Escolar Documentos
Profissional Documentos
Cultura Documentos
Unauthorized
“BAR STAR NOTES” users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW OF
KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD
BE UNHAPPY IN LIFE for stealing the intellectual property of the author.
15. The withdrawal of a tax exemption should not be 19. National Power Corporation (NPC) is of the
construed as prohibiting future grants of exemption from all insistence that it is not subject to the payment of franchises
taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., taxes imposed by the Province of Isabela because all of its
etc., G. R. No. 143867, August 22, 2001) shares are owned by the Republic of the Philippines. It is thus,
an instrumentality of the National Government which is exempt
16. Tax exemptions in franchises are always subject to from local taxation. As such it is not a private corporation
withdrawal. A legislative franchise is granted with the express condition engaged in “business enjoying franchise”
that it is subject to amendment, alteration, or repeal. (1987 Constitution, Art. Is such contention meritorious ?
XII, Sec. 11)
SUGGESTED ANSWER: No. Philippine Long Distance Telephone
It is enough to say that the parties to a contract cannot, through the
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
exercise of prophetic discernment, fetter the exercise of the taxing power
2001, upheld the authority of the City of Davao, a local government unit, to
of the State. For not only are existing laws read into contracts in order to fix
impose and collect a local franchise tax because the Local Government
obligations as between parties, but the reservation of essential attributes of
Code has withdrawn all tax exemptions previously enjoyed by all persons
sovereign power is also read into contracts as a basic postulate of the legal
and authorized local government units to impose a tax on business enjoying
order. The policy of protecting contracts against impairment presupposes
a franchise tax notwithstanding the grant of tax exemption to them.
the maintenance of a government which retains adequate authority to
secure the peace and good order of society. (Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008) 20. “In lieu of all taxes” in the franchise of ABS-CBN
NOTES AND COMMENTS: Philippine Long Distance Telephone does not exempt it from local franchise taxes. It does not expressly
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001 made provide what kind of taxes ABS-CBN is exempted from. It is not clear
the observation that since Smart’s franchise was granted after the effectivity of the whether the exemption would include both local, whether municipal, city or
Local Government Code that its tax exemption privilege was reinstated. However, provincial, and national tax. Whether the “in lieu of all taxes provision”
Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, would include exemption from local tax is not unequivocal.
September 16, 2008 is explicit in its holding that Smart is not entitled to a tax The right to exemption from local franchise tax must be clearly
exemption. 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
â 17. When withdrawal of a tax exemption impairs all taxes” provision should be construed against ABS-CBN. ABS-CBN has
the obligation of contracts. The Contract Clause has never been the burden to prove that it is in fact covered by the exemption so claimed
thought as a limitation on the exercise of the State’s power of taxation save but has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting
only where a tax exemption has been granted for a valid consideration. Corporation, G. R. No. 166408, October 6, 2008)
(Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
14
NOTES AND COMMENTS: This is practically the same holding in an NOTES AND COMMENTS: The author opines that the above finds
earlier case involving another telecommunications company Smart application to all telecommunications companies.
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 22. The “in lieu of all taxes” clause in the franchise of
to telecommunications companies are similarly worded that the above doctrine finds ABS-CBN has become functus officio with the abolition of the
application to the others.)
franchise tax on broadcasting companies with yearly gross
â 21. “In lieu of all taxes” refers to national internal 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
revenue taxes and not to local taxes. The “in lieu of all taxes” clause
is paid is a tax other than a franchise tax. Since the franchise tax on the
applies only to national internal revenue taxes and not to local taxes. As
broadcasting companies with yearly gross receipts exceeding ten million
appropriately pointed out in the separate opinion of Justice Antonio T.
pesos has been abolished, the “in lieu of all taxes” clause has now become
Carpio in a similar case involving a demand for exemption from local
functus officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN
franchise taxes: Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to NOTES AND COMMENTS: This is practically the same holding in an
taxes, other than income tax, imposed under the National Internal Revenue earlier case involving another telecommunications company. Smart
Code. The "in lieu of all taxes" clause does not apply to local taxes. The Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
proviso in the first paragraph of Section 9 of Smart's franchise states that September 16, 2008. The author opines that since practically all franchises granted
the grantee shall "continue to be liable for income taxes payable under Title to telecommunications companies are similarly worded that the above doctrine finds
II of the National Internal Revenue Code." Also, the second paragraph of application to the others.)
Section 9 speaks of tax returns filed and taxes paid to the "Commissioner
of Internal Revenue or his duly authorized representative in accordance ââ 23. Double taxation in its generic sense, this
with the National Internal Revenue Code." Moreover, the same paragraph means taxing the same subject or object twice during the same
declares that the tax returns "shall be subject to audit by the Bureau of taxable period. In its particular sense, it may mean direct duplicate
Internal Revenue." Nothing is mentioned in Section 9 about local taxes. taxation, which is prohibited under the constitution because it violates the
The clear intent is for the "in lieu of all taxes" clause to apply only to taxes concept of equal protection, uniformity and equitableness of taxation.
under the National Internal Revenue Code and not to local taxes. Even with Indirect duplicate taxation is not anathematized by the above constitutional
respect to national internal revenue taxes, the "in lieu of all taxes" clause limitations.
does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's ââ 24. Elements of direct duplicate taxation:
franchise to also apply to local taxes, Congress would have expressly a. Same
mentioned the exemption from municipal and provincial taxes. Congress 1) Subject or object is taxed twice
could have used the language in Section 9(b) of Clavecilla's old franchise, 2) by the same taxing authority
as follows: 3) for the same taxing purpose
x x x in lieu of any and all taxes of any kind, nature or description 4) during the same taxable period
levied, established or collected by any authority whatsoever, municipal, b. Taxing all of the subjects or objects for the first time without
provincial or national, from which the grantee is hereby expressly taxing all of them for the second time.
exempted, x x x. (Emphasis supplied). If any of the elements are absent then there is indirect duplicate
However, Congress did not expressly exempt Smart from local taxation which is not prohibited by the constitution.
taxes. Congress used the "in lieu of all taxes" clause only in reference to NOTES AND COMMENTS:
nd
national internal revenue taxes. The only interpretation, under the rule on a. Presence of the 2 element violates the equal protection clause.
st
strict construction of tax exemptions, is that the "in lieu of all taxes" clause If only the 1 element is present, taxing the same subject or object twice, by the same
in Smart's franchise refers only to national and not to local taxes. [Smart taxing authority, etc., there is no violation of the equal protection clause because all
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, subjects and objects that are similarly situated are subject to the same burdens and
September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v. granted the same privileges without any discrimination whatsoever,
City of Davao, 447 Phil. 571, 594 (2003)]
15
nd
The presence of the 2 element, taxing all of the subjects and objects for the such as inserting the stand-by authority to the President to
first time, without taxing all for the second time, results to discrimination among increase the VAT from 10% to 12%; deleting entirely the no pass-
subjects and objects that are similarly situated, hence violative of the equal protection
clause. on provisions found in both the House and Senate Bills;
25. Double taxation a valid defense against the legality of inserting the provision imposing a 70% limit on the amount of
a tax measure if the double taxation is direct duplicate taxation, input tax to be credited against the output tax; and including the
because it would violate the equal protection clause of the constitution. amendments introduced only by Senate Bill No. 1950 regarding
other kinds of taxes in addition to the value-added tax. Thus,
26. When an item of income is taxed in the Philippines there was a violation of the constitutional mandate that revenue
and the same income is taxed in another country, this would be bills shall originate exclusively from the House of
known as international juridical double taxation which is the Representatives.
imposition of comparable taxes in two or more states on the same taxpayer Are the contentions of such weight as to constitute grave
in respect of the same subject matter and for identical grounds. (Commissioner abuse of discretion which may invalidate the law ? Explain
of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, briefly.
1999) SUGGESTED ANSWER: No. There was no grave abuse of
discretion because all the changes and modifications made by the Bicameral
ââ 27. Methods for avoiding double taxation (indirect Conference Committee were germane to subjects of the provisions referred
duplicate taxation). to it for reconciliation.
a. Tax treaties which exempts foreign nationals from local taxation The Bicameral Conference Committee merely exercised the judicially
and local nationals from foreign taxation under the principle of reciprocity. recognized long-standing legislative practice of giving said conference
b. Tax credits where foreign taxes are allowed as deductions from committee ample latitude for compromising differences between the Senate
local taxes that are due to be paid. and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
c. Allowing foreign taxes as a deduction from gross income. 168056, September 1, 2005 and companion cases]
28. Tax credit generally refers to an amount that is subtracted 31. The VAT while regressive is NOT violative of the
directly from one’s total tax liability, an allowance against the tax itself, or a mandate to evolve a progressive system of taxation. Do you
deduction from what is owned. agree ? The mandate to Congress is not to prescribe but to evolve a
A tax credit reduces the tax due, including –whenever applicable – the progressive system of taxation. Otherwise, sales taxes which perhaps are
income tax that is determined after applying the corresponding tax rates to the oldest form of indirect taxes, would have been prohibited with the
taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug proclamation of the constitutional provision. Sales taxes are also regressive.
Corporation, G. R. No. 159647, April 15, 2005) . [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.
29. A tax deduction is defined as a subtraction fro income for tax No. 115455, August 25, 1994, 235 SCRA 630]
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. 32. All revenues and assets of non-stock, non-profit
A tax deduction reduces the income that is subject to tax in order to educational institutions that are actually, directly and
arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon exclusively used for educational purposes shall be exempt from
Drug Corporation, G. R. No. 159647, April 15, 2005) taxation.
â 30. The petitioners allege that the R-VAT law is 33. Revenues and assets of proprietary educational
constitutional because the Bicameral Conference Committed institutions, including those which are cooperatively owned,
has exceeded its authority in including provisions which were may be entitled to exemptions subject to limitations provided by
never included in the versions of both the House and Senate law including restrictions on dividends and provisions for
16
reinvestments. There is no law at the present which grants exemptions, reasons:
other the exemptions granted to cooperatives. a. Lifeblood theory.
b. Taxes are not contractual obligations but arise out of a duty
OTHER CONCEPTS 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)
ââ1. Distinguish tax from debt. c. Taxes cannot be the subject of compensation because the
TAX DEBT government and taxpayer are not mutually creditors and debtors of each
other and a claim for taxes is not such a debt, demand, contract or
Basis based on law based on contract or judgment as is allowed to be set-off.
judgment Thus, it is correct to say that the offsetting of a taxpayer’s tax refund
Failure to Pay may result in no imprisonment with its alleged tax deficiency is unavailing under Art. 1279 of the Civil
imprisonment Code. (South African Airways v. Commissioner of Internal Revenue, G.R. No.
180356, February 16, 2010 reiterating Caltex Philippines, Inc. v. Commission
Mode of generally payable in payable in money, on Audit, which applied Francia v. Intermediate Appellate Court)
Payment money property or service
Assignability not assignable assignable ââ4. Exceptions: When set-off or compensation allowed
Payment unless it becomes a may be a subject for local taxes. a.
debt is not subject to Where both claims already become overdue and demandable as
compensation or set- well as fully liquidated. Compensation takes place by operation of law under
off Art. 1200 in relation to Arts. 1279 and 1290 all of the Civil Code. (Domingo
v. Garlitos, 8 SCRA 443) b. Compensation
Interest does not draw interest draws interest if takes place by operation of law, where the government and the taxpayer
unless delinquent stipulated or delayed are in their own right reciprocally debtors and creditors of each other, and
Authority imposed by public can be imposed by that the debts are both due and demandable. This is in consequence of
authority private individuals Article 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
c. ,The Supreme Court
Prescription Prescriptive periods debt under the Civil upheld the validity of a set-off between the taxpayer and the government.
for tax under NIRC Code In both cases, the claims of the taxpayers therein were certain and
liquidated. The claims were certain since there were no doubts or disputes
as to their refundability. In fact, the government admitted the fact of over-
WARNING: Do not use the above arrangement in answering Bar
questions. payment. (Commissioner of Internal Revenue v. Esso Standard Eastern,
Inc., 172 SCRA 364) d. In case of a tax overpayment, the
BIR’s obligation to refund or off-set arises from the moment the tax was
2. Compensation takes place by operation of law, where the
paid. REASON: Solutio indebeti. (Commissioner of Internal Revenue v. Esso
local government and the taxpayer are in their own right reciprocally debtors Standard Eastern, Inc 172 SCRA 364)
and creditors of each other, and that the debts are both due and demandable, e. While judgment should be
in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. rendered in favor of Republic for unpaid taxes, judgment ought at the same
Garlitos, 8 SCRA 443)
time to issue for Sampaguita Pictures commanding payment to the latter
by the Republic of the value of the backpay certificates which the Republic
ââ 3. May there be compensation or set-off between a received. (Republic v. Ericta, 172 SCRA 623)
national tax and a debt ? Reason out your answer.
SUGGESTED ANSWER: As a general rule, there could be ââ 5. Gilbert obtained a judgment for a sum of
no compensation or set-off between a tax and a debt for the following money against the municipality of Camiling. The judgment has
17
become final although execution has not issued. Upon exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting
receiving an assessment for municipal sales taxes from the 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
Municipal Treasurer, Gilbert executed a partial assignment of
667, 680) The burden of proof rests upon the party claiming the exemption
his judgment sufficient to cover the assessment in favor of the to prove that it is in fact covered by the exemption so claimed. (Quezon City,
Municipality. May the Municipal Treasurer validly accept the supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)
assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are mutually 9. Rationale for strict interpretation of tax exemption
debtors and creditors of each other, and since both of the claims became laws. The basis for the rule on strict construction to statutory provisions
overdue, demandable and fully liquidated, compensation takes place by granting tax exemptions or deductions is to minimize differential treatment
operation of law. Such was the holding in Domingo v. Garlitos, 8 SCRA and foster impartiality, fairness and equality of treatment among taxpayers.
443, a case decided by the Supreme Court whose factual antecedents are (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
similar to the problem. October 6, 2008) He who claims an exemption from his share of common
6. In burden must justify his claim that the legislature intended to exempt him by
case of doubt, tax laws must be construed strictly against the unmistakable terms. For exemptions from taxation are not favored in law,
State and liberally in favor of the taxpayer because taxes, as burdens nor are they presumed. They must be expressed in the clearest and most
which must be endured by the taxpayer, should not be presumed to go unambiguous language and not left to mere implications. It has been held
beyond what the law expressly and clearly declares. (Lincoln Philippine Life that “exemptions are never presumed the burden is on the claimant to
Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99) 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,
7. Interpretation in the imposition of taxes, is not the since taxation is the rule and exemption the exception, the intention to
similar doctrine as that applied to tax exemptions. The rule in the make an exemption ought to be expressed in clear and unambiguous
interpretation of tax laws is that a statute will not be construed as imposing terms. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed.,
a tax unless it does so clearly, expressly, and unambiguously. A tax cannot p. 302)
be imposed without clear and express words for that purpose. Accordingly,
the general rule of requiring adherence to the letter in construing statutes 10. Why are tax exemptions are strictly construed
applies with peculiar strictness to tax laws and the provisions of a taxing against the taxpayer and liberally in favor of the State ?
act are not to be extended by implication. In answering the question of who SUGGESTED ANSWER: Taxes are necessary for the continued
is subject to tax statutes, it is basic that in case of doubt, such statutes are existence of the State.
to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed
11. In case of a tax overpayment, where the BIR’s
to be imposed beyond what statutes expressly and clearly import.
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. obligation to refund or set-off arises from the moment the tax
167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322, 330-331 was paid under the principle of solutio indebeti. (Commissioner of
(1997)] As burdens, taxes should not be unduly exacted nor assumed Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
beyond the plain meaning of the tax laws. (Ibid., citing CIR v. Philippine
American Accident Insurance Company, Inc., G.R. No. 141658, March 18, 2005, 12. But note Nestle Phil. v. Court of Appeals, et al., G.R.
453 SCRA 668) 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
8. Strict interpretation of tax exemption laws. Taxes are that its payment of the customs duties was in excess of what was required
what civilized people pay for civilized society. They are the lifeblood of the by the law at the time the subject 16 importations of milk and milk products
nation. Thus, statutes granting tax exemptions are construed stricissimi were made. Unless shown otherwise, the disputable presumption of
juris against the taxpayer and liberally in favor of the taxing authority. A regularity of performance of duty lies in favor of the Collector of Customs.
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,
18
13. Strict interpretation of a tax refund that partakes of it is granted clearly and distinctly show that such was the intention.
the nature of a tax does not apply to tax refund based on [Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal
Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company v. Vera, G.R.
erroneous payment or where there is no law that authorizes No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao Consolidated
collection of the tax. There is parity between tax refund and tax Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
exemption only when the former is based either on a tax exemption statute A claim for tax refund may be based on statutes granting tax
or a tax refund statute. (Commissioner of Internal Revenue v. Fortune Tobacco exemption or tax refund. In such case, the rule of strict interpretation
Corporation, G. R. Nos. 167274-75, July 21, 2008) against the taxpayer is applicable as the claim for refund partakes of the
Tax refunds (or tax credits), on the other hand, are not founded nature of an exemption, a legislative grace, which cannot be allowed unless
principally on legislative grace but on the legal principle which underlies all granted in the most explicit and categorical language. The taxpayer must
quasi-contracts abhorring a person’s unjust enrichment at the expense of show that the legislature intended to exempt him from the tax by words too
another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 plain to be mistaken. [Commissioner, supra with a note to see Surigao
Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil. 985 (1963)] Consolidated Mining Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp. v.
The dynamic of erroneous payment of tax fits to a tee the prototypic Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999); Davao Gulf Lumber
quasi-contract, solutio indebiti, which covers not only mistake in fact but Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-892 (1998); .
also mistake in law. (Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154 Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228
and 2155) (1995)]
The Government is not exempt from the application of solutio
indebiti. (Commissioner, supra citing Commissioner of Internal Revenue v. 15. Effect of a BIR reversal of a previous ruling
Fireman’s Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, interpreting a law as exempting a taxpayer. A reversal of a BIR ruling
324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of favorable to a taxpayer would not necessarily create a perpetual exemption
Manila, supra)
in his favor, for after all the government is never estopped from collecting
Indeed, the taxpayer expects fair dealing from the Government,
taxes because of mistakes or errors on the part of its agents. (Lincoln Philippine
and the latter has the duty to refund without any unreasonable delay what
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
it has erroneously collected. (Commissioner, supra citing Commissioner of
Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its
16. A tax amnesty is a general pardon or intentional overlooking
taxpayers to observe fairness and honesty in paying their taxes, it must
by the State of its authority to impose penalties on persons otherwise guilty
hold itself against the same standard in refunding excess (or erroneous)
of evasion or violation of a revenue or a tax law.
payments of such taxes. It should not unjustly enrich itself at the expense
It partakes of an absolute waiver by the government of its right to
of taxpayers. [Commissioner, supra citing AB Leasing and Finance Corporation
collect what is due it and to give tax evaders who wish to relent a chance
v. Commissioner of Internal Revenue, 453 Phil. 297 in turn citing BPI-Family
Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And so,
to start with a clean slate. A tax amnesty, much like a tax exemption, is
given its essence, a claim for tax refund necessitates only preponderance never favored nor presumed in law. The grant of a tax amnesty, similar to
of evidence for its approbation like in any other ordinary civil case. a tax exemption, must be construed strictly against the taxpayer and
(Commissioner, supra) liberally in favor of the taxing authority. (Philippine Banking Corporation, etc.,
v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)
14. Tax refunds premised upon a tax exemption strictly
17. The purpose of tax amnesty is to
construed, Tax exemption is a result of legislative grace. And he who
a. give tax evaders who wish to relent a chance to start a clean
claims an exemption from the burden of taxation must justify his claim by
slate, and to
showing that the legislature intended to exempt him by words too plain to
b. give the government a chance to collect uncollected tax from
be mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco
tax evaders without having to go through the tedious process of a tax
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated
Mining Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10, 2000)
119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such that 18. Tax amnesty distinguished from tax exemption.
the exemption will not be held to be conferred unless the terms under which
19
a. Tax amnesty is an immunity from all criminal, civil and the tax benefits are cancelled out. (Ibid.) Thus, the need for the tax sparing
administrative liabilities arising from nonpayment of taxes (People v. provision.
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 NATIONAL INTERNAL REVENUE CODE
from a charge or burden to which others are subjected. (Florer v. Sheridan,
137 Ind. 28, 36 NE 365)
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
b. Tax amnesty applies only to past tax periods, hence of
retroactive application (Castaneda, supra) WHILE tax exemption has INTERNAL REVENUE
prospective application.
1. Rep. Act No. 1405, the Bank Deposits Secrecy Law
19. Tax avoidance is the use of legally permissible means to prohibits inquiry into bank deposits. As exceptions to Rep. Act
reduce the tax while tax evasion is the use of illegal means to escape the No. 1405, the Commissioner of Internal Revenue is only
payment of taxes. authorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; and
20. Tax evasion connotes the integration of three b. any taxpayer who has filed an application for compromise of his
factors: tax liability by reason of financial incapacity to pay his tax liability. [Sec. 5
a. The end to be achieved, i.e., the payment of less than that (F), NIRC of 1997]
known by the taxpayer to be legally due, or the non-payment of tax when it c. A taxpayer who authorizes the Commissioner to inquire into his
is shown that a tax is due; bank deposits.
b. an accompanying state of mind which is described as being
“evil” on “bad faith,” “willful,” or ”deliberate and not accidental”; and 2. Purpose of the NIRC of 1997. Revenue generation
c. a course of action or failure of action which is unlawful. has undoubtedly been a major consideration in the passage of
(Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco
R. No. 147188, September 14, 2004) Corporation, G. R. Nos. 167274-75, July 21, 2008)
3.
âââ21. Tax avoidance distinguished from tax evasion. Purpose of shift from ad valorem system to specific
a. Tax avoidance is legal while tax evasion is illegal. tax system in taxation of cigarettes. The shift from the ad valorem
b. The objective of tax avoidance in most instances is merely to system to the specific tax system is likewise meant to promote fair
reduce the tax that is due while is tax evasion the object is to entirely escape competition among the players in the industries concerned, to ensure
the payment of taxes. an equitable distribution of the tax burden and to simplify tax administration
c. Tax evasion warrants the imposition of civil, administrative and by classifying cigarettes, among others, into high, medium and low-priced
criminal penalties while tax avoidance does not. based on their net retail price and accordingly graduating tax rates.
(Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
22. Tax sparing is a provision in some tax treaties which 167274-75, July 21, 2008)
provides that the state of residence allows as credit the amount that would
have been paid, as if no reduction has been made. (Vogel, Klaus on Double TAX ON INCOME
Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax
Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5) 1. The Tax Code has included under the term
There may be instances where a particular income is exempt from
“corporation” partnerships, no matter how created or organized,
taxation in order to encourage foreign investments which may lead to
joint-stock companies, joint accounts (cuentas en participacion),
economic development. If the tax credit method is used, there would be no
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC
more tax to credit since there is no more tax to credit as a result of the tax
of 1997]
exemption. Consequently, when the tax method credit method is applied
to these items of income, such incentives are siphoned off since, in effect,
20
2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court 6. The income from the rental of the house, bought from
held citing Mertens that the term partnership includes a syndicate, group, the earnings of co-owned properties, shall be treated as the
pool, joint venture or other unincorporated organization, through or by means income of an unregistered partnership to be taxable as a corporation
of which any business, financial operation, or venture is carried on. because of the clear intention of the brothers to join together in a venture for
making money out of rentals.
3. Certain business organizations do not fall under the
category of “corporations” under the Tax Code, and therefore not 7. Income is gain derived and severed from capital, from labor
subject to tax as corporations, include: or from both combined. For example, to tax a stock dividend would be to tax
a. General professional partnerships; a capital increase rather than the income. (Commissioner of Internal
b. Joint venture or consortium formed for the purpose of Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
undertaking construction projects engaging in petroleum, coal, geothermal,
and other energy operations, pursuant to an operation or consortium 8. The term taxable income means the pertinent items of
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agreement under a service contract with the Government. [1 sentence, gross income specified in the Tax Code, less the deductions and/or personal
Sec. 22 (B), BIRC of 1997] and additional exemptions, if any, authorized for such types of income by the
Tax Code or other special laws. (Sec. 31, NIRC of 1997)
ââ 4. Co-heirs who own inherited properties which
produce income should not automatically be considered as 9. The cancellation and forgiveness of indebtedness
partners of an unregistered corporation subject to income tax may amount to (a) payment of income; (b) gift; or to a (c) capital transaction
for the following reasons: depending upon the circumstances.
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 10. If an individual performs services for a creditor who,
right or interest in any property from which the returns are derived. There in consideration thereof, cancels the debt, it is income to the extent
must be an unmistakable intention to form a partnership or joint venture. of the amount realized by the debtor as compensation for his services.
(Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)
b. There is no contribution or investment of additional capital to 11. An insolvent debtor does not realize taxable income
increase or expand the inherited properties, merely continuing the dedication
from the cancellation or forgiveness. (Commissioner v. Simmons Gin
of the property to the use to which it had been put by their forebears. (Ibid.) th
Co., 43 Fd 327 CCA 10 )
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
12. The insolvent debtor realizes income resulting from
respective contribution, are not thereby rendered partners. They have no the cancellation or forgiveness of indebtedness when he
common stock capital, and no community of interest as principal proprietors becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F)
in the business itself from which the proceeds were derived. (Elements of the 289)
nd
Law of Partnership by Floyd R. Mechem, 2 Ed., Sec. 83, p. 74 cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560) 13. If a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the amount of the
5. The common ownership of property does not itself debt it is a gift from the creditor to the debtor and need not be
create a partnership between the owners, though they may use it for included in the latter’s income.
purpose of making gains, and they may, without becoming partners, are
among themselves as to the management and use of such property and the 14. If a corporation to which a stockholder is indebted
application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, forgives the debt, the transaction has the effect of payment of a
160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166
dividend. (Sec. 50, Rev. Regs. No. 2)
SCRA 560)
21
15. Members of cooperatives not subject to tax on the 20. Payment for services, other than compensation
interest earned from their deposits with the cooperative. No less than income, is considered as having been earned at the place where
our Constitution guarantees the protection of cooperatives. Section 15, Article XII the activity or service was performed.
of the Constitution considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II of the 21. A non-resident alien, who has stayed in the
Constitution declares that it is a policy of the State to promote social justice in all Philippines for an aggregate period of more than 180 days during
phases of national development. In relation thereto, Section 2 of Article XIII of the
any calendar year, shall be considered as a non-resident alien
Constitution states that the promotion of social justice shall include the commitment
to create economic opportunities based on freedom of initiative and self-reliance. doing business in the Philippines. Consequently, he shall be subject
Bearing in mind the foregoing provisions, we find that an interpretation exempting to income tax on his income derived from sources from within the Philippines.
the members of cooperatives from the imposition of the final tax under Section [Sec. 25 (A) (1), NIRC]
24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with He is allowed to avail of the itemized deductions including the personal
the letter and spirit of our Constitution. (Dumaguete Cathedral Credit Coopertive and additional exemptions subject to the rule on reciprocity.
[DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22,
2010) ââ 22. What are considered as de minimis benefits not
In closing, cooperatives, including their members, deserve a preferential tax subject to withholding tax on compensation income of both
treatment because of the vital role they play in the attainment of economic managerial and rank and file employees ?
development and social justice. Thus, although taxes are the lifeblood of the SUGGESTED ANSWER:
government, the State’s power to tax must give way to foster the creation and a. Monetized unused vacation leave credits of employees not
growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: “The exceeding ten (10) days during the year;
power of taxation, while indispensable, is not absolute and may be subordinated b. Medical cash allowance to dependents of employees not
to the demands of social justice.” (Ibid., citing Commissioner of Internal Revenue v. exceeding P750.00 per employee per semester or P125 per month;
American Express International, Inc. (Philippine Branch), 500 Phil. 586 (2005). c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per
month amounting to not more than P1,000.00;
16. The Global system of income taxation is a system d. Uniforms and clothing allowance not exceeding P3,000.00 per
employed where the tax system views indifferently the tax base and generally annum;
treats in common all categories of taxable income of the individual. (Tan v. e. Actual yearly medical benefits not exceeding P10,000.00 per
del Rosario, Jr., 237 SCRA 324, 331) annum;
f. Laundry allowance not exceeding P300 per month;
17. The Schedular system of income taxation is a system g. Employees achievement awards, e.g. for length of service or
employed where the income tax treatment varies and is made to depend on safety achievement, which must be in the form of a tangible persona property
the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, other than cash or gift certificate, with an annual monetary value not
Jr., 237 SCRA 324, 331) exceeding P10,000.00 received by an employee under an established
written plan which does not discriminate in favor of highly paid employees;
18. Under the National Internal Revenue Code the global h. Gifts given during Christmas and major anniversary
system is applicable to taxable corporations and the schedular celebrations not exceeding P5,000 per employee per annum;
to individuals. i. Flowers, fruits, books, or similar items given to employees
under special circumstances, e.g. on account of illness, marriage, birth of a
19. Compensation income is considered as having been baby, etc.; and
earned in the place where the service was rendered and not j. Daily meal allowance for overtime work not exceeding twenty
considered as sourced from the place of origin of the money. 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,
22
if the employer pays more than the ceiling prescribed by these regulations, sickness, plus the amounts of any damages received on whether by suit or
the excess shall be taxable to the employee receiving the benefits only if agreement on account of such injuries or sickness.
such excess is beyond the P30,000.00 ceiling, provided, further, that any e. Income of any kind to the extent required by any treaty
amount given by the employer as benefits to its employees, whether obligation binding upon the Government of the Philippines.
classified as de minimis benefits or fringe benefits, shall constitute as f. Retirement benefits received under Republic Act No. 7641.
deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2- Retirement received from reasonable private benefit plan after compliance
98 as amended by Rev. Regs. No. 8-2000] with certain conditions. Amounts received for beyond control separation.
Foreign social security, retirement gratuities, pensions, etc. USVA benefits,
23. Income subject to “final tax” refers to an income SSS benefits and GSIS benefits.
collected through the withholding tax system. The payor of the
income withholds the tax and remits it to the government as a final settlement âââ 26. What are the conditions for excluding
of the income tax as a final settlement of the income tax due on said income. retirement benefits from gross income, hence tax-exempt ?
The recipient is no longer required to include the income subjected to a final SUGGESTED ANSWER:
tax as part of his gross income in his income tax return. a. Retirement benefits received under Republic Act No. 7641 and
those received by officials and employees of private firms, whether individual
ââ 24. Distinguish exclusions from deductions. or corporate, in accordance with the employer’s reasonable private benefit
SUGGESTED ANSWER: plan approved by the BIR.
a. Exclusions from gross income refer to a flow of wealth to the b. Retiring official or employee
taxpayer which are not treated as part of gross income for purposes of 1) In the service of the same employer for at least ten (10)
computing the taxpayer’s taxable income, due to the following reasons: (1) years;
It is exempted by the fundamental law; (2) It is exempted by statute; and (3) 2) Not less than fifty (50) years of age at time of retirement;
It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) 3) Availed of the benefit of exclusion only once. [Sec. 32
WHILE deductions are the amounts which the law allows to be subtracted (B) (6) (a), NIRC of 1997] The retiring official or employee should not
from gross income in order to arrive at net income. have previously availed of the privilege under the retirement plan of
st
b. Exclusions pertain to the computation of gross income WHILE the same or another employer. [1 par., Sec. 2.78 (B) (1), Rev. Regs.
deductions pertain to the computation of net income. No. 2-98]
c. Exclusions are something received or earned by the taxpayer
which do not form part of gross income WHILE deductions are something ââ 27. What kind of separation (retirement) pay is
spent or paid in earning gross income. excluded from gross income, hence tax-exempt ?
An example of an exclusion from gross income are life insurance SUGGESTED ANSWER:
proceeds, and an example of a deduction are losses. a. Any amount received by an official, employee or by his heirs,
b. From the employer
ââ 25. What are excluded from gross income ? c. As a consequence of separation of such official or employee
SUGGESTED ANSWER: from the service of the employer because of
a. Proceeds of life insurance policies paid to the heirs or 1) Death, sickness or other physical disability; or
beneficiaries upon the death of the insured whether in a single sum or 2) For any cause beyond the control of said official or
otherwise. employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment,
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b. Amounts received by the insured as a return of premiums paid redundancy and cessation of business. [1 par., Sec. 2.78 (B), (1)
by him under life insurance, endowment or annuity contracts either during (b), Rev. Regs. No. 2-98]
the term, or at maturity of the term mentioned in the contract, or upon
surrender of the contract. 28. What are the Itemized deductions from gross income
c. Value of property acquired by gift, bequest, devise, or descent. and who may avail of them ?
d. Amounts received, through accident or health insurance or a. Ordinary and necessary trade, business or professional
Workmen’s Compensation Acts as compensation for personal injuries or expenses.
23
b. The amount of interest paid or incurred within a taxable year f. Depreciation or a reasonable allowance for the exhaustion,
on indebtedness in connection with the taxpayer’s profession, trade or wear and tear (including reasonable allowance for obsolescence) of property
business. used in trade or business.
Resident citizens, resident alien individuals and nonresident alien Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses. other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense. within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense. Philippines are not allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with g. Depletion or deduction arising from the exhaustion of a non-
the taxpayer’s profession. replaceable asset, usually a natural resource.
Resident citizens, resident alien individuals and nonresident alien Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses. other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense. within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense. Philippines are not allowed to deduct this expense.
âââ d. Ordinary losses, losses from casualty, theft or âââ h. Charitable and other contributions. Resident citizens,
embezzlement; and net operating losses. resident alien individuals and nonresident alien individuals who are engaged
Resident citizens, resident alien individuals and nonresident alien in trade and business, on their gross incomes other from compensation
individuals who are engaged in trade and business, on their gross incomes income are allowed to deduct these expenses. Domestic corporations,
other from compensation income are allowed to deduct these expenses. estates and trusts may also deduct this expense. Nonresident citizens and
Domestic corporations, estates and trusts may also deduct this expense. foreign corporations on their gross incomes from within may also deduct this
Nonresident citizens and foreign corporations on their gross incomes from expense.
within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.
Philippines are not allowed to deduct this expense. i. Research and development expenditures treated as deferred
âââ e. Bad debts due to the taxpayer, actually ascertained to expenses paid or incurred by the taxpayer in connection with his trade,
be worthless and charged off within the taxable year, connected with business or profession, not deducted as expenses and chargeable to capital
profession, trade or business, not sustained between related parties. account but not chargeable to property of a character which is subject to
Resident citizens, resident alien individuals and nonresident alien depreciation or depletion.
individuals who are engaged in trade and business, on their gross incomes Resident citizens, resident alien individuals and nonresident alien
other from compensation income are allowed to deduct these expenses. individuals who are engaged in trade and business, on their gross incomes
Domestic corporations, estates and trusts may also deduct this expense. other from compensation income are allowed to deduct these expenses.
Nonresident citizens and foreign corporations on their gross incomes from Domestic corporations, estates and trusts may also deduct this expense.
within may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from
Nonresident alien individuals not engaged in trade or business in the within may also deduct this expense.
Philippines are not allowed to deduct this expense. Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
24
j. Contributions to pension trusts. Resident citizens, resident 3) Must be paid or incurred in carrying on a trade or
alien individuals and nonresident alien individuals who are engaged in trade business.
and business, on their gross incomes other from compensation income are 4) Must not be bribes, kickbacks or other illegal
allowed to deduct these expenses. Domestic corporations, estates and expenditures
trusts may also deduct this expense. Nonresident citizens and foreign b. Compliance with the substantiation test. Proof by evidence or
corporations on their gross incomes from within may also deduct this records of the deductions allowed by law including compliance with the
expense. business test.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense. ââ 31. What are the requisites for the deductibility of
k. Insurance premiums for health and hospitalization. Resident ordinary and necessary trade, business, or professional
citizens, resident alien individuals and nonresident alien individuals who are expenses, like expenses paid for legal and auditing services ?
engaged in trade and business, on their gross incomes other from SUGGESTED ANSWER:
compensation income are allowed to deduct these expenses. Nonresident a. the expense must be ordinary and necessary;
citizens and nonresident alien individual engaged in trade or business in the b. it must have been paid or incurred during the taxable year
Philippine on their gross incomes from within may also deduct these dependent upon the method of accounting upon the basis of which the net
premiums. income is computed.
Nonresident alien individuals not engaged in trade or business in the c. it must be supported by receipts, records or other pertinent
Philippines are not allowed to deduct these premiums. papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation,
l. Personal and additional exemptions. Resident citizens, and G. R. No. 172231, February 12, 2007)
resident alien on their gross incomes and from compensation income are
allowed to deduct these premiums. Nonresident citizens on their gross âââ 32. TMG Corporation is issuing the accrual
incomes from within may also deduct this expense. Nonresident alien
method of accounting. In 2005 XYZ Law Firm and ABC Auditing
individuals engaged in trade or business in the Philippines are allowed to
deduct these exemptions under reciprocity. Firm rendered various services which were billed by these firms
Nonresident alien individuals not engaged in trade or business in the only during the following year 2006. Since the bills for legal and
Philippines are not allowed to deduct this expense. auditing services were received only in 2006 and paid in the
same year, TMG deducted the same from its 2006 gross income.
ââ 29. Distinguish ordinary expenses from capital The BIR disallowed the deduction ?
expenditures. Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: Ordinary expenses are those which are SUGGESTED ANSWER: The BIR is correct. TMG should have
common to incur in the trade or business of the taxpayer WHILE capital deducted the professional and legal fees in the year they were incurred in
expenditures are those incurred to improve assets and benefits for more than 2005 and not in 2006 because at the time the services were rendered in
one taxable year. Ordinary expenses are usually incurred during a taxable 2005, there was already an obligation to pay them. (Commissioner of
year and benefits such taxable year. Necessary expenses are those which Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231,
are appropriate or helpful to the business. February 12, 2007)
NOTES AND COMMENTS:
ââ 30. What are the requisites for the deductibility of a. Accounting methods for tax purposes comprise a set of rules
business expenses ? for determining when and how to report income and deductions.
SUGGESTED ANSWER: The following are the requisites for (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No.
deductibility of business expenses: 172231, February 12, 2007)
a. Compliance with the business test: The two (2) principal accounting methods for recognition of income
1) Must be ordinary and necessary; are the (a) accrual method; and the (b) cash method.
2) Must be paid or incurred within the taxable year; b. Recognition of income and expenses under the accrual
method of accounting. Amounts of income accrue where the right to
25
receive them becomes fixed, where there is created an enforceable liability. kind by an employer to an individual employee (except rank and file
Liabilities, are incurred when fixed and determinable in nature without regard employees), such as but not limited to:
to indeterminacy merely of time of payment.. (Commissioner of Internal a. Housing;
Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, b. Expense account;
2007) c. Vehicle of any kind;
The accrual of income and expense is permitted when the all-events d. Household personnel, such as maid, driver and others;
test has been met. (Ibid.) e. Interest on loan at less than market rate to the extent of the
c. All-events test. This test requires: difference between the market rate and actual rate granted;
1) fixing of a right to income or liability to pay; and f. Membership fees, dues and other expenses borne by the
2) the availability of the reasonable accurate determination employer for the employee in social and athletic clubs or other similar
of such income or liability. organizations;
The test does not demand that the amount of such income or liability g. Expenses for foreign travel;
be known absolutely, only that a taxpayer has at his disposal the information h. Holiday and vacation expenses;
necessary to compute the amount with reasonable accuracy. i. Educational assistance to the employee or his dependents; and
The all-events test is satisfied where computation remains uncertain; j. Life or health insurance and other non-life insurance premiums
if its basis is unchangeable, the test is satisfied where a computation may or similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997;
st
be unknown, but is not as much as unknowable, within the taxable year. The 1 par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
amount of liability does not have to be determined exactly,; it must be
determined with “reasonable accuracy” implies something less than an exact 35. Fringe benefits that are not subject to the fringe
or completely accurate amount. benefits tax:
The propriety of an accrual must be judged by the fact that a taxpayer a. When the fringe benefit is required by the nature of, or
knew, or could reasonably be expected to have known, at the closing of its necessary to the trade, business or profession of the employer; or
books for the taxable year. Accrual method of accounting presents largely a b. When the fringe benefit is for the convenience or advantage of
st
question of fact; such that the taxpayer bears the burden of proof of the employer. [Sec. 32(A), NIRC of 1997; 1 par., Sec. 2.33 (A), Rev. Regs.
establishing the accrual of an item of income or deduction. (Commissioner No. 3-98]
of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, c. Fringe benefits which are authorized and exempted from
February 12, 2007) income tax under the Tax Code or under any special law;
d. Under the cash method income is to be construed as income d. Contributions of the employer for the benefit of the employee to
for tax purposes only upon actual receipt of the cash payment. It is also retirement, insurance and hospitalization benefit plans;
referred to as the “cash receipts and disbursements method” because both e. Benefits given to the rank and file employees, whether granted
the receipt and disbursements are considered. Thus, income is recognized under a collective bargaining agreement or not; and
only upon actual receipt of the cash payment but no deductions are allowed f. De minimis benefits as defined in the rules and regulations to
from the cash income unless actually disbursed through an actual payment be promulgated by the Secretary of Finance upon recommendation of the
in cash. Commissioner of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec.
2.33 (C), Rev. Regs. No. 3-98]
33. The fringe benefits tax is a final withholding tax imposed on
the grossed-up monetary value of fringe benefits furnished, granted or paid ââ36. De minimis benefits are facilities and privileges
by the employer to the employee, except rank and file employees. [1st par., (such as entertainment, medical services, or so-called “courtesy discounts”
Sec. 2.33 (A), Rev. Regs. No. 3-98] on purchases), furnished or offered by an employer to his employees. They
are not considered as compensation subject to income tax and consequently
ââ 34. What is meant by “fringe benefit” for purposes of to withholding tax, if such facilities are offered or furnished by the employer
taxation ? merely as a means of promoting the health, goodwill, contentment, or
SUGGESTED ANSWER: For purposes of taxation, fringe benefit efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by
means any good, service, or other benefit furnished or granted in cash or in Rev. Regs. No. 8-2000]
26
reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v.
â 37. Preferred shares are considered capital regardless Court of Appeals, et al., 256 SCRA 667]
of the conditions under which such shares are issued and g. Must have been reported as receivables in the income tax return
dividends or “interests” paid thereon are not allowed as of the current or prior years. (Sec. 103, Rev. Regs. No. 2)
deductions from the gross income of corporations. (Revenue :
Memorandum Circular No. 17-71) ââ 41. What is the “tax benefit” rule ?
SUGGESTED ANSWER: The “tax benefit rule” posits that the
âââ 38. Bad debts are those which result from the recovery of bad debts previously allowed as deduction in the preceding year
worthlessness or uncollectibility, in whole or in part, of amounts due the or years shall be included as part of the taxpayer’s gross income in the year
taxpayer by others, arising from money lent or from uncollectible amounts of of such recovery to the extent of the income tax benefit of said deduction.
income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99) NOTES AND COMMENTS:
a. If in the year the taxpayer claimed deduction of bad debts
ââ 39. Who are related parties ? 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
SUGGESTED ANSWER: The following are related parties:
be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
a. Members of the same family. The family of an individual shall
b. If the said taxpayer did not benefit from the deduction of the
include only his brothers and sisters (whether by the whole or half-blood),
said bad debt written-off because it did not result to any reduction of his
spouse, ancestors, and lineal descendants;
income tax in the year of such deduction (i.e. where the result of his business
b. An individual and a corporation more than fifty percent (50%) in
operation was a net loss even without deduction of the bad debts written-off),
value of the outstanding stock of which is owned, directly or indirectly, by or
then his subsequent recovery thereof shall be treated as a mere recovery or
for such individual;
a return of capital, hence, not treated as receipt of realized taxable income.
c. Two corporations more than fifty percent (50%) in value of the
(Sec. 4, Rev. Regs. 5-99)
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
42. Depreciation is the gradual diminution in the useful value of
tangible property resulting from ordinary wear and tear and from normal
e. The fiduciary of a trust and the fiduciary of another trust if the
obsolescence. The term is also applied to amortization of the value of
same person is a grantor with respect to each trust; or
intangible assets the use of which in the trade or business is definitely limited
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC
of 1997] in duration.
ââ 40. What are the requisites for valid deduction of bad 43. The methods of depreciation are the following:
a. Straight line method;
debts from gross income ?
b. Declining balance method;
SUGGESTED ANSWER:
c. Sum of years digits method; and
a. There must be an existing indebtedness due to the taxpayer which
d. Any other method prescribed by the Secretary of Finance upon
must be valid and legally demandable;
the recommendation of the Commissioner of Internal Revenue:
b. The same must be connected with the taxpayer’s trade, business
1) Apportionment to units of production;
or practice of profession;
2) Hours of productive use;
c. The same must not be sustained in a transaction entered into
3) Revaluation method; and
between related parties;
4) Sinking fund method.
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 44. What are personal and additional exemptions ?
uncollectible during the taxable year; SUGGESTED ANSWER: These are the theoretical persona, living
f. The debts are uncollectible despite diligent effort exerted by the and family expenses of an individual allowed to be deducted from the gross
taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 or net income of an individual taxpayer.
27
These are arbitrary amounts which have been calculated by our c. if such dependent is
lawmakers to be roughly equivalent to the minimum of subsistence, taking 1) not more than twenty-one (21) years of age,
into account the personal status and additional qualified dependents of the 2) unmarried and
taxpayer. They are fixed amounts in the sense that the amounts have been 3) not gainfully employed or
predetermined by our lawmakers and until our lawmakers make new d. if such dependent,
adjustments on these personal exemptions, the amounts allowed to be 1) regardless of age
deducted by a taxpayer are fixed as predetermined by Congress. [Pansacola 2) is incapable of self-support
v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citing 3) because of mental or physical defect.” [2nd par., Sec.
Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)] 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-
2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997, as
ââ45. What is the amount allowed as basic personal amended by Rep. Act No. 9504]
exemption ? c. It is to be noted that under the NIRC of 1997, as amended by
SUGGESTED ANSWER: There shall be allowed a basic personal Rep. Act No. 9504, only qualified dependent children are considered for
exemption amounting to Fifty thousand pesos (P50,000) for each individual additional exemptions. Grandparents, parents, as well, as brothers or
taxpayer. sisters, and other collateral relatives are not qualified dependents to be
In the case of married individuals where only one of the spouse is claimed as additional exemptions.
deriving gross income, only such spouse shall be allowed the personal However, if they are senior citizens they may qualify as additional
exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. exemptions under the “Senior Citizens Law” but not under the NIRC of
2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008] 1997, as amended by Rep. Act No. 9504.
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that Senior citizen shall be treated as dependents provided for in the
each of the spouses may claim the P50,000.00. Thus, the total familial National Internal Revenue Code, as amended, and as such, individual
basic personal exemption for spouses is P100,000.00. taxpayers caring for them, be they relatives or not shall be accorded the
Furthermore, the distinctions between the concepts of single, privileges granted by the Code insofar as having dependents are
married and head of the family for purpose of availing of the basic personal concerned. [last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act 9257,
exemption has already been eliminated by Rep. Act No. 9504. “The Expanded Senior Citizens Act of 2003”]
ââ45. What are the amounts of additional exemptions ? ââ47. Capital assets shall refer to all real properties held by a
SUGGESTED ANSWER: “An individual, taxpayer, whether or not connected with his trade or business, and which are
a. whether single or married, not included among the real properties considered as ordinary assets. (Sec.
b. shall be allowed an additional exemption of Twenty-Five 2.a, Rev. Regs. No. 7-2003)
Thousand Pesos (P25,000.00) The term “capital assets” means property held by the taxpayer
c. for each qualified dependent child, (whether or not connected with his trade or business), BUT DOES NOT
d. provided that the total number of dependents for which INCLUDE:
additional exemptions may be claimed a. Stock in trade of the taxpayer, or
1) shall not exceed four (4) dependents.” [1st par., Sec. 2.79 b. Other property of a kind which would properly be included in the
(I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, inventory of the taxpayer if on hand at the close of the taxable year, or
arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as c. Property held by the taxpayer primarily for sale to customers in
amended by Rep. Act No. 9504] the ordinary course of his trade or business, or
NOTES AND COMMENTS: d. Property used in the trade or business, of a character which is subject to
a. It is clear that under the amendment, single individuals may the allowance for depreciation; or real property used in the trade or business
now claim for the additional exemptions. Furthermore, the concept of head of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and
of a family does not find application anymore. arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
b. “A dependent means
a. a legitimate, illegitimate or legally adopted child ââ48. Examples of capital assets:
b. chiefly dependent upon and living with the taxpayer
28
a. Stock and securities held by taxpayers other than dealers in d. The wood, paint, varnish, nails, glue, etc. which are the raw
securities; materials of a furniture factory;
b. Jewelry not used for trade and business; e. Inherited parcels of land of substantial areas located in the
c. Residential houses and lands owned and used as such; heart of Metro Manila, which were subdivided into smaller lots then sold on
d. Automobiles not used in trade and business; installment basis after introducing comparatively valuable improvements not
e. Paintings, sculptures, stamp collections, objects of arts which for the purpose of simply liquidating the estate but to make them more
are not used in trade or business; saleable ; the employment of an attorney-in-fact for the purpose of
f. Inherited large tracts of agricultural land which were subdivided developing, managing, administering and selling the lots; sales made with
pursuant to the government mandate under land reform, then sold to tenants. frequency and continuity; annual sales income from the sales was
(Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968) considerable; and the heir was not a stranger to the real estate business.
g. “Real property used by an exempt corporation in its exempt (Tuazon, Jr. v. Lingad, 58 SCRA 170)
operations, such as a corporation included in the enumeration of Section 30 f. Inherited agricultural property improved by introduction of good
of the Code, shall not be considered used for business purposes, and roads, concrete gutters, drainage and lighting systems converts the property
rd
therefore considered as capital asset.” (last sentence, 3 par., Sec. 3.b, Rev. to an ordinary asset. The property forms part of the stock in trade of the
Regs. No. 7-2003) owner, hence an ordinary asset. This is so, as the owner is now engaged in
h. “Real property, whether single detached, townhouse, or the business of subdividing real estate. (Calasanz v. Commissioner of Internal
condominium unit, not used in trade or business as evidenced by a Revenue, 144 SCRA at p. 672)
certification from the Barangay Chairman or from the head of administration,
in case of condominium unit, townhouse or apartment, and as validated from ââ51. Tax treatment of real properties that have been
the existing available records of the Bureau of Internal Revenue, owned by transferred. Real properties classified as capital or ordinary asset in the
an individual engaged in business, shall be treated as capital asset.” (last hands of the seller/transferor may change their character in the hands of the
par., Sec. 3.b., Rev. Regs. No. 7-2003) buyer/transferee. The classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following rules:
ââ49. Ordinary assets shall refer to all real properties a. Real property transferred through succession or donation to the
specifically excluded from the definition of capital assets, namely: heir or donee who is not engaged in the real estate business with respect to
a. Stock in trade of a taxpayer or other real property of a kind which the real property inherited or donated, and who does not subsequently use
would properly be included in the inventory of a taxpayer if on hand at the such property in trade or business, shall be considered as a capital asset in
close of the taxable year; or the hands of the heir or donee.
b. Real property held by the taxpayer primarily for sale to customers b. Real property received as dividend by stockholders who are not
in the ordinary course of his trade or business; or engaged in the real estate business and who not subsequently use such real
c. Real property used in trade or business (i.e. buildings and/or property in trade or business shall be treated as capital assets in the hands
improvements), of a character which is subject to the allowance for of the recipient even if the corporation which declared the real property
depreciation; or dividend is engaged in real estate business.
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, c. The real property received in an exchange shall be treated as
Rev. Regs. No. 7-2003) ordinary asset in the hands of the transferee in the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer who
ââ 50.. Examples of ordinary assets hence not capital is engaged in real estate business, or to a taxpayer who, even if not engaged
assets: in real estate business, will use in business the property received in the
a. The machinery and equipment of a manufacturing concern exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
subject to depreciation;
b. The tractors, trailers and trucks of a hauling company; ââ 52. The tax is “imposed upon capital gains presumed
c. The condominium building owned by a realty company the units of to have been realized from the sale, exchange, or other
which are for rent or for sale; disposition of real property located in the Philippines, classified
as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations
29
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 57. Holding period not applied to the taxation of the presumed
the ‘Civil Code of the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003) capital gains derived from the sale of real property considered as capital
assets.
ââ 53. Transactions covered by the presumed capital
gains tax on real property: ââ 58. The tax liability, of individual taxpayers (not
a. sale, corporate), if any, on gains from sales or other dispositions of
b. exchange, real property, classified as capital assets, to the government or
c. or other disposition, including pacto de retro sales and other any of its political subdivisions or agencies or to government owned or
forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and controlled corporations shall be determined, at the option of the taxpayer, by
arrangement supplied] including the proceeds as part of gross income to be subjected to the
d. “ Sale, exchange, or other disposition” includes taking by the allowable deductions and/or personal and additional exemptions, then to the
government through condemnation proceedings. (Gutierrez v. Court of Tax schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC
Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861) 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]
54. In case the mortgagor exercises his right of
redemption within one (1) year from the issuance of the certificate of sale, 59. The seller of the real property, classified as a capital
in a foreclosure of mortgage sale of real property, no capital gains tax shall asset, pays the presumed capital gains tax whether:
be imposed because no capital gains has been derived by the mortgagor a. an individual [Sec. 24 (D) (1), NIRC of 1997];
and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. 1) Citizen, whether resident or not [Ibid.];
No. 4-99] 2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the
55. In case of non-redemption of the property sold upon a Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the
foreclosure of mortgage sale, the presumed capital gains tax shall be NIRC of 1997];
imposed, based on the bid price of the highest bidder but only upon the 4) Nonresident alien not engaged in trade or business in the
expiration of the one year period of redemption provided for under Sec. 6 of Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the
Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty NIRC of 1997];
(30) days from the expiration of the said one-year redemption period. [Sec. b. an estate or trust (Ibid.);
3 (2), Rev. Regs. No. 4-99] c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
ââ 56. The basis for the final presumed capital gains tax ââ 60. Excepted from the payment of the presumed
of six per cent (6%) is whichever is the higher of the capital gains tax are those presumed to have been realized from
a. gross selling price, or
the disposition by natural persons of their principal place of
b. the current fair market value as determined below:
1) the fair market value or real properties located in each residence
zone or area as determined by the Commissioner of Internal a. the proceeds of which is fully utilized in acquiring or
Revenue after consultation with competent appraisers both from the constructing a new principal residence;
private and public sectors; or b. within eighteen (18) calendar months from the date of sale or
2) the fair market value as shown in the schedule of values disposition
of the Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. c. the BIR Commissioner shall have been duly notified by the
6 (E), both of the NIRC of 1997] taxpayer within thirty (30) days from the date of sale or disposition through a
It does not matter whether there was an actual gain or loss because prescribed return of his intention to avail of the tax exemption; and
the tax is a “presumed” capital gains tax. It is the transaction that is taxed d. the said tax exemption can only be availed of once every ten
not the gain. (10) years. [Sec. 24 (D) (2), NIRC of 1997]
30
of the gross income as of the end of the taxable year, as defined herein, is
61. MBC was incorporated in 1961 and engaged in hereby imposed on a corporation taxable under this Title, beginning on the
commercial banking operations since 1987. On May 22, 1987, it fourth taxable year immediately following the year in which such corporation
ceased operations that year by reason of insolvency and its commenced its business operations, when the minimum corporate income
assets and liabilities were placed under the charge of a tax is greater than the tax computed under Subsection (A) of this section for
the taxable year.” [Sec. 27 (E) (1), NIRC of 1997]
government-appointed receiver. On June 23, 1999, the BSP
b. Period when a corporation becomes subject to the MCIT.
authorized MBC to operate as a thrift bank. “(5) Specific rules for determining the period when a corporation becomes
In 2000, It filed its tax return for the year 1999 paying the subject to the MCIT (minimum corporate income tax) -
amount of P33 million computed in accordance with the For purposes of the MCIT, the taxable year in which business
minimum corporate income tax (MCIT). It sought the BIR’s ruling operations commenced shall be the year in which the domestic corporation
on whether it is entitled to the four (4) year grace period for registered with the Bureau of Internal Revenue (BIR).
paying on the basis of MCIT reckoned from 1999. BIR then ruled Firms which were registered with BIR in 1994 and earlier years shall
that cessation of business activities as a result of being placed be covered by the MCIT beginning January 1, 1998. x x x” (Rev. Regs. No.
under involuntary receivership may be an economic reason for 9-98)
suspending the imposition of the MCIT. Manila Banking Corporation v. Commissioner of Internal Revenue, G.
R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because
As a result of the ruling MBC filed an application for refund
Rev. Regs. No. 4-95 specifically refers to thrift banks.)
of the P33 million. Due to the BIR’s inaction, MBC filed a petition c. Purpose of the four (4) year grace period. The intent of
for review with the CTA. Congress relative to the MCIT is to grant a four (43) – year suspension of tax
The CTA denied the petition on the ground that MBC is not payment to newly organized corporations. Corporations still starting their
a newly organized corporation. In a volte facie the BIR now business operations have to stabilize their venture in order to obtain a
maintains that MBC should pay the MCIT beginning January 1, stronghold in the industry. It does not come as a surprise then when many
1998 as it did not close its business operations in 1987 but companies reported losses in their initial years of operations.
merely suspended the same. Even if placed under receivership, Thus, in order to allow new corporations to grow and develop at the
the corporate existence was never affected. Thus, it falls under initial stages of their operations, the lawmaking body saw the need to provide
the category of an existing corporation recommencing its a grace period of four years from their registration before they pay their
minimum corporate income tax. (Manila Banking Corporation v.
banking operations.
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
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
ESTATE TAXES
the corporation commenced its business operations. [Sec. 27 (E) (1), NIRC
of 1997] ââ1. In determining the gross estate of a decedent,
The date of commencement of operations of a thrift bank is the date it are his properties abroad to be included, and more particularly,
was registered with the SEC or the date when the Certificate of Authority to what constitutes gross estate ?
Operate was issued to it by the Monetary Board, whichever comes later. SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or
(Sec. 6, Rev. Regs. No. 4-95) a resident alien.
Clearly then. MBC is entitled to the grace period of four years from The gross estate of a Filipino citizen or a resident alien comprises all
June 23, 1999 when it was authorized by the BSP to operate as a thrift bank his real property, wherever situated; all his personal property, tangible,
before the MCIT should be applied to it. (Manila Banking Corporation v. intangible or mixed, wherever situated, to the extent of his interest existing
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006) therein at the time of his death.
NOTES AND COMMENTS: The gross estate of a non-resident alien comprises all his real
a. The MCIT and when should be imposed and the four (4) property, situated in the Philippines; all his personal property, tangible,
year grace period. “A minimum corporate income tax of two percent (2%)
31
intangible or mixed, situated in the Philippines, to the extent of his interest a. The decedent takes the insurance policy on his own life, and
existing therein at the time of his death. b. the proceeds are receivable by a beneficiary designated as
irrevocable. [Sec. 85 (E), NIRC of 1997)
ââ 2. William Smith, an American citizen, was a NOTES AND COMMENTS: The beneficiary must not be the decedent’s
permanent resident of the Philippines. He died in San estate, executor or administrator, because the proceeds are includible as part of
gross estate whether or not the decedent retained the power of revocation. (Ibid.)
Francisco, California. He left 10,000 shares of San Miguel c. Where the insurance was NOT taken by the decedent upon
Corporation, a condominium unit at the Twin Towers Building his own life and the beneficiary is not the decedent’s estate, his executor
at Pasig, Metro Manila and a house and lot in Miami, Florida. or administrator.
What assets shall be included in the Estate Tax Return to
be filed with the BIR ? 4. Items deductible from the gross estate of a resident
SUGGESTED ANSWER: All of the assets should be included in the or nonresident Filipino decedent or resident alien decedent:
Estate Tax Return to be filed with the BIR. a. Expenses, losses, claims, indebtedness and taxes;
Smith, an American citizen and a permanent resident of the Philippines b. Property previously taxed;
is considered, for Philippine estate tax purposes, a resident alien. c. Transfers for public use;
Consequently, the assets to be included in the Estate Tax Return to be filed d. The Family Home up to a value not exceeding P1 million;
with the BIR should be all property, real or personal, tangible, intangible or e. Standard deduction of P1 million;
mixed, wherever situated, to the extent of the interest that Smith has at the f. Medical expenses not exceeding P500,000.00;
time of his death. Thus, all of the properties enumerated in the problem g. Amount of exempt retirement received by the heirs under Rep.
irrespective of where they are situated are includible in the gross estate of Act Mo. 4917;
Smith. h. Net share of the surviving spouse in the conjugal partnership.
ââ 8. The approval of the court sitting in probate, or 5. How are gifts of personal property to be valued for
as a settlement tribunal over the estate of the deceased is not a donor’s tax purposes ?
SUGGESTED ANSWER: The market value of the personal property
mandatory requirement for the collection of the estate. The
at the time of the gift shall be considered the amount of the gift. (Sec. 102,
probate court is determining issues which are not against the property of the
NIRC of 1997)
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
6. What is the valuation of donated real property for
formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive donor’s tax purposes ?
period. SUGGESTED ANSWER: The real property shall be appraised at its
The tax assessment having become final, executory and enforceable, fair market value as of the time of the gift.
the same can no longer be contested by means of a disguised protest. However, the appraised value of the real property at the time of the
(Marcos, II v. Court of Appeals, et al., 273 SCRA 47) gift shall be whichever is the higher of:
a. the fair market value as determined by the Commissioner of
Internal Revenue (zonal valuation) or
DONOR’S TAXES
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
ââ 1. What is the donor’s tax rate if the donee is a of the NIRC of 1997]
stranger ?
33
â 7. A died leaving as his only heirs, his surviving spouse which is not conducted for profit, or to any political subdivisions of the
B, and three minor children, X, Y and Z. Since B does not want said Government;
to participate in the distribution of the estate, she renounced her f. Gifts made by residents or non residents in favor of an
hereditary share in the estate. educational and/or charitable, religious, cultural or social welfare
a. Is the renunciation subject to donor’s tax ? Explain. corporation, institution, foundation, trust or philanthropic organization or
SUGGESTED ANSWER: No. The general renunciation by an heir, research institution or organization: Provided, however, That not more than
including the surviving spouse, as in the case B, of her share in the thirty percent (30%) of said gifts shall be used by such donee for
th
hereditary estate left by the decedent is not subject to donor’s tax. (4 par., administration purposes. [Sec. 101 (A), NIRC of 1997, numbering and
Sec. 11, Rev. Regs. No. 2-2003) arrangement supplied]
This is so because the general renunciation by B was not specifically g. Gifts made by non-resident aliens outside of the Philippines to
and categorically done in favor of identified heir/s to the exclusion or Philippine residents are exempt from donor’s taxes because taxation is
disadvantage of the other co-heirs in the hereditary estate. basically territorial. The transaction, which should have been subject to tax
was made by non-resident aliens and took place outside of the Philippines.
b. Supposing that instead of a general renunciation, B
renounced her hereditary share in A’s estate to X who is a
ââ 9. What is the concept of donation or gift splitting ?
special child, would your answer be the same ? Explain.
Illustrate.
SUGGESTED ANSWER: My answer would be different. The
SUGGESTED ANSWER: Donation or gift splitting is spreading the
renunciation in favor of X would be subject to donor’s tax.
gift over numerous calendar years in order to avail of lower donor’s taxes.
This is so because the renunciation was specifically and
In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his
categorically done in favor of X and identified heir to the exclusion or
first cousin. The P200,000.00 is the totality of the net gifts for 2008. If he
disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4th
donated the P200,000.00 in 2008 the first P100,000 would be exempt
par., Sec. 11, Rev. Regs. No. 2-2003)
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,
âââ 8. Give some donations that are exempt from
donating P100,000.00 on December 30, 2008 and the remaining
donor’s tax. P100,000.00 on January 1, 2009 the transaction would be exempt from
SUGGESTED ANSWER: donor’s tax. This is so even if the donation is separated only by two days
a. The first P100,000.00 net donation during a calendar year is because the basis is the calendar year. Leon would be enjoying the
exempt from donor’s tax [Sec. 99 (A), NIRC of 1997] made by a resident or exemption for the first P100,000.00 net gifts for each calendar year.
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
ââ10. A, who is engaged in the car “buy and sell”
the national sports association is exempt from donor’s tax (Sec. 1, Rep. Act business sold to B P7 million Jaguar for only P4 million. The
No. 7549) proper VAT on the sale was paid. If you are the BIR examiner
c. Political contributions made by a resident or non-resident assigned to review the sale, would you issue a tax assessment
individual if registered with the COMELEC irrespective of whether donated on the transaction ? Explain your answer briefly.
to a political party or individual. SUGGESTED ANSWER: Donor’s taxes would be due on the
However, the Corporation Code prohibits corporations from making insufficiency of consideration.
political contributions. (Corp. Code, Title IV, Sec. 36.9) Where property, other than real property that has been subjected to
d. Dowries or gifts made on account of marriage and before the final capital gains tax, is transferred for less than an adequate and full
its celebration or within one year thereafter by residents who are parents to consideration in money or money’s worth, then the amount by which the
each of their legitimate, recognized natural, or adopted children to the fair market value of the property at the time of the execution of the Contract
extent of the first ten thousand pesos (P10,000.00); to Sell or execution of the Deed of Sale which is not preceded by a Contract
e. Gifts made by residents or non-residents to or for the use of to Sell exceeded the value of the agreed or actual consideration or selling
the National Government or any entity created by any of its agencies price shall be deemed a gift, and shall be included in computing the amount
34
of gifts made during the calendar year. (5th par., Sec. 11, Rev. Regs. No. 2- 4. Illustration of effects of exemptions from VAT which
2003) is an indirect tax. A VAT exempt seller sells to a non-VAT exempt
purchaser. The purchaser is subject to VAT because the VAT is merely
VALUE-ADDED TAXES (VAT) 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
WARNING !!! Approximately 10% of the total questions asked in the burden of paying the tax to the purchaser.
Bar Examination are sourced from VAT and its concepts. This area is
probably the most difficult area to forecast because there are no statistically 5. The VAT is a tax on consumption. Meaning of
perceived patterns. The author has retained the “Stars System” for VAT. consumption as used under the VAT system. Consumption is
Considering the limited period of time, the reader is advised to focus on "the use of a thing in a way that thereby exhausts it."
areas marked with stars and just browse the unmarked areas. Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer's release
âââ1. Value-added tax (VAT) is a tax which is imposed from any past or future liability x x x" Unlike goods, services cannot be
only on the increase in the worth, merit or importance of goods, properties physically used in or bound for a specific place when their destination is
or services, and not on the total value of the goods or services being sold determined. Instead, there can only be a "predetermined end of a course"
or rendered. when determining the service "location or position x x x for legal purposes."
[Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc.
âââ2. Nature of VAT. VAT is an indirect tax that may be G. R. No. 164365, June 8, 2007]
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 6. Illustration of the meaning of consumption as used
of the person or entity that is primarily, directly liable for its payment, but in under the VAT system. For example the services rendered by a local
terms of its nature as a tax on consumption. [Commissioner of Internal firm to its foreign client are performed or successfully completed upon its
Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, sending to a foreign client the drafts and bills it has gathered from service
2005 citing various authorities} establishments here. Its services, having been performed in the
VAT is a percentage tax imposed on any person whether or not a Philippines, are therefore also consumed in the Philippines. Such
franchise grantee, who in the course of trade or business, sells, barters, facilitation service has no physical existence, yet takes place upon
exchanges, leases, goods or properties, renders services. It is also levied rendition, and therefore upon consumption, in the Philippines.
on every importation of goods whether or not in the course of trade or [Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc.
business. The tax base of the VAT is limited only to the value added to G. R. No. 164365, June 8, 2007]
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. âââ7. Who are liable for the value-added tax.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
a. Any person who, in the course of his trade or business,
October 6, 2008)
1) Sells, barters, exchanges or leases goods or
properties, or
âââ3. Effect of exemptions from VAT which is an 2) renders services, and
indirect tax. If a special law merely exempts a party as a seller from its b. any person who imports goods xxx
direct liability for payment of the VAT, but does not relieve the same party However, in the case of importation of taxable goods, the importer,
as a purchaser from its indirect burden of the VAT shifted to it by its VAT- whether an individual or corporation and whether or not made in the course
registered suppliers, the purchase transaction is not exempt. of his trade or business, shall be liable to VAT xxx. (Rev. Regs. No. 16-
REASON: The VAT is a tax on consumption, the amount of which 2005,Sec. 4.105-1, paraphrasing supplied)
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)
âââ8. Various VAT methods and systems.
a. Cost deduction method. This is a single-stage tax which is
payable only by the original sellers. (Abakada Guro Party List (etc.) v.
35
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases)
This was subsequently modified and a mixture of “cost deduction method” âââ12. Input tax is the value-added tax due on or paid by a
and “tax credit method” was used to determine the value-added tax VAT-registered person on importation of good or local purchases of goods
payable. (Ibid.) or services, including lease or use of properties, in the course of his trade
b. Tax credit method. This method relies on invoices, an entity or business. (Rev. Regs. No. 4.110-1, 1st par.)
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,
13. Included in the input tax.
February 11, 2005] a. the transitional input tax and
If at the end of a taxable period, the output taxes charged by a seller b. the presumptive input tax xxx.
are equal to the input taxes passed on by the suppliers, no payment is It includes
required. It is when the output taxes exceed the input taxes that the excess c. input taxes which can be directly attributed to transactions
has to be paid. subject to the VAT plus a ratable portion of any input tax which cannot be
If however, the input taxes exceed the output taxes, the excess shall directly attributed to either the taxable or exempt activity. (Rev. Regs. No.
st nd nd
be carried over to the succeeding quarter or quarters. Should the input 4.110-1, 1 par., 2 sentence,. And 2 par., paraphrasing, arrangement
taxes result from zero-rated or effectively zero-rated transactions or from and numbering supplied )
acquisition of capital goods, any excess over the output taxes shall instead 14. Concept of transitional input tax credits on
be refunded to the taxpayer or credited against other internal revenue beginning inventories. Taxpayers who become VAT-registered
taxes. (Ibid.) 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
9. How the VAT is imposed on the increase in worth, exceed P1,500,000.00 (except franchise grantees of radio and television
merit or improvement of the goods or services. The VAT utilizes broadcasting whose threshold is P10,000,000.00) shall be entitled to a
the concept of the output and input taxes. transitional input tax on the inventory on hand as of the effectivity of their
Output VAT less Input VAT = VAT due on the increase in worth, merit VAT registration, on the following:
or improvement f the goods or services. a. goods purchased for resale in their present condition;
b. materials purchased for further processing, but which have
not yet undergone processing;
10. The right to credit the input tax be limited by
c. goods which have been manufactured by the taxpayer;
legislation because it is a mere creation of law. Prior to the d. goods in process for sale; or
enactment of multi-stage sales taxation, the sales taxes paid at every level e. goods and supplies for use in the course of the taxpayer’s
of distribution are not recoverable from the taxes payable. With the advent trade or business as a VAT-registered person. [Rev. Regs. No. 16-2005,
of Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it st
Sec.4.111-1, (a), 1 par., arrangement and numbering supplied]
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 15. Concept of presumptive input tax credits. Persons
output tax was established. This continued with the Expanded VAT Law or firms engaged in the processing of sardines, mackerel, and milk, and in
(R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The manufacturing refined sugar, cooking oil and packed noodle-based instant
right to credit input tax as against the output tax is clearly a privilege created meals, shall be allowed a presumptive input tax, creditable against the
by law, a privilege that also the law can limit. It should be stressed that a output tax, equivalent to four percent (4%) of the gross value in money of
person has no vested right in statutory privileges. (ABAKADA Guro Party List, their purchases of primary agricultural products which are used as inputs
etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and companion cases,
to their production.
on the motion for reconsideration)
As used in this paragraph, the term processing shall mean
pasteurization, canning and activities which through physical or chemical
âââ11. Output tax is the value-added tax due on the sale or process alter the exterior texture or form or inner substance of a product in
lease or taxable goods, properties or services by any VAT-registered such a manner as to prepare it for special use to which it could not have
person.
36
been put in its original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111- Is the sale subject to VAT ?
1, (b)] SUGGESTED ANSWER: No. The term "carrying on business" does
not mean the performance of a single disconnected act, but means
16. The VAT registration fee does NOT violate religious conducting, prosecuting and continuing business by performing
freedom. The VAT registration fee imposed on non-VAT enterprises progressively all the acts normally incident thereof; while "doing business"
which includes among others, religious sects which sells and distributes conveys the idea of business being done, not from time to time, but all the
religious literature is not violative of religious freedom, although a fixed time. "Course of business" is what is usually done in the management of
amount is not imposed for the exercise of a privilege but only for the trade or business. "Course of business" or "doing business" connotes
purpose of defraying part of the cost of registration. regularity of activity. In the instant case, the sale was an isolated
The registration fee is thus more of an administrative fee, one not transaction. The sale
imposed on the exercise of a privilege, much less a constitutional right. which was involuntary and made pursuant to the declared policy of
(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) 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
17. Interpretation of the term “In the Course of Trade or the Revised Charter of the NDC which bears no indication that the NDC
Business” as used in the VAT system. The term "doing business" 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,
or “course of business” conveys the idea of business being done, not from 2006)
time to time, but all the time. It does not include isolated transactions.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No.
146984, July 28, 2006) âââ19. Under the Value Added Tax (VAT), the tax is
imposed on sales, barter, or exchange or goods and services.
âââ18. Pursuant to a government program of The VAT is also imposed on certain transactions “deemed
privatization, NDC, a VAT-registered entity created for the sales” which include:
purpose of selling real property, decided to sell to private a. Transfer, use or consumption not in the course of
enterprise all of its shares in its wholly-owned subsidiary the business or properties originally intended for sale or for use in the course
of business. xxx
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
b. Distribution or transfer to:
DWT Tween-Decker, "Kloeckner" type vessels. The vessels
1) Shareholders or investors as share in the profits of the
were constructed for the NDC between 1981 and 1984, then VAT- registered person; xxx or
initially leased to Luzon Stevedoring Company, also its wholly- 2) Creditors in payment of debt or obligation
owned subsidiary. Subsequently, the vessels were transferred c. Consignment of goods if actual sale is not made within sixty
and leased, on a bareboat basis, to the NMC. The NMC (60) days following the date such goods were consigned. Consigned goods
shares and the vessels were offered for public bidding. Among returned by the consignee within the 60-day period are not deemed sold.
the stipulated terms and conditions for the public auction was d. Retirement from or cessation of business, with respect to
that the winning bidder was to pay "a value added tax of 10% all goods on hand,
on the value of the vessels." Magsaysay Lines, Inc., offered to 1) whether capital goods, stock-in-trade, supplies or
buy the shares and the vessels for P168,000,000.00. The bid materials as of the date of such retirement, or cessation,
2) whether or not the business is continued by the new
was made by Magsaysay Lines, purportedly for a new company
owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7,
still to be formed composed of itself, Baliwag Navigation, Inc., paraphrasing, arrangement and numbering supplied]
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.
37
20. Transactions considered retirement or cessation of sale/transfer/disposition was executed on or after November 1, 2005,
business “deemed sale” subject to VAT. provided, That not later than January 31, 2009 and every three (3) years
a. Change of ownership of the business. There is change in the thereafter, the amounts stated herein shall be adjusted to its present value
ownership of the business where a single proprietorship incorporates; or using the Consumer Price Index, as published by the National Statistics
1) the proprietor of a single proprietorship sells his entire Office (NSO); provided, further, that such adjustment shall be published
business. through revenue regulations to be issued not later than March 31 of each
b. Dissolution of a partnership and creation of a new partnership year.
which takes over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), If two or more adjacent residential lots are sold or disposed in favor
(4) paraphrasing, arrangement and numbering supplied] 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
21. Sale of or lease of real properties subject to VAT. exceed P1,500,000.00. Adjacent residential lots, although covered by
Sale of real properties primarily for sale to customers or held for lease in separate titles and/or separate tax declarations, when sold or disposed of
the ordinary course of trade or business of the seller shall be subject to to one and the same buyer, whether covered by one or separate Deed of
VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.) Conveyance, shall be presumed as a sale of one residential lot. [Rev.
Thus, capital transactions of individuals are not subject to VAT. Only Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied]
real estate dealers are subject to VAT.
24. VAT on services and lease of properties.
22. On September 4, 2009, XYZ, Inc., a domestic a. There shall be levied, assessed, and collected,
corporation engaged in the real estate business, sold a building b. a value-added tax equivalent to twelve percent (12%) of gross
receipts
for P10,000,000.00. Is the sale subject to the value-added tax
c. derived from the sale or exchange of services,
(VAT)? If so, how much? Explain. 1) including the use or lease of properties.[NIRC of
SUGGESTED ANSWER: Yes. 12% on the gross selling price 1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and
because the sale was made in the ordinary course of trade of business of numbering supplied]
X, a domestic corporation engaged in the real estate business.
25. “Sale or exchange of services”, defined. The term
âââ23. The following sales of real properties are “sale or exchange of services” means the performance of all kinds of
exempt from VAT, namely: services in the Philippines for others for a fee, remuneration or
a. Sale of real properties not primarily held for sale to customers consideration, whether in kind or in cash, including those performed or
or held for lease in the ordinary course of trade or business; rendered by the following:
b. Sale of real properties utilized for low-cost housing as a. construction and service contractors;
defined by RA No. 7279, otherwise known as the “Urban and Development b. stock, real estate, commercial, customs and immigration
Housing Act of 1992” and other related laws, such as RA No. 7835 and RA brokers;
No. 8763. c. lessors of property, whether personal or real;
xxx xxx xxx d. persons engaged in warehousing services
c. Sale of real properties utilized for socialized housing as e. lessors or distributors of cinematographic films;
defined under RA No. 7279, and other related laws wherein the price ceiling f. persons engaged in milling, processing, manufacturing or
per unit is P225,000.00 or as may from time to time be determined by the repacking goods for others;
HUDCC and the NEDA and other related laws. g. proprietors, operators or keepers of hotels, motels, rest-
xxx xxx xxx houses, pension houses, inns, resorts; theaters, and movie houses;
d. Sale of residential lot valued at One Million Five Hundred h. proprietors or operators of restaurants, refreshment parlors,
Thousand Pesos (P1,500,000.00) and below, or house & lot and other cafes and other eating places, including clubs and caterers;
residential dwellings valued at Two Million Give Hundred Thousand Pesos i. dealers in securities;
(P2,500,000.00) and below where the instrument of j. lending investors;
38
k. transportation contractors on their transport of goods or g. The lease of motion picture films, film tapes and discs;
cargoes, including persons who transport goods or cargoes for hire and h. The lease or the use of or the right to use radio, television,
other domestic common carriers by land relative to their transport of goods satellite transmission and cable television time. (Rev. Regs. No. 16-2005,
nd
or cargoes; Sec. 4.108-2, 2 par.)
l. common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another âââ27. Zero-rated Sales of Goods or Properties. A
place in the Philippines; zero-rated sale of goods or properties by a sale by a VAT-registered person
m. sales of electricity by generation companies, transmission, is a taxable transaction for VAT purposes but the sale does not result in
and/or distribution companies; any output tax.
n. franchise grantees of electric utilities, telephone and However, the input tax on the purchases of goods, properties or
telegraph, radio and television broadcasting and all other franchise services related to such zero-rated sale shall be available as tax credit or
grantees except franchise grantees of radio and/or television broadcasting refund in accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No.
whose annual gross receipts of the preceding year do not exceed Ten st
16-2005, 1 par.)
Million Pesos (P10,000,000.00), and franchise grantees of gas and water
utilities; âââ28. Concept of VAT zero-rating. The tax rate is set at
o. non-life insurance companies (except their crop insurances), zero. When applied to the tax base, such rate obviously results in no tax
including surety, fidelity, indemnity and bonding companies; and 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
p. similar services regardless of whether or not the performance previously charged by suppliers. [Commissioner of Internal Revenue v.
thereof calls for the exercise or use of the physical or mental faculties. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005]
[NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-
st Under a zero-rating scheme, the sale or exchange of a particular
2005, Sec. 4,108-2, 1 par., arrangement and numbering supplied]
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
26. Also included in the phrase “sale or exchange of
in the cost of purchases attributable to the sale or exchange. The tax paid
services. or withheld is not deducted from the tax base. (Commissioner, of Internal
a. The lease or the use of or the right or privilege to use any Revenue v. American Express International, Inc. (Philippine Branch), G. R. No.
copyright, patent, design or model, plan, secret formula or process, 152609, June 29, 2005 citing various cases)
goodwill, trademark, trade brand or other like property or right;
b. The lease or the use of, or the right to use any industrial, 29. Situs of taxation of zero-rated VAT services such as
commercial or scientific equipment; facilitating the collection of receivables from credit card
c. The supply of scientific, technical, industrial or commercial
members situated in the Philippines and payment to service
knowledge or information;
d. The supply of any assistance that is ancillary and subsidiary
establishments in the Philippines. The place where the service is
rendered determines the jurisdiction to impose the VAT
to and is furnished as a means of enabling the application or enjoyment of
Performed in the Philippines, the service is necessarily subject to its
any such property, or right as is mentioned in subparagraph (2) hereof or
jurisdiction for the State necessarily has to have a “substantial connection”
any such knowledge or information as is mentioned in subparagraph (3)
to it in order to enforce a zero rate. The place of payment is immaterial
hereof; or
much less is the place where the output of the service will be further or
e. The supply of services by a non-resident person or his
ultimately used.
employee in connection with the use of property or rights belonging to, or
This is so because the law neither makes a qualification nor adds a
the installation or operation of any brand, machinery or other apparatus
purchased from such non-resident person; condition in determining the tax situs of a zero-rated service. (Commissioner
of Internal Revenue v. American Express International, Inc. (Philipppine Branch),
f. The supply of technical advice, assistance or services G. R. No. 152609, June 29, 2005)
rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project of scheme;
39
âââ30. Destination principle under the VAT c. Foreign currency denominated sale; and
System. As a general rule, the VAT system uses the destination principle d. Sales to persons or entities deemed tax-exempt under special
as a basis for the jurisdictional reach of the tax. law or international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd
par., paraphrasing supplied)
Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.
This is also known as the “Cross Border Doctrine.” 35. 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
âââ31. Exception to the destination principle.
primarily intended to be enjoyed by the seller, which charges no output
The law clearly provides for an exception to the destination principle; that
VAT but can claim a refund of or a tax credit certificate for the input VAT
is, for a zero percent VAT rate for services that are performed in the
previously charged to it by suppliers. (Commissioner of Internal Revenue v.
Philippines, "paid for in acceptable foreign currency and accounted for in Manila Mining Corporation, G.R. No. 153204, August 31, 2005)
accordance with the rules and regulations of the [BSP]."
36. Sales to ecozone, such as PEZA, considered export-
âââ32. Rationale for zero-rating of exports. The sale. Notably, while an ecozone is geographically within the Philippines,
Philippine VAT system adheres to the Cross Border Doctrine, according to it is deemed a separate customs territory and is regarded in law as foreign
which, no VAT shall be imposed to form part of the cost of goods destined soil. Sales by suppliers from outside the borders of the ecozone to this
for consumption outside of the territorial border of the taxing separate customs territory are deemed as exports and treated as export
authority. [Commissioner of Internal Revenue v. Toshiba Information Equipment sales. These sales are zero-rated or subject to a tax rate of zero percent.
(Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross Border Doctrine” (Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R. No.
149671, July 21, 2006 citing various authorities)
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, 37. “Ecozone”, defined. An ECOZONE or a Special
those destined for use or consumption within the Philippines shall be Economic Zone has been described as – [S]elected areas with highly
imposed the twelve percent (12%) VAT. 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
âââ33. Zero-rated sale distinguished from exempt Presidential Proclamations. An ECOZONE may contain any or all of the
transactions: following: industrial estates (IEs), export processing zones (EPZs), free
a. A zero-rated sale is a taxable transaction but does not result trade zones and tourist/recreational centers. The national territory of the
in an output tax WHILE an exempt transaction is not subject to the output Philippines outside of the proclaimed borders of the ECOZONE shall be
tax. referred to as the Customs Territory. [Commissioner of Internal Revenue v.
b. The input tax on the purchases of a VAT registered person Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
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 âââ38. Zero-rated sale of service, defined. A zero-rated
purchases despite the issuance of a VAT invoice or receipt.
sale of service (by a VAT-registered person) is a taxable transaction for
c. Persons engaged in transactions which are zero rated being
VAT purposes, but shall not result in any output tax. However, the input
subject to VAT are required to register WHILE registration is optional for
tax on purchases of goods, properties or services related to such zero-rated
VAT-exempt persons.
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
âââ34. Zero-rated sales by VAT-registered persons. supplied)
The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate: âââ39. Service performed by American Express in
a. Export sales;
facilitating the collection of receivables from credit card
b. Considered export sales under Executive Order No. 224;
40
members situated in the Philippines and payment to service the operation and maintenance of two power barges appointed
establishments in the Philippines in behalf of its Hong-Kong BWSC-Denmark as its coordination manager. BWSCMI was
based client is subject to VAT but zero-rated. This is so because established as the subcontractor to perform the actual work in
it meets all the requirements for VAT imposition, as follows: the Philippines. The Consortium paid BWSCMI in acceptable
a. It regularly renders in the Philippines the service of facilitating foreign exchange and accounted for in accordance with the
the collection and payment of receivables belonging to a foreign company rules and regulations of the BSP.
that is a clearly separate and distinct entity. Through a February 14, 1995 ruling the BIR declared that
b. Such service is commercial in nature; carried on over a
BWSCMI may choose to register as a VAT persons subject to
sustained period of time; on a significant scale with a reasonable degree of
frequency; and not at random, fortuitous, or attenuated. VAT at zero rate. For 1996, it filed the proper VAT returns
c. For this service, it definitely receives consideration in foreign showing zero rating. On December 29, 1997, believing that it is
currency that is accounted for in conformity with law. covered by Rev. Regs. 5-96, dated February 20, 1996, BWSCMI
d. It is not an entity exempt under any of our laws or international paid 10% output VAT for the period April-December 1996,
agreements. (Commissioner, of Internal Revenue v. American Express through the Voluntary Assessment Program (VAP).
International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005) On January 7, 1999, BWSCMI was able to obtain a Ruling
from the BIR reconfirming that it is subject to VAT at zero-
40. While the service performed by American Express is rating. On this basis, BWSCMI applied for a refund of the output
subject to VAT it is zero-rated, and BIR Revenue Regulations VAT it paid.
that alter the legal requirements for zero-rating are ultra vires a. Is BWSCMI subject to the 10% VAT or is it zero rated
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 SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is
consumed, subject to the 10% VAT. It is rendering service for the Consortium which
However, the law itself provides for clear exceptions under which the is not doing business in the Philippines. Zero-rating finds application only
supply of services shall be zero-rated, among which are the following: where the recipient of the services are other persons doing business
a. The service is performed in the Philippines; outside of the Philippines. BWSCMI provides services to the Consortium
b. The services are within the categories provided for under the which by virtue of its contract with NAPOCOR is doing business within the
Tax Code; and Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain
c. It is paid for in acceptable foreign currency of the Bangko Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22,
Sentral ng Pilipinas. 2007)
American Express renders assistance to its foreign clients by b. Could it obtain a refund of the VAT it paid through
receiving the bills of service establishments located in the country and
the VAP ? Explain.
forwarding them to their clients abroad. The services are performed or
SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the
successfully completed upon send to its foreign clients the drafts and bills
10% output VAT it paid the based on the non-retroactivity of the prejudicial
it has gathered from service establishments here, Its services, having been
revocation of the BIR Rulings which held that it’s services are subject to
performed in the Philippines are therefore also consumed in the
0% VAT and which BWSCMI invoked in applying for refund of the output
Philippines. Thus, its services are exempt from the destination principle
VAT. (Commissioner of Internal Revenue v. Burmeister and Wain
and are zero-rated.
Scandinavian Contractor Mindanao, Inc., supra)
The BIR could not change the law. [Commissioner, of Internal Revenue
v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June NOTES AND COMMENTS:
29, 2005] a. Do not confuse the BWSCMI case with the American
Express case. American Express International, Inc. (Philippine Branch)]
âââ41. A foreign Consortium composed of BWSC- is a VAT-registered person that facilitates the collection and payment of
Denmark, Mitsui Engineering and Shipbuilding Ltd., and Mitsui receivables belonging to its non-resident foreign client [American
Express International, Inc. (Hongkong Branch)], for which it gets paid in
and Co., Ltd., which entered into a contract with NAPOCOR for
41
acceptable foreign currency inwardly remitted and accounted for in Marine food products shall include fish and crustaceans, such as,
accordance with BSP rules and regulations. (Commissioner of Internal but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels
Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., and clams.
G. R. No. 153205, January 22, 2007) Meat, fruit, fish, vegetables and other agricultural and marine food
âââ42. What are VAT-Exempt transactions ? SUGGESTED Products classified under this paragraph shall be considered in their
ANSWER: The sale of goods or properties and/or services and the use original state even if they have undergone the simple processes of
or lease of properties that is preparation or preservation for the market, such as freezing, drying, salting,
b. not subject to VAT (output tax) and broiling, roasting, smoking or stripping, including those using advanced
c. the seller is not allowed any tax credit on VAT (input tax) technological means of packaging, such as shrink wrapping in plastics,
purchases. vacuum packing, tetra-pack, and other similar packaging methods.
The person making the exempt sale of goods, properties or services Polished and/or husked rice, corn grits, raw cane sugar and molasses,
shall not bill any output tax to his customers because the said transaction ordinary salt, and copra shall be considered in their original state.
is not subject to VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement Sugar whose content of sucrose by weight, in the dry state, has a
and numbering supplied] polarimeter reading of 99.5o and above are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for
âââ43. VAT-exempt transactions distinguished from internal revenue purposes, to be refined sugar:
VAT-exempt entities. (1) product of a refining process,
(2) products of a sugar refinery, or
a. An exempt transaction, on the one hand, involves goods or
(3) product of a production line of a sugar mill accredited by
services which, by their nature, are specifically listed in and expressly
the BIR to be producing sugar with polarimeter reading of 99.5o and above,
exempted from the VAT under the Tax Code, without regard to the tax
and for which the quedanissued therefor, and verified by the Sugar
status – VAT-exempt or not – of the party to the transaction.
Regulatory Administration, identifies the same to be of a polarimeter
An exempt party, on the other hand, is a person or entity granted
reading of 99.5o and above.
VAT exemption under the Tax Code, a special law or an international
Bagasse is not included in the exemption provided for under this
agreement to which the Philippines is a signatory, and by virtue of which its
section.
taxable transactions become exempt from VAT. [Commissioner of Internal
(B) Sale or importation of fertilizers; seeds, seedlings and
Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. 150154, August
9, 2005] fingerlings; fish, prawn, livestock and poultry feeds, including ingredients,
b. An exempt transaction shall not be the subject of any billing whether locally produced or imported, used in the manufacture of finished
for output VAT but it shall not also be allowed any input tax credits WHILE feeds (except specialty feeds for race horses, fighting cocks, aquarium fish,
an exempt party being zero-rated is allowed to claim input tax credits. zoo animals and other animals generally considered as pets);
“Specialty feeds” refers to non-agricultural feeds or food for race
44. Transactions are exempt from VAT. (Subject to the horses, fighting cocks, aquarium fish, zoo animals and other animals
election by a VAT-registered person not to be subject to the value-added generally considered as pets.
tax), the following shall be exempt from VAT: (C) Importation of personal and household effects belonging to
(A) Sale or importation of agricultural and marine food products in the residents of the Philippines returning from abroad and nonresident
their original state, livestock and poultry of a kind generally used as, or citizens coming to resettle in the Philippines: Provided, That such goods
yielding or producing foods for human consumption; and breeding stock are exempt from customs duties under the Tariff and Customs Code of the
and genetic materials therefor. Philippines;
Livestock shall include cows, bulls and calves, pigs, sheep, goats (D) Importation of professional instruments and implements,
and rabbits. Poultry shall include fowls, ducks, geese and turkey, wearing apparel, domestic animals, and personal household effects
Livestock or poultry does not include fighting cocks, race horses, zoo (except any vehicle, vessel, aircraft, machinery, other goods for use in the
animals and other animals generally considered as pets. 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
42
arriving within ninety (90) days before or after their arrival, upon the “Agricultural contract growers” refers to those persons producing for
production of evidence satisfactory to the Commissioner of Internal others poultry, livestock or other agricultural and marine food products in
Revenue, that such persons are actually coming to settle in the Philippines their original state.
and that the change of residence is bona fide; (G) Medical, dental, hospital and veterinary services except those
(E) Services subject to percentage tax under Title V of the Tax Code, rendered by professionals;
as enumerated below: Laboratory services are exempted. If the hospital or clinic operates
(1) Sale or lease of goods or properties or the performance a pharmacy or drug store, the sale of drugs and medicine is subject to VAT.
of services of non-VAT-registered persons, other than the (H) Educational services rendered by private educational
transactions mentioned in paragraphs (A) to (U) of Sec. 109 (1) of institutions, duly accredited by the Department of Education (DEPED), the
the Tax Code, the annual sales and/or receipts of which does not Commission on Higher Education (CHED), the Technical Education And
exceed the amount of One Million Five Hundred thousand Pesos Skills Development Authority (TESDA) and those rendered by government
(P1,500,000.00), Provided, That not later than January 31, 2009 educational institutions;
and every three (3) years thereafter, the amount herein stated shall “Educational services” shall refer to academic, technical or
be adjusted to its present value using the Consumer Price Index, vocational education provided by private educational institutions duly
as published by the National Statistics Office (NSO). (Sec. 116, accredited by the DepED, the CHED and TESDA and those rendered by
Tax Code) government educational institutions and it does not include seminars, in-
(2) Services rendered by domestic common carriers by service training, review classes and other similar services rendered by
land for the transport of passengers and keepers of garages. (Sec. persons who are not accredited by the DepED, the CHED and/or the
117) TESDA.
(3) Services rendered by international air/shipping carriers. (I) Services rendered by individuals pursuant to an employer-
(Sec. 118) employee relationship;
(4) Service rendered by franchise grantees of radio and/or (J) Services rendered by regional or area headquarters
television broadcasting whose annual gross receipts of the established in the Philippines by multinational corporations which act as
preceding year do not exceed Ten Million Pesos (P10,000,000.00) supervisory, communications and coordinating centers for their affiliates,
and by franchises of gas and water utilities. (Sec. 119) subsidiaries or branches in the Asia-Pacific Region and do not earn or
(5) Service rendered for overseas dispatch message or derive income from the Philippines;
conversation originating from the Philippines. (Sc. 120) (K) Transactions which are exempt under international
(6) Services rendered by any person, company or agreements to which the Philippines is a signatory or under special laws,
corporation (except purely cooperative companies or associations except those under Presidential Decree No. 529 – Petroleum Exploration
) doing life insurance business of any sort in the Philippines. (Sec. Concessionaires under the Petroleum Act of 1949; and;
123) (L) Sales by agricultural cooperatives duly registered with the
(7) Services rendered by fire, marine or miscellaneous Cooperative Development Authority (CDA) to their members as well as
insurance agents of foreign insurance companies. (Sec. 124) sale of their produce, whether in its original state or processed form, to non-
(8) Services of proprietors, lessees or operators of members; their importation of direct farm inputs, machineries and
cockpits, cabarets, night or day clubs, boxing exhibitions equipment, including spare parts thereof, to be used directly and
professional basketball games, jai-Alai and race tracks. (Sec. exclusively in the production and/or processing of their produce;
125). and (M) Gross receipts from lending activities by credit or multi-
(9) Receipts on sale, barter or exchange of shares of stock purpose cooperatives duly registered and in good standing with the
listed and traded through the local stock exchange or through initial Cooperative Development Authority;
public offering. (Sec. 127) (N) Sales by non-agricultural, non-electric and non-credit
(F) Services by agricultural contract growers and milling for cooperatives duly registered with the Cooperative Development Authority:
others of palay into rice, corn into grits and sugar cane into raw sugar; 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;
43
Importation by non-agricultural, non-electric and non-credit provided, further, that if any portion of such fuel, goods or supplies is used
cooperatives of machineries and equipment, including spare parts thereof, for purposes other than that mentioned in this paragraph, such portion of
to be used by them are subject to VAT. fuel, goods and supplies shall be subject to 10% VAT (now 12%);
(O) Export sales by persons who are not VAT-registered; (U) Services of banks, non-bank financial intermediaries performing
(P) Sale of real properties not primarily held for sale to customers quasi-banking functions, and other non-bank financial intermediaries; and
or held for lease in the ordinary course of trade or business, or real property âââ (V) Sale or lease of goods or properties or the performance
utilized for low-cost and socialized housing as defined by Republic Act No. of services other than the transactions mentioned in the preceding
7279, otherwise known as the Urban Development and Housing Act of paragraphs, the gross annual sales and/or receipts do not exceed the
1992, and other related laws, such as RA No. 7835 and RA No. 8765, amount of One million five hundred thousand pesos (P1,500,000):
residential lot valued at One million five hundred thousand pesos (P Provided, That not later than January 31, 2009 and every three (3) years
1,500,000) and below, house and lot, and other residential dwellings valued thereafter, the amount herein stated shall be adjusted to its present value
at Two million five hundred thousand pesos (P 2,500,000) and below: using the Consumer Price Index as published by the National Statistics
Provided, That not later than January 31, 2009 and every three (3) years Office (NSO).
thereafter, the amounts herein stated shall be adjusted to their present For purposes of the threshold of P1,500,000.00, the husband and
values using the Consumer Price Index, as published by the National wife shall be cnsidered separate taxpayers. However, the aggregation rule
Statistics Office (NSO); for each taxpayer shall apply. For instance, if a profesional, aside from the
(Q) Lease of a residential unit with a monthly rental not exceeding practice ofhis profession, also derives revenue from other lines of business
Ten thousand pesos (P 10,000) Provided, That not later than January 31, which are otherwise subject to VAT, the same shall be combined for
2009 and every three (3) years thereafter, the amount herein stated shall purposes of determining whether the threshold has been exceeded. Thus,
be adjusted to its present value using the Consumer Price Index as the VAT-exempt sales shall to be icluded in determining the threshold.
published by the National Statistics Office (NSO); [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from
(R) Sale, importation, printing or publication of books and any Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied]
newspaper, magazine, review or bulletin which appears at regular intervals
with fixed prices for subscription and sale and which is not devoted âââ45. Tax to be paid by persons exempt from VAT.
principally to the publication of paid advertisements;
a. Any person, whose sales or receipts are exempt under Sec.
(S) Sale, importation or lease of passenger or cargo vessels and
109 (1) (V) of the Tax Code,
aircraft, including engine, equipment and spare parts thereof for domestic
(V) Sale or lease of goods or properties or the performance of
or international transport operations; Provided, that the exemption from
services other than the transactions mentioned in the preceding
VAT on the importation and local purchase of passenger and/or cargo
paragraphs, the gross annual sales and/or receipts do not exceed
vessels shall be limited to those of one hundred fifty (150) tons and above,
the amount of One million five hundred thousand pesos
including engine and spare parts of said vessels; Provided, further, that the
(P1,500,000): Provided, That not later than January 31, 2009 and
vessels be imported shall comply with the age limit requirement, at the time
every three (3) years thereafter, the amount herein stated shall be
of acquisition counted from the date of the vessel’s original commissioning,
adjusted to its present value using the Consumer Price Index as
as follows: (i) for passenger and/or cargo vessels, the age limit is fifteen
published by the National Statistics Office (NSO), from the
years (15) years old, (ii) for tankers, the age limit is ten (10) years old, and
payment of VAT and
(iii) For high-speed passenger cars, the age limit is five (5) years old,
b. who is not a VAT-registered person
Provided, finally, that exemption shall be subject to the provisions of section
c. shall pay a tax equivalent to three percent (3%) of his gross
4 of Republic Act No. 9295, otherwise known as “The Domestic Shipping
monthly sales or receipts;
Development Act of 2004.”
Provided, that cooperatives shall be exempt from the three (3%)
(T) Importation of fuel, goods and supplies by persons engaged
gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1,
in international shipping or air transport operations; Provided, that the said
arrangement, numbering and words in italics supplied)
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;
RETURNS AND WITHHOLDING
44
1. Income tax returns being public documents, until profession within the Philippines shall file an income tax return regardless of
controverted by competent evidence, are competent evidence, are prima the amount of gross income [Sec. 51 (A) (2), NIRC of 1997]
facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et al., b. An individual with respect to pure compensation income,
296 SCRA 309, 317) derived from such sources within the Philippines, the income tax on which
has been correctly withheld: Provided, That an individual deriving
2. Individuals required to file an income tax return. compensation concurrently from two or more employers at any time during
a. Every Filipino citizen residing in the Philippines; the taxable year shall file an income tax return [Sec. 51 (A) (2), NIRC of 1997,
b. Every Filipino citizen residing outside the Philippines on his as amended by Rep. Act No. 9504, paraphrasing supplied]
income from sources within the Philippines; c. An individual whose sole income has been subject to final
c. Every alien residing in the Philippines on income derived from withholding tax;
sources within the Philippines; and d. A minimum wage earner (is a worker in the private sector paid
d. Every nonresident alien engaged in trade or business or in the the statutory minimum wage, or is an employee in the public sector with
exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC of 1997] compensation income of not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned), an individual who is
3. Married individuals who are earning purely exempt from income tax pursuant to the provisions of the Tax Code and
compensation income allowed to file separate returns. other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec.
22 (HH), both as amended by Rep. Act. 9504]
4. Married individuals, whether citizens, resident or
7. Minimum wage earners are exempt from income
non-resident aliens, who do not derive income purely from
taxation. That minimum wage earners (is a worker in the private sector
compensation shall file a consolidated return for the taxable year paid the statutory minimum wage, or is an employee in the public sector
to include the income of both spouses, but where it is impracticable with compensation income of not more than the statutory minimum wage
for the spouses to file one return, each spouse may file a separate return of in the non-agricultural sector where he/she is assigned) shall be exempt
income but the returns so filed shall be consolidated by the Bureau for from the payment of income tax on their taxable income: Provided, further,
purposes of verification.” [Section 51 (D) of the NIRC of 1997] That the holiday pay, overtime pay, night shift differential pay and hazard
pay received by such minimum wage earners shall likewise be exempt from
5. Computation of income tax for married individuals income tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as
whether citizens, resident or non-resident aliens, who do not amended by Rep. Act. 9504]
derive income purely from compensation required file a
consolidated return for the taxable year but could not do so. For 8. An individual who is not required to file an income
married individuals, the husband and wife, subject to no. 2, supra,, shall tax return may nevertheless be required to file an information
compute separately their individual income tax based on their respective return. [Sec. 51 (A) (3), NIRC of 1997]
total taxable income: Provided, that if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by either 9. A corporation files its income tax return and pays its
of the spouses, the same shall be divided equally between the spouses for income tax four (4) times during a single taxable year. Quarterly
the purpose of determining their respective taxable income. [2nd to the last returns are required to be filed for the first three quarters, then a final
par., Sec. 24 (A) (2), NIRC of 1997 as amended by Rep. Act No. 9504] adjustment return is filed covering the total taxable income for the whole
taxable year, be it calendar or fiscal.
6. Individuals who are not required to file an income tax
return. 10. An individual earning from the practice of his
a. An individual whose gross income does not exceed his total profession or who engages in trade or business files his income
personal and additional exemptions for dependents, Provided, That a citizen
tax return and pays his income tax four (4) times during a single
of the Philippines and any alien individual engaged in business or practice of
taxable year. Quarterly returns are required to be filed for the first three
45
quarters, then an annual income tax return is filed covering the total taxable 17. Under the creditable withholding tax system, taxes
income for the whole of the previous calendar year. withheld on certain income payments are intended to equal or at
least approximate the tax due from the payee on the said
11. The purpose of the above four (4) times a year income. The income recipient is still required to file an income tax return
requirement is to make available sufficient funds to meet the and/or pay the difference between the tax withheld and the tax due on the
budgetary requirements, on a quarterly basis thereby increasing income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
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 18. The two kinds of creditable withholding taxes are (a)
to raise large sums of money in order to pay the tax. taxes withheld on income payments covered by the expanded withholding
tax; and (b) taxes withheld on compensation income.
12. An individual earning purely compensation income
files only one annual income tax return covering the total taxable 19. Payments to the following are exempt from the
compensation income for the whole of the previous calendar year. requirement of withholding or when no withholding taxes
required:
13. Under the withholding tax system, taxes imposed or a. National Government and its instrumentalities including
prescribed by the NIRC of 1997 are to be deducted and withheld provincial, city, or municipal governments;
by the payors from payments made to payees for the former to b. Persons enjoying exemption from payment of income taxes
pay directly to the Bureau of Internal Revenue. It is also known as pursuant to the provisions of any law, general or special, such as but not
collection of the tax at source. limited to the following:
1) Sales of real property by a corporation which is registered
14. A withholding agent is explicitly made personally with and certified by the HLURB or HUDCC as engaged in socialized
liable under the Tax Code for the payment of the tax required to housing project where the selling price of the house and lot or only the
be withheld, in order to compel the withholding agent to withhold the tax lot does not exceed P180,000.00 in Metro Manila and other highly
under any and all circumstances. In effect, the responsibility for the collection urbanized areas and P150,000.00 in other areas or such adjusted
of the tax as well as the payment thereof is concentrated upon the person amount of selling price for socialized housing as may later be
over whom the Government has jurisdiction. (Filipinas Synthetic Fiber
determined and adopted by the HLURB;
Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 2) Corporations registered with the Board of Investments and
1999) The system facilitates tax collection and reduces tax evasion. enjoying exemptions from income under the Omnibus Investment
Code of 1997;
15. The two (2) types of withholding at source are the 1) 3) Corporations exempt from income tax under Sec. 30, of
the Tax Code, like the SSS, GSIS, the PCSO, etc. However, income
final withholding tax; and 2) creditable withholding tax.
payments arising from any activity which is conducted for profit or
income derived from real or personal property shall be subject to a
16. Under the final withholding tax system the amount of withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
income tax withheld by the withholding agent is constituted as a
full and final payment of the income due from the payee on the 20. For tax amnesty purposes, the withholding agent is
said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98] not a taxpayer. He is made to pay the tax where he fails to withhold as a
The liability for payment of the tax rests primarily on the payor or the penalty and not because the tax is due from him. (Commissioner of Internal
withholding agent.. Thus, in case of his failure to withhold the tax or in case Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor
of under withholding, the deficiency tax shall be collected from the payor case)
withholding agent. The payee is not required to file an income tax return for
the particular income. PENALTIES, INTERESTS AND SURCHARGES
46
1. Surtaxes or surcharges, also known as the civil penalties, are 7. Compromise penalty is the amount agreed upon between
the amounts imposed in addition to the tax required. the taxpayer and the Government to be paid as a penalty in cases of a
They are in the nature of penalties and shall be collected at the same compromise.
time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of
1997] 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
2. What are the two (2) kinds of civil penalties ? on time. Imposed surcharges and interests for such delay, the
SUGGESTED ANSWER: taxpayer not invokes good faith with the BIR countering by
a. the 25% surcharge for late filing or late payment [Sec. 248 (A), saying that good faith is not a valid defense for violation of a
NIRC of 1997] (also known as the delinquency surcharge), and
special law. Furthermore, the BIR further raises the defense that
b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.]
the government is not bound by the errors of its agents. Who is
3. Define deficiency income tax. correct ?
SUGGESTED ANSWER: Deficiency income tax is the amount by SUGGESTED ANSWER: The taxpayer is correct. The settled rule is
which the tax imposed under the NIRC of 1997 exceeds the amount shown that good faith and honest belief that one is not subject to tax on the basis of
as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of previous interpretation of government agencies tasked to implement the tax,
1997] 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)
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 REPUBLIC ACT NO. 1125, CREATING THE
payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997] COURT OF TAX APPEALS INCLUDING
JURISDICTION OF THE CTA, AS AMENDED
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
COURT OF TAX APPEALS, IN GENERAL
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 â 1. Discuss the role of the judiciary in taxation.
the notice and demand by the Commissioner of Internal Revenue. [Sec.249 SUGGESTED ANSWER: The role of the judiciary is to be the
(c), NIRC of 1997] sympathetic or vigilant court which would check injustices or abuses of the
legislative and administrative agents of the State in their exercise of the
6. After resolving the issues the BIR Commissioner power of taxation.
reduced the assessment. Was it proper to impose delinquency â 2. What is the nature and composition of the Court of
interest despite the reduction of the assessment ? Why ? Tax Appeals ?
SUGGESTED ANSWER: Yes. The intention of the law is to SUGGESTED ANSWER: The Court of Tax Appeals is the special tax
discourage delay in the payment of taxes due to the State and in this sense court created under Republic Act No. 1125, as amended, and is composed
the surcharge and interest charged are not penal but compensatory in nature of a Presiding Justice and eight (8) Associate Justices, organized into three
– they are compensation to the State for the delay in payment, or for the (3) divisions.
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. â 3. What are the purposes for the creation of the Court
Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)
of Tax Appeals ?
SUGGESTED ANSWER:
47
a. To prevent delay in the disposition of tax cases by the then Agriculture in the case of agricultural product, commodity or article, involving
Courts of First Instance (now RTCs), in view of the backlog of civil, criminal, dumping and countervailing duties under Section 301 and 302, respectively,
and cadastral cases accumulating in the dockets of such courts; and of the Tariff and Customs Code, and safeguard measures under Republic
b. To have a body with special knowledge which ordinary Judges Act No. 8800, where either party may appeal the decision to impose or not
of the then Courts of First Instance (now RTCs), are not likely to possess, to impose said duties. (DIVISION)
thus providing for an adequate remedy for a speedy determination of tax b. Jurisdiction over cases involving criminal offenses as
cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209) herein provided:
1. Exclusive original jurisdiction over all criminal cases
âââ 4. Jurisdiction of the Court of Tax Appeals. arising from violations of the National Internal Revenue Code or Tariff and
“a. Exclusive appellate jurisdiction to review by appeal, as Customs Code and other laws administered by the Bureau of Internal
herein provided: Revenue or the Bureau of Customs: Provided, however, That offenses or
1. Decisions of the Commissioner of Internal Revenue in cases felonies mentioned in this paragraph where the principal amount of taxes and
involving disputed assessments, refunds of internal revenue taxes, fees or fees, exclusive of charges and penalties claimed, is less than One million
other charges, penalties, in relation thereto, or other matters arising under pesos (P1,000,000.00) or where there is no specified amount claimed shall
the National Internal Revenue Code or other laws administered by the be tried by the regular Courts and the jurisdiction of the CTA shall be
Bureau of Internal Revenue’; (DIVISION) appellate. Any provision of law or the Rules of Court to the contrary
2. Inaction by the Commissioner of Internal Revenue in cases notwithstanding, the criminal action and the corresponding civil action for the
involving disputed assessments, refunds or internal revenue taxes, fees or recovery of civil liability for taxes and penalties shall at all times be
other charges, penalties in relation thereto, or other matter arising under the simultaneously instituted with, and jointly determined in the same proceeding
National Internal Revenue Code or other laws administered by the Bureau of by the CTA, the filing of the criminal action being deemed to necessarily carry
Internal Revenue, where the National Internal Revenue Code provides a with it the filing of the civil action, and no right to reserve the filing of such civil
specific period of action, in which case the inaction shall be deemed a denial; action separately from the civil action will be recognized.
(The inaction on refunds in two years from the time tax was paid. Thus, if 2. Exclusive appellate jurisdiction in criminal offenses:
the prescriptive period of two years is about to expire, the taxpayer should a) Over appeals from the judgments, resolutions or orders
interpose a petition for review with the CTA – DIVISION) of the Regional Trial Courts in tax cases originally decided by them, in
3. Decisions, orders or resolutions of the Regional Trial Courts in their respective territorial jurisdiction.
local tax cases originally decided or resolved by them in the exercise of their b) Over petitions for review of the judgments, resolutions
original or appellate jurisdiction; (If original DIVISION; if appellate EN BANC) or orders of the Regional Trial Courts in the exercise of their appellate
4. Decisions of the Commissioner of Customs in cases involving jurisdiction over tax cases originally decided by the Metropolitan Trial
liability for customs duties, fees or other money charges, seizure, detention Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in
or release of property affected, fines, forfeitures or other penalties in relation their respective jurisdiction.
thereto, or other matters arising under the Customs Law or other laws c. Jurisdiction over tax collection cases:
administered by the Bureau of Customs; (DIVISION) 1. Exclusive original jurisdiction in tax collection cases involving
5. Decisions of the Central Board of Assessment Appeals in the final and executory assessments for taxes, fees, charges and penalties:
exercise of its appellate jurisdiction over cases involving the assessment and Provided, however, That collection cases where the principal amount of
taxation of real property originally decided by the provincial or city board of taxes and fees, exclusive of charges and penalties, claimed is less than One
assessment appeals; (EN BANC) million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court,
6. Decisions of the Secretary of Finance on customs cases Metropolitan Trial Court and Regional Trial Court.
elevated to him automatically for review from decisions of the Commissioner 2. Exclusive appellate jurisdiction in tax collection cases:
of Customs which are adverse to the Government under Section 2315 of the a) Over appeals from judgments, resolutions, or orders of
Tariff and Customs Code; (This has reference to forfeiture cases where the the Regional Trial Courts in tax collection cases originally decided by
decision is to release the seized articles – DIVISION) them, in their respective territorial jurisdiction.
7. Decisions of the Secretary of Trade and Industry, in case of b) Over petitions for review of the judgments, resolutions
nonagricultural product, commodity or article, and the Secretary of or orders of the Regional Trial Courts in the exercise of their appellate
48
jurisdiction over tax collection cases originally decided by the the provisions of laws administered by the Commission. Issuance of revenue
Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit regulations are authorized under the NIRC.
Trial Courts, in their respective jurisdiction.” (Sec. 7, R. A. No. 1125, as British American Tobacco reversed Asia International Auctioneers
amended by R. A. No. 9282, emphasis and words in parentheses supplied) upon the concept of the judiciary’s “expanded power.”
The petition for review to be filed with the CTA en banc as
the mode for appealing a decision, resolution, or order of the 6. Instances where the Court of Tax Appeals would
CTA Division, under Section 18 of Republic Act No. 1125, as have jurisdiction even if there is no decision of the
amended, is not a totally new remedy, unique to the CTA, with Commissioner of Customs:
a special application or use therein. To the contrary, the CTA merely a. Decisions of the Secretary of Trade and Industry or the
adopts the procedure for petitions for review and appeals long established Secretary of Agriculture in anti-dumping and countervailing duty cases are
and practiced in other Philippine courts. Accordingly, doctrines, principles, appealable to the Court of Tax Appeals within thirty (30) days from receipt of
rules, and precedents laid down in jurisprudence by this Court as regards such decisions.
petitions for review and appeals in courts of general jurisdiction should b. In case of automatic review by the Secretary of Finance in seizure
likewise bind the CTA, and it cannot depart therefrom. (Santos v. People, et or forfeiture cases where the value of the importation exceeds P5 million or
al, G. R. No. 173176, August 26, 2008) where the decision of the Collector of Customs which fully or partially
releases the shipment seized is affirmed by the Commissioner of Customs.
ââ 5. It is the Regional Trial Court that has c. In case of automatic review by the Secretary of Finance of a
jurisdiction to rule upon the constitutionality of a tax law or a decision of a Collector of Customs acting favorably upon a customs protest.
regulation issued by the taxing authorities. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation ASSESSMENT OF INTERNAL REVENUE TAXES
issued by the administrative agency in the performance of its quasi-
legislative function, the regular courts have jurisdiction to pass upon the ââ 1. Outline of tax remedies of a taxpayer and the
same. The determination of whether a specific rule or set of rules issued government relative to ASSESSMENT of internal revenue taxes.
by an administrative agency contravenes the law or the constitution is a. The taxpayer files his tax return.
within the jurisdiction of the regular courts. b. A Letter of Authority is issued authorizing BIR examiner to audit
Indeed, the Constitution vests the power of judicial review or the or examine the tax return and determines whether the full and complete taxes
power to declare a law, treaty, international or executive agreement, have been paid.
presidential decree, order, instruction, ordinance, or regulation in the c. If the examiner is satisfied that the tax return is truly reflective
courts, including the regional trial courts. This is within the scope of judicial of the taxable transaction and all taxes have been paid, the process ends.
power, which includes the authority of the courts to determine in an However, if the examiner is not satisfied that the tax return is truly reflective
appropriate action the validity of the acts of the political departments. of the taxable transaction and that the taxes have not been fully paid, a Notice
Judicial power includes the duty of the courts of justice to settle actual of Informal Conference is issued inviting the taxpayer to explain why he
controversies involving rights which are legally demandable and should not be subject to additional taxes.
enforceable, and to determine whether or not there has been a grave abuse d. If the taxpayer attends the informal conference and the
of discretion amounting to lack or excess of jurisdiction on the part of any examiner is satisfied with the explanation of the taxpayer, the process is
branch or instrumentality of the Government. (British American Tobacco v. again ended.
Camacho et al., G. R. No. 163583, August 20, 2008 with an intervenor) If the taxpayer ignores the invitation to the informal conference, or if
NOTES AND COMMENTS: The above doctrine supersedes Asia the examiner is not satisfied with taxpayer’s explanation,, and he believes
International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. that proper taxes should be assessed, the Commissioner of Internal
No. 103445, December 18, 2007 which ruled that it is the Court of Tax Revenue or his duly authorized representative shall then notify the taxpayer
Appeals that has jurisdiction relative to matters involving the constitutionality of the findings in the form of a pre-assessment notice. The pre-assessment
of regulations issued by the BIR. The reason was that this falls under the notice requires the taxpayer to explain within fifteen (15) days from receipt
concept of decisions of the BIR Commissioner on “other matter” arising under why no notice of assessment and letter of demand for additional taxes should
be directed to him.
49
e. If the Commissioner is satisfied with the explanation of the If the taxpayer fails to so appeal, the denial of the Commissioner or
taxpayer, then the process is again ended. the inaction of the Commissioner would result to the notice of assessment
If the taxpayer ignores the pre-assessment notice by not responding becoming final and collectible and the BIR could then utilize its administrative
or his explanations are not accepted by the Commissioner, then a notice of and judicial remedies to collect the tax.
assessment and a letter of demand is issued. i. A decision of a division of the Court of Tax Appeals adverse to
The notice of assessment must be issued by the Commissioner to the taxpayer or the government may be the subject of a motion for
the taxpayer within a period of three (3) years from the time the tax return reconsideration or new trial, a denial of which is appealable to the Court of
was filed or should have been filed whichever is the later of the two events. Tax Appeals en banc by means of a petition for review.
Where the taxpayer did not file a tax return or where the tax return filed is The Court of Tax Appeals, has a period of twelve (12) months from
false or fraudulent, then the Commissioner has a period of ten (10) years submission of the case for decision within which to decide.
from discovery of the failure to file a tax return or from discovery of the fraud j. If the decision of the Court of Tax Appeals en banc affirms the
within which to issue an assessment notice. The running of the above denial of the protest by the Commissioner or the assessment in case of
prescriptive periods may however be suspended under certain instances. failure by the Commissioner to decide the taxpayer must file a petition for
The notice of assessment must be issued within the prescriptive review on certiorari with the Supreme Court within fifteen (15) days from
period and must contain the facts, law and jurisprudence relied upon by the notice of the judgment on questions of law. An extension of thirty (30) days
Commissioner. Otherwise it would not be valid. may for justifiable reasons be granted. If the taxpayer does not so appeal,
f. The taxpayer should then file an administrative protest by filing the decision of the Court of Tax Appeals would become final and this has the
a request for reconsideration or reinvestigation within thirty (30) days from effect of making the assessment also final and collectible. The BIR could
receipt of the assessment notice. then use its administrative and judicial remedies to collect the tax.
The taxpayer could not immediately interpose an appeal to the Court
of Tax Appeals because there is no decision yet of the Commissioner that 2. The word assessment when used in connection with
could be the subject of a review. taxation, may have more than one meaning. More commonly the
To be valid the administrative protest must be filed within the word “assessment” means the official valuation of a taxpayer’s property for
prescriptive period, must show the error of the Bureau of Internal Revenue purpose of taxation. The above definition of assessment finds application
and the correct computations supported by a statement of facts, and the law under tariff and customs taxation as well as local government taxation.
and jurisprudence relied upon by the taxpayer. There is no need to pay under For real property taxation, there may be a special meaning to the
protest. If the protest was not seasonably filed the assessment becomes burdens that are imposed upon real properties that have been
final and collectible and the Bureau of Internal Revenue could use its benefited by a public works expenditure of a local government. It is
administrative and judicial remedies in collecting the tax. sometimes called a special assessment or a special levy. (Commissioner of
g. Within sixty (60) days from filing of the protest, all relevant Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No.
supporting documents shall be submitted, otherwise the assessment shall 128315, June 29, 1999)
become final and collectible and the BIR could use its administrative and For internal revenue taxation assessment as laying a tax. The
judicial remedies to collect the tax. ultimate purpose of an assessment to such a connection is to ascertain the
Once an assessment has become final and collectible, not even the amount that each taxpayer is to pay. (Ibid.)
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 3. An assessment is a notice duly sent to the taxpayer
Court of Tax Appeals. which is deemed made only when the BIR releases, mails or
h. If the protest is denied in whole or in part, or is not acted upon sends such notice to the taxpayer. (Commissioner of Internal Revenue v.
within one hundred eighty (180) days from the submission of documents, the Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)
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 4. Self-assessed tax, defined. A tax that the taxpayer himself
decision, or from the lapse of the one hundred eighty (180-) day period, with assesses or computes and pays to the taxing authority. It is a tax that self-
an application for the issuance of a writ of preliminary injunction to enjoin the assessed by the taxpayer without the intervention of an assessment by the
BIR from collecting the tax subject of the appeal. tax authority to create the tax liability.
50
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 7. Meaning of "best evidence obtainable" under Sec. 6 (B),
pays the tax as he files the return. The pay-as-you-file system is a self- NIRC of 1997. This means that the original documents must be
assessing tax return. produced. If it could not be produced, secondary evidence must be adduced.
Internal revenue taxes are self-assessing. (Dissent of J. Carpio in (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No.
Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 47172, September 30, 1998)
26, 2005 and companion case)
A clear example of a self-assessed tax is the annual income tax, which â 8. The following are the general methods developed by
the taxpayer himself computes and pays without the intervention of any the Bureau of Internal Revenue for reconstructing a taxpayer’s
assessment by the BIR. The annual income tax becomes due and payable income where the records do not show the true income or where no return
without need of any prior assessment by the BIR. The BIR may or may not was filed or what was filed was a false and fraudulent return
investigate or audit the annual income tax return filed by the taxpayer. The (a) Percentage method;
taxpayer’s liability for the income tax does not depend on whether or not the (b) Net worth method.;
BIR conducts such subsequent investigation or audit. (c) Bank deposit method;
However, if the taxing authority is first required to investigate, and after (d) Cash expenditure method;
such investigation to issue the tax assessment that creates the tax liability, (e) Unit and value method;
then the tax is no longer self-assessed. (Ibid.) (f) Third party information or access to records method;
(g) Surveillance and assessment method. (Chapter XIII. Indirect
ââ 5. Sec. 6 (B) of the NIRC of 1997 allows the BIR to Approach to Investigation, Handbook on Audit Procedures and Techniques
make or amend a tax return from his own knowledge or obtained – Volume I, pp. 68-74)
through testimony or otherwise. Thus, the Commissioner of Internal
Revenue investigates ”any circumstance which led him to believe that the ââ 9. Third party information or access to records
taxpayer had taxable income larger than that reported. Necessarily, this method. The BIR may require third parties, public or private to supply
inquiry would have to be outside of the books because they supported the information to the BIR, and thus, “obtain on a regular basis from any person
return as filed. He may take the sworn testimony of the taxpayer, he may other than the person whose internal revenue tax liability is subject to audit
take the testimony of third parties; he may examine and subpoena, if or investigation, or from any office or officer of the national and local
necessary, traders’ and brokers’ accounts and books and the taxpayer’s governments, government agencies and instrumentalities including the
books of accounts. The Commissioner is not bound to follow any set of Bangko Sentral ng Pilipinas and government-owned or –controlled
patterns. The existence of unreported income may be shown by any corporations, any information such as, but not limited to, costs and volume
particular proof that is available in the circumstances of the particular of production, receipts or sales and gross incomes of taxpayers, and the
situation. (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. names , addresses, and financial statements of corporations, mutual fund
136975, March 31, 2005) companies, insurance companies, regional operating headquarters or
multinational companies, joint accounts, associations, joint ventures or
6. General rule: When the Commissioner of Internal consortia and registered partnerships, and their members; xxx” [Sec. 5 (B),
Revenue may rely on estimates. “The rule is that in the absence of NIRC of 1997)
accounting records of a taxpayer, his tax liability may be determined by
estimation. The petitioner (Commissioner of Internal Revenue) is not 10. A pre-assessment notice is a letter sent by the Bureau of
required to compute such tax liabilities with mathematical exactness. Internal Revenue to a taxpayer asking him to explain within a period of fifteen
Approximation in the calculation of taxes due is justified. To hold otherwise (15) days from receipt why he should not be the subject of an assessment
would be tantamount to holding that skillful concealment is an invincible notice. It is part of the due process rights of a taxpayer.
barrier to proof.” (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. As a general rule, the BIR could not issue an assessment notice
R. No. 136975, March 31, 2005) without first issuing a pre-assessment notice because it is part of the due
“However, the rule does not apply where the estimation is arrived at process rights of a taxpayer to be given notice in the form of a pre-
arbitrarily and capriciously.” (Ibid.)
51
assessment notice, and for him to explain why he should not be the subject Government because tax officers would be obliged to act promptly in the
of an assessment notice. making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against unscrupulous
ââ 11. Instances where a pre-assessment notice is not tax agents who will always find an excuse to inspect the books of taxpayers,
required before a notice of assessment is sent to the taxpayer. not to determine the latter’s real liability, but to take advantage of every
a. When the finding for any deficiency tax is the result of mathematical opportunity to molest peaceful, law-abiding citizens. Without such a legal
error in the computation of the tax as appearing on the face of the return; or defense taxpayers would furthermore be under obligation to always keep
b. When a discrepancy has been determined between the tax their books and keep them open for inspection subject to harassment by
withheld and the amount actually remitted by the withholding agent; or unscrupulous tax agents. The law on prescription being a remedial measure
c. When a taxpayer opted to claim a refund or tax credit of excess should be interpreted in a way conducive to bringing about the beneficent
creditable withholding tax for a taxable period was determined to have purpose of affording protection to the taxpayer within the contemplation of
carried over and automatically applied the same amount claimed against the the Commission which recommend the approval of the law. [Bank of
estimated tax liabilities for the taxable quarter or quarters of the succeeding Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of
table year; or Internal Revenue, G. R. No. 174942, March 7, 2008]
d. When the excess tax due on excisable articles has not been paid; This mandate governs the question of prescription of the
or government’s right to assess internal revenue taxes primarily to safeguard
e. When an article locally purchased or imported by an exempt the interests of taxpayers from unreasonable investigation. Accordingly,
person, such as, but not limited to vehicles, capital equipment, machineries the government must assess internal revenue taxes on time so as not to
and spare parts, has been sold, trade or transferred to non-exempt persons. extend indefinitely the period of assessment and deprive the taxpayer of
(Sec. 228, NIRC of 1997) the assurance that it will no longer be subjected to further investigation for
taxes after the expiration of reasonable period of time. (Commissioner of
Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30,
âââ 12. Prescriptive periods for making assessments 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R.
of internal revenue taxes. No. 162852, December 16, 2004, 447 SCRA 214, 225)
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). 14. Unreasonable investigation contemplates cases
The CIR has three (3) years from the date of actual filing of the tax return where the period for assessment extends indefinitely because this
to assess a national internal revenue tax or to commence court deprives the taxpayer of the assurance that it will not longer be subjected to
proceedings for the collection thereof without an assessment. [Bank of further investigation for taxes after the expiration of a reasonable period of
Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner
time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No.
of Internal Revenue, G. R. No. 174942, March 7, 2008]
162852, December 16, 2004 with note to see Republic v. Ablaza, 108 Phil. 1105.
b. ten years from discovery of the failure to file the tax return or 1108)
discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997[ ; or Laws on prescription should be liberally construed in favor of the
c. within the period agreed upon between the government and the taxpayer. Reason: for the purpose of safeguarding taxpayers from an
taxpayer where there is a waiver of the prescriptive period for assessment unreasonable examination, investigation or assessment, our tax laws
(Sec. 222 (b), NIRC of 1997).
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
13. Purpose of period of limitations in taxation. For the to afford such protection, As a corollary, the exceptions to the law on
purpose of safeguarding taxpayers from any unreasonable examination, prescription should perforce be strictly construed. [Philippine Journalists, Inc. v.
investigation or assessment, our tax law provides a statute of limitations in the Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing
collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby
(now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February 24, International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA
1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, 546]
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
52
The prescriptive period was precisely intended to give the taxpayers of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA
peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et 397)
al., G.R. No. 104171, February 24, 1999) c. The likelihood that the taxpayer will have access to the relevant
information [Commissioner of Internal Revenue, supra citing United States v.
15. A “jeopardy assessment” is a delinquency tax Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United States Supreme
assessment which was assessed without the benefit of complete or partial Court on November 19, 1973]
audit by an authorized revenue officer, who has reason to believe that the d. The desirability of bolstering the record-keeping requirements
assessment and collection of a deficiency tax will be jeopardized by delay of the NIRC. (Ibid.)
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 â 19. Give instances where prima facie correctness of a
substantiate all or any of the deductions, exemptions, or credits claimed in tax assessment does not apply.
his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000) SUGGESTED ANSWER: The “prima facie correctness of a tax
Jeopardy assessment is an indication of the doubtful validity of the assessment does not apply upon proof that an assessment is utterly without
assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. foundation, meaning it is arbitrary and capricious. Where the BIR has come
Regs. No. 6-2000] out with a “naked assessment” i.e., without any foundation character, the
determination of the tax due is without rational basis.” [Commissioner of Internal
ââ16.
Requisites for Formal Letter of Demand and Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing United
Assessment Notice. The formal letter of demand and assessment States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a situation,
notice shall be issued by the Commissioner or his duly authorized “the determination of the Commissioner contained in a deficiency notice
representative. The letter of demand calling for payment of the taxpayer’s 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
deficiency tax or taxes shall state the facts, the law, rules and regulations,
698 (1959)] “Hence, the determination by the CTA must rest on all the
or jurisprudence on which the assessment is based, otherwise, the formal
evidence introduced and its ultimate determination must find support in
letter of demand and assessment notice shall be void. The same shall be
credible evidence.” [Commissioner of Internal Revenue, supra]
sent to the taxpayer only by registered mail or by personal delivery.
ââ 17. What are the requirements for the validity of a ââ 20. What are the instances that suspends the
running of the prescriptive periods (Statute of Limitations) within
formal letter of demand and assessment notice ?
SUGGESTED ANSWER: which to make an assessment and the beginning of distraint or
a. There must have been previously issued a pre-assessment levy or of a proceeding in court for the collection, in respect of
notice until excepted; any tax deficiencies?
b. It must have been issued prior to the prescriptive period; and SUGGESTED ANSWER:
c. The letter of demand calling for payment of the taxpayer’s a. When the Commissioner is prohibited from making the
deficiency tax or taxes shall state the facts, the law, rules and regulations, or assessment, or beginning distraint, or levy or proceeding in court and for sixty
jurisprudence on which the assessment is based, otherwise, the formal letter (60) days thereafter;
of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No. b. When the taxpayer requests for and is granted a reinvestigation
12-99) by the commissioner;
c. When the taxpayer could not be located in the address given
18. What are the reasons for presumption of correctness by him in the return filed upon which the tax is being assessed or collected;
of assessments ? d. When the warrant of distraint and levy is duly served upon the
SUGGESTED ANSWER: taxpayer, his authorized representative, or a member of his household with
a. Lifeblood theory sufficient discretion, and no property could be located; and
b. Presumption of regularity (Commissioner of Internal Revenue v. e. When the taxpayer is out of the Philippines.
Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the performance NOTES AND COMMENTS:
53
The holding in Commissioner of Internal Revenue v. Court of Appeals, assess/collect shall be administratively dealt with. (Renumbering and
et al., G.R. No. 115712, February 25, 1999 (Carnation case) that the waiver emphasis supplied.)
of the period for assessment must be in writing and have the written consent If the above are not followed there is no valid waiver and prescription
of the BIR Commissioner is still doctrinal because of the provisions of Sec. would run. (Commissioner of Internal Revenue v. FMF Development Corporation,
223, NIRC of 1997 which provides for the suspension of the prescriptive G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner
period: of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 228-
229)
3. What should be established by a taxpayer for the ââ 7. What is solutio indebeti as applied to tax cases
grant of a tax refund ? Why ? ?
SUGGESTED ANSWER: A taxpayer needs to establish not only that SUGGESTED ANSWER: Under the principle of solutio indebiti
the refund is justified under the law, but also the correct amount that should provided in Art. 2154, Civil Code, “If something is received when there is
be refunded. no right to demand it, and it was unduly delivered through mistake, the
If the latter requisite cannot be ascertained with particularity, there is obligation to return it arises.” The BIR received something “when there
cause to deny the refund, or allow it only to the extent of the sum that is [was] no right to demand it,” and thus, it has the obligation to return it.
actually proven as due. [State Land Investment Corporation v. Commissioner of Internal Revenue,
Tax refunds partake of the nature of tax exemptions and are thus G. R. No. 171956, January 18, 2008citing Citibank, N. A. v. Court of
construed strictissimi juris against the person claiming the exemption. The Appeals and Commissioner of Internal Revenue, G.R. No. 107434,
burden in proving the claim for refund necessarily falls on the taxpayer. (Far October 10, 1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v.
East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. Mathay, Sr., 89 SCRA 586 (1979)]. It is an ancient principle that no one,
R. No. 138919, May 2, 2006)
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.)
ââ 4. 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: 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
nd
(2 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)
56. What are the reasons for requiring the filing of an
ââ 5. The two (2) year period and the thirty (30) day administrative application for refund or credit with the BSUGGESTED
period should be applied on a whichever comes first basis. Thus, ââ ââ 8. Why is it necessary to file an administrative claim
if the 30 days is within the 2 years, the 30 days applies, if the 2 year period for refund with the BIR, before filing a case with the Court of Tax
is about to lapse but there is no decision yet by the Commissioner which Appeals ?
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.)
60
a. 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
SCRA79)
b. To notify the Government that such taxes have been questioned ââ 9. As a general
and the notice should be borne in mind in estimating the revenue available rule the filing of an application for refund or credit with the
for Bureau of Internal Revenue is an administrative precondition
expenditures.
61
before a suit may be filed with the Court of Tax Appeals ?
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 Who could apply for a tax refund or credit ?
was
ââ 25. The basis of dutiable value of merchandise that is 29. A flight stewardess arrived from Singapore. Upon her
subject to ad valorem customs duties is the transaction value, arrival she was asked whether she has anything to declare. She
which shall be the price actually paid or payable for the goods when sold for answered none, and she submitted her “Customs Baggage
export to the Philippines, adjusted by adding certain cost elements to the Declaration Form” which she accomplished and signed with
extent that they are incurred by the buyer but are not included in the price nothing or written on the space for items to be declared. When
actually paid or payable for the imported goods, and may include the her hanger bag was examined some pieces of jewelry were
following: found concealed within the lining of said bag.
a. Cost of containers and packing, She was then convicted of violating of Sec. 3601 of the
b. Insurance, and Tariff and Customs Code for unlawful importation which
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No.
penalizes any person who shall fraudulently import or bring into
9135)
the Philippines any article contrary to law.
She now appeals claiming that lower court erred n
ââ 26. The above transaction value is the primary convicting her under Sec. 3601 when the facts alleged both in
method of determining dutiable value. If the transaction value of
the information and those shown by the prosecution constitute
the imported article could not be determined using the above,
the offense under Sec. 2505 “Failure to Declare Baggage,” of
the following alternative methods should be used one after the
which she was acquitted. Is she correct ?
other: SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It
a. Transaction value of identical goods merely provides, inter alia, the administrative remedies which can be
b. Transaction value of similar goods resorted to by the Bureau of Customs when seizing dutiable articles found
c. Deductive method the baggage of any person arriving in the Philippines which is not included in
d. Computed method the accomplished baggage declaration submitted to the customs authorities,
e. Fallback method and the administrative penalties that such person must pay for the release of
such goods if not imported contrary to law.
27. How and to whom should claims for refund of Such administrative penalties are independent of the criminal liability
customs duties be made ? for smuggling that may be imposed under Sec. 3601, and other provisions of
SUGGESTED ANSWER: All claims for refund of duties shall be made the TCC which can only be determined after the appropriate criminal
in writing and forwarded to the Collector of Customs to whom such duties are
68
proceedings, prescinding from the outcome in any administrative case that What is the rationale for this doctrine ?
may have been filed and disposed of by the customs authorities. SUGGESTED ANSWER:
Indeed the second paragraph of Sec. 2505 provides that nothing shall a. Regional Trial Courts have no jurisdiction to replevin a property
prevent the bringing of a criminal action against the offender for smuggling which is subject to seizure and forfeiture proceedings for violation of the Tariff
under Section 3601. (Jardeleza v. People, G. R. No. 165265, February 6, and Customs Code otherwise, actions for forfeiture of property for violation
2006) 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)
30. Payment is not a defense in smuggling. “When upon trial b. The doctrine of exclusive customs jurisdiction over customs
for violation of this section, the defendant is shown to have possession of the cases to the exclusion of the RTCs is anchored upon the policy of placing no
article in question, possession shall be deemed sufficient evidence to unnecessary hindrance on the government’s drive, not only to prevent
authorize conviction, unless the defendant shall explain the possession to smuggling and other frauds upon Customs,
the satisfaction of the court: Provided, however, That payment of the tax due c. but more importantly, to render effective and efficient the
after apprehension shall not constitute a valid defense in any prosecution collection of import and export duties due the State, which enables the
under this section.” (last par., Sec. 3601, TCC) 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)
31. How is smuggling committed ? d. The issuance by regular courts of writs of preliminary injunction
SUGGESTED ANSWER: Smuggling is committed by any person in seizure and forfeiture proceedings before the Bureau of Customs may
who: arouse suspicion that the issuance or grant was for consideration other than
a. fraudulently imports or brings into the country any article the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])
contrary to law; e. Under the doctrine of primary jurisdiction, the Bureau of Customs
b. assists in so doing any article contrary to law; or has exclusive administrative jurisdiction to conduct searches, seizures and
c. receives, conceals, buys, sells or in any manner facilitates the forfeitures of contraband without interference from the courts. It could
transportation, concealment or sale of such goods after importation, conduct searches and seizures without need of a judicial warrant except if
knowing the same to have been imported contrary to law. (Jardeleza v. the search is to be conducted in a dwelling place.
People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of Where an administrative office has obtained a technical expertise in a
Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296) specific subject, even the courts must defer to this expertise.
NOTES AND COMMENTS: NOTES AND COMMENTS: The Bureau of Customs could search
a. Importation consists of bringing an article into the country and seize articles without need of a judicial warrant unless the place to be
from the outside. Importation begins when the conveying vessel or aircraft searched is a dwelling place. In such a case customs requires a judicial
enters the jurisdiction of the Philippines with intention to unload therein. warrant.
b. When unlawful importation is complete. In the absence of
a bona fide intent to make entry and pay duties when the prohibited article 33. “A” claiming to be the owner of a vessel which is the
enters the Philippine territory. Importation is complete when the taxable, subject of customs warrant of seizure and detention sought the
dutiable commodity is brought within the limits of the port of entry. Entry intercession of the RTC to restrain the Bureau of Customs from
through a custom house is not the essence of the act. (Jardeleza v. People, interfering with his property rights over the vessel. Would the
G.R. No. 165265, February 6, 2006) suit prosper?
SUGGESTED ANSWER: No. His remedy was not with the RTC but
âââ 32. The Collector of Customs sitting in seizure and with the CTA, as issues of ownership of goods in the custody of customs
forfeiture proceedings has exclusive jurisdiction to hear and officials are within the power of the CTA to determine.
determine all questions touching on the seizure and forfeiture of The Collector of Customs has exclusive jurisdiction over seizure and
dutiable goods. RTCs are precluded from assuming cognizance forfeiture proceedings and trial courts are precluded from assuming
over such matters even through petitions of certiorari, cognizance over such matters even through petitions for certiorari,
prohibition or mandamus. (The Bureau of Customs, et al., v. Ogario, et prohibition or mandamus. (Commissioner of Customs v. Court of Appeals,
al., G.R. No. 138081, March 20, 2000) et al., G. R. Nos. 111202-05, January 31, 2006)
69
c. The release of the property would be contrary to law.
34. The customs authorities do not have to prove to the (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January
satisfaction of the court that the articles on board a vessel were 25, 1999)
imported from abroad or are intended to be shipped abroad
before they may exercise the power to effect customs searches, 39. 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
seizures, or arrests provided by law and continue with the
Court clarified that the fraud contemplated by law must be actual
administrative hearings. (The Bureau of Customs, et al., v. Ogario, et
al., G.R. No. 138081, March 20, 2000) 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.
35. The Tariff and Customs Code allows the Bureau of
Customs to resort to the administrative remedy of seizure, such as
ââ 40. Requisites for forfeiture of imported goods:
by enforcing the tax lien on the imported article when the a. Wrongful making by the owner, importer, exporter or consignee
imported articles could be found and be subject to seizure and of any declaration or affidavit, or the wrongful making or delivery by the same
forfeiture. person of any invoice, letter or paper – all touching on the importation or
exportation of merchandise.
36. The Tariff and Customs Code allows the Bureau of b. the falsity of such declaration, affidavit, invoice, letter or paper;
Customs to resort to the judicial remedy of filing an action in court and
when the imported articles could not anymore be found. 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.,
ââ 37. Section 2301 of the TCCP states that seized G.R. No. 139050, October 2, 2001)
articles may not be released under bond if there is prima facie
evidence of fraud in their importation. Commissioner of Customs v. 41. On January 7, 1989, the vessel M/V ”Star Ace,
Court of Tax Appeals, et al., G. R. No. 171516-17, February 13, 2009 ”coming from Singapore laden with cargo, entered the Port of
Section 2301. Warrant for Detention of Property-Cash Bond. – Upon San Fernando, La Union for needed repairs. When the Bureau
making any seizure, the Commissioner shall issue a warrant for the of Customs later became suspicious that the vessel’s real
detention of the property; and if the owner or importer desires to secure the purpose in docking was to smuggle cargo into the country,
release of the property for legitimate use, the Collector shall, with the seizure proceedings were instituted and subsequently two
approval of the Commissioner of Customs, surrender it upon the filing of a Warrants of Seizure and Detention were issued for the vessel
cash bond, in an amount fixed by him, conditioned upon the payment of the and its cargo.
appraised value of the article and/or any fine, expenses and costs which
Cesar does not own the vessel or any of its cargo but
may be adjudged in the case: Provided, That such importation shall not
be released under any bond when there is prima facie evidence of claimed a preferred maritime lien. Cesar then brought several
fraud in the importation of the article: Provided, further, That articles the cases in the RTC to enforce his lien. Would these suits prosper
importation of which is prohibited by law shall not be released under any ?
circumstances whatsoever: Provided, finally, That nothing in this section SUGGESTED ANSWER: No. The Bureau of Customs having first
shall be construed as relieving the owner or importer from any criminal obtained possession of the vessel and its goods has obtained jurisdiction to
liability which may arise from any violation of law committed in connection the exclusion of the trial courts.
with the importation of the article. (emphasis supplied) 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
38. Instances where there is no right of redemption of of Commerce under which the vessel may be attached and sold.
seized and forfeited articles: However, the basic operative fact is the actual or constructive
a. There is fraud; possession of the res by the tribunal empowered by law to conduct the
b. The importation is absolutely prohibited, or proceedings. This means that to acquire jurisdiction over the vessel, as a
70
defendant, the trial court must have obtained either actual or constructive in any matter brought before him upon protest or by his
possession over it. Neither was accomplished by the RTC as the vessel was action or ruling in any case of seizure may appeal to the
already in the possession of the Bureau of Customs. (Commissioner of Court of Tax Appeals, in the manner and within the period
Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006) prescribed by law and regulations.
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the Bureau of Customs is in Unless an appeal is made to the Court of Tax Appeals in the manner
the nature of a proceeding in rem, i.e. directed against the res or imported and within the period prescribed by laws and regulations, the action or
goods and entails a determination of the legality of their importation. In this ruling of the Commissioner shall be final and conclusive. [Emphasis
proceeding, it is in legal contemplation the property itself which commits the supplied.] (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs,
violation and is treated as the offender, without reference whatsoever to the G. R. No. 176380, June 18, 2009)
character or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited ââ 45. Administrative tax protest under the Tariff and
and disposed of in accordance with law for violation of the Tariff and Customs Customs Code (TCCP). A tax protest case, under the TCCP, involves
Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. a protest of the liquidation of import entries. (Pilipinas Shell Petroleum
126634, January 25, 1999) Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)
Forfeiture of seized goods in the Bureau of Customs is a proceeding
against the goods and not against the owner. (Asian Terminals, Inc. v. 46. Liquidation, defined. A liquidation is the final computation
Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing Transglobe) and ascertainment by the collector of the duties on imported merchandise,
based on official reports as to the quantity, character, and value thereof,
42. The Collector of Customs upon probable cause that and the collector’s own finding as to the applicable rate of duty; it is akin to
the articles are imported or exported, or are attempted to be an assessment of internal revenue taxes under the National Internal
imported or exported, in violation of the tariff and customs laws Revenue Code where the tax liability of the taxpayer is definitely
shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93) determined. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs,
If the search and seizure is to be conducted in a dwelling place, then G. R. No. 176380, June 18, 2009)
a search warrant should be issued by the regular courts not the Bureau of
Customs. ââ 47. The following letters of demand can not be
There may be instances where no warrants issued by the Bureau of considered as a liquidation or an assessment of Shell’s import
Customs or the regular courts is required, as in search and seizures of motor
tax liabilities that can be the subject of an administrative tax
vehicles and vessels.
protest proceeding before the Commissioner of Customs
43. Smuggled goods seized by virtue of a court warrant whose decision is appealable to the Court of Tax Appeals:
a. the One Stop Shop Inter-Agency Tax Credit and Duty
should be surrendered to the court that issued the warrant and
Drawback Center (the Center) November 3 letter, signed by the Secretary
not to the Bureau of Customs because the goods are in custodia legis. of Finance, informing it of the cancellation of the Tax Credit Certificates
(TCCs);
ââ 44. Decisions of the Commissioner of Customs b. the Commissioner of Customs’ November 19 letter requiring
“in cases involving liability for customs duties, fees or other Shell to replace the amount equivalent to the amount of the cancelled TCCs
money charges” that must be appealed to the Court of Tax used by Shell; and
Appeals Division within thirty (30) days from receipt specifically c. the Commissioner of Customs’ collection letters, issued
refer to his decisions on administrative tax protest cases, as stated in through Deputy Commissioner Atty. Valera, formally demanding the
Section 2402 of the Tariff and Customs Code of the Philippines (TCCP): amount covered by the cancelled TCCs.
None of these letters, however, can be considered as a liquidation
Section 2402. Review by Court of Tax Appeals. – or an assessment of Shell’s import tax liabilities that can be the subject of
The party aggrieved by a ruling of the Commissioner an administrative tax protest proceeding before the respondent whose
71
decision is appealable to the CTA. Shell’s import tax liabilities had long A suit for the collection of internal revenue taxes, where the
been computed and ascertained in the original assessments, and Shell assessment has already become final and executory, the action to collect
paid these liabilities using the TCCs transferred to it as payment. is akin to an action to enforce the judgment. No inquiry can be made therein
It is even an error to consider the letters as a “reassessment” as to the merits of the
because they refer to the same tax liabilities on the same importations In light of the conclusion that the present case does not involve a
covered by the original assessments. The letters merely reissued the decision of the Commissioner of Customs on a matter brought to him as a
original assessments that were previously settled by Shell with the use of tax protest, Atty. Valera’s lack of authority to issue the collection letters and
the TCCs. However, on account of the cancellation of the TCCs, the tax to institute the collection suits is irrelevant. For this same reason, the
liabilities of Shell under the original assessments were considered unpaid; injunction against Atty. Valera cannot be invoked to enjoin the collection of
hence, the letters and the actions for collection. unpaid taxes due from Shell. (Pilipinas Shell Petroleum Corporation v.
When Shell went to the CTA, the issues it raised in its petition were Commissioner of Customs, supra)
all related to the fact and efficacy of the payments made, specifically the
genuineness of the TCCs; the absence of due process in the enforcement
of the decision to cancel the TCCs; the facts surrounding the fraud in LOCAL GOVERNMENT TAXATION
originally securing the TCCs; and the application of estoppel. These are
payment and collection issues, not tax protest issues within the CTA’s ââ 1. The fundamental principles of local taxation are:
jurisdiction to rule upon. a. Uniformity;
Shell never protested the original assessments of its tax liabilities b. Taxes, fees, charges and other impositions shall be equitable
and in fact settled them using the TCCs. These original assessments, and based on ability to pay, for public purposes, not unjust, excessive,
therefore, have become final, incontestable, and beyond any subsequent oppressive or confiscatory, not contrary to law, public policy, national
protest proceeding, administrative or judicial, to rule upon. economic policy or in restraint of trade;
To be very precise, Shell’s petition before the CTA principally c. The levy and collection shall not be let to any private person;
questioned the validity of the cancellation of the TCCs – a decision that was d. Inures solely to the local government unit levying the tax;
made not by the Commissioner of Customs, but by the Center. As the CTA e. The progressivity principle must be observed.
has no jurisdiction over decisions of the Center, Shell’s remedy against the
cancellation should have been a certiorari petition before the regular courts, âââ 2. A law which deprives local government units of
not a tax protest case before the CTA. Records do not show that Shell ever their power to tax would be unconstitutional. The constitution has
availed of this remedy. delegated to local governments the power to levy taxes, fees and other
Alternatively, as held in Shell v. Republic of the Philippines, G.R. No. charges. This constitutional delegation may only be removed by a
161953, March 6, 2008, 547 SCRA 701, the appropriate forum for Shell constitutional amendment.
under the circumstances of this case should be at the collection cases
before the RTC where Shell can put up the fact of its payment as a defense. 3. Under the now prevailing Constitution, where there is
(Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. neither a grant nor prohibition by statute, the taxing power of
No. 176380, June 18, 2009) local governments must be deemed to exist although Congress
may provide statutory limitations and guidelines in order to
ââ 48. A case becomes ripe for filing with the safeguard the viability and self-sufficiency of local government units by
Regional Trial Court (RTC), as a collection matter after the directly granting them general and broad tax powers. (City Government of
finality of the Commissioner of Customs assessment. (Pilipinas San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June
18, 2009 citing Shell v. Republic of the Philippines, G.R. No. 161953, March 6,
2008, 547 SCRA 701)
4. The Local Government Code explicitly authorizes
The assessment has long been final, and this recognition of finality provinces and cities, notwithstanding “any exemption granted
removes all perceived hindrances, based on this case, to the continuation by any law or other special law” to impose a tax on businesses
of the collection suits. enjoying a franchise. Indicative of the legislative intent to carry out the
constitutional mandate of vesting broad tax powers to local government units,
72
the Local Government Code has withdrawn tax exemptions or incentives While the power to tax by local governments may be exercised by
theretofore enjoyed by certain entities. (City Government of San Pablo, local legislative bodies, no longer merely be virtue of a valid delegation as
Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution, the basic doctrine on local taxation remains essentially the
5. Philippine Long Distance Telephone Company, Inc., same, “the power to tax is [still] primarily vested in the Congress.” (Quezon
v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
upheld the authority of the City of Davao, a local government unit, to impose 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
and collect a local franchise tax because the Local Government has
Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11,
withdrawn all tax exemptions previously enjoyed by all persons and 1996, 261 SCRA 667, 680)
authorized local government units to impose a tax on business enjoying a
franchise tax notwithstanding the grant of tax exemption to them.
9. Further amplification by Bernas of the local
government’s power to tax. “What is the effect of Section 5 on the
ââ 6. Explain the concept of the “paradigm shift” in
fiscal position of municipal corporations? Section 5 does not change the
local government taxation. doctrine that municipal corporations do not possess inherent powers of
SUGGESTED ANSWER: “Paradigm shift” from exclusive taxation. What it does is to confer municipal corporations a general power
Congressional power to direct grant of taxing power to local legislative to levy taxes and otherwise create sources of revenue. They no longer
bodies. The power to tax is no longer vested exclusively on Congress; local have to wait for a statutory grant of these powers. The power of the
legislative bodies are now given direct authority to levy taxes, fees and other legislative authority relative to the fiscal powers of local governments has
charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas been reduced to the authority to impose limitations on municipal powers.
Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion Moreover, these limitations must be “consistent with the basic policy of local
case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, autonomy.” The important legal effect of Section 5 is thus to reverse the
G. R. No. 149110, April 9, 2003) principle that doubts are resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on municipal fiscal powers,
7. The fundamental law did not intend the direct grant to doubts will be resolved in favor of municipal corporations. It is understood,
local government units to be absolute and unconditional, the however, that taxes imposed by local government must be for a public
constitutional objective obviously is to ensure that, while local government purpose, uniform within a locality, must not be confiscatory, and must be
units are being strengthened and made more autonomous, the legislature within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-
must still see to it that: CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
a. the taxpayer will not be over-burdened or saddled with multiple Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.
and unreasonable impositions; 162015, March 6, 2006, 484 SCRA 169)
b. each local government unit will have its fair share of available
resources; 10. Reconciliation of the local government’s authority
c. the resources of the national government will be unduly to tax and the Congressional general taxing power. Congress has
disturbed; and the inherent power to tax, which includes the power to grant tax exemptions. On
d. local taxation will be fair, uniform and just. (Manila Electric the other hand, the power of local governments, such as provinces and cities for
Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999) 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
8. Taxing power of the local government is limited. The 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
taxing power of local governments is limited in the sense that Congress can exemptions.
enact legislation granting tax exemptions. The Supreme Court in a series of cases has sustained the power of
While the system of local government taxation has changed with the Congress to grant tax exemptions over and above the power of the local
onset of the 1987 Constitution, the power of local government units to tax government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN
is still limited. Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
73
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. (last par., Art. 228, Rules and Regulations Implementing the Local
162015, March 6, 2006, 484 SCRA 16) Government Code of 1991)
“Indeed, the grant of taxing powers to local government units under
the Constitution and the LGC does not affect the power of Congress to ââ 13. Who are the professionals who, if they are in
grant exemptions to certain persons, pursuant to a declared national policy. practice of their profession, are subject to professional tax ?
The legal effect of the constitutional grant to local governments simply SUGGESTED ANSWER: The professionals subject to the
means that in interpreting statutory provisions on municipal taxing powers, professional tax are only those who have passed the bar examinations, or
doubts must be resolved in favor of municipal corporations.” [Ibid., referring any board or other examinations conducted by the Professional Regulation
to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Commission (PRC). for example, a lawyer who is also a Certified Public
Davao] 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
ââ 11. Professional tax may be imposed by a XXX, Rules and Regulations Implementing the Local Government Code of
province or city but not by a municipality or barangay. 1991]
a. Transaction taxed: Exercise or practice of profession requiring
government licensure examination. â 14. X City issued a notice of assessment against
b. Tax rate: In Accordance with a taxing ordinance which should ABC Condominium Corporation for unpaid business taxes. The
not exceed P300.00. Condominium Corporation is a duly constituted condominium
c. Tax base: Reasonable classification by the sanggunian.
corporation in accordance with the Condominium Act which
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
owns and holds title to the common and limited common areas
profession in any part of the Philippine professionals exclusively employed of the condominium. Its membership comprises the unit owners
in the government. and is authorized under its By-Laws to collect regular
e. Date of payment: or on before January 31 or engaging in the assessments from its members for operating expenses, capital
profession. expenditures on the common areas and other special
f. Place of payment: Province or city where the professional assessments as provided for in the Master Deed with
practices his profession or where he maintains his principal office in case he ?Declaration of Restrictions of the Condominium.
practices his profession in several places. ABC Condominium Corporation insists that the X City
Revenue Code and the Local Government Code do not contain
ââ 12. Requirements: Any individual or corporation provisions upon which the assessment could be based. Resolve
employing a person subject to professional tax shall require payment by that the controversy.
person of the tax on his profession before employment and annually SUGGESTED ANSWER: ABC is correct. Condominium corporations
thereafter. are generally exempt from local business taxation under the Local
Any person subject to the professional tax shall write in deeds, Government Code, irrespective of any local ordinance that seeks to declare
receipts, prescriptions, reports, books of account, plans and designs, surveys
otherwise.
and maps, as the case may be, the number of the official receipt issued to
X City, is authorized under the Local Government Code, to impose a
him.
tax on business, which is defined under the Code as ”trade or commercial
Exemption: Professionals exclusively employed in the government
activity regularly engaged in as a means of livelihood or with a view to profit.”
shall be exempt from payment. (Sec. 139, LGC)
By its very nature a condominium corporation is not engaged in business,
NOTE: For the purpose of collecting the tax, the provincial or city
and any profit that it derives is merely incidental, hence it may not be subject
treasurer or his duly authorized representative shall require from such
to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation,
professionals their current annual registration cards issued by competent
G. R. No. 154993, October 25, 2005)
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.
â 15. Authority of Local Government Units (LGUs)
such as the City of Manila to impose business taxes. Section
74
143 of the LGC, is the very source of the power of municipalities and cities The criterion established by the statute contemplates a hypothetical
to impose a local business tax, and to which any local business tax imposed sale. Hence, the buyers need not be actual and existing purchasers. (Allied
by cities or municipalities such as the City of Manila must conform. It is Banking Corporation, etc., v. Quezon City Government, et al., G. R. No.
apparent from a perusal thereof that when a municipality or city has already 154126, October 11, 2005 )
imposed a business tax on manufacturers, etc. of liquors, distilled spirits, NOTES AND COMMENTS: In fixing the value of real property,
wines, and any other article of commerce, pursuant to Section 143(a) of assessors have to consider all the circumstances and elements of value and
the LGC, said municipality or city may no longer subject the same must exercise prudent discretion in reaching conclusions. (Allied Banking
manufacturers, etc. to a business tax under Section 143(h) of the same Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
Code. Section 143(h) may be imposed only on businesses that are subject October 11, 2005)
to excise tax, VAT, or percentage tax under the NIRC, and that are “not Preparation of fair market values:
otherwise specified in preceding paragraphs.” In the same way, a. The city or municipal assessor shall prepare a schedule of fair
businesses such as respondent’s, already subject to a local business tax market values for the different classes of real property situated in their
under Section 14 of Tax Ordinance No. 7794 [which is based on Section respective Local Government Units for the enactment of an ordinance by the
143(a) of the LGC], can no longer be made liable for local business tax sanggunian concerned; and
under Section 21 of the same Tax Ordinance [which is based on Section b. The schedule of fair market values shall be published in a
143(h) of the LGC]. (The City of Manila, et al., v. Coca-Cola Bottlers newspaper of general circulation in the province, city or municipality
Philippines, Inc., G. R. No. 181845, August 4, 2009) 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
REAL PROPERTY TAXATION 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
1. The fundamental principles of real property taxation
in at lease two (2) prominent places in the provincial capitol, city, municipal
are: or barangay hall for a minimum of three (3) consecutive weeks. (Figuerres
a. Appraisal at current and fair market value; v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)
b. Classification for assessment on the basis of actual use;
c. Assessment on the basis of uniform classification;
4. Approaches in estimating the fair market value of real
d. Appraisal, assessment, levy and collection shall not be let to a
private person; property for real property tax purposes ?
e. Appraisal and assessment shall be equitable. a. Sales Analysis Approach. The sales price paid in actual market
NOTES AND COMMENTS: Real properties shall be appraised at the transactions is considered by taking into account valid sales data
current and fair market value prevailing in the locality where the property is accumulated from among the Registrar of Deeds, notaries public, appraisers,
situated and classified for assessment purposes on the basis of its actual brokers, dealers, bank officials, and various sources stated under the Local
use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. Government Code.
154126, October 11, 2005) 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
2. The reasonable market value is determined by the
be invested in the purchase of the property.
assessor in the form of a schedule of fair market values. c. Reproduction cost approach is a formal approach used
The schedule is then enacted by the local sanggunian. exclusively n appraising man-made improvements such as buildings and
other structures, based on such data as materials and labor costs to
3. Fair market value is the price at which a property may reproduce a new replica of the improvement.
be sold by a seller who is not compelled to sell and bought by a The assessor uses any or all of these approaches in analyzing the
buyer who is not compelled to buy, taking into consideration all uses data gathered to arrive at the estimated fair market value to be included in
to which the property is adopted and might in reason be applied. the ordinance containing the schedule of fair market values. (Allied Banking
75
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, While the Local Government Code provides that the assessment of
October 11, 2005 citing Local Assessment Regulations No. 1-92) real property shall not be increased once every three (3) years, the
questioned proviso subjects the property to a higher assessment every time
ââ 5. An ordinance whereby the “parcels of land sold, a sales transaction is made. Real property owners would therefore postpone
ceded, transferred and conveyed for remuneratory sales until after the lapse of the three (3) year period, or if they do so within
consideration after the effectivity of this revision shall be subject the said period they shall be compelled to dispose of the property at a price
to real estate tax based on the actual amount reflected in the not exceeding the last prior conveyance in order to avoid a higher tax
assessment.
deed of conveyance or the current approved zonal valuation of
In the above two scenarios real property owners are effectively
the Bureau of Internal Revenue prevailing at the time of sale, prevented from obtaining the best price possible for their properties and
cession, transfer and conveyance, whichever is higher, as unduly hampers the equitable distribution of wealth. (Allied Banking
evidenced by the certificate of payment of the capital gains tax Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11,
issued therefore” is INVALID being contrary to public policy and for 2005)
restraining trade for the following reasons:
a. It mandates an exclusive rule in determining the fair market ââ 6. Examples of personal property under the civil law
value and departs from the established procedures such as the sales that may be considered as real property for purposes of taxes.
analysis approach, the income capitalization approach and the reproduction Personal property under the civil law may be considered as real property for
approach provided under the rules implementing the statute. It unduly purposes of taxes where the property is essential to the conduct of the
interferes with the duties statutorily placed upon the local assessor by business.
completely dispensing with his analysis and discretion which the Local a. Underground tanks are essential to the conduct of the business
Government Code and the regulations require to be exercised. An ordinance of a gasoline station without which it would not be operational. (Caltex Phils.,
that contravenes any statute is ultra vires and void. Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)
b. The “consideration approach” in the ordinance is illegal since b. Light Rail Transit (LRT) improvements such as buildings,
“the appraisal, assessment, levy and collection of real property tax shall not carriageways, passenger terminals stations, and similar structures do not
be let to any private person”, it will also completely destroy the fundamental form part of the public roads since the former are constructed over the latter
principle in real property taxation – that real property shall be classified, in such a way that the flow of vehicular traffic would not be impaired. The
valued and assessed on the basis of its actual use regardless of where carriageways and terminals serve a function different from the public roads.
located, whoever owns it, and whoever uses it. Allowing the parties to a Furthermore, they are not open to use by the general public hence not
private sale to dictate the fair market value of the property will dispense with exempt from real property taxes. Even granting that the national
the distinctions of actual use stated in the Local Government Code and in the government owns the carriageways and terminal stations, the property is not
regulations. exempt because their beneficial use has been granted to LRTA a taxable
c. The invalidity is not cured by the prhase “whichever is higher” entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et al.,
because an integral part of that system still permits valuing real property in G. R. No. 127316, October 12, 2000)
disregard of its “actual use.” c. Barges on which were mounted gas turbine power plants
d. The ordinance would result to real property assessments more designated to generate electrical power, the fuel oil barges which supplied
than once every three (3) years and that is not the congressional intent as fuel oil to the power plant barges, and the accessory equipment mounted on
shown in the provisions of the Local Government Code and the regulations. the barges were subject to real property taxes.
Consequently, the real property tax burden should not be interpreted to Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and
include those beyond what the Code or the regulations expressly clearly structures which, though floating, are intended by their nature and object to
state. remain at a fixed place on a river, lake or coast” are considered immovable
e. The proviso would provide a chilling effect on real property property by destination being intended by the owner for an industry or work
owners or administrators to enter freely into contracts reflecting the which may be carried on in a building or on a piece of land and which tend
increasing value of real properties in accordance with prevailing market directly to meet the needs of said industry or work. (FELS Energy, Inc., v.
conditions. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)
76
7. Unpaid realty taxes attach to the property and is a. Distraint of personal property;
chargeable against the person who had actual or beneficial use b. Sale of delinquent real property, and
and possession of it regardless of whether or not he is the c. Collection of real property tax through ordinary court action.
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 11. Notice and publication, as well as the legal
designated periods would not only be contrary to law but also unjust. requirements for a tax delinquency sale, are mandatory, and the
Consequently, MERALCO the former owner/user of the property failure to comply therewith can invalidate the sale. The prescribed notices
was required to pay the tax instead of the new owner NAPOCOR. (Manila must be sent to comply with the requirements of due process. (De Knecht, et
Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
NOTES AND COMMENTS: The above May 18, 2001 decision was
set aside by the Supreme Court when it granted the petitioner’s second 12. The reason behind the notice requirement is that tax
motion for reconsideration on June 29, 2004. The author submits that the sales are administrative proceedings which are in personam in
above ruling in the May 18, 2001 decision is still valid, not on the basis of the nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)
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 ââ 13. FELS Energy, Inc., had a contract to supply
May 18, 2001 decision. NPC with the electricity generated by FELS’ power barges. The
contract also stated that NPC shall be responsible for all real
8. Secretary of Justice can take cognizance of a case estate taxes and assessments. FELS then received an
involving the constitutionality or legality of tax ordinances where assessment of real property taxes on its power barges from the
there are factual issues involved. (Figuerres v. Court of Appeals, et al., Provincial Assessor of Batangas. If filed a motion for
G.R. No. 119172, March 25, 1999)
reconsideration with the Provincial Assessor.
Taxpayer files appeal to the Secretary of Justice, within 30
a. Upon denial, FELS elevated the matter to the Local
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 Board of Assessment Appeals (LBAA), where it raised the
if the Secretary does not act thereon, after the lapse of 60 days, a party could following issues:
already seek relief in court within 30 days from the lapse of the 60 day period. 1) Since NPC is tax-exempt then FEL’s should
These three separate periods are clearly given for compliance as a also be tax-exempt because of its contract with NPC.
prerequisite before seeking redress in a competent court. Such statutory 2) The power barges are not real property subject
periods are set to prevent delays as well as enhance the orderly and speedy to real property taxes.
discharge of judicial functions. For this reason the courts construe these b. Upon the other hand the Local Treasurer insists that
provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al., the assessment has attained a state of finality hence the appeal
G.R. No. 118233, December 10, 1999)
to the LBAA should be dismissed.
Rule on the conflicting contentions.
9. Public hearings are mandatory prior to approval of
SUGGESTED ANSWER:
tax ordinance, but this still requires the taxpayer to adduce evidence to a. All the contentions of FELS are without merit:
show that no public hearings ever took place. (Reyes, et al., v. Court of Appeals, 1) NPC is not the owner of the power barges nor the
et al., G.R. No. 118233, December 10, 1999) Public hearings are required to be
operator of the power barges. The tax exemption privilege granted to
conducted prior to the enactment of an ordinance imposing real property NPC cannot be extended to FELS. the covenant is between NPC
taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999) and FELs and does not bind a third person not privy to the contract
such as the Province of Batangas.
10. The concurrent and simultaneous remedies afforded 2) The Supreme Court of New York in Consolidated Edison
local government units in enforcing collection of real property Company of New York, Inc., et al., v. The City of New York, et al., 80
taxes: Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of
77
Batangas, G. R. No. 168557, February 16, 2007 and companion case, a. Payment under protest at the time of payment or within thirty
held that barges on which were mounted gas turbine power plants (30) days thereafter, protest being lodged to the provincial, city or in the case
designated to generate electrical power, the fuel oil barges which of a municipality within the Metro Manila Area the municipal treasurer.
supplied fuel oil to the power plant barges, and the accessory b. The treasurer has a period of sixty (60) days from receipt of the
equipment mounted on the barges were subject to real property taxes. protest within to decide.
Moreover, Article 415(9) of the Civil Code provides that “[d]ocks c. Within thirty (30) days from receipt of treasurer’s decision or if
and structures which, though floating, are intended by their nature and the treasurer does not decide, within thirty (30) days from the expiration of
object to remain at a fixed place on a river, lake or coast” are the sixty (60) period for the treasurer to decide, the taxpayer should file an
considered immovable property by destination being intended by the appeal with the Local Board of Assessment Appeals.
owner for an industry or work which may be carried on in a building d. The Local Board of Assessment Appeals has 120 days from
or on a piece of land and which tend directly to meet the needs of said receipt of the appeal within which to decide.
industry or work. e. The adverse decision of the Local Board of Assessment
b. The Treasurer is correct. The procedure do not allow a motion Appeals should be appealed within thirty (30) days from receipt to the Central
for reconsideration to be filed with the Provincial Assessor. Board of Assessment Appeals.
To allow the procedure would indeed invite corruption in the system of f. The adverse decision of the Central Board of Assessment
appraisal and assessment. it conveniently courts a graft-prone situation Appeals shall be appealed to the Court of Tax Appeals (En Banc) by means
where values of real property ay be initially set unreasonably high, and then of a petition for review within thirty (30) days from receipt of the adverse
subsequently reduced upon the request of a property owner. In the latter decision.
instance, allusions of possible cover, illicit trade-off cannot be avoided, and g. The decision of the CTA may be the subject of a motion for
in fact can conveniently take place. Such occasion for mischief must be reconsideration or new trial after which an appeal may be interposed by
prevented and excised from our system. (FELS Energy, Inc., v. Province of means of a petition for review on certiorari directed to the Supreme Court on
Batangas, G. R. No. 168557, February 16, 2007 and companion case) pure questions of law within a period of fifteen (15) days from receipt
extendible for a period of thirty (30) days.
14. A special levy or special assessment is an imposition
by a province, a city, a municipality within the Metropolitan 18. The entitlement to a tax refund does not necessarily
Manila Area, a municipality or a barangay upon real property specially call for the automatic payment of the sum claimed. The amount of
benefited by a public works expenditure of the LGU to recover not more than the claim being a factual matter, it must still be proven in the normal course
60% of such expenditure. and in accordance with the administrative procedure for obtaining a refund
of real property taxes, as provided under the Local Government Code. (Allied
15. If the ground for the protest is validity of the real Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
property tax ordinance and not the unreasonableness of the amount September 15, 2006)
collected the tax must be paid under protest, and the issue of legality may be NOTES AND COMMENTS: In the above Allied Banking case, the
raised to the proper courts on certiorari without need of exhausting Supreme Court provided for the starting date of computing the two-year
administrative remedies. 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.
16. If the ground for the protest is unreasonableness of the
amounts collected there is need to pay under protest and
19. Procedure for refund of real property taxes based on
administrative remedies must be resorted to before recourse to the proper
courts. 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
17. Procedure for refund of real property taxes based on
to such reduction or readjustment, who must decide within sixty (60) days
unreasonableness or excessiveness of amounts collected. from receipt.
78
b. The denial by the local treasurer of the protest would fall within must be proof therefore of the actual and direct use to be exempt from
the Regional Trial Court’s original jurisdiction, the review being the initial taxation. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
judicial cognizance of the matter. Despite the language of Section 195 of the 144104, June 29, 2004)
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 âââ 23. The “actual, direct and exclusive use” of the
competent jurisdiction,” labeling the said review as an exercise of appellate property for charitable purposes is the direct and immediate and
jurisdiction is inappropriate since the denial of the protest is not the judgment actual application of the property itself to the purposes for which the
or order of a lower court, but of a local government official. (Yamane , etc. v. charitable institution is organized. It is not the use of the income from the
BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) real property that is determinative of whether the property is used for tax-
c. The decision of the Regional Trial Court should be appealed by exempt purposes.
means of a petition for review directed to the Court of Tax Appeals (Division). If real property is used for one or more commercial purposes, it is not
d. The decision of the Court of Tax Appeals (Division) may be the exclusively used for the exempted purpose but is subject to taxation,. The
subject of a review by the Court of Tax Appeals (en banc). words “dominant use” or “principal use” cannot be substituted for the words
e. The decision of the Court of Tax Appeals (en banc) may be the “used exclusively” without doing violence to the Constitution and the law.
subject of a petition for review on certiorari on pure questions of law directed Solely is synonymous with exclusively. (Lung Center of the Philippines v. Quezon
to the Supreme Court. City, et al., etc., G. R. No. 144104, June 29, 2004)
âââ 20. Charitable institutions, churches and 24. Portions of the land of a charitable institution, such as
parsonages or convents appurtenant thereto, mosques, non- a hospital, leased to private entities as well as those parts of the
profit cemeteries, and all lands, buildings and improvements hospital leased to private individuals are not exempt from real
that are actually, directly and exclusively used for religious, property taxes. On the other hand, the portion of the land occupied by the
charitable or educational purposes are exempt from taxation. hospital and portions of the hospital used for its patients, whether paying or
[Sec.28 (3) Article VI, 1987 Constitution] 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)
âââ 21. The constitutional tax exemptions refer only to
real property that are actually, directly and exclusively used for religious, 25. As a general principle, a charitable institution does
charitable or educational purposes, and that the only constitutionally not lose its character as such and its exemption from taxes
recognized exemption from taxation of revenues are those earned by non- simply because it derives income from paying patients, whether
profit, non-stock educational institutions which are actually, directly and out-patient, or confined in the hospital, or receives subsidies
exclusively used for educational purposes. (Commissioner of Internal from the government. So long as the money received is devoted or used
Revenue v. Court of Appeals, et al., 298 SCRA 83) altogether to the charitable object which it is intended to achieve; and no
The constitutional tax exemption covers property taxes only. What is money inures to the private benefit of the persons managing or operating the
exempted is not the institution itself, those exempted from real estate taxes institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
are lands, buildings and improvements actually, directly and exclusively used 144104, June 29, 2004)
for religious, charitable or educational purposes. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) âââ26. Property that are exempt from the payment of
real property tax under the Local Government Code.
22. The 1935 Constitution stated that the lands, a. Real property owned by the Republic of the Philippines or any
buildings, and improvements are “used exclusively” but the of its political subdivisions except when the beneficial use thereof has been
present Constitution requires that the lands, buildings and granted to a taxable person for a consideration or otherwise;
improvements are “actually, directly and exclusively used.” The b. Charitable institutions, churches, parsonages or convents
change should not be ignored. Reliance on past decisions would have appurtenant thereto, mosques, non-profit or religious cemeteries, and all
sufficed were the words “actually” as well as :directly” are not added. There
79
lands, buildings and improvements actually, directly and exclusively used for the city limits, and withdrawing all tax exemptions previously
religious, charitable and educational purposes; granted. Among properties covered are those owned by the
c. Machineries and equipment, actually, directly and exclusively company from which the City is now collecting P43 million. The
used by local water districts; and government owned and controlled properties of the company were then scheduled by the City for
corporations engaged in the supply and distribution of water and generation
sale at public auction.
and transmission of electric power;
d. Real property owned by duly registered cooperatives; The company then filed a petition for the issuance of a
e. Machinery and equipment used for pollution control and writ of prohibition claiming exemption under its legislative
environmental protection. franchise. The City defended its position raising the following:
a. There was no exhaustion of administrative remedies
âââ27. Manila International Airport Authority (MIAA) it because the matter should have first been filed before the Local
is not a government owned or controlled corporation but an Board of Assessment Appeals;
instrumentality of the government that is exempt from taxation. b. The company’s properties are exempt from tax
It is not a stock corporation because its capital is not divided into under its franchise.
shares, neither is it a non-stock corporation because there are no Resolve the issues raised.
members. It is instead an instrumentality of the government upon which SUGGESTED ANSWERS:
the local governments are not allowed to levy taxes, fees or other charges. a. There is no need to exhaust administrative remedies as the
An instrumentality “refers to any agency of the National appeal to the LBAA is not a speedy and adequate remedy within the law.
Government, not integrated within the department framework vested with This is so because the properties are already scheduled for auction sale.
special functions or jurisdiction by law, endowed with some if not all Furthermore one of the recognized exceptions to the rule on
corporate powers, administering special funds, and enjoying operational exhaustion is that if the issue is purely legal in character which is so in this
autonomy, usually through a charter. This term includes regulatory case.
agencies chartered institutions and government-owned or controlled b. The properties are exempt from taxation. The grant of taxing
corporations.” [Sec. 2 (10), Introductory Provisions, Administrative Code powers to local governments under the Constitution and the Local
of 1987] It is an instrumentality exercising not only governmental but also Government Code does not affect the power of Congress to grant tax
corporate powers. It exercises governmental powers of eminent domain, exemptions.
police power authority, and levying of fees and charges. The term “exclusive of this franchise” is interpreted to mean
Finally, the airport lands and buildings are property owned by the properties actually, directly and exclusively used in the radio or
government that are devoted to public use and are properties of the public telecommunications business. The subsequent piece of legislation which
domain. (Manila International Airport Authority v. City of Pasay, et al., G. R. No. reiterated the phrase “exclusive of this franchise” found in the previous tax
163072, April 2, 2009) 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
28. A telecommunications company was granted by power, all of the company’s properties that are actually, directly and
Congress on July 20, 1992, after the effectivity of the Local exclusively used in the pursuit of its franchise. (The City Government of
Government Code on January 1, 1992, a legislative franchise Quezon City, et al., v. Bayan Telecommunications, Inc., G. R. No. 162015,
with tax exemption privileges which partly reads, “The grantee, March 6, 2006)
its successors or assigns shall be liable to pay the same taxes
on their real estate, buildings and personal property, exclusive âââ29. The owner operator of a BOT and not the
of this franchise, as other persons or corporations are now or ultimate owner is subject to real property taxes. Consistent with
hereafter may be required by law to pay.” This provision existed the BOT concept and as implemented, BPPC – the owner-manager-
operator of the project – is the actual user of its machineries and
in the company’s franchise prior to the effectivity of the Local
equipment. BPPC’s ownership and use of the machineries and equipment
Government Code. A City then enacted an ordinance in 1993 are actual, direct, and immediate, while NAPOCOR’s is contingent and, at
imposing a real property on all real properties located within this stage of the BOT Agreement, not sufficient to support its claim for tax
80
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