San Beda College of Law Centralized Bar Operations 2001

PRELIMINARY NOTES Taxation Law

1. What are bad debts and what are the requisites for a valid deduction of bad debts from gross income? Bad debts refer to those debts resulting 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. The requisites for a valid deduction of bad debts from gross income are: (a.) There must be an existing, valid and legally demandable indebtedness due to the taxpayer; (b.) The same must be connected with the taxpayers trade, business or practice of profession; (c.) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; (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 same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. 2. If the advances between two corporations were made pursuant to a partnership agreement rather than a contract of loan, could they be later on claimed as bad debts? No. A bona fide debt is one which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. (Philex Mining Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5200, August 21, 1998). 3. What are the basic procedural steps in tax assessments as set forth under BIR Revenue Regulation No. 12-99? I. Due process requirement / Prior Notice Rule Notice of Informal Conference to the taxpayer in case he is not amenable to the internal officers findings that he is liable for deficiency tax. He has 15 days to respond, otherwise he will be declared in default. 2. Preliminary Assessment Notice to the taxpayer if there exists sufficient basis to assess the taxpayer for any deficiency tax. He has 15 days to respond, otherwise he will be declared in default.
1.

1. 2. 3. 4. 5.

II. Exceptions to the prior notice rule When the finding for any deficiency tax is the result of mathematical error. When it is determined that there is a discrepancy between the tax withheld and the amount remitted by withholding agent. When it is determined that a claim for refund/credit has been applied to tax liabilities. When excise tax due on excisable articles has not been paid. When an article locally purchased or imported by an exempt person has been sold, traded, or transferred to non-exempt persons. III. Formal Letter of Demand and Assessment Notice

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY NOTES IN TAXATION

STRICTLY FOR BEDAN BARRISTERS
Unauthorized reproduction of this copy is strictly prohibited!!!

To be issued by the CIR or his representative in accordance with form prescribed by law (state facts, the law, regulations, or jurisprudence, otherwise it is void). This is to be sent to the taxpayer only by registered mail or by personal delivery. IV. Disputed Assessment 1. The taxpayer may protest administratively against the assessment within 30 days from date of receipt thereof. Otherwise, assessment becomes final, executory, and demandable. 2. If there are deficiency tax(es) attributable to undisputed issues, the taxpayer must first pay them before any action can be had for his protest. Prescription for collection of taxes on disputed assessment is suspended. 3. The taxpayer must submit supporting documents within 60 days from the date of filing the protest, otherwise the assessment becomes executory, final and demandable. 4. The protest must also state the facts, laws, regulations, or jurisprudence on which it is based, otherwise it is void. V. If protest is denied 1. Elevate the matter to the CIR within 30 days from receipt of final decision of CIRs duly authorized representative. Otherwise, the assessment shall be final, executory, and demandable. 2. Appeal to the CTA within 30 days from receipt of final decision of CIR or his duly authorized representative. 3. If the CIR or his duly authorized representative fails to act on the protest within 180 days from date of submission by taxpayer, the latter may appeal within 30 days from lapse of the 180 day period, otherwise the assessment shall be final, executory, and demandable. 4. Decision of the CIR or his duly authorized representative (a) must state the facts, law, rules and regulations, or jurisprudence on which such decision is based, otherwise it is void, and (b) must indicate that it is his final decision. 4. What is Minimum Corporate Income Tax (MCIT)? What are its important features? A MCIT of 2% of the Gross Income (GI) as of the end of the taxable year is imposed upon any domestic corporation and resident foreign corporation beginning on the 4th taxable year immediately following the year in which such corporation commence its business. Important Features a. Imposed only where 2% of the GI is more than the normal income tax rates. b. Excess of MCIT (2%) over the normal income tax (NIT) shall be carried forward and credited against the NIT for the three immediately succeeding years. c. This provision is to be applied on ANNUAL BASIS and not to be used in the quarterly corporate returns. d. The Sec. of Finance is authorized to suspend this MCIT on account of: i. Prolonged labor dispute ii. Force majeure iii. Legitimate business reverses 5. Does the four-year grace period for MCIT apply to a corporation reopened after receivership proceedings?

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY NOTES IN TAXATION A corporation that has been reopened after a long period of inactivity while under STRICTLY FOR for suspension of the receivership proceedings may qualify BEDAN BARRISTERS MCIT. The corporation Unauthorized reproduction of this copy is strictly prohibited!!! shall be subject to MCIT beginning on the fourth taxable year from the year of

commencement of business operations which shall be taken as the year the company reopened. 6. Explain the concept of NOLCO. Net operating loss DOES NOT pertain to all the operating losses of the taxpayer. It refers ONLY to the excess of allowable deduction which he is unable to DEDUCT on the year it was incurred. The loss which he is unable to deduct is allowed by law to be carried over for the next three (3) years. For example, X Corporation obtained an operating loss of P2 million for 1998. But X Corp. is allowed only a deduction of P1.5 million for 1998. The undeducted loss of P500,000.00 can be deducted as a loss in the next operating years immediately following the year of such loss. 7. What is the effect of a merger on the constituent corporations NOLCO and MCIT? The aggregate NOLCO balances of the absorbed corporations and the surviving corporation may be claimed by the latter as a deduction from gross income under Section 34(D)(3) of the 1997 Tax Code. Likewise, the excess MCIT of the absorbed corporations shall be carried forward and credited against the normal income tax due of the surviving corporation for the three immediately succeeding taxable years pursuant to Section 27(E)(3) of the same Code (BIR Ruling No. 137-99 dated August 31, 1999). 8. Is interest income received by a foreign embassy from its foreign currency deposit with a local bank taxable? How about the deposit of its diplomatic personnel? No. Interest income received by the embassy from its foreign currency time deposit with a local bank is considered income derived from interest on deposits in banks in the Philippines by foreign governments, and excluded from the computation of gross income. Hence, such income is exempt from the final tax on the interest from bank deposits including the 7.5% interest from foreign currency deposit. Yes. Under Art. 34 of the 1961 Vienna Convention on Diplomatic Relations, exemption of diplomatic agents from all dues and taxes, personal or real, national, regional or municipal does not include exemption from tax on private income having its source in the receiving State. Accordingly, its diplomatic personnel are subject to withholding tax on interest from their accounts maintained with local banks. 9. Is the profit from the sale of apartments which have been leased to tenants for several years subject to capital gains tax? No. Capital assets, as defined in Section 39 (A)(1) of the Revenue Code include all the properties of a taxpayer whether or not connected with his trade of business, except; 1) stock in trade or other property included in the taxpayers inventory; 2) property primarily for sale to customers in the ordinary course of his trade or business;

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

3) property PRELIMINARY NOTES IN of the taxpayer and subject to used in the trade or business TAXATION STRICTLY FOR depreciation allowance; and BEDAN BARRISTERS Unauthorized reproduction of this copy is strictly prohibited!!! 4) real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above mentioned, any gain of loss relative thereto is an ordinary gain or an ordinary loss. The sale of properties which form part of the rental business of the taxpayer cannot be characterized as other than sales of non-capital assets (Tuason , Jr. vs. Lingad, 58 SCRA 170). The gains derived therefrom are subject to the regular income tax. 10. Is the sale of land which is to be devoted strictly for religious purposes by the Church exempt from the capital gains tax? No, the transaction is not exempt from the capital gains tax. It is due from the seller of the land. While it is true that Sec. 28(3), Article VI of the Constitution recognizes tax exemptions of land actually, directly and exclusively used for religious purposes, this tax exemption refers only to real property and not to capital gains tax. 11. Under the CTRP, is the concept of the P1 million Standard Deduction from the Gross Estate the same with the 10% Optional Standard Deduction from the Gross Income? NO. It is in addition to all other deductions from the gross estate. It must not be confused with the 10% standard deduction from Gross Income which is optional on the part of the taxpayer in lieu of the itemized deductions allowed under Sec. 34. 12. Is the real property foreclosed and sold in a public auction subject to capital gains tax? If the mortgagee acquires the property and within the redemption period subsequently sells his mortgage right and interest to another, is he likewise subject to capital gains tax? Yes. Capital gains tax is payable by the debtor-mortgagor. The tax covers involuntary sale like that in execution and expropriation. (NB: In expropriation sale, 6% Final Tax or Normal Tax Rate, at the option of the taxpayer). No. The sale by the mortgagee of his mortgage right and interest over the property in favor of another is not subject to capital gains tax. The vendee of the mortgage right and interest and later on as owner due to the consolidation of his title to the property is also not subject to the capital gains tax. 13. Harry Quingquing was prosecuted for willfully attempting to evade the income tax imposed by the BIR. Harry Quingquing argued that he could not be prosecuted because there was no assessment yet with respect to his tax obligations. He even cited the recent ruling of the Supreme Court in the case of CIR vs. CA and Lucio Tan (257 SCRA 200) where it was held that a taxpayer could not be held criminally liable without the previous issuance of assessment. Decide. Harry Quingquings contention is without merit. Sec. 222 of the NIRC provides that a proceeding in court for the collection of tax maybe filed without assessment in the case of a false or fraudulent return with intent to evade tax or of failure to file a return. The Supreme Court upheld this in its ruling in the case of Ungab vs. Cusi. The Lucio Tan case has not reversed the Ungab case because the latter was decided by the Supreme Court sitting en banc while the former was decided only by

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY NOTES IN TAXATION the Supreme Courts 1st division. However, the two rulings can be reconciled. An STRICTLY FOR Tan case because the assessment was required in the LucioBEDAN BARRISTERS said case is based on Unauthorized reproduction of this copy is strictly prohibited!!! the alleged misrepresentation on manufacturers wholesale price. Such amount was pre-approved. The Ungab case on the other hand involved sale proceeds which

were never included as part of the gross income stated in the return, and therefore no assessment is necessary in order to make him liable. 14. Is terminal leave pay received by government employee subject to tax income? No, because terminal leave pay is retirement benefits and not a part of the gross salary or income. This is so because the government encourages unused leaves to be accumulated. The government recognized that for most public servants, retirement pay is always less than generous. Terminal leave payments are given not only at the same time but for the same policy considerations governing benefits (CIR vs, CA, 72 SCRA 203). 15. Can a claim for refund prosper even if the tax was not paid under protest? Yes. Sec. 299 (CTRP). Recovery of Tax Erroneously or Illegally Collected. 16. What is Transaction Value under RA 8181? It is the invoice value of the goods plus freight, insurance, costs, expenses and other necessary expenses which is used as basis for the determination of dutiable value. This replaces the Home Consumption Value which is based on the value declared in the consular, commercial, trade, or sales invoice. The change to transaction value was a consequence of the Philippines participation in the Uruguay Round of the GATT. 17. Under the Revenue Regulation No. 8-98 of the capital gains tax: a) Who should file the return? b) Who should pay the tax? c) When is the period within which said tax is to be paid? d) To whom payment shall be made? a) Seller b) Seller c) 1) On transaction basis, upon the filing within thirty (30) days following each sale or other disposition of real property; 2) In installments, in case the taxpayer is qualified, and so elects, the tax for each Installment payment of the buyer shall be paid within thirty (30) days from receipt of such installment d) Authorized Agent Bank located within Revenue District Office having jurisdiction over the place where the property being transferred is located. 18. What is the difference between a sale of real property on a deferred payment scheme and the sale of real property on installment? Sale of real property on a deferred payment scheme means sale of real property, the initial payments of which in the year of sale exceed 25% of the gross selling price. Sale of real property on installment plan means sale by a real estate dealer whereby initial payments in the year do not exceed 25% of the gross selling price.

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY NOTES IN TAXATION

STRICTLY FOR BEDAN BARRISTERS

19. A parcel of land owned by Songlak was expropriated by the National Government valued at P5M. At that time, Songlak was assessed by the BIR for the payment of income taxes worth P3M. The P5M value of the expropriated

Unauthorized reproduction of this copy is strictly prohibited!!!

land was at the time of the assessment remained unpaid to Songlak by the Government. Songlak now claims that he is not required to settle his tax obligation because such claim has been set-off with the amount the Government owes him. Rule on Songlaks contention. Songlaks contention is untenable and therefore he has to pay the income tax. REASONS: (1) Lifeblood Theory; (2)Taxes are not contractual obligations; and (3) The government and the taxpayer are not mutual creditors and debtors of each other. 20. Why are intracorporate dividends of domestic corporation and resident foreign corporation NOT subject to intracorporate dividend, WHILE non-resident foreign corporation are subject to intracorporate dividend? Domestic and resident foreign corporations are not subject to intracorporate dividend tax because said corporations are not the end recipient of the said dividend. Such intracorporate dividend shall eventually be given as dividend to their respective stockholders which shall be subject to FINAL TAX. [Sec. 24B(2)] 21. Are all fringe benefits taxable? What are the rules? General Rule: YES. If given to rank and file employees Fringe benefits shall be included in their gross compensation income subject to the graduated rates of 5% 32%. If given to employees other than rank and file (i.e. managerial and supervisory employees), said benefits are subject to final withholding tax of 32% (effective Jan. 1, 2000) based on the Grossed-up Monetary Value. Exceptions: 1. De Minimis Benefits 2. Benefits that were given to rank-and-file employees 3. Those where the grant of the benefits is required of, or necessary to trade, business/profession of the employer. 4. Those for the convenience of the employer. 5. Those exempt from tax under special laws. 6. Those contributions of the employer for the benefit of the employee to insurance, retirement, and hospitalization benefit plans. 22. Sanbull Corporation is a domestic corporation which suffered a net loss on its fifth year of operations. Believing that no tax is due from it, it decided not to file an income tax return. Is Sanbulls action proper? What will be Sanbulls liability for its failure to file an income tax return? NO. The filing of income tax returns in case of Philippine corporations is mandatory. A net loss on the part of a corporation does not automatically exempt it from the payment of income tax particularly in the instant case wherein Sanbull is already covered by the minimum corporate income tax.

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY NOTES tax delinquency? 23. What are the Rates of Surcharges in case of IN TAXATION
STRICTLY FOR BEDAN BARRISTERS

1. 50% of tax or deficiency tax in case of false or fraudulent returns. 2. 50% of tax in case of willful neglect to file return.

Unauthorized reproduction of this copy is strictly prohibited!!!

3. 25% of amount due in case there is neglect to file return or neglect in payment which is not willful 4. 25% of amount due in case where Return is not filed with officer designated by law. 24. When is interest imposed? From the date prescribed for payment until amount is fully paid at the rate of 20% per annum or such higher rate as may be prescribed by Rules and Regulations. 25. Is there a limitation on the right of the taxpayer to file an amended return? Yes. A taxpayer is allowed to amend any tax return filed within three years from the date of filing but before the service of a notice for audit for the examination of the said return ( Sec.6 A). 26. What are the classes of interest? 1. Deficiency interest on any deficiency on the tax due 2. Delinquency interest in case of failure to pay: the amount of tax due in the return the amount of tax due for which no return is required a deficiency tax, or any surcharge or interest thereon 3. Interest on Extended Payment where tax is payable on installment 27. What are FCDUs? Discuss possible advantages and disadvantages in the imposition of 7.5% tax on FCDUS. FCDUs are Foreign Currency Deposit Units. FCDUs are formerly exempt from taxes. The CTRP imposes a 7.5% tax on FCDUs. - Opponents of the imposition of this tax states that this will discourage FCD in the Philippines. This will in turn lessen the foreign reserves of the Central Bank because banks are required to deposit certain percentage of said FCDUs. - Proponents on the tax argued that this will increase the income of the government. Furthermore, the depositors of FCDUs also consider the stability of the banking sector and not just the interest. 28. Baleleng Abu is the owner of a parcel of land situated in Batangas City. In 1990, the City Assessor served her a notice of assessment. Thereafter, she filed a request for reconsideration with the City Assessor. The latter granted her request by reducing the assessed value of the property. A new notice of assessment was subsequently issued. Was the City Assessors act under the foregoing circumstances proper? NO. The Supreme Court in the case of Callanta vs. Ombudsman (Jan. 20, 1998) held that the local assessor is automatically divested of any jurisdiction to entertain any request for a review or readjustment of the assessed value of the subject

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY owner or IN TAXATION property once he sends notice to the NOTESlawful possessor of real property of its STRICTLY FOR BEDAN BARRISTERS assessed value.
Unauthorized reproduction of this copy is strictly prohibited!!!

29. Is the informers reward in the Discovery of Violation of NIRC and Discovery and Seizure of Smuggled Goods subject to tax? What rate?

Yes. It is subject to 10% Final Withholding Tax (Rev. Reg. 2-98) 30.Can an importer go directly to the Court of Tax Appeals upon the receipt of the decision of Collector which was based on the opinion earlier given by the Commissioner of Customs/ Sec. of Finance? What are the steps which he must follow? a.) No. There is no exhaustion of administrative remedies. The Comm. of Customs and the Sec. Of Finance must both be given the opportunity to correct their mistakes. b.) Pay under protest, then follow this procedure: 1. Adverse ruling of the Collector of Customs may be protested by : a. presenting to the Collector at the time when payment of the amount claimed to be due the govt is made or within 15 days thereafter; b. a written protest setting forth of his objection to the ruling together with the reasons therefor. (Sec. 2308, TCC) 2. No protest shall be considered unless payment of the amount due has first been made and the corresponding docket fees paid. 3. Upon termination of the hearing, the Collector shall render a decision within 30 days a. If the protest is sustained, the entry is liquidated. (Sec. 2312, TCC) b. If the protest is denied, the aggrieved has 15 days after notification in writing, to appeal to the Commissioner of Customs. (Sec. 2313, TCC) 4. The person aggrieved by the decision of the Commissioner has 30 days from receipt of decision to appeal to the Court of Tax Appeals. (Sec. 2315, 2402, TCC) 31. Does the Secretary of Finance have the authority to order re-assessment of duties? As provided under Sec. 2315 of TCCP, decision of the Collector of Customs on the assessment of duties which is adverse to the government shall be automatically elevated to and reviewed by the Commissioner. If the decision is affirmed by the Commissioner, it shall automatically elevated for review by the Sec. of Finance. However, pursuant to Sec. 1407 of the TCCP, appraisal, classification or return approved by the Collector may not be altered or modified in any manner except: Within one year after payment of the duties, upon statement of error as approved by the Collector; Within 15 days after payment, upon request by the Collector for reappraisal or reclassification if the appraisal or classification is deemed to be low; and Upon request for reappraisal or reclassification in the form of a timely protest.

32. When does an importation end? . For articles subject to customs duties, importation ends when the regular permit for withdrawal shall have been issued. Importation is not yet ended if falsified

9 SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

PRELIMINARY NOTES of the articles.. documents were used to effect the release IN TAXATIONConsequently, the STRICTLY prescriptive period is not tolled. FOR BEDAN BARRISTERS
Unauthorized reproduction of this copy is strictly prohibited!!!

33. Give some valid reasons for extension of estate tax payment? What are the requirements?

Where the Philippine estate consists of real properties which cannot be liquidated and bank accounts which cannot be withdrawn, deadline for the payment of the estate tax may be extended up to two years. However, the executor, administrator or beneficiary is required to furnish the Commissioner a bond at least amounting to the tax sue and the estate shall be liable for the corresponding interest accrued up to the time of payment of the tax. 34. Are prizes from a government-sponsored raffle exempted from tax? A final tax at the rate of 20% is imposed on, among others, prizes and winnings derived by individuals from sources within the Philippines. The tax shall be withheld by the organizer as withholding agent. The fact that the raffle is governmentsponsored does not constitute a valid ground for the exemption of winners. Corporate winners, however, are not subject to the final withholding tax but their winnings are subject to the corporate income tax. 35. Can a foreign corporation be accredited as a donee corporation? Under Sec. 34(h) of the Tax Code, contributions or gifts may be deductible from gross income for tax purposes if paid to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans. Said section specifically mentions of accredited domestic corporations or associations and non-government organizations which is defined to mean a non-profit domestic corporation. Hence, a foreign corporation cannot be accredited as a donee corporation.