1. Income taxation clearly mandates that income tax is
T filed a claim for its unutilized input VAT on capital
payable only when there is income realized.
Whereas, the 2% MCIT is payable only by
Corporations sustaining losses, thereby violating
income taxation. How do you reconcile these 2
impositions? Explain w/ logic.
ANS:
The imposition of the Minimum Corporate Income Tax (MCIT)
does not violate income taxation.
The imposition of the MCIT is justified by the purpose for which it
was enacted. It should be noted that MCIT is imposed in lieu of the
normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a
very much reduced 2% and uses as the base the corporation’s
gross income. The imposition is intended to put a stop to the
practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or
zero income taxes year in and year out, through under-declaration
of income or over-deduction of expenses otherwise called tax
shelters. As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through sophisticated
and artful manipulations of deductions and other stratagems.
Since the tax base was broader, the tax rate was lowered.
Declaring that MCIT should be “imposed whenever such
corporation has zero or negative taxable income” merely defined
the coverage of Section 27(E) (Minimum Corporate Income
Tax on Domestic Corporations). It means that even if a
corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an
MCIT of 2% of its gross income. This is consistent with the law
which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT is
to be paid only if it is greater than the normal net income.
Obviously, it may well be the case that the MCIT would be less than
the net income of the corporation which posts a zero or negative
taxable income.
Corporations owe their corporate existence and their
privilege to do business to the government. They also benefit
from the efforts of the government to improve the financial market
and to ensure a favorable business climate. It is therefore fair for
the government to require them to make a reasonable
contribution to the public expenses.
Moreover, taxes are the lifeblood of the government. Without
taxes, the government can neither exist nor endure. The exercise
of taxing power derives its source from the very existence of the
State whose social contract with its citizens obliges it to promote
public interest and the common good. Taxation is an inherent
attribute of sovereignty. It is a power that is purely legislative.
Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. It has the
authority to prescribe a certain tax at a specific rate for a particular
public purpose on persons or things within its jurisdiction. In
other words, the legislature wields the power to define what tax
shall be imposed, why it should be imposed, how much tax shall be
imposed, against whom (or what) it shall be imposed and where it
shall be imposed.
(Case: Chamber of Real Estate and Builder’s Associations, Inc.
vs Romulo, GR 160756, March 9, 2010)
2.
goods purchased. CIR did not act on Ts claim. Within
the reglementary period, T filed a judicial claim
before the CTA. In the CIR’s Answer on the petition
she claimed that T is not entitled to a refund for the
reason that T have not yet submitted some
documents under the VAT Law. CTA ordered both
parties to file their memorandum. T complied but
CIR did not despite the notice. Thereafter, CTA-
Division rendered a decision in favor of T and
ordered CIR to issue a Certificate of Tax Credit. CIR
did not file an MR to said decision. Hence, said
decision became final and executory. CIR filed MR
before the CTA-EB praying for the annulment of the
CTA Decision on the order of issuance of TCC in favor
of T. May the CTA-EB annul said final decision of the
CTA-Div? (CIR vs KEPCO ILIJAN Corp., June 21, 2016)
ANS:
Annulment of judgment, as provided for in Rule 47 of the Rules of
Court, is based only on the grounds of extrinsic fraud and lack of
jurisdiction. It is a recourse that presupposes the filing of a
separate and original action for the purpose of annulling or
avoiding a decision in another case. Annulment is a remedy in law
independent of the case where the judgment sought to be annulled
is rendered. 19 It is unlike a motion for reconsideration, appeal or
even a petition for relief from judgment, because annulment is not
a continuation or progression of the same case, as in fact the case
it seeks to annul is already final and executory. Rather, it is an
extraordinary remedy that is equitable in character and is
permitted only in exceptional cases.
Annulment of judgment involves the exercise of original
jurisdiction, as expressly conferred on the Court of Appeals by
Batas Pambansa Bilang (BP Blg.) 129, Section 9(2). It also implies
power by a superior court over a subordinate one, as provided for
in Rule 47 of the Rules of Court, wherein the appellate court may
annul a decision of the regional trial court, or the latter court may
annul a decision of the municipal or metropolitan trial court.
But the law and the rules are silent when it comes to a situation
similar to the case at bar, in which a court, in this case the Court of
Tax Appeals, is called upon to annul its own judgment. More
specifically, in the case at bar, the CTA sitting en banc is being
asked to annul a decision of one of its divisions. However, the laws
creating the CTA and expanding its jurisdiction (RA Nos. 1125 and
9282) and the court's own rules of procedure (the Revised Rules
of the CTA) do not provide for such a scenario.
It is the same situation among other collegial courts. To illustrate,
the Supreme Court or the Court of Appeals may sit and adjudicate
cases in divisions consisting of only a number of members, and
such adjudication is already regarded .as the decision of the Court
itself. 21 It is provided for in the Constitution, Article VIII, Section
4(1) and BP Blg. 129, Section 4, respectively. The divisions are not
considered separate and distinct courts but are divisions of one
and the same court; there is no hierarchy of courts within the
Supreme Court and the Court of Appeals, for they each remain as
one court notwithstanding that they also work in divisions. The
Supreme Court sitting en banc is not an appellate court vis-a-vis its
divisions, and it exercises no appellate jurisdiction over the latter.
As for the Court of Appeals en banc, it sits as such only for the
purpose of exercising administrative, ceremonial, or other non-
adjudicatory functions.
Thus, it appears contrary to these features that a collegial court,
sitting en banc, may be called upon to annul a decision of one of its
divisions which had become final and executory, for it is
tantamount to allowing a court to annul its own judgment and
acknowledging that a hierarchy exists within such court. In the
process, it also betrays the principle that judgments must, at some
point, attain finality. A court that can revisit its own final
judgments leaves the door open to possible endless reversals or
modifications which is anathema to a stable legal system.
Thus, the Revised Rules of the CTA and even the Rules of Court
which apply suppletorily thereto provide for no instance in which
the en banc may reverse, annul or void a final decision of a division.
Verily, the Revised Rules of the CTA provide for no instance of an
annulment of judgment at all. On the other hand, the Rules of
Court, through Rule 47, provides, with certain conditions, for
annulment of judgment done by a superior court, like the Court of
Appeals, against the final judgment, decision or ruling of an
inferior court, which is the Regional Trial Court, based on the
grounds of extrinsic' fraud and lack of .jurisdiction. The Regional
Trial Court, in turn, also is empowered to, upon a similar action,
annul a judgment or ruling of the Metropolitan or Municipal Trial
Courts within its territorial jurisdiction. But, again, the said Rules
are silent as to whether a collegial court sitting en banc may annul
a final judgment of its own division.
As earlier explained, the silence of the Rules may be attributed to
the need to preserve the principles that there can be no hierarchy
within a collegial court between its divisions and the en banc, and
that a court's judgment, once final, is immutable.
A direct petition for annulment of a judgment of the CTA to the
Supreme Court, meanwhile, is likewise unavailing, for the same
reason that there is no identical remedy with the High Court to
annul a final and executory judgment of the Court of Appeals. RA
No. 9282, Section l puts the CTA on the same level as the Court of
Appeals, so that if the latter's final judgments may not be annulled
before the Supreme Court, then the CTA's own decisions similarly
may not be so annulled. And more importantly, it has been
previously discussed that annulment of judgment is an original
action, yet, it is not among the cases enumerated in the
Constitution's Article VIII, Section 5 over which the Supreme Court
exercises original jurisdiction. Annulment of judgment also often
requires an adjudication of facts, a task that the Court loathes to
perform, as it is not a trier of facts.
Nevertheless, there will be extraordinary cases, when the
interest of justice highly demands it, where final judgments of the
Court of Appeals, the CTA or any other inferior court may still be
vacated or subjected to the Supreme Court's modification,
reversal, annulment or declaration as void. But it will be
accomplished not through the same species of original action or
petition for annulment as that found in Rule 47 of the Rules of
Court, but through any of the actions over which the Supreme
Court has original jurisdiction as specified in the Constitution, like
65 of the Rules of Court.
As Applied in this Case:
Did the CTA En Banc correctly deny the petition for annulment of
judgment filed by petitioner? (YES)
The petition designated as one for annulment of judgment
(following Rule 47) was legally and procedurally infirm and, thus,
was soundly dismissed by the CTA En Banc on such ground.
Also, the CTA could not have treated the petition as an appeal or a
continuation of the case before the CTA First Division because the
latter's decision had become final and executory and, thus, no
longer subject to an appeal.
Instead, what remained as a remedy for the petitioner was to file a
petition for certiorari under Rule 65, which could have been filed
as an original action before this Court and not before the CTA En
Banc. Certiorari is available when there is no appeal or any other
plain, speedy and adequate remedy in the ordinary course of law,
such as in the case at bar. Since the petition below invoked the
gross and palpable negligence of petitioner's counsel which is
allegedly tantamount to its being deprived of due process and its
day in court as party-litigant and, as it also invokes lack of
jurisdiction of the CTA First Division to entertain the petition filed
by private respondent since the same allegedly fails to comply
with the reglementary periods for judicial remedies involving
administrative claims for refund of excess unutilized input VAT
under the National Internal Revenue Code (NIRC), which periods
it claims to be jurisdictional, then the proper remedy that
petitioner should have availed of was indeed a petition for
certiorari under Rule 65, an original or independent action
premised on the public respondent having acted without or in
excess of jurisdiction or with grave abuse of discretion amounting
to lack or excess of jurisdiction. However, since a certiorari
petition is not a continuation of the appellate process borne out of
the original case but is a separate action focused on actions that
are in excess or wanting of jurisdiction, then it cannot be filed in
the same tribunal whose actions are being assailed but is instead
cognizable by a higher tribunal which, in the case of the CTA, is this
Court. In the case involving petitioner, the petition could have
been filed directly with this Court, even without any need to
file a motion for reconsideration with the CTA division or En
Banc, as the case appears to fall under one of the recognized
exceptions to the rule requiring such a motion as a
prerequisite to filing such petition.
The writ of certiorari is an "extraordinary remedy" that is justified
in the "absence of an appeal or any plain speedy and adequate
remedy in the ordinary course of law." It may be given due course
as long as petitioners allege that they had no appeal or any other
efficacious remedy against the appellate court's decision.
Direct resort to this Court via a certiorari petition on the same
grounds as in this case has jurisprudential precedents.1âwphi1 In
one, We held that when the appellate court's decision is void for
lack of due process, the filing of a petition for certiorari with this
court without a motion for reconsideration is justified. 33 This
Court also has held that a petition for certiorari under Rule 65 of
the Rules of Court is available when the proceedings in question
amount to depriving the petitioner his day in court.34 It is true
that certiorari is not a substitute for appeal, but exempt from this
rule is a case when the trial court's decision or resolution was
issued without jurisdiction or with gr.ave abuse of discretion. 35
When a fraudulent scheme prevents a party from having his day in
court or from presenting his case, the fraud is one that affects and
goes into the jurisdiction of the court. 36 A question as to lack of
jurisdiction of the respondent tribunal or agency is properly the
office of a petition for certiorari.
In any event, petitioner's failure to avail of this remedy and
mistaken filing of the wrong action are fatal to its case and renders
and leaves the CTA First Division's decision as indeed final and
executory. By the time the instant petition for review was filed by
petitioner with this Court on December 9, 2011, more than sixty
(60) days have passed since petitioner's alleged discovery (on
March 7, 2011) of its loss in the case as brought about by the
alleged negligence or fraud of its counsel.
Thus, the current discussion serves no further purpose other than
as merely a future guide to the bench and the bar when confronted
with a similar situation.
Although in select cases, this Court has asseverated that "it is
always within its power to suspend its own rules or to except a
particular case from its operation, whenever the purposes of
justice require it" and that the Rules of Court were conceived and
promulgated to set forth 'guidelines in the dispensation of justice
but not to bind and chain the hand that dispenses it, for otherwise,
courts will be mere slaves to or robots of technical rules, shorn of
judicial discretion. 37 We have also equally stressed that strict
compliance with the rules of procedure is essential to the
administration of justice. 38
In this case, even if there was allegedly a deliberate effort from
petitioner's counsel to refuse to participate, despite notice, in the
conduct of the case after the filing of the Answer right up to the
issuance of the Writ of Execution against petitioner, 38 equally
apparent is the failure of petitioner and/or petitioner's
responsible subordinates to supervise the said counsel as well as
the conduct and progress of the case. Not only was there an
apparent negligence of counsel, 39 which binds the client, there
likewise appears to have been lapses on the part of the client - the
petitioner and the petitioner's responsible subordinates -
themselves. Equally oft-repeated is the rule that service made
upon the present counsel of record at his given address is service
to the client.40 Thus, it is harder to justify a relaxation of the rules
when the litigant itself suffers from inexcusable neglect. It is an oft-
repeated pronouncement that clients should take the initiative of
periodically checking the progress of their cases, so that they could
take timely steps to protect their interest.41 Failing such, clients
are left with more recourse against the consequence of their and
their counsel's omissions.
FALLO:
WHEREFORE, premises considered, the petition for review is
hereby DENIED. The assailed Resolutions dated July 27, 2011
and November 15, 2011 of the Court of Tax Appeals En Banc
are AFFIRMED.
3. CIR authorized the assessment of X corporation. In
the initial investigation, it was found out that X has
substantial undeclared assets. “R”, the tax official
assigned to assess moved for the issuance of an
authority to look into all properties and accounts of
X to determine the extent of its liabilities. X objected
invoking the Bank Secrecy Law, whereas the
government counters that the same is in consonance
with the Lifeblood Doctrine and the 3rd party rule in
taxation. Decide.
ANS:
Under the Bank Secrecy Law, bank deposits of whatever nature
including investments in government bonds are considered
absolutely confidential. This law prohibits the government and its
agencies, including the BIR, to look into bank accounts.
The National Internal Revenue Code (Tax Code) provides some of
the exceptions.
Section 6(F) of the TRAIN ACT authorizes the Commissioner to
inquire into the bank deposits and other related information held
by financial institutions of:
(1) A decedent to determine his gross estate; and
(2) Any taxpayer who has filed an application for compromise of
his tax liability by reason of financial incapacity to pay his tax
liability (on the condition that the applicant made a waiver in
writing of his privilege under Republic Act No. 1405, Republic Act
No. 6426, otherwise known as the Foreign Currency Deposit Act of
the Philippines, or under other general or special laws)
(3) A specific taxpayer or taxpayers subject of a request for the
supply of tax information from a foreign tax authority pursuant to
an international convention or agreement on tax matters to which
the Philippines is a signatory or a party of.
The BIR does not have the power to ascertain the contents of a
taxpayer’s bank account outside these exceptions. Thus, the
situation in this case not falling within the exceptions mentioned
above, “R” the tax official cannot successfully secure an authority
to inspect X’s assets and bank deposits even if he invokes the
Lifeblood Doctrine.
4. While riding a taxi bound for the City proper, T
noticed a brown bag lying at the back of the taxi
driver. He picked it up, and found cash inside. He
took the bag and upon arriving home unloaded the
contents thereof and learned that the money inside
the bag amounted to Php 250,000.
4g) if the money was paid to him on condition that he pays
whatever tax is imposable thereon, is the donation
taxable to him? Give explanations to all of the above.
Yes. It will be taxable to him, so long as he accepts the said
donation. A stipulation in the donation that the donee pays
the imposable taxes on the transaction is valid.

4a) Should T decide to keep the money instead of

surrendering it to the authorities, is the money taxable to
him?

Under the NIRC, the money is considered income on the part

of T because the term “INCOME” includes earnings, lawfully
or unlawfully acquired, without consensual recognition,
express or implied, of an obligation to repay and without
restriction as to their disposition. The amount is taxable at 5-
32% Normal Income Tax.

Under the TRAIN, the same is considered income to T, but it

shall not be subject to tax as the TRAIN Law now exempts
income not exceeding Php 250k from the normal income tax.

4b) If T had stolen the money from his employer, is the

money taxable to him knowing very well that it belongs
to the ER?
The money is still taxable to T. The term “INCOME” includes
earnings, lawfully or unlawfully acquired, without consensual
recognition, express or implied, of an obligation to repay and
without restriction as to their disposition.

When the thief or embezzler is known, the proceeds from

swindling, embezzlement, theft or robbery is NOT TAXABLE,
because the right, title and interest in the money rests w/ the
victim and to collect a tax from the culprit would give the
government and unjustified preference as to the part of the
money that rightfully and belongs to the victim. (?) (p.176,
Lim)

4c) if the money was wrongfully paid to him by a friend,

is the same taxable to him?
The money is taxable to T. The term “INCOME” includes
earnings, lawfully or unlawfully acquired, without consensual
recognition (express or implied) of an obligation to repay.

4d) if the money was won by him from a number game

(jueteng), is it taxable to him?
The money is still taxable to T. The term “INCOME” includes
earnings, lawfully or unlawfully acquired.

4e) if the money was given to him by his brother who won
the lotto, is the same taxable to him?
No. The money is not taxable to T because the transaction,
being a donation, was already subjected to a donor’s tax,
which is a final tax. The income subject of a final tax is not
included in the computation of the taxable income. Also, the
value of a property acquired by gift, bequest or devise or
descent shall be excluded from gross income.

4f) if that money was paid to him in an obligation where

he is the creditor, is the sum taxable to him?
If the debt had already been claimed as deductions from gross
income (by way of bad debts), its subsequent recovery shall
form part of the taxpayer’s gross income in the year of
recovery to the extent of the income tax benefit of its previous
deduction.
 5. X Corporation paid its 2nd quarter income tax a day
before due date (August 15, 2012). One year
thereafter in an in-house audit, the accountant
noticed an overpayment of Php 150k in the return.
The cashier was advised to file a claim for refund. On
the last day for the payment of the income tax for the
year 2014 (April 15, 2015), the cashier acted
accordingly and filed in behalf of “X” an application
for tax refund. The BIR did not act on the request of
X. On February 4, 2016, “X” filed a petition for review
before the tax Court alleging among others that the
silence of the CIR is an implied denial of its request
for refund. The BIR filed a motion to dismiss
contending the claim is already time-barred. Is the
BIR correct? Explain.
ANS:
Filed: Aug. 14, 2012 (Erroneously collected)
Final Adjustment Return (FAR): filed April 15, 2013 (for yr. 2012)
Administrative and Judicial claims must be filed w/in 2 years from
the filing of the FAR (thus: must be filed on/before April 15, 2015)
Admin. Claim: filed April 15, 2015 (ok)
Judicial Claim: filed February 4, 2016 (wrong; filed beyond the 2-
yr. prescriptive period, which is April 15, 2015)
The BIR is correct.
Under Sec. 229, a corporate claim for refund or credit for an invalid
payment (overpaid tax) of income tax must be duly filed with the
Commissioner within 2 years from the day the Final Adjustment
Return (FAR) was submitted. In this case, the FAR for the taxable
year 2012 must have been filed on April 15, 2013. This date shall
be the reckoning point for purposes of the 2-year prescriptive
period under Sec. 229 of the Tax Code. Thus, the administrative
claim and judicial claim of X Corporation must be filed on or before
April 15, 2015.
In this case, the administrative claim was timely filed as it was
submitted on April 15, 2015. However, the judicial claim was filed
only on February 4, 2016 – way beyond the prescriptive period set
forth by law. Accordingly, the BIR was correct in filing a motion to
dismiss as the claim was already time-barred.
6. X Corporation owns 10 units of taxi operating in the
City of Baguio and its neighboring municipalities.
After an assessment the CIR has positively
established that X owes the government deficiency
income tax, withholding taxes and VAT of Php 1M.
Before warrant, the CIR learned that 7 of the taxis
were placed under constructive distraint to answer a
judgment lien in favor of the EEs of X for unpaid
wages. Who has a preferential lien over the taxis, the
govt (BIR) or the EEs? Reason w/ logic.
ANS:
Related Articles:
Article 2241 (Civil Code). With reference to specific movable
property of the debtor, the following claims or liens shall be
preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision
thereof;
(2) Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the performance of
their duties, on the movables, money or securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said movables,
so long as they are in the possession of the debtor, up to the value of
the same; and if the movable has been resold by the debtor and the
price is still unpaid, the lien may be enforced on the price; this right
is not lost by the immobilization of the thing by destination, provided
it has not lost its form, substance and identity; neither is the right
lost by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged
are in the hands of the creditor, or those guaranteed by a chattel
mortgage, upon the things pledged or mortgaged, up to the value
thereof;
(5) Credits for the making, repair, safekeeping or preservation of
personal property, on the movable thus made, repaired, kept or
possessed;
(6) Claims for laborers' wages, on the goods manufactured or the
work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from the
contract of tenancy on shares, on the share of each in the fruits or
harvest;
(9) Credits for transportation, upon the goods carried, for the price
of the contract and incidental expenses, until their delivery and for
thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to travellers
by hotel keepers, on the movables belonging to the guest as long as
such movables are in the hotel, but not for money loaned to the
guests;
(11) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal property of the
lessee existing on the immovable leased and on the fruits of the same,
but not on money or instruments of credit;
(13) Claims in favor of the depositor if the depositary has wrongfully
sold the thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or preference
attaches have been wrongfully taken, the creditor may demand them
from any possessor, within thirty days from the unlawful seizure.
(1922a)
Article 2242 (Civil Code). With reference to specific immovable
property and real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable
sold;
(3) Claims of laborers, masons, mechanics and other workmen, as
well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works, upon
said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon the
real estate mortgaged;
(6) Expenses for the preservation or improvement of real property
when the law authorizes reimbursement, upon the immovable
preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a
judicial order, by attachments or executions, upon the property
affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an immovable
among them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or other
conditions imposed upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance
premium for two years. (1923a)
Article 2243 (Civil Code). The claims or credits enumerated in the
two preceding articles shall be considered as mortgages or pledges
of real or personal property, or liens within the purview of legal
provisions governing insolvency. Taxes mentioned in No. 1, article
2241, and No. 1, article 2242, shall first be satisfied. (n)
The BIR has a preferential lien over the taxis.
Article 110 of the Labor Code, in determining the reach of its terms,
cannot be viewed in isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code concerning the
classification, concurrence and preference of credits, which
provisions find particular application in insolvency proceedings
where the claims of all creditors, preferred or non-preferred, may
be adjudicated in a binding manner. It is thus important to begin
by outlining the scheme constituted by the provisions of the Civil
Code on this subject.
Those provisions may be seen to classify credits against a
particular insolvent into three general categories, namely:
(a) special preferred credits listed in Articles 2241 and 2242,
(b) ordinary preferred credits listed in Article 2244; and
(c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241 and
2242, it should be noted at once that these credits constitute liens
or encumbrances on the specific movable or immovable property
to which they relate. Article 2243 makes clear that these credits
"shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing
insolvency." It should be emphasized in this connection that
"duties, taxes and fees due [on specific movable property of the
insolvent] to the State or any subdivision thereof" (Article 2241
[1]) and "taxes due upon the [insolvent's] land or building (2242
[1])"stand first in preference in respect of the particular movable
or immovable property to which the tax liens have attached.
Article 2243 is quite explicit: "[T]axes mentioned in number 1,
Article 2241 and number 1, Article 2242 shall first be satisfied. "
The claims listed in numbers 2 to 13 in Article 2241 and in
numbers 2 to 10 in Articles 2242, all come after taxes in order of
precedence; such claims enjoy their privileged character as liens
and may be paid only to the extent that taxes have been paid from
the proceeds of the specific property involved (or from any other
sources) and only in respect of the remaining balance of such
proceeds. What is more, these other (non-tax) credits, although
constituting liens attaching to particular property, are not
preferred one over another inter se. Provided tax liens shall have
been satisfied, non-tax liens or special preferred credits which
subsist in respect of specific movable or immovable property are
to be treated on an equal basis and to be satisfied concurrently and
proportionately.
Put succinctly, Articles 2241 and 2242 jointly with Articles 2246
to 2249 establish a two-tier order of preference. The first tier
includes only taxes, duties and fees due on specific movable or
immovable property. All other special preferred credits stand on
the same second tier to be satisfied, pari passu and pro rata, out of
any residual value of the specific property to which such other
credits relate.
Credits which are specially preferred because they constitute liens
(tax or non-tax) in turn, take precedence over ordinary preferred
credits so far as concerns the property to which the liens have
attached. The specially preferred credits must be discharged first
out of the proceeds of the property to which they relate, before
ordinary preferred creditors may lay claim to any part of such
proceeds.
(RP vs Hon. Peralta, G.R. No. L-56568 May 20, 1987)
Moreover, a declaration of bankruptcy or a judicial liquidation
must be present before the worker's preference may be enforced.
Thus, Article 110 of the Labor Code and its implementing rule
cannot be invoked in this case absent a formal declaration of
bankruptcy or a liquidation order. The rationale is that to hold Art.
110 to be applicable also to extrajudicial proceedings would be
putting the worker in a better position than the State which could
only assert its own prior preference in case of a judicial
proceeding.
It (worker preference) will find application when, in proceedings
such as insolvency, such unpaid wages shall be paid in full before
the "claims of the Government and other creditors" may be paid.
But, for an orderly settlement of a debtor's assets, all creditors
must be convened, their claims ascertained and inventoried, and
thereafter the preferences determined, in the course of judicial
proceedings which have for their object the subjection of the
property of the debtor to the payment of his debts or other lawful
obligations. Thereby, an orderly determination of preference of
creditors' claims is assured (Philippine Savings Bank vs. Lantin,
No. L-33929, September 2, 1983, 124 SCRA 476); the adjudication
made will be binding on all parties-in-interest since those
proceedings are proceedings in rem; and the legal scheme of
classification, concurrence and preference of credits in the Civil
Code, the Insolvency Law, and the Labor Code is preserved in
harmony.
(DBP v NLRC, G.R. No. 108031 March 1, 1995)
 7. Scenarios
7a. “A” is a non-resident person invited to share his
knowledge (sale of services) on the latest technology on
paint manufacturing. He stayed here only for 2 weeks. Is
he subject to business taxes?
ANS:
Yes.
RR 16-2005 defines the phrase “in the course of trade or business”
as “the regular conduct or pursuit of a commercial or economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-
stock, non-profit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
Under RR 16-2005, X, being a non-resident who does not stay in
the Philippines permanently may be considered a non-resident
lessor or owner for purposes of determining the VATability of the
lease payments on his property located in the Philippines. He need
only prove to the satisfaction of the CIR the fact of his physical
presence abroad with a definite intention to reside therein, and
that he owns/ leases properties, real or personal, whether tangible
or intangible, located in the Philippines.
Accordingly, since the property leased in this case is located in the
PH and there being no showing that X intends to stay permanently
in the Philippines, he is thus considered a non-resident
lessor/owner whose rental income shall be subject to VAT.

Non-resident persons who perform services in the PH are deemed to

be making sales in the course of trade or business, even if the
performance of services is not regular. “

Accordingly, by express provision of the law, “A”, being a non-

resident person who sold his services is subject to business taxes
despite the fact the he rendered his services for only 2 weeks.
Regularity in the conduct of trade or business does not apply to
non-resident persons because they are deemed to be making sales
in the course of trade or business even if the performance of
services is not regular.
(Sec. 4.105-3 RR 16-2005)

7b. X failed to register as a VAT-registered businessman

notwithstanding the fact that he has realized gross sales
of Php 3M in the preceding year. What are the tax
implications of such failure for VAT purposes?
ANS:

7c. X is a dual citizen and he owns a condominium unit in

Makati City. Since X does not stay here permanently and
he leases the unit to his friend Y. The lease contract was
executed abroad and the monthly rent payment is
transmitted by Y from Makati City directly to the savings
account of X in Chicago USA. Is the lease of the real
property VATABLE?
ANS:
Lease of property shall be subject to VAT regardless of the place
where the contract of lease or licensing agreement was executed if
the property leased or used is located in the Philippines.

VAT on rental and/or royalties payable to non-resident foreign

corporations or owners for the sale of services and use or lease of
properties in the Philippines shall be based on the contract price
agreed upon by the licensor and the licensee.

A Non-resident lessor/ owner refers to any person, natural or

juridical, an alien or a citizen who establishes to the satisfaction of
the Commissioner of Internal Revenue the fact of his physical
presence abroad with a definite intention to reside therein, and who
owns/ leases properties, real or personal, whether tangible or
intangible, located in the Philippines.
(Sec. 4.108-3 RR 16-2005)

The lease of the real property is VATABLE.

Lease of property shall be subject to VAT regardless of the place

where the contract of lease or licensing agreement was executed if
the property leased or used is located in the Philippines.
 8. X is a VAT Registered person who operates a grocery 9. 2-Year Prescriptive Period: Sec. 229 vs Sec 112D
store. His books show gross sales of Php 3.1M in his
1st yr of operation and Php 2.9M in his 2nd yr. is he Sec. 112D Sec. 229
liable for VAT on his 2nd yr. of operation? As to applicability:
ANS: Applies/ pertains to Applies/ pertains to
Yes. refunds of tax credits of Recovery of Tax Illegally or
Input Tax. erroneously collected.
Under Section 106 (C) of the TRAIN, VAT shall also apply to goods As to Appeals:
disposed of or existing as of a certain date if under circumstances Appeal is still available Appeal beyond the 2-year
to be prescribed in rules and regulations to be promulgated by the even beyond the 2-year period is no longer allowed
Secretary of Finance, upon recommendation of the Commissioner, period, as it is only the as both administrative and
the status of a person as a VAT-registered person changes or is administrative claim which judicial claims must be filed
terminated. must be submitted within within the prescriptive
the said period. period.
Existing VAT-registered taxpayers whose gross sales or receipts As to Applicability of the
have exceeded the previous threshold but have not exceeded the Doctrine of Twin
increased threshold of P3 million now have the option to update Prescriptive Period:
their registration from VAT to non-VAT, or they can continue The Doctrine does not The Doctrine must be
being a VAT-registered taxpayer and avail of the “Optional apply. applied.
Registration for Value-Added Tax of Exempt Person” provided
under Section 236(H) of the National Internal Revenue Code 10. Distinguish
(NIRC), as amended.
a. VAT-Registered Taxpayer vs Non-VAT taxpayers
Under the existing VAT regulations, VAT-registered taxpayers will
have to update their registration by submitting a duly VAT-Registered Taxpayer Non-VAT Taxpayer
accomplished Application for Registration Information Update As to Applicability of Php
Form (BIR Form No. 1905) to their designated Revenue District 3M Threshold:
Office (RDO). Failure to update to non-VAT despite having gross Applies to persons or Generally applies to
sales or receipts not exceeding P3 million shall still subject the business entities exceeding persons or business
taxpayer to VAT. But if the VAT-registered taxpayer whose gross the Php 3M threshold. entities not exceeding the
sales did not exceed the P3 million threshold opts to continue its Php 3M threshold
VAT registration, it shall not be entitled to cancel its VAT As to type of Tax paid:
registration for the next three years. Pays VAT, which is an Pays Other Percentage Tax,
indirect tax. (Meaning: the which is a direct tax.
Revenue Memorandum Circular (RMC) No. 39-2018 clarified the tax may be passed on to the Business entity pays the
taxability of goods or properties originally intended for sale or use purchaser of the goods or tax.
in business, including capital goods, disposed of or existing as of services)
the date of change of status of a person as VAT-registered
As to Tax Rate:
taxpayer. In accordance with Section 106 of the NIRC, as amended,
Pays 12% VAT Subject to 3% Percentage
the taxpayer shall pay 12 percent output VAT based on the gross
Tax
selling price of its goods or properties originally intended for sale
As to Liability for VAT:
or use in business, including capital goods, disposed of or existing
Liable to pay the excess of Not required to pay the
as of the date of change of status, by filing the quarterly VAT return
its output VAT over its input VAT, but may be held liable
on or before the 25th day following the end of the quarter.
VAT. for other business taxes
such as Other Percentage
Only upon compliance with the above requirements shall the
Taxes or Excise taxes.
taxpayer be considered a non-VAT registered person under
As to Creditability of Input
Section 109 (1) (BB) of the NIRC, as amended, and shall pay a tax
Taxes:
equivalent to 3 percent of their gross quarterly sales or receipts
A VAT taxpayer may claim Cannot claim input tax
(EXCEPT for cooperatives and Self-employed individuals and
the input taxes he paid as credit.
professionals availing of the 8 percent tax on gross sales and/or
credits to his output tax.
receipts and other non-operating income, which shall be exempt
from the payment of 3 percent percentage tax)
b. Transitional Input Taxes vs Presumptive Input Taxes
(The Manila Times: Transitioning from VAT to Non-VAT by
Joanne Quitallas, June 11, 2018)
Transitional Input Tax Presumptive Input Tax
As to applicability:
Applies to a person who Applies to persons engaged
becomes liable to the VAT in the processing of:
upon exceeding the (i) Sardines
threshold of 3M. (ii) Mackerel and
Milk; and in
The ff. inventories shall be (iii) Manufacturing
subject to transitional input refined sugar;
tax: (iv) Cooking oil;
(i) Goods purchased (v) Packed noodle-
for resale in their based instant
meals
 present providing details of
condition; administration and
(ii) Materials procedure.
purchased for As to
further  Form part of tax  Not part of the tax
processing, but laws. law they refer to.
which have not  They have the  These are
yet undergone force and effect administrative
processing; of law. opinions on
(iii) Goods which have queries which do
been not have the force
manufactured by and effect of a law.
the taxpayer;
(iv) Goods in process
for sale; As to Issuing Authority:
(v) Goods and Issued by the Secretary of Issued by the Commissioner
supplies for use in Finance. of Internal Revenue.
the course of As to Publication
taxpayer’s trade Requirement:
or business as a Must be published to have Need not be published.
VAT-registered the force and effect of a
person law.
As to rate: As to Applicability:
The amount shall be 4% of the gross value in Of General Application Of Particular or specific
whichever is HIGHER money of the purchases of application.
between: primary agricultural
a. 2% of the products which are used as e. Automatic 0% VAT vs Effective 0% VAT
beginning inputs to their production.
inventory of Automatic 0% VAT Effective 0% VAT
goods, materials Pertains to export sales of Refers to the local sale of
and supplies; or goods and supply of goods or supply of services
b. The actual value services by a VAT- by a VAT-Registered person
added tax paid on registered person to persons or entities who
such goods, were granted indirect tax
materials and exemption under special
supplies laws or international
As to creditability: agreements.
Creditable against the Creditable against the As to chargeability of tax:
output tax during the output tax. The tax rate is set at 0%, The seller charges no
month of conversion. and when applied to the tax output tax, but can claim a
base, results in no tax refund of tax credit for the
chargeable against the VAT previously charged to
c. Tax Exemption vs Franchise purchaser. him by his suppliers.
As to Requirement of
Tax Exemption Franchise Approval:
It is an immunity, privilege This is a privilege granted No need to secure an Approval is necessary for
or freedom from the to a person or entity to application and approval the before the transaction
payment of a charge or transact business (or from the BIR prior to sale of may be considered
burden to which others exercise a corporate goods or services. effectively zero-rated.
who are similarly situated franchise) in the State. The
are obliged to pay. holder of the franchise shall
be subject to a franchise tax.
As to revocability:
May always be revoked by Always revocable as this is
the granting authority. considered a privilege
which is not covered by the
Non-impairment clause.

d. Revenue Regulations vs Administrative Rulings

Revenue Regulations Administrative Rulings

Definition
These are formal These are merely advisory
pronouncements intended service to the taxpayer; they
to clarify or explain the law are not conclusive.
and carry into effect its
general provisions by