on whether it is exempt from the payment of VAT with regard to the sale of its produce to members and non-members. The cooperative is duly registered with the CDA and it primarily provided the various inputs, capital and technology transfer to its members for production of refined sugars. Decide

 Cooperative is exempt from payment of VAT. For internal

revenue purposes, sale of raw cane sugar is exempt from VAT because it is considered to be in its original state. On the other hand, refined sugar is an agricultural product that can no longer be considered to be in its original state because it has undergone the refining process; its sale is thus subject to VAT.  Although the sale of refined sugar is subject to VAT, such

transaction may qualify as VAT-exempt transaction if the sale is made by a cooperative. Under Sec. 109(1) of NIRC, sales by agricultural cooperatives are exempt from VAT provided the ff. conditions concur, viz: 1. First, seller must be an agricultural cooperative duly registered with the CDA. 2. Second, Cooperative must sell either exclusively to its members or to both members and non-members, its produce, whether in its original state or processed form.

 The second requisite differentiates cooperatives according to

its customers. If the cooperative transacts only with members, all its sales are VAT-exempt, regardless of what it sells.  On the other hand, if it transacts with both members and non-

members, product sold must be the cooperative’s own produce in order to be VAT-exempt.  Cooperative satisfies these requisites in the present case. (CIR

vs. United Cadiz Sugar G.R. Nos. 209776, Dec. 7, 2016)

82. ABC Construction Co. constructs concrete barriers for the ADB Bank in Ortigas Center to prevent car bombs from ramming ADB gates along ADB Ave. in Mandaluyong City. What kind of VAT is it subject to?  Under Sec. 108 (B)(3) of NIRC, the transaction is subject to zero

percent VAT.  ADB is exempt from direct and indirect taxes under a special

law, thereby making the sale of services to by a VAT registered construction company effectively zero-rated.

83. A Call Center operated by a domestic enterprise in Makati handles exclusively the reservations of a hotel chain which are all located in North America. The services are paid for in USD and duly accounted for with the BSP. Discuss the VAT implications.  Under Sec. 108 (B)(3) of NIRC, the transaction is subject to zero

percent VAT.  Zero-rated sales of services includes services rendered to a

person engaged in business outside the PH and consideration is paid in acceptable foreign currency duly accounted for by BSP.

84. A, owner and operator of a hotel, leases a part of the hotel’s premises to PAGCOR. For Jan 1996 to Apr 1997, A incurred VAT from its rental income and sale of food and beverages to PAGCOR. A shifted the said tax to PAGCOR by incorporating it in the amount assessed to the latter but it refused to pay taxes on account of its tax exempt status. However, A claimed that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. Is A correct?

 Yes. Transactions with a VAT exempt taxpayer is subject to zero

rated VAT. While it was proper for PAGCOR not to pay the 10% VAT (now 12%) charged by A, the latter is not liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax.  Such exemption falls within the former Sec. 102 (b)(3) now 106

of the 1977 Tax Code which exempts “services rendered to persons or entities whose exemption under special laws.” (CIR vs. Acesite (Phils.) Hotel Corp., G.R. No. 147295, Feb. 16, 2007)  Note: PAGCOR enjoys a blanket exemption taxes with no

distinction whether taxes are direct or indirect.

85. B inherited from her father a 300sqm lot which is valued at P3M. The lot used to be the place of her father’s car wash business until his death. Now, the lot serves as an ancestral home to B’s family. BIR asserts that the property is subject to VAT. Do you agree?  Yes. Under NIRC, transfer, use or consumption not in the

course of business of goods or properties originally intended for sale or for use in the course of B’s father’s business.  As such, being a product of a transaction deemed sale,

property in question is subject to VAT (Sec. 106 (B)(1), NIRC)

86. S Corp., a VAT registered entity, was granted a preferred pioneer status by BOI. NPC and S Corp. agreed that all electricity generated by S Corp. will be purchased by the NPC. When S Corp. filed a claim for tax refund or credit representing its unutilized excess VAT, the same was disallowed. Tax court based this conclusion on the ground that no commercial sale of electricity had been made in favor of NPC since the project was still under construction at that time and the amount which was paid to S Corp. was equal to the costs for producing the electricity. Is the sale of electricity a transaction deemed sale?

 Yes. In granting the tax benefit to VAT-registered zero-rated or

effectively zero-rated taxpayers, Sec. 112(A) of NIRC does not limit the definition of sale to commercial transactions in the normal course of business.  Conspicuously, Sec. 106(B) of the NIRC, which deals with the

imposition of VAT does not limit the term “sale” to commercial sales rather it extends the term to transactions that are “deemed sale”.  Hence, although all the electricity generated by S Corp. was not

transferred through a commercial sale or in the normal course of business, such transaction is deemed as a sale under the law (San Roque Power Corp. vs. CIR, G.R. No. 180345, Nov. 25, 2009)

87. XYZ co. purchased from the national gov’t. a portion of the Fort Bonifacio Global City. It then submitted to the BIR as an inventory of all its real properties located therein and claimed that it is entitled to a transitional input tax credit. BIR argued that XYZ Co. is not entitled to a transitional input tax credit because no taxes were paid in the acquisition of the subject Fort Bonifacio Global City property. a. Is prior payment of taxes required to be entitled for a

transitional input tax credit? b. Assuming that A co. is entitled to a transitional input tax

credit, is it only limited to the value of the improvement of real properties therein?

a.

No. There is nothing indicated in the NIRC that prior payment is necessary for the availment of a transitional input tax credit. All that is required is for the taxpayer to file a beginning inventory with the BIR. In this case, XYZ co. submitted to the BIR the inventory of all the properties involved. Hence, it can validly claim a transitional input tax credit arising from the purchase of the subject property (Fort Bonifacio Dev’t. Corp. vs CIR, G.R. No. 173425, Jan. 22, 2013)

b. No. Transitional input tax credit includes the value of the

improvement of the real properties as well as the value of the real properties (Fort Bonifacio Dev’t. Corp. vs CIR, G.R. No. 173425, Jan. 22, 2013)

88. A is engaged in the business of canning tuna in General Santos. After a year, A filed a claim for presumptive input tax credit to the BIR. If you are the Commissioner, how will you decide A’s claim, assuming A complied with the requirements for filing tax credit? Explain your answer.  I will dismiss A’s claim for presumptive input tax credit. Under

NIRC, this tax is only allowed to persons or firms engaged in the processing of sardines, mackerel and milk and in manufacturing refined sugar, cooking oil and packed noodle based instant meals.  Processing shall mean pasteurization, canning and activities

which through physical or chemical process alter the exterior texture, form or inner substance of a product in such manner…

 … as to prepare it for special use to which it could not have

been put in its original form or condition  In this problem, although A is engaged in the business of

canning tuna, law does not mention tuna in the enumeration.  Thus, A cannot claim a presumptive input tax credit (Sec. 9 of

RA 9337)

89. Discuss the VAT implications of creditable input tax on depreciable assets.  Where a VAT registered person purchases or imports capital

goods, which are depreciable assets for income tax purposes and the aggregate acquisition cost of which (exclusive of VAT) in a calendar month exceeds P1M regardless of the acquisition cost of each capital good, the input tax shall be amortized

1. Over a period of 60 months if estimated useful life is 5 years or more 2. Over the actual months comprising the estimated useful life if estimate is less than 5 years (NIRC, Sec. 110 (A)(2))

90. Discuss the prescriptive period for filing of refund or tax credit for unutilized input tax. a. For zero-rated and effectively zero-rated sales of goods,

properties or services: Administrative claim with the CIR must be filed within 2 years after the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made. CIR has 120 days from the complete submission of supporting docs within which to decide whether to grant or deny the claim (NIRC, Sec. 112) A judicial claim must be filed with the CTA within 30 days from receipt of CIR’s decision denying the administrative claim OR from expiration of the 120-day period without any action from the CIR

90. Discuss the prescriptive period for filing of refund or tax credit for unutilized input tax – cont. b. Cessation of business or VAT status

The 2-year period shall commence from the date of cancellation of registration of the taxpayer (Associated Swedish Steels Phils., Inc. vs. CIR, CTA Case No. 7850, Aug. 23, 2012)

91. ABC Corp., a VAT registered entity, is primarily engaged in the generation and distribution of electricity to NAPOCOR. After BIR’s approval of ABC Corp’s. Effective Zero Rating application, ABC Corp. filed before the BIR an administrative claim for refund of its excess input VAT payments. 15 days after and without waiting for the action of the CIR, ABC Corp. filed a judicial claim with the CTA. If you are the CTA judge, how will you rule on the claim of ABC Corp.?

 I will dismiss the judicial claim of ABC Corp. for lack of

jurisdiction. In case of denial of claim for tax refund or credit or failure on the part of CIR to act on the application within 120 days from date of submission of complete docs in support of the application, taxpayer has 30 days from receipt of decision denying claim or after expiration of the 120 day period, to appeal the decision or the unacted claim with the CTA  Compliance with the 120 + 30 day is mandatory and

jurisdictional. ABC Corp. filed its claim with the CTA after 15 days of filing its claim with the BIR.  Therefore, for failure to observe mandatory period, CTA did not

have jurisdiction over ABC Corp’s judicial claim (CIR vs. Mirant Pagbilao Corp., G.R. No. 180434, Jan. 20, 2016)

92. CE Corp., a domestic corp. engaged in the business of power generation, had an overpayment of input VAT. On Nov. 30, 2006, CE filed an administrative claim for refund of unutilized input VAT for the taxable year of 2005 before the BIR. Thereafter, on Jan. 03, 2007, a judicial claim was filed before the CTA. Tax Court denied the claim on the ground that the claim was filed prematurely since it was filed only after the lapse of 34 days from the time of the filing of administrative claim with the BIR. Was CE Corp’s. claim for tax refund prematurely filed?

 No. An exception to the mandatory and jurisdictional nature of

the 120-day period provided under Sec. 112 of NIRC is the taxpayer’s reliance to BIR Ruling No. DA-489-03 which expressly declared that the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review”  As such from Dec. 10, 2003 to Oct. 06, 2010 which refers to the

interregnum when BIR Ruling No, DA-489-03 was issued taxpayer-claimants need not observe the stringent 120-day period. CE Corp’s. administrative and judicial claims were filed during the period of effectivity of BIR Ruling No. DA-489-03. Therefore, its claim for tax refund was not prematurely filed (CE Luzon Geothermal Power Co., Inc. vs. CIR, G.R. No. 200841, Aug. 26, 2015)

 Note: BIR Ruling No. DA-489-03 can be applied even though

the taxpayer did not specifically invoke the same. It is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a gov’t. agency tasked with processing tax refunds and credits. Thus, it applies to all taxpayers alike, and not only to one particular taxpayer (CIR vs. Air Liquide Phils., Inc., G.R. No. 210646, July 29, 2015)

93. On May 15, 2015, P Corp. filed an administrative claim for refund of unutilized input VAT for the 1st 2 quarters of 2007 with the necessary docs. On Aug. 28, 2008, additional docs were submitted. Thereafter, on Jan. 23, 2016, a judicial claim was filed before the CTA due to the inaction of the CIR. When should the submission of documents be deemed “completed” for purposes of determining the running of 120-day period?  The 120-day period starts to run from May 15, 2015. RMC 54-

2014 dated June 11, 2014 requires the taxpayer to file his claim with complete supporting docs and to attest that he will no longer submit any other document to prove his claim.  Further, the taxpayer is barred from submitting additional docs

after he has filed his claim (Pilipinas Total Gas, Inc. vs. CIR, G.R. No. 207112, Dec. 08, 2015)

94. A, a non-VAT registered person, is engaged in the business of nail spa servicing clients in the city of Manila. In 2016, A erroneously issued receipts to her clients showing his TIN, followed with the word “VAT” Upon assessment by the BIR, A was ordered to pay on top of percentage taxes, an amount equivalent to 25% surcharge. Is the liability imposed by the BIR correct?

 No. Under Sec. 113 (D) of NIRC, the issuer of receipt or invoice

who is not a VAT registered person who has erroneously issued a VAT receipt or invoice shall, in addition to any liability to other percentage taxes, be liable to: a. the tax imposed in Sec. 106 or 108 without the benefit of any input tax credit; and b. a 50% surcharge under Sec. 248(B) of the same code  In this case, it was incorrect for the BIR to impose only a 25%

surcharge as the law expressly provides a higher surcharge of 50% as penalty for erroneous issuance of VAT receipts.

95. E Corp., a VAT registered taxpayer, handles income telecommunications services for non-resident foreign cos. The non-resident foreign corp. pay E-Corp. in the US dollars inwardly remitted through PH banks, in accordance with the rules and regulations of BSP, E-Corp. timely filed with the BIR its claim for refund representing excess input VAT attributable to its effectively zero-rated sales in 2000. BIR denied E Corp’s. claim for refund because the VAT official receipts submitted by E Corp. did not bear the words “zerorated.” Should E Corp’s claim for refund be granted?

 No. An applicant for a claim for tax refund or tax credit must

not only prove entitlement to the claim but also compliance with all the documentary and evidentiary requirements.  In this respect, the Court has consistently ruled on the denial of

a claim for refund or tax credit whenever the word “zerorated” has been omitted on the invoices or sale receipts of the taxpayer-claimant (Eastern Telecommunications Phils., Inc. vs. CIR, G.R. No. 183531, Mar. 25, 2015)

96. T Corp., a subcontractor, entered into a contract with B Corp., a domestic corp. duly registered with PEZA as an ECOZONE developer, for the purpose of constructing a local airport. T Corp. filed its claim for tax refund covering the taxable year of 2012 on the basis of VAT Ruling issued by the BIR, which states that the sales of goods and services rendered by T Corp. to B Corp. are subject to zero percent VAT. Claim was denied on the ground that the official receipts presented by T Corp. were insufficient to substantiate its claim for refund. Was the denial of the claim proper?

 Yes. A VAT invoice is the seller’s best proof of the sale of goods

or services to the buyer, while a VAT receipt is the buyer’s best evidence of payment of goods or services received from the seller.  A VAT invoice and a VAT receipt should not be confused and

made to refer to one and the same thing. Certainly, neither does the law intend the 2 to be used alternatively.  Thus, T Corp’s claim for tax refund cannot prosper since an

official receipt is not the best evidence to prove zero-rated sale of services (Takenaka Corp.., Inc. vs. CIR, G.R. No. 193321, Oct. 19, 2016)

97. Discuss the 2 Types of Withholding Taxes on VAT. 1.

Payments made to a non-resident whose services are considered as VAT –taxable in which case the 12% VAT will be withheld by the payor. This is a Final Wihholding VAT (RR No. 04-2007, Sec. 4.114-2)

2.

Payments made by gov’t. agencies, in which case, the gov’t. entity will withhold 5% from its payment. This is a Creditable Withholding VAT.

Note: The 5% Final VAT withholding rate shall represent the net VAT payable of the seller .The remaining 7% effectively accounts for the standard input VAT for sales of goods or services to gov’t. of any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of actual input VAT directly attributable or ratably apportioned to such sales…

Note: … Should actual input VAT attributable to sale to gov’t. exceeds 7% of gross payments, the excess may form part of the sellers’ expense or cost. On the other hand, if actual input VAT attributable to sale to gov’t. is less than 7% gross payment, the difference must be closed to expense or cost. (RR No. 04-2007, Sec. 4.114-2)

98. L Corp. imports leaf tobacco from foreign sources and purchases locally produced tobacco to be used in its production of cigars and cigarettes. It claimed that the imposition of excise taxes on stemmed leaf tobacco and a specific tax on the finished products would result in the prohibited form of double taxation. a. Discuss the nature of excise taxes and its different kinds.

b. Is there double taxation?

a.

Excise tax is a tax on production, sale or consumption of a specific commodity in a country. Excise taxes are essentially taxes on property because they are levied on certain specified goods or articles manufactured or produced in the PH for domestic sale or consumption or for any other disposition and on goods imported. Excise tax based on weight, volume capacity or any other physical unit of measurement is referred to as “specific tax”. If based on selling price or other specified value, it is referred to as “ad valorem tax.”

b. No. For double taxation in the prohibited sense to exist, “the

same property must be taxed twice, when it should be taxed but price.” Both taxes must be imposed on the same property or subjectmatter, for the same purpose, by the same taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax.” In this case, there is no double taxation in the prohibited sense because the specific tax is imposed by explicit provisions of the Tax Code on 2 different articles or products: 1.) On the stemmed leaf tobacco and 2.) On cigar or cigarette (La Suerte Cigar & Cigarette Factory vs. CA, G.R. No. 123546, Nov. 11, 2014)

99. S Corp. sold and delivered petroleum products to various int’l carriers in the PH for their use outside the PH. A portion of these was sourced by Shell from P Corp. The excise taxes paid by P Corp. were passed on to S Corp. and the latter sold the same to int’l carriers net of excise taxes. S Corp. filed administrative claims for refund or credit of the excise taxes paid on the said sales. Excise taxes on the portion sourced from P Corp. was disallowed on the ground that S Corp. is not the proper party to claim the same because pursuant to Sec. 135 of NIRC, only int’l carriers are exempt from paying excise taxes but not the manufacturer/ producer. Should the claim for refund/ credit be granted?

 Yes. Petroleum products sold by local manufacturers/ sellers

to international carriers are exempt from the imposition of excise taxes as these international carriers enjoy exemption from payment of excise taxes under Sec. 135(a) of the NIRC  Considering the S Corp. is the statutory taxpayer who is directly

liable to pay the said excise taxes, it is entitled to a refund or credit of the excise taxes, it is entitled to a refund or credit of the excise taxes (Pilipinas Shell Petroleum Corp.. vs. CIR, G.R. No. 180402, Feb. 10, 2016)

100. Discuss the nature of percentage taxes. Who are liable for percentage taxes? • The nature of OPT is essentially a tax on the transaction and not

on the articles sold, bartered or exchanged. It is an indirect tax which can be passed on to the buyer (Phil. Acetylene vs. CIR, G.R. No. L-19707, Aug. 17, 1967) • Under Sec. 116 of NIRC, any person whose sales or receipts are

exempt from payment of VAT and who is not a VAT-registered person shall pay a tax equivalent to 3% of his gross quarterly sales or receipts. • Provided, that cooperatives shall be exempt from the 3% gross

receipts tax herein imposed.

101. F Pawnshop Inc. contests the deficiency assessments for VAT and Documentary Stamp Tax imposed upon it by BIR for the year 2004. The core of Petitioner’s argument is that it is not a lending investor within the purview of Sec. 108(A) of NIRC, as amended, and thus not subject to VAT. Is F Pawnshop liable to pay VAT? • No. For purposes of determining tax liability, pawnshops are

treated as non-bank Financial Intermediaries (H. Tambunting Pawnshop, Inc. vs. CIR, G.R. No. 172394, Oct. 13, 2010) • Under RA No. 9238, the services of non-bank FIs are specifically

exempted from VAT

• However, it re-imposed the 0% to 5% Percentage Tax on Gross

Receipts on other Non-bank FIs under Sec. 122 of the Tax Code of 1997 • Hence, P pawnshop is subject to percentage tax on its gross

receipts (First Planters Pawnshop Inc. vs. CIR, G.R. No. 174134, July 30, 2008)

102. LT Distillers Inc. (LTD) entered into a plan of merger with several corps. As a result of the merger, assets and liabilities of the absorbed corp. were transferred to LTD, the surviving corp.? BIR claimed that LTD is liable for DST with respect to the transfer of real properties since a DST is levied on the exercise of the privilege to convey real property regardless of the manner of conveyance. Decide with reasons.

• Properties transferred by means of merger are not subject to

DST. Under Sec. 196 of NIRC, a DST shall be collected on conveyances, deeds, instruments or writings whereby any land, tenement or other realty sold shall be conveyed to the purchaser or purchasers. • Considering that properties subject to the merger were not sold

but merely absorbed by the surviving corporation by operation of law, transfer does not fall under Sec. 196 and is not subject to DST. (CIR vs. La Tondena Distillers, Inc. (LTDI) G.R. No. 175188, July 15, 2015)

103. H Bank performs custodial services on behalf of its investor-clients with respect to their passive investments in the PH. H Bank managed its clients’ accounts through electronic messages containing instructions to debit its clients’ local or foreign currency accounts in the PH and pay a certain named recipient also residing in the PH. H Bank paid DST on the said messages. However, later on, H Bank filed for tax refund for the said DST it paid, CIR denied their claim on the ground that DST under Sec. 181 is levied on H exercise of a privilege. Are the electronic messages subject to DST?

• No. DST under Sec. 181 of NIRC is levied on the acceptance or

payment of a “bill of exchange purporting to be drawn in a foreign country but payable in the PH.” • The electronic messages of H Bank’s investor-clients are not that

kind of transaction. • Further,

such electronic messages cannot be considered negotiable instruments as they lack the feature of negotiability.

• Therefore, they are not subject to DST (HSBC vs. CIR, G.R. Nos.

166018 & 167728, June 04, 2014)

A. TAX CREDIT/ REFUND

i. 2017 SUPREME COURT DECISIONS

1. Soriano vs. Sec. of Finance and CIR G.R. 184450 – 01/24/17 Facts:  CIR required the withholding of taxes from:  Pro-rate application of the applicable tax exemptions of individuals in 2008  The 13th month pay and other bonuses and benefits of Minimum Wage Earners

(MWEs) that exceeded the tax exempt threshold pursuant to Rev. Reg. 10-2008 dated July 8, 2008

1. Soriano vs. Sec. of Finance and CIR G.R. 184450 – 01/24/17 Issue: Is the requirement from the CIR valid?

1. Soriano vs. Sec. of Finance and CIR G.R. 184450 – 01/24/17 Ruling:  The SC required the CIR to refund the taxes withheld on the basis of

the ff. arguments:  Rep. Act 9504 exempted MWEs from payment of income tax on their minimum

wage, holiday pay, overtime pay, night shift differential and hazard pay  Personal and additional exemptions under RA 9504 should be applied to the

entire taxable year 2008. The exemption from income tax of MWEs is for the entire taxable year 2008

1. Soriano vs. Sec. of Finance and CIR G.R. 184450 – 01/24/17 Ruling – cont.:  Sections 1 and 3 of RA 9504 added a requirement effectively declaring that an

MWE who receives other benefits in excess of statutory limit of Php30,000 is no longer entitled to exemption provided by the same RA  SC declared as null and void the provisions of RA 9504 and the tax exemption of

MWEs starting July 06, 2008 and disqualifies MWEs who earn pure compensation income from the privilege of MWE exemption in case they receive bonuses and other compensation-related benefits exceeding Php30,000

ii. 2017 CTA EN BANC CASES

1. Leo Mario Celdran vs. CIR CTA EB 1527 – 03/14/17 Facts: • Celdran filed a claim for refund of Expanded Withholding Tax (EWT) on his

purchase of 4 parcels of land from Star Management Ropoas Inc. (SAMRI) which is a Special PurposeVehicle (SPV) • Upon execution of Deed of Sale, Celdran reported and paid 3% EWT on the

transaction • BIR alleged that the transaction is subject to 6% EWT

• Celdran paid under protest and requested a refund for the EWT

1. Leo Mario Celdran vs. CIR CTA EB 1527 – 03/14/17 Facts – cont.: • CIR refused the refund so Celdran appealed to CTA in Division • CIR argued that SAMRI is not habitually engaged in real estate business but as

an SPV, is “akin to a bank or financial institution” and its sale of ROPOA, being an ordinary asset is subject to 6% EWT • CTA in Division sustained Celdran, prompting the CIR to elevate case to

CTA En Banc.

1. Leo Mario Celdran vs. CIR CTA EB 1527 – 03/14/17 Issue: Is SAMRI entitled to claim for a refund?

1. Leo Mario Celdran vs. CIR CTA EB 1527 – 03/14/17 Ruling: • Yes. SAMRI is entitled to refund since it is not a bank so the sale of ROPOA

is not subject to 6% EWT • Under Sec. 15 of RA 9182 (SPV Act of 2002), sale of Non-performing Assets

(NPAs) to a 3rd party shall be exempt from EWT • Although Celdran would have been entitled to a refund of the entire 6%

EWT, CTA En Banc held that it is constrained to grant only the 3% EWT requested by Celdran

1. Leo Mario Celdran vs. CIR CTA EB 1527 – 03/14/17 Ruling – cont.:  The fundamental rule is that reliefs granted on litigant are limited to those

specifically prayed for in the complaint.

2. Philex Mining Corp. vs. CIR CTA EB 1493 – 06/01/17 Facts:  Philex filed its quarterlyVAT returns for the 2nd and 3rd quarters of 2012  On 2013, Philex filed an administrative claim for refund or tax credit for

its alleged unutilized inputVAT for said quarters of 2012  Due to the inaction of the BIR, Philex filed for a Petition for Review

2. Philex Mining Corp. vs. CIR CTA EB 1493 – 06/01/17 Facts – cont.:  The court partially grants the petition and ordered BIR to refund or issue

a TCC in favor of Philex for its unutilized excess inputVAT

2. Philex Mining Corp. vs. CIR CTA EB 1493 – 06/01/17 Issue: Whether or not Philex is entitled to a VAT refund

2. Philex Mining Corp. vs. CIR CTA EB 1493 – 06/01/17 Ruling:  Court said that there is nothing in the law which compels the taxpayer to

submit its sales and purchase journal in a claim for refund or tax credit  While the nature of tax exemption is strictly construed against the

taxpayer, this rule is not absolute, especially if the taxpayer who seeks for refund can justify the claim by words too plain to be mistaken and too categorical to be misinterpreted.

2. Philex Mining Corp. vs. CIR CTA EB 1493 – 06/01/17 Ruling- cont.:  Court said that sales invoice is necessary to substantiate the actual

amount of goods sold and their selling price and taken collectively are the best means to prove the inputVAT payments  VAT invoice is the seller’s best proof of the sale of goods or services to

the buyer

3. Manulife Data Services, Inc. vs. CIR CTA EB 1437 – 06/07/17 Facts:  MDSI accumulated input VAT for 2011 from its domestic purchases of

supplies and services and from purchase of capital goods which remained unutilized and is now the subject of this claim  MDSI is a foreign corporation authorized by SEC to operate as a Regional

Operating Headquarters (ROHQ)  It filed an administrative application for refund or the issuance of a TCC

for its unutilized inputVAT for 1st-4th quarters of 2011

3. Manulife Data Services, Inc. vs. CIR CTA EB 1437 – 06/07/17 Facts – cont.:  CIR denied the claim  CTA in Division granted the claim for refund but only in a reduced

amount  CIR argues that CTA in Division erred in granting such claim on the

ground that the sales made by MDSI to Manufacturer’s Life Insurance Co. (MILC) cannot qualify for VAT zero rating since MDSI failed to substantiate its claim for refund

3. Manulife Data Services, Inc. vs. CIR CTA EB 1437 – 06/07/17 Issue: Whether or not MDSI is entitled to a refund

3. Manulife Data Services, Inc. vs. CIR CTA EB 1437 – 06/07/17 Ruling:  CTA En Banc gave credence to the Intra-Group Service Agreements

presented by MDSI since these documents confirmed that MDSI’s customers to whom it rendered services are doing business outside the PH  Claim for refund was granted at a reduced amount in view of MDSI’s

failure to appeal the decision and resolution of the court in division

3. Manulife Data Services, Inc. vs. CIR CTA EB 1437 – 06/07/17 Ruling – cont.:  Court En Banc cannot grant any affirmative relief to MDSI other than the

relief granted in the Court in the division’s decision  MDSI accumulated input VAT for 2011 from its domestic purchases of

supplies and services and from purchase of capital goods which remained unutilized and is now the subject of this claim

4. CIR vs. CE Luzon Geothermal Power Co. Inc. CTA EB 1397 – 06/07/17 Facts:  BIR appeals the decision of the CTA in Division in allowing a partial VAT

refund of CE Luzon  BIR alleged that CE Luzon failed to submit complete documents and that the

Court has no jurisdiction since the company violated the 120 + 30 day requirement under the Tax Code

4. CIR vs. CE Luzon Geothermal Power Co. Inc. – cont. CTA EB 1397 – 06/07/17 Issue: Whether or not CE Luzon is entitled toVAT refund

4. CIR vs. CE Luzon Geothermal Power Co. Inc. – cont. CTA EB 1397 – 06/07/17 Ruling:  Yes. The Court En Banc ruled that upon filing its administrative claim for

VAT refund, the taxpayer has 30 days to submit the complete documents  The 120-days commence from the submission of further documents or

expiration of the 30-day period  Exceptions to this are: o When taxpayer manifests that it will no longer submit any further documents

upon filing of the claim o When the BIR, during the course of examination, requires the taxpayer

5. Manulife Data Services, Inc. vs. CIR CTA EB 1547 – 07/05/17 Facts:  MDSI applied for the refund of its excess input VAT which was denied by

the CIR  CIR argued that the refund was being denied because MDSI did not show

the sales invoices and/or ORs so it failed in its substantial compliance  MDSI argued that evidence has been comprehensively and completely

evaluated during the tax examination  CTA in Division partially grant the refund claim and the substantiation

argument of the CIR was rejected

5. Manulife Data Services, Inc. vs. CIR CTA EB 1547 – 07/05/17 Issue: Whether or not the CTA in Division erred in partially granting the refund

5. Manulife Data Services, Inc. vs. CIR CTA EB 1547 – 07/05/17 Ruling: Since the Petition for Review did not specify which of the VAT invoices or receipts did not comply with the substantiation requirements in line of cases, it was emphasized that litigants should specify in their appeal briefs the errors alleged to have been committed by the lower court so the reviewing court and opposing party can see what points are in controversy. A general assignment of errors is unacceptable under the rules.

6. Philam Properties Corp. vs. CIR CTA EB 1406 – 07/07/17 Facts:  Philam Properties Corp. claims refund of its excess creditable

withholding taxes.  CTA in Division denied it for insufficiency of evidence  Thereafter, it amended its decision and partially granted the refund

6. Philam Properties Corp. vs. CIR CTA EB 1406 – 07/07/17 Issue: Whether or not the entire claim for refund should be granted

6. Philam Properties Corp. vs. CIR CTA EB 1406 – 07/07/17 Ruling:  No, without the corresponding CWT certificates to support Philam’s

prior year’s excess credit of Php43M, the said amount cannot be applied against its reported income tax liability for year 2010  With regard to Philam’s reliance on the ICPA report stating that it has

sufficient prior year’s excess tax credit for 2010, the CTA EB ruled that the report is a mere tool to aid the court in the resolution of a case  Its probative value is still within the province of the CTA EB

7. KEP (Philippines) Realty Corp. vs. CIR CTA EB 1594 – 08/18/17 Facts: • On 09/14/12, KEP purchased from Cebu Light Industrial Park, Inc., 5

parcels of land in Lapu-Lapu City • On 01/07/13, KEP executed a Contract of Lease with Knowles Electronics

(Phils.) involving the land • Knowles is an entity registered with PEZA and qualified for VAT zero rating

of its transactions with local suppliers • KEP filed on 12/26/12 its quarterlyVAT returns for the 3rd quarter of 2012

7. KEP (Philippines) Realty Corp. vs. CIR CTA EB 1594 – 08/18/17 Facts – cont.: • On 09/18/14, KEP filed its administrative claim for refund and also filed a

Petition for Review before the CTA in Division on 02/06/15 • This involves a tax refund/ credit case representing KEP’s unutilized input

VAT attributable to its zero rated sales for the 3rd qtr. of 2012 • CIR argues that: o No evidence was presented to prove that KEP has zero-rated transactions for

2012 to which input VAT may be attributed

7. KEP (Philippines) Realty Corp. vs. CIR CTA EB 1594 – 08/18/17 Facts – cont.: o Assuming that the claim is possible, as the property is merely rented for 25

years, ownership remains with KEP and that refund can only be made when the property is eventually sold o KEP is given the option to carry over to the succeeding quarters any

unutilized input VAT to file a claim for refund and availing of an option precludes choosing that of the other o KEP failed to prove that the input VAT being claimed remained unutilized for

taxable years 2012-2014

7. KEP (Philippines) Realty Corp. vs. CIR CTA EB 1594 – 08/18/17 Issue: Whether KEP is entitled to refund

7. KEP (Philippines) Realty Corp. vs. CIR CTA EB 1594 – 08/18/17 Ruling: • Yes, the Tax Code does not provide in a claim for refund of input VAT that

there be zero rated transactions at the time the claimed input VAT was incurred or paid… Nor does it state that the input tax on the purchase of land shall be refunded only when it was sold  Law does not provide the option to carry over to the succeeding quarters any

unutilized input tax or to file a claim for refund and avail of an option precludes that of others

7. KEP (Philippines) Realty Corp. vs. CIR CTA EB 1594 – 08/18/17 Ruling - cont.: • What the law provides is that the taxpayer who has zero rated transactions

was allowed to apply for the issuance of a tax credit certificate/ tax refund, in addition to the option to carry forward the input taxes against future tax liabilities • In this case, it is immaterial that there is no reported zero rated sale for 2012

as long as the input taxes should not have been applied against output taxes

B. TAX ASSESSMENT

i. 2017 SUPREME COURT DECISIONS

1. St. Luke’s Medical Center vs. CIR G.R. 203514 – 02/13/17 Facts: • St. Luke’s Medical Center Inc. (SLMC) was assessed by the CIR for deficiency

income tax for taxable year 2005 (P78.6M) and 2006 (P57.1M) under Sec. 27(B) based on the 10% preferential rate under Sec. 27 (B) of Tax Code • Case was elevated by SLMC to CTA in Division which ruled on 08/26/10 that

SLMC is not liable for deficiency income tax under Sec. 27(B) since it is exempt from paying income tax under Sec.30(E) and (G) of Tax Code • CIR moved for reconsideration but the CTA in Division denied the same in its

12/28/10 Resolution

1. St. Luke’s Medical Center vs. CIR G.R. 203514 – 02/13/17 Facts – cont.: • CIR filed a Petition for Review with the CTA En Banc • On 05/09/12, the CTA En Banc sustained the findings of the CTA in Division

that SLMC complies with all requisites under Sec. (E) & (G) of Tax Code and they are entitled to tax exemption • CIR filed a Motion for Reconsideration with CTA En Banc which was denied so

they filed a petition under Rule 45 of Rules of Court

• On 09/26/12, SC rendered a decision finding SLMC not entitled to exemption

as it does not operate exclusively for social welfare purpose insofar as its revenues from paying patients are concerned

1. St. Luke’s Medical Center vs. CIR G.R. 203514 – 02/13/17 Issue: Is St. Lukes Medical Center liable for Income Tax?

1. St. Luke’s Medical Center vs. CIR G.R. 203514 – 02/13/17 Ruling: • SLMC is liable for income tax under Sec. 27(b) of the Tax Code insofar as its

revenues from paying patients are concerned and this issue has been settled in G.R. 195909 & 195960 • SC ruled that SLMC is a corporation which is not operated exclusively for

charitable purposes • An institution under Sec. 30(E) & (G) does not lose its tax exemption if it earns

income from for-profit activities

• Such income in the last paragraph of Sec. 30 is subject to tax previously at

ordinary corporate rate but now at preferential rate of 10% pursuant to Sec. 27 (B)

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Facts:  CIR found out that the Output VAT declared by suppliers of PDI exceeded

the InputVAT declared by PDI in its 2014VAT returns  BIR alleged that PDI under declared its Input VAT which meant that it had

under declared purchases and its gross income  CIR assessed PDI for deficiency VAT and income tax on the amount of

under declared gross income for 2014

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Facts – cont.:  PDI protested the assessment stating that any understatement of expenses or

purchases does not mean it understated its sales

 It was also argued that its transactions with the advertising agencies should

not be treated as Cost of Sales since these were “not materials” required by PDI to generate income

 Due to inaction of CIR on PDI’s protest, PDI appealed to CTA which

cancelled the CIR’s assessment

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Facts – cont.:  In determining whether the taxes were assessed on time, CTA determined

whether the returns filed by PDA was fraudulent  This is in view of the execution by PDI of 3 Waivers of Defense of Prescription

 CTA ruled that while the 1st and 2nd Waivers were executed in 3 copies which

complies with the regulation, the CIR was not provided with copies of the waivers and the officer who signed the 3rd Waiver has no authority to do so

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Facts – cont.:  CTA concluded that the 3-year prescriptive period was not extended due to

such defects

 CTA also rejected the CIR’s theory that an under declaration of Input VAT

and purchases translated to taxable income

 CTA ruled that the CIR erroneously imposed deficiency income tax based

on under declared Input VAT

 CIR appealed to the Supreme Court

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Issue: 1.

Did PDI refused CIR’s assessment?

2.

Did PDI file a false or fraudulent return in which the 10-year prescriptive period would apply?

3.

Are the waivers executed by PDI valid?

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Ruling: 1. No. PDI failed to sufficiently refute CIR’s assessment.

The services rendered by PDI’s agencies are meant to promote PDI’s services so it should be part of Cost of Services (which may be grossed up to compute for under declared income) instead of general and administrative expenses or operating expenses

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Ruling – cont.: 2.

PDI did not file a false or fraudulent return.

Citing the Aznar case decided by SC in 1974, a false return implies deviation from the truth, whether intentional or not, while a fraudulent return implies intent to evade taxes due. There is a distinction between false and fraudulent return. Hence, despite PDI failing to refute the assessment, CIR’s assessment is still void due to prescription.

2. Phil. Daily Inquirer vs. CIR G.R. 213943 – 03/22/17 Ruling: 3.

The waivers are invalid.

While the 1st and 2nd Waivers were executed in 3 copies, CIR failed to provide the office accepting the Waivers with the 3rd copy of each as these were still attached to the docket of the case. Moreover, the 3rd Waiver was not executed in 3 copies. Thus, the 3-year prescriptive period was not extended and the assessments by the CIR are void.

3. Power Sector Assets & Liabilities Management (PSALM) Corp. vs. CIR G.R. 198146 – 08/08/17 Facts:  PSALM filed a Petition for Review seeking the reversal of the earlier

decision and resolution of the CA nullifying the decision of the Sec. of Justice  Issues on the case include whether the DOJ Secretary has jurisdiction

over the case and the resolution on whether the sale of PantabanganMasiway Plant and Magat Plant is subject to VAT

3. Power Sector Assets & Liabilities Management (PSALM) Corp. vs. CIR G.R. 198146 – 08/08/17 Facts – cont.:  It was noted that the DOJ is vested by law to have jurisdiction over

this case pursuant to Pres. Decree No. 242 which states that all disputes and claims solely between gov’t. agencies, offices and GOCCs shall be administratively settled by the Sec. of Justice, Solicitor General or the Gov’t. Corporate Counsel

3. Power Sector Assets & Liabilities Management (PSALM) Corp. vs. CIR G.R. 198146 – 08/08/17 Ruling:  SC ruled that the sale of power plants is not subject to VAT since the sale was

made pursuant to PSALM’s mandate to privatize NPC assets and was not undertaken in the course of trade or business  PSALM was merely exercising a governmental function under EPIRA law  Petition was granted and the court set aside the decision and resolution of the

CA  Earlier decision and resolution of the Sec. of Justice were reinstated

4. Phil. Aluminum Wheels, Inc. vs. CIR G.R. 216161 – 08/09/17 Facts: • BIR filed a Petition for Review on Certioriari seeking the reversal of

the earlier decisions of CTA First Division and CTA En Banc on the cancellation and withdrawal of the 2001 deficiency tax assessments issued against PAWI • PAWI was issued with assessment notices, preliminary and final and

later a Final Decision on Disputed Assessment (FDDA) • PAWI also availed of the tax amnesty under R.A. 9489

4. Phil. Aluminum Wheels, Inc. vs. CIR G.R. 216161 – 08/09/17 Facts - cont.: • Despite the availment, the BIR challenged and assessed PAWI as it

argued that the tax amnesty had no effect on the assessment due to the finality of the FDDA prior to PAWI’s availment of the amnesty

4. Phil. Aluminum Wheels, Inc. vs. CIR G.R. 216161 – 08/09/17 Ruling: • Court believes otherwise as Sec. 1 of R.A. 9480 states that the coverage

shall be all Nat’l Internal Revenue Taxes for taxable year 2005 and prior years, with or without assessments duly issued • It was also argued that the situation is included as an exception on Sec. 8

of R.A. 9480 that cases subject to final and executory judgment by the courts should not be covered by the tax amnesty

4. Phil. Aluminum Wheels, Inc. vs. CIR G.R. 216161 – 08/09/17 Ruling – cont.: • Court disagrees since the FDDA issued by the BIR is not a tax case subject

to final and executory judgment by the courts but a mere assessment • Petition for Review was denied by the SC

5. Edison Bataan Cogeneration Corp. vs. CIR G.R. 201668 – 08/30/17 Facts: • EBCC filed a Petition for Review on Certioriari seeking the reversal of the

CTA En Banc decision holding it liable to deficiency FWT on interest payments • BIR assessment arose from the loan extended by OGDEN to EBCC that is

accordingly subject to FWT assessment on interest payments as early as year 2000 • It was the position of the BIR that EBCC should be held liable to interest

from the date of execution of Loan agreement (Jan. 05, 2000) and not the date of the 1st payment of loan (June 01, 2002)

5. Edison Bataan Cogeneration Corp. vs. CIR G.R. 201668 – 08/30/17 Facts – cont.: • The loan agreement indicated that the interest is to be paid separately

from the principal • EBCC insists otherwise and maintains its position that it should not be

liable for any deficiency taxes

5. Edison Bataan Cogeneration Corp. vs. CIR G.R. 201668 – 08/30/17 Ruling: • SC considered the provisions of Rev. Reg. 2-98 which provides that the

obligation of EBCC to deduct or withhold tax arises by the time the income is paid or payable, whichever comes first • Considering further that under the said regulation, the term “payable” refers

to the date the obligation becomes due, demandable or legally enforceable • Consequently, the SC finds no reason to reverse the earlier decision of the

CTA En Banc

ii. 2017 CTA EN BANC CASES

1. IP Contact Center Outsourcing, Inc. vs. CIR CTA EB 1415 – 06/05/17 Facts:  IPCCO was assessed with deficiency taxes  It executed waivers of the defense of prescription with the BIR  However, the assessment was eventually brought before the CTA 3rd

Division which cancelled the assessment due to the defects in the execution of the waivers

1. IP Contact Center Outsourcing, Inc. vs. CIR CTA EB 1415 – 06/05/17 Issue: Whether or not the waivers executed between IPPCO and the BIR are valid

1. IP Contact Center Outsourcing, Inc. vs. CIR CTA EB 1415 – 06/05/17 Ruling:  Yes, BIR is estopped from questioning the validity of the waivers  Given that it was able to benefit from the waivers, it was given the chance

to submit the documents and contest the assessment in the administrative level  BIR is now estopped from challenging the validity of the waivers  The doctrine in the Next Mobile Case applies

2. LBC Express, Inc. vs. CIR CTA EB 1365 – 06/22/17 Facts:  LBC was assessed for several deficiency taxes

 Among its alleged liabilities per assessment were compromise penalties  LBC filed for an abatement of compromise penalties and made a partial

payment  LBC was able to avail of tax amnesty, however, its application for abatement

of penalties was eventually denied and the balance was being collected by the BIR  LBC brought the matter before the CTA. The Court in Division ruled for

LBC

2. LBC Express, Inc. vs. CIR CTA EB 1365 – 06/22/17 Issue: Whether LBC is liable for the balance of the compromise penalties

2. LBC Express, Inc. vs. CIR CTA EB 1365 – 06/22/17 Ruling:  The Court En Banc sustained the findings of the CTA in Division that the

liability being assessed are actually compromise penalties  As a rule, compromise penalties are agreed upon by the taxpayer and the

BIR so these may not be imposed against the will of the taxpayer  Hence, the alleged deficiency should be cancelled

3. Derek Arthur P. Ramsay vs. CIR CTA EB 1413 – 06/22/17 Facts: • Ramsay was assessed with deficiency income andVAT • He claimed that he was not served any assessment notices with the FLD and

that the FLD did not state a definite date of demand • Upon bringing the matter to the CTA, the Court in Division voided the

assessment for failure to afford the taxpayer his right to due process • The BIR appealed the same to the Court En Banc

3. Derek Arthur P. Ramsay vs. CIR CTA EB 1413 – 06/22/17 Issue: Whether or not the assessment is valid

3. Derek Arthur P. Ramsay vs. CIR CTA EB 1413 – 06/22/17 Ruling: • No, the Court En Banc sustained the findings of the CTA in Division

• Failure to serve the taxpayer the assessment notices with the FLD is a violation of the

taxpayer’s right to due process • Under the law, a taxpayer must be informed of the facts and the law on which the

assessment is based • The service of an assessment notice is part of keeping that mandate • Moreover, failure to indicate the due date in the demand of payment is also fatal to

the assessment • Hence, the finding of the Court in Division must be sustained

4. Q-Clean Living Phils. Corp. vs. CIR CTA EB 1435 – 06/23/17 Facts:  BIR appealed the findings of the CTA in Division, particularly the ruling that

the protest to the FLD/ FAN was filed on time

 Since the FLD/ FAN was served by registered mail, there is a presumption

that the same was received within a reasonable amount of time

 Hence, when the taxpayer filed its protest 3 months after the same was

mailed, it should be considered as being filed out of time

 Moreover, the BIR contends that the Petition for Review was filed out of

time, being received by the Court beyond the 30-day period from receipt of the FDDA

4. Q-Clean Living Phils. Corp. vs. CIR CTA EB 1435 – 06/23/17 Issue: Whether or not the Court has jurisdiction over the Petition for Review

4. Q-Clean Living Phils. Corp. vs. CIR CTA EB 1435 – 06/23/17 Ruling:  Yes. As to the protest, it is incumbent upon the BIR to prove that the

taxpayer received FLD/ FAN within 30 days from mailing the same

 The BIR failed to do so but the taxpayer was able to prove that it received

the FLD/ FAN subsequently, and filed its protest 30 days thereafter

 As to the Petition for Review, although the Court received the Petition

beyond 30 days from the taxpayer’s receipt of the FDDA, it was proved that the Petition was actually filed by registered mail within the said period. The court acquired the jurisdiction

5. Fort Bonifacio Dev’t. Corp. (FBDC) vs. CIR CTA EB 1410 – 07/11/17 Facts:  FBDC was found to be liable for deficiency VAT, WTC, EWT, FWT on

fringe benefits, DST and IT by the CIR  CTA in Division cancelled the assessment covering deficiency WTC  The other assessments were affirmed but with modifications

 Both parties appealed through Petition for Review

5. Fort Bonifacio Dev’t. Corp. (FBDC) vs. CIR CTA EB 1410 – 07/11/17 Facts:  FBDC was found to be liable for deficiency VAT, WTC, EWT, FWT on

fringe benefits, DST and IT by the CIR  CTA in Division cancelled the assessment covering deficiency WTC  The other assessments were affirmed but with modifications

 Both parties appealed through Petition for Review

5. Fort Bonifacio Dev’t. Corp. (FBDC) vs. CIR CTA EB 1410 – 07/11/17 Issue: Whether or not the Court in Division’s decision should be revered or set aside

5. Fort Bonifacio Dev’t. Corp. (FBDC) vs. CIR CTA EB 1410 – 07/11/17 Ruling:  The petition is dismissed  The CTA EB noted that both parties directly filed Petitions for Review

without filing a prior MR or MNT  Due to this procedural lapse, the amended decision has already attained

finality insofar as the CIR is concerned

5. Fort Bonifacio Dev’t. Corp. (FBDC) vs. CIR CTA EB 1410 – 07/11/17 Ruling – cont.:  CTA EB also cited the Asia Trust case, wherein the SC pronounced that in

order for the CTA EB to take cognizance of an appeal via a Petition for Review, a timely MR or MNT must first be filed with the CTA in Division that issued the assailed decision and that failure to file such is a ground for the dismissal of its Petition for Review.

6. EDS Manufacturing, Inc. vs. CIR CTA EB 8830 – 08/03/17 Facts:  Petitioner EDS was assessed with various deficiency taxes  EDS questioned the same before the CTA  It was found out that there was no LOA issued to Revenue Officers  The ROs were only issued a Memorandum of Agreement  EDS claims that the assignment is void

6. EDS Manufacturing, Inc. vs. CIR CTA EB 8830 – 08/03/17 Facts – cont.:  CIR insists that there was no need to issue an LOA for the investigation

since there was no need to examine the documents  The assessment was based purely on legal issue so there was no need to

examine any document and issue an LOA

6. EDS Manufacturing, Inc. vs. CIR CTA EB 8830 – 08/03/17 Issue: Whether or not the assessment is valid

6. EDS Manufacturing, Inc. vs. CIR CTA EB 1493 – 08/03/17 Ruling:  CTA EB stressed the importance of the issuance of LOA  It applied the SC’s decision in the Medicard case where the SC ruled that

regardless of whether actual documents of the taxpayer were examined or not, an LOA must be duly issued to the Revenue Officers who are conducting the audit  Without a valid LOA authorizing such officers, the assessment is void

7. Hoya Glass Disk Philippines vs. CIR CTA EB 1524 & 1529 – 08/16/17 Facts: • During a special meeting of the Board of Directors on 12/22/06, the Board

declared a cash dividend to stockholders as of 03/31/06 payable on 01/31/07 • Hoya paid the cash dividends to its stockholders on 02/02/07

• Hoya filed its monthly remittance form of Final Income Tax Withheld (Form

1601-F) on 03/10/07 • It also paid the FWT on 03/10/07 but was only confirmed on 03/12/07

7. Hoya Glass Disk Philippines vs. CIR CTA EB 1524 & 1529 – 08/16/17 Facts – cont.: • On 01/28/13, Hoya received a PAN dated 01/09/13 assessing Hoya for

penalties to the supposed late payment of the FWT on cash dividends • Hoya filed its reply to the PAN on 02/27/13 and received the Assessment

Notice with FLD reiterating the assessment of the PAN • On 03/22/13, Hoya filed its protest

7. Hoya Glass Disk Philippines vs. CIR CTA EB 1524 & 1529 – 08/16/17 Facts – cont.: • The CTA in division found that the return filed was false due to the fact that

it declared in its FWT return that the dividend payment was a February transaction instead of January (it was declared that the cash dividends were payable on or before 01/31/07) • Pursuant to RR 2-98, the FWT Return and FWT should have been filed and

paid on or before 02/10/07

7. Hoya Glass Disk Philippines vs. CIR CTA EB 1524 & 1529 – 08/16/17 Issue: Whether or not CIR’s authority to assess Hoya for deficiency FWT on dividends is already barred by prescription

7. Hoya Glass Disk Philippines vs. CIR CTA EB 1524 & 1529 – 08/16/17 Ruling: • The CTA EB disagrees with the CTA in division’s findings

• Hoya’s act was a mistake, but such mistake is not considered a falsity that would

trigger the operation of the 10-year prescriptive period • First, there was no design to mislead on the part of Hoya

• Second, there was no intentional omission to put the BIR at a disadvantage since the

BIR was not prevented from issuing the deficiency assessment within the 3-year general prescriptive period • There was no fraudulent intent to evade the payment if the correct amount of tax

C. DOF/ BIR Tax updates for 2017

i. REVENUE REGULATIONS Issuances signed by the Sec. of Finance that define rules and regulations for the effective enforcement of the provisions of the NIRC and related statutes

1. Rev. Reg. No. 2-2017 (01/13/17) Payment of Taxes thru Credit/ Debit/ Prepaid card (Amends Rev. Reg. 3-2016) • Payment of taxes through these cards shall be made on the date and time

appearing in the system-generated payment confirmation receipt issued to the taxpayer-cardholder by the AAB-Acquirer • In case of late/ non-remittance of taxes to the BIR (despite the timely issuance

of a valid confirmation receipt by the AAB-Acquirer to the taxpayercardholder) liability to pay the tax rests upon the AAB-Acquirer since the latter becomes the trustee of the gov’t. with the obligation to remit payment on time to the BIR

2. Rev. Reg. No. 1-2017 (01/24/17) Prescribing Regulations for VAT Refund (under Sec. 112 prior to RMC 54-2014) • Administrative claim must be made within 2 years after the close of the taxable

quarter when sales were made • Documents must be completed within the 2-year period • Pending administrative claims prior to the effectivity of RMC 54-2014 shall be

processed by the concerned offices based on available documents within the 2year period

2. Rev. Reg. No. 1-2017 (01/24/17) – cont. Claims not Covered: • Claims beyond the 2-year prescriptive period • Those denied in writing by approving authority

• Those approved fully or partially by the approving authority • Those already appealed to and pending with the CTA unless there is proof of

withdrawal of the case filed with the CTA

3. Rev. Reg. No. 3-2017 (02/24/17) Implementation of Microfinance NGO’s Act (Rep. Act 10693) • Pursue a program of poverty eradication wherein poor Filipino families are

encouraged to undertake in entrepreneurial activities to meet their basic needs • It aims to encourage these institutions to work with the gov’t. to pursue

economic dev’t. • A duly-registered MF NGO shall pay a 2% tax based on gross receipts from

microfinance operations in lieu of all national taxes

3. Rev. Reg. No. 3-2017 (02/24/17) – cont. Implementation of Microfinance NGO’s Act (Rep. Act 10693) • Provided, that preferential tax treatment shall be entitled to this privilege only

when its primary purpose is microfinance to alleviate property, catering to the poor and low-income individuals • A Certificate of Accreditation issued by SEC is essential to avail of the 2%

preferential tax treatment • The basis of this tax treatment only applies to gross receipts from MF

operations related to lending and insurance activities • All others shall be subject to applicable rates

4. Rev. Reg. No. 4-2017 (03/07/17) Issuance of Authority to Release Imported Goods (ATRIGs) • This amends certain provisions of Rev. Reg. 2-2016 particularly in issuance of

ATRIGs for imported automobiles already released from customs custody  For foreign embassies and recognized international organizations, a one-time

ruling confirming exemption from ATRIG on importation of automobiles shall first be secured from the International Tax Affairs Division (ITAD) of the BIR  This will be presented to Bureau of Customs prior to release of imported

automobiles from customs custody

5. Rev. Reg. No. 5-2017 (04/20/17) Act Expanding the Benefits and Privileges of PWDs (Rep. Act 10754) • This regulation implements Rep. Act 10754

• This prescribes the guidelines for the availment of tax incentives for

establishments granting 20% sales discount and exemption from VAT under Rep. Act 9442 (Magna Carta for Persons with PWD) • Qualified Persons With Disability shall be entitled to the 20% discount from

certain establishments to sale of goods and services for personal consumption

6. Rev. Reg. No. 6-2017 (09/25/17) Use of Internal Revenue Stamps • This regulation amends certain provision of Rev. Reg. 7-2014 prescribing

affixture of Internal Revenue Stamps on Imported and Locally Manufactured Cigarettes • This also prescribes the use of Internal Revenue Stamps Integrated System

(IRSIS) for monitoring the affixture of stamps • After approval of the order of stamps and prior to release from the APO

designated plant, the importer or local manufacturer of cigarette shall pay to APO (P0.15) per IRS

6. Rev. Reg. No. 6-2017 (09/25/17) – cont. Use of Internal Revenue Stamps (IRS) • The IRS shall be affixed at the upper portion of the immediate container of the

cigarettes • Cigarettes packed in 5 and 10 sticks bundled in pack of 20s and other

packaging combinations of not more than 20 shall be taxed as one but the IRS stamps affixed to these cigarettes shall be equivalent to the number of packs bundled together • All locally manufactured packs of cigarettes shall be affixed with new Internal

Revenue Stamps pursuant to the transitory provisions of the Revenue Regulation

7. Rev. Reg. No. 7-2017 (11/23/17) BSP’s Obligation as Withholding Agent of CWT • This amends the pertinent provision of Rev. Reg. 2-98 which reduced BSP’s

obligation as withholding agent of the Creditable Withholding Tax from 5% to 1% • This refers to income payments on purchases of minerals and quarry resources

such as gold, silver and other materials • However, BSP as the constituted agent shall only collect the 1% Creditable

Withholding Tax on its purchase of metallic minerals and the 2% excise tax due thereon.

ii. REVENUE MEMORANDUM CIRCULAR Issuances that published pertinent and applicable portions as well as amplification of laws, rules, regulations and precedents issued by the BIR and other agencies

1. Rev. Memorandum Circular 1-2017 (12/22/16) Unitary Excise Tax Rate on Cigarette Tax Stamps • This Circular clarifies Sec. 2(C) of RR No. 7-2014 on the colors of cigarette

tax stamps in relation to the effectivity of unitary excise tax rate

• Effective 01/01/17, all removal/ withdrawal/ importation of cigarettes

(whether packed by hand or machine) shall be subject to the unitary excise tax rate of P30

• To monitor implementation, the Excise Large Taxpayer Field Operations

Division shall conduct inventory count of all unused/ unissued and unaffixed Internal Revenue Stamps in the possession of cigarette manufacturers, importers and exporters as of 12/13/16

1. Rev. Memorandum Circular 1-2017 (12/22/16) – cont. Unitary Excise Tax Rate on Cigarette Tax Stamps • Thereafter, all removal and importation using old Internal Revenue Stamps

shall pay the differential Excise Tax due through Electronic Filing System using BIR Form No. 2200-T

2. Rev. Memorandum Circular 18-2017 (03/01/17) Issuing CTE to Cooperatives • Under a Memorandum of former Comm. Henares dated 02/24/15, BIR

officials were directed to refrain from issuing CTE to cooperatives not specifically identified under RA 9520 (labor contracting, professionals, construction, mining and other cooperatives similarly created) • Upon recommendation of the Deputy Comm. of Legal Group, the

Commissioner approved that service cooperatives must not be totally prohibited from availing of tax incentives (Rep Act 9520) provided that they are registered with the CDA and issued Certificates of Good Standing to show that they are bona fide cooperatives

2. Rev. Memorandum Circular 18-2017 (03/01/17) – cont. Issuing CTE to Cooperatives • The service cooperatives will also be subject to prost audit verification to check

on whether they are just being used as tax shield or evade tax payment

3. Rev. Memorandum Circular 23-2017 (03/07/17) Vat Exemption Identification Card (VEIC) • This Circular prescribes a new VEIC for qualified diplomats, officials and

dependents of the US Embassy • BIR received reports that the use of VEIC on personal purchase of goods and

services by the holders has caused confusion among business establishments due to the existing layout of cards that appears to be issued by the US Embassy rather than the BIR • All VEICs duly issued before the issuance of this RMC shall remain valid until

their expiry dates

4. Rev. Memorandum Circular 24-2017 (03/08/17) Suspension of Enrollment to eFPS • This prescribes the addendum of RMC No. 14-2017 on the temporary

suspension of enrollment to eFPS o Taxpayers required to secure the BIR’s Importer’s Clearance Certificate (ICC),

Broker’s Clearance Certificate (BCC) and Gov’t. Bidder’s Tax Clearance are exempted from provisions, suspending eFPS enrollment during the period of Mar 1 to Apr 30 of every year o RDO shall continue to process eFPS applications of said taxpayers and activate

accounts upon verification of completeness of documents submitted

4. Rev. Memorandum Circular 24-2017 (03/08/17) – cont. Suspension of Enrollment to eFPS o Taxpayers who successfully enrol to eFPS shall file their tax returns through

eFPS facility o Taxpayers who do not receive an auto-email notification of successful enrolment

within 24 hours shall file their returns thru BIR forms facility until such time they receive their notification o The conditions under this RMC shall apply only for the duration of suspension

of eFPS enrolment from March 1 to April 30 of every year

5. Rev. Memorandum Circular 27-2017 (03/28/17) Basis of Tax on Sale, Exchange of Real Property • This Circular clarifies the basis for imposition of tax on the sale, exchange or

other disposition of real property o CGT/ Income Tax and Withholding tax on sale, exchange or other disposition of

real property shall be based on the gross selling price or FMV as determined under Sec. 6€ of the Tax Code, whichever is higher o FMV of the property shall be the FMV as determined by the Commissioner or

the FMV as shown in the Schedule of Values of the Provincial and City Assessors, whichever is higher

5. Rev. Memorandum Circular 27-2017 (03/28/17) – cont. Basis of Tax on Sale, Exchange of Real Property o Revenue Official shall not apply any basis (such as comparative sales) other than

those mentioned above for the imposition of tax on sale, exchange or other disposition of real property

6. Rev. Memorandum Circular 31-2017 (04/12/17) Microfinance NGOs Act • This Circular covers the advisory issued by the Microfinance NGO Regulatory

Council as to the implementation of the tax provisions of Rep. Act No. 10963 (Microfinance NGOs Act) • Microfinance NGOs certified by the SEC to have no derogatory information

are entitled to avail of the 2% gross receipts on its income from microfinance operations • All Microfinance NGOs that were able to secure a Certificate of No

Derogatory Information are advised to update their registration using BIR Form 1905 and submit the certificate issued from 2016 to present

7. Rev. Memorandum Circular 34-2017 (04/26/17)

Filing, Receiving and Processing of 2016 ITR • This Circular clarifies paragraph 6 of RMC 28-2017 as to the guidelines in the

filing, receiving and processing of 2016 Income Tax Return and all its attachments • Attachments shall be submitted to the LTS/ RDO or AABs located within the

territorial jurisdiction of the LTS/ RDO where the taxpayer is registered.

7. Rev. Memorandum Circular 34-2017 (04/26/17) – cont.

Filing, Receiving and Processing of 2016 ITR  Taxpayers who filed electronically shall also submit online a copy of ITR and

its attachments with Filing Reference Number (FRN) thru an eFPS facility or an email Tax Return Receipt Confirmation within 15 days from the deadline of filing or date of electronic filing at the return whichever comes later

8. Rev. Memorandum Circular 35-2017 (04/27/17)

Payment of Capital Gains Tax • This Circular clarifies the imposition of CGT on sale, exchange or other

dispositions of a real property • Payment of CGT is a direct consequence of the sale, exchange or transfer • It is not the transfer of ownership per se that subject these transactions to CGT

but the profit presumed to be realized by the seller • Mere issuance of a tax declaration in the absence of any sale or exchange is not

subject to CGT

9. Rev. Memorandum Circular 36-2017 (05/03/17)

Format of Certificate of Availment • This Circular prescribes BIR Accountable Forms relative to the implementation

of RMO 3-2017 • This is regarding the format of Certificate of Availment/ Approval of Denial

relative to the Application for Compromise Settlement and/ or Abatement of Penalties BIR Form No.

Form Name

2342

Certificate of Availment – Compromise Settlement

2343

Certificate of Availment – Abatement of Penalties

0427

Notice of Denial – Application for Compromise Settlement

0428

Notice of Denial – Application for Abatement of Penalties

10. Rev. Memorandum Circular 42-2017 (06/09/17)

Certificate of Update of Exemption and /of Employer and Employees Information • This Circular prescribed the revised BIR Form No. 2305 (Certificate of Update

of Exemption and/ of Employer and Employee’s Information) • This reflects the provision of Rev. Reg. 5-2017 implementing Rep. Act 10754

(Act Expanding the Benefits and Privileges of Person with Disability (PWD) • This discusses the tax privileges of PWD

11. Rev. Memorandum Circular 43-2017 (06/09/17)

Update of Exemption of Employees Data Entry Module • This Circular announces the availability of the new versions of Update of

Exemption of Employees (UEE) Data Entry Module and Batch File Validation Module used in the filing of BIR No. 2305 Batch File Validation Module • Updates in the new version include the acceptance of PWD pursuant to Rep.

Act. 10754

11. Rev. Memorandum Circular 43-2017 (06/09/17) – cont.

Update of Exemption of Employees Data Entry Module • Each employer should ascertain whether a PWD, regardless of age, who

claimed as a dependent, is qualified by satisfying that he is a Filipino citizen within the 4th civil degree of consanguinity or affinity to the taxpayer, not employed and dependent upon living with the taxpayer/ benefactor

iii. REVENUE MEMORANDUM ORDER Issuances that provide directives, guidelines and procedures necessary in the implementation of stated policies goals and programs of the BIR in all areas of operations except audit

1. Rev. Memorandum Order 8-2017 (03/28/17) Preferential Tax Treaty Benefits • This RMO prescribes the new procedure claiming preferential tax treaty

benefits on dividend, interest and royalty income amending RMO 72-2010 o Filing of a Tax Treaty Relief Application (TTRA) is no longer required to avail

relief for dividends, interests and royalties o Provisions of RMO No. 72-2010 shall apply on other types of income o Reduced tax rate of 15% on intercorporate dividends paid to non-resident

foreign corporation under Sec. 28(B)(5)(b) of Tax Code shall be covered by a separate issuance

2. Rev. Memorandum Order 12-2017 (05/16/17) Welfare of Underprivileged and Homeless Sectors • This RMO aims to improve level of taxpayer service for underprivileged and

homeless sectors of society • Expedite issuance of Certificate of Tax Exemption (CTE) and electronic

Certificate Authorizing Registration (eCAR) for transfer of raw lands to HOA intended for socialized housing projects under the Community Mortgage Program (CMP of RA No. 7279 • Amplify laws decongesting requests for tax exemption on said transfer of raw

lands • Delineate functions of offices involved in processing transfer

3. Rev. Memorandum Order 18-2017 (08/07/17) Handling “Inactive” Business Taxpayers • This RMO was issued to define and set criteria in tagging taxpayers as “inactive”

providing policies, clean up the Taxpayer Registration Database and including this status in the Integrated Tax System • Taxpayer shall be considered “inactive” if a registered business taxpayer was

identified to have failed to file all the required internal revenue tax returns for all types that they are registered • Cannot be located taxpayers are those that cannot be served Letter of Notices

due to failure to locate the subject taxpayers after exhausting all possible means

4. Rev. Memorandum Order 28-2017 (04/25/17) PERA Act of 2008 (RA 9505) • This RMO was issued to revise reportorial requirements on the guidelines in

the implementation of Personal Equity and Retirement Account • The objective is to establish a more effective data gathering measures for proper

implementation of the undertaking under this RMO • This will also ease submission of PERA reports in favor of both the PERA

administrators and processing office by simplifying reports on transactions

5. Rev. Memorandum Order 30-2017 (09/29/17) Amendment of Signatories in the eCAR • This RMO was issued to amend signatories in the eCAR provided in RMO 55-

2016 • For expedient taxpayer service, either the RDO or the ARDO may sign an

eCAR in cases one is absent • In instances where both are absent, the Chief of the Assessment Section may

sign on their behalf

iv. REMEDIES

1. Rev. Reg. No. 18-2013 (Tax Audit in the PH) a. PAN instead of Informal Conference • In RR 12-99, the findings and alleged deficiency taxes from tax assessment in

the PH shall be contained in a Notice for Informal Conference/ Preliminary Findings giving the taxpayer 5 to 15 days to respond either through informal discussion with handling paper or position paper to the Notice for Informal Conference • Under the new rules, issuance of Notice of Informal Conference has been

deleted and a Preliminary Assessment Notice (PAN) shall be issued • Taxpayer may pay deficiency taxes in the PAN or file a reply within 15 days

When is PAN No Longer Required? Under Sec. 228 of the tax code, PAN shall no longer be required in the ff. cases: o When the finding for any deficiency tax is the result of mathematical

error in the computation of the tax appearing on the face of the tax return o When a discrepancy has been determined between the tax withheld and

the amount actually remitted by the withholding agent o When a Taxpayer who opted to claim a Refund/ Tax Credit of excess

CWT for a taxable period have carried over the same amount claimed against future tax liabilities

When is PAN No Longer Required ? – cont. Under Sec. 228 of the tax code, PAN shall no longer be required in the ff. cases – cont.: o When the excise tax due on excisable articles has not been paid o When an article locally purchased or imported by an exempt person has

been sold to non-exempt persons

1. Rev. Reg. No. 18-2013 (Tax Audit in the PH) b. Issuance of FAN/ FLD within 15 days from PAN • Upon issuance of PAN, BIR will issue a Final Assessment Notice – Formal

Letter of Demand (FAN-FLD) within 15 days • Wording of this regulation is silent as to the impact of the reply to the PAN

timely filed within 15 days from receipt thereof • Taxpayer may pay deficiency taxes in the FAN-FLD issued within the

prescriptive period of the BIR to issue or file the protest to the FAN-FLD with factual and legal basis within 30 days from receipt thereof then submit complete supporting docs within 60 days from filing the protest

What if there are Several Findings in FLD/ FAN? o In this case, a Collection Letter will be issued with regard to those tax

deficiency findings which are not protested by the taxpayer as the same shall be considered Final and Executory like those protested items where the taxpayer fails to state the factual or legal basis in support of his protest o The Collection Letter shall include payment of the said deficiency tax,

inclusive of applicable surcharge and/ or interest

Request for Reconsideration vs. Request for Reinvestigation o Request for Reconsideration – plea for re-evaluation of an assessment

on the basis of existing records which were already presented before. Since there is no need for additional evidences, the 60-day rule for submission of supporting documents does not apply o Request for Reinvestigation – plea for re-evaluation of an assessment on

the merits of newly discovered evidences that a taxpayer intends to present on the reinvestigation. The taxpayer has 60 days from the filing of the protest to submit its supporting documents

Requirement for filing of Protest letter c. Final and executory of undisputed findings • In filing the protest, taxpayer should dispute all alleged findings on deficiency

internal revenue taxes • Any item stated in the assessment that has not been disputed will become final

and executory where the taxpayer will be required to pay upon filing the protest • Protests filed without payment on undisputed findings will not be accepted

by the BIR

Requisites of a Valid Protest It must be made in writing, addressed to the Commissioner of Internal Revenue, contains below information and complies with the following conditions: o Name of taxpayer and address for the immediate past three (3) taxable years o Nature of request whether reinvestigation or reconsideration o Taxable periods covered o Assessment Number o Date of Receipt of Assessment Notice or Letter of Demand

Requisites of a Valid Protest – cont. o Itemized statement of the findings to which the taxpayer agrees as a basis for

computing the tax due, which amount should be paid immediately upon the filing of the protest For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first o Itemized schedule of the adjustments with which the taxpayer does not agree o Statement of facts and/ or law in support of the protest

Failure of the taxpayer to comply here renders the protest void even if the protest submitted by the taxpayer is accepted

Guidelines on Protest Letters and Requests for Reinvestigation/ Reconsideration RMC No. 39-2013 outlines the following procedures: 1. All Protest Letters, Requests for reinvestigation/ reconsideration shall be made with the Office of the concerned Regional Director (RD), Asst. Commissioner -Large Taxpayers Service (ACIR-LTS) and Asst. Commissioner - Enforcement Service (ACIR-ES) who signed the PAN, FAN and Formal Letters of Demand, for proper recording

This procedure must be strictly followed by taxpayers since failure to do so would render the Protest Letter/ Requests void and without force and effect

Guidelines on Protest Letters and Requests for Reinvestigation/ Reconsideration – cont. 2. After filing is made, Revenue Officers are mandated to ensure that the protests are properly prepared in the prescribed form and promptly submitted to the CIR every Monday of each week in hard and soft copies 3. Based on the weekly report submitted, CIR’s office shall create a database of all protests and requests received by the different offices of the BIR

4. Any Protests/ Requests allegedly filed by any taxpayer but not included in the database shall be deemed not officially filed with the BIR and shall not be used as basis for granting or denying the Protests/ Requests

Guidelines on Protest Letters and Requests for Reinvestigation/ Reconsideration – cont. • While RMC No. 39-2013 will aid the BIR in monitoring Protests/ Requests, it

raises some concerns on the part of the taxpayers, specifically #4 above, which considers invalid any Protests/ Requests not included in the CIR database • Since the creation of the CIR database is largely dependent on human effort, it

cannot be absolutely free of human errors • If this rule is strictly implemented, taxpayer who have faithfully filed their Protest

Letters may stand to lose simply because of possible procedural lapses on the part of the BIR • If necessary, Taxpayers may need to secure a certification from the CIR that their

Protest Letter is already included in the CIR database

Rules for Administrative Appeal d. Administrative Appeal • Tax assessment process would be undertaken by the Commissioner or Regional

Directors • In this event, a taxpayer has the option to elevate the tax assessment case in the

PH with the CTA through Petition for Review within 30 days: o Denial of the protest to the FAN-FLD o Inaction on the protest within 180 days

• Under the new rules, if a denial or inaction has been made by the

Commissioner’s authorized representative, the taxpayer has the option to elevate it with the CIR instead of having the same with the CTA

Service of Notices e. Service of Tax Assessment Notices to taxpayers • Under RR No. 12-99, services of notices such as PAN and FAN-FLD shall be made

either by personal delivery or by registered mail only

• In this new rules of tax assessment in the PH under this Rev. Reg., the ff. new

modes of serving notices have been introduced that are aligned with the Rules of Court of the SC o Service to taxpayer in its business address or residence o Service to professional courier under service by mail o Service to the OIC of the office or legal resident at residence or with the barangay

officials under substituted service o Service to tax agent

• BIR has more options now for the service of notices for each taxpayers under tax

assessment

Penalties & Interest • Under the Tax Code in addition to basic taxes, failure of the taxpayer to file returns

and pay taxes shall result in the imposition of the 25% surcharge based on the amount of basic tax • In case of false or fraudulent return, 50% surcharge is imposable • In case of Deficiency Tax Assessment, there is also a surcharge of 25% based on the

amount of the deficiency tax • Moreover, a deficiency interest of 20% per annum (computed from the date

prescribed for payment of the tax until full payment) is imposed on the amount of basic tax • There is also a compromise penalty depending on the violation based on a Schedule

of Compromise Penalties prescribed by the BIR

Delinquency Interest f. Imposition of Delinquency Interest • Delinquency interest – interest being imposed upon a taxpayer as an addition

to the tax (from the time required to be paid as stated in the FAN-FLD up to such time of full payment) • RR No. 18-2013 expressly provides that delinquency interest should be imposed • The base for the computation of such delinquency interest includes deficiency

interest from the time required by law for the return to be filed or from late filing until the date required to be paid as stated in the FAN-FLD • Deficiency interest will generate delinquency interest similar to a compounded

interest

Deficiency and Delinquency Interest Under RR 18-2013  20% deficiency interest shall be assessed from the date prescribed for the

payment of the tax until the full payment thereof  20% delinquency interest shall be collected from the due date appearing on

the Notice and Demand of the Commissioner until the amount is fully paid

Remedies of the Govt. for Collection of Delinquent Taxes

If the assessment against the taxpayer becomes final, executory and demandable, the BIR may effect the collection of taxes and incremental penalties by: o Distraint of personal property which includes stocks, debts, credits, bank

accounts and rights over personal property o Garnishment in case of money o Levy upon real property and interest over real property

o Civil or criminal action

Above remedies may be pursued simultaneously until full amount of tax is paid.

Remedies of the Govt. for Collection of Delinquent Taxes  Another remedy of the BIR to enforce collection of delinquent taxes is by

issuing Warrant of Garnishment of money of a delinquent taxpayer in the possession of a bank, employer or debtor  BIR issued RMO No. 30-07 in 2007 intended to convert the long standing

delinquent accounts into revenue through the issuance of warrant of distraint/ levy and/or garnishment on delinquent accounts that are still pending with the various BIR offices, to be signed and approved by the concerned BIR official based on prevailing revenue delegation authority orders

Remedies of the Govt. for Collection of Delinquent Taxes • Upon issuance, Revenue Officers in charge of collection should immediately

identify the properties and specific accounts owned by and in the name of the taxpayer that shall be levied, forfeited, seized or garnished in favor of the government • A Notice of Tax Lien and Notice of Levy shall be sent out to place such identified

properties under seizure/ forfeiture/ garnishment • There will be proper annotations of the lien on the document evidencing the

ownership of the taxpayer • The sale through public auction will be made in accordance with the existing

rules and regulations unless full payment of the delinquency taxes are duly paid

Amended Sec. 6(E) of NIRC - TRAIN • Prescribing Real Property Values - CIR is authorized by the Tax Code to

divide the country into different zones or areas. • He shall, upon consultation with the competent appraisers both from private

and public sectors with prior notice to affected taxpayers, determine the FMV of real properties located in each zone or area. This is referred to as the zonal value.  The FMV shall be subject to automatic adjustment once every 3 years through

rules and regulations issued by the Sec. of Finance based on the current Phil. valuation standards.

Amended Sec. 6(E) of NIRC  No adjustment in zonal value shall be valid unless published in a newspaper of

general circulation or in its absence shall be posted in the province, city or municipality concerned and in 2 conspicuous public places • For purposes of computing any Internal Revenue Tax, the value

of the property shall whichever is the higher of: 1. FMV as determined by the Commissioner 2. FMV as shown in the Schedule of Values of the Provincial and City Assessors. (Sec. 6[e] tax code) 

The basis of any valuation shall be public records open to any inquiry of the taxpayer

Procedure for Levy of Real Estate 1. Preparation of a Duly Authenticated Certificate showing the Name of the Taxpayer and the Amount of the Tax Delinquency, the certificate shall operate with the force of a legal execution throughout the Philippines 2. Writing upon said Certificate a Description of the Property upon which levy is made 3. Service of Written Notice to Delinquent Taxpayer or Occupant of the Property. The proper Register of Deeds of the province of city where the property is located shall also be notified of the levy

Procedure for Levy of Real Estate – cont. 4. Advertisement of the time and place of sale of the Taxpayer’s property or so much thereof as may be necessary to satisfy the claim within 20 days after levy and it shall cover a period of at least 30 days 5. Sale at public auction to the highest bidder 6. Disposition of proceeds of sale - In case the proceeds of the sale exceed the claim (assessed taxes, penalties and interest) and cost of the sale, the excess shall be turned over to the owner of the property.

Real property placed under levy may be sold at public auction for less than its market value since the delinquent taxpayer is given the right to redeem.

Remedies of the Govt. for Collection of Delinquent Taxes  In case of Warrant of Garnishment, the same may be issued not only to

banks where the delinquent taxpayer may possibly maintain bank accounts but may also be applied to the delinquent Taxpayer’s Compensation Income from his employers and to the Taxpayer’s Receivables from contracts and similar agreements with the private and government sectors  In case of Real Property registered in the name of the delinquent taxpayer, a

Notice of Levy shall be filed with the concerned Register of Deeds  In case of Personal Property, a Notice of Actual Seizure of Personal

Property shall immediately be seized following the procedures in the collection manual

Remedies of the Govt. for Collection of Delinquent Taxes • Notice of Sale of Real/ Personal Property levied/ distrained shall immediately

be published and the sale shall be conducted through a public auction in the manner prescribed under existing revenue issuances

• In case there are no qualified bidders or no bidders at all, a Declaration of

Forfeiture shall immediately be issued and filed with the concerned Register of Deeds to transfer the title to the Republic of the Philippines after the lapse of the redemption period

• In the event the summary remedies do not succeed, the docket of the case shall

be referred to the Legal Service Division for the filing of civil or criminal action against the taxpayer

Resale of Real Estate taken for Taxes CIR shall be in-charge of any real estate obtained by the government in payment or satisfaction of the taxes, penalties or costs arising under the Tax Code and in compromise or adjustment of any claim therefor: o He may upon giving not less than twenty (20) days notice, sell and dispose

of the same at public auction, or with the approval of the Sec. of Finance, may dispose of the same at a private sale o In either case, the proceeds of the sale shall be deposited in the National

Treasury, and an account of the same shall be rendered to the Commission on Audit

Redemption of Property Sold or Forfeited – cont. Person Entitled to Redeem – the Delinquent Taxpayer or anyone for him shall have the right to redeem the property sold or forfeited Time to Redeem – the right of redemption may be exercised within one (1) year from the date of the sale or forfeiture

The one year period begins from the Registration of the Deed of Sale or Declaration of Forfeiture. The rationale behind this is that the owners of the properties sold for delinquency may be notified of the act taken in connection with their properties. This one year redemption period is not extendible by the courts.

Redemption of Property Sold or Forfeited – cont. Possession of property pending redemption – the owner (Delinquent Taxpayer) shall not be deprived of the possession of the property sold and shall be entitled to the rents and other income until the expiration of the time allowed for its redemption Thus, the right of the highest bidder who purchased the property is merely inchoate It becomes absolute only upon the expiration of the one-year redemption period

Redemption of Property Sold or Forfeited – cont. Price of redemption – the person redeeming the property shall pay to the Internal Revenue Officer the amount of the taxes and incremental penalties from the date of delinquency to the date of sale at public auction together with interest on said purchase price at the rate of 15% per annum from the date of purchase to the date of redemption The property may be sold for less than its fair market value upon the theory that the lesser the price, the easier it is for the owner to buy back the property

Redemption of Property Sold or Forfeited – cont. Right of redemptioner – the person making the redemption shall be entitled to the delivery of: o The certificate issued to the purchaser o The certificate from the Internal Revenue Officer that he has redeemed the

property After the redemption, the Internal Revenue Officer shall pay over to the purchaser the amount by which such property has been redeemed

Thereafter, the property shall be free from lien of taxes and penalties

Remedies of the Govt. for Collection of Delinquent Taxes Tax lien – Taxpayers who after demand, neglects or refuses to pay the tax assessment, the amount thereof shall constitute a lien on all property and rights to property belonging to the taxpayer from the time the assessment is made until fully paid However, the lien shall not be valid against any 3rd party until notice of such lien is filed with the Register of Deeds of the province or city where the property of the taxpayer is situated

The tax lien will subsist from the time the tax assessment is made until full payment of the unpaid tax and incremental penalties

Remedies of the Govt. for Collection of Delinquent Taxes Inquiring into Bank Deposit Accounts - despite Rep. Act 1405 on Secrecy of Bank Deposits, CIR is authorized by the Tax Code to inquire into the bank deposits of : o A Decedent or Deceased Person to determine his gross estate o Any Taxpayer who has filed an application to compromise his Tax Liability

under Sec. 204 of the Tax Code by reason of financial incapacity to pay his tax liability o The taxpayer should waive in writing his privilege under R.A. 1405 before his

compromise request could be given due course

Remedies of the Govt. for Collection of Delinquent Taxes Third Party Verification – In ascertaining the correctness of any return or in making a return when none has been made, the CIR or his authorized representative may: o Obtain information on a regular basis from any person other than the taxpayer

under audit, or from any office of the National and Local Government including the BSP and GOCC o To summon any person having custody of the Books of Accts and other

accounting records pertaining to the taxpayer under audit

Remedies of the Govt. for Collection of Delinquent Taxes Inventory-taking of stock-in-trade and making surveillance –CIR may at any time during the taxable year order inventory-taking of the stock-in-trade of any taxpayer as a basis for determining his internal revenue tax liabilities o CIR may place the business operations of any person under surveillance if there

are reasons to believe that such person is not declaring his correct income o CIR’s findings can be used as a basis of assessment and shall be deemed prima

facie correct

Remedies of the Govt. for Collection of Delinquent Taxes Prescribing Presumptive Gross Sales or Receipts – The CIR after taking into account the sales, receipts, income, other taxable base of other persons engaged in similar businesses under similar situations or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and taxable base Under RMO 5-2012, BIR prescribed the guidelines and procedures in the conduct of industry performance benchmarking method Former BIR Commissioner Henares emphasized that the Performance Benchmarking Method is a “surgical measure to detect tax leakages and improve collections on VAT, income and other taxes”

Remedies of the Govt. for Collection of Delinquent Taxes  RMO 5-2012 is more structured than RMO 4-2006 which was issued by the BIR in 2006

because it clearly defined the process in determining the basis for benchmark and identifying potential Non-compliant Taxpayers  “Benchmarking”, as defined in the RMO, “is a point of reference for measurement or a

set of standard used to measure the performance or compliance of taxpayers in a particular industry  RMO focuses on Income Tax and Value Added Tax (VAT) compliance  Presumption of non-compliance must not be made arbitrarily  BIR must ensure the integrity of the data collected and that there are acceptable, rationale

bases for adopting a benchmarking method

Remedies of the Govt. for Collection of Delinquent Taxes Expenditure Method – In the case of CIR vs. Antonio Villan Manly (G.R. 197590) decided by SC on Nov. 24, 2014, the use of the expenditure method to assess a taxpayer was allowed This is a method of reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from the declared yearly income

This happens when the amount of money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income

Remedies of the Govt. for Collection of Delinquent Taxes Net Worth Method of Investigation - Net Worth Expenditures Formula for determining increases in taxable income goes this way: “Increase in net worth plus nondeductible expenses, minus Non-taxable Receipts, equals Taxable net income” This is the method which brought longest time U.S. Mobster Alfonse “Scarface” Capone to jail for tax evasion While Al Capone was able to get away with murder or mulcting money, it took a simple audit of his fabulous expenditures that led to the filing of Tax Evasion charges against him for which he pled guilty on June 16, 1931

Remedies of the Govt. for Collection of Delinquent Taxes Tax-mapping – BIR has been regularly conducting inspection of business establishments throughout the country and doing what is popularly known as “taxmapping” Its purpose is to inspect compliance of business establishments to registration, invoicing, bookkeeping and other rules and regulations of the BIR and to catch Tax Evaders This is usually done by a BIR Representative unannounced Thousands of business establishments have already been filed with charges under this Tax Compliance Verification Drive

Remedies of the Govt. for Collection of Delinquent Taxes Tips to legally avoid paying penalties in case of Tax Mapping: a. Register your business with the BIR. b. Pay Annual Registration Fee (BIR Form 0605) on or before Jan. 31 of each year. c. Display in your establishment: o BIR Certificate of Registration (BIR Form 2303) o Annual Registration Fee for the current year (BIR Form 0605) o Notice to the Public “Ask for Receipt” signage.

Remedies of the Govt. for Collection of Delinquent Taxes – cont. d. Issue receipts/ invoices for your sale of goods or services e. Register your company’s manual receipts/invoices with the BIR f. Register your company’s Cash Register Machine (CRM), Point of Sales Machine (POS) or similar devices with the BIR Any violation made regarding issuance of receipts shall be penalized with a fine of not less than P500K but not more than P10M and imprisonment of not less than 6 years but not more than 10 years - Amended Sec. 264 of NIRC

Remedies of the Govt. for Collection of Delinquent Taxes g. Attach original sticker in the machine authorizing the use of CRM/ POS or similar device h. Register Books of Accounts with the BIR and maintain it in the business establishment i. Withhold and remit the tax on the following with the BIR: Compensation of Employees (BIR Form 1601c), Payments subject to Final and Creditable Withholding Tax (BIR Form 1601e)

Failure to Transmit Data Entered on CRM/ POS  A taxpayer required to transmit sales data to BIR’s Electronic Sales

Reporting System but fails to do so shall pay a penalty of 1/10 of 1% of annual net income as reflected in AFS for the 2nd year preceding the current taxable year for each day or P10K whichever is higher  Should the aggregate no. of days of violation exceed 180 days within a

taxable year, an additional penalty of permanent closure of taxpayer shall be imposed except if due to force majeure

Judicial Remedies of the Govt. for Collection of Delinquent Taxes  Civil or Criminal Action for the collection of taxes may also be pursued by the

BIR  Civil Action refers to actions filed in the Regular Courts (Regional Trial

Courts, Metropolitan Trial Courts and Municipal Trial Courts) depending on the amount involved after the assessment has become final and executory  It includes filing by the government with probate courts of claims against

deceased taxpayers  The claim for unpaid taxes must be filed within the period of limitation

prescribed in the Tax Code under Sections 203 & 223

Judicial Remedies of the Govt. for Collection of Delinquent Taxes • Criminal Action is now a direct mode for collection of delinquent taxes.

The judgment in the criminal case shall not only impose the penalty but also order payment of the taxes subject to the criminal case as finally decided by the CIR

• An assessment of tax deficiency is not necessary to a criminal prosecution

for tax evasion. The crime is complete when the violator has knowingly and willfully filed a fraudulent return with intend to evade and defeat the tax (Cusi vs. Ungab, May 30, 1980) • This ruling was qualified in Fortune Tobacco Corp. Case where it was ruled

that for a criminal prosecution to proceed, there must be a prima facie showing of willful attempt to evade.There is a dissenting opinion

Judicial Remedies of the Govt. for Collection of Delinquent Taxes Effect of Acquittal in the Criminal Case - Such acquittal does not exonerate taxpayer from his civil liability to pay the tax due Government may still collect the tax in the same action

The reason is that the payment of tax is an obligation imposed by statute and does not arise from a criminal act Thus, taxpayer is still liable where acquittal is based on the fact that the failure to pay was due to a reasonable cause and not to willful neglect Likewise, satisfaction of the civil liability for the taxes will not operate to extinguish taxpayer’s criminal liability

Judicial Remedies of the Govt. for Collection of Delinquent Taxes Form and Mode of Proceeding – Civil and Criminal actions for collection of delinquent taxes are brought in the name of the government of the Philippines and are conducted by the Legal Officers of the BIR The government of the Philippines would be the plaintiff in the case However, when the taxpayer files an action in the CTA for the refund or credit of Internal Revenue Taxes, the CIR and not the government should be made the defendant

Judicial Remedies of the Govt. for Collection of Delinquent Taxes Approval of Commission of Internal Revenue is essential – Law requires that no civil and criminal action for the collection of delinquent taxes shall begin without the approval of the CIR The rationale of this requirement is to allow taxpayers to enter into compromise agreements with the BIR, particularly in meritorious cases It is best that any contemplated action against a taxpayer be first studied and acted upon by the agency charged with the enforcement of internal revenue laws since taxation is a technical subject

Judicial Remedies of the Govt. for Collection of Delinquent Taxes Approval of Regional Director is sufficient – The Regional Director, as head of a Regional District has been given Delegated Authority and Power to approve Filing of Civil and Criminal actions in court since it is not among the power exclusively belonging to the CIR under Sec. 7 of the Tax Code which are as follows: o Power to recommend rules and regulations to the secretary of finance o Power to issue rulings of first impression o Power to compromise or to abate under Sec. 204 of the Tax Code except if the

amount of Basic Deficiency Taxes is Php500,000 or less o Power to assign or reassign Internal Revenue Offices to establishments where

articles subject to excise tax are produced or kept

Recourse if documents could not be submitted

 In cases there are reasons where the taxpayer cannot submit his Books of

Accounts, Accounting Records and other documents requested in the Electronic Letter of Authority (eLA)  He may request for an extension of time within which to submit the same to

avoid the issuance of a Jeopardy Assessment, provided he executed a Waiver of the Statute of Limitations

What is a “Jeopardy Assessment”? Consequence if Taxpayer refuses to Execute a Waiver  Jeopardy Assessment is a tax assessment made by an authorized Revenue

Officer without complete or partial audit since he believes that the assessment and collection of a deficiency tax will be jeopardized by delay due to taxpayer’s failure to comply with submission of his books of accounts and/ or pertinent records for audit purposes  This is an assessment usually made to beat the prescriptive period for the

issuance of the final assessment

Effect of Failure to Comply With eLA  If the taxpayer still fails or ignore the submission of the records and

documents requested in the eLA issued by the BIR, the taxpayer will soon receive a Subpoena DucesTecum  Taxpayer is advised for prudence sake not to take the situation into a very

compromising one  It is because the taxpayer will lose his bargaining power to settle the tax

deficiencies that the Examiner may come up with

Effect of Failure to Comply With eLA – cont.  There are instances when the BIR requests for a copy of the tax return from

the taxpayer.  While the taxpayer knows that one is not actually required to submit the

returns being asked by the BIR because they are expected to have these returns on their files, for prudence sake, they should comply with the request.  This is to facilitate the immediate conclusion of the investigation by the BIR.

Period within which an Audit may be Conducted  A Revenue Officer is allowed only 120 days from the date of receipt of a

Letter of Authority by the taxpayer to conduct the audit and submit the required report of investigation  If the Revenue Officer is unable to submit his final report of investigation

within the 120-day period, he must then submit a Progress Report to his head of office, and surrender the Letter of Authority for revalidation