Primus Cut and Paste

“PRiMUS CUT AND PASTE: The BAR STAR NOTES” in TAXATI0N With selected Supreme Court decisions up to May 10, 2009 VER: 09.05.12 by ABELARDO T. DOMONDON How to use the Notes: These Notes in the form of textual materials and representative review questions were specially prepared by Prof. Domondon for the exclusive use of Bar Candidates who attended his 2009 lectures on Taxation, and others he has personally authorized. The purpose of these Notes is to test the candidate’s ability to answer probable questions that may be asked in the September 33, 2009 Bar Examinations in Taxation. The last version to be released is Ver. 09.08.17 which may substantially alter the contents of this Ver. 09.05.12 Be sure to secure the last version to replace this version. DO NOT MEMORIZE the suggested answers. Some of the answers were purposely made to be lengthy in order to serve as explanatory devices. This is so because you do not have time anymore to refer back to your review materials. The materials are arranged in accordance with the bar examination coverage. The actual bar questions may not be so arranged. Likewise, these Notes are only indicative of the areas from where Bar questions may be sourced. The questions shown in these Notes may or may not be exactly worded in the actual Bar questions. The reader is advised to take note of the areas marked with stars: If pressed for time, the reader should read only the items marked and . These areas represent 80% to 90% of the sources of questions that would probably be given in the 2009 Bar exams. The reader should merely browse the areas marked and the unmarked areas because they represent only 10% to 20% of the areas from where questions may probably be sourced this year. WARNING: These materials are copyrighted and/or based on the writer’s books on Taxation and future revisions. It is prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, including photocopying without the written permission of the author. Only copies with the signature of Prof. Domondon, or his authorized representative and the corresponding number on this page are considered authorized copies. Holders of authorized copies are requested not to lend their copies for reproduction through Xerox or otherwise. GENERAL PRINCIPLES OF TAXATION TAXATION, IN GENERAL 1. Why are tax laws construed strictly against the State and liberally in favor of the State ? SUGGESTED ANSWER: In case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99) 2. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State ? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State. 3. Strict interpretation of tax exemption laws. Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301) 4. Rationale for strict interpretation of tax exemption laws. The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that “exemptions are never presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302) 5. What is the effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer ? SUGGESTED ANSWER: A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99) 6. Why is the right to collect taxes imprescriptible ? SUGGESTED ANSWER: a. As a general rule, revenue laws are not intended to be liberally construed, and exemptions are not given retroactive application, considering that taxes are the lifeblood of the government and in Holmes’ memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. (Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutes may provide for prescriptive periods for the collection of particular kinds of taxes. Tax laws, unlike remedial laws, are not to be applied retroactively. Revenue laws are substantive laws and their application must not be equated with remedial laws. (Acosta, supra) 7. It is said that taxes are the lifeblood of the government and any delay in its collection would impair the rendition of government services. May the collection of taxes be restrained by a court ? SUGGESTED ANSWER: As a general rule, “No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge.” (Sec. 218, NIRC) However, the COURT OF TAX APPEALS is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (Sec. 11, Rep. Act No. 1125) 8. What are the grounds and procedure for suspension of collection of taxes ? SUGGESTED ANSWER: Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals. The MOTION FOR SUSPENSION of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005) 9. Explain the sumptuary purpose of taxation. SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected. Taxation may be made the implement of the state’s police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil. 148, 152 (1955); in turn citing Great Atl. & Pac. Tea Co. v. Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316] The reader should note that the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision. The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) 10. Explain the compensatory purpose of taxation. SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc.  Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) 11. What are the distinctions between a tax and a license fee ? SUGGESTED ANSWER: The following are the distinctions between a tax and a license fee: a. PURPOSE: A tax is imposed for revenue purposes WHILE a license fee is imposed for regulatory purposes. (Unless it is a joint exercise of both the police power and the power of taxation). b. BASIS: A tax is imposed under the power of taxation WHILE a license fee is imposed under police power. c. AMOUNT: There is no limit as to the amount of a tax WHILE the amount of license fee that could be collected is limited to the cost of the license and the expenses of police surveillance and regulation. d. TIME OF PAYMENT: Taxes are normally paid after the start of a business WHILE a license fee before the commencement of business. e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the business illegal WHILE failure to pay a license fee makes the business illegal. f. SURRENDER: Taxes being the lifeblood of the state, cannot be surrendered except for lawful consideration WHILE a license fee may be surrendered with or without consideration. 12. Distinguish taxation from police power. SUGGESTED ANSSWER: Taxation is distinguishable from police power as to the means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing U. S. Chief Marshall who once said, the power to tax involves the power to destroy, McCulloch v. Maryland, 4 Wheaton 316, cited in Sison v. Ancheta, G. R. No. L – 59431, July 25, 130 SCRA 654) and the belief that taxes are lifeblood of the state. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing “*T+axes being the lifeblood of the government, their prompt and certain availability is of the essence.” Sison v. Ancheta, id., citing Vera v. Fernandez, G. R. No. L-31364, March 30, 1979, 89 SCRA 199] These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Southern Cross Cement Corporation, supra) If the question asks for an enumeration of the distinctions between the power of taxation and police power, the candidate should reformulate no. 17 above. 13. What is the purpose of the SUGAR ADJUSTMENT ACT ? SUGGESTED ANSWER: The Sugar Adjustment Act which increased existing taxes on sugar was enacted to stabilize the sugar industry to prepare it for the loss of its quota in the U.S. market was levied for a regulatory purpose to protect and promote the sugar industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. 148) The Philsugin fund, an imposition on sugar, to raise funds to conduct research for the improvement of the sugar industry, is for the purpose of stabilizing the sugar industry which one of the pillars of the Philippine economy which affects the welfare of the State. The levy is not so much an exercise of the power of taxation, nor the imposition of a special levy, but the exercise of police power which is for the general welfare of the entire country, therefore for a public purpose. (Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966) 14. Section 40 (g) of the Public Service Act authorizes the collection of “x x x fees as reimbursement of its expenses in the authorization, supervision and/or regulation of the public services: x x x g) For each permit, authorizing the increase in equipment, the installation of new units or authorizing the increase of capacity, or the extension of means or general extensions in the services, twenty centavos for each one hundred pesos or fraction of the additional capital necessary to carry out the permit.” (paraphrasing supplied) Is the imposition a tax measure ? Explain. SUGGESTED ANSWER: No. It is not a tax measure but a simple regulatory provision for the collection of fees imposed pursuant to the exercise of the State’s police power. A tax is imposed under the taxing power of government principally for the purpose of raising revenues. The law in question, however, merely authorizes and requires the collection of fees for the reimbursement of the Commission’s expenses in the authorization, supervision and/or regulation of public services. (Republic, etc., v. International Communications Corporation (ICC), G. R. No. 141667, July 17, 2006) 15. How may the power of taxation also be used to implement power of eminent domain ? SUGGESTED ANSWER: Tax measures are but ”enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public purpose.” In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)] 16. What is purpose for the limitations on the power of taxation ? SUGGESTED ANSWER: The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax. INHERENT LIMITATIONS 1. What are the INHERENT LIMITATIONS on the power of taxation ? SUGGESTED ANSWER: The inherent limitations are: a. Public purpose. The revenues collected from taxation should be devoted to a public purpose. b. No improper delegation of legislative authority to tax. Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. c. Situs or Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority. d. Recognition of government exemptions; and e. Observance of the principle of comity. Comity is the respect accorded by nations to each other because they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon equals out of respect. Some authorities include no double taxation. 2. When are taxes considered as being for a PUBLIC PURPOSE ? SUGGESTED ANSWER: The tax revenues are for a public purpose if utilized for the benefit of the community in general. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) 3. Define a taxpayer’s suit. SUGGESTED ANSWER: Taxpayers’ suit is a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. (Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110) 4. What is locus standi ? SUGGESTED ANSWER: Locus standi is “a right of appearance in a court of justice on a given question. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) It is a party’s personal and substantial interest in the case, such that the party has sustained or will sustain direct injury as a result of the government act being challenged. It calls for more than just a generalized grievance. A party need not be a party to the contract to challenge its validity. (Ibid.) 5. What is meant by the term “material interest” ? SUGGESTED ANSWER: The term “interest” means a material interest, an interest in issue affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) 6. What is the rationale for locus standi ? SUGGESTED ANSWER: The rationale for requiring a party who challenges the constitutionality of a statute to allege such a personal stake in the outcome of the controversy is “to ensure that a concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of different constitutional questions.” (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) 7. When may locus standi be brushed aside ? SUGGESTED ANSWER: In cases of paramount importance where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review. [Coconut Oil Refiners Association, Inc., etc., et al., vs. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Bayan (Bagong Alyansang Makabayan) v. Zamora, G. R. No. 138570, October 10, 2000, 342 SCRA 449, in turn citing Kilosbayan, Inc. v. Guingona, Jr., G. R. No. 113375, May 5, 1994, 232 SCRA 110] 8. What are the requirements that must be met before taxpayers, concerned citizens and legislators may be accorded standing to sue? SUGGESTED ANSWER: a. The case should involve constitutional issues; b. For TAXPAYERS, there must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. c. For VOTERS, there must be a showing of obvious interest in the validity of the election law in question. d. For CONCERNED CITIZENS, there must be a showing that the issues raised are of transcendental importance which must be settled early. e. For LEGISLATORS, there must be a claim that the official action complained of infringes upon their prerogatives as legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006) 9. What are the requisites for challenging constitutionality of law including a tax law ? SUGGESTED ANSWER: The party bringing suit must show “not only that the law or act is invalid, but also that he has sustained or is in immediate, or imminent danger of sustaining some direct injury as a result of its enforcement and not merely that he suffers thereby in some indefinite way.” (Soriano III v. Lista, et al., G. R. No. 153881, March 24, 2003) 10. Locus standi being merely a matter of procedure, have been waived in certain instances where a party who is not personally injured may be allowed to bring suit. Give some examples. SUGGESTED ANSWER: The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest: a. Taxpayer’s suits to question contracts entered into by the national government or government- owned or controlled corporations allegedly in contravention of the law. b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) 11. The petitioners impugn the validity of the establishment of tax and duty-free shops within the Subic Special Economic Zone (SSEZ) and the removal of consumer goods and items from the zones without payment of corresponding duties and taxes for the reason that this constitute executive legislation in violation of the rule on separation of powers, that only “raw material, capital and equipment” should be allowed the privilege. Rule on the objections and reason out your answer briefly. SUGGESTED ANSWER: The objections should not be given credence. It is legal to setup duly authorized duty-free shops in the SSEZ to sell tax and duty-free consumer items in the Secured Area. This is in line with the policy enunciated in the law that “the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments.” While it is true that Section 12 (b) of Rep. Act No. 7227 mentions only raw materials, capital and equipment, this does not necessarily mean that the tax and duty free buying privilege is limited to these types of articles to the exclusion of consumer goods. It must be remembered that in construing statutes, the proper course is to start out and follow the true intent of the Legislature and to adopt that sense which harmonizes best with the context and promotes to the fullest manner the policy and objects of the Legislature. The concept of inclusio unius est exclusio alterius does not find application because the phrase “tax and duty-free importations of raw materials, capital and equipment” was merely cited as an example of incentives that the SSEZ is authorized to grant, in line with its being a free port zone. Thus, the legislative intent is that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine law. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005) `Would your answer be the same if a Presidential Proclamation allowed for the limited withdrawal from the Clark Special Economic Zone or the John Hay Economic Zone of consumer goods tax and duty-free ? SUGGESTED ANSWER: The answer would not be the same. This time the Presidential Proclamation would be invalid as the statutory tax exempt privilege was granted only to the Subic Special Economic Zone and not to John Hay or Clark. This is so because the Constitution mandates that no law granting tax exemption shall be passed without the concurrence of a majority of all the members of Congress. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing John Hay People’s Alternative Coalition, et al., v. Lim, etc., et al., G.R. No. 119775, October 24, 2003, 414 SCRA 356) Furthermore, the law is very clear that the “exportation or removal of goods from the territory of the Subic Special Economic Zone to other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.” (Ibid.) 11-A. Nature of actual case or controversy. An actual case or controversy involves a conflict of legal rights, an assertion of opposite legal claims susceptible of judicial adjudication. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Cruz, Isagani, PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p. 23) 11-B. Criteria of being ripe for judicial determination. A closely related requirement is ripeness, that is, the question must be ripe for adjudication. And a constitutional question is ripe for adjudication when the governmental act being challenged has a direct adverse effect on the individual challenging it. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Bernas, Joaquin, THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES: A COMMENTARY, 1996 edition, pp. 848-849) Thus, to be ripe for judicial adjudication, the petitioner must show a personal stake in the outcome of the case or an injury to himself that can be redressed by a favorable decision of the Court. [ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary of Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion] 11-C. Personal injury must be shown for judicial controversy to be ripe for judicial determination. In this case, aside from the general claim that the dispute has ripened into a judicial controversy by the mere enactment of the law even without any further overt act. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing La Bugal-B’Laan Tribal Association, Inc. v. Ramos, G.R. No. 127882, 01 December 2004, 445 SCRA 1) Thus, where petitioners fail either to assert any specific and concrete legal claim or to demonstrate any direct adverse effect of the law on them or are unable to show a personal stake in the outcome of this case or an injury to themselves their petition is procedurally infirm. (ABAKADA Guro Party List, etc., supra) 11-D. Constitutionality of law is exception to the doctrine of “ripe for judicial determination”. This notwithstanding, public interest requires the resolution of the constitutional issues raised by petitioners. The grave nature of their allegations tends to cast a cloud on the presumption of constitutionality in favor of the law. And where an action of the legislative branch is alleged to have infringed the Constitution, it becomes not only the right but in fact the duty of the judiciary to settle the dispute. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Tañada v. Angara, 338 Phil. 546 (1997)] 12. The VAT law provides that, the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied. “(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).” Was there an invalid delegation of legislative power ? SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare the even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various cases]] 13. The power to tax should be exercised only within the territorial boundaries of the taxing authority. In theory, it is only within a state’s territorial boundaries that a state could give protection, hence it is only within that territory that it could demand support in the form of taxes. 14. Situs of taxation is the place or the authority that has the power to collect taxes. It is premised upon the symbiotic relation between the taxpayer and the State. 15. The place that gives protection is the place that has the right to demand that it be supported in the form of taxes so it could continually give protection. 16. The situs of real property taxes is the place where the property is located because it is that place that gives protection. The applicable concept is lex situs or lex rei sitae. 17. The situs of taxation of tangible personal property is the place where the owner is located because it is that place that gives protection to the owner which protection extends to the tangible personal property. The applicable concept is mobilia sequuntur personam. 18. Intangible personal property may have obtained a business situs in a particular place even if located elsewhere. Thus, the dividends earned from domestic corporations are considered as income from within, irrespective where the shares of stock of such domestic corporation is located. 19. The situs of income taxation is determined by the nationality, residence of the taxpayer and source of income. Please refer to general principles of income taxation under income taxation. 20. The situs of excise taxes is the place where the privilege is exercised because it is that place that gives protection. 21. The situs of transfer taxes, such as estate and donor’s taxes, is determined by the nationality and residence of the taxpayer and the place where the property is located. Please refer to estate and donor’s taxes. 22. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission of 10% all sales actually concluded and collected through her efforts. The local company withheld the amount of P107,000 from her sales commission and remitted the same to the BIR. She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Is her contention correct ? SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually performed. Since the activity of securing the sales were in Germany, then the income did not originate from sources from within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006) NOTE AND COMMENTS: In the above case, the Supreme Court reiterated the rule that “source of income” relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, it is the place where the labor or service was performed that determines the source of the income. The above Baier-Nickel case discussed the import of the landmark cases (Howden and BOAC) involving sources of income for tax purposes both of which may be dangerous for Bar purposes: 23. A domestic insurance company decided to reinsure with a foreign reinsurer the risks it has undertaken with its local clients. The foreign reinsurer does not have an office, neither does it do business in the Philippines. Are the reinsurance premiums subject to Philippine income taxation ? SUGGESTED ANSWER: Yes because the undertaking of the foreign insurance company to indemnify the local insurance company is the activity that produced the income. The reinsurance premiums remitted to the foreign reinsurer had for their source the undertaking to indemnify the local insurer against liability. Said undertaking is the activity that produced there insurance premiums, and the same took place in the Philippines. The reinsured, the liabilities insured and the risk originally undertaken by the local insurance company, upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. (Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965) cited in Baier-Nickel) 24. BOAC, a foreign airline company which does not maintain any flight to and from the Philippines sold air tickets in the Philippines, through a general sales agent, relating to the carriage of passengers and cargo between two points, both outside the Philippines. Is BOAC subject to income taxes on the sale of the tickets ? SUGGESTED ANSWER: Yes. The source of income which is taxable is that “activity” which produced the income. The ”sale of tickets” in the Philippines is the activity that determines whether such income is taxable in the Philippines. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from and occurred, within the Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. (Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395 cited in Bauer-Nickel) NOTES AND COMMENTS: The concept of imposition of the gross Philippine billings that taxes only flights that originate from the Philippines apply only to resident foreign corporations doing business in the Philippines [Sec. 28 (A) (3) (a), NIRC of 1997] AND NOT TO incomes of non-resident foreign corporations that are taxed on the gross income. [Sec. 28 (B) (1)] 25. No improper delegation of legislative authority to tax. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing COOLEY TAXATION, 3 rd Ed., p. 43 cited in DIMAAMPAO, TAX PRINCIPLE AND REMEDIES, p. 13) 26. Instances where the national revenue officers had ventured in the area of unauthorized administrative legislation. a. By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%—a situation not supported by the plain wording of Section 145 of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008) b. Respondent was not informed in writing of the law and the facts on which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who had simply relied upon the old provisions of the law and Revenue Regulation No. 12-85 which was based on the old provision of the law. The Court held that in case of discrepancy between the law as amended and the implementing regulation based on the old law, the former necessarily prevails. The law must still be followed, even though the existing tax regulation at that time provided for a different procedure. (Ibid., Commissioner of Internal Revenue v. Reyes, G.R. No. 159694, 27 January 2006, 480 SCRA 382 in turn citing Philippine Petroleum Corp. v. Municipality of Pililla, Rizal, 198 SCRA 82, 88, 3 June 1991, likewise citing Shell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628, 634, 27 June 1988) c. The tax authorities gave the term “tax credit” in Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides. Their interpretation muddled up the intent of Congress to grant a mere discount privilege and not a sales discount. The Court, striking down the revenue regulation, held that an administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the legislature. (Ibid., Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414) d. Commissioner Jose Ong issued Revenue Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91, imposing a 5% lending investor’s tax under the 1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored the imposition on the definition of lending investors provided in the 1977 Tax Code which, according to him, was broad enough to include pawnshop operators. However, the Court noted that pawnshops and lending investors were subjected to different tax treatments under the Tax Code prior to its amendment by the executive order; that Congress never intended to treat pawnshops in the same way as lending investors; and that the particularly involved section of the Tax Code explicitly subjected lending investors and dealers in securities only to percentage tax. And so the Court affirmed the invalidity of the challenged circulars, stressing that “administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out.” (Ibid., citing Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in turn citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108358, 20 January 1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles v. Home Development Mutual Fund, G.R. No. 131082, 19 June 2000; 333 SCRA 777, 786) e. The then acting Commissioner issued RMC 7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly income tax payments, thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax Code. The Court nullified the circular, ruling that the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. [Ibid., Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)] f. The Supreme Court ruled as invalid RMO 4-87 which had construed the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the promulgation of the executive order on 22 August 1986 and not assessments made to that date. The Supreme Court resolved in the negative. [Ibid., Commissioner of Internal Revenue v. CA, et al., 310 Phil. 392 (1995)] 27. The rule-making power must be confined to details for regulating the mode or proceedings in order to carry into effect the law as it has been enacted. a. It cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court of Appeals, 327 Phil. 1047, 1052 (1996)] An administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the legislature. (Ibid., Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414) The “PLAIN MEANING RULE” or verba legis in statutory construction should be applied such that where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. (Ibid.) b. Administrative regulations must always be in harmony with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic law. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court of Appeals, 327 Phil. 1047, 1052 (1996)] CONSTITUTIONAL LIMITATIONS 1. What are the constitutional limitations on the power of taxation ? SUGGESTED ANSWER: The general or indirect constitutional limitations as well as the specific or direct constitutional limitations. 2. What are the GENERAL or INDIRECT constitutional limitations on the power of taxation ? SUGGESTED ANSWER: The general or indirect constitutional limitations are the following: a. Due process clause; b. Equal protection clause; c. Freedom of the press; d. Religious freedom; e. No taking of private property without just compensation; f. Non-impairment clause; g. Law-making process: 1) Bill should embrace only one subject expressed in the title thereof; 2) Three (3) readings on three separate days; 3) Printed copies in final form distributed three (3) days before passage. h. Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture after conviction by final judgment. 3. What are the SPECIFIC OR DIRECT constitutional limitation ? SUGGESTED ANSWER:  No imprisonment for non-payment of a poll tax; b. Taxation shall be uniform and equitable; c. Congress shall evolve a progressive system of taxation; d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose and concur with amendments; e. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object; f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage and wharfage dues: 1) Delegation by Congress 2) through a law 3) subject to Congressional limits and restrictions 4) within the framework of national development program. g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious, charitable or educational purposes; h. No tax exemption without the concurrence of majority vote of all members of Congress; i. No use of public money or property for religious purposes except if priest is assigned to the armed forces, penal institutions, government orphanage or leprosarium; j. Money collected on tax levied for a special purpose to be used only for such purpose, balance if any, to general funds; k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above; l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy; m. Automatic release of local government's just share in national taxes; n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes; o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits; p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes subject to conditions prescribed by law. 3-A. No denial of due process when the respondent is given the opportunity to file affidavits and other pleadings during the preliminary investigation. A respondent cannot claim denial of due process when she was given the opportunity to file her affidavits and other pleadings and submit evidence before the DOJ during the preliminary investigation of her case and before the Information was filed against her. Due process is merely an opportunity to be heard. In addition, preliminary investigation conducted by the DOJ is merely inquisitorial. It is not a trial of the case on the merits. Its sole purpose is to determine whether a crime has been committed and whether the respondent therein is probably guilty of the crime. It is not the occasion for the full and exhaustive display of the parties’ evidence. Hence, if the investigating prosecutor is already satisfied that he can reasonably determine the existence of probable cause based on the parties’ evidence thus presented, he may terminate the proceedings and resolve the case. (Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing De Ocampo v. Secretary of Justice, G.R. No. G.R. No. 147932, 25 January 2006, 480 SCRA 71, 81-82) 4. Equal protection of the law clause is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999) 4-A. The equal protection of the laws clause of the Constitution allows classification. Classification in law, as in the other departments of knowledge or practice, is the grouping of things in speculation or practice because they agree with one another in certain particulars. A law is not invalid because of simple inequality. The very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality. All that is required of a valid classification is that it be reasonable, which means that the classification should be:  based on substantial distinctions which make for real differences,  that it must be germane to the purpose of the law;  that it must not be limited to existing conditions only; and  that it must apply equally to each member of the class.  not palpably arbitrary. This Court has held that the standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008] 4-B. State has discretion to make the classification. In the exercise of its power to make classifications for the purpose of enacting laws over matters within its jurisdiction, the state is recognized as enjoying a wide range of discretion. It is not necessary that the classification be based on scientific or marked differences of things or in their relation. Neither is it necessary that the classification be made with mathematical nicety. Hence, legislative classification may in many cases properly rest on narrow distinctions, for the equal protection guaranty does not preclude the legislature from recognizing degrees of evil or harm, and legislation is addressed to evils as they may appear. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008] 4-C. Equal protection does not demand absolute equality. The equal protection clause exists to prevent undue favor or privilege. It is intended to eliminate discrimination and oppression based on inequality. Recognizing the existence of real differences among men, the equal protection clause does not demand absolute equality.  It merely requires that all persons shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing Himagan v. People, G.R. No. 113811, 7 October 1994, 237 SCRA 538, 551. It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense - yet, they were treated differently. (Santos, supra) 5. What are the requisites for the validity of a classification ? SUGGESTED ANSWER: Classification, to be valid, must (a) rest on substantial distinctions, (b) be germane to the purpose of the law, (c) not be limited to existing conditions only, and (d) apply equally to all members of the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999) 6. The law grant of tax and duty-free status under Rep. Act No. 7227, to retailers inside the SSEZ without granting the same to those outside the SSEZ. Is there a violation of the equal protection clause ? SUGGESTED ANSWER: There is no violation of equal protection because there exists a valid classification as shown below: a. Significant distinctions exist between the two groups. Those outside of the SSEZ maintain their business within Philippine customs territory while those within the SSEZ operate within the so-called “separate customs territory.” To grant the same privileges would clearly defeat the statue’s intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained. b. The classification is germane to the purpose of Rep. Act No. 7227. As held in Tiu, the real concern of the law is to convert the lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such objective, Congress deemed it necessary to extend economic incentives, in terms of a complete package of tax incentives and other benefits, to the establishments within the zone to attract and encourage foreign and local investors. c. The classification is not limited to the existing conditions when the law was promulgated but to future conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a self-sustaining investment center. d. The classification applies equally to all retailers found within the “secured area.” As ruled in Tiu, the individuals and businesses within the “secured area,” being in like circumstances or contributing directly to the achievement of the end purposes of the law, are not categorized further. They are all similarly treated, both in privileges granted and in obligations required. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999, 301 SCRA 278) 7. Is the statutory grant of tax and duty-free importation into the Subic Special Economic Zone violative of the “preferential use” concept of the Constitution ? SUGGESTED ANSWER: No. The mere fact that the law authorizes the importation and trade of foreign goods does not suffice to declare it unconstitutional on this ground. While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only in foreign competition that is unfair. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v. Angara, G. R. No. 118295, May 2, 1997, 272 SCRA 18) 8. Equality and uniformity of taxation may mean the same as equal protection. In such a case, the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever. 9. Uniformity may have a restrictive meaning different from equality and equal protection. It would mean then that the same rate shall be imposed for the same subjects and objects within the territorial boundaries of a taxing authority. 10. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that, "inequalities which result from a singling out of one particular class of taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617) 10-A. The law providing financial rewards to tax collectors is constitutional. Public service is its own reward. Nevertheless, public officers may by law be rewarded for exemplary and exceptional performance. A system of incentives for exceeding the set expectations of a public office is not anathema to the concept of public accountability. In fact, it recognizes and reinforces dedication to duty, industry, efficiency and loyalty to public service of deserving government personnel. The U.S. Supreme Court validated a law which awards to officers of the customs as well as other parties an amount not exceeding one-half of the net proceeds of forfeitures in violation of the laws against smuggling. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing United States v. Matthews, 173 U.S. 381 (1899)] The offer of a portion of such penalties to the collectors is to stimulate and reward their zeal and industry in detecting fraudulent attempts to evade payment of duties and taxes. [ABAKADA Guro Party List, etc., supra citing Dorsheimer v. United States, 74 U.S. 166 (1868)] In the same vein, employees of the BIR and the BOC may by law be entitled to a reward when, as a consequence of their zeal in the enforcement of tax and customs laws, they exceed their revenue targets. Public service is its own reward. Nevertheless, public officers may by law be rewarded for exemplary and exceptional performance. A system of incentives for exceeding the set expectations of a public office is not anathema to the concept of public accountability. In fact, it recognizes and reinforces dedication to duty, industry, efficiency and loyalty to public service of deserving government personnel. (ABAKADA Guro Party List, etc., supra) 10-B. Rewards law establishes safeguards to ensure that the reward system will not create “bounty hunters.” The Attrition Act of 2005 RA 9335 establishes safeguards to ensure that the reward will not be claimed if it will be either the fruit of “bounty hunting or mercenary activity” or the product of the irregular performance of official duties. One of these precautionary measures is embodied in Section 8 of the law: SEC. 8. Liability of Officials, Examiners and Employees of the BIR and the BOC. – The officials, examiners, and employees of the [BIR] and the [BOC] who violate this Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by any business establishment or taxpayer as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008) 10-C. The rewards law to tax collectors does not violate equal protection. Equality guaranteed under the equal protection clause is equality under the same conditions and among persons similarly situated; it is equality among equals, not similarity of treatment of persons who are classified based on substantial differences in relation to the object to be accomplished. When things or persons are different in fact or circumstance, they may be treated in law differently. The guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws upon all citizens of the [S]tate. It is not, therefore, a requirement, in order to avoid the constitutional prohibition against inequality, that every man, woman and child should be affected alike by a statute. Equality of operation of statutes does not mean indiscriminate operation on persons merely as such, but on persons according to the circumstances surrounding them. It guarantees equality, not identity of rights. The Constitution does not require that things which are different in fact be treated in law as though they were the same. The equal protection clause does not forbid discrimination as to things that are different. It does not prohibit legislation which is limited either in the object to which it is directed or by the territory within which it is to operate. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008] The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. [22] With respect to RA 9335, its expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes, customs duties, fees and charges. Both the BIR and the BOC are bureaus under the DOF. They principally perform the special function of being the instrumentalities through which the State exercises one of its great inherent functions – taxation. Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. [ABAKADA Guro Party List, etc. supra)] 10-D. The prosecution of one guilty person while others equally guilty are not prosecuted, however, is not, by itself, a denial of the equal protection of the laws. Where the official action purports to be in conformity to the statutory classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute, is not without more a denial of the equal protection of the laws. The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. This may appear on the face of the action taken with respect to a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. But a discriminatory purpose is not presumed, there must be a showing of “clear and intentional discrimination. [Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing People v. Dela Piedra, 403 Phil. 31, 54-56 (2001)] 10-E. There is no denial of equal protection where the prosecution exercises its discretion in determining probable cause. The discretion of who to prosecute depends on the prosecution’s sound assessment whether the evidence before it can justify a reasonable belief that a person has committed an offense. The presumption is that the prosecuting officers regularly performed their duties, and this presumption can be overcome only by proof to the contrary, not by mere speculation. There must be evidence to overcome this presumption. The mere allegation a Cebuana, was charged with the commission of a crime, while a Zamboangueña, was not, is insufficient to support a conclusion that the prosecution officers acted in denial of the equal protection of the laws. (Santos v. People, et al, G. R. No. 173176, August 26, 2008) 10-F. Equal protection should not be used to protect commission of crime. While all persons accused of crime are to be treated on a basis of equality before the law, it does not follow that they are to be protected in the commission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because others have murdered with impunity. The remedy for unequal enforcement of the law in such instances does not lie in the exoneration of the guilty at the expense of society x x x. Protection of the law will be extended to all persons equally in the pursuit of their lawful occupations, but no person has the right to demand protection of the law in the commission of a crime. Likewise, [i]f the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008) 11. A fixed annual license fee on those engaged in the business of general enterprise was also imposed on the sale of bibles by a religious sect. Is this valid or violative of the constitutionally guaranteed freedom of religion ? SUGGESTED ANSWER: It is not valid because it violates the constitutionally guaranteed freedom of religion. As a license fee is fixed in amount and unrelated to the receipts of the taxpayer, such a license fee, when applied to a religious sect is actually imposed as a condition for the free exercise of religion. A license fee “restrains in advance those constitutional liberties of press and religion and inevitably tends to suppress their exercise.” 12. A lawful tax on a new subject, or an increased tax on an old one, does not interfere with a contract or impairs its obligation, within the meaning of the constitution. Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the constitution, nor can it be said that it impairs the obligations of any existing contract in its true and legal sense. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) 13. Under the now prevailing Constitution, where there is neither a grant nor prohibition by statute, the taxing power of local governments must be deemed to exist although Congress may provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) 13-A. Franchise tax is a direct tax. The franchise tax is a percentage tax imposed only on franchise holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.) 14. The Local Government Code explicitly authorizes provinces and cities, notwithstanding “any exemption granted by any law or other special law” to impose a tax on businesses enjoying a franchise. Indicative of the legislative intent to carry out the constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by certain entities. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) 15. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. 16. Explain the concept of the “paradigm shift” in local government taxation. SUGGESTED ANSWER: “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003) 17. The fundamental law did not intend the direct grant to local government units to be absolute and unconditional, the constitutional objective obviously is to ensure that, while local government units are being strengthened and made more autonomous, the legislature must still see to it that: a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions;  each local government unit will have its fair share of available resources;  the resources of the national government will be unduly disturbed; and d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999) 17-A. Taxing power of the local government is limited. The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. While the power to tax by local governments may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, “the power to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) 17-B. Further amplification by Bernas of the local government’s power to tax. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be:  for a public purpose,  uniform within a locality,  must not be confiscatory, and  must be within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169) 17-C. Reconciliation of the local government’s authority to tax and the Congressional general taxing power. Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16) “Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy.  The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.” [Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao] 18. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all taxes. Indeed, the grant of taxing powers to local government units under the Local Government Code does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001) 18-A. Tax exemptions in franchises are always subject to withdrawal. Moreover, Smart’s franchise was granted with the express condition that it is subject to amendment, alteration, or repeal. (1987 CONSTITUTION, Art. XII, Sec. 11) It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. In truth, the Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Tolentino v. Secretary of Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others) 19. When Congress approved a provision that, “Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise.” (Underscoring supplied) there was no intention for it to operate as a blanket tax exemption to all telecommunications entities. Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxation, it was held that said provisions cannot be considered as extending its application to franchises such as that of PLDT. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001) 19-A. “In lieu of all taxes in the franchise of ABS-CBN does not exempt it from local franchise taxes.” The “in lieu of all taxes” provision in the franchise of ABS-CBN does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. Whether the “in lieu of all taxes provision” would include exemption from local tax is not unequivocal. The right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the “in lieu of all taxes” provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. This is practically the same holding in an earlier case involving another telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.) 19-B. “In lieu of all taxes” refers to national internal revenue taxes and not to local taxes. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old franchise, as follows: x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x x. (Emphasis supplied). However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)] 19-C. The “in lieu of all taxes” clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos. The clause “in lieu of all taxes” does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the “in lieu of all taxes” clause has now become functus officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. This is practically the same holding in an earlier case involving another telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.) 19-D. Historical background on why ABS-CBN is subject to VAT and not to the franchise tax. At the time of the enactment of its franchise on May 3, 1995, ABS- CBN was subject to 3% franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended. On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law, took effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Notably, under the same law, “telephone and/or telegraph systems, broadcasting stations and other franchise grantees” were omitted from the list of entities subject to franchise tax. The impression was that these entities were subject to 10% VAT but not to franchise tax. Subsequently, R.A. No. 8241 took effect on January 1, 1997 containing more amendments to the NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to choose between paying 3% national franchise tax or 10% VAT On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC. On January 1, 1998, R.A. No. 8424 was passed confirming the 10% VAT liability of radio and/or television companies with yearly gross receipts exceeding P10,000,000.00. R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006. In consonance with the above survey of pertinent laws on the matter, ABS- CBN is subject to the payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00). (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.) 20. Double taxation in its generic sense, this means taxing the same subject or object twice during the same taxable period. In its particular sense, it may mean direct duplicate taxation, which is prohibited under the constitution because it violates the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate taxation is not anathematized by the above constitutional limitations. 21. What are the elements of direct duplicate taxation ? SUGGESTED ANSWER: a. Same 1) Subject or object is taxed twice 2) by the same taxing authority 3) for the same taxing purpose 4) during the same taxable period b. Taxing all of the subjects or objects for the first time without taxing all of them for the second time.  If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution. NOTES AND COMMENTS: a. Presence of the 2 nd element violates the equal protection clause. If only the 1 st element is present, taxing the same subject or object twice, by the same taxing authority, etc., there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the same burdens and granted the same privileges without any discrimination whatsoever, The presence of the 2 nd element, taxing all of the subjects and objects for the first time, without taxing all for the second time, results to discrimination among subjects and objects that are similarly situated, hence violative of the equal protection clause. 22. Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate taxation, because it would violate the equal protection clause of the constitution. 23. When an item of income is taxed in the Philippines and the same income is taxed in another country, this would be known as international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999) 24. What are the methods for avoiding double taxation (indirect duplicate taxation) ? SUGGESTED ANSWER: The following are the methods of avoiding double taxation: a. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity. b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid.  Allowing foreign taxes as a deduction from gross income. 25. Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an allowance against the tax itself, or a deduction from what is owned. A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005) 26. A tax deduction is defined as a subtraction from income for tax purposes, or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005) 27. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has exceeded its authority in including provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%; deleting entirely the no pass-on provisions found in both the House and Senate Bills; inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax. Thus, there was a violation of the constitutional mandate that revenue bills shall originate exclusively from the House of Representatives. Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ? Explain briefly. SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation. The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Philippine Judges Association v. Pardo, G. R. No. 105371, November 11, 1993, 227 SCRA 703; Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235SCRA 630] 28. The VAT is assailed as being regressive and therefore violative of the mandate to evolve a progressive system of taxation. Do you agree ? Explain your answer. SUGGESTED ANSWER: No. The VAT does not violate the progressive system of taxation. The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of the constitutional provision. Sales taxes are also regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630] 29. All revenues and assets of non-stock, non-profit educational institutions that are actually, directly and exclusively used for educational purposes shall be exempt from taxation. 30. Revenues and assets of proprietary educational institutions, including those which are cooperatively owned, may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestments. There is no law at the present which grants exemptions, other the exemptions granted to cooperatives. OTHER CONCEPTS 1. What is a TAX AMNESTY ? SUGGESTED ANSWER: A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law.  It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. (Philippine Banking Corporation, etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009 citing Commissioner of Internal Revenue v. Marubeni Corp., 423 Phil. 862, 874 (2001). 1-A. The purpose of tax amnesty is to a. give tax evaders who wish to relent a chance to start a clean slate, and to; b. give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10, 2000) 2. Distinguish tax amnesty from tax exemption. SUGGESTED ANSWER:  Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from non- payment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988)  WHILE a TAX EXEMPTION is an immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)  Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda, supra)  WHILE tax exemption has prospective application. 3. Define tax avoidance and tax evasion. SUGGESTED ANSWER: Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes. NOTES AND COMMENTS: a. Tax evasion connotes the integration of three factors: 1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; 2) an accompanying state of mind which is described as being “evil” on “bad faith,” “willful,” or ”deliberate and not accidental”; and 3) a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004) 4. Distinguish between the tax avoidance and tax evasion. SUGGESTED ANSWER:  Tax avoidance is legal while tax evasion is illegal.  The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion the object is to entirely escape the payment of taxes.  Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax avoidance does not. 5. What are the reasons why national taxes cannot be the subject of compensation and set-off with debts ? SUGGESTED ANSWER: a. The lifeblood theory; b. Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of government, to the making and enforcing of which the personal consent of the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA 622) c. The government and the taxpayer are not mutually creditors and debtors of each other and a claim for taxes is no such debt, demand, contract or judgment as is allowed to be set-off. (Caltex Philippines, Inc. v. Commission on Audit, 208 SCRA 726, 756) 6. COMPENSATION takes place: i. by operation of law, ii. where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that iii. the debts are both due and demandable, in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443) 7. In case of a tax overpayment, where the BIR’s obligation to refund or set-off arises from the moment the tax was paid under the principle of solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364) 8. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which held that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs. 9. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else. Examples are individual and corporate income taxes, transfer taxes, and residence taxes. (Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases, citing Maceda v. Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217) 10. The main difference between direct taxes and indirect taxes is that the burden of direct taxes could not be shifted by the taxpayer to another while the burden of indirect taxes could be shifted to another person, such the burden value- added taxes being shifted or transferred by the taxpayer, the seller, to the buyer. 11. Acesite is the owner and operator of restaurant which caters to the patrons of a casino operated by PAGCOR within its premises. It billed PAGCOR for the cost of the food and beverages consumed by the PAGCOR’s patrons as well as the lease of the premises plus the VAT on these items. PAGCOR paid Acesite minus the VAT claiming exemption while Acesite, in order to avoid legal implications, paid the P30 million tax and applied for a refund on the ground of solutio indebeti. Acesite cites the tax exemption grant in PAGCOR’s franchise as follows: “The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income, or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association (s), agency (cies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino (s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator.” (emphasis supplied) The BIR denied the claim on the ground that PAGCOR is exempt only from direct taxes and not from indirect taxes so Acesite may not avail of the exemption. Is this correct ? SUGGESTED ANSWER: No. As the law is worded the exemption flows to Acesite. The law is clear that the exemption extends the exemption to entities or individuals dealing with PAGCOR. (Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February 16, 2007) NOTES AND COMMENTS: a. The above holding should be differentiated from Philippine Acetylene Co. v. Commissioner of Internal Revenue, 20 SCRA 1056, where the tax exemption did not flow to private entities. (cited in Abaya v. Ebdane, G. R. No. 167919, February 14, 2007), and in the following case of Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008. b. So also, the tax exemption of PAGCOR has already been withdrawn by Rep. Act No. 9337. 12. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from Petron Corporation, which it uses for its operations. It now claims for refund or tax credit for the excise taxes it paid claiming that it is exempt from the payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997. Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore). Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption “from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer. SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons: a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax should be paid by the manufacturer or producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)] b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from “all taxes” granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. An exemption from “all taxes” excludes indirect taxes, unless the exempting statute, like NPC’s charter, is so couched as to include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated the details covered by NPC’s exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 *NPC’s amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from “all forms of taxes, duties*,+ fees…” The use of the phrase “all forms” of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008) NATIONAL INTERNAL REVENUE CODE ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE 1. Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry into bank deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue is only authorized to inquire into the bank deposits of: a. a decedent to determine his gross estate; and b. any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997] c. A taxpayer who authorizes the Commissioner to inquire into his bank deposits. 2. Purpose of the NIRC of 1997. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008) 3. Purpose of shift from ad valorem system to specific tax system in taxation of cigarettes. The shift from the ad valorem system to the specific tax system is likewise meant to:  promote fair competition among the players in the industries concerned, to;  ensure an equitable distribution of the tax burden and to;  simplify tax administration by classifying cigarettes, among others, into high, medium and low-priced based on their net retail price and accordingly graduating tax rates. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Record of the Senate, pp. 224-225) TAX ON INCOME 1. The Tax Code has included under the term “CORPORATION”- i. partnerships, no matter how created or organized; ii. joint-stock companies,  joint accounts (cuentas en participacion), iv. associations, or v. insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997] 2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the term PARTNERSHIP includes a: i. syndicate, ii. group, iii. pool, iv. joint venture or v. other unincorporated organization, - through or by means of which any business, financial operation, or venture is carried on. 3. Certain business organizations do not fall under the category of “corporations” under the Tax Code, and therefore not subject to tax as corporations, include: a. General professional partnerships; b. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or consortium agreement under a service contract with the Government. [1 st sentence, Sec. 22 (B), BIRC of 1997] 4. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.  There must be an unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436) b. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had been put by their forebears. (Ibid.) c. Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock capital, and no community of interest as principal proprietors in the business itself from which the proceeds were derived. (Elements of the Law of Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 5. The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among themselves as to the management and use of such property and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 6. The income from the rental of the house, bought from the earnings of co- owned properties, shall be treated as the income of an unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals. 7. Income is gain derived and severed from capital, from labor or from both combined. For example, to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999) 8. The term TAXABLE INCOME means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997) 9. The cancellation and forgiveness of indebtedness may amount to: (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the circumstances. 10. If an individual performs services for a creditor who, in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services. 11. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10 th ) 12. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289) 13. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt- it is a gift from the creditor to the debtor and need not be included in the debtor’s income. 14. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2) 15. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) 16. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) 17. Under the National Internal Revenue Code the GLOBAL SYSTEM is applicable to taxable corporations and the SCHEDULAR to individuals. 18. What are general principles of income taxation in the Philippines OR the situs of income taxation in the Philippines OR the source rule of income taxation as applied in the Philippines ? SUGGESTED ANSWER: a. A CITIZEN OF THE PHILIPPINES residing therein is taxable on all income derived from sources within and without the Philippines. b. A NONRESIDENT CITIZEN is taxable only on income derived from sources within the Philippines. c. An individual citizen of the Philippines who is working and deriving income from abroad as an OVERSEAS CONTRACT WORKER is taxable only on income from sources within the Philippines: Provided, That a SEAMAN who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. d. An ALIEN individual, whether resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. e. A DOMESTIC CORPORATION is taxable on all income derived from sources within and without the Philippines. f. A FOREIGN CORPORATION, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997) 19. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. 20. Payment for services, other than compensation income, is considered as having been earned at the place where the activity or service was performed. 21. A NON-RESIDENT ALIEN, who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year, shall be considered as a non-resident alien doing business in the Philippines. Consequently, he shall be subject to income tax on his income derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC]  He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity. 22. What are considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER:  Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;  Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;  Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;  Uniforms and clothing allowance not exceeding P3,000.00 per annum;  Actual yearly medical benefits not exceeding P10,000.00 per annum;  Laundry allowance not exceeding P300 per month;  Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees;  Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;  Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and  Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000] 23. Income subject to “final tax” refers to an income collected through the withholding tax system. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income.  The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. 24. Distinguish EXCLUSIONS from DEDUCTIONS. SUGGESTED ANSWER: EXCLUSIONS DEDUCTIONS - refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) - amounts which the law allows to be subtracted from gross income in order to arrive at net income. - pertain to the computation of gross income. - pertain to the computation of net income. - something received or earned by the taxpayer which do not form part of  something spent or paid in earning gross income. gross income.  life insurance proceeds  losses. 25. What are excluded from gross income ? SUGGESTED ANSWER: a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. b. Amounts received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term, or at maturity of the term mentioned in the contract, or upon surrender of the contract. c. Value of property acquired by gift, bequest, devise, or descent. d. Amounts received, through accident or health insurance or Workmen’s Compensation Acts as compensation for personal injuries or sickness, plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. e. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. f. Retirement benefits received under Republic Act No. 7641. Retirement received from reasonable private benefit plan after compliance with certain conditions. Amounts received for separation beyond the control of the taxpayer. Foreign social security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS benefits. 26. What are the conditions for excluding retirement benefits from gross income, hence tax- exempt ? SUGGESTED ANSWER: a. Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with the employer’s reasonable private benefit plan approved by the BIR. b. Retiring official or employee- 1) In the service of the same employer for at least ten (10) years; 2) Not less than fifty (50) years of age at time of retirement; 3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. [1 st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98] 27. What kind of SEPARATION (RETIREMENT) PAY is excluded from gross income, hence tax-exempt ? SUGGESTED ANSWER: a. Any amount received by an official, employee or by his heirs, b. From the employer c. As a consequence of separation of such official or employee from the service of the employer because of: 1) Death, sickness or other physical disability; or 2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of business. [1 st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98] 28. What are the ITEMIZED DEDUCTIONS FROM GROSS INCOME and who may avail of them ? a. Ordinary and necessary trade, business or professional expenses. b. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. c. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.  Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within the taxable year, connected with profession, trade or business, not sustained between related parties. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.  Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a natural resource. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. h. Charitable and other contributions. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.  Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. i. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. k. Insurance premiums for health and hospitalization. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. l. Personal and additional exemptions. Resident citizens, and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. Nonresident citizens on their gross incomes from within may also deduct this expense. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. 29. Distinguish ORDINARY EXPENSES from CAPITAL EXPENDITURES. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. Necessary expenses are those which are appropriate or helpful to the business. 30. What are the requisites for the deductibility of business expenses ? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: a. Compliance with the business test: 1) Must be ordinary and necessary; 2) Must be paid or incurred within the taxable year; 3) Must be paid or incurred in carrying on a trade or business. 4) Must not be bribes, kickbacks or other illegal expenditures. b. Compliance with the substantiation test. - Proof by evidence or records of the deductions allowed by law including compliance with the business test. 31. What are the requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services ? SUGGESTED ANSWER:  the expense must be ordinary and necessary;  it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed.  it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) 32. TMG Corporation is issuing the accrual method of accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. Since the bills for legal and auditing services were received only in 2006 and paid in the same year, TMG deducted the same from its 2006 gross income. The BIR disallowed the deduction ? Who is correct, TMG or BIR ? Explain. SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005, there was already an obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007) NOTES AND COMMENTS: a. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) The two (2) principal accounting methods for recognition of income are the – (a) accrual method; and the (b) cash method. b. Recognition of income and expenses under the accrual method of accounting. Amounts of income accrue where the right to receive them becomes fixed, where there is created an enforceable liability. Liabilities, are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) The accrual of income and expense is permitted when the all-events test has been met. (Ibid.) c. All-events test. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of such income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain; if its basis is unchangeable, the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly,; it must be determined with “reasonable accuracy” implies something less than an exact or completely accurate amount.  The propriety of an accrual must be judged by the fact that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) d. Under the CASH METHOD income is to be construed as income for tax purposes only upon actual receipt of the cash payment. It is also referred to as the “cash receipts and disbursements method” because both the receipt and disbursements are considered. Thus, income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash. 33. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished, granted or paid by the employer to the employee, except rank and file employees. [1 st par., Sec. 2.33 (A), Rev. Regs. No. 3-98] 34. What is meant by “fringe benefit” for purposes of taxation ? SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees), such as but not limited to: a. Housing; b. Expense account; c. Vehicle of any kind; d. Household personnel, such as maid, driver and others;  Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;  Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; g. Expenses for foreign travel; h. Holiday and vacation expenses; i. Educational assistance to the employee or his dependents; and  Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st par., Sec. 2.33 (B), Rev. Regs. No. 3-98] 35. Fringe benefits that are NOT SUBJECT to the fringe benefits tax: a. When the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer; or b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC of 1997; 1 st par., Sec. 2.33 (A), Rev. Regs. No. 3-98] c. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law; d. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; e. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and f. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1 st par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98] 36. De minimis benefits are facilities and privileges (such as entertainment, medical services, or so-called “courtesy discounts” on purchases), furnished or offered by an employer to his employees. They are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000] 37. Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income of corporations. (Revenue Memorandum Circular No. 17-71) 38. Bad debts are those which result from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99) 39. Who are RELATED PARTIES ? SUGGESTED ANSWER: The following are related parties:  Members of the same family. The family of an individual shall include only his brothers and sisters (whether by the whole or half- blood), spouse, ancestors, and lineal descendants;  An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;  Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual; d. A grantor and a fiduciary of any trust; or e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997] 40. What are the requisites for VALID DEDUCTION OF BAD DEBTS from gross income ? SUGGESTED ANSWER: a. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; b. The same must be connected with the taxpayer’s trade, business or practice of profession; c. The same must not be sustained in a transaction entered into between related parties; d. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and e. The debt must be actually ascertained to be worthless and uncollectible during the taxable year; f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA 667] g. Must have been reported as receivables in the income tax return of the current or prior years. (Sec. 103, Rev. Regs. No. 2) 41. What is the “TAX BENEFIT” rule ? SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. 42. If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99) 43. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99) 44. Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. 45. The methods of depreciation are the following: a. Straight line method; b. Declining balance method; c. Sum of years digits method; and d. Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1) Apportionment to units of production; 2) Hours of productive use; 3) Revaluation method; and 4) Sinking fund method. 46. What are personal and additional exemptions ? SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are fixed arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)] 47. CAPITAL ASSETS shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003) The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE: (SOUP)  Stock in trade of the taxpayer, or; b. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or; c. Property Used in the trade or business, of a character which is subject to the allowance for depreciation; or real property used in the trade or business of the taxpayer. d. Property held by the taxpayer Primarily for sale to customers in the ordinary course of his trade or business, or; [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003] 47-A. Examples of CAPITAL ASSETS:  Stock and securities held by taxpayers other than dealers in securities;  Jewelry not used for trade and business;  Residential houses and lands owned and used as such;  Automobiles not used in trade and business;  Paintings, sculptures, stamp collections, objects of arts which are not used in trade or business;  Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L- 25043, April 26, 1968)  “Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore considered as capital asset.” (last sentence, 3 rd par., Sec. 3.b, Rev. Regs. No. 7-2003) h. “Real property, whether single detached, townhouse, or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset.” (last par., Sec. 3.b., Rev. Regs. No. 7-2003) 48. ORDINARY ASSETS shall refer to all real properties specifically excluded from the definition of capital assets, namely: a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year; or b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c. Real property used in trade or business (i.e. buildings and/or improvements), of a character which is subject to the allowance for depreciation; or d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003) 49.. EXAMPLES OF ORDINARY ASSETS hence not capital assets: a. The machinery and equipment of a manufacturing concern subject to depreciation; b. The tractors, trailers and trucks of a hauling company; c. The condominium building owned by a realty company the units of which are for rent or for sale; d. The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture factory; e. i. Inherited parcels of land of substantial areas located in the heart of Metro Manila, which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable ; ii. the employment of an attorney-in-fact for the purpose of developing, managing, administering and selling the lots; iii. sales made with frequency and continuity; annual sales income from the sales was considerable; iv. and the heir was not a stranger to the real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170) f. Inherited agricultural property improved by introduction of good roads, concrete gutters, drainage and lighting systems converts the property to an ordinary asset.  The property forms part of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is now engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672) 50. Tax treatment of real properties that have been transferred. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: a. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. b. Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. c. The real property received in an exchange in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange. It shall be treated as ordinary asset in the hands of the transferee (Sec. 3.f., Rev. Regs. No. 7-2003) 51. The tax is “imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined real property as having “the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the ‘Civil Code of the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003) 52. Transactions covered by the presumed capital gains tax on real property: a. sale, b. exchange, c. or other disposition, including pacto de retro sales and other forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied] d. “Sale, exchange, or other disposition” includes taking by the government through condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861) 53. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99] 54. In case of non-redemption of the property sold upon a foreclosure of mortgage sale: a. the presumed capital gains tax shall be imposed, b. based on the bid price of the highest bidder but; c. only upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and; d. shall be paid within thirty (30) days from the expiration of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99] 55. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the - a. gross selling price, or b. the current fair market value as determined below: 1) the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors; or 2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997] It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. It is the transaction that is taxed not the gain. 56. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. 57. The tax liability, of individual taxpayers (not corporate), if any, on gains from sales or other dispositions of real property, classified as capital assets, to the government or any of its political subdivisions or agencies or to government owned or controlled corporations shall be determined- - at the option of the taxpayer, by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions, then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997] 58. The SELLER of the real property, classified as a capital asset, pays the presumed capital gains tax whether: a. an individual [Sec. 24 (D) (1), NIRC of 1997]; 1) Citizen, whether resident or not [Ibid.]; 2) Resident alien [Ibid.]; 3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; 4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; b. an estate or trust (Ibid.); c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997] 59. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence- a. the proceeds of which is fully utilized in acquiring or constructing a new principal residence;  within eighteen (18) calendar months from the date of sale or disposition; c. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and;  the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D) (2), NIRC of 1997] 60. A final withholding tax (FWT) of 20% on passive income is collected from the interest income of banks. It likewise has to pay a 5% gross receipts tax (GRT) on gross receipts which includes their passive income. XYZ Bank now claims that the GRT should be computed after deducting the 20% passive income tax on the ground that the monies or receipts that do not redound to the benefit of the taxpayer are not part of its gross receipts. To impose the GRT without deducting the 20% would be double taxation. It also contends that since the 20% was withheld at source and is paid directly to the government, then the bank has not received the same. Thus, it should not be included in the gross receipts subject to tax. Resolve the issue of whether the 20% FWT on the bank’s passive income form part of the taxable gross receipts for the purpose of computing the 5% GRT. SUGGESTED ANSWER: No. The word “gross” must be used in its plain and ordinary meaning. It is defined as “whole, entire, total, without deduction.” Thus, the 20% should not be deducted for purposes of computing the 5% gross receipts tax. Receipt may either be actual or constructive. There is prior to the withholding a constructive receipt of the interest, otherwise there would be no interest from where the 20% tax may be withheld from. There is no double taxation because there are two kinds of taxes, the 20% FWT which is an income tax and the 5% GRT which is a percentage tax. (Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case) NOTES AND COMMENTS: a. Commissioner of Internal Revenue v. Manila Jockey Club, 108 Phil. 821 (1960) is different from Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case. Manila Jockey Club paid amusement taxes on its commission in the total amount of bets called wager funds and did not include the 5½% of the fund which went to the Board on Races and to the owners of horses and jockeys. The Supreme Court rules that the gross receipts of Manila Jockey Club should not include the 5½% because although delivered to the Club, such money has been especially earmarked by law or regulation for other persons. Manila Jockey does not apply because what happened there was earmarking and not withholding. Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts because these are by law or regulation reserved for some person other than the taxpayer, although delivered or received. On the contrary, amounts withheld form part of gross receipts because there are in constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process. (Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case) b. There are distinctions between the 20% FWT on interest income and the 5% GRT on banks. Since the two are different there is no double taxation. 1) FWT is an income tax under Title II of the Code (Tax on Income) while GRT is a percentage tax under Title V of the Tax Code. 2) Percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services while an income tax is a national tax imposed on the net or gross income realized in a taxable year. 3) Income tax is subject to withholding while percentage is not. (Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case) 61. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. On May 22, 1987, it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. On June 23, 1999, the BSP authorized MBC to operate as a thrift bank. In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). It sought the BIR’s ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT. As a result of the ruling MBC filed an application for refund of the P33 million. Due to the BIR’s inaction, MBC filed a petition for review with the CTA. The CTA denied the petition on the ground that MBC is not a newly organized corporation. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1, 1998 as it did not close its business operations in 1987 but merely suspended the same. Even if placed under receivership, the corporate existence was never affected. Thus, it falls under the category of an existing corporation recommencing its banking operations. Should the refund be granted ? SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. [Sec. 27 (E) (1), NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 4-95) Clearly then, MBC is entitled to the grace period of four years from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006) NOTES AND COMMENTS: a. The MCIT and when should be imposed and the four (4) year grace period. “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year.” [Sec. 27 (E) (1), NIRC of 1997] b. Period when a corporation becomes subject to the MCIT. “(5) Specific rules for determining the period when a corporation becomes subject to the MCIT (minimum corporate income tax) -  For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. x x x” (Rev. Regs. No. 9-98) Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically refers to thrift banks.) c. Purpose of the four (4) year grace period. The intent of Congress relative to the MCIT is to grant a four (4) – year suspension of tax payment to newly organized corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many companies reported losses in their initial years of operations. Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006) ESTATE TAXES 1. The gross estate for purposes of estate taxation of FILIPINO CITIZENS, whether residents or nonresidents and resident alien includes the value at the time of his death of: i. all his real property, wherever situated; ii. personal property, whether tangible, intangible or mixed, wherever situated; iii. to the extent of the interest existing therein of the decedent at the time of his death. 2. The gross estate for purposes of estate taxation of NON-RESIDENT ALIENS includes the value at the time of his death of all the real property situated in the Philippines, personal property whether tangible, intangible or mixed, situated in the Philippines, to the extent of the interest therein of the decedent at the time of his death. 3. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien decedent: a. Expenses, losses, claims, indebtedness and taxes; b. Property previously taxed; c. Transfers for public use; d. The Family Home up to a value not exceeding P1 million; e. Standard deduction of P1 million; f. Medical expenses not exceeding P500,000.00; g. Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917;  Net share of the surviving spouse in the conjugal partnership. 4. Not every inter-vivos transfer in anticipation of death is considered “transfer in contemplation of death” for purposes of determining the property to be included in the gross estate of a decedent. 5. To be considered a “transfer in contemplation of death” “the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death” [Sec. 85 (B), NIRC of 1997]. It is clear that the properties are not transferred in contemplation of or intended to take effect in possession or enjoyment at or after death. 6. There is no transfer in contemplation of death if there is no showing the transferor “retained for his life or for any period which does not in fact end before his death: (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom.” [Sec. 85 (B), NIRC of 1997] 7. The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. The notices of levy were regularly issued within the prescriptive period. The tax assessment having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47) DONOR’S TAXES 1. What is the donor’s tax rate if the donee is a stranger ? SUGGESTED ANSWER: When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. 2. For purposes of the donor’s tax who is a stranger ? SUGGESTED ANSWER: A stranger is a person who is NOT A:  Brother, sister (whether by whole or half- blood), spouse, ancestor and lineal descendant; or  Relative by consanguinity in the collateral line within the fourth degree of relationship.” [Sec. 99 (B), NIRC of 1997]  All relatives by affinity, irrespective of the degree, are considered as strangers. 3. What is the tax base for donations ? SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. 99 (A), NIRC of 1997] 4. For purposes of the donor’s tax, what is meant by “net gifts ?” SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. (last par., Sec. 11, Rev. Regs.No.2-2003) 5. How are gifts of personal property to be valued for donor’s tax purposes? SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered the amount of the gift. (Sec. 102, NIRC of 1997) 6. What is the valuation of donated real property for donor’s tax purposes ? SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift. However, the appraised value of the real property at the time of the gift shall be whichever is the higher of:  the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or; b. the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997] 7. A died leaving as his only heirs, his surviving spouse B, and three minor children, X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced her hereditary share in the estate. a. Is the renunciation subject to donor’s tax ? Explain. SUGGESTED ANSWER: No. The general renunciation by an heir, including the surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is not subject to donor’s tax. (4 th par., Sec. 11, Rev. Regs. No. 2-2003) This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. b. Supposing that instead of a general renunciation, B renounced her hereditary share in A’s estate to X who is a special child, would your answer be the same ? Explain. SUGGESTED ANSWER: My answer would be different. The renunciation in favor of X would be subject to donor’s tax. This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4 th par., Sec. 11, Rev. Regs. No. 2-2003) 8. Give some donations that are EXEMPT FROM DONOR’S TAX. SUGGESTED ANSWER: a. The first P100,000.00 net donation during a calendar year is exempt from donor’s tax [Sec. 99 (A), NIRC of 1997] made by a resident or non resident; b. The donation by a resident or non-resident of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donor’s tax (Sec. 1, Rep. Act No. 7549) c. Political contributions made by a resident or non- resident individual if registered with the COMELEC irrespective of whether donated to a political party or individual.  However, the Corporation Code prohibits corporations from making political contributions. (Corp. Code, Title IV, Sec. 36.9) d. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by residents who are parents to each of their legitimate, recognized natural, or adopted children to the extent of the first ten thousand pesos (P10,000.00); e. Gifts made by residents or non-residents to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivisions of the said Government; f. Gifts made by residents or non residents in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. [Sec. 101 (A), NIRC of 1997, numbering and arrangement supplied] g. Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from donor’s taxes because taxation is basically territorial. The transaction, which should have been subject to tax was made by non-resident aliens and took place outside of the Philippines. 9. What is the concept of donation or gift splitting ? Illustrate. SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in order to avail of lower donor’s taxes. In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first cousin. The P200,000.00 is the totality of the net gifts for 2008. If he donated the P200,000.00 in 2008 the first P100,000 would be exempt and the remaining P50,000.00 would be subject to donor’s tax If Leon spreads the P200,000 donation over two (2) calendar years, donating P100,000.00 on December 30, 2008 and the remaining P100,000.00 on January 1, 2009 the transaction would be exempt from donor’s tax. This is so even if the donation is separated only by two days because the basis is the calendar year. Leon would be enjoying the exemption for the first P100,000.00 net gifts for each calendar year. 10. A sold to B and P7 million Jaguar for only P4 million. The proper VAT on the sale was paid. If you are the BIR examiner assigned to review the sale, would you issue a tax assessment on the transaction ? Explain your answer briefly. SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of consideration. Where property, other than real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. (5 th par., Sec. 11, Rev. Regs. No. 2-2003) VALUE-ADDED TAXES (VAT) 1. Define value-added tax (VAT). SUGGESTED ANSWER: A tax which is imposed only on the increase in the worth, merit or importance of goods, properties or services, and not on the total value of the goods or services being sold or rendered. 2. What is the nature of VAT ? SUGGESTED ANSWSER: VAT is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. As such, it should be understood not in the context of the person or entity that is primarily, directly liable for its payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various authorities} As an indirect tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines. These services must be regularly conducted in this country, undertaken in “pursuit of a commercial or an economic activity,” for a valuable consideration, and not exempt under the Tax Code, other special laws, or any international agreement. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities) VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) 3. What is the effect on exemptions of VAT being an indirect tax ? Reason out and illustrate your answer. SUGGESTED ANSWER: If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. REASON: The VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005) Illustration: A VAT exempt seller sells to a non-VAT exempt purchaser. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser. 4. The VAT is a tax on consumption. Explain the meaning of consumption as used under the VAT system. Give an example. SUGGESTED ANSWER: Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability x x x" Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes." For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. Such facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. [Commissioner of Internal Revenue v. American Express G.R. No. 152609, 29 June 2005, 462 SCRA 197 cited in Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007] 5. Who are liable for the value-added tax ? SUGGESTED ANSWER: a. Any person who, in the course of his trade or business, 1) Sells, barters, exchanges or leases goods or properties, or 2) renders services, and b. any person who imports goods xxx However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to VAT xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasing supplied) 6. What are the various VAT methods and systems ? SUGGESTED ANSWER: a. Cost deduction method. This is a single-stage tax which is payable only by the original sellers. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Deoferio, Jr. V. A. and Mamalateo, V.C., The Value Added Tax in the Philippines (First Edition 2000)] This was subsequently modified and a mixture of “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. (Ibid.) b. Tax credit method. This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities] 7. The VAT being imposed on the increase in worth merit or improvement of the goods or services. How is this done ? SUGGESTED ANSWER: The VAT utilizes the concept of the output and input taxes. 8. Define output tax. SUGGESTED ANSWER: The value-added tax due on the sale or lease or taxable goods, properties or services by any VAT-registered person. 9. Define input tax. SUGGESTED ANSWER: The VAT due on or paid by a VAT-registered person on importation of good or local purchases of goods or services, including lease or use of properties, in the course of his trade or business. (Rev. Regs. No. 4.110-1, 1 st par.) 10. What are included in the input tax. SUGGESTED ANSWER: It shall also include: a. the transitional input tax and b. the presumptive input tax xxx. It includes c. input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1 st par., 2 nd sentence,. And 2 nd par., paraphrasing, arrangement and numbering supplied ) 11. May the right to credit the input tax be limited by legislation ? SUGGESTED ANSWER: Yes because it is a mere creation of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are not recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that a person has no vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the motion for reconsideration) 12. What is the concept of transitional input tax credits on beginning inventories ? SUGGESTED ANSWER: Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily register even if their turnover does not exceed P1,500,000.00 (except franchise grantees of radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on the following:  goods purchased for resale in their present condition;  materials purchased for further processing, but which have not yet undergone processing;  goods which have been manufactured by the taxpayer; d. goods in process for sale; or e. goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person. [Rev. Regs. No. 16- 2005, Sec.4.111-1, (a), 1 st par., arrangement and numbering supplied] 14. What is the concept of presumptive input tax credits ? SUGGESTED ANSWER: 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, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this paragraph, the term processing shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)] 15. Does the VAT registration fee violate religious freedom ? SUGGESTED ANSWSER: The VAT registration fee imposed on non-VAT enterprises which includes among others, religious sects which sells and distributes religious literature is not violative of religious freedom, although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. The registration fee is thus more of an administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) 16. Explain the proper interpretation of the term “In the Course of Trade or Business. SUGGESTED ANSWSER: VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006) 16-A. Pursuant to a government program of privatization, NDC, a VAT- registered entity created for the purpose of selling real property, decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC. The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." Magsaysay Lines, Inc., offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong . The bid was approved by the Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines. Is the sale subject to VAT ? SUGGESTED ANSWER: No. The sale is not subject to VAT. In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)]. What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006) 17. Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or exchange or goods and services. The VAT is also imposed on certain transactions “deemed sales.” What are these so- called transactions “deemed sales “ ? SUGGESTED ANSWER: a. Transfer, use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. xxx b. Distribution or transfer to: 1) Shareholders or investors as share in the profits of the VAT- registered person; xxx or 2) Creditors in payment of debt or obligation c. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold. d. Retirement from or cessation of business, with respect to all goods on hand, 1) whether capital goods, stock-in- trade, supplies or materials as of the date of such retirement, or cessation, 2) whether or not the business is continued by the new owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing, arrangement and numbering supplied] 18. What transactions considered retirement or cessation of business “deemed sale” subject to VAT ? SUGGESTED ANSWER: a. Change of ownership of the business. There is change in the ownership of the business where a single proprietorship incorporates; or 1) the proprietor of a single proprietorship sells his entire business. b. Dissolution of a partnership and creation of a new partnership which takes over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied] 19. What sale of or lease of real properties subject to VAT ? SUGGESTED ANSWER: Sale of real properties primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1 st par.) Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers are subject to VAT. 20. On Jan. 10, 2008, X, a domestic corporation engaged in the real estate business, sold a building for P10,000,000.00. Is the sale subject to the value- added tax (VAT)? If so, how much? Explain. SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X, a domestic corporation engaged in the real estate business. 21. What sale of real property EXEMPT From VAT ? SUGGESTED ANSWER: The following sales of real properties are exempt from VAT, namely:  Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business;  Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the “Urban and Development Housing Act of 1992” and other related laws, such as RA No. 7835 and RA No. 8763. xxx xxx xxx  Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. xxx xxx xxx  Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after November 1, 2005, provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed of to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied] 22. What is the VAT on services and lease of properties ? SUGGESTED ANSWER:  There shall be levied, assessed, and collected,  a value-added tax equivalent to ten percent (10%) of gross receipts  derived from the sale or exchange of services,  including the use or lease of properties.  Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:  Value-added tax collection as a percentage of Gross Domestic product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or  National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and numbering supplied] 23. “Sale or exchange of services”, defined. The term “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: a. construction and service contractors; b. stock, real estate, commercial, customs and immigration brokers; c. lessors of property, whether personal or real; d. persons engaged in warehousing services e. lessors or distributors of cinematographic film; f. persons engaged in milling, processing, manufacturing or repacking goods for others; g. proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie houses; h. proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and catere i. dealers in securities; j. lending investors; k. transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; l. common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; m. sales of electricity by generation companies, transmission, and/or distribution companies; n. franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water utilities; o. non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and p. similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1 st par., arrangement and numbering supplied] 24. X Corporation rendered technical services through its “work engineers” to PNB and SSS in the construction of their buildings. The “work engineers” acted as overseers of X Corporation, rendering their professional services as employees of X corporation. Should X Corporation be subjected to VAT or should it be subjected to tax on the professional services of those employees themselves? Decide the case with reason. SUGGESTED ANSWER: X Corporation is subject to VAT. 25. Also included in the phrase “sale or exchange of services”. a. The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; b. The lease or the use of, or the right to use any industrial, commercial or scientific equipment; c. The supply of scientific, technical, industrial or commercial knowledge or information; d. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in subparagraph (3) hereof; or e. The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person; f. The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project of scheme; g. The lease of motion picture films, film tapes and discs; h. The lease or the use of or the right to use radio, television, satellite transmission and cable television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2 nd par.) 26. Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. However, the input tax on the purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005, 1 st par.) 27. Concept of VAT zero-rating. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005] Under a zero-rating scheme, the sale or exchange of a particular service is completely freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit, the tax that is included in the cost of purchases attributable to the sale or exchange. The tax paid or withheld is not deducted from the tax base. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases) 28. Situs of taxation of zero-rated VAT services such as facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines. The place where the service is rendered determines the jurisdiction (Commissioner of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005 citing “*N+o state may tax anything not within its jurisdiction without violating the due process clause of the *C+constitution.” Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900, January 17, 1936, per Malcolm, J.) to impose the VAT [Commissioner, supra citing Deoferio, Jr. and Mamalateo, The Value Added Tax in the Philippines (2000), p. 93] Performed in the Philippines, the service is necessarily subject to its jurisdiction [Commissioner, supra citing Alejandro, The Law on Taxation (1966 rev. ed.) p. 33], for the State necessarily has to have a “substantial connection” [Commissioner, supra citing Garner (ed. in chief), Black’s Law Dictionary (8 th ed., 1999), p. 1503] to it in order to enforce a zero rate. [Commissioner, supra citing De Leon, The Fundamentals of Taxation (12 th ed., 1998), p. 3] The place of payment is immaterial [Commissioner, supra citing Deoferio, Jr. and Mamalateo, The Value Added Tax in the Philippines (2000), p. 93], much less is the place where the output of the service will be further or ultimately used. This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. (Commissioner, supra) 29. What is the destination principle the VAT ? SUGGESTED ANSWER: As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero- rated, while imports are taxed. 30. Is there any exception to the destination principle ? SUGGESTED ANSWER: Yes. The law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]." 31. Rationale for zero-rating of exports. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross Border Doctrine” is also known as the destination principle. Hence, actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. 32. Zero-rated sale distinguished from exempt transactions: a. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax. b. The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. c. Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons. 33. Zero-rated sales by VAT-registered persons. The following sales by VAT- registered persons shall be subject to zero percent (0%) rate: a. Export sales; b. Considered export sales under Executive Order No. 224; c. Foreign currency denominated sale; and d. Sales to persons or entities demed tax-exempt under special law or international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2 nd par., paraphrasing supplied) 34. Sale of gold to the Central Bank considered as export sales. As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by the seller, which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers. (Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005) 35. Sales to ecozone, such as PEZA, considered export-sale. Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero percent. (Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities) 36. “Ecozone”, defined. An ECOZONE or a Special Economic Zone has been described as – [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers. The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] 37. ZERO-RATED SALE OF SERVICE, defined. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics supplied) 38. Service performed by American Express in facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT but zero-rated. This is so because it meets all the requirements for VAT imposition, as follows: a. It regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity. b. Such service is commercial in nature; carried on over a sustained period of time; on a significant scale with a reasonable degree of frequency; and not at random, fortuitous, or attenuated. c. For this service, it definitely receives consideration in foreign currency that is accounted for in conformity with law. d. It is not an entity exempt under any of our laws or international agreements. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005) 39. While the service performed by American Express is subject to VAT it is zero-rated, and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and invalid. The VAT system uses the destination principle which posits that the goods and services are taxed only in the country where they are consumed, However, the law itself provides for clear exceptions under which the supply of services shall be zero-rated, among which are the following: a. The service is performed in the Philippines; b. The services are within the categories provided for under the Tax Code; and  It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas. American Express renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to their clients abroad. The services are performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here, Its services, having been performed in the Philippines are therefore also consumed in the Philippines. Thus, its services are exempt from the destination principle and are zero-rated. The BIR could not change the law. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005) 40. A foreign Consortium composed of BWSC-Denmark, Mitsui Engineering and Shipbuilding Ltd., and Misui and Co., Ltd., which entered into a contract with NAPOCOR for the operation and maintenance of two power barges appointed BWSC-Denmark as its coordination manager. BWSCMI was established as the subcontractor to perform the actual work in the Philippines. The Consortium paid BWSCMI in acceptable foreign exchange and accounted for in accordance with the rules and regulations of the BSP. Through a February 14, 1995 ruling the BIR declared that BWSCMI may choose to register as a VAT persons subject to VAT at zero rate. For 1996, it filed the proper VAT returns showing zero rating. On December 29, 1997, believing that it is covered by Rev. Regs. 5-96, dated February 20, 1996, BWSCMI paid 10% output VAT for the period April-December 1996, through the Voluntary Assessment Program (VAP). On January 7, 1999, BWSCMI was able to obtain a Ruling from the BIR reconfirming that it is subject to VAT at zero-rating. On this basis, BWSCMI applied for a refund of the output VAT it paid. a. Is BWSCMI subject to the 10% VAT or is it zero rated ? SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is subject to the 10% VAT. It is rendering service for the Consortium which is not doing business in the Philippines.  Zero-rating finds application only where the recipient of the services are other persons doing business outside of the Philippines. BWSCMI provides services to the Consortium which by virtue of its contract with NAPOCOR is doing business within the Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007) b. Could it obtain a refund of the VAT it paid through the VAP ? Explain. SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the 10% output VAT it paid the based on the non-retroactivity of the prejudicial revocation of the BIR Rulings which held that it’s services are subject to 0% VAT and which BWSCMI invoked in applying for refund of the output VAT. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., supra) NOTES AND COMMENTS: a. Do not confuse the BWSCMI case with the American Express case. American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007) 41. VAT-Exempt transactions, defined. a. The sale of goods or properties and/or services and the use or lease of properties that is b. not subject to VAT (output tax) and c. the seller is not allowed any tax credit on VAT (input tax) purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement and numbering supplied] 42. VAT-exempt transactions distinguished from VAT-exempt entities. a. An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status – VAT-exempt or not – of the party to the transaction. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005] b. An exempt transaction shall not be the subject of any billing for output VAT but it shall not also be allowed any input tax credits WHILE an exempt party being zero-rated is allowed to claim input tax credits. 43. What transactions are from VAT ? SUGGESTED ANSWER: (Subject to the election by a VAT-registered person not to be subject to the value-added tax), the following shall be exempt from VAT: (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey, Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams. Meat, fruit, fish, vegetables and other agricultural and marine food Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state. Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5o and above are presumed to be refined sugar. Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar:  product of a refining process,  products of a sugar refinery, or (3) product of a production line of a sugar mill accredited by the BIR to be producing sugar with polarimeter reading of 99.5o and above, and for which the quedanissued therefor, and verified by the Sugar Regulatory Administration, identifies the same to be of a polarimeter reading of 99.5o and above. Bagasse is not included in the exemption provided for under this section. (B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); “Specialty feeds” refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets. (C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; (D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; (E) Services subject to percentage tax under Title V of the Tax Code, as enumerated below: (1) Sale or lease of goods or properties or the performance of services of non-VAT-registered persons, other than the transactions mentioned in paragraphs (A) to (U) of Sec. 109 (1) of the Tax Code, the annual sales and/or receipts of which does not exceed the amount of One Million Five Hundred thousand Pesos (P1,500,000.00), Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO). (Sec. 116, Tax Code) (2) Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages. (Sec. 117) (3) Services rendered by international air/shipping carriers. (Sec. 118) (4) Service rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) and by franchises of gas and water utilities. (Sec. 119) (5) Service rendered for overseas dispatch message or conversation originating from the Philippines. (Sc. 120) (6) Services rendered by any person, company or corporation (except purely cooperative companies or associations ) doing life insurance business of any sort in the Philippines. (Sec. 123) (7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies. (Sec. 124) (8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions professional basketball games, jai-Alai and race tracks. (Sec. 125). and (9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering. (Sec. 127) (F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; “Agricultural contract growers” refers to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state. (G) Medical, dental, hospital and veterinary services except those rendered by professionals; Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. (H) Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical Education And Skills Development Authority (TESDA) and those rendered by government educational institutions; “Educational services” shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepED, the CHED and TESDA and those rendered by government educational institutions and it does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA. (I) Services rendered by individuals pursuant to an employer-employee relationship; (J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529 – Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and; (L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; (M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority; (N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members; Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. (O) Export sales by persons who are not VAT-registered; (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, such as RA No. 7835 and RA No. 8765, residential lot valued at One million five hundred thousand pesos (P 1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P 2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); (Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000) Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); (R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; (S) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of one hundred fifty (150) tons and above, including engine and spare parts of said vessels; Provided, further, that the vessels be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessel’s original commissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is fifteen years (15) years old, (ii) for tankers, the age limit is ten (10) years old, and (iii) For high-speed passenger cars, the age limit is five (5) years old, Provided, finally, that exemption shall be subject to the provisions of section 4 of Republic Act No. 9295, otherwise known as “The Domestic Shipping Development Act of 2004.” (T) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT (now 12%); (U) Services of banks, non-bank financial intermediaries performing quasi- banking functions, and other non-bank financial intermediaries; and (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO). For purposes of the threshold of P1,500,000.00, the husband and wife shall be cnsidered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a profesional, aside from the practice ofhis profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall to be icluded in determining the threshold. [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied] 44. X is engaged in the importation and sale of books and magazines. Is the importation of books and magazines subject to the 10% VAT? Explain. SUGGESTED ANSWER: No. Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; 45. Is there any tax to be paid by persons exempt from VAT ? SUGGESTED ANSWER: Yes. a. Any person, whose sales or receipts are exempt under Sec. 109 (1) (V) of the Tax Code, (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO), from the payment of VAT and b. who is not a VAT-registered person c. shall pay a tax equivalent to three percent (3%) of his gross monthly sales or receipts; Provided, that cooperatives shall be exempt from the three (3%) gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1, arrangement, numbering and words in italics supplied) RETURNS AND WITHHOLDING 1. Income tax returns being public documents, until controverted by competent evidence, are competent evidence, are prima facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317) 2. “Married individuals, whether citizens, resident or non-resident aliens, who do not derive income purely from compensation shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification.” *Section 51 (D) of the NIRC of 1997+ 3. Individuals required to file an income tax return. a. Every Filipino citizen residing in the Philippines; b. Every Filipino citizen residing outside the Philippines on his income from sources within the Philippines; c. Every alien residing in the Philippines on income derived from sources within the Philippines; and d. Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC of 1997] 4. Individuals who are not required to file an income tax return. a. An individual whose gross income does not exceed his total personal and additional exemptions for dependents, Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return regardless of the amount of gross income; b. An individual with respect to pure compensation income for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items, derived from sources within the Philippines, the income tax on which has been correctly withheld, Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose pure compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000.00), shall also file an income tax return; c. An individual whose sole income has been subject to final withholding tax; d. An individual who is exempt from income tax pursuant to the provisions of the NIRC of 1997, and other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997] NOTES AND COMMENTS: Amendments under Rep. Act No. 9504 are not incouded. 5. An individual who is not required to file an income tax return may nevertheless be required to file an information return. [Sec. 51 (A) (3), NIRC of 1997] 6. A corporation files its income tax return and pays its income tax four (4) times during a single taxable year. Quarterly returns are required to be filed for the first three quarters, then a final adjustment return is filed covering the total taxable income for the whole taxable year, be it calendar or fiscal. 7. An individual earning from the practice of his profession or who engages in trade or business files his income tax return and pays his income tax four (4) times during a single taxable year. Quarterly returns are required to be filed for the first three quarters, then an annual income tax return is filed covering the total taxable income for the whole of the previous calendar year. 8. The purpose of the above four (4) times a year requirement is to make available sufficient funds to meet the budgetary requirements, on a quarterly basis thereby increasing government liquidity. It also eases hardships on the part of individuals who are required to make this four time return. Thus, the taxpayer does not have to raise large sums of money in order to pay the tax. 9. An individual earning purely compensation income files only one annual income tax return covering the total taxable compensation income for the whole of the previous calendar year. 10. Under the withholding tax system, taxes imposed or prescribed by the NIRC of 1997 are to be deducted and withheld by the payors from payments made to payees for the former to pay directly to the Bureau of Internal Revenue. It is also known as collection of the tax at source. 11. A withholding agent is explicitly made personally liable under the Tax Code for the payment of the tax required to be withheld, in order to compel the withholding agent to withhold the tax under any and all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999) The system facilitates tax collection. 12. The two (2) types of withholding at source are the 1) final withholding tax; and 2) creditable withholding tax. 13. Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income due from the payee on the said income. [1 st sentence, 1 st par., Sec. 2.57 (A), Rev. Regs. No. 2-98] The liability for payment of the tax rests primarily on the payor or the withholding agent.. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor withholding agent. The payee is not required to file an income tax return for the particular income. 14. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due from the payee on the said income. The income recipient is still required to file an income tax return and/or pay the difference between the tax withheld and the tax due on the income. [1 st and 2 nd sentences, Sec. 257(B), Rev. Regs. No. 2-98] 15. The two kinds of creditable withholding taxes are (a) taxes withheld on income payments covered by the expanded withholding tax; and (b) taxes withheld on compensation income. 16. Payments to the following are exempt from the requirement of withholding or when no withholding taxes required: a. National Government and its instrumentalities including provincial, city, or municipal governments; b. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: 1) Sales of real property by a corporation which is registered with and certified by the HLURB or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000.00 in Metro Manila and other highly urbanized areas and P150,000.00 in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB; 2) Corporations registered with the Board of Investments and enjoying exemptions from income under the Omnibus Investment Code of 1997; 3) Corporations exempt from income tax under Sec. 30, of the Tax Code, like the SSS, GSIS, the PCSO, etc. However, income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98) 17. “A’ erroneously withheld the amount of 15% from the selling price of books authored by “W” when the correct rate should have been 10% only. Since “W” is out of the country, “A” applied for a refund of the excess withholding of 5%. May “A” properly apply for the refund ? Explain. SUGGESTED ANSWER: Yes. In applications for refund, the withholding agent is a taxpayer because if he does not pay the tax shall be collected from him. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA 377, 383-386), NOTES AND COMMENTS: a. For tax amnesty purposes, the withholding agent is not a taxpayer because he is made to pay the tax where he fails to withhold as a penalty and not that the tax is due from him. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor case) PENALTIES, INTERESTS AND SURCHARGES 1. What are surtaxes or surcharges ? SUGGESTED ANSWER: Surtaxes or surcharges, also known as the civil penalties, are the amounts imposed in addition to the tax required. They are in the nature of penalties and shall be collected at the same time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of 1997] 2. What are the two (2) kinds of civil penalties ? SUGGESTED ANSWER: a. the 25% surcharge for late filing or late payment [Sec. 248 (A), NIRC of 1997] (also known as the delinquency surcharge), and b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.] 3. Define deficiency income tax. SUGGESTED ANSWER: Deficiency income tax is the amount by which the tax imposed under the NIRC of 1997 exceeds the amount shown as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of 1997] 4. Deficiency interest, defined. The interest assessed and collected on any unpaid amount of tax at the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997] 5. Delinquency interest, defined. The interest assessed and collected on the unpaid amount until fully paid where there is failure on the part of the taxpayer to pay the amount die on any return required to be filed; or the amount of the tax due for which no return is required; or a deficiency tax, or any surcharge or interest thereon, on the date appearing in the notice and demand by the Commissioner of Internal Revenue. [Sec.249 (c), NIRC of 1997] 6. After resolving the issues the BIR Commissioner reduced the assessment. Was it proper to impose delinquency interest despite the reduction of the assessment ? Why ? SUGGESTED ANSWER: Yes. The intention of the law is to discourage delay in the payment of taxes due to the State and in this sense the surcharge and interest charged are not penal but compensatory in nature – they are compensation to the State for the delay in payment, or for the concomitant tuse of the funds by the taxpayer beyond the date he is supposed to have paid them to the State. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006) 7. Compromise penalty, defined. The amount agreed upon between the taxpayer and the Government to be paid as a penalty in cases of a compromise. 8. As a result of divergent rulings on whether it is subject to tax or not, the taxpayer was not able to pay his taxes on time. Imposed surcharges and interests for such delay, the taxpayer not invokes good faith with the BIR countering by saying that good faith is not a valid defense for violation of a special law. Furthermore, the BIR further raises the defense that the government is not bound by the errors of its agents. Who is correct ? ANSWER: The taxpayer is correct. The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax, are sufficient justification to delete the imposition of surcharges. (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No. 166786, September 11, 2006) REPUBLIC ACT NO. 1125, CREATING THE COURT OF TAX APPEALS INCLUDING JURISDICTION OF THE CTA, AS AMENDED 1. The Court of Tax Appeals is the special tax court created under Republic Act No. 1125, as amended, and is composed of a Presiding Justice and eight (8) Associate Justices, organized into three (3) divisions. 2. Why was the Court of Tax Appeals created ? SUGGESTED ANSWER: a. To prevent delay in the disposition of tax cases by the then Courts of First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and b. To have a body with special knowledge which ordinary Judges of the then Courts of First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209; Lacsamana, et al., etc., v. CTA, et al., 102 Phil. 931) 3. The legal remedies under the NIRC of 1997 and other laws available to an aggrieved taxpayer may be classified into the tax remedies with respect to: a. assessment; b. collection, and c. refund of internal revenue taxes. The remedies may also be classified into the administrative or the judicial remedies. 4. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer at the administrative level with respect to assessment of internal revenue taxes are the following: a. Upon receipt of a pre-assessment notice, the taxpayer shall respond to the same within fifteen (15) days from receipt which is the period provided for by implementing rules and regulations. [3 rd par., Sec. 228 (e), NIRC of 1997] b. Upon the issuance of an assessment notice, the taxpayer shall protest administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. c. Within sixty (60) days from the filing of the protest, all relevant supporting documents shall be submitted; otherwise the assessment shall become final. (4 th par., Ibid.) 5. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer at the judicial level with respect to assessment of internal revenue taxes: a. If the protest is denied in whole or in part, or b. is not acted upon within one hundred eighty (180) days from submission of documents, c. the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180) – day period; otherwise, the decision shall become final, executory and demandable. [last par., Sec. 228 (e), NIRC of 1997] d. On appeal, the taxpayer should apply for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal. e. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. f. A decision of the Court of Tax Appeals en banc adverse to the taxpayer or the government may be appealed to the Supreme Court through a petition for review on certiorari filed with fifteen (15) days from notice, and extendible for justifiable reasons for thirty (30) days only. 6. The legal remedy under the NIRC of 1997 available to an aggrieved taxpayer at the administrative level with respect to refund or recovery of tax erroneously or illegally collected, is to file a claim for refund or credit with the Commissioner of Internal Revenue. (1 st par., Sec. 229, NIRC of 1997) 7. What is the legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected ? SUGGESTED ANSWER. The legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected, is the filing of a suit or proceeding with the Court of Tax Appeals a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause that may arise after payment (2 nd par., Sec. 229, NIRC of 1997), or b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125) 8. The two (2) year period and the thirty (30) day period should be applied on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.) 9. Where the taxpayer is a corporation the two year prescriptive period from “date of payment” for refund of income taxes should be the date when the corporation filed its final adjustment return not on the date when the taxes were paid on a quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999) Generally speaking it is the Final Adjustment Return, in which amounts of the gross receipts and deductions have been audited and adjusted, which is reflective of the results of the operations of a business enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001) 10. Outline of tax remedies of a taxpayer and the government relative to ASSESSMENT of internal revenue taxes. a. The taxpayer files his tax return. b. A Letter of Authority is issued authorizing BIR examiner to audit or examine the tax return and determines whether the full and complete taxes have been paid. c. If the examiner is satisfied that the tax return is truly reflective of the taxable transaction and all taxes have been paid, the process ends. However, if the examiner is not satisfied that the tax return is truly reflective of the taxable transaction and that the taxes have not been fully paid, a Notice of Informal Conference is issued inviting the taxpayer to explain why he should not be subject to additional taxes. d. If the taxpayer attends the informal conference and the examiner is satisfied with the explanation of the taxpayer, the process is again ended. If the taxpayer ignores the invitation to the informal conference, or if the examiner is not satisfied with taxpayer’s explanation,, and he believes that proper taxes should be assessed, the Commissioner of Internal Revenue or his duly authorized representative shall then notify the taxpayer of the findings in the form of a pre-assessment notice. The pre-assessment notice requires the taxpayer to explain within fifteen (15) days from receipt why no notice of assessment and letter of demand for additional taxes should be directed to him. e. If the Commissioner is satisfied with the explanation of the taxpayer, then the process is again ended. If the taxpayer ignores the pre-assessment notice by not responding or his explanations are not accepted by the Commissioner, then a notice of assessment and a letter of demand is issued. The notice of assessment must be issued by the Commissioner to the taxpayer within a period of three (3) years from the time the tax return was filed or should have been filed whichever is the later of the two events. Where the taxpayer did not file a tax return or where the tax return filed is false or fraudulent, then the Commissioner has a period of ten (10) years from discovery of the failure to file a tax return or from discovery of the fraud within which to issue an assessment notice. The running of the above prescriptive periods may however be suspended under certain instances. The notice of assessment must be issued within the prescriptive period and must contain the facts, law and jurisprudence relied upon by the Commissioner. Otherwise it would not be valid. f. The taxpayer should then file an administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment notice. The taxpayer could not immediately interpose an appeal to the Court of Tax Appeals because there is no decision yet of the Commissioner that could be the subject of a review. To be valid the administrative protest must be filed within the prescriptive period, must show the error of the Bureau of Internal Revenue and the correct computations supported by a statement of facts, and the law and jurisprudence relied upon by the taxpayer. There is no need to pay under protest. If the protest was not seasonably filed the assessment becomes final and collectible and the Bureau of Internal Revenue could use its administrative and judicial remedies in collecting the tax. g. Within sixty (60) days from filing of the protest, all relevant supporting documents shall be submitted, otherwise the assessment shall become final and collectible and the BIR could use its administrative and judicial remedies to collect the tax. Once an assessment has become final and collectible, not even the BIR Commissioner could change the same. Thus, the taxpayer could not pay the tax, then apply for a refund, and if denied appeal the same to the Court of Tax Appeals. h. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from the submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the adverse decision, or from the lapse of the one hundred eighty (180-) day period, with an application for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal. If the taxpayer fails to so appeal, the denial of the Commissioner or the inaction of the Commissioner would result to the notice of assessment becoming final and collectible and the BIR could then utilize its administrative and judicial remedies to collect the tax. i. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. . The Court of Tax Appeals, has a period of twelve (12) months from submission of the case for decision within which to decide. j. If the decision of the Court of Tax Appeals en banc affirms the denial of the protest by the Commissioner or the assessment in case of failure by the Commissioner to decide the taxpayer must file a petition for review on certiorari with the Supreme Court within fifteen (15) days from notice of the judgment on questions of law. An extension of thirty (30) days may for justifiable reasons be granted. If the taxpayer does not so appeal, the decision of the Court of Tax Appeals would become final and this has the effect of making the assessment also final and collectible. The BIR could then use its administrative and judicial remedies to collect the tax. 11. Requisites for Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. 11-A.. What is the burden of taxpayers seeking tax refunds or credits ? SUGGESTED ANSWER: It has always been the rule that those seeking tax refunds or credits bear the burden of proving the factual basis of their claims and of showing, by words too plain to be mistaken, that the legislature intended to entitle them to such claims. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526, March 16, 2007, See Commissioner of Internal Revenue v. Seagate Technology (Philippines) G. R. No. 153866, 11 February 2005, 451 SCRA 132) 12. What is the nature of proceedings before the Court of Tax Appeals ? SUGGESTED ANSWER: First, a judicial claim for refund or tax credit in the CTA is by no means an original action, but rather an appeal by way of petition for review of a previous, unsuccessful administrative claim. Therefore, as in every appeal or petition for review, a petitioner has to convince the appellate court that the quasi-judicial agency a quo did not have any reason to deny its claims. Second, cases filed in the CTA are litigated de novo. Thus, a petitioner should prove every minute aspect of its case by presenting, formally offering and submitting its evidence to the CTA. Since it is crucial for a petitioner in a judicial claim for refund or tax credit to show that its administrative claim should have been granted in the first place, part of the evidence to be submitted to the CTA must necessarily include whatever is required for the successful prosecution of an administrative claim. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526, March 116, 2007) 13. What is the jurisdiction of the Court of Tax Appeals ? SUGGESTED ANSWER: “a. Exclusive appellate jurisdiction to review by appeal, as herein provided: 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue’; (DIVISION) 2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds or internal revenue taxes, fees or other charges, penalties in relation thereto, or other matter arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; (The inaction on refunds in two years from the time tax was paid. Thus, if the prescriptive period of two years is about to expire, the taxpayer should interpose a petition for review with the CTA – DIVISION) 3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; (If original DIVISION; if appellate EN BANC) 4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; (DIVISION) 5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; (EN BANC) 6. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code; (This has reference to forfeiture cases where the decision is to release the seized articles – DIVISION) 7. Decisions of the Secretary of Trade and Industry, in case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. (DIVISION) b. Jurisdiction over cases involving criminal offenses as herein provided: 1. Exclusive original jurisdiction over all criminal cases arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties claimed, is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the civil action will be recognized. 2. Exclusive appellate jurisdiction in criminal offenses: a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respective territorial jurisdiction. b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. c. Jurisdiction over tax collection cases: 1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court. 2. Exclusive appellate jurisdiction in tax collection cases: a. Over appeals from judgments, resolutions, or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.” (Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282, emphasis and words in parentheses supplied) The petition for review to be filed with the CTA en banc as the mode for appealing a decision, resolution, or order of the CTA Division, under Section 18 of Republic Act No. 1125, as amended, is not a totally new remedy, unique to the CTA, with a special application or use therein. To the contrary, the CTA merely adopts the procedure for petitions for review and appeals long established and practiced in other Philippine courts. Accordingly, doctrines, principles, rules, and precedents laid down in jurisprudence by this Court as regards petitions for review and appeals in courts of general jurisdiction should likewise bind the CTA, and it cannot depart therefrom. (Santos v. People, et al, G. R. No. 173176, August 26, 2008) 13-A. General rule: The denial of a motion to quash is an interlocutory order which is not the proper subject of an appeal or a petition for certiorari. According to Section 1, Rule 41 of the Revised Rules of Court, governing appeals from the Regional Trial Courts (RTCs) to the Court of Appeals, an appeal may be taken only from a judgment or final order that completely disposes of the case or of a matter therein when declared by the Rules to be appealable. Said provision, thus, explicitly states that no appeal may be taken from an interlocutory order. (Santos v. People, et al, G. R. No. 173176, August 26, 2008) 14. Applicability of Proton Pilipinas Corporation vs. Republic, etc., G. R. No. 165027, October 16, 2006. The case was decided on factual antecedents before R. A. No. 9282 which grants criminal jurisdiction to the Court of Tax Appeals if the value of the tax is P1 million or more. Interpreting the provisions of Republic Act No. 8249, which provides that the civil action for recovery of civil liability should be jointly determined in the criminal proceeding by the Sandiganbayan or appropriate courts, the prohibition of reservation of the criminal aspect, the Supreme Court said that tax collection cases may be tried separately, and not before the Sandiganbayan in Rep. Act No. 3019 cases. This is so because, Rep. Act No. 3019 is silent on the definition of civil liability and the application of Art. 104 of the Revised Penal Code does not cover taxes. Consequently, the Supreme Court ruled that on the tax collection case the RTC would have jurisdiction. Interpretation by the author in the light of Rep. Act. 9282. If it is a criminal case cognizable by the Sandiganbayan, then this court retains jurisdiction, with the civil jurisdiction being cognizable by the CTA or the lower courts depending on the amount. If the issue is a purely tax case, even if it involves cases cognizable by the Sandiganbayan, then jurisdiction vests upon the CTA or the lower courts depending on the amount of the tax. 15. On January 24, 1995, the then Secretary of Finance, through the recommendation of the then Commissioner of Internal Revenue issued Revenue Regulations [Rev. Reg.] No. 1-95, providing the “Rules and Regulations to Implement the Tax Incentives Provisions Under Paragraphs (b) and (c) of Section 12, [R.A.] No. 7227, [o]therwise known as the Bases Conversion and Development Act of 1992.” Subsequently, Rev. Reg. No. 12-97 was issued providing for the “Regulations Implementing Sections 12(c) and 15 of *R.A.+ No. 7227 and Sections 24(b) and (c) of [R.A.] No. 7916 Allocating Two Percent (2%) of the Gross Income Earned by All Businesses and Enterprises Within the Subic, Clark, John Hay, Poro Point Special Economic Zones and other Special Economic Zones under PEZA.” On September 27, 1999, Rev. Reg. No. 16-99 was issued “Amending *RR+ No. 1-95, as amended, and other related Rules and Regulations to Implement the Provisions of paragraphs (b) and (c) of Section 12 of [R.A.] No. 7227, otherwise known as the ‘Bases Conversion and Development Act of 1992’ Relative to the Tax Incentives Granted to Enterprises Registered in the Subic Special Economic and Freeport Zone.” On June 3, 2003, the Commissioner of Internal Revenue issued Revenue Memorandum Circular (RMC) No. 31-2003 setting the “Uniform Guidelines on the Taxation of Imported Motor Vehicles through the Subic Free Port Zone and Other Freeport Zones that are Sold at Public Auction,” which provided for the tax treatments on the transactions involved in the importation of motor vehicles through the SSEFZ and other legislated Freeport zones and subsequent sale thereof through public auction. This was later amended by RMC No. 32- 2003. Asia International Auctioneers and others filed a complaint before the RTC of Olongapo City, to declare Void, Ultra Vires, and Unconstitutional [RMC] No. 31-2003 dated June 3, 2003 and [RMC] No. 32-2003 dated June 5, 2003, Rev. Reg. Nos. 1-95, 12-97 and 16-99 dated January 24, 1995, August 7, 1997 and September 27, 1999, respectively, They contended that jurisdiction over the case at bar properly pertains to the regular courts as this is “an action to declare as unconstitutional, void and against the provisions of *R.A. No.+ 7227” the RMCs issued by the CIR. They do “do not challenge the rate, structure or figures of the imposed taxes, rather they challenge the authority of the respondent Commissioner to impose and collect the said taxes.” They also claim that the challenge on the authority of the CIR to issue the RMCs does not fall within the jurisdiction of the Court of Tax Appeals (CTA). Does the RTC have jurisdiction ? SUGGESTED ANSWER: No. It is the Court of Tax Appeals that has exclusive jurisdiction. In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that “exportation or removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.” They were issued pursuant to the power of the CIR under Section 4 of the National Internal Revenue Code, viz: Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.-- The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (as amended by the NIRC of 1997, emphases supplied, Asia International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007) NOTES AND COMMENTS: The author disputes this doctrine. The decisions of the Commission under “other matter” refers to the quasi-judicial decisions and not to the quasi-legislative powers of the Commissioner. 16. What is the characteristic of a BIR denial of a protest such as would enable the taxpayer to appeal the same to the Court of Tax Appeals ? SUGGESTED ANSWER: The Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment. On the basis of his statement indubitably showing that the Commissioner’s communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. (Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523) NOTES AND COMMENTS: a. Reasons for the rule requiring CIR’s unequivocal language on his action on the protest. 1) It would obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment – and, consequently, the collection of the amount demanded as taxes – by repeated requests for recomputation and reconsideration. 2) On the part of the Commissioner of Internal Revenue, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and define decision thereon in the first instance. 3) This would also deter the Commissioner of Internal Revenue from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. 4) Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action. . (Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523) 17. Cite acts of BIR Commissioner that may be considered as denial of a protest which serve as basis for appeal to the Court of Tax Appeals. SUGGESTED ANSWER: a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547) b. An indication to the taxpayer by the Commissioner “in clear and unequivocal language” of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the appeal is the final decision not the warrant of distraint. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547) c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523) d. A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204) e. Final notice before seizure considered as commissioner’s decision of taxpayer’s request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only response received: its content and tenor supports the theory that it was the CIR’s final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that the taxpayer was being given “this LAST OPPORTUNITY” to pay; otherwise, its properties would be subjected to distraint and levy. 18. The taxpayer seasonably protested the assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxes subject of the protest. As counsel what advice shall you give the taxpayer. Explain briefly your answer. SUGGESTED ANSWER: The taxpayer should appeal, by way of a petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but on other matter arising under the provisions of the National Internal Revenue Code. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered a final decision on a disputed assessment. To be a valid decision on a disputed assessment, the decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not complied with by the mere issuance of a warrant of distraint and levy. (Commissioner of Internal Revenue v. Union Shipping Corp., 185 SCRA 547) Furthermore, a motion for the suspension of the collection of the tax may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) because the collection of the tax may jeopardize the interest of the taxpayer. 18-A. As a general rule, there must always be a decision of the Commissioner of Internal Revenue or Commissioner of Customs before the Court of Tax Appeals, would have jurisdiction. If there is no such decision, the petition would be dismissed for lack of jurisdiction unless the case falls under any of the following exceptions. 19. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision yet by the Commissioner of Internal Revenue: a. Where the Commissioner has not acted on the disputed assessment after a period of 180 days from submission of complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001) b. Where the Commissioner has not acted on an application for refund or credit and the two year period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid. It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after the Commissioner, would have, at his personal convenience, given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.) 20. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision of the Commissioner of Customs: a. Decisions of the Secretary of Trade and Industry or the Secretary of Agriculture in anti-dumping and countervailing duty cases are appealable to the Court of Tax Appeals within thirty (30) days from receipt of such decisions. b. In case of automatic review by the Secretary of Finance in seizure or forfeiture cases where the value of the importation exceeds P5 million or where the decision of the Collector of Customs which fully or partially releases the shipment seized is affirmed by the Commissioner of Customs. c. In case of automatic review by the Secretary of Finance of a decision of a Collector of Customs acting favorably upon a customs protest. 21. As a general rule, “No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge.” (Sec. 218, NIRC) “No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.” (Sec. 11, Rep. Act No. 1125, as amended by Sec.9, Rep. Act No. 9282 ) The Supreme Court may enjoin the collection of taxes under its general judicial power but it should be apparent that the source of the power is not statutory but constitutional. The Supreme Court did not grant the provisional remedy prayed for in Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004 for it would be tantamount to enjoining the collection of taxes, a peremptory judicial act which is traditionally frowned upon unless there is a clear statutory basis for it. Evident is the clear legislative intent that the imposition of safeguard measures, despite the availability of judicial review, should not be enjoined notwithstanding any timely appeal of the imposition. This so because the Safeguard Measures Act states that the filing of a petition for review before the CTA does not stop, suspend, or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard measures. 22. General rule: “The rule is that in the absence of accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner (Commissioner of Internal Revenue) is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof.” *Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citing United States v. Johnson, 319 U.S. 1233 (1943)+ “However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.” *Commissioner of Internal Revenue v. Hantex Trading Co., Inc., citing United States v. Rindskopf, 105 U.S.418 (1881)] 23. Meaning of "best evidence obtainable" under Sec. 6 (B), NIRC of 1997. This means that the original documents must be produced. If it could not be produced, secondary evidence must be adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No. 47172, September 30, 1998) NOTES AND COMMENTS: a. The secondary evidence referred to are those that may be adduced using the general methods for reconstructing a taxpayer’s income or the indirect approach to tax investigation. The “best evidence” envisaged in Section 16 of the 1977 NIRC *now Sec. 6 (B),NIRC of 1997+ “includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales.” (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citing De Leon, The National Internal Revenue Code Annotated, p. 37) “Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the “Tariff and Customs Commission.” (sic, Commissioner v. Hantex Trading Co., Inc., supra) “The law allows the BIR access to all relevant or material records or data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject of the order of the BIR is kept.” (Ibid.) Purpose of the “best evidence obtainable” rule under Sec, 6 (B), NIRC of 1997. “The purpose of the law is to enable the BIR to get at the taxpayer’s records in whatever form they may be kept.” (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005) 24. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make or amend a tax return from his own knowledge or obtained through testimony or otherwise. Thus, the Commissioner of Internal Revenue investigates ”any circumstance which led him to believe that the taxpayer had taxable income larger than that reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer, he may take the testimony of third parties; he may examine and subpoena, if necessary, traders’ and brokers’ accounts and books and the taxpayer’s books of accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any particular proof that is available in the circumstances of the particular situation. [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. citing Campbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)] Citing its ruling in a previous case, a “U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. (Ibid., in turn citing Kenney v. Commissioner, 111 F.2d 374) 25. The following are the general methods developed by the Bureau of Internal Revenue for reconstructing a taxpayer’s income where the records do not show the true income or where no return was filed or what was filed was a false and fraudulent return (a) Percentage method; (b) Net worth method.; (c) Bank deposit method; (d) Cash expenditure method; (e) Unit and value method; (f) Third party information or access to records method; (g) Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68- 74) 26. Third party information or access to records method. The BIR may require third parties, public or private to supply information to the BIR, and thus, “obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities including the Bangko Sentral ng Pilipinas and government-owned or –controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names , addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters or multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members; xxx” *Sec. 5 (B), NIRC of 1997) 27. A pre-assessment notice is a letter sent by the Bureau of Internal Revenue to a taxpayer asking him to explain within a period of fifteen (15) days from receipt why he should not be the subject of an assessment notice. It is part of the due process rights of a taxpayer. As a general rule, the BIR could not issue an assessment notice without first issuing a pre-assessment notice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-assessment notice, and for him to explain why he should not be the subject of an assessment notice. 28. Instances where a pre-assessment notice is not required before a notice of assessment is sent to the taxpayer. a. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or b. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or c. When a taxpayer opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding table year; or d. When the excess tax due on excisable articles has not been paid; or e. When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, trade or transferred to non-exempt persons. (Sec. 228, NIRC of 1997) 29. The word assessment when used in connection with taxation, may have more than one meaning. More commonly the word “assessment” means the official valuation of a taxpayer’s property for purpose of taxation. The above definition of assessment finds application under tariff and customs taxation as well as local government taxation. For real property taxation, there may be a special meaning to the burdens that are imposed upon real properties that have been benefited by a public works expenditure of a local government. It is sometimes called a special assessment or a special levy. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999) For internal revenue taxation assessment as laying a tax. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999) 30. An assessment is a notice duly sent to the taxpayer which is deemed made only when the BIR releases, mails or sends such notice to the taxpayer. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999) 31. What is a self-assessed tax ? SUGGESTED ANSWER: A tax that the taxpayer himself assesses or computes and pays to the taxing authority. It is a tax that self-assessed by the taxpayer without the intervention of an assessment by the tax authority to create the tax liability. The Tax Code follows the pay-as-you-file system of taxation under which the taxpayer computes his own tax liability, prepares the return, and pays the tax as he files the return. The pay-as-you-file system is a self-assessing tax return. Internal revenue taxes are self-assessing. [Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case citing Tupaz v. Ulep, 316 SCRA 118 (1999) in turn citing Vitug and Acosta, Tax Law and Jurisprudence, 1 st edition, 1997, p. 267] A clear example of a self-assessed tax is the annual income tax, which the taxpayer himself computes and pays without the intervention of any assessment by the BIR. The annual income tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or may not investigate or audit the annual income tax return filed by the taxpayer. The taxpayer’s liability for the income tax does not depend on whether or not the BIR conducts such subsequent investigation or audit. However, if the taxing authority is first required to investigate, and after such investigation to issue the tax assessment that creates the tax liability, then the tax is no longer self-assessed. (Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case) 32. On October 28, 1988 taxpayer bank received a notice of assessment from the BIR informing it that deficiency taxes are due from the said taxpayer bank without any findings of law or fact but supported only with a computation. On December 10, 1988, the taxpayer bank counsel filed a letter that “as soon as this is explained and clarified in a proper notice of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the assessment.” The taxpayer bank insists that the assessment was not valid. Of course, BIR took the opposite view contending further that there was no seasonable protest, hence the tax is sue and collectible. Who is correct ? SUGGESTED ANSWER: The BIR is correct. Under the old law Sec. 270, it is enough merely that the BIR Commissioner shall “notify the taxpayer of his findings The taxpayer bank counsel’s December 10, 1988 letter is not a seasonable protest because it was filed thirty (30) days after receipt of the assessment on October 28, 1988. (Commissioner of Internal Revenue v. Bank of Philippine Islands, G. R. No. 134062, April 17, 2007) NOTES AND COMMENTS: The statement, “The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void” is an amendment to Sec. 270 (now renumbered to Sec. 228) which took effect only on January 1, 1998 upon the effectivity of the Tax Reform Act of 1997. 33. What are the prescriptive periods for making assessments of internal revenue taxes ? SUGGESTED ANSWER: a. Three (3) years from the last day within which to file a return or when the return was actually filed, whichever is later (Sec. 203, NIRC of 1997). The CIR has three (3) years from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without an assessment. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] b. ten years from discovery of the failure to file the tax return or discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997) ; or c. within the period agreed upon between the government and the taxpayer where there is a waiver of the prescriptive period for assessment (Sec. 222 (b), NIRC of 1997). 34. Purpose of period of limitations in taxation. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004;], as well as their assessments. The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. [Republic of the Philippines v. Ablaza, 108 Phil. 1105, 1108, cited in Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] 35. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will not longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108) Laws on prescription should be liberally construed in favor of the taxpayer. Reason: for the purpose of safeguarding taxpayers from an unreasonable examination, investigation or assessment, our tax laws provide a statute of limitation on the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection, As a corollary, the exceptions to the law on prescription should perforce be strictly construed. [Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546] The prescriptive period was precisely intended to give the taxpayers peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999) 36. A “jeopardy assessment” is a delinquency tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000) Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000] 37. During Juliana’s lifetime, her business affairs were managed by the Philippine Trust Company (Philtrust). She died on April 3, 2001.Two days after her death, Philtrust, through its Trust Officer, filed her Income Tax Return for 2000, without indicating that Juliana died. On May 22, 2001, Philtrust filed a verified petition with the RTC for appointment as Special Administrator. This was denied by the court who appointed one of the heirs as Special Administrator. Philtrust’s motion for reconsideration was denied. After an investigation by the BIR of the decedent’s income tax liability, it sent, on November 18, 2003, a demand letter and a Notice of Assessment to Juliana c/o Philtrust at the latter’s address which was stated in the 1998 Income Tax Return. No response was made neither was the BIR advised that Juliana already died. On June 18, 2005, the BIR Commissioner issued warrants of distraint and levy to enforce collection of the deficiency income tax liability which was served on Juliana’s heir. On November 22, 2005, the BIR filed with the estate court a motion for allowance of claim. The heir claimed that there was no proper service of the notice of assessment and that the filing of the motion was time-barred. On the other hand the BIR made the submission that both the issuance of the assessment notice and the motion were all properly made on Philtrust. Furthermore the lapse of the 30-day period within which to protest made the assessment final, executory and uncontestable and not time barred. Rule on the conflicting claims of the parties. SUGGESTED ANSWER: I would rule in favor of the heir. There was no proper service of the notice of assessment because the death of Juliana automatically severed the legal relationship of principal and agent between her and Philtrust. The severed relationship could not be revived on the mere fact that Philtrust filed her Tax Return two days after her death. Philtrust’s failure to file a notice of death subjects it to penal sanctions which do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments. (Estate of the late Juliana Diez Vda. de Gabriel v. Commissioner of Internal Revenue, G.R. No. 155541, January 27, 2004) 38. What are the requirements for the validity of a formal letter of demand and assessment notice ? SUGGESTED ANSWER: a. There must have been previously issued a pre-assessment notice until excepted; b. It must have been issued prior to the prescriptive period; and c. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99) 39. What is the presumption that flows from a taxpayer’s failure to protest an assessment ? SUGGESTED ANSWER: “Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.” (Commissioner of Internal Revenue v. Bank of Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G. R. No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted) 40. What are the reasons for presumption of correctness of assessments ? SUGGESTED ANSWER: a. Lifeblood theory b. Presumption of regularity (Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the performance of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA 397) c. The likelihood that the taxpayer will have access to the relevant information [Commissioner of Internal Revenue, supra citing United States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United States Supreme Court on November 19, 1973) d. The desirability of bolstering the record-keeping requirements of the NIRC. (Ibid.) 41. Give instances where prima facie correctness of a tax assessment does not apply. SUGGESTED ANSWER: The “prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a “naked assessment” i.e., without any foundation character, the determination of the tax due is without rational basis.” *Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)+ In such a situation, “the determination of the Commissioner contained in a deficiency notice disappears.” *Commissioner of Internal Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner of Internal Revenue, 266 F. 2d 698 (1959)+ “Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence.” *Commissioner of Internal Revenue, supra] 42. What are the instances that suspends the running of the prescriptive periods (Statute of Limitations) within which to make an assessment and the beginning of distraint or levy or of a proceeding in court for the collection, in respect of any tax deficiencies? SUGGESTED ANSWER: a. When the Commissioner is prohibited from making the assessment, or beginning distraint, or levy or proceeding in court and for sixty (60) days thereafter; b. When the taxpayer requests for and is granted a reinvestigation by the commissioner; c. When the taxpayer could not be located in the address given by him in the return filed upon which the tax is being assessed or collected; d. When the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and e. When the taxpayer is out of the Philippines. NOTES AND COMMENTS: The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) that the waiver of the period for assessment must be in writing and have the written consent of the BIR Commissioner is still doctrinal because of the provisions of Sec. 223, NIRC of 1997 which provides for the suspension of the prescriptive period: 43. The signatures of both the Commissioner and the taxpayer, are required for a waiver of the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not suspend the prescriptive period. [Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)] 44. The act of requesting a reinvestigation alone does not suspend the running of the prescriptive period. The request for reinvestigation must be granted by the CIR. The Supreme Court declared that the burden of proof that the request for reinvestigation had been actually granted shall be on the Commissioner of Internal Revenue. Such grant may be expressed in its communications with the taxpayer or implied from the action of the Commissioner or his authorized representative in response to the request for reinvestigation. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] 45. Philippine Journalists, Inc. (PJI) filed its Annual Income Tax Return for the calendar year ended December 31, 1994 which showed a net income of P30 million and the tax due as P10 million. An examination of PJI’s books of account and other accounting records for the period January 1, 1994 to December 31, 1994 showed deficiency VAT, Income Tax and Withholding Tax in the total amount of P1`27 million. During the September 22, 1997 informal conference with the Revenue District Officer, PJI’s Comptroller executed a waiver of statute of limitations provided for under sections 223 and 224 of the NIRC. On October 5, 1998, the BIR issued a Pre-Assessment Notice which was followed by Assessment/Demand No.33-1-000757-94 stating a total deficiency taxes in the amount of P111 million for income tax, VAT and expanded withholding taxes, inclusive of interest and compromise penalty. On March 16, 1999, the BIR sent to PJI a Preliminary Collection Letter to pay the assessment within 10 days from receipt. On November 10,1999, a Final Notice Before Seizure was issued giving PJI 10 days from receipt within which to pay. PJI received the final notice on November 24, 1999 and on November 26, 1999 PJI asked that it be clarified on how the tax liability of P111 million was arrived at and requested for an extension of 30 days from receipt of the clarification within which to reply. PJI, through a follow-up letter, asserted it never received Assessment/Demand No. 33-1-000757-94. On March 28, 2000 PJI received a Warrant of Distraint and/or Levy. PJI then appealed to the CTA. The following issues are for resolution in the appeal: a. Does the CTA have jurisdiction over the appeal ? b. Was the Waiver of the Statute of Limitations valid ? c. Were the Assessment/Demand and the Warrant of Distraint and/or Levy valid ? Will the appeal prosper? Explain briefly your answer. SUGGESTED ANSWER: Yes, it will prosper. a. The CTA has jurisdiction to determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of the Statute of Limitations was validly effected. This is so because the CTA has exclusive appellate jurisdiction to review by appeal decisions of the Commissioner of Internal Revenue in cases involving “other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue.” *Sec. 7 (a) (1). R. A. No. 1125, as amended by R. A. No. 9282) Thus it was previously ruled that the CTA had jurisdiction to act on a petition to invalidate and annul the distraint orders of the Commissioner. [Ynares-Santiago, J. Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing Panrtoja v. David, 111 Phil. 197; 1 SCRA 608 (1961)] Likewise upheld by the Supreme Court was the decision of the CTA declaring several waivers executed by the taxpayer as null and void, thus invalidating the assessments issued by the BIR. (Ibid., citing Commissioner of Internal Revenue v. Court of Appeals, G. R. No. 115712, 25 February 1999, 303 SCRA 614) b. The Waiver of the Statute of Limitations is not valid because it did not specify a definite agreed date between the BIR and PJI, within which the former may assess and collect revenue taxes. Furthermore, the waiver is also defective from the government side because it was signed only by a revenue district officer, and not the Commissioner, as so required. Finally, PJI was not furnished a copy of the waiver. c. The waiver document is incomplete and defective and thus the three- year prescriptive period within which to assess was not tolled or extended and continued to run until April 17, 1998. Consequently, Assessment/Demand No. 33- 1-000757-94 issued on December 9, 1998 was invalid because it was issued beyond the three (3) year period. In the same manner, the Warrant of Distraint and/or Levy which PJI received on March 28, 2000 is also null and void for having been issued pursuant to an invalid assessment. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004) 46. What are the two ways of protesting an assessment notice for an internal revenue tax ? Alternatively, what are the two types of protests ? Explain briefly. SUGGESTED ANSWER: a. Request for reconsideration which refers to a plea for re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. b. Request for reinvestigation which refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85) 47. What is that type of protest that suspends the running of the statute of limitations for the beginning of distraint or levy or a proceeding in court for collection ? Why ? SUGGESTED ANSWER: It is that type of protest “when the taxpayer requests for a reinvestigation which is granted by the Commissioner” (Sec. 223, NIRC of 1997), that suspends the running of the statute of limitations for collection of the tax. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of 1997) When a taxpayer demands a reinvestigation, the time employed in reinvestigation should be deducted from the total period of limitation. [Commissioner of Internal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)] Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Bank of Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231) 48. What are the requirements for the validity of a taxpayer’s protest ? SUGGESTED ANSWER: a. It must be filed within the reglementary period of thirty (30) days from receipt of the notice of assessment. b. The taxpayer must not only show the errors of the Bureau of Internal Revenue but also the correct computation through 1) A statement of the facts, the applicable law, rules and regulations, or jurisprudence on which the taxpayer’s protest is based, 2) If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. (Sec. 3.1.5, Rev. Regs. 12-99) c. Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents. [4 th par., Sec. 228 (e), NIRC of 1997] 49. What is the procedure for suspension of collection of taxes ? SUGGESTED ANSWER: Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals. The motion for suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005) 50. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code) A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001) 50-A. What tax cases may be the subject of a compromise ? SUGGESTED ANSWER: The following cases may, upon taxpayer’s compliance with the basis for compromise, be the subject matter of compromise settlement: a. Delinquent accounts; b. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office; c. Civil tax cases being disputed before the courts; d. Collection cases filed in courts; e. Criminal violations, other than those already filed in court, or those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002) 51. What tax cases could not be the subject of compromise ? SUGGESTED ANSWER: a. Withholding tax cases unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold.; b. Criminal tax fraud cases, confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative; c. Criminal violations already filed in court; d. Delinquent accounts with duly approved schedule of installment payments; e. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis; f. Cases which become final and executory after final judgment of a court where compromise is requested on the ground of doubtful validity of the assessment; and g. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002) 52. The Commissioner may compromise the payment of any internal revenue tax when: a. A reasonable doubt as to the validity of the claim against the taxpayer exists provided that the minimum compromise entered into is equivalent to forty percent (40%) of the basic tax; or b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax provided that the minimum compromise entered into is equivalent to ten percent (10%) of the basic assessed tax In the above instances the Commissioner is allowed to enter into a compromise only if the basic tax involved does not exceed One million pesos (P1,000,000.00), and the settlement offered is not less than the prescribed percentages. [Sec. 204 (A), NIRC of 1997] In instances where the Commissioner is not authorized, the compromise shall be subject to the approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy Commissioners. 53. The Commissioner of Internal Revenue is authorized to abate or cancel a tax liability, when: a. The tax or any portion thereof appears to be unjustly or excessively assessed; or b. The administration and collection costs involved do not justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997] 54. What is the prescriptive period for collecting internal revenue taxes ? SUGGESTED ANSWER: There are four (4) prescriptive periods for the collection of an internal revenue tax: a. Collection upon a false or fraudulent return or no return without assessment. In case of a false or fraudulent return with the intent to evade tax or of failure to file a return, “a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission.” *Sec. 222 (a), NIRC of 1997) b. Collection upon a false or fraudulent return or no return with assessment. Any internal revenue tax which has been assessed (because the return is false or fraudulent with intent to evade tax or of failure to fail a return), within a period of ten (10) years from discovery of the falsity, fraud or omission “may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax.” *Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied) c. Collection upon an extended assessment. Where a tax has been assessed with the period agreed upon between the Commissioner and the taxpayer in writing (which should initially be within three (3) years from the time the return was filed or should have been filed), or any extensions before the expiration of the period agreed upon, the tax “may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon.” *Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis supplied) d. Collection upon a return that is not false or fraudulent, or where the assessment is not an extended assessment. “Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period; Provided, That in case where a return is filed beyond the period prescribed by law, the three (3) year period shall be computed from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered filed on such last day.” (Sec. 203, NIRC of 1997, emphasis supplied) When the BIR validly issues an assessment within the three (3)-year period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R. No. 139736, 17 October 2005, 473 SCRA 205, 222-223) NOTES AND COMMENTS: a. Both the former Sec. 269, NIRC of 1977 and Sec.222 of NIRC of 1997 do not refer to a “regular return.” It is clear that in enacting Sec. 222, entitled “Exceptions as to the period of limitation of assessment and collection of taxes,” the NIRC of 1997 has eliminated sub-paragraph c of the former Sec. 269 of the NIRC, also entitled “Exceptions as to the period of limitation of assessment and collection of taxes.” Said Sec. 269 (c), reads “Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.” A perusal of Sec. 222 of the NIRC is clear that it covers only three scenarios only. 1) No assessment was made upon a false or fraudulent return or omission to file a return; 2) an assessment was made upon a false or fraudulent return or omission to file a return; and 3) an extended assessment issued within a period agreed upon by the Commissioner and the taxpayer. The same scenarios are those referred to in the former Sec. 269 which provided for a prescriptive period for collection of three (3) years. It is clear therefore that neither Sec. 222 nor the former Sec. 269 provide for an instance where the assessment was made upon a “regular return” or one that is not false or fraudulent, or that there was an agreement to extend the period for assessment. Resort should therefore be made to the three (3) year period referred to in Sec. 203 of the NIRC of 1997 which reads, “Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes x x x “ (paraphrasing and emphasis supplied) 55. What is solutio indebeti as applied to tax cases ? SUGGESTED ANSWER: This is erroneous payment of taxes and occurs when the taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made. Such payment is held to be not voluntary and therefore, can be recovered or refunded. (Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February 16, 2007) NOTES AND COMMENTS: Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens. State Land Investment Corporation v. Commissioner of Internal Revenue, G. R. No. 171956, January 18, 2008 citing BPI-Family Savings Bank, Inc. v. Court of Appeals, G.R. No. 122480, April 12, 2000, 330 SCRA 507. Under the principle of solutio indebiti provided in Art. 2154, Civil Code, “If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.” The BIR received something “when there *was+ no right to demand it,” and thus, it has the obligation to return it. State Land Investment Corporation v. Commissioner of Internal Revenue supra citing Citibank, N. A. v. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 107434, October 10, 1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v. Mathay, Sr., 89 SCRA 586 (1979). It is an ancient principle that no one, not even the state, shall enrich oneself at the expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes. (Ibid.) 56. What are the reasons for requiring the filing of an administrative application for refund or credit with the BSUGGESTED 56. The filing of an administrative claim for refund with the BIR, before filing a case with the Court of Tax Appeals, is necessary for the following reasons: a. To afford the Commissioner an opportunity to correct his errors or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA 79) b. To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. (Bermejo v. Collector, G.R. No. L-3028, July 28, 1950) 57. As a general rule the filing of an application for refund or credit with the Bureau of Internal Revenue is an administrative precondition before a suit may be filed with the Court of Tax Appeals. Is there any exception ? SUGGESTED ANSWER: Yes. The failure to first file a written claim for refund or credit is not fatal to a petition for review involving a disputed assessment where an assessment was disputed but the protest was denied by the Bureau of Internal Revenue. To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed assessment and require him to file a claim for a refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Commissioner would certainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to result in absurdities. (vda. de San Agustin., etc., v. Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector of Internal Revenue, 4 SCRA 279) NOTE: Reconciliation between above two numbers (56 and 57). An application for refund or credit under Sec. 229 of the NIRC of 1997 is required where the case filed before the CTA is a refund case, which is not premised upon a disputed assessment. There is no need for a prior application for refund or credit, if the refund is merely a consequence of the resolution of the BIR’s denial of a protested assessment. 58. What is the nature of the taxpayer’s remedy of either to ask for a refund of excess tax payments or to apply the same in payment of succeeding taxable periods’ taxes ? SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative and the choice of one precludes the other. Since the Bank has chosen the tax credit approach it cannot anymore avail of the tax refund. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999) NOTES AND COMMENTS: a. The choice, is given to the taxpayer, whether to claim for refund under Sec. 76 or have its excess taxes applied as tax credit for the succeeding taxable year, such election is not final. Prior verification and approval by the Commissioner of Internal Revenue is required. The availment of the remedy of tax credit is not absolute and mandatory. It does not confer an absolute right on the part of the taxpayer to avail of the tax credit scheme if it so chooses. Neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004) 59. What is the “irrevocability rule” in claims for refund and what is the rationale behind this ? SUGGESTED ANSWER: A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. [Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)] This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The phrase “such option shall be considered irrevocable for that taxable period” means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund. (Systra Philippines, Inc., supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE CODE, Seventh Edition, 2000, p. 430) 60. In the year 2000 Systra derived excess tax credits and exercised the option to carry them over as tax credits for the next taxable year. However, the tax due for the next taxable year is lower than excess tax credits. It now applies for a refund of the unapplied tax credits. May its refund be granted ? If the refund is denied, does Systra lose the unapplied tax credits ? Explain briefly your answer. SUGGESTED ANSWER: Systra’s claim for refund should be denied. Once the carry over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized Under Section 76 of the Tax Code, a claim for refund of such excess credits can no longer be made. The excess credits will only be applied “against income tax due for the taxable quarters of the succeeding taxable years.” Despite the denial of its claim for refund, Systra does not lose the unapplied tax credits. The amount will not be forfeited in favor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. (Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761) Supposing in the above problem that Systra permanent ceased operations, what happens to the unapplied credits ? SUGGESTED ANSWER: Where, the corporation permanently ceases its operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply. Cessante ratione legis, cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007) NOTES AND COMMENTS: The holding in State Land Investment Corporation v. Commissioner of Internal Revenue, G. R. No. 171956, January 18, 2008 that the taxpayer is entitled to a refund because during the succeeding year there was no tax due against which the excess tax credits may be applied is not doctrinal. This is so because it interpreted the provisions of then Sec. 69 of the NIRC, which did not provide for the “irrevocability rule” now contained in Sec. 76 of the NIRC of 1997. 60-A. In early April 1999 XYZ Bank advanced the amount of P180 million to the BIR its income tax payment for the bank’s 1999 operations in response for the government’s call to generate more revenues for national development. In separate letters dated April 19 and 29, 1999 and May 14, 1999 XYZ requested for the issuance of a Tax Credit Certificate (TCC) to be utilized against future tax obligations of the bank. By the end of 1999, a credit balance in the amount of P73 million remain which was carried over for the years 2000 to 2004 but was not availed of because XYZ incurred losses during the period. On July 28, 2005 PNB reiterated its request for the issuance of a TCC for the P73 million balance. The BIR rejected the request on the ground of among others prescription having been applied for beyond the two-year reglementary period for filing claims for refund as set forth in Sec. 229 of the NIRC of 1997. Has the claim prescribed ? Explain briefly your answer. SUGGESTED ANSWER: The claim has not prescribed. Sec. 229 of the Tax Code, as couched, particularly its statute of limitations component, is in context intended to apply to suits for any national internal revenue tax “alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have excessively or in any manner wrongfully collected.” Analyzing the underlying reason behind the advance payment (to help the government) made by XYZ it would be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Sec. 229 of the NIRC of 1997. An availment of tax credit due for reasons other than the erroneous or wrongful collection of taxes may have a different prescriptive period. (Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 161997, October 25, 2005 citing Commissioner of Internal Revenue v. The Philippine Life Insurance Co., et al. G.R. No. 105208, May 29, 1995) Absent any specific provision in the Tax Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code. (Commissioner of Internal Revenue v. Philippine National Bank, supra) 61. ABC Bank filed with the BIR an application for a tax credit/refund for alleged excess payments of its gross receipts tax (GRT) for the 3 rd and 4 th quarters of 2003 and the entire 2004 amounting to P14 million. Since no action was taken by the Commissioner on its claim, ABC filed a case with the CTA on October 18, 2005 to comply with the two-year reglementary period and avoid the prescription of its action. Only July 30, 2007, the CTA rendered a decision denying the claim for ABC’s failure to file its formal offer of evidence in the CTA. ABC Bank now seeks refuge in Onate v. Court of Appeals, 320 Phil. 344; 250 SCRA 283 (1995) where the Supreme Court allowed evidence, not formally offered, to be considered on condition that: (1) evidence must have been identified by testimony duly recorded and (2) it must have been incorporated in the records of the case. Is ABC correct ? SUGGESTED ANSWER: No. A tax refund s in the nature of a tax exemption which must be construed strictissimi juris against the taxpayer. The taxpayer must present convincing evidence to substantiate a claim for refund. Without any documentary evidenced on record, ABC failed to discharge the burden of proving its right to a tax credit/tax refund. (Far East Bank & Trust Company v. Commissioner of Internal Revenue, G. R. No. 149589, September 15, 2006) 62. A simultaneous filing of the application with the BIR for refund/credit and the institution of the court suit with the CTA is allowed. There is no need to wait for a BIR denial. REASONS: a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997); b. The doctrine that delay of the Commissioner in rendering decision does not extend the peremptory period fixed by the statute; c. The law fixed the same period two years for filing a claim for refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period (thirty days from receipt of decision) for appealing to the court, thus clearly implying that the prior decision of the Commissioner is necessary to take cognizance of the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151) 63. The grant of a refund is founded on the assumption that the tax return is valid, i.e. that the facts stated therein are true and correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would be virtually impossible to determine whether the proper taxes have been assessed and paid. After all, it is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004) However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil. 719; 326 SCRA 641 (2000), refund was granted, despite the failure to present the tax return, because other evidence was presented to prove that the overpaid taxes were not applied. (Ibid.) 64. Discuss the difference between tax refund and tax credit. SUGGESTED ANSWER: There are unmistakable formal and practical differences between the two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer. On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004) NOTES AND COMMENTS: It may be that there is no essential difference between a tax refund and a tax credit since both are moves of recovering taxes erroneously or illegally paid to the government. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004) 65. What are the three (3) conditions for the grant of a claim for refund of creditable withholding tax ? SUGGESTED ANSWER: a. The claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of the payment of the tax. b. It is shown on the return of the recipient that the income payment received was declared as part of the gross income; and c. The fact of withholding is established by a copy of a statement duly issued by the payee showing the amount paid and the amount of tax withheld therefrom. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007) NOTES AND COMMENTS: a. Proof of fact of withholding. “Sec. 10. Claim for tax credit or refund. – (a) Claims for Tax Credit or Refund of Income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received has been declared as part of the gross income and the fact of withholding is established by a copy of the Withholding Tax Statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld therefrom xxx” (Rev. Regs. No. 6-85, as amended) The document which may be accepted as evidence of the third condition, that is, the fact of withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid. . (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007) 65-A. What should be established by a taxpayer for the grant of a tax refund ? Why ? SUGGESTED ANSWER: A taxpayer needs to establish not only that the refund is justified under the law, but also the correct amount that should be refunded. If the latter requisite cannot be ascertained with particularity, there is cause to deny the refund, or allow it only to the extent of the sum that is actually proven as due. Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the person claiming the exemption. The burden in proving the claim for refund necessarily falls on the taxpayer. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006) 66. What are the requisites for the refund of illegally deducted taxes from the income of an employees’ trust fund ? SUGGESTED ANSWER: What has to be established, as a matter of evidence, is that the amount sought to be refunded to the bank-trustee corresponds to the tax withheld on the interest income earned from the exempt employees’ trust. The need to be determinate is important, specially if the bank trustee, in the ordinary course of its banking business, earns interest income not only from its investments of employees’ trusts, but on a whole range of accounts which do not enjoy the same broad exemption as employees’ trusts. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006) NOTES AND COMMENTS: a. Employees’ trust fund, defined. An employees’ trust fund is a trust established by an employer to provide retirement, pension, or other benefits to employees - it is a separate taxable entity established for the exclusive benefit of the employees. (Development Bank of the Philippines v. Commission on Audit, 422 SCRA 459) b. Income of employees’ trust is tax exempt. “Any provision of law to the contrary notwithstanding, the retirement benefits received by official and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to amendment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action’ x x x “ (Sec. 1, Rep. Act 4917) A tax-exempt employees’ trust fund is referred to under the NIRC of 1997 as a “reasonable private retirement plan, which means “a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials or employees.” *Sec. 32 (B) (6 ) (a), NIRC of 1997] c. Extent of exemption. The tax exemption enjoyed by employees’ trust is absolute irrespective of the nature of the tax. It does not apply only to the tax on interest income from money market placements, bank deposits, other deposit substitute instruments and government security, because the source of the interest income does not have any effect on the exemption enjoyed by employee’s trusts. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006) 67. A bank-trustee of employee trusts filed an application for the refund of taxes withheld on the interest incomes of the investments made of the funds of the employees’ trusts. Instead of presenting separate accounts for interest incomes made of these investments, the bank-trustee instead presented witness to establish that it would next to impossible to single out the specific transactions involving the employees’ trust funds from the totality of all interest income from its total investments. On the above basis will the application for refund prosper ? SUGGESTED ANSWER: No. The application for refund will not prosper. The bank-trustee needs to establish not only that the refund is justified under the law (which is so because incomes of employees’ trusts are tax exempt), but also the correct amount that should be refunded. Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the person or entity claiming the exemption. The burden in proving the amount to be refunded necessarily falls on the bank-trustee, and there is an apparent failure to do so. A necessary consequence of the special exemption enjoyed alone by employees’ trusts would be a necessary segregation in the accounting of such income, interest or otherwise, earned from those trusts from that earned by the other clients of the bank-trustee. (Far East Bank and Trust Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2, 2006) The amounts that are the exempt earnings of the employee’s trust has not been shown as they have been commingled with the interest income of the other clients of the bank- trustee. 68. CTA Circular No. 1-95 clearly requires that photocopies of the receipts or invoices must be pre-marked and submitted to the CTA to verify the correctness of the summary listing and the CPA certification. CTA Circular No. 1- 95, issued on 25 January 1995, reads: “1. The party who desires to introduce as evidence such voluminous documents must present: (a) Summary containing the total amount/s of the tax account or tax paid for the period involved and a chronological or numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination and evaluation of the voluminous receipts and invoices. Such summary and certification must properly be identified by a competent witness from the accounting firm. 2. The method of individual presentation of each and every receipt or invoice or other documents for marking, identification and comparison with the originals thereof need not be done before the Court or the Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices and other documents covering the said accounts or payments must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party whenever he/she desires to check and verify the correctness of the summary and CPA certification. However, the originals of the said receipts, invoices or documents should be ready for verification and comparison in case doubt on the authenticity of the particular documents presented is raised during the hearing of the case.” (Emphasis supplied) 69. Manila Electric Company a grantee of a legislative franchise under Act No. 484, as amended by Republic Act No. 4159 and Presidential Decree No. 551, [3] had been paying a 2% franchise tax based on its gross receipts, in lieu of all other taxes and assessments of whatever nature. Upon the effectivity of Executive Order No. 72 on February 10, 1987, however, respondent became subject to the payment of regular corporate income tax. For the last quarter ending December 31, 1987, respondent filed on April 15, 1988 its tentative income tax reflecting a refundable amount of P101,897,741, but only P77,931,812 was applied as tax credit for the succeeding taxable year 1988. Acting on a yearly routinary Letter of Authority No. 0018064 NA dated June 27, 1988 issued by petitioner, directing the investigation of tax liabilities of respondent for taxable year 1987, an investigation was conducted by Revenue Officer Frederick Capitan which showed that respondent was liable for “1. deficiency income tax in the amount of P2,340,902.52; and 2. deficiency franchise tax in the amount of P2,838,335.84.” On April 17, 1989, respondent filed an amended final corporate Income Tax Return ending December 31, 1988 reflecting a refundable amount of P107,649,729. Respondent thus filed on March 30, 1990 a letter-claim for refund or credit in the amount of P107,649,729 representing overpaid income taxes for the years 1987 and 1988. Petitioner not having acted on its request, respondent filed on April 6, 1990 a judicial claim for refund or credit with the Court of Tax Appeals. It is gathered that respondent paid the deficiency franchise tax in the amount of P2,838,335.84. It protested the payment of the alleged deficiency income tax and claimed as an alternative remedy the deduction thereof from its claim for refund or credit. The Court of Tax Appeals granted the P107,649,729 claim for refund, or in the alternative for the BIR to issue a tax credit. Is the Court of Tax Appeals correct ? SUGGESTED ANSWER: Yes. Section 69 of the National Internal Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly tax payments made during a taxable year is not equal to the total tax due on the entire taxable income of that year as shown in its final adjustment return, the corporation has the option to either: (a) pay the excess tax still due, or (b) be refunded the excess amount paid. The returns submitted are “merely pre-audited which consist mainly of checking mathematical accuracy of the figures in the return.” After such checking, the purpose of which being to “insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes,” (Revenue Memorandum Order No. 32-76 dated June 11, 1976) the refund or tax credit is granted. (Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007) TARIFF AND CUSTOMS LAWS ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE TARIFF AND CUSTOMS CODE 1. When does importation begin, and why is it important to know whether importation has already begun or not ? SUGGESTED ANSWER: Importation begins when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. (Sec. 1202, TCCP) The jurisdiction of the Bureau of Customs to enforce the provisions of the TCCP including seizure and forfeiture also begins from the beginning of importation. Thus, the Bureau of Customs obtains jurisdiction over imported articles only after importation has begun. 2. When is importation deemed terminated and why is it important to know whether importation has already ended? SUGGESTED ANSWER: Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted. In case the articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP) The Bureau of Customs loses jurisdiction to enforce the TCCP and to make seizures and forfeitures after importation is deemed terminated. 3. The flexible tariff clause is a provision in the Tariff and Customs Code, which implements the constitutionally delegated power to the Congress to further delegate to the President of the Philippines, in the interest of national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others. 4. Customs duties defined. Customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001) 5. Special customs duties are additional import duties imposed on specific kinds of imported articles under certain conditions. The special customs duties under the Tariff and Customs Code (TCCP) are the anti-dumping duty, the countervailing duty, the discriminatory duty, and the marking duty, and under the Safeguard Measures Act (SMA) additional tariffs as safeguard measures. 6. The special customs duties are imposed for the protection of consumers and manufacturers, as well as Philippine products. 7. Dumping duty is an additional special duty amounting to the difference between the export price and the normal value of such product, commodity or article (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999.”) imposed on the importation of a product, commodity or article of commerce into the Philippines at less than its normal value when destined for domestic consumption in the exporting country which is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”+ 8. When is the anti-dumping duty imposed ? SUGGESTED ANSWER: The anti-dumping duty is imposed a. Where a product, commodity or article of commerce is exported into the Philippines at a price less than its normal value when destined for domestic consumption in the exporting country, b. and such exportation is causing or is threatening to cause material injury to a domestic industry, or materially retards the establishment of a domestic industry producing the like product. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”+ 9. Normal value for purposes of imposing the anti-dumping duty is the comparable price at the date of sale of like product, commodity, or article in the ordinary course of trade when destined for consumption in the country of export. *Sec. 301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”+ 10. The imposing authority for the anti-dumping duty is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. *Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”+ 11. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”+ Thus, the cabinet secretaries could not contravene the recommendation of the Tariff Commission. They could not impose the anti-dumping duty or any special customs duty without the favorable recommendation of the Tariff Commission. 12. In the determination of whether to impose the anti-dumping duty, the Tariff Commission, may consider among others, the effect of imposing an anti- dumping duty on the welfare of the consumers and/or the general public, and other related local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”) 13. The amount of anti-dumping duty that may be imposed is the difference between the export price and the normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”) The anti-dumping duty shall be equal to the margin of dumping on such product, commodity or article thereafter imported to the Philippines under similar circumstances, in addition to ordinary duties, taxes and charges imposed by law on the imported product, commodity or article. 14. What are countervailing duties and when are they imposed ? SUGGESTED ANSWER: Countervailing duties are additional customs duties imposed on any product, commodity or article of commerce which is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product commodity or article, and the importation of such subsidized product, commodity, or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as amended by Section 1, R.A. No. 8751) 15. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”) 16. The countervailing duty is equivalent to the value of the specific subsidy. 17. Marking duties are the additional customs duties imposed on foreign articles (or its containers if the article itself cannot be marked), not marked in any official language in the Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin. 18. The Commissioner of Customs imposes the marking duty. 19. The marking duty is equivalent to five percent (5%) ad valorem. 20. A discriminatory duty is a new and additional customs duty imposed upon articles wholly or in part the growth or product of, or imported in a vessel, of any foreign country which imposes, directly or indirectly, upon the disposition or transportation in transit through or re-exportation from such country of any article wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction, regulation or limitation which is not equally enforced upon like articles of every foreign country, or discriminates against the commerce of the Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition, in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. 21. The President of the Philippines imposes the discriminatory duties. 22. Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them. The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004) The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition. 23. Imposing authority for safeguard measures. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. 24. Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports. 25. The basis of dutiable value of merchandise that is subject to ad valorem customs duties the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding certain cost elements to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, and may include the following: a. Cost of containers and packing, b. Insurance, and c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135) 26. The above transaction value is the primary method of determining dutiable value. If the transaction value of the imported article could not be determined using the above, the following alternative methods should be used one after the other: a. Transaction value of identical goods b. Transaction value of similar goods c. Deductive method d. Computed method e. Fallback method 27. How and to whom should claims for refund of customs duties be made ? SUGGESTED ANSWER: All claims for refund of duties shall be made in writing and forwarded to the Collector of Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same by the records of his Office, and if found to be correct and in accordance with law, shall certify the same to the Commissioner of Customs with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct. (Sec. 1708, TCC) 28. What is mean by the term “entry” in Customs Law ? SUGGESTED ANSWER: It has a triple meaning. a. the documents filed at the Customs house; b. the submission and acceptance of the documents; and c. Customs declaration forms or customs entry forms required to be accomplished by passengers of incoming vessels or passenger planes as envisaged under Sec. 2505 of the TCCP (Failure to declare baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006) 29. A flight stewardess arrived from Singapore. Upon her arrival she was asked whether she has anything to declare. She answered none, and she submitted her “Customs Baggage Declaration Form” which she accomplished and signed with nothing or written on the space for items to be declared. When her hanger bag was examined some pieces of jewelry were found concealed within the lining of said bag. She was then convicted of violating of Sec. 3601 of the Tariff and Customs Code for unlawful importation which penalizes any person who shall fraudulently import or bring into the Philippines any article contrary to law. She now appeals claiming that lower court erred n convicting her under Sec. 3601 when the facts alleged both in the information and those shown by the prosecution constitute the offense under Sec. 2505 “Failure to Declare Baggage,” of which she was acquitted. Is she correct ? SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It merely provides, inter alia, the administrative remedies which can be resorted to by the Bureau of Customs when seizing dutiable articles found the baggage of any person arriving in the Philippines which is not included in the accomplished baggage declaration submitted to the customs authorities, and the administrative penalties that such person must pay for the release of such goods if not imported contrary to law. Such administrative penalties are independent of the criminal liability for smuggling that may be imposed under Sec. 3601, and other provisions of the TCC which can only be determined after the appropriate criminal proceedings, prescinding from the outcome in any administrative case that may have been filed and disposed of by the customs authorities. Indeed the second paragraph of Sec. 2505 provides that nothing shall prevent the bringing of a criminal action against the offender for smuggling under Section 3601. (Jardeleza v. People, G. R. No. 165265, February 6, 2006) 29-A. Payment is not a defense in smuggling. “When upon trial for violation of this section, the defendant is shown to have possession of the article in question, possession shall be deemed sufficient evidence to authorize conviction, unless the defendant shall explain the possession to the satisfaction of the court: Provided, however, That payment of the tax due after apprehension shall not constitute a valid defense in any prosecution under this section.” (last par., Sec. 3601, TCC) 30. How is smuggling committed ? SUGGESTED ANSWER: Smuggling is committed by any person who: a. fraudulently imports or brings into the country any article contrary to law; b. assists in so doing any article contrary to law; or c. receives, conceals, buys, sells or in any manner facilitates the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law. (Jardeleza v. People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296) NOTES AND COMMENTS: a. Importation consists of bringing an article into the country from the outside. Importation begins when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein. b. When unlawful importation is complete. In the absence of a bona fide intent to make entry and pay duties when the prohibited article enters the Philippine territory. Importation is complete when the taxable, dutiable commodity is brought within the limits of the port of entry. Entry through a custom house is not the essence of the act. (Jardeleza v. People, G.R. No. 165265, February 6, 2006) 31. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000) What is the rationale for this doctrine ? SUGGESTED ANSWER: a. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455) b. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored upon the policy of placing no unnecessary hindrance on the government’s drive, not only to prevent smuggling and other frauds upon Customs, c. but more importantly, to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43) d. The issuance by regular courts of writs of preliminary injunction in seizure and forfeiture proceedings before the Bureau of Customs may arouse suspicion that the issuance or grant was for consideration other than the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003]) e. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to be conducted in a dwelling place. Where an administrative office has obtained a technical expertise in a specific subject, even the courts must defer to this expertise. 32. “A” claiming to be the owner of a vessel which is the subject of customs warrant of seizure and detention sought the intercession of the RTC to restrain the Bureau of Customs from interfering with his property rights over the vessel. Would the suit prosper? SUGGESTED ANSWER: No. His remedy was not with the RTC but with the CTA, as issues of ownership of goods in the custody of customs officials are within the power of the CTA to determine. The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and trial courts are precluded from assuming cognizance over such matters even through petitions for certiorari, prohibition or mandamus. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006) 33. The customs authorities do not have to prove to the satisfaction of the court that the articles on board a vessel were imported from abroad or are intended to be shipped abroad before they may exercise the power to effect customs searches, seizures, or arrests provided by law and continue with the administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000) 34. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article when the imported articles could be found and be subject to seizure and forfeiture. 35. The Tariff and Customs Code allows the Bureau of Customs to resort to the judicial remedy of filing an action in court when the imported articles could not anymore be found. 36. Instances where there is no right of redemption of seized and forfeited articles: a. There is fraud; b. The importation is absolutely prohibited, or c. The release of the property would be contrary to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999) 37. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law must be actual and not constructive. It must be intentional, consisting of deception, willfully and deliberately done or resorted to in order to induce another to give up some right. 38. Requisites for forfeiture of imported goods: a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper – all touching on the importation or exportation of merchandise. b. the falsity of such declaration, affidavit, invoice, letter or paper; and c. an intention on the part of the importer/consignee to evade the payment of the duties due. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001) 39. On January 7, 1989, the vessel M/V ”Star Ace, ”coming from Singapore laden with cargo, entered the Port of San Fernando, La Union for needed repairs. When the Bureau of Customs later became suspicious that the vessel’s real purpose in docking was to smuggle cargo into the country, seizure proceedings were instituted and subsequently two Warrants of Seizure and Detention were issued for the vessel and its cargo. Cesar does not own the vessel or any of its cargo but claimed a preferred maritime lien. Cesar then brought several cases in the RTC to enforce his lien. Would these suits prosper ? SUGGESTED ANSWER: No. The Bureau of Customs having first obtained possession of the vessel and its goods has obtained jurisdiction to the exclusion of the trial courts. When Cesar has impleaded the vessel as a defendant to enforce his alleged maritime lien, in the RTC, he brought an action in rem under the Code of Commerce under which the vessel may be attached and sold. However, the basic operative fact is the actual or constructive possession of the res by the tribunal empowered by law to conduct the proceedings. This means that to acquire jurisdiction over the vessel, as a defendant, the trial court must have obtained either actual or constructive possession over it. Neither was accomplished by the RTC as the vessel was already in the possession of the Bureau of Customs. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006) NOTES AND COMMENTS: a. Forfeiture of seized goods in the Bureau of Customs is in the nature of a proceeding in rem, i.e. directed against the res or imported goods and entails a determination of the legality of their importation. In this proceeding, it is in legal contemplation the property itself which commits the violation and is treated as the offender, without reference whatsoever to the character or conduct of the owner. The issue is limited to whether the imported goods should be forfeited and disposed of in accordance with law for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999) Forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods and not against the owner. (Asian Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing Transglobe) 40. The Collector of Customs upon probable cause that the articles are imported or exported, or are attempted to be imported or exported, in violation of the tariff and customs laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93) If the search and seizure is to be conducted in a dwelling place, then a search warrant should be issued by the regular courts not the Bureau of Customs. There may be instances where no warrants issued by the Bureau of Customs or the regular courts is required, as in search and seizures of motor vehicles and vessels. 41. Smuggled goods seized by virtue of a court warrant should be surrendered to the court that issued the warrant and not to the Bureau of Customs because the goods are in custodia legis. LOCAL GOVERNMENT TAXATION LOCAL GOVERNMENT TAXATION, IN GENERAL 1. The fundamental principles of local taxation are: a. Uniformity; b. Taxes, fees, charges and other impositions shall be equitable and based on ability to pay, for public purposes, not unjust, excessive, oppressive or confiscatory, not contrary to law, public policy, national economic policy or in restraint of trade; c. The levy and collection shall not be let to any private person; d. Inures solely to the local government unit levying the tax; e. The progressivity principle must be observed. 2. A law which deprives local government units of their power to tax would be unconstitutional. The constitution has delegated to local governments the power to levy taxes, fees and other charges. This constitutional delegation may only be removed by a constitutional amendment. 3. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003) 4. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. It is thus, an instrumentality of the National Government which is exempt from local taxation. As such it is not a private corporation engaged in “business enjoying franchise” Is such contention meritorious ? SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. 5. Professional tax may be imposed by a province or city but not by a municipality or barangay. a. Transaction taxed: Exercise or practice of profession requiring government licensure examination. b. Tax rate: In Accordance with a taxing ordinance which should not exceed P300.00. c. Tax base: Reasonable classification by the sanggunian. d. Exception: Payment to one province or city no longer subject to any other national or local tax, license or fee for the practice of such profession in any part of the Philippine professionals exclusively employed in the government. e. Date of payment: or on before January 31 or engaging in the profession. f. Place of payment: Province or city where the professional practices his profession or where he maintains his principal office in case he practices his profession in several places. 6. Requirements: Any individual or corporation employing a person subject to professional tax shall require payment by that person of the tax on his profession before employment and annually thereafter. Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports, books of account, plans and designs, surveys and maps, as the case may be, the number of the official receipt issued to him. Exemption: Professionals exclusively employed in the government shall be exempt from payment. (Sec. 139, LGC) NOTE: For the purpose of collecting the tax, the provincial or city treasurer or his duly authorized representative shall require from such professionals their current annual registration cards issued by competent authority before accepting payment of their professional tax for the current year. The PRC shall likewise require the professionals presentation of proof of payment before registration of professionals or renewal of their licenses. (last par., Art. 228, Rules and Regulations Implementing the Local Government Code of 1991) 7. Who are the professionals who, if they are in practice of their profession, are subject to professional tax ? SUGGESTED ANSWER: The professionals subject to the professional tax are only those who have passed the bar examinations, or any board or other examinations conducted by the Professional Regulation Commission (PRC). for example, a lawyer who is also a Certified Public Accountant (CPA) must pay the professional tax imposed on lawyers and that fixed for CPAs, if he is to practice both professions. [Sec. 238 (f), Rule XXX, Rules and Regulations Implementing the Local Government Code of 1991] 8. X City issued a notice of assessment against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance with the Condominium Act which owns and holds title to the common and limited common areas of the condominium. Its membership comprises the unit owners and is authorized under its By-Laws to collect regular assessments from its members for operating expenses, capital expenditures on the common areas and other special assessments as provided for in the Master Deed with ?Declaration of Restrictions of the Condominium. ABC Condominium Corporation insists that the X City Revenue Code and the Local Government Code do not contain provisions upon which the assessment could be based. Resolve the controversy. SUGGESTED ANSWER: ABC is correct. Condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise. X City, is authorized under the Local Government Code, to impose a TAX ON BUSINESS, which is defined under the Code as ”trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.” By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) REAL PROPERTY TAXATION 1. What are the fundamental principles of real property taxation ? SUGGESTED ANSWER: The fundamental principles of real property taxation are: a. Appraisal at current and fair market value; b. Classification for assessment on the basis of actual use; c. Assessment on the basis of uniform classification; d. Appraisal, assessment, levy and collection shall not be let to a private person; e. Appraisal and assessment shall be equitable. NOTES AND COMMENTS: Real properties shall be appraised at the current and fair market value prevailing in the locality where the property is situated and classified for assessment purposes on the basis of its actual use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005) 2. Who determines the fair market value of properties ? SUGGESTED ANSWER: The reasonable market value is determined by the assessor in the form of a schedule of fair market values. The schedule is then enacted by the local sanggunian. 3. What is the fair market value of properties ? ANSWER: Fair market value is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adopted and might in reason be applied. The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 ) NOTE: In fixing the value of real property, assessors have to consider all the circumstances and elements of value and must exercise prudent discretion in reaching conclusions. [Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Reyes v. Almanzor, 196 SCRA 322, 327 (1991)]) Preparation of fair market values: a. The city or municipal assessor shall prepare a schedule of fair market values for the different classes of real property situated in their respective Local Government Units for the enactment of an ordinance by the sanggunian concerned; and b. The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999) Proposed fair market values of real property in a local government unit as well as the ordinance containing the schedule must be published in full for three (3) consecutive days in a newspaper of local circulation, where available, within ten (10) days of its approval, and posted in at lease two (2) prominent places in the provincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999) 4. What are the approaches in estimating the fair market value of real property for real property tax purposes ? ANSWER: a. Sales Analysis Approach. The sales price paid in actual market transactions is considered by taking into account valid sales data accumulated from among the Registrar of Deeds, notaries public, appraisers, brokers, dealers, bank officials, and various sources stated under the Local Government Code. b. Income Capitalization Approach. The value of an income-producing property is no more than the return derived from it. An analysis of the income produced is necessary in order to estimate the sum which might be invested in the purchase of the property. c. Reproduction cost approach is a formal approach used exclusively n appraising man-made improvements such as buildings and other structures, based on such data as materials and labor costs to reproduce a new replica of the improvement. The assessor uses any or all of these approaches in analyzing the data gathered to arrive at the estimated fair market value to be included in the ordinance containing the schedule of fair market values. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Local Assessment Regulations No. 1-92) 5. Quezon City passed an ordinance whereby the “parcels of land sold, ceded. Transferred and conveyed for remuneratory consideration after the effectivity of this revision shall be subject to real estate tax based on the actual amount reflected in the deed of conveyance or the current approved zonal valuation of the Bureau of Internal Revenue prevailing at the time of sale, cession, transfer and conveyance, whichever is higher, as evidenced by the certificate of payment of the capital gains tax issued therefore.” Is the proviso for the basis in determining the value for real property tax purposes valid ? SUGGESTED ANSWER: No. The proviso being contrary to public policy and for restraining trade is not valid for the following reasons: a. It mandates an exclusive rule in determining the fair market value and departs from the established procedures such as the sales analysis approach, the income capitalization approach and the reproduction approach provided under the rules implementing the statute. It unduly interferes with the duties statutorily placed upon the local assessor by completely dispensing with his analysis and discretion which the Local Government Code and the regulations require to be exercised. An ordinance that contravenes any statute is ultra vires and void. b. The “consideration approach” in the ordinance is illegal since “the appraisal, assessment, levy and collection of real property tax shall not be let to any private person”, it will also completely destroy the fundamental principle in real property taxation – that real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. Allowing the parties to a private sale to dictate the fair market value of the property will dispense with the distinctions of actual use stated in the Local Government Code and in the regulations. c. The invalidity is not cured by the phrase “whichever is higher” because an integral part of that system still permits valuing real property in disregard of its “actual use.” d. The ordinance would result to real property assessments more than once every three (3) years and that is not the congressional intent as shown in the provisions of the Local Government Code and the regulations. Consequently, the real property tax burden should not be interpreted to include those beyond what the Code or the regulations expressly clearly state. e. The proviso would provide a chilling effect on real property owners or administrators to enter freely into contracts reflecting the increasing value of real properties in accordance with prevailing market conditions. While the Local Government Code provides that the assessment of real property shall not be increased once every three (3) years, the questioned proviso subjects the property to a higher assessment every time a sales transaction is made. Real property owners would therefore postpone sales until after the lapse of the three (3) year period, or if they do so within the said period they shall be compelled to dispose of the property at a price not exceeding the last prior conveyance in order to avoid a higher tax assessment. In the above two scenarios real property owners are effectively prevented from obtaining the best price possible for their properties and unduly hampers the equitable distribution of wealth. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005) 6. What is the nature of a tax declaration ? SUGGESTED ANSWER: As a rule, tax declarations or realty tax payments of property are not conclusive evidence of ownership, nevertheless, they are good indicia of possession in the concept of owner, for no one in his right mind would be paying taxes for a property that is not in his actual or constructive possession. They constitute at least proof that the holder has a claim of title over the property. The voluntary declaration of a piece of property for taxation purposes manifests not only one’s sincere and honest desire to obtain title to the property and announces his adverse claim against the State and all other interested parties, but also the intention to contribute needed revenues to the government. Such an act strengthens one’s bona fide claim of acquisition of ownership. (Buenaventura, et al., v. Republic, G. R. No. 166865, March 2, 2007 citing Heirs of Simplicio Santiago v. Heirs of Mariano E. Santiago, G. R. No. 151440, 17 June 2003, 404 SCRA 193, 199 – 200) 7. Give examples of personal property under the civil law that may be considered as real property for purposes of taxes. SUGGESTED ANSWER: Personal property under the civil law may be considered as real property for purposes of taxes where the property is essential to the conduct of the business. a. Underground tanks are essential to the conduct of the business of a gasoline station without which it would not be operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296) b. Light Rail Transit (LRT) improvements such as buildings, carriageways, passenger terminals stations, and similar structures do not form part of the public roads since the former are constructed over the latter in such a way that the flow of vehicular traffic would not be impaired. The carriageways and terminals serve a function different from the public roads. Furthermore, they are not open to use by the general public hence not exempt from real property taxes. Even granting that the national government owns the carriageways and terminal stations, the property is not exempt because their beneficial use has been granted to LRTA a taxable entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et al., G. R. No. 127316, October 12, 2000) c. The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes. Moreover, Article 415(9) of the Civil Code provides that “*d+ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work. 8. The restriction upon the power of courts to impeach tax assessment without a prior payment, under protest, of the taxes assessed is consistent with the doctrine that taxes are the lifeblood of the nation, and as such their collection cannot be curtailed by injunction or any like action; otherwise, the state or, in this case, the local government unit, shall be crippled in dispensing the needed services to the people, and its machinery gravely disabled. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) Thus, the trial court has no jurisdiction to entertain a petition for prohibition absent payment under protest of the tax assessed. (Ibid.) NOTES AND COMMENTS: While the above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004, the author submits that the above doctrine in the May 18, 2001 decision is still valid, because what was reversed in the second motion for reconsideration was the garnishment of Meralco’s assets. The remand to the lower court was for the resolution of whether or not an assessment was issued to Meralco. 9. Unpaid realty taxes attach to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on the subsequent owner which was neither the owner not the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. Consequently, MERALCO the former owner/user of the property was required to pay the tax instead of the new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) NOTE: The above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18, 2001 decision but in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite the doctrine as emanating from the May 18, 2001 decision. 10. Secretary of Justice can take cognizance of a case involving the constitutionality or legality of tax ordinances where there are factual issues involved. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999) Taxpayer files appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could already seek relief in court within 30 days from the lapse of the 60 day period. These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999) 11. Public hearings are mandatory prior to approval of tax ordinance, but this still requires the taxpayer to adduce evidence to show that no public hearings ever took place. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999) 12. The concurrent and simultaneous remedies afforded local government units in enforcing collection of real property taxes: a. Distraint of personal property; b. Sale of delinquent real property, and c. Collection of real property tax through ordinary court action. 13. The remedy of levy can be pursued by putting up for sale the real property subject of tax, i.e., the delinquent property upon which the tax lien attaches, regardless of the present owner or possessor thereof. However this remedy is only one of the other remedies. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) NOTE: The above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18, 2001 decision, in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite the doctrine as emanating from the May 18, 2001 decision. 14. The LGU could also avail of the remedy of distraint and levy of personal property subjecting any personal property of the taxpayer to execution. thus, the issuance of the warrants of garnishment over MERALCO’s bank deposits was not improper or irregular. (Manila Electric Company v. Barlis, et al., G.R. No. 114231, May 18, 2001) NOTE: The above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18, 2001 decision, in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite the doctrine as emanating from the May 18, 2001 decision. 58. Notice and publication, as well as the legal requirements for a tax delinquency sale, are mandatory, and the failure to comply therewith can invalidate the sale. The prescribed notices must be sent to comply with the requirements of due process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236) 16. The reason behind the notice requirement is that tax sales are administrative proceedings which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314) 17. FELS Energy, Inc., had a contract to supply NPC with the electricity generated by FELS’ power barges. The contract also stated that NPC shall be responsible for all real estate taxes and assessments. FELS then received an assessment of real property taxes on its power barges from the Provincial Assessor of Batangas. If filed a motion for reconsideration with the Provincial Assessor. a. Upon denial, FELS elevated the matter to the Local Board of Assessment Appeals (LBAA), where it raised the following issues: 1) Since NPC is tax-exempt then FEL’s should also be tax-exempt because of its contract with NPC. 2) The power barges are not real property subject to real property taxes. b. Upon the other hand the Local Treasurer insists that the assessment has attained a state of finality hence the appeal to the LBAA should be dismissed. Rule on the conflicting contentions. SUGGESTED ANSWER: a. All the contentions of FELS are without merit: 1) NPC is not the owner of the power barges nor the operator of the power barges. The tax exemption privilege granted to NPC cannot be extended to FELS. the covenant is between NPC and FELs and does not bind a third person not privy to the contract such as the Province of Batangas. 2) The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes. Moreover, Article 415(9) of the Civil Code provides that “*d+ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work. b. The Treasurer is correct. The procedure do not allow a motion for reconsideration to be filed with the Provincial Assessor. To allow the procedure would indeed invite corruption in the system of appraisal and assessment. it conveniently courts a graft-prone situation where values of real property ay be initially set unreasonably high, and then subsequently reduced upon the request of a property owner. In the latter instance, allusions of possible cover, illicit trade-off cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be prevented and excised from our system. (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, citing Callanta v. Office of the Ombudsman. G. R. Nos. 115253-74, January 30, 1998, 285 SCRA 648) 18. A SPECIAL LEVY OR SPECIAL ASSESSMENT is an imposition by a province, a city, a municipality within the Metropolitan Manila Area, a municipality or a barangay upon real property specially benefited by a public works expenditure of the LGU to recover not more than 60% of such expenditure. 19. If the ground for the protest is validity of the real property tax ordinance and not the unreasonableness of the amount collected the tax must be paid under protest, and the issue of legality may be raised to the proper courts on certiorari without need of exhausting administrative remedies. 20. If the ground for the protest is unreasonableness of the amounts collected there is need to pay under protest and administrative remedies must be resorted to before recourse to the proper courts. 21. Procedure for refund of real property taxes based on unreasonableness or excessiveness of amounts collected. a. Payment under protest at the time of payment or within thirty (30) days thereafter, protest being lodged to the provincial, city or in the case of a municipality within the Metro Manila Area the municipal treasurer. b. The treasurer has a period of sixty (60) days from receipt of the protest within to decide. c. Within thirty (30) days from receipt of treasurer’s decision or if the treasurer does not decide, within thirty (30) days from the expiration of the sixty (60) period for the treasurer to decide, the taxpayer should file an appeal with the Local Board of Assessment Appeals. d. The Local Board of Assessment Appeals has 120 days from receipt of the appeal within which to decide. e. The adverse decision of the Local Board of Assessment Appeals should be appealed within thirty (30) days from receipt to the Central Board of Assessment Appeals. f. The adverse decision of the Central Board of Assessment Appeals shall be appealed to the Court of Tax Appeals (En Banc) by means of a petition for review within thirty (30) days from receipt of the adverse decision. g. The decision of the CTA may be the subject of a motion for reconsideration or new trial after which an appeal may be interposed by means of a petition for review on certiorari directed to the Supreme Court on pure questions of law within a period of fifteen (15) days from receipt extendible for a period of thirty (30) days. 22. A City Ordinance adopting a method of assessment was nullified by the Supreme Court. A taxpayer who has paid his real property taxes on the basis of the nullified ordinance now posits that the return of the real property tax erroneously collected and paid is a necessary consequence of the Supreme Court’s nullification of the ordinance and there is no need to claim for a refund. Is this correct ? SUGGESTED ANSWER: No. The entitlement to a tax refund does not necessarily call for the automatic payment of the sum claimed. The amount of the claim being a factual matter, it must still be proven in the normal course and in accordance with the administrative procedure for obtaining a refund of real property taxes, as provided under the Local Government Code. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, September 15, 2006) NOTE: In the above Allied Banking case, the Supreme Court provided for the starting date of computing the two-year prescriptive period within which to file the claim with the Treasurer, which is from finality of the Decision. The procedure to be followed is that shown below. 23. Procedure for refund of real property taxes based on validity of the tax measure or solutio indebeti. a. Payment under protest not required, claim must be directed to the LOCAL TREASURER, within two (2) years from the date the taxpayer is entitled to such reduction or readjustment, who must decide within sixty (60) days from receipt. b. The denial by the local treasurer of the protest would fall within the Regional Trial Court’s original jurisdiction, the review being the initial judicial cognizance of the matter. Despite the language of Section 195 of the Local Government Code which states that the remedy of the taxpayer whose protest is denied by the local treasurer is “to appeal with the court of competent jurisdiction,” labeling the said review as an exercise of appellate jurisdiction is inappropriate since the denial of the protest is not the judgment or order of a lower court, but of a local government official. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) c. The decision of the Regional Trial Court should be appealed by means of a petition for review directed to the Court of Tax Appeals (Division). d. The decision of the Court of Tax Appeals (Division) may be the subject of a review by the Court of Tax Appeals (en banc). e. The decision of the Court of Tax Appeals (en banc) may be the subject of a petition for review on certiorari on pure questions of law directed to the Supreme Court. 24. Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements that are actually, directly and exclusively used for religious, charitable or educational purposes are exempt from taxation. [Sec.28 (3) Article VI, 1987 Constitution] 25. The constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83) The constitutional tax exemption covers property taxes only. What is exempted is not the institution itself, those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004 citing Justice Davide) 31. The 1935 Constitution stated that the lands, buildings, and improvements are “used exclusively” but the present Constitution requires that the lands, buildings and improvements are “actually, directly and exclusively used.” The change should not be ignored. Reliance on past decisions would have sufficed were the words “actually” as well as :directly” are not added. There must be proof therefore of the actual and direct use to be exempt from taxation. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004 citing Province of Abra v. Hernando, 107 SCRA 105) 26. What is meant by “actual, direct and exclusive use” of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purpose but is subject to taxation,. The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitution and the law. Solely is synonymous with exclusively. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) 27. Portions of the land of a charitable institution, such as a hospital, leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from real property taxes. On the other hand, the portion of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) 28. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government. So long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) 29. What property are exempt from the payment of real property tax under the Local Government Code ? SUGGESTED ANSWER: a. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted to a taxable person for a consideration or otherwise; b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes; c. Machineries and equipment, actually, directly and exclusively used by LOCAL WATER DISTRICTS; and government owned and controlled corporations engaged in the supply and distribution of water and generation and transmission of electric power; d. Real property owned by duly registered cooperatives; e. Machinery and equipment used for pollution control and environmental protection. 30. The Manila International Airport Authority (MIAA) was subject to real property taxes by the municipality of Paranaque on its airport lands, and buildings on the ground that the Local Government Code has withdrawn exemptions previously enjoyed by government-owned and controlled corporations. MIAA contends otherwise as it claims it is not a government owned or controlled corporation. Who is correct. SUGGESTED ANSWER: MIAA is correct because it is not a government owned or controlled corporation but an instrumentality of the government that is exempt from taxation. It is not a stock corporation because its capital is not divided into shares, neither is it a non-stock corporation because there are no members. It is instead an instrumentality of the government upon which the local governments are not allowed to levy taxes, fees or other charges. An INSTRUMENTALITY “refers to: i. any agency of the National Government, ii. not integrated within the department framework vested with special functions or jurisdiction by law, iii. endowed with some if not all corporate powers, iv. administering special funds, and v. enjoying operational autonomy, vi. usually through a charter. This term includes regulatory agencies chartered institutions and government- owned or controlled corporations.” *Sec. 2 (10), Introductory Provisions, Administrative Code of 1987] It is an instrumentality exercising not only governmental but also corporate powers. It exercises governmental powers of eminent domain, police power authority, and levying of fees and charges. Finally, the airport lands and buildings are property owned by the government that are devoted to public use and are properties of the public domain. (Manila International Airport Authority v. City of Pasay, et al., G. R. No. 163072, April 2, 2009 citing Manila International Airport Authority v. Court of Appeals, et al., G. R. No. 155650, July 20, 2006) 31. A telecommunications company was granted by Congress on July 20, 1992, after the effectivity of the Local Government Code on January 1, 1992, a legislative franchise with tax exemption privileges which partly reads, “The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay.” This provision existed in the company’s franchise prior to the effectivity of the Local Government Code. A City then enacted an ordinance in 1993 imposing a real property on all real properties located within the city limits, and withdrawing all tax exemptions previously granted. Among properties covered are those owned by the company from which the City is now collecting P43 million. The properties of the company were then scheduled by the City for sale at public auction. The company then filed a petition for the issuance of a writ of prohibition claiming exemption under its legislative franchise. The City defended its position raising the following: a. There was no exhaustion of administrative remedies because the matter should have first been filed before the Local Board of Assessment Appeals; b. The company’s properties are exempt from tax under its franchise. Resolve the issues raised. SUGGESTED ANSWERS: a. There is no need to exhaust administrative remedies as the appeal to the LBAA is not a speedy and adequate remedy within the law. This is so because the properties are already scheduled for auction sale. Furthermore one of the recognized exceptions to the rule on exhaustion is that if the issue is purely legal in character which is so in this case. b. The properties are exempt from taxation. The grant of taxing powers to local governments under the Constitution and the Local Government Code does not affect the power of Congress to grant tax exemptions. The term “exclusive of this franchise” is interpreted to mean properties actually, directly and exclusively used in the radio or telecommunications business. The subsequent piece of legislation which reiterated the phrase “exclusive of this franchise” found in the previous tax exemption grant to the company is an express and real intention on the part of Congress to once against remove from the LGC’s delegated taxing power, all of the company’s properties that are actually, directly and exclusively used in the pursuit of its franchise. (The City Government of Quezon City, et al., v. Bayan Telecommunications, Inc., G. R. No. 162015, March 6, 2006) NOTES AND COMMENTS: a. Note the confusion in the decision. It cited Mactan Cebu which stated that the taxing power of local government units is “no longer merely by virtue of a valid delegation as before, but pursuant to direct authority” but in the concluding portion referred to it as “the LGC’s delegated taxing power.” Which is which, delegated or direct grant ? The author submits that the weight of jurisprudence shows that it is a direct grant not a delegated power. If a question is asked then state it is a direct grant. 32. The owner operator of a BOT and not the ultimate owner is subject to real property taxes. Consistent with the BOT concept and as implemented, BPPC – the owner-manager-operator of the project – is the actual user of its machineries and equipment. BPPC’s ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCOR’s is contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. (National Power Corporation v. Central Board of Assessment Appeals, et al., G, R. No. 171470, January 30, 2009) ADVANCE CONGRATULATIONS AND SEE YOU IN COURT