A.

GENERAL PRINCIPLES

Q: How is the lifeblood theory illustrated in applicable tax rules/principles?

A: It is illustrated in the prohibition against set-off of taxes and in the rule that prohibits the issuance of an injunction to restrain the collection of taxes. However,
the latter admits of an exception which is provided under RA 9282 (CTA law) wherein it is provided that “when in the opinion of the Court the collection may
jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court”.

For the prohibition against set-off of taxes, note that the payment of taxes with Tax Credit Certificates is valid as this is expressly provided for in Section 204 (C) of
the Tax Code and this is technically not sett-off.

Other illustrations can be seen in the principle of the presumption of correctness of assessments, the imposition of the MCIT and the withholding tax system.

Q: What can Congress decide on with respect to the coverage of taxes being imposed?
A: Congress has the power to select the subject of taxation as well as those that will be exempted. (Lutz vs. Araneta & Gomez vs. Palomar)

Q: What are the non-revenue or SUMPTUARY objectives of taxation?

A:
a.) Taxation can strengthen anemic enterprises or provide incentive to greater production through the grant of tax exemptions or the creation of conditions
conducive to their growth.
b.) Taxes may be increased in periods of prosperity to curb spending power and halt inflation or lowered in periods of slump to expand business and ward off
depression.
c.) Taxes on imports may be increased to protect local industries against foreign competition or decreased to encourage foreign trade.
d.) Taxes on imported goods may also be used as a bargaining tool by a country by setting tariff rates first at a relatively high level before trade negotiations
are entered into with another country to enhance its bargaining power.
e.) Taxes can discourage certain businesses such as in the case of the high taxes imposed on alcohol and tobacco products.
f.) Taxes can also minimize inequity.

Q: How do you distinguish tax from tolls, penalties, special assessments and license?

TAX TOLL TAX LICENSE

A demand of sovereignty
Paid for the support of the
government
Generally no limit on the
amount of tax that may be
imposed
May be imposed only by the
government
A demand of proprietorship
Paid for the use of another’s property
Amount of toll depends upon
the cost of construction or
maintenance of the public
improvement used
May be imposed by the government
or private individuals or entities
+
ADMG
Enforced contribution assessed
by sovereign authority to defray
public expenses
Levied for revenue
Exercise of taxing power
Imposed on persons, property,
exercise of right or privilege
Generally no limit on the
amount of tax that may be
imposed
Legal compensation or
Reward of an officer for
specific services
Imposed for regulation
Exercise of police power
Imposed on the right to
exercise a privilege only
Amount should be limited
to the necessary expenses
of inspection and
Page 1 of 61
 regulation
Failure to pay does not Failure to pay makes the
necessarily make an act or act of business illegal
business illegal

TAX SPECIAL ASSESSMENT TAX PENALTY

Levied on persons, property,
privileges, acts, etc
Personal liability
Based on necessity and benefits
Has general application
Levied only on land Intended to raise revenue Designated to regulate
conduct
Not a personal liability of the person May be imposed only by the May be imposed by the
involved, his liability is limited only to government government or private
the land involved individuals or entities
Based wholly on benefits
Exceptional both as to the time and
place

Q: Was the Motor Vehicle Registration FEE (“MVRF”) imposed against Philippine Airlines considered a tax or a regulatory fee?
A: The MVRF was considered tax notwithstanding its designation as a fee. The SC upheld the previous decision in the Calalang case and based its ruling on the
fact that (1) the legislative intent clearly showed that the imposition was primarily levied as a tax and (2) more importantly, only 1/5 of the amount levied was
reserved for the operating expenses of the collecting agency which is a clear indication that the main purpose of MVRF was for revenue.

Q: Is the royalty fee of P0.50 per liter of fuel deliveries made to customers inside the special economic zone and imposed by Clark Development
Corporation on Chevron a tax or a regulatory measure?
A: It is a REGULATORY FEE. The royalty fee was deemed imposed primarily for regulatory purposes and not for generation of income which is the primary
feature of a tax levy. The Court mentioned that the oil industry is “greatly imbued with public interest” and that the highly combustible product “poses serious threat
to life and property”. It also upheld the reasonable relation between the fee and the regulation sought to be attained given the high volume of fuel entering the
CSEZ and the fact that the increasing administrative costs were triggered by security risks arising from possible terrorist strikes. Thus, CDC was authorized to
impose the fee. (Chevron Philippines, Inc. vs. Bases Conversion Development Authority)

Q: How are taxes classified?

A:
As to subject matter
a.) Personal – Tax of a fixed amount, imposed on persons within a specified territory, whether citizens or not, without regard to their property or the
occupation or business in which they are engaged
b.) Property – Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable methods
of apportionment
c.) Excise – Any tax which does not fall within the classification of a personal or a property tax. It is a charge imposed upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation, profession or business. THIS IS WHERE MOST OF THE TAXES UNDER THE TAX CODE
FALL UNDER INCLUDING INCOME TAX AND VAT.
As to who bears the burden
a.) Direct – Demanded from the person who also shoulders the burden of the tax; the taxpayer is directly or primarily liable, and he cannot shift the burden
to another. Incidence and burden of tax are on the same person. (Example: income tax)

+
ADMG
Page 2 of 61
 b.) Indirect – Demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the
ultimate purchaser or consumer. Incidence is on one person but the burden is shifted to another. (Example: VAT)
As to scope
a.) National – Tax imposed by the national government
b.) Local – Tax imposed by municipal corporations or local government units

As to rate
a.) Progressive – The rate increases as the tax base of bracket increases
b.) Regressive – The rate decreases as the tax base or bracket increases

Q: What are the basic principles of a sound tax system?

A:
a.) Fiscal adequacy – Sources of revenue should be sufficient to meet the demands of public expenditure in order to avoid fiscal deficit. It also means that the
revenues should be capable of expanding or contracting annually in response to variations in public expenditures. An example is raising taxes to avoid the
current fiscal crisis.
b.) Equality or theoretical justice – This is also called the ability-to-pay principle. The tax burden should be in proportion to the taxpayer’s ability to pay. An
example is the schedular system of taxation applied in the Philippines.
c.) Administrative Feasibility - Tax laws should be capable of convenient, just and effective administration. An example would be avoiding taxing the
government to reduce collection costs and the non-imposition of taxes on very small amounts of benefits given to employees such as coffee, etc. since to
monitor these small amounts would be very difficult administratively.

Q: What are the inherent limitations on the power of taxation?

A: public purpose, international comity, non-delegability, exemption of government, territoriality --- PINET

Q: How are international comity and territoriality distinguished from each other?
A: International comity is a limitation which states that the property or income of a foreign government may not be taxed by another state whereas territoriality
states that a state may not tax property lying outside its borders or impose a tax upon the exercise of a right or privilege in another state.

Q: Is the rule of not imposing a withholding agent obligation on international organization-employers such as UN, ADB, etc. on their Filipino employees
applying the limitation of international comity or territoriality?
A: It is applying the limitation of international comity since the Philippine government is according respect to the status of these entities in the international
community. Please note that only the obligation to withhold by the international organization-employers is not imposed but the taxability of the Filipino employees
may still exist.

Q: Is the Expanded Value Added Tax Law unconstitutional for embodying a regressive system of taxation?
A: Even if the VAT is regressive because it is an indirect tax, it is not prohibited since the Constitution does not prohibit regressive taxes. What it simply provides is
that “Congress shall evolve a progressive system of taxation”, which means that direct taxes are to be preferred and indirect taxes minimized. (Tolentino vs.
Secretary of Finance)

Q: Is the Attrition Act 0f 1935 unconstitutional such that the same violates the rights of the BIR and BOC employees to (1) due process; (2) equal
protection of the laws; and (3) security of tenure.
A: No.
(1) Given the clear parameters on revenue targets, rewards, removal levels, etc., R.A. 9335 is complete in all its essential terms and conditions and
contains sufficient standards that negate a claim of undue delegation.
+
ADMG
Page 3 of 61
 (2) BOC and BIR are both revenue-generating agencies that are both under the DOF. Such substantial distinction Is germane and related to the
purpose of the law. (BOCEA vs. Teves)

Q: Is the law providing that the 20% senior citizen discount may be claimed only as a tax deduction unconstitutional?
A: No. The law is a legitimate exercise of police power which has general welfare for its object. This is despite the claim of Petitioner that the law has the effect of
imposing upon private entities the burden of partly subsidizing a government program. Even if the current rule does not provide the entities providing discounts a
peso for peso reimbursement, no payment of just compensation is warranted for being an exercise of police power and not eminent domain, which is a similar
characterization for similar rules such as price control laws.

The law has also not been shown to be unreasonable, oppressive or confiscatory and does not necessarily affect companies’ rates of return since (1) not all
customers are senior citizens; (2) the level of profit margin of the goods and services offered to the public varies; and (3) the entities’ ability to recoup the discounts
through higher mark-ups or from other products not subject to discounts. (Manila Memorial Park, Inc. vs, Secretaries of DSWD & DOF)

Q: The YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. It leased part of its premises to small canteen
owners and charged parking fees on the lots besides its building. The CIR wanted to tax YMCA for such income; however the latter claimed that it is
exempt from such. Which side is correct?
A: The CIR is correct that YMCA is liable to pay income tax. The assessment here was for deficiency INCOME tax on income derived from rental of real property
and NOT PROPERTY tax. Section 27 of the NIRC provides that even if non-profitable clubs are exempted, the last paragraph expressly states that profits realized
from real property from whatever source and wherever used is taxable (It is also taxable on income from profitable activities). On the other hand, the Constitutional
exemption under Art. 6 Sec. 28 (3) of Constitution (“charitable institutions, churches, non-profit cemeteries, etc.) refers to exemption from property taxes only. The
Constitutional exemption under Art. 14 Sec. 4 (3) which states that non-stock educational institution whose assets are used actually, directly and exclusively for
educational purpose is exempt from tax applies to income tax but this did not apply in the case at bar since YMCA was unable to prove that it is an educational
institution.

Q: What is the decision of the Supreme Court in the case of Lung Center Hospital vs. Quezon City as it relates to exemption of hospitals from property
taxes?
A: The Court ruled that even if the hospital leases out portions for commercial purposes and admits both paying and non-paying patients, it
does not lose its character as a charitable institution as long as the proceeds are used to further charitable purposes. However, even so, petitioner was deemed as
not exempt from real property tax on the portions of its property not actually, directly and exclusively used for charitable purposes. Thus, portions leased out for
commercial purposes are subject to real property tax while those used by hospital even if used for paying patients are still exempt from the same tax.

Q: What is the effect of multiplicity of situs of taxation?

A: Due to the variance in the concept of “domicile” for tax purposes, and considering the multiple distinct relationships that may arise with respect to intangible
personality and the use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile of
the owner thereto, the same income or intangible property may be subject to taxation in several taxing jurisdictions.

A simple example is an American decedent who died while residing in Japan and who has properties in the Philippines. Depending on the type of tax being
imposed (i.e., income, donor’s, estate, etc.), multiple jurisdictions may impose similar taxes at the same time.

Q: How is the problem of multiplicity of situs addressed?

A: The taxing jurisdiction may:
1) Provide for exemptions or allowance of tax credit for foreign taxes and;
2) Enter into treaties with other states.

+
ADMG
Page 4 of 61
Q: What are the elements of double taxation in its strict sense (direct duplicate taxation)?
A:
a.) taxing twice,
b.) by the same taxing authority,
c.) within the same jurisdiction or taxing district,
d.) for the same purpose,
e.) in the same year (or taxing period).

Q: What are some examples of double taxation in its broad sense (indirect duplicate taxation) and are thus not prohibited?
A:
(1) income of corporation which is both subject to income tax and then to withholding tax when declared as dividends to individual shareholders
(2) tax levied by two different states

Q: The City of Manila sought to enforce both Sections 14 and 21 of the Manila Revenue Code claiming that the former is a tax on manufacturers, etc.
while the latter applies to business subject to excise, VAT or percentage tax. Will the imposition of both sections amount to invalid double taxation?
A: Yes. There is in fact double taxation since both sections are being imposed on the same subject matter (privilege of doing business within the city), for the
same purpose, by the same taxing authority, within the same taxing jurisdiction, for the same taxing period, and of the same kind or character (a local business tax
imposed on gross sales or receipts). The Court further said that the LGC provision applicable (Section 143) clearly states that Section 143 (h) may be imposed
only on businesses that are subject to excise tax, VAT, and percentage tax “and that are not otherwise specified in the preceding paragraphs”.

Q: What happened in the case of CIR vs. Toda as to justify the Court’s finding that the taxpayers were guilty of tax evasion ?
A: CIC Corp. sold Cibeles building to Mr. Altonaga for 100 million who, on the same day, sold the same building to Royal Match Inc. for 200 million. The
assessment was based on the taxable gain not reported by virtue of the scheme adopted by the parties. The Court ruled that the three factors in tax evasion are all
present in this case, viz: (1) end to be achieved (payment of less tax) (2) evil or deliberate state of mind (not merely accidental) (3) course of action which is
unlawful. The Court added that the two transfers were tainted with fraud since the intermediary transfer (from CIC to Altonaga) was prompted only by the desire to
mitigate tax liabilities and not for any business purpose.

Q: Private respondents are locators within Subic Economic Zone and have been granted tax- and duty-free incentives under R.A. 7227. Subsequently,
R.A. 9334 was passed in 2005 which stated that notwithstanding any special contrary, “importation of cigarettes, spirits, liquors into the Philippines
even if destined for tax and duty free shops, shall be subject to all applicable taxes” and specific reference was made to goods destined for the Subic
Economic Zone. Will the Subic locators continue enjoying tax incentives even after R.A. 9334?
A: No. The revocation of the tax- and duty-free exemption of importation of cigarettes is valid because
(1) There is no vested right in tax exemption and may thus be modified or withdrawn at will by the granting authority.
(2) Tax exemptions are strictly construed against claiming party.
(3) While tax exemption may have been part of the inducement to carry on business within the zone, this exemption is not contractual and, as such, the
non-impairment clause of the Constitution can not be rightly invoked.
(4) Whatever rights were granted in the certificates/licenses issued to the locators, the same must yield to exercise of police power (‘taxation may be
made the implement of police power’). (Republic of the Philippines vs. Caguioa)

Q: Can a law be passed rationalizing the fiscal incentives granted to special economic zone locators such as PEZA, Subic Economic Zone, Clark
Development Corporation, etc. such that the same will have the effect of withdrawing or altering the current fiscal/tax incentives by the locators?
A: Yes. There are no vested rights in tax exemption and the grant thereof may thus be modified or withdrawn at will by the granting authority. This applies even if
the locators infused significant amounts of capital, equipment, etc.

+
ADMG
Page 5 of 61
Q: How are tax laws construed?
A: The legislative intent is primarily looked into. In case of doubt, the statue is construed strictly against the government unless the language of the law is clear.

Q: Who promulgates tax rules and regulations?

A: The Secretary of Finance acting on the recommendation of the Commissioner of Internal Revenue

Q: Can the CIR delegate the issuance of a ruling regarding an issue which has not previously been subject of a ruling?
A: No. The issuance of rulings of first impression cannot be delegated by the Commissioner of Internal Revenue.

Q: What are the requisites of a taxpayer’s suit?

A: The two minimum requisites for taxpayer suit are that (1) public funds are disbursed and (2) the law violated affects the petitioner. This is why in the case of
Lozada vs. BP, petitioner’s action mandamus to call election to fill up BP vacancies was not considered a taxpayer’s suit because the failure to call elections does
not involve public expenditure and in fact seeks government to spend funds.

Q: The Municipality of Agoo in La Union province passed a resolution authorizing its mayor to obtain a loan from the Petitioner and mortgaging as
collateral a portion of the Agoo plaza. As additional security, the municipality assigned a portion of its internal revenue allotment (IRA) in favor of the
Petitioner. The loan proceeds were used to construct a commercial center on the plaza which was objected to by the local residents including the
Respondent. Did the Respondent have standing to file for the nullification of the loan?
A: Yes. The two requisites for a taxpayer’s suit have been complied with. First, even if the construction of the commercial center would be sourced from the loan
proceeds from the Petitioner, the said funds were already converted into public funds upon receipt by the municipality and the assignment of the IRA likewise
characterized the funds as public. Second, since the plaza is for public use, the Respondent, like all other Agoo residents, is directly affected. Besides it has been
held that as long as taxes are involved, people have a right to question government contracts even if they are not party to the contract/s. (Land Bank of the
Philippines vs. Cacayuran)

+
ADMG
Page 6 of 61
B. INCOME TAX

Q: What are the features of the Philippine tax system

A: the Philippine tax system is (1) direct; (2) progressive; and (3) semi-schedular (varying taxes imposed on passive income), semi-global (one rate for all types of
gross income)

Q: What are the elements of a taxable income?

A: 1) gain or profit (as opposed to mere reimbursements or return on capital; note also that stock dividends are generally not considered as taxable income
given that it is merely a return on capital as the same does not result in the increase in the proportional interest of the shareholder in the company)
2) received or realized during taxable year (as opposed to the common examples of unrealized forex gains or mere revaluation increments) ---
REALIZATION concept
CONSTRUCTIVE RECEIPT doctrine --- An item is treated as income when it is credited to the account of or made unconditionally available to the
taxpayer; no physical possession is required.
3) not exempt from income tax (example of exempt is de minimis benefits and professional fees of general professional partnerships)

Q: After the PCGG filed cases to recover the ill-gotten wealth of the late husband of Beendicto, a compromise agreement was reached wherein the
parties agreed that Swiss cases involving Benedicto’s husband’s bank deposits would be terminated in exchange for the PCGG unfreezing all of the
deposits so that Benedicto could get his 49% share from the deposits. The CIR assessed the amount of the unfrozen accounts claiming that the same
was income subject to tax. Did Benedicto’s husband realize income as a result of the compromise agreement which led to him receiving 49% of the
deposits?
A: No. The 49% was in no way income because Benedicto’s husband did not gain any wealth nor did he become any richer than he was before as in fact his
wealth diminished to the extent of the 51% which he ceded to the PCGG. The 49% was a mere return of capital not subject to income tax. The Court ruled that it
is only the interest income of the deposits which may be subjected to income tax as the same is the only gain. (CIR vs. Benedicto)

Q: Is back pay paid to a separate employee considered income?

A: Yes. Notwithstanding that it is paid when possibly the employer-employee tie has been severed, the fact remains that the amount paid arose out of the same
employer-employee relationship.

Q: A frugal person decides to grow his own produce in his backyard. He calculated that his savings from not having to buy his goods from the market
(such as tomatoes, kalamansi, etc.) is around P5,000. Is this P5,000 income to him?
A: No. There is no realized gain since the same requires that there be a closed and completed transaction. As there was no counterparty involved in the case
there is no transaction to speak of.

Q: Is the security deposit paid by a lessee to a lessor income to the latter upon his receipt?
A: No. As the lessor’s entitlement to the said amount is still subject to some contingency, conditions, etc. which may ultimately limit his ability to realize the
income, the same cannot be considered income at the point of receipt. This is based on the CLAIM-OF-RIGHT DOCTRINE.

Q: A businessman asks one of his customers that instead of paying him that the customer instead writes a check payable to the school of the
businessman’s son. In short, the businessman never had possession of the money due from his customer. Is the amount income to the businessman?
A: Yes. This is an exact example of the constructive receipt doctrine where the income recipient need not have physical possession of the income as long as the
same is made unconditionally available to him/her.

+
ADMG
Page 7 of 61
Q: Are political contributions for election campaigns income to the candidate?
A: No. The law explicitly excludes this from the recipient-candidate’s gross income except only in the instance when the same are unutilized (for the campaign)
and thus becomes income of the recipient-candidate.

Q: What are not considered as wages for withholding tax purposes?

A: The term wages includes all remuneration for services performed by an employee for his employer including the cash value of all remuneration paid in any
form other than cash except that such term shall not include: (1) products of the farm where agricultural labor is performed (example: paying farmhand with eggs,
milk, etc.); (2) payments for domestic services in a private home; (3) payments for casual labor (occasional, irregular) not in the course of the employer’s trade or
business (example: asking your driver to line up and buy UAAP tickets for you) (4) payments for services by resident or citizens for foreign government,
international organizations . However, while these items are not subject to withholding the same will still be generally taxable in the hands of the recipient unless
there is some other basis for them not to be subject to income tax such as for example if they are minimum wage earners, etc.

Please note that for (4) above, it has been clarified that the individuals exempt from income tax are only the following: (a) diplomats (including family, staff,
servants if they are not locals/Filipinos); (b) officials of the UN and specialized agencies (ILO, UNESCO, IMF, WHO, UNICEF, ILO, FAO-UN) regardless of their
nationality or place of residence; (c) officials of other international organization such as ADB, IMF, IBRD, UNICEF, IRRI but only those that are non-Filipinos. Thus,
for those that are still subject to income tax (example: Filipino employee of ADB), the rule is that their wage is not subject to withholding BUT they are still required
to file their return and pay their income taxes albeit they have to do it on their own.

Q: How does income differ from capital?

A: Income is any wealth that flows into the taxpayer other than a return of capital while capital constitutes the investment which is the source of income.
Therefore, capital is fund while income is the flow. Capital is wealth while income is the service of wealth. Capital is the tree while income is the fruit.

Q: How do you classify taxpayers?

A:
A. According to source of income:
Those taxed on WORLDWIDE income are only resident citizens and domestic corporations; ALL OTHER types of taxpayers are subject only to
tax on Philippine sourced income
B. According to tax base:
Those taxed on GROSS income are only nonresident alien not engaged in trade or business in the Philippines and nonresident foreign
corporations; ALL OTHER types of taxpayers are subject to tax on net income (i.e., may claim deductions)

Q: How is the residency of an alien determined?

A: An alien is considered a nonresident if he/she stays here for a DEFINITE SHORT PERIOD of time. An alien will be considered a resident if the stay here is
either (a) DEFINITE AND EXTENDED or (b) INDEFINITE. Once determined to be a nonresident alien, the test to determine whether the alien is a nonresident
alien ENGAGED in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days.

Nonresident aliens not engaged in business are subject to tax of 25% on gross income earned from all sources EXCEPT (1) interest from FCDU/OBU deposits
(exempt) and (2) CGT on sale of shares (5%/10%) and real property (6%) classified as capital asset. They are also not entitled to Optional Standard Deduction.

Q: How is a dual citizen treated for tax purposes?

A: A dual citizen is considered a Filipino citizen for tax purposes. So the tax implications of his/her income, transactions will depend on his/her residency.

Q: Define “Taxable Income”

+
ADMG
Page 8 of 61
A: The term 'taxable income' means the pertinent items of gross income specified in the Tax Code less the deductions and/or personal and additional exemptions,
if any, authorized for such types of income. In formula form ---

Income
Less: Exclusions
Gross Income

Less: Deductions/Exemptions
Taxable Income

Q: What is the rationale for using net taxable income (as opposed to gross income) as the tax base against which the tax rate is applied?
A: This is consistent with the “ability-to-pay” concept.

Q: What is the consequence of an income item being subjected to FINAL tax?

A: Such income is no longer “RETURNABLE”, i.e.; it will no longer be declared as income in the Income Tax Return, hence will no longer be subject to the
schedular rates on income tax (for individuals) or to 30% (for corporations).

Q: What income items are considered as passive income subject to final tax in the hands of an individual resident citizen?
A: These are (i) interest from bank deposits; (ii) royalties; (iii) prizes exceeding P10,000; and (iv) dividends.

Q: How are prizes taxed under the Tax Code?

A: The tax imposable will depend on the amount of the prize. If the prize is:
more than 10,000 = 20% FINAL TAX
10,000 or less = forms part of gross income which is subject to the SCHEDULAR rate
However, winnings from the PCSO and LOTTO are EXEMPT from tax.

Q: What is the taxability of dividends received by individuals?

A: It depends. If the dividends are from a DOMESTIC COPRORATION, the recipients will be taxed as follows:
Citizens and resident aliens = 10%
Nonresident aliens engaged in trade or business in the Philippines = 20%
Nonresident aliens engaged NOT in trade or business in the Philippines = 25%
If the dividends are from a FOREIGN CORPORATION, then it will form part of the gross income of any type of taxpayer subject to scheduler rate
(except NRANETB which is still the 25%) BUT note that the situs of the income becomes material except for a resident citizen who is taxed on
worldwide income.

Q: What is the taxability of dividends received by corporations from a domestic corporation?

A: It depends. If the dividends are from a DOMESTIC CORPORATION, the recipients will be taxed as follows:
Domestic or Resident Foreign corporation = 0% (as inter-corporate dividends)
Nonresident foreign corporation =
Tax treaty rate, if any
15% if no tax treaty but satisfies tax-sparing provision
30% if no tax treaty and does not comply with tax-sparing provision

+
ADMG
Page 9 of 61
 If the dividends are from a FOREIGN CORPORATION, then it will form part of the gross income of any type of taxpayer BUT note that the situs of
the income becomes material except for a domestic corporation which is taxed on worldwide income.

Q: Are retirement benefits taxable?

A: They are generally taxable except if the same are granted (i) in accordance with a reasonable private benefit plan maintained by the employer; (ii) in favor of a
retiring official or employee who has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of
his retirement; and (iii) is availed of only once by the said individual.

Q: What is the tax implication of liquidating dividends?

A: Any gain (computed as the difference between the fair market value of the liquidating dividend received and the cost basis of the shares in the liquidating
company) shall be subject to the regular tax rate (scheduler rate for individuals and 30% for corporations).

Q: Are SENIOR CITIZENS supported and living with a taxpayer included for purposes of claiming additional exemptions?
A: According to a BIR Ruling, senior citizens do not qualify for purposes of claiming additional exemptions because such does not have basis in law.

Q: What is the effect of a change in status of the taxpayer or the CHANGE-IN-STATUS rule?
A: The rule of thumb is THAT WHICH WILL BE BENEFICIAL TO TAXPAYER (e.g., if the child is born on the last day of the year, the parent can still take the
whole P25,000 additional exemption in the same way that if the child dies on the first day of the year, the whole P25,000 is still claimable. Note that the P50,000
personal exemption is now applicable across the board so it does not matter whether one is single or married and there is no longer no concept of a head of the
family.)

Q: Is a nonresident alien entitled to personal and additional exemption?

A: It depends. If engaged in trade or business and country of residence allows exemptions to Filipinos, then the individual is allowed the lower of either the
exemptions in the Philippines or those available in his/her home country. If the nonresident alien is not engaged in trade or business, he/she will NOT be allowed
any exemption.

Q: Are employees of ROHQs, OBUs and FCDUs entitled to personal and additional exemptions:
A: No, these employees are subject to tax on gross income without the benefit of deduction/exemptions.

Q: What are the changes introduced by REPUBLIC ACT NO. 9504 (TAX EXEMPTION OF MINIMUM WAGE EARNES AND INCREASING
PERSONAL/ADDITIONAL EXEMPTIONS / CHANGE IN OSD) (June 17, 2008)?
A:

• “Minimum wage earners” shall be exempt from the payment of income tax on their taxable income. Moreover, the holiday pay, overtime, night shift differential
pay, and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. The term “statutory minimum wage” refers to the rate
fixed by the Regional Tripartite Wage and Productivity Board.
• Increases the amount of personal exemption for all individuals to a fixed amount of P50,000.00, from the previous varying amounts of P20,000.00, P25,000.00
and P32,000.00. Also increases the additional exemption from P8,000.00 toP25,000.00 for each dependent, not exceeding four (4).
• Amends Section 34(L) to ---
(1) Increase to 40% of gross sales or receipts the 10% Operational Standard Deduction (OSD) previously allowed to individuals (except nonresident
aliens) engaged in business or earning income in the exercise of their profession; and
(2) Now allow corporations (except nonresident foreign corporations) to claim OSD, instead of itemized deductions, in an amount not exceeding 40% of
their gross income.
+
ADMG
Page 10 of 61
• If the taxpayer did not indicate in his or her return his or her intention to elect the OSD, he or she shall be considered as having availed (irrevocable for that
year) of the itemized deductions. Hence, the election can be made on a yearly basis. An individual who opts for the OSD shall not be required to submit
financial statements but a corporation availing of the OSD is still required to submit its financial statements.

Q: Who are the individuals who are NOT required to file an ITR?
A:
(1) A compensation earner whose income does not exceed the allowable exemptions;
(2) A compensation earner whose withholding taxes were correct EXCEPT if he/she had 2 or more employers;
(3) Those whose only income is subject to Final Withholding Tax;
(4) Individuals exempt from income tax;
(5) Those whose total compensation is below 60T.

However, an individual who is engaged in business is ALWAYS required to file an ITR regardless of the amount of income generated.

Q: How do you differentiate between Capital Gains Tax on sale of shares of stock not traded in the local stock exchange and Capital GainsTax on sale
of real property considered as capital asset?
A: The sale of shares of stock not traded in the local stock exchange is subject to CGT at the rate of 5% for the first P100,000 and 10% on the amount in excess
of P100,000. The tax base shall be only the GAIN on the sale. Such sale will always be subject to CGT without any possibility of exemption. As for the
sale of real property considered as capital asset, the rate is 6% and the tax base is the ENTIRE SELLING PRICE or the FAIR MARKET VALUE, because
under the law this is a PRESUMED GAIN from the sale. However, there is a possibility of exemption as when the proceeds of the sale will be utilized by
the taxpayer to buy his principal residence, such purchase to be made within 18 months from the sale. The money in this case shall be put in escrow. The
sale of real property classified as capital asset to the government may be subject to either the 6% CGT or form part of gross income of the taxpayer (in the
latter case, only the gain forms part of the gross income), subject to the taxpayer’s choice.

CGT on --- Rate Base Exemption

(1) Sale of real 5% / 10% Net Capital Gain Sale of principal
property residence with
proceeds to be
used to buy
another one
(2) Sale of unlisted 6% Gross Selling Price or Fair None
shares Market Value, whichever is
higher

Note that SHARES OF STOCK IS DEFINED TO INCLUDE warrants and/or options to purchase shares of stock, units of participation in a partnership
(except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and RECREATION
OR AMUSEMENT CLUBS (SUCH AS GOLF, POLO OR SIMILAR CLUBS), and mutual fund certificates.

TAX ON CORPORATIONS

Q: Are professional fees paid to general professional partnerships subject to withholding tax?

+
ADMG
Page 11 of 61
A: No, since the GPPs are exempt from tax, payments to them are also not subject to withholding tax. However, payments made BY them (or any other tax exempt
entity) are subject to withholding tax if the payee/income recipient is not similarly exempt from income tax.

Q: What is the tax implication when a partner in a partnership withdraws or retires and consequently receives his partnership interest?
A: As this is akin to selling his partnership interest, the gain derived by the partner (computed similar to a liquidating gain; i.e., amount received less cost) is
treated as an ordinary gain and not a capital gain. Thus, the same gain will form part of the partner’s gross income.

Q: In the cases of Obilos and Gatchalian, what were considered as the elements to establish that a taxable unregistered partnership existed?
A: The elements that were deemed necessary for a taxable unregistered partnership were (1) mutual contribution of funds and (2) joint interest in properties and
gains. In the Obilos case the fact that a father bought land which he then transferred to his children who then resold them without actually introducing
improvements or subdividing was considered as NOT giving rise to a taxable unregistered partnership as opposed to the Gatchalian case where they agreed to
contribute funds to buy lotto tickets and then showed clear intent to divide profits.

Q: St. Luke’s is a non-stock non-profit hospital. The BIR assessed St. Luke’s based on the argument that Section 27 (B) of the Tax Code should apply
to it and hence all of St. Luke’s income should be subject to the 10% tax therein as it is a more specific provision and should prevail over Section 30
which is a general provision. St. Luke’s countered by saying that its free services to patients was 65% of its operating income and that no part of its
income inures to the benefit of any individual. Does Section 27 (B) have the effect of taking proprietary non-profit hospitals out of the income tax
exemption under Section 30 of the Tax Code and should instead be subject to a preferential rate of 10% on its entire income?
A: No. The enactment of Section 27 (B) does not remove the possible income tax exemption of proprietary non-profit hospitals. The only thing that Section 27 (B)
captures (at 10% tax) in the case of qualified hospitals is in the instance where the income realized by the hospital falls under the last paragraph of Section 30
such as when the entity conducts any activity for profit. The revenues derived by St. Luke’s from pay patients are clearly income from activities conducted for profit.
(CIR vs. St. Luke’s Medical Center, Inc.)

PAY PATIENTS – 30% OF TOTAL PATIENTS CHARITY PATIENTS – 70% OF TOTAL PATIENTS RESTAURANTS, ETC.

INCOME TAX = SUBJECT AT 10% (ST LUKE’S) INCOME TAX = EXEMPT INCOME TAX = SUBJECT AT 10%
RPT = STILL EXEMPT (LUNG CENTER) RPT = EXEMPT RPT = SUBJECT

Q: What is the taxability of the sale of realty to the government?

A: It will be subject to EITHER the regular income tax OR 6% CGT, at the option of the TAXPAYER

Q: When is the MCIT imposable on a domestic corporation?

A: It is imposable on the fourth year following the year of operation

Q: Up to what period may the MCIT be carried over?

A: It may be carried over up to the three (3) immediately succeeding taxable years.

Q: How is the MCIT imposed?

A: It is imposed if the computed 2% tax on gross (excludes passive income subject to final tax from gross income and with only direct costs as deductions) is
higher than the regular income tax (computed based on gross income less the deductions allowed under the Tax Code)

Q: Can the imposition of the MCIT be suspended?

A: Yes, in cases of force majeure, labor strike or legitimate business reverses BUT note that only the Department of Finance can grant the suspension.
+
ADMG
Page 12 of 61
Q: When is a company considered as a resident foreign corporation?
A: The Tax Code defines such an entity as being engaged in trade or business or who, as defined in jurisprudence, “undertakes continuous business
transaction”. A BRANCH corporation is a RESIDENT FOREIGN CORPORATION while a SUBSIDIARY is a DOMESTIC CORPORATION.

Q: Air New Zealand is a foreign corporation engaged as an off-line international carrier having no landing rights in the Philippines but which has a
general sales agent in the Philippines which agent sells passage documents for compensation or commission covering off-line flights of Air New
Zealand. Is Air New Zealand totally exempt from Philippine taxes?
A: No. While Air New Zealand is not subject to Gross Philippine Billings (GPB) as an offline carrier, it is liable for corporate income tax as it is considered a resident
foreign corporation for doing business in the Philippines as evidenced by its maintenance of a general sales agent here. (Air New Zealand vs. CIR)

Q: Are there corporations exempt from the BPRT?

A: YES. PEZA companies are not subject to BPRT.

Q: What is the difference between a Regional/Area Headquarters and a Regional Operating Headquarters?
A: An R/AHQ can only perform supervisory, communication, coordination functions while an ROHQ can do planning, logistics, R&D, financial advisory, etc. For
income tax purposes, an R/AHQ is exempt from income tax primarily because it is not expected to generate any income while the ROHQ is subject to the
preferential tax rate of 10%. For VAT purposes, services by an R/AHQ are VAT exempt while those of the ROHQ may be VAT-taxable or VAT zero rated if, in the
latter case, the services are performed for nonresidents and paid for in foreign currency.

Q: Will the 15% preferential rate for Filipinos occupying managerial and technical position in an ROHQ apply even if the position is not concurrently
held by expatriate ?
A: Yes.

Q: What are the requirements so that a Filipino employed by an ROHQ is entitled to the 15% preferential tax rate?
A: The employee must pass the three-fold test such that ---
(1) He/she is occupying a managerial or highly technical position
(2) His/her taxable income is at least P975,000 per year
(3) He/she is employed exclusively by the ROHQ

Q: How is the income of a head office which transacts business independently of the branch taxed?
A: The head office shall be treated as a nonresident foreign corporation with respect to the income it generated from the transaction carried out independently of
the branch [Marubeni case]. An example is when a head office acquires shares of another company independently of its branch office in the Philippines, the
dividends received by the head office is taxes as one received by a nonresident foreign corporation (i.e., (i) treaty rate or (ii) 15% if w/ tax sparing or (iii) 30% as
part of gross income) and not a resident foreign corporation (i.e., exempt as intercorporate dividends).

Q: Petitioner withheld a 15% tax on its remittances to its head office in Germany using as basis the Tax Code provision on BPRT. Believing that it
overpaid the BPRT since the RP-Germany provides for a lower rate of 10% on branch remittances, the Petitioner filed a refund with the BIR and
subsequently with the CTA. Both the BIR and the CTA denied stating that the branch office should have filed a tax treaty relief application prior to
availing of the preferential treaty rate in view of the existing doctrine in the Mirant case. Is Deutsche Bank entitled to the claim for refund even if it did
not file a tax treaty relief application with the BIR?

+
ADMG
Page 13 of 61
A: Yes. The Court initially stated that the minute resolution upholding the doctrine in Mirant is not a binding precedent specially since there are differences in the
parties, taxable period, etc. On the substantive issue, the Court said that the principle of pacta sunt servanda requires the performance in good faith of treaty
obligations. Thus, to require that taxpayers must first comply with an administrative requirement (under RMO 1-2000) is not in consonance with the performance in
good faith. The obligation to comply with a tax treaty must take precedence over the objectives of the said RMO. In addition, it was pointed out that the prior
application becomes illogical if the premise of the claim was an erroneous payment since the taxpayer could not have known it would be entitled to the refund
since precisely it was using a different basis when it paid the taxes due. (Deutsche Bank AG Manila Branch vs. CIR)

Q: How do you trace the ownership for purposes of determining whether corporation is closely-held for purposes of determining exemption from the
IAET ?
A: You trace it all the way up to the ultimate parent. An example would be if Company A improperly accumulates earnings and the company is owned 100% by
Company B who is in turn owned by Company C who is in turn owned by Company D. Even if only Company D is a public company, the same still inures to
Company A’s benefit thus exempting it from IAET.

Q: Are there entities exempt from Improperly Accumulated Earnings Tax?

A: YES.
1. banks and other non-bank financial intermediaries
2. insurance companies
3. publicly-held corporations
4. general professional partnerships
5. non-taxable joint ventures
6. enterprises duly registered with the PEZA, BCDA, and those under special income tax regimes

Q: Are there ways by which to avoid liability from the IAET?

A: YES, when the accumulation of earnings is justified by reasonable needs of the business such as:
1. accumulation up to 100% of the paid-up capital
2. for definite corporate expansion projects or programs
3. for buildings, plants or equipment acquisitions
4. for compliance with a loan covenant or pre-existing obligation under a legitimate business agreement
5. when there is a legal prohibition for its distribution
6. in the case of Phil. subsidiaries of foreign corporations, undistributed earnings intended or reserved for investments within the Philippines

Q: When improperly accumulated earnings are subjected to the IAET, will it still be subject to the tax on dividends when eventually declared as
dividends?
A: YES.

Q: In justifying the required corporate liquidity to justify exemption from IAET, is the Bardahl formula applicable to all corporations?
A: NO. The Bardahl formula may apply only to companies with shorter operating cycles. An operating cycle of 288.35 days does not justify a high liquidity as
opposed to companies with operating cycle of 3.33 months

Q: What is the tax benefit rule?

A: This rule states that the recovery of an amount previously written-off but which was subsequently collected is a taxable event TO THE EXTENT THAT IT
BENEFITED THE TAXPAYER, i.e., to the extent that the said deduction resulted in a lower taxable INCOME, hence a lower tax due. Thus, if the taxpayer was
already in a taxable loss position before deducting the bad debts, then subsequent recovery of the bad debt will not be taxable since the bad debt did not benefit
him with a reduced tax due.
+
ADMG
Page 14 of 61
Q: What is the rule on the taxability of STOCK dividends?
A: Generally, STOCK dividends are not taxable EXCEPT when
1. it changes the proportionate interest of a shareholder after its receipt
2. the stock dividends are subsequently sold

Disguised dividends = excessive payments by a corporation to shareholders (not in the form of dividends) which may be interpreted as ways to avoid tax on
dividends (example: interest and loan payments)

Liquidating dividend = dividends declared by a dissolving company. The tax implication to the shareholder is as if he/she sold his/her shares to the liquidating
company (i.e., actual gain computed as liquidating dividend less cost basis in the share subscription). The liquidating company is NOT subject to any tax.

Q: Define transfer pricing.

A: It is the power of the Commissioner to distribute, apportion, allocation and shift income and expenses between related taxpayers to reflect their true taxable
income or to prevent evasion of taxes.

Q: What is the tax implication of a forgiveness of debt?

A: If the forgiveness of debt is made:
for services rendered, it shall be taxed as compensation income on the part of the recipient
for no consideration, it is subject to donor’s tax
by a corporation in favor or a debtor who is likewise a stockholder of the creditor-corporation, it will be treated as a dividend
by a stockholder in favor of a corporation-debtor, it will be treated as additional capital of the stockholder-lender on the corporation-debtor [SEC. 50 OF RR
2]

Q: Are the income of property donated likewise excluded from gross income if the donor’s tax is paid ?
A: No. Only the property donated will be excluded but not the income (ex. Dividends on shares donated)

Q: What are considered as exclusions from gross income:

A:

1) life insurance paid to heirs of deceased

2) retirement pay if (i) at least 50 and 10 and (ii) plan registered w/ BIR and (iii) benefit availed only once
3) benefits received under SSS/GSIS
4) gifts (because subject to donor’s tax already) BUT income of property (ex. Dividends of shares) is TAXABLE
th
5) 13 month pay AND other benefits
6) income by foreign government. from loans, bonds, stocks, deposits by foreign government, financing institution owned, controlled or refinanced by gov’t., or
international regional financial institution set-up by foreign government
7) income derived by the government or its political subdivisions from any public utility or from the exercise of any essential governmental function
8) prizes and awards to recognize religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if (i) the recipient was selected without
any action on his part to enter the contest or proceeding; and (ii) the recipient is not required to render substantial future services as a condition to receiving the
prize or award.
9) all prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations.

+
ADMG
Page 15 of 61
Q: What are the de minimis benefits exempted from income tax?

A:

(a) Monetized unused VL not exceeding ten (10) days during the year
(b) Medical cash allowance not exceeding 1,500 per year
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month
(d) Uniform and clothing allowance not exceeding P5,000 per annum;
(e) Actual yearly medical benefits not exceeding P10,000 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than
cash or gift certificate, with an annual monetary value not exceeding P10,000
(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc., and
(j) daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage."

Q: Can a company also consider as de minimis benefit other amounts of relatively small value given to employees (such as cell phone allowance) even
if the same is not in the above list of de minimis benefits?
A: No. The current list of de minimis benefits not subject to tax is exclusive.

Q: What is the income tax implication when taxes are successfully refunded?
A: If the tax was previously claimed as deduction then subsequently refunded, it will form part of gross income at the year of refund. However, if said tax was not
claimed as deduction in the first place as they are non-deductible types of taxes (such as income tax, estate tax, etc.), it will not constitute taxable income in the
year of recovery/refund.

Q: Will separation pay received due to redundancy be exempt as well?

A: YES. Redundancy is also considered as a cause beyond the control of the employee.

Q: What benefits are exempt from the FBT?

A:
1. Benefits granted to rank and file employees
2. Benefits required by the business or for the convenience of the employer
3. De minimis benefits
4. Benefits exempted by law

Q: When are loans granted to employees subject to Fringe Benefit Tax?

A: When the interest on said loans are lower than the legal rate of 12%. In which case, the difference between 12% and the stipulated interest rate shall be
subject to FBT.

Q: When is educational assistance exempt from FBT?

A: When the following conditions concur:
(1) the education is related to employer’s business and
(2) Such assistance is coupled with a service contract.
Otherwise, the assistance is subject to FBT.
+
ADMG
Page 16 of 61
If granted to relatives of the employee (ex. child), then the same is subject FBT except if there is a competitive scholarship scheme

Q: The spouses Benaglia were provided rooms and meals free of charge by the Royal Hawaiian Hotel during the time that the husband was stationed
as the hotel manager. The government asked the spouses to include in their gross income the market value of the rooms and meals furnished by the
hotel. Are the amounts subject to fringe benefits tax?
A: No. The rooms and meals were provided for the “convenience of the employer” since they were not given as compensation for services and not for the personal
convenience of the employee. The same was given because he could not otherwise perform his services required of him and that so he would be able to perform
his duty continuously and his presence was possible at a moment’s call. The advantage provided to the spouses was merely incidental since the primary goal was
to give convenience to the employer.

Q: Are transportation allowances taxable?

A: If they are part of the salary and are given as a fixed amount, it is taxable as compensation. If it is required by the nature of the work and the employee is
required to liquidate, it is not taxable.

Q: Can housing benefit be exempt from FBT?

A: Yes. If the housing is (i) less than 50 meters away from the workplace or (ii) the stay of the employee is less than 3 months.

Q: Once an item is subjected to FBT will the same still form part of the taxable income of the recipient-employee?
A: No. The FBT is a final tax.

Q: Who can avail of the deductions provided under the law?

A: All types of taxpayers EXCEPT:
1. nonresident aliens not engaged in business and
2. nonresident foreign corporations
3. other individuals subject to tax on gross income such as employees of ROHQs, OBUs, etc.
4. those who elect to avail of the OSD

Q: What are examples of capital expenditures which are considered as non-deductible are instead spread out over the life of the asset?
A: Some examples would be litigation expenses to protect the title of a property and advertising expense (see below). The test to characterize a payment as a
capital expense is if the benefit/s extends beyond the taxable year when payment was made.

Q: What is the taxability of advertising expense?

A: It depends. If the advertising expense was incurred to stimulate current sales (tactical), it is deductible in full. If however it is incurred to stimulate future sale
(thematic), it will be treated as a capital expenditure and the cost thereof will be amortized over the years benefited, with each year able to claim only the amount
amortized in such year. [GENERAL FOODS (APRIL 14, 2003)] (note also that in this case, the SC held that the amount was not considered ORDINARY, thereby
failing one of the requisites for deductibility of business expenses, since the P9 million cost of advertising was inordinately large as it constituted ½ of the
company’s total marketing expense)

Q: What are the requisites for business expense to be deductible?

A:
(1) ordinary and necessary (which integrates the requirement that the same be reasonable and connected with the trade or business)
+
ADMG
Page 17 of 61
(2) paid or incurred
(3) if there is a requirement to withhold, that the payor must have withheld and remitted the taxes
(4) must be substantiated with documents
(5) the payments are not illegal

Q: What is the ceiling imposed on representation expense for purposes of deduction from gross income?
A: for sale of goods: 0.50% of net sales
Sale of service: 1% of net revenue
However, when supporting documents reflect a lower amount, then such lower amount shall be used. Note that the treatment of representation expense will apply
if the taxpayer is able to show that it was in fact NOT a fringe benefit granted. An example would be the club memberships which, if used to entertain clients, would
be part of representation expenses but if only used by the employee-officer, the it will be subject to FBT.

Q: What is interest arbitrage?

A: It results in the reduction of the interest expense by a percentage of the interest income subject to final tax. It is also defined as a circumstance which is
presumed to exist because by putting excess funds in deposits/securities subject to 20% withholding, taxpayers are able to avoid the 32% tax which will happen if
same funds are invested in revenue-generating activities (thus, margin is 12%). Another illustration of this is when a taxpayer borrows money from the bank
(interest payments on which can then be claimed as expense and thus a 32% benefit) then deposits it in a bank (and subsequently suffers only a 20% final
withholding tax), thus benefiting by 12% representing the difference between the 32% deduction and the 20% withholding tax. It does not matter if taxpayer
actually intended to save on taxes.

Q: Will interest payments between a parent company and its subsidiary be disallowed in view of Section 34 (B)(2)(b) in relation to Section 36 (B) of the
Tax Code?
A: No. The prohibition on non-deductibility of interest expense refers to a case where the creditor and debtor are commonly owned by at least 50%. The case of a
parent and subsidiary loan does not refer to a case of commonly-owned entities but one where one entity owns the other.

Q: What is the treatment of interest paid to acquire property used for business?
A: Interest incurred to acquire property used for business may either be claimed as a deduction or treated as capital expenditure

Q: Who may avail of tax credits for income tax purposes?

A: Only those subject to tax on worldwide income (resident citizen and domestic corporation) because they pay taxes for foreign sourced income twice (in the
Philippines and abroad), and the tax credit is meant to lessen the impact of double taxation.

Q: What are the non-deductible taxes?

A:

(1) Income tax

(2) estate and donor's taxes; and
(3) taxes assessed against local benefits of a kind tending to increase the value of the property assessed (RPT)

Q: Are unclaimed input VAT (such as for instance when there is an excess of input VAT and there is no basis to refund or the period to refund has
lapsed) deductible?
A: No. There is no legal basis to claim this as deductions.

+
ADMG
Page 18 of 61
Q: When is there a net operating loss carry-over (NOLCO)?
A: When the allowable deductions exceed gross income.

Q: For how long may the NOLCO be carried over?

A: It may be carried-over for 3 succeeding years. Any NOLCO remaining beyond said period is forfeited.

Q: Are there instances when a net operating loss may not be carried over?
A: YES. When the net operating loss is incurred at the time when company not taxable (e.g., registered under the BOI), such net operating loss may NOT be
carried-over.

Q: Can the depreciation expense exceed the amount of acquisition cost of the asset if the property is reappraised and it is shown that the
reappraised value is higher than the acquisition cost?
A; No.

Q: What properties are subject to depreciation?

A: Tangible and intangible assets which are limited in duration such as copyright, patent, franchise. Property not subject to depreciation would be inventories,
LAND, properties not used for business and intangibles with unlimited use.

Q: Using the straight-line method, what is the annual depreciation of an equipment which was acquired for 5M and an estimated useful life of 5 years
and a salvage value of zero?
A: The annual depreciation will be 1M pesos computed as follows: (5,000,000 less 0) divided by 5 years.

Q: Mr. X buys a computer for P15,000. The computer has an estimated useful life of 5 years and, as such, it takes a yearly depreciation expense of
P3,000. After 5 years, Mr. X sells the computer for P5,000. Mr. X claims a loss of P10,000 as he claims that the amount realized of P5,000 is less than the
cost basis of P15,000. Is he correct?
A: No. Mr. X’s basis has to be adjusted to take into account the depreciation expense already claimed. Thus, the adjusted cost basis would be zero as the
computer is already fully depreciated. Mr. X will then have a gain of P5,000 which is P5,000 (amount realized) less zero (adjusted cost basis). To take the position
that the basis is not reduced by the depreciation is a clear violation of the CAPITAL RECOVERY CONCEPT.

Q: When are forex losses and re-appraisal adjustments deductible?

A: The same are deductible only when there is already a close and completed transaction because it is only at such point when the loss is realized. An example is
when a $100 loan incurred when the exchange rate was P50:$1 is subsequently paid when the exchange rate is already at P60:$1, the same will result in a
deductible forex loss of P1000 which represents the additional amount of peso the borrower has to come up to pay the same amount of dollar loan (100). Before
actual payment, there is as yet no closed and completed transaction which may be claimed as a deductible expense.

Q: When are bad debts deductible?

A: When they are ascertained to be worthless and after having gone through the process of ascertainment such as by sending demand letters, etc. Note that in
the cases of banks claiming the expense, the BSP must approve of the bad debt deduction. On the other hand, if the bad debt being written off is from an
insurance company, the insurance company must be proven as being insolvent.

Q: Philex entered into an agreement with Baguio Gold entitled “Power of Attorney” whereby Philex was made to manage and operate Baguio Gold’s
mining claim in Sto. Nino, Benguet province. In return, Philex was to receive as compensation 50% of the net profit of the Sto. Nino project. In the
course of the project, Philex made advances of cash and property until the mine stopped operating due to losses. Subsequently, Philex wrote off the

+
ADMG
Page 19 of 61
indebtedness to Baguio Gold. The BIR disallowed the write-off as the same was considered as investment in a partnership rather than as a loan. Is
Philex entitled to the write-off of bad debts?
A: No. The amount advanced by Philex was meant to be investments (NOT loan) since (i) 50% share is too big to be interest (ii) no requirement to repay for
Baguio Gold (iii) no collateral (iv) sharing of profit and creation of common fund are indicators of joint venture. As such they are not bad debts that could be written
off. (Philex Mining Corporation vs. CIR )

Q: When are donations deductible in full?

A: When the same are made to:
(1) Government for PRIORITY ACTIVITIES in education, health, youth & sports, human settlements, science, economic development
(2) Foreign institutions and international organizations
(3) accredited NGOs, provided the following conditions are met:
th rd
a. it utilizes the same w/in the 15 day after the 3 month from close of the year,
b. the administrative expenses of such NGO does not exceed 30%,
c. upon dissolution, the assets of such NGO are required to be transferred to another NGO, and
d. its board members receive no compensation

Q: When is the amount of donation deductible subject to limitation? What is the limitation?
A: When the donation is made to:
(1) the government for public purposes
(2) accredited domestic corporations for religious, charitable, scientific, etc. purposes
(3) social welfare institutions
(4) NGOs (not accredited according to the conditions above)

The limitations are that the deductible donation does not exceed ---
(1) 10% of the net income for individual taxpayers
(2) 5% of the net income for corporate taxpayers

Q: Are interest and penalties paid on a deficiency tax assessment deductible for tax purposes ?
A: Only interest is deductible, the penalties paid are not.

Q: Who can avail of the optional standard deduction (OSD)?

A: The following are entitled to avail of the OSD: (1) individuals except nonresident aliens (whether engaged or not engaged in trade or business): (2) estates; (3)
trusts; and (4) corporations except nonresident foreign corporations

Q: What is the difference in the way that the OSD is determined for individuals and corporations?
A: The 40% OSD for individuals is applied on the gross sales/receipts while the 40% OSD for corporations is applied against gross income.
 
Q: Can partnerships and the constituent partners claim OSD?
A: Yes. However, for GPPs, if the GPP availed of the itemized deductions, the partners can still claim itemized deductions but cannot claim the OSD. On the
other hand, if the partnership already claimed the OSD, then the partners cannot claim any more expenses, whether it be itemized or also the OSD.

Q: What items are non deductible for income tax purposes?

A:
(1) Personal expenses
+
ADMG
Page 20 of 61
 (2) Amounts to improve buildings (because the amounts spent thereon are capitalized, but which will subsequently be deductible in the form of depreciation
expense)
(3) Restoration expenses for property subject to depreciation (because capitalized)
(4) Premiums for life insurance on employee where taxpayer is beneficiary of insurance
(5) Losses from sale or exchange between related parties

Q: What are capital assets?

A: Capital assets are those property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE
1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or
2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or
3. property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or
4. Real property used in trade or business of the taxpayer.
These four items are considered as ORDINARY ASSETS.

Q: Mr. A owns a ten-door apartment with a monthly rental of P5,000 each unit. He sells the entire complex to Mr. B. Is the sale subject to capital gains
tax?
A: No. The apartment complex is definitely real property used in business and the gains derived from the sale is considered ordinary income.

Q: When is the holding period material for purposes of imposing the capital gains tax?
A: Only when the shares are sold by an individual such that if the same has been held for more than 12 months, only 50% of the gain or loss is taken into
account. This does not apply to corporations.

Q: A bought X Co. shares today and sold it after 3 months and suffered losses but after 15 days also bought X Co. shares. Is the loss suffered in the
previous sale allowed?
A: No. This is an example of a wash sale where the losses from sale of stocks or securities is disallowed if taxpayer acquired 30 days before and after stocks or
securities substantially identical EXCEPT if the taxpayer involved is a dealer in securities.

Q: Are equity investments considered as capital assets?

A: YES. Equity investments are considered capital assets and not ordinary asset. The only instance when shares of stock are considered as ordinary assets is
when the same is in the hands of a dealer in securities. Thus, loss in investments which become worthless is capital loss (deductible only from capital gains, if
any) and NOT deductible as a bad debt. (China Banking Corporation vs. CIR)

Q: Describe a simple tax-free transfer under Section 40 (C)(2) of the Tax Code.
A: X Corp. transfers a parcel of land to Y Corp. in exchange for Y Corp. shares as a result of which transfer X Corp. gains control of Y Corp. (i.e., shares
transferred makes X Corp. owner of at least 51% of Y Corp.). Subsequent to the exchange, the cost basis of the assets transferred will be as follows: (1) land in
the hands of Y Corp. – same cost basis as in the hands of X Corp. / Y Corp. shares – same cost basis as the land exchanged by X Corp.

Q: What is the purpose for the exemption/deferral accorded under Section 40?
A: To encourage corporations in pooling, combination or expanding resources to spur economy

Q: What is the situs of dividends?

A: It is considered as sourced within the Philippines if the dividends are declared by:
1. A domestic corporation
+
ADMG
Page 21 of 61
 2. A foreign corporation, at least 50% of whose gross income for the three-year period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines – but pro rated
(i.e., only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within
the Philippines bears to its gross income from all sources.
If the income derived from sources within the Philippines is less than 50% of the total gross income, the entire amount of income generated is NOT considered
as Philippine-sourced.

Q: What is the situs of services?

A: It is considered as sourced within the Philippines when performed in the Philippines

Q: An employee of a multinational company holds office and performs all his services in the Philippines. Its employer structures his salary such that
part of it is paid out of the Philippines and part of it is paid out of Singapore where an affiliate company is located. Would the portion of the employee’s
salary that is paid out of Singapore not be subject to Philippine taxes?
A: No. As long as the services are performed in the Philippines, the place of payment and/or the source of the salary are irrelevant and the compensation income
will still be considered as Philippine-sourced.

Q: What is the situs of sale of personal property?

A: It situs is the place of sale EXCEPT:
(1) if what is sold are shares of a domestic corporation which is always considered as Philippine sourced income
(2) if such personal property is manufactured abroad and sold here or manufactured here and sold abroad – in which case the amount shall be allocated

Q: What is the situs of rentals, royalties, and other intangibles?

A: It is considered as sourced within the Philippines when the same is used in the Philippines.

Q: Would it matter if the underlying contract which is the source of payment was signed outside the Philippines?
A: No. The place of execution of a contract is never considered in determining the situs of income.

Q: What is the situs of insurance contracts?

A: The situs of which is the place of activity (meaning the location of risk) and NOT the place of business (which reinsurers do not have in the Philippines).

Q: What is the situs of interest income?

A: In NDC vs. CIR it was said that “The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the
place of payment, is the determining factor of the source of interest income.”

Q: X Corp., a Philippine company, engaged Y Corp., a nonresident US company, to perform services abroad. Will X Corp.’s payments be subject to
withholding tax?
A: No. Since Y Corp.’s income is not subject to Philippine tax as it is earned by a nonresident foreign corporation and is considered as non-Philippine source
income, the same is not subject to income tax and to the Philippine withholding taxes.

Q: What is meant by MOBILIA SEQUUNTUR PERSONAM as it relates to situs rules?

A: Taxation follows the property or person who shall be subject to tax.

SALE ON INSTALLMENTS - BANAS VS. C.A. (FEBRUARY 10, 2000)

Petitioner sold lots to Ayala and was paid less than 25%, the balance was covered by 4 checks.
+
ADMG
Page 22 of 61
On the same day, the checks were discounted (meaning exchanged for cash at an amount lower than the face value) also to Ayala.
Petitioner reported as income for the year of sale only the cash amount received from sale and excluded the amounts received from the discounted
checks. The balance was reported as income by the petitioner only in the next 4 years.
Petitioner claims it was correct because initial payment excludes evidences of indebtedness including Promissory Notes.

SC = The transaction remains to be an installment (not cash) sale as the law expressly excludes “evidence of indebtedness” in the determination of
how much was paid for the year. However, even if the proceeds of discounted note is not considered as part of initial payment, the income realized
from the discounting itself is still a separate taxable income in the year it was converted into cash because it was at this year that there was actual gain
on the discounted notes.

Q: When a taxpayer indicates in his ITR that the excess income tax paid shall be carried over to the succeeding taxable years, may he subsequently
apply for a tax credit or refund for the same amount?
A: NO. The option to carry-over, once exercised, is irrevocable [Section 76 of the Tax Code]. The same rule will apply even if the taxpayer did not tick the “carry-
over” box in the year when the excess payment occurred but did indicate in the succeeding year that the excess amount was being treated as “prior year’s excess
credits”. (Philam Asset Management vs. CIR)

Q: What are the elements required to successfully file a claim for excess CWT payments?
A: The elements required are:

a.) filing a claim within 2 years

b.) the income upon which the taxes were withheld were included in the return of the claimant
c.) the fact of withholding is established by certificate/s issued by the payor to the payee-claimant (Filinvest Development Corp. vs. CIR)

Q: Who are required by law to withhold on income payments?

A:
agents, employees of withholding agents
persons having control of the payment and claiming the expense (ex. Utility bills paid to SM by concessionaires)
payor having control of the payment where payment is made thru brokers (ex. Travel agents)

Q: When does the obligation to withhold arise?

A: Either when:
1. it is paid
2. it becomes payable (i.e., it is legally due, demandable or enforceable) or
3. it is accrued as an asset or expense

Q: Distinguish creditable withholding tax (CWT) from final withholding tax (FWT).
A: Payments under the CWT merely approximate the tax due on the payee while those under the FWT constitute dull payment of the tax due. Under the CWT
system, the income recipient is still required to report the income from which taxes were withheld although it may claim the CWT as credit. Under the FWT, the
payments subjected to the same are no longer reported as taxable income.

Q: Smart entered into an Agreement with Prism, a nonresident foreign corporation domiciled in Malaysia, whereby Prism will provide programming and
consultancy services to Smart. Thinking that the payments to Prism were royalties, Smart withheld 25% under the RP-Malaysia Tax Treaty. Smart then
filed a refund with the BIR alleging that the payments were not subject to Philippine withholding taxes given that they constituted business profits paid
+
ADMG
Page 23 of 61
to an entity without a permanent establishment in the Philippines. Does Smart have the right to file the claim for refund even if it is “just” a withholding
agent?
A: Yes. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal interest to bring a suit for refund of taxes he
believes were illegally collected from him. Since the withholding agent is an agent of the beneficial owner of the payments (i.e., nonresident), the authority as agent
is held to include the filing of a claim for refund. The Silkair case was held inapplicable as it involved excise taxes and not withholding taxes. It is important to note
that the Court pointed that the obligation of Smart is to give the refunded amount to Prism to avoid unjust enrichment. (CIR vs. Smart Communication, Inc.)

Q: X Corp. pays Y Corp. regularly. The payments are generally subject to withholding tax but X Corp. has refused to withhold on the basis that it (X
Corp.) is exempt from tax. Is X Corp. correct?
A: No. The exemption has to pertain to the payee, in this case Y Corp., so that the withholding taxes would not be due.

Q: When is a short period return due after a merger?

A: Within 30 days from the effectivity of the merger based on the SEC approval

Q: Is it necessary for the person who executed and prepared the withholding tax certificates to be presented and to testify personally on the
authenticity of the certificates?
A: No. The copies of the withholding tax certificates when found by the duly commissioned independent certified public accountant to be faithful reproductions of
the original copies would suffice to establish the fact of withholding. This is in accordance with Rule 13 of the Revised Rules of the Court of Tax Appeals. While the
Rules further state that the documents may be subject to verification and comparison, the CIR was not deprived of the opportunity to examine the certificates since
Respondent manifested that the original copies of the documents are available at the Respondent’s office but the CIR made no effort to examine the same and
verify their authenticity. (CIR vs. Team (Philippines) Operations Corporation)

+
ADMG
Page 24 of 61
C. ESTATE AND DONOR’S TAXES

Q: When is the property transferred?

A: Civil Code says property is transferred at time of death WITHOUT interruption. Thus, the governing law is that which was existing at the time of death.

Q: In case of a conditional transfer (as when the will provides that the property may not be sold within 10 years from the death of the testator), when
does the estate tax accrue?
A: The tax thereon accrues at the time of death notwithstanding the condition. (Lorenzo vs. Posadas)

Q: In the same situation, which value is considered for purposes of computing the estate tax?
A: Since death is generating source from which the power of state to impose tax, tax should be measured by value at time of death regardless of (i)
postponement of actual possession or (ii) subsequent appreciation or depreciation.

Q: What law shall govern in such a situation?

A: It will be governed by the law in force at the time of death.

Q: What are the two general classifications of properties that are covered by the estate tax?
A:
1. Those directly included:
a. For citizens and residents – property located WORLDWIDE, whether
i. realty,
ii. personal property (tangible or intangible)
b. For nonresident alien – property located in RP
i. realty,
ii. personal property (tangible or intangible)
However, INTANGIBLE PERSONAL property (such as shares of a foreign company 85% of whose business is located in the Philippines) of nonresident
aliens where there is reciprocity may be excluded, meaning the country of residence of the decedent
(a) did not impose transfer tax or
(b) allowed similar exemption from transfer tax of property owned by Filipino citizens NOT residing in that foreign country
2. Those indirectly included:
a. Transfers in contemplation
b. Revocable transfers
c. Property under general power of appointment
d. Transfers with retention of certain rights over income or enjoyment
e. Transfers for insufficient consideration

These are considered “substitutes for testamentary dispositions” – although inter vivos in form, they are mortis causa in substance.

Q: When is a transfer considered as one made in contemplation of death?

+
ADMG
Page 25 of 61
A: When the motivating factor for such transfer is the thought of death, or if given near the time of death – ex. old age, failing health, length of time between
donation & death, concurrence with will-making.
Note: the 3 year presumption under PD. 1705 (which provides that transfers made within 3 years of death are presumed to have been done in contemplation of
death) NO longer applies.

Q: Are there instances which DISPROVE that the transfer was made in contemplation of death?
A: YES. When it is shown that the reason for the transfer was the decedent’s desire:
1. to see his children enjoy the property
2. to save income taxes
3. to settle family disputes
4. to relieve donor from administrative burden
5. to reward services rendered

Q: When an heir renounces his/her rights from an inherited property what is/are the tax implication/s? Example: A died leaving as his only heirs, his
surviving spouse B, and three minor children, X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced her
hereditary share in the estate. Is the renunciation subject to donor’s tax?
A: No. The general renunciation by an heir, including the surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is not subject
to donor’s tax. This is because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or
disadvantage of the other co-heirs in the hereditary estate.

Q: Supposing that instead of a general renunciation, B renounced her hereditary share in A’s estate to X who is a special child, would your answer be
the same?
A: My answer would be different. The renunciation in favor of X would be subject to donor’s tax. This is because the renunciation was specifically and categorically
done in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate.

Q: In determining whether a transfer is a donations inter vivos or a donation mortis causa, is a determination of the type of heir relevant?
A: YES. Where there is a donation inter vivos to a person who is NOT a forced heir, the presumption is that such transfer was inter vivos. But if the recipient of
the donated property is a forced heir, the transfer is presumed to be made merely to accelerate the inheritance, hence mortis causa. However, the presumption
may be rebutted by evidence to the contrary (Vda. De Roces vs. Posadas)

Q: What deductions are not available to nonresident estates?

A: Nonresident estates cannot deduct the 1 million standard deduction, medical expenses and family home.

Q: Illustrate transfers for insufficient consideration.

A:
Case A Case B Case C
FMV at the time of transfer 1,000 1,000 1,000
Consideration received at the time 700 1,000 0
of transfer
FMV at the time of death
2,000 2,000 2,000

Amount included in estate 1,300 0 2,000

+
ADMG
Page 26 of 61
In determining whether there was sufficient consideration, compare the FMV of the property at the time of transfer with the amount of consideration received at the
time of transfer. However, the amount to be included in the estate is computed by taking the difference between the FMV of the property at the time of death and
the amount of consideration received at the time of transfer.

Q: What is the reason behind allowing as deduction for estate tax purposes property which was previously taxed (vanishing deduction)?
A: To mitigate the harshness of previous taxation.

Q: What are the conditions for the deductibility of property previously taxed or VANISHING DEDUCTION?
A:
1. Present decedent must have acquired the property by inheritance or donation within 5 years prior to his death
2. Property acquired formed part of gross estate of the prior decedent, or was a taxable gift of the donor
3. Estate tax or donor’s tax due thereon must have been paid
4. The property must be identified as the one received from the prior decedent or from the donor
5. The estate of the prior decedent has not previously availed of the vanishing deduction

Q: How do you compute for the vanishing deduction?

A: Procedure –
1) determine the FMV of the PPT at the time of the prior decedent’s death and the FMV at the time of the present decedent’s death then get the
lower of these two amounts
2) prorate = [value in 1 above/gross estate] X deductions (except family home, medical expenses, standard deduction, R.A. 4917 BUT includes
transfer for public use)
3) subtract 2 from 1
4) Apply rate of vanishing deduction to 3 above (20% to 100%)

Example:
In 2000, Y inherits a land at P500T. In 2003, Y died with the said land having a FMV of P600T. His gross estate amounted to P2M. His allowable
deductions amounted to P400T.

Vanishing deduction
= (500T) – (500T/2M x 400T)
= 400T

â 400T x 60% = 240T

Q: There were claims against the estate of the deceased which were reduced subsequent to the death of the deceased since the heirs and creditors
agreed to a compromise amount. The BIR said that the lower amounts that were paid as compromise payments during the settlement of the estate
should be used in arriving at the net estate. Will the compromise amounts be the amounts considered as deductions to the gross estate?
A: NO, the deduction allowable is that amount determined at the time of death. Post-death developments are not material in determining the amount of deduction,
specially for the claims against the estate deduction. Thus, the Court applied the “date-of-death valuation rule” which is the US rule on deductions and which is
applicable also in the Philippines given no apparent reason to disregard the same. The amount deductible is the debt which could have been enforced against the
deceased in his lifetime, nothing more and nothing less. (Dizon in his capacity as administrator of deceased Fernandez vs. CIR)

Q: Are amounts in excess of the P500,000 medical expenses, if unpaid at the point of death, still deductible as claims against the estate?
+
ADMG
Page 27 of 61
A: No.

Q: Are notarial fees and attorney’s fees on guardianship proceedings deductible from gross estate?
A: It depends. If the attorney’s fees pertain to the collection of assets, payment of debts, or distribution of the property to the heirs then they are deductible. If the
expenses only benefit one heir, they are not deductible.

Q: Should the BIR discover unpaid taxes due from the decedent already after the property has been distributed to the heirs, how can the BIR recover
such unpaid tax liabilities?
A: The BIR can recover in two ways:
(1) it may recover said liability from all the heirs who shall share proportionately OR
(2) it may go against the property held by an heir if the same is sufficient to cover the whole tax liability (in which case, the heir who paid can seek
reimbursement from his/her co-heirs)

Q: Who are considered as persons/officers who should require proof of payment of estate tax before acting upon a request by an heir?
A: These would be the Register of Deeds, debtors, lawyers and banks – all on transactions relating to their business.

Q: For purposes of imposing the donor’s tax, is donative intent always necessary?
A: NO, as in the case of transfers for less than adequate consideration. However, for the donor’s tax to be imposed in this case, the following requirements must
concur:
1. Property donated is NOT realty that is capital asset (otherwise it will be subject to 6% CGT on the entire gross selling price or FMV, whichever is
higher)
2. the transfer is for less than adequate consideration
3. the transfer is inter vivos

Q: Mr. A sold his lot not used for business to his brother Mr. B for 500,000 when at that time the lot was valued in the market at P1M. Mr. A bought it
for P100,000. In addition, A sold some of the shares of his company, X Corp., to his senior executives. He sold the X Corp. shares for P300,000 when
the market value was at P500,000. His original cost in the shares is P100,000. Are the sales subject to donor’s tax?
A: The sale of the lot is not subject to donor’s tax as it is a real property classified as a capital asset and as such is subject to the 6% capital gains tax. The sale
of the shares is, however, subject to the donor’s tax of 30% based on the difference between the selling price and the market value.

Q: Metro Pacific Corp. sold its shares with a par value of P100 per share in Bonifacio Land Corporation to a third party in the amount of P158 per share
even while it was established that the book value of the shares was at P332 per share. Petitioner countered by saying that donor’s tax should not be
imposed as it was “an ordinary business transaction negotiated in good faith by unrelated parties for legitimate business purposes”. It was also stated
that the acquisition cost was higher than the book value. Is donor’s tax due on the sale?
A: Yes. The rules clearly define fair market value of unlisted shares as its book value. Thus, a 30% donor’s tax is due on the difference between the selling price
and the BV/FMV. The par value and acquisition cost are irrelevant in determining the imposition of the donor’s tax. Also, it was pointed out that the lack of any
exception/exemption under Section 100 deprives the Petitioner its basis in claiming its aforesaid defense. (Metro Pacific Corporation vs. CIR)

Q: Are there deductions from the gross gift?

A: Actually, there are really no deductions, only exemptions which are as follows:
1. dowries up to a maximum amount of P10,0000, subject to the following conditions:
a. the donation is made before marriage or w/in 1 yr. thereafter
b. it is made by parents to their children, whether legitimate, illegitimate, or adopted
2. gifts to the national gov’t. or to other created entities not made for profit
+
ADMG
Page 28 of 61
 3. gifts to religious, charitable, etc. provided that not more than 30% of the value of the gifts are used for admin. purposes
4. encumbrance on the property if assumed by the donee
5. those specifically provided as diminution on property donated

Q: Are non-resident aliens entitled to all these deductions?

A: NO. Only 2 to 5 are allowed.

Q: Which is a more tax efficient mode of transferring property – via donation mortis causa or inter vivos ?
A: While the rates for donor’s tax are lower (2% to 15%) compared to those imposed for estate tax (5% to 20%), payment of donor’s tax are necessarily earlier
than estate tax.

+
ADMG
Page 29 of 61
D. REMEDIES

Q: Who is the current Commissioner of Internal Revenue?

A: Kim Jacinto Henares

Q: What are the powers of the Commissioner of Internal Revenue?

A: The CIR has the power:
1. to interpret tax laws and decide tax cases
a. interpretation of laws
• exclusive and original
• subject to review by the Secretary of Finance
b. decide tax cases
• exclusive appellate jurisdiction of the CTA

2. to obtain information, to summon, examine and take testimony of persons

9 but these powers do not empower the CIR to inquire into bank deposits except as provided under Section 6(F) of the NIRC

The Commissioner is hereby authorized to inquire

into the bank deposits of:
(1) a decedent to determine his gross estate; and
(2) any taxpayer who has filed an application for
compromise of his tax liability under Sec.
204(A)(2) of this Code by reason of financial
incapacity to pay his tax liability. This requires a
signed Waiver of the Secrecy of Bank Deposits.
(3) a specific taxpayer or taxpayers subject of a
request for 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

3. to make assessments and prescribe additional requirements for tax administration and enforcement
a. examination of returns and determination of tax due
• once filed, the taxpayer may no longer withdraw it; but he may amend it, subject to the following requirements:
1. it is made within 3 years from filing, and
2. no notice for audit or investigation (Letter of Authority or L/A) has been actually served to him
b. failure to submit required returns, statements, reports, and other documents
9 assessment to be based on best obtainable evidence
c. authority to conduct inventory-taking, surveillance, and to prescribe presumptive gross sales and receipts
d. authority to terminate taxable period when the taxpayer is
i. retiring from business
+
ADMG
Page 30 of 61
 ii. intending to leave the country
iii. removing his property
iv. obstructing tax collection
e. authority to prescribe real property values
f. authority to accredit and register tax agents
g. authority to prescribe additional procedural or documentary requirements

Q: Are all the powers of the Commissioner delegable?

A: No. The following may not be delegated:

1) Promulgation of rules & regulations

2) Issuance of first impression rulings
3) Compromise or abate if the amount is over P500,000
4) Assign officers in charge of excisable articles

Q: May the CIR be compelled to make an assessment?

A: NO. Mandamus lies only to perform ministerial functions; assessment is discretionary on the CIR. Absent showing of grave abuse, CIR’s right to interpret tax
laws and enforce them is discretionary (Meralco Securities Corp. vs. CIR)

Q: Sony Philippines incurred advertising costs that that were billed by local advertising agencies. As part of its internal policy, Sony Philippines had
the said costs reimbursed by its affiliate, Sony Singapore. Sony Philippines was ordered examined for “the period 1997 and unverified prior years” as
indicated in the Letter of Authority. The audit yielded assessments against Sony Philippines for deficiency VAT on reimbursable amounts received by
Sony Philippines from its offshore affiliate, Sony Singapore since the BIR claimed that Sony Philippines cannot claim input VAT from the advertising
expenses as the same costs were reimbursed by Sony Singapore. The BIR additionally claimed that Sony Philippines is subject to VAT on the
“payments” made to it by Sony Singapore. (1) Is Petitioner liable for deficiency VAT? (2) Was the investigation of its 1998 FWT return valid?
A: (1) NO. Sony Philippines did in fact incur expenses supported by valid VAT invoices when it paid for certain advertising costs. This is sufficient to accord it the
benefit of input VAT credits and where the money came from to satisfy said advertising billings is another matter but does not alter the VAT effect. In the same
way, Sony Philippines cannot be deemed to have received the reimbursable as a fee for a VAT-taxable activity.
The reimbursable was couched as an aid for Sony Philippines by Sony Singapore in view of the company’s “dire or adverse economic conditions”. More
importantly, the absence of a sale, barter or exchange of goods or properties supports the non-VAT nature of the reimbursement. This was distinguished from the
COMASERCO case where even if there was similarly a reimbursement-on-cost arrangement between affiliates, there was in fact an underlying service. Here, the
advertising services were rendered in favor of Sony Philippines not Sony Singapore.
(2) NO. A Letter of Authority should cover a taxable period not exceeding one year and to indicate that it covers ‘unverified prior years’ should be enough to
invalidate it. In addition, even if the FWT was covered by Sony Philippines’ fiscal year ending March 1998, the same fell outside of ‘the period 1997’ and was thus
not validly covered by the LOA. (CIR vs. Sony Philippines, Inc.)

Q: What is the rule with respect to retention of books of accounts and other accounting records?
A: All taxpayers are required to preserve their books of accounts and other accounting records (including invoices, receipts, vouchers, and other source
documents) for a period of ten (10) years reckoned from the day following the deadline in filing a return or if filed after the deadline, from the date of actual filing. If
there is a pending examination due to an assessment or a filed refund claim, the records are to be preserved until the case is finally resolved.

Q: When is the civil penalty of 25% imposable?

A: It is imposable in case of:
1. failure to file return and pay tax due thereon
+
ADMG
Page 31 of 61
 2. filing with unauthorized revenue officer
3. failure to pay within time prescribed in assessment notice
4. failure to pay part of the amount shown in ITR

Note: All the above simultaneously attract the 20% interest except number 2.

Q: If a taxpayer who files a return subsequently realizes that the return filed was insufficient, will his amended return be subject to the 25% surcharge?
A: As long as the taxpayer files the amended return before the lapse of any demand by the BIR to pay his/her deficiency assessment, the taxpayer is not liable for
any surcharge.

Q: Taxpayer A filed and paid taxes on April 15, 2009 worth 5M. On May 15, 2009, he realized he should have paid P6M and thus pays the additional
P1M. Is he subject to the 25% surcharge?
A: No. None of the violations mentioned was committed by the taxpayer.

Q: Taxpayer B filed and paid taxes on April 15, 2009 worth 5M. On May 15, 2009, the BIR issued an assessment and required that Taxpayer pay an
additional P1M on or before June 15, 2009. If he pays before June 15, 2009 is he subject to the 25% surcharge?
A: No. None of the violations mentioned was committed by the taxpayer.

Q: Taxpayer C did not file any return nor pay any taxes on April 15, 2009. On May 15, 2009, he realized he should have paid P6M and thus pays the
whole 6M. Is he subject to the 25% surcharge?
A: Yes. Taxpayer C failed to file return and pay tax due thereon which is the first type of act which requires a 25% surcharge imposition.

Q: Taxpayer D filed and paid taxes on April 15, 2009 worth 10M. On May 15, 2009, the BIR issued an assessment and required that Taxpayer pay an
additional P5M on or before June 15, 2009. If he pays after June 15, 2009 is he subject to any surcharge?
A: Yes. Taxpayer D will be subject to the 50% surcharge since (a) he failed to pay within the time prescribed in the notice of assessment and (b) the
underdeclaration is 50% or in excess of the 30% threshold which raises the prima facie presumption of a false or fraudulent return. As such allegation is only prima
facie, it may be rebutted.

Q: Can a taxpayer be subject to both the 50% and 25% in the same assessment against him/her/it?
A: No.

Q: If a taxpayer is allowed an extension on its tax payments (such as when the taxpayer is an individual and the tax payment is more than P2,000), is
there any surcharge and/or interest imposed on the payments after the deadline date? For example, if an individual instead of paying the full amount of
taxes due from it on April 15, 2014 requests (by April 10, 2014) to pay the 50% on May 15, 2014 and the request is granted, will it be subject to
surcharge and/or interest?
A: There is no surcharge imposed since the request for extension was made before the deadline of payment. However, a 20% interest is imposed on the balance
of unpaid amount so that the amount unpaid after April 15, 2014 (or 50% of the amount due), then there is a 20% per annum interest imposed on the payment
computed from April 16, 2014 to May 15, 2014.

Q: Can the compromise offer of a taxpayer be lower the prescribed rates (10% for financial incapacity and 40% for doubtful validity) in the Tax Code?
A: Yes, but the approval by the Evaluation Board, which is composed of the CIR plus 4 Deputy Commissioners, is required

Q: When may the interest on deficiency tax be waived?

+
ADMG
Page 32 of 61
A: When the assessment is highly controversial as in the case of CAGAYAN ELECTRIC POWER & LIGHT where there was a withdrawal of its exemption from
income tax and a subsequent reinstatement of such exemption. Thus, non-payment during the short time when the taxpayer was exempt was not subjected to
interest payment.

Q: What remedies are available for the collection of taxes?

A:

1. tax lien (Sec. 219)

2. compromise (Sec. 204)
3. distraint of goods (shares, debts, ect.)
4. levy of real property
5. civil or criminal action
6. forfeiture
7. suspension of business operations
8. enforcement of administrative fines

The remedies may be resorted to all at the same time but 3 and 4 not available if less than 100 pesos.

Q: Illustrate the rule provided under Section 219 with respect to tax liens.
A: Section 219 provides that “If any person x x x liable to pay an internal revenue tax, neglects or refuses to pay the same after demand, the amount shall be a
lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner until paid x x x “. For example, if a
taxpayer paid P1,000,000 on April 15, 2014 but was assessed on June 15, 2014 and asked to pay on or before September 15, 2014. If the taxpayer fails to pay on
or before September 15, 2014, the tax lien shall be effective as of June 15, 2014 which is when the assessment was made. This applies even if, for example, a
warrant of distraint and levy was issued on October 15, 2014. But note that the lien (if imposed on real property) is ineffective against a mortgagee, purchaser or
judgment creditor until notice is filed with the Register of Deeds where the property is located.

Q: The assessment against Company H had become final and unappelable since there was a failure to protest the same within the 30-day period
provided by law. However, the CTA held that the BIR failed to collect within the prescribed time and thus ordered the cancellation of the assessment
notice. The CIR disputed the jurisdiction of the CTA arguing that since the assessment had become final and unappealable, the taxpayer can no longer
dispute the correctness of the assessment even before the CTA. Can the CTA still take cognizance of an assessment case which has become ‘final and
unappealable’ for failure of the taxpayer to protest within the 30-day protest period?
A: Yes. The appellate jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or refunds. The CTA law
clearly bestows jurisdiction to the CTA even on “other matters arising under the National Internal Revenue Code”. Thus, the issue of whether the right of the CIR to
collect has prescribed, collection being one of the duties of the BIR, is considered covered by the term “other matters”. The fact that assessment has become final
for failure to protest only means that the validity or correctness of the assessment may no longer be questioned on appeal. However, this issue is entirely distinct
from the issue of whether the right to collect has in fact prescribed. (CIR vs. Hambrecht & Quist Philippines, Inc.)

Q: Company X was initially assessed for deficiency EWT on its software maintenance fees paid to an offshore affiliate. In response to Company X’s
protest, the CIR issued a Final Decision on Disputed Assessment (FDDA) cancelling the deficiency EWT assessment but issuing an assessment for
FWT on the same software fees albeit using a lower 15% rate under the RP-US Tax Treaty. Was the Petitioner deprived of due process when the FDDA
changed the assessment from deficiency EWT to deficiency FWT?
A: Yes. The change of the assessment in the FDDA (from an EWT assessment to an FWT assessment) itself constituted a new assessment. As such, the
taxpayer should have been given the chance to dispute the same via the process laid down in the Tax Code which is by way of filing a protest. Given that this was

+
ADMG
Page 33 of 61
not complied with as what was issued was already an FDDA, the circumstances certainly deprived Company X of a reasonable opportunity to be heard and submit
evidence in support of its defense which is a clear violation of due process requirements. (Fluor Daniel Philippines, Inc. vs. CIR)

Q: For purposes of determining whether the prescriptive period provided by law has been met, when is an assessment deemed made?
A: An assessment is deemed made when notice to that effect is released, mailed or sent to the taxpayer prior to the lapse of the period to assess and EVEN IF
THE RECEIPT WAS AFTER THE APPLICABLE PERIOD (3 or 10 years).

Q: CIR issued assessments against Company Y but when the same were disputed before the CTA it failed to mark and formally introduce as evidence
the PAN issued to the taxpayer. It was claimed, however, that their existence and value were properly established since the BIR records were
forwarded by the CIR to the CTA. Can the CTA consider the PAN even if the same were not formally offered in evidence?
A: No. The Court said that the rule of requiring offer may be relaxed provided that the same must have been (1) duly identified by testimony and (2) incorporated in
the records of the case. The CIR only said the PAN was anyway tackled in the petitioner’s witnesses’ testimonies but did not (1) claim that the same were
positively identified and (2) explain why it failed to formally offer the same. As the assessments were issued after January 1, 1998, the rules under the current Tax
Code were deemed applicable. (CIR vs. United Salvage and Towage (Phils.), Inc.)

Q: Should the filing of a criminal complaint be preceded by assessment ?

A: NO. In case of a false or fraudulent return, proceedings in court may be commenced without an assessment since under the Tax Code, civil and criminal
aspects may be pursued simultaneously.

Q: Mrs. K was engaged in the business of selling beauty products. For several years, she failed to file an income tax return. After she was charged by the BIR
for tax evasion, she submitted the defense that she did not have personal knowledge of the actual filing of the said returns since it was her husband who filed
their ITRs. The husband in turn alleged that their ITRs were in fact prepared by their accountant and that they necessarily just relied on the said accountant.
These facts supposedly contradicted the claim that their failure to file the returns was willful. Was the Mrs. K. guilty of tax evasion?
A: Yes. The elements of a violation under Section 255 have been satisfied. These are (1) that the accused is a person required to make or file a return; (2) that the
accused failed to file the return at the time required by law; and (3) that the failure to file was willful. For (1), as income-generating spouses, they were obviously
covered by the filing requirements. For (2), the BIR witnesses presented showed sufficient proof that indeed no returns were filed in the RDOs where they should
have filed. For (3), the Court said that the mere fact of having an accountant prepare one’s returns is not enough to show that that there was no voluntary,
intentional or deliberate failure to file. The Court added that the fact of her being a businesswoman presupposes that she ought to know and understand all matters
concerning her business including the filing of returns, citing Rule 131 on the Rules on Evidence which states that “it is presumed that a person takes ordinary care
of his concern”. More importantly, the Court found no affirmative acts on the part of defendant to make sure her obligation to file ITRs had been fully complied with
given that she testified that she does not even know how much her tax liabilities were. This neglect or omission was considered tantamount to “deliberate
ignorance” or “conscious avoidance”. Lastly, the Court noted that the accountant himself was not even presented as witness. (People of the Philippines vs. Gloria
Kintanar

Q: When the government files a criminal case against a taxpayer, can it reserve the right to file a separate civil action to collect the taxes?
A: No. Section 7 of Republic Act clearly provides that “Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the
corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the
same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing
of such civil action separately from the criminal action will be recognized.”

Q: What are the requirements for one to be entitled to an informer’s reward under the Tax Code?
A: The informer must –

• not be any of the following:

+
ADMG
Page 34 of 61
 9 all public officials, employees regardless of whether they are retired if they gathered the information in their capacity as a public official, employee
th
9 relatives within the 6 degree of any public official, employee
• provided facts that are concise and credible and supported by “substantial evidence”
• provide information not yet in the possession of the BIR
• provide information that does not refer to a pending case
• provide information that must lead or be instrumental in the discovery of fraud/violation of Tax Code and MUST RESULT IN ACTUAL COLLECTION
• claim the reward within 3 years from the time the BIR itself collected

The reward is 10% of the collected amount or P1,000,000, whichever is lower. This also covers cases where the offender compromised with BIR. The informer’s
reward is subject to 10% withholding tax.

Q: When does the government’s right to assess prescribe?

A: The general rule is that the government’s right to assess prescribes in 3 yrs. from the date of the last day of filing.
However:
1. If the return is filed after such date, the 3-yr. period is reckoned from the date of actual filing
2. If return filed before last day, then considered as filed on the last day.

Q: May there be a proceeding in court when no assessment is made within such 3-year period?
A: NO. Except under Sec. 222 which provides for the following instances:
a) If ---
a. A false or fraudulent return is filed with intent to evade tax
b. There is a failure to file return
Then ---
a. tax may be assessed OR
b. proceeding in court for collection may be filed without assessment
--- at any time within 10 years from discovery of falsity, fraud or omission

(b) Waiver of PERIOD TO ASSESS is allowed before the end of period (Note: waivers must be consented to by the BIR and is not a unilateral act)

Q: When is the running of the period of prescription suspended?

A: It is suspended when ---
1. the CIR was prohibited from making the assessment or beginning distraint/levy and for 60 days thereafter (example: when injunction allowed under the
CTA law is availed of)
2. taxpayer requests reinvestigation which is granted by CIR
3. taxpayer cannot be located in address
4. a warrant of distraint or levy is served (not only issued) and no property could be found
5. taxpayer is out of the Philippines

Regular ITR No ITR, or false or fraudulent ITR

Collection w/ prior assessment Collection w/ prior assessment

+
ADMG
Page 35 of 61
 • Assess within 3 yrs. from actual filing or last day to file (if the filing was
done prior to said last day)
• Collection within 5 yrs. from date of assessment by summary OR judicial
• Assess within 10 yrs. from discovery of falsity, fraud, omission
• Collection within 5 yrs. from date of assessment by summary OR judicial
(Note: ONCE THERE IS AN ASSESSMENT, THE PERIOD TO
COLLECT IS ALWAYS 5 YEARS EVEN IF THE RETURN IS
FRAUDULENT, FALSE OR WAS NOT FILED)

Collection w/o prior assessment Collection w/o prior assessment

Can not be done anymore in view of clear provision that there has to be Collection within 10 yrs. from date of discovery of falsity, fraud, omission by
assessment before collection judicial proceedings only and not by summary proceedings (this limitation
on mode of enforcing collection is the distinction if the government
proceeds to collection without assessment)

Q: Is there a need to prove that the taxpayer actually received the assessment notice within the prescriptive period?
A: No. As a general rule, the assessment is deemed made once the notice is mailed. However, if the receipt is disputed and for this presumption of receipt of mail
to apply, CIR must prove that (1) letter was properly addressed and (2) that it was mailed; otherwise, presumption of receipt cant apply.

Q: CIR issued assessment notices against Respondent for deficiency income tax, VAT and documentary stamp tax on deposit on subscription and on
pawn tickets. Respondent filed its written protest on the assessments. The BIR required that the respondent submit supporting documents including
the DST return on the pawn tickets which the respondent was unable to submit since it did not file any. When the CIR did not act on the protest during
the 180-day period (reckoned from the filing of the protest), respondent filed a petition before the CTA. Has the assessment become final and
unappealable given that no supporting documents were submitted during the 60-day period? Was the appeal filed with the CTA done prematurely?
A: No. The assessment against Respondent has not become final and unappealable. It cannot be said that respondent failed to submit relevant supporting
documents that would render the assessment final because when Respondent submitted its protest, Respondent attached all the documents it felt were necessary
to support its claim. Further, CIR cannot insist on the submission of proof of DST payment because such document does not exist as Respondent claims that it is
not liable to pay (and in fact has not paid) the DST on the deposit on subscription.
The term "relevant supporting documents" are those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer.
The BIR can only inform the taxpayer to submit additional documents and cannot demand what type of supporting documents should be submitted. Otherwise, a
taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. Since the taxpayer is deemed to have
submitted all supporting documents at the time of filing of its protest, the 180-day period likewise started to run on that same date. Thus, the appeal to the CTA
was also not filed prematurely since the same was filed within 180 days reckoned from the filing of the protest as the 60-day period was no longer taken into
account. (CIR vs. First Express Pawnshop, Inc.)

Q: What is the effect of a reinvestigation on the period to collect ?

A: The period utilized for reinvestigation is deducted from the period within which to collect. Thus, if the assessment was made on 1/1/2000 and the collection was
made on 1/1/2006 but it was shown that from 1/1/2001 to 1/1/2003, or a period of 2 years, the assessment was being reinvestigated, the action to collect has not
yet prescribed since deducting the 2 year period when reinvestigation was made will only amount to 4 years (6 years total minus 2 years of reinvestigation) and is
thus still within the 5 year period to collect.

Q: What is the difference between a request for reinvestigation and a request for reconsideration for purposes of tolling the running of the prescriptive
period to collect?
A: A request for reconsideration is a reevaluation on the basis of existing records while a reinvestigation is a reevaluation on the basis of newly-discovered or
additional evidence. It is a request for reinvestigation acted upon which suspends the prescriptive period to collect. (Bank of the Philippines Islands vs.
CIR)

+
ADMG
Page 36 of 61
Q: What are the requirements of a valid waiver?
A: (a) acceptance date (to ensure execution prior to expiry of period); (b) specified period/expiry date (c) signed by proper authority (for 1M or above, the CIR must
sign); (d) notarized; and (e) taxpayer must be furnished a copy of the waiver in order to perfect agreement since waiver is not a mere unilateral act

Q: An informer filed a case with the CTA against the taxpayer and the BIR. The informer was seeking to (1) declare the taxpayer as having an
assessment and (2) as a consequence of (1), to collect his informer’s reward. This case was filed by the informer within 3 years from the time that the
taxpayer filed its return. However, apart from this action initiated by the informer, no other action was filed by the government seeking to collect
against the taxpayer. Has the right to collect already prescribed?
A: No, this is a unique case but the BIR is deemed to be compliant with the requirement “collection within 5 years from time of assessment” since if the Petitioner-
informant won, the CTA would have ordered the erring parties to pay the tax. At the very least, the filing by the informer of the case would have suspended the
running of the period because the BIR is prohibited from making collection because there was a pending case. (PNOC vs. CA)

Q: A bank was assessed for income tax and DST. It had earlier executed a Waiver of the Statute of Limitations before the period to assess had
prescribed but the same was not signed by the authorized officer (i.e., Commissioner of Internal Revenue). The bank paid the DST assessment
choosing not to question the same anymore. Subsequently, it found the defect in the waiver and thus filed a case with the CTA questioning the
assessment for both income and DST as the same were supposedly issued beyond the period provided by law since the waiver was deemed
ineffective. Did the bank’s action of paying a portion of the assessment against (i.e., DST) put it in estoppels and thus prevented it from questioning the
validity of the said waiver (on the basis that the CIR did not sign it) with respect to the other covered but unsettled assessments (income tax)?
A: Yes. The bank is considered estopped through its partial payment of the revised assessments within the extended period provided in the said waivers. Thus, it
had impliedly admitted the validity of the said waivers. Had it believed that the waiver was invalid and that the period to assess had effectively prescribed, the bank
could have refused to make any payment based on any assessment against it. (RCBC vs. CIR)

Q: Is there a difference between a false return and a fraudulent return?

A: YES. A false return merely implies deviation from truth, whether intentional or not, while a fraudulent return refers to an intentional evasion of tax (Aznar vs.
CIR)

Q: When does the period of prescription with respect to the government’s right to file a criminal action begin to run?
A: Prescription begins to run from the date of commission, or if not known, from discovery AND actual filing of judicial proceeding [SEC. 281 Tax Code].

Q: When is the prescriptive period interrupted?

A: It is interrupted when;
a. proceedings are instituted and
b. when the taxpayer is out of the country [SEC. 281 Tax Code]

Q: When quarterly tax returns are required to be filed, from where is the 3-year prescriptive period reckoned?
A: It depends. If the quarterly returns are final returns such as VAT returns, then the 3-year period is reckoned from each of the quarterly returns. However if the
quarterly returns are not final returns such as income tax returns, the 3-year period is reckoned from the date of the filing of the final adjustment return which is due
annually.

Q: What is the nature of the requirement that the assessment must “state the facts and the law on which the assessment is based”?
A: Such is not merely a procedural requirement but a substantive requirement which determines taxpayer’s ability to protest. Thus, the same must be complied
with otherwise the assessment is void. Thus, assessment notices which only have computations are invalid. This is the reason why the new Tax Code provides

+
ADMG
Page 37 of 61
that the taxpayer be “informed” and not merely “notified”. Given that this new rule benefits the taxpayer, the same may be applied retroactively. (CIR vs. Azucena
Reyes, January 27, 2006 upheld in CIR vs. Enron Subic Power Corporation – January 19, 2009)
Q: In what instance is the Preliminary Assessment Notice not required?
A:

1) assessment is purely mathematical error

2) discrepancy between tax withheld and remitted
3) section 76 – claim for refund is filed when it was previously carried-over
4) excise tax on excisable article not paid
5) goods imported by tax-exempt is sold not taxable entity

Q: What are the changes on the procedures relative to the assessment of a taxpayer?
The significant changes are as follows ---
1) The Notice of Informal Conference step has been removed. Thus, first step after examination is the issuance of the PAN (unless not required)
2) The taxpayer must specify if what is being filed is a request for reinvestigation or a request for reconsideration. If the appeal is from the decision of an
authorized representative to the CIR, the only mode of appeal allowed is a request for reconsideration
3) The modes of service of the PAN, FAN, and FDDA have been defined ---
• personal service on registered or known address (where business is conducted)
• substituted service (where the same is left with the clerk or person-in-charge if in a place of business or with a person of legal age if in a house or
if there is nobody there or there is refusal to receive, then 2 barangay officials will witness the service)
• service by mail which is either registered or reputable professional courier service, or, if neither is available, ordinary mail
4) The duly authorized representatives are Revenue Regional Directors, Assistant Commissioners – LTS, and Assistant Commissioner for Enforcement (Note:
This upholds the case of Festo which held that Revenue District Officers are not authorized representatives for assessment purposes)
5) The issuance of FLD/FAN reiterating immediate payment of assessment previously made in the PAN is a denial of the PAN protest and is thus a decision on
disputed assessment which may be appealed (Note: This upholds the Allied Banking decision that the FAN and not just the FDDA is appealable to the CTA)

Q: May interest on the tax refund be awarded?

A: NO. Interest on the tax refund cannot be awarded unless
(1) authorized by law or
(2) the collection of the tax was attended by arbitrariness (inexcusable or obstinate disregard of legal provisions). But there is no arbitrariness when there is
room for two opinions

EXTENSION OF 2-YEAR PERIOD ?

TWO YEAR PERIOD TO FILE JUDICIAL CLAIM FOR REFUND “IS NOT JURISDICTIONAL AND MAY BE SUSPENDED OR REASONS OF EQUITY AND
OTHER SPECIAL CIRCUMSTANCES” SUCH AS
1) WHEN TAXPAYER MADE ADVANCE INCOME TAX PAYMENT (HEEDING PRES. AQUINO’S CALL) AND WAS MADE TO BELIEVE THAT ITS REQUEST
FOR TAX CREDIT WILL BE ACTED UPON FAVORABLY CONSIDERING THAT ITS CARRY-OVER WAS UNUTILIZED SINCE THE COMPANY SUFFERED
LOSSES FOR THE NEXT 4 YEARS (PNB CASE)
2) WHEN THE TAXPAYER AND THE CIR AGREED TO WAIT FOR THE RESULT IN ANOTHER CASE HAVING THE SAME ISSUE (PANAY ELECTRIC CO.
CASE)
3) WHEN THE CIR INITIALLY AGREED TO GRANT THE REFUND AND LATER DENIED THE SAME (NAGUIAT CASE)
(PNB vs. CIR)

+
ADMG
Page 38 of 61
Q: Is a final demand letter issued by the BIR reiterating the demand for immediate payment considered as a final decision appealable to the CTA?
A: YES. The letter is deemed as the CIR’s final act since failure to comply therewith exposes property to distraint and levy (CIR vs. Isabela Cultural Corp.)

Q: When is a decision appealable to CTA ?

A: So long as the tenor of the decision is that the dispute of Petitioner is denied, it is appealable. To let the Petitioner defer the period is to unduly put in his hand the
collection of taxes. The CIR should always indicate in clear language the decision of the BIR (Surigao Electric Corporation vs. CIR)

Q: Allied Banking Corporation received a PAN from the BIR which it timely disputed. In response, the BIR issued a Formal Letter of Demand with
Assessment Notices. Instead of protesting the FAN, the petitioner filed a Petition for Review with the CTA. The CTA dismissed the Petition stating that
it is neither the assessment nor the formal demand letter itself that is appealable before it but instead it should be the decision of the CIR on the
disputed assessment. Can the Formal Letter of Demand be construed as the final decision of the CIR appealable to the CTA under Republic Act 9282?
A: Yes. This is considered an exception to the general rule on exhaustion of administrative remedies since the CIR is considered estopped from claiming the same
principle applies in its case. The tenor of the demand letter is clear that the CIR had already made a final decision and that the remedy of the Petitioner was to
appeal the same within 30 days of receipt. This can be gleaned from the use of the terms “final decision” and “appeal” which were deemed unequivocal language
pointing to the finality of the decision. While the Court cited the rules relative to (a) protesting the FAN and not the PAN and (b) counting the 30 day period to
appeal to the CTA from receipt of the decision of the CIR and not issuance of the assessment, this particular case was deemed a clear exception in view of the
CIR’s own actions. (Allied Banking Corporation vs. CIR)

Q: What is the rule on the filing of claims for refund of unutilized input VAT arising from zero-rated sales?
A: In the cases of CIR vs. Aichi Forging Company of Asia, Inc. and CIR vs. Mindanao II Geothermal Partnership, the following rules were laid down:
(1) The administrative claim must be filed within two (2) years from the “close of the taxable quarter when the sales were made” The rules under Sections
204 (C) and 229 as cross-referred to Section 114 do not apply as they only cover erroneous payments or illegal collections of taxes which is not the case for
refund of unutilized input VAT. The period of exception for this rule is from June 8, 2007 to September 12, 2008 when the 2-year period is reckoned from the date
of the payment of output VAT as provided in the case of Visayas Geothermal Power Company vs. CIR.
(2) For the judicial claim, Section 112 mandates that the taxpayer filing the refund must either wait for the administrative decision of the CIR or the lapse of
the 120-day period before filing its judicial claim. Failure to observe this rule is fatal to a claim. Thus, this rule effectively allows the judicial claim to be filed even
beyond the 2-year period as this 2-year period was deemed to apply only to the administrative claim. The period of exception to this rule of requiring the lapse of
the 120-day period or awaiting the CIR’s decision is for claims filed between December 10, 2003 and October 5, 2010 as this is the period when the Atlas case
was in effect.
(3) The 120-day period is reckoned from the submission of complete documents.

Q: Does the Aichi doctrine apply to all refund cases?

A: No. The case in fact only applies to VAT refund of unutilized input VAT arising from zero-rated sales. All other refunds have to comply with the Gibbs doctrine
where the rule is that both administrative and judicial claims have to be filed within the 2-year period.

Q: Meralco obtained a loan from a Singapore branch of ING Barings and withheld 10% on its interest payments. Subsequently, it discovered that the
lender is a foreign government-owned financing institution of Germany and then filed a request for ruling with the BIR seeking confirmation of the tax
exempt status of the lender and consequently their non-liability to withholding taxes. After the BIR issued the ruling confirming the exemption,
Respondent filed a claim for refund with the CIR. The CIR denied the claim stating that the claim has prescribed as 2 years has lapsed from the time the
withholding taxes were paid. Has the right to claim refund of the erroneously paid withholding taxes prescribed?
A: Yes. The 2-year period is applied regardless of any supervening cause that may arise after payment. In this case, the issuance by the BIR of the ruling is merely
confirmatory in nature and is not the operative act from which an entitlement of refund is determined. The period also cannot begin to run merely from the
discovery by the taxpayer of erroneous or excessive payment of taxes. Neither can solution indebiti be used as basis since this legal concept presupposes that

+
ADMG
Page 39 of 61
there is no binding relationship between the payor and the payee. There is clearly a binding relationship since Respondent is required by law to act as withholding
agent on its payment to the lender-bank. (CIR vs. Meralco)

PLEASE REMEMBER THE PERIODS IN AN ASSESSMENT PROCEEDINGS

• 30 DAYS TO PROTEST FROM RECEIPT OF FAN

• 60 DAYS TO SUBMIT COMPLETE SET OF DOCUMENTS
• 180 DAYS FOR THE CIR TO ACT FROM THE SUBMISSION OF COMPLETE DOCUMENTS
• 30 DAYS TO APPEAL TO THE CTA FROM DENIAL OR INACTION

+
ADMG
Page 40 of 61
E. CTA

R.A. 9282
JURISDICTION ---
A. EXCLUSIVE APPELLATE JURISDICTION
1. DECISIONS OF CIR
2. INACTION OF CIR
3. DECISIONS OF RTC ON LOCAL TAX CASES
4. DECISIONS OF COC
5. DECISIONS OF CBAA (ON EXERCISE OF APPEAL OVER RPT TAX CASES DECIDED BY LBAA)
6. DECISIONS OF DOF ON CUSTOMS CASES ELEVATED TO HIM ON AUTOMATIC REVIEW DUE TO ADVERSE DECISION VS.
GOVERNMENT
7. DECISIONS OF DTI (ON NON-AGRI. PRODUCTS) AND DA (ON AGRI. PRODUCTS) INVOLVING DUMPING AND COUNTERVAILING
DUTIES

B. OVER CRIMINAL OFFENSES

1. ORIGINAL - FOR CRIMINAL ACTS UNDER NIRC AND CUSTOMS CODE 1M OR ABOVE
2. APPELLATE – LESS THAN 1M OR NO SPECIFIED AMOUNT (REGULAR COURTS, IF FROM RTC = APPEAL TO CTA / IF FROM MTC
THEN RTC = PETITION FOR REVIEW TO CTA)

C. OVER TAX COLLECTION CASES

1. ORIGINAL – 1M OR ABOVE
2. APPELLATE – LESS THAN 1M (REGULAR COURTS, IF FROM RTC = APPEAL TO CTA / IF FROM MTC THEN RTC = PETITION FOR
REVIEW TO CTA)

PERIOD – 30 DAYS FROM RECEIPT OR INACTION

MODE ---
A. PETITION FOR REVIEW = RULE 42 (HEARD BY DIVISION)
B. IF FROM CBAA OR RTC (IN APPELLATE JURISDICTION) = RULE 43 (HEARD EN BANC)
MAY FILE MR OR NEW TRIAL WITHIN 15 DAYS FROM RECEIPT OF DENIAL
C. FROM DIVISION TO EN BANC – PETITION FOR REVIEW
D. FROM EN BANC TO SC – PETITION FOR REVIEW ON CERTIORARI (RULE 45)

Q: Smart received a closure order from the Municipality of Malvar for the non-payment of dues arising out of an ordinance regulating the establishment of
special projects which included Smart’s telecommunications tower. Smart protested and upon denial of the protest appealed the same to the Regional
Trial Court of Tanauan questioning as well the validity of the ordinance. Thereafter, Smart appealed the RTC’s decision to the CTA which dismissed the
same for lack of jurisdiction claiming that it cannot resolve cases where the constitutionality of a law or rule is challenged. Does the CTA have jurisdiction
over a decision of the RTC on a purported tax case?
A: Not in this case. The primary reason for the CTA’s lack of jurisdiction is that what was imposed under the questioned ordinance are not taxes but are instead
regulatory fees, specifically to address the environmental depredation of the said special projects. As such, the case that originated from the RTC is not considered a
local tax case over which the CTA has jurisdiction. (Smart Communications, Inc. vs. Municipality of Malvar)

+
ADMG
Page 41 of 61
Q: Are the remedies of (1) filing an appeal on the BIR’s inaction and (2) filing an appeal on the CIR’s decision exclusive or alternative remedies?
A: the options are mutually exclusive and resort to one bars the other. In the case of RCBC vs. CIR (APRIL 24, 2007), CIR failed to act on the disputed
assessment within 180 days from date of submission of documents. Thus, petitioner opted to file a Petition for Review before the Court of Tax Appeals BUT
FILED THE SAME MORE THAN 30 DAYS AFTER LAPSE OF 180-DAY PERIOD. After availing the first option, i.e., filing a Petition for Review which was however
filed out of time, Petitioner cannot successfully resort to the second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the
Court of Tax Appeals, on the pretext that there is yet no final decision on the disputed assessment because of the Commissioner’s inaction.

Q: Philippine British Assurance Company was an insurance company which regularly issued customs bonds to its clients in favor of the BOC. The bonds
secure the release of imported goods in order that the goods may be released without prior payment of duties and taxes. Under these bonds, Petitioner and its
clients jointly bind themselves to pay BOC the value of the bonds in the event that the bonds expire without the imported goods being re-exported or the
proper duties being paid. BOC then filed a collection case alleging that Petitioner had unliquidated customs bonds. The RTC decided in favor of BOC but the
appeal filed with the Court of Appeals was dismissed as the CA claimed lack of jurisdiction and said that the appeal lies with the CTA as a case for collection
of taxes. Did the CA, not the CTA, have jurisdiction over the appeal filed from the RTC?
A: Yes. An action to collect on a bond used to secure the payment of taxes is not a tax collection case but rather a simple case for enforcement of contractual liability. This
was the same ruling in Mambulao Lumber where to satisfy its deficiency sales tax, the parties agreed for the taxpayer to pay in installments and as a security a bond was
executed. Upon default, the government proceeded against the bond while the taxpayer argued that the 5-year period to collect had set in. The Court also ruled that the
prescription rules under the Tax Code do not apply and instead those under the Civil Code apply. (Philippine British Assurance Company, Inc. vs. BOC)

Q: Is a Motion for Reconsideration from the decision of a division of the CTA mandatory prior to elevating the case to the CTA en banc?
A: Yes. The use of the term “must” clearly indicates that the requirement is mandatory and not merely directory. There is no exigent and persuasive reason (such as
relieving a litigant of injustice) to relax the rules in this case. (Commissioner of Customs vs. Marina Sales, Inc.)

+
ADMG
Page 42 of 61
F. VAT

Q: What is the current VAT rate?

A: 12%

Q: What is the nature of the VAT and what are the elements of a VAT-taxable sale?
A: VAT is an indirect tax that may be shifted. The elements of a VAT-taxable sale are as follows:
1) Sale of goods and services, lease of property including “deemed sale” transaction such as (1) transfer of goods not in the course of business (2) property dividends
(OF GOODS HELD FOR SALE OR LEASE) (3) consignment and without the sale being made within 60 days
2) In the course of trade or business (except if importation) and including INCIDENTAL transactions (as opposed to isolated transactions except if service by nonresident)
except that an importation to be subject to VAT need not be in the course of trade or business
3) The transaction is not a VAT zero-rated or a VAT exempt transaction
4) The transaction is done in the Philippines

Q: Is profit required for VAT to apply to a sale or lease?

A: No. The rule requiring gain/profit only applies to income tax and not VAT. The case of COMASERCO held that even if the arrangement is just a reimbursement of cost,
the payments are still subject to VAT

Q: What are considered as “goods or properties” for VAT purposes?

A: All tangible and intangible objects which are capable of pecuniary estimation and shall include:

(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, films, tapes and discs; and
(e) Radio, television, satellite transmission and cable television time.

Q: National Development Corporation (NDC), in pursuance of the government-mandated plan of privatization, sold to Respondent 5 of its ships. Is the
sale of the ships subject to VAT?
A: NO, the sale is exempt for being an isolated transaction. The requirement of the sale being “in the course of trade or business” of the seller is indispensable
and the seller must be treated as having done so “not just from time to time but all the time”. The Court added that if the VAT is imposed on isolated transactions,
there would be less chance of being able to recover the VAT on its sale since no input VAT may have been passed-on to the seller given the nature of the
transaction as not “doing business”. Likewise, the Court clarified that the enumeration of what are “deemed sale” does not modify the requirement of the sale being
in the “ordinary course of trade or business” and is thus irrelevant. (CIR vs. Magsaysay Lines)
Q: What is “technical importation” as it relates to VAT?
A: It is the subsequent sale, transfer or exchange of imported goods by VAT-exempt persons to non-exempt persons or entities. In these cases, the latter shall
be considered the importers thereof and shall be liable for VAT due on such importation.

Q: Distinguish VAT zero-rated and VAT exempt transactions.

+
ADMG
Page 43 of 61
A: They both do not yield any output VAT. However, the input VAT treatment is different such that (i) for a zero-rated transaction, the attributable input VAT may be
credited and/or refunded and (ii) for an exempt transaction, the input VAT cannot be credited/refunded. In addition, a VAT zero-rated taxpayer is required to VAT register
while an exempt taxpayer should not VAT-register.

Q: What are the notable VAT-exempt transactions?

A:
(1) Sale of agricultural food products in their original state (such as freezing, drying, broiling, roasting, etc.)
(2) Services provided by an R/AHQ but note that services by ROHQ are not VAT exempt but may be zero rated if the services are performed for a
nonresident and paid for in foreign currency
(3) Medical services (by hospitals, etc.) except that services rendered by professionals (individuals) are already VAT-taxable
(4) Services from an employer-employee relationship
(5) Export sales of non-VAT registered taxpayers (Note: if they were VAT-registered these would be zero-rated)
(6) Real property not held for sale to customers OR sales within the low-cost cap of below P1,919,200 for a lot and P3,199,500 for a house and lot, and
P12,800 per month for leases
(7) Banks and non-bank financial intermediaries
(8) Services subject to percentage tax
(9) Services by TESDA-accredited entities
(10)Sales NOT enumerated in 109 (A) to (V) and NOT exceeding 1,919,200 annually (Note: if the services/sales are covered under (A) to (V), the
amount is irrelevant)

Remember that the enumeration under the Tax Code is exclusive.

Q: What are notable VAT-taxable transactions under the new law?

A: Sale of electricity / Sale of non-food agricultural products / Services by doctors and lawyers

Q: What are notable zero-rated transactions already?

A: Sale of goods & services to international shipping companies / Sale of power thru renewable sources (biomass, solar, wind, etc.) / Transport of passengers and cargo
by air and sea from the Philippines to a foreign country

Q: What are the only bases currently existing to refund unutilized input VAT?
A: Only the input VAT relating to zero-rated transactions, those erroneously paid and those which remain unutilized at the close of the business may be refunded.

Q: Being a PEZA exporter, can a taxpayer claim its unutilized input VAT?
A: YES, Sekisui is entitled to tax refund. PEZA entities can avail of two alternative or subsequent incentives of ITH and 5% GIE. It is only in the latter where the
VAT is not imposed on the PEZA entity on its sales. Being under ITH, it will be subject to VAT and should VAT-register. However, (1) sales to the PEZA entity,
regardless of incentive availed, is zero-rated on the part of the seller since PEZA is considered “foreign soil” and thus sales to them are considered as “export
sales” and (2) if the PEZA entity is an exporter, its input VAT are subject to refund not by virtue of its PEZA status (and thus regardless of whether it’s at 5% GIE
or ITH) but due to the nature of its transactions (i.e., export sales). (CIR vs. Sekisui Jushi Philippines, Inc.)

Q: Are PhilHealth’s services considered “medical services” to entitle it to VAT exemption?

A: NO, but PhilHealth may exempt from VAT due only to a previously issued ruling.
(1) The VAT-exempt transaction involved is “medical, dental, hospital and veterinary services except those rendered by professionals”. Given that Petitioner is not
the entity providing medical services and only (i) acts as a conduit; (ii) arranges for the provision of health care; (iii) contracts services of doctors, etc.; and (iv)
contracts and negotiates with hospitals, its services are not VAT-exempt.
+
ADMG
Page 44 of 61
(2) However, the Court ruled that the revocation of the 1988 ruling cannot be applied retroactively since it will prejudice the taxpayer who has not committed any of
the acts (i.e., bad faith, omission of facts, etc.) to merit retroactivity of rulings. The fact that the term “health maintenance organization” only took on a technical
definition in 1995 upon the passage of the National Health Insurance Act supports PhilHealth’s good faith contention. (CIR vs. Philippine Health Care Providers,
Inc.)

Q: A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC. The foreign entity then subcontracted the actual
O&M to the Burmeister. NPC paid the foreign consortium a mixture of currencies while the consortium, in turn, paid Burmeister foreign currency
inwardly remitted into the Philippines. BIR did not want to grant refund since the services are “not destined for consumption abroad” (or the
destination principle). Are the receipts of Burmeister entitled to VAT zero-rated status?
A: Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior to the filing of CIR’s Answer in the CTA.
The substantial basis of the petition has no merit since the consortium, which was the recipient of services rendered by Burmeister, was deemed doing business
within the Philippines since its 15-year O&M with NPC cannot be interpreted as an isolated transaction. In addition, the Court interpreted Sections (1) (referring to
‘processing, manufacturing, repacking’) and (2) (‘services other than those in (1)’) of Sec. 102 (b) as both requiring (i) payment in foreign currency; (ii) inward
remittance; (iii) accounted for by the BSP; and (iv) that the service recipient is doing business outside the Philippines. The Court ruled that if this is not the case,
taxpayers can circumvent just by stipulating payment in foreign currency.
The refund was allowed since Respondent secured a ruling from the BIR allowing zero-rating of its sales to foreign consortium. However, the ruling is only valid
until the time that CIR filed its Answer in the CTA which is deemed revocation of the previously-issued ruling. The Court said the revocation can not retroact since
none of the instances in Section 246 (bad faith, omission of facts, etc.) are present. (CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.)

Q: Accenture filed a VAT claim for refund on unutilized input VAT premised on its claim that its sales were zero-rated for being in connection with services
rendered to nonresident clients. The CIR denied the claim stating that Accenture failed to prove that its foreign clients did business outside the Philippines. Is
Accenture entitled to the VAT refund?
A: No. Accenture failed to prove that services were rendered for nonresident. The Amex case did not rule that the services recipients need not be doing business outside
the Philippines but only that the consumption need not be abroad. However, Accenture failed to prove that the clients/service recipients are doing business outside the
Philippines as they only submitted SEC certifications showing that their clients have not established any branch offices in the Philippines and billing statements issued to
the said clients. The Court ruled that while it did prove that its clients are foreign (i.e., not doing business in the Philippines), there was no affirmative proof that they were
doing business outside the Philippines. (Accenture, Inc. vs. CIR)

Q: How is the VAT imposed on real property transactions?

A: VAT is imposed on real properties held for sale or lease as follows:
a.) If cash or deferred payment (i.e., payment is more than 25%), then the VAT on the whole amount is already imposed
b.) If installment (less than 25% for year), then the VAT is imposed on each payment

Q: Assuming a VAT-taxable transaction, is the advance payment in a real estate transaction subject to VAT?
A: Of the amounts typically covering an advance payment, only pre-paid rent is subject to VAT. Other forms of advance payment such as option money, security
deposit, etc., are not subject to VAT.

Q: A real estate company sold to an individual two adjacent residential lots worth P3,000,000 each. The lots were covered by two separate titles but the
sales were made one week apart. Are the sales subject to VAT?
A: Yes. While the two separate sales each fell below the threshold of P3,199,200, the sale shall be aggregated considering that (1) the lots were adjacent and (2)
there was just one buyer. This rule applies for sales executed and notarized after January 1, 2012.

Q: X Corporation had the following sales during the month:

+
ADMG
Page 45 of 61
Sale to private entities subject to 12% P100,000.00
Sale to private entities subject to 0% 100,000.00
Sale of exempt goods 100,000.00
Sale to gov't. subjected to 5% final VAT Withholding 100,000.00
Total sales for the month P400,000.00

The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) P5,000.00

Input tax on zero-rated sales 3,000.00
Input tax on sale of exempt goods 2,000.00
Input tax on sale to government 4,000.00
Input tax on depreciable capital good not attributable to any specific activity P20,000.00
(monthly amortization for 60 months)

How much creditable input VAT is available for each of the respective type of transactions entered into by X Corp.?

A:

1) For sales subject to 12% VAT --- (i) actual input VAT of P5,000 and (ii) ratable portion of P5,000
2) For sales subject to 0% VAT --- (i) actual input VAT of P3,000 and (ii) ratable portion of P5,000
3) For sale of exempt goods --- no input VAT is creditable as the transactions are VAT exempt
4) For sales to government --- no input VAT is creditable as the law imposes a 5% final withholding VAT obligation on the government agency-payor

Q: In the above problem, how was the ratable portion of creditable input VAT (for VAT-taxable and zero-rated sales) computed?
A:

(1) for input VAT creditable on VAT-taxable sales

Taxable sales
____________ x Amount of input tax not directly attributable

Total Sales

100,000
_______ x 20,000 = 5,000

400,000

(2) for input VAT creditable on VAT zero-rated sales

Zero-rated sales
____________ x Amount of input tax not directly attributable
+
ADMG
Page 46 of 61
Total Sales

100,000
_______ x 20,000 = 5,000

400,000

Q: When is the appropriate time to claim input VAT?

A: 1) for purchase of goods, upon consummation of the sale and issuance of invoice
2) for purchase of services, upon payment
3) for importations, upon payment of taxes

Q: What are capital goods for VAT purposes and what is their relevance?
A: Capital goods are those with useful life of more than one year and are considered as depreciable assets under Section 34 (H) of the Tax Code. They are used
directly in production or sale of taxable goods/services. For capital items exceeding P1,000,000 (excluding the VAT amount), the input VAT arising from its
purchase shall be claimed over the estimated life of the asset or 5 years, whichever is shorter. For capital goods which are valued at less than P1,000,000, the
input VAT is claimed in the month of purchase. Note that for purchase of services and rental payments, there is no spreading out regardless of how much amount
is. As an example, if the capital goods purchased is worth P5,000,000 and has a useful life of 10 years, the buyer can claim as input VAT only 10,000 per month
[(P5,000,000 x 12%) / 5 years / 12 months]. If it’s useful life is 2 years, then the input VAT to be claimed per month is P25,000 [(P5,000,000 x 12%) / 2 years / 12
months). If the item is worth P100,000 the input VAT to be claimed on the month of purchase is P12,000 (P100,000 x 12%).

Q: When does the withholding VAT apply?

A: The withholding VAT applies in cases where (1) payments are made to a nonresident whose services are considered as VAT-taxable (ex. royalties) in which
case the 12% VAT will be withheld by the payor or (2) payments by government agencies, in which case the government entity will withhold 5% on its payments.
These are all considered as final VAT payments.

Q: Is a party dealing with a government entity deprived of its entitlement to the input VAT it accumulated considering the VAT withholding tax
mechanism?
A: The 7% difference (12%-5%) is the presumed input VAT cost of the entity dealing with the government agency. If the actual input VAT is below 7%, then the
taxpayer will realize additional income. However if the if the actual input VAT is above 7%, then the difference between the actual input VAT and 7% is considered
as additional cost which can be claimed as an expense.

Q: What is the effect if the zero-rated seller fails to stamp ‘zero-rated’ on the receipts and invoices it issues?
A: Any claim for refund of unutilized input VAT of the zero-rated seller will be denied. As an example, A sells raw materials to B which are subject to VAT. B
processes the materials and thereafter sells the finished products to C, an exempt entity (ex. PEZA buyer). B’s sale to C must indicate ‘zero-rated’, otherwise the
input VAT passed on by A to B may not be credited/refunded by B.

Q: What are the effects of the failure to register for VAT if such registration is required?
A: The taxpayer will be (1) required to pay VAT even if it did not register; (2) prohibited from availing of input VAT on its purchases and (3) will be imposed
administrative penalties of 50% surcharge.

Q: What are the effects of issuing VAT receipts is the taxpayer is a VAT-exempt seller?

+
ADMG
Page 47 of 61
A: The taxpayer will be (1) subject to other business taxes (ex. percentage) plus the VAT; (2) prohibited from availing of input VAT on its purchases and (3) will
be imposed administrative penalties of 50% surcharge. Note that the buyer can avail of the input VAT in the transaction.

+
ADMG
Page 48 of 61
G. LOCAL TAXATION

Q: What is the basis of the Local Government’s TAXING POWER? (SECTION 129)
A: It is only granted by the Constitution (Sec. 5 Art. X, Constitution) and is not inherent in the Local Government.

Q: Who exercises the power of taxation for LGUs?

A: It is exercised by the Sanggunian through the passage of local ordinances.

Q: What are the limitations on the taxing power of LGUs?

A: LGUs can not impose:

1) income tax (except on banks and financial entities)

2) DST
3) Estate and donor’s taxes
4) Customs duties
5) Taxes on goods passing through the LGU
6) Taxes on BOI-registered enterprises
7) Excise taxes on articles under the Tax Code
8) Percentage tax and VAT
9) Taxes on gross receipts of transportation contractors
10) Motor vehicle taxes and fees
11) Taxes and fees on the National government, its agencies and instrumentalities

Q: Is a municipal ordinance imposing fees on goods (corn) that pass through a municipality’s territory valid?
A: No, it is void. While the LGU can tax the vehicles using the roads it cannot tax the goods even in the guise of “police surveillance” fees. (Palma Development
Corp. vs. Zamboanga del Sur)

Q: Petron maintains a depot or bulk plant at the Navotas Fishport Complex where it engages in the selling of diesel fuels to vessels used in
commercial fishing. Navotas City thereafter levied business taxes on its sale of petroleum products. Can LGUs levy local taxes on sale of petroleum?
A: No, LGUs cannot impose any type of local tax on petroleum products. The LGC provision provides two possible bases for exemption when it states the LGCs
cannot impose --- (i) “excise taxes on articles enumerated under the Tax Code” and (ii) “taxes, fees or charges on petroleum products”.
(1) The reference to excise taxes in the LGC is not for “the performance, carrying on or exercise of an activity”. Rather it refers to those subjected to
specific or ad valorem taxes under the Tax Code.
nd
(2) The 2 basis for exemption refers not only to direct or excise taxes to be levied by LGUs on petroleum products but on all types of taxes on petroleum
products including business taxes. The Court said that this could not refer again to the non-imposition of excise taxes on petroleum products because
otherwise it would be a redundancy. (Petron Corporation vs. Tiangco)

Q: Bulacan passed an ordinance imposing tax on minerals extracted from public lands BUT went on to collect tax on minerals extracted from private
lands. Since the LGC only provides for tax on public lands, is the action of Bulacan valid?

+
ADMG
Page 49 of 61
A: Generally, LGC can impose even if not in LGC since Sec. 186 is sweeping. However, Bulacan can’t levy on minerals from private lands because it is an excise
tax on an article already covered by the Tax Code. This applies the PREEMPTION OR EXCLUSIONARY RULE wherein the national government elects to tax a
particular area, and thus impliedly withholding from LGU the delegated power to tax the same field (Province of Bulacan vs. CA)

Q: Who is covered by the Local Business Tax?

A:

(1) manufacturers, assemblers, processors

(2) wholesalers, dealers, distributors
(3) exporters, manufacturers of essential commodities
(4) retailers (if both wholesale and retail, then pay both taxes)
(5) contractors
(6) banks and other Financial Institutions (income subject to LBT are enumerated in the section)
(7) peddlers
(8) other business not specified --- THOSE ALREADY SUBJECT TO TAX UNDER (1) TO (7) CAN NO LONGER BE SUBJECT TO TAX UNDER (8) otherwise it
will be deemed as double taxation

Q: Can an LGU tax a condominium corporation?

A: In YAMANE VS. BA LEPANTO CONDO. CORP., it was ruled that condominium corporations are not “businesses” as the same is defined under the LGC w/c is
a “commercial activity regularly engaged with a view to profit”. Even if a condominium corporation can levy fees, these are used merely to finance expenses of the
condominium and nothing more.

Q: Lepanto Consolidated Mining had a mining lease contract for a mining claim in Benguet. They used the sand and gravel mined to construct and
maintain concrete structures needed in its mining operations such as a tailings dam, access roads, and offices. The provincial treasurer of Benguet
then asked Lepanto Consolidated Mining to pay sand and gravel tax for the quarry materials extracted from the mining site. The counterargument was
that the said tax applied only to commercial extractions and since Lepanto did not supply other users for some profit, the tax should not apply. Is
Lepanto liable for the tax imposed by Benguet on the sand and gravel that it extracted from within the area of its mining claim used exclusively in its
mining operations?
A: Yes. The CTA erred in applying the provision of the Local Government Code (Section 138) since the basis of Benguet province emanates from the Revised
Benguet Revenue Code itself. This notwithstanding, the provincial revenue measure still did not distinguish between commercial and non-commercial extractions.
In addition, the Petitioner’s argument that when a company is taxed on its main business it can no longer be taxable for engaging in an activity that is but part of,
incidental to, and necessary to such main business, was held to be inapplicable. The Court said that the cases where the above principle has been applied
involved business taxes and thus the incidental activities could not be treated as separate and distinct from the main business. Here the tax being imposed was an
excise tax levied on the privilege of extracting gravel and sand. (Lepanto Consolidated Mining Company vs. Ambanloc)

Q: On what is the local business tax imposed?

A: Gross receipts

Q: Ericsson was assessed for deficiency LBT but countered that the assessment was erroneous for having been based on its gross revenues (which,
on top of gross receipts, includes uncollected earnings) rather than just its gross receipts. Can LGCs validly impose the LBT on the gross revenues
rather than the gross receipts?
A: NO, the LBT should be assessed based only on gross receipts. The LGC clearly provides that the LBT is based on gross receipts which include money or its
equivalent actually or constructively received, the latter being defined to include deposit in banks, issuance of notice to offset any debt/obligation, etc. In contrast,
gross revenue includes receivables which are “payments yet to be received” but are just “expected to be received”. Since Ericsson employs the accrual method of
+
ADMG
Page 50 of 61
accounting, it does book its receivables as part of gross revenue which exposes it to potential double taxation on these amounts since a taxpayers’ gross revenue
will definitely include its gross receipts to be reported in a subsequent year (i.e., when it is already paid actually or constructively) and for which LBT will be paid
again. (Ericsson Telecommunications, Inc. vs. City of Pasig)

Q: Give the rule on SITUS as stated in SECTION 150 of the LGC

A: The rule applies if a company has several offices (head office, branch, sales office, warehouse) and is summarized as follows:

(A) Sec. 150 (a)

W/ branch/sales office? recorded at allocation

Yes branch/sales office none

No principal none

(B) Sec. 150 (b)

Plantation & factory allocation to allocation to factory, etc.

In same location ? principal

Yes 30% 70%

No 30% factory – 60%
Plantation – 40% (if 2 or more factories, etc. = 70% is prorated

Remember that Section 150 (b) [or (B) above] is only resorted to if there is no branch or sales office

Q: How are the sales of route trucks and vans taxed?

A: If the sale is made in a place with a branch office, the sale is reported in the LGU where the branch office is located. However, if the sale is made in a place
without a branch office, the sale is reported in the LGU where the goods are withdrawn.

Q: When does the tax accrue?

st
A: January 1 except new taxes which will accrue on the 1 day of the quarter next following effectivity of ordinance

Q: What penalties are imposable on failure to pay local business taxes?

A: The penalty of 25% and 2% interest per month not to exceed 36 months (or a maximum of 72%) may be imposed.

Q: Are the local business tax payments paid for privilege of carrying on business in the year paid or for having engaged in business the previous year?
A: It is paid for privilege of carrying on business in the year paid. For example, a corporation whose gross sales was 10M in 2008 and 20M in 2009, the LBT
payable in January 2009 is based on P10M (gross receipts for 2008) but the same is payment for the right to do business in 2009. Thus, on the year of retirement,
the company will only be liable if the actual LBT on the basis of current year sales is more than LBT paid based on previous year’s sales. To continue the example,
if the sales of the company are also P10M as of the date of retirement in 2010, this means that the payment made in January 2010 based on the 2009 gross
receipts is sufficient to cover the LBT due upon retirement. (Mobil Phils. Inc. vs.
Treasurer of Makati)

+
ADMG
Page 51 of 61
Q: What are the remedies available to the local government?
A: Civil remedies are distraint and levy AND collection and the same may be proceeded simultaneously. Certain personal properties, however, are exempt from
distraint or levy (sec. 185) – ex. one horse, tools, clothing, libraries, etc.

Q: Give the process on how an appeal involving questions on ordinance is made?

A: Questions on ordinance are appealed to the Secretary of Justice within 30 days from effectivity which must be decided within 60 days BUT an appeal does not
suspend effectivity of the ordinance. Within 30 days from the Sec. of Justice’s decision or after 60 day inaction, an appeal may be filed with the RTC.

Q: In relation to the rule on appeals on ordinance, what is the doctrine in DRILON v. LIM?
A: The Secretary can declare an ordinance void for not having followed requirements (procedural and substantive) but he cannot replace it with his own law or he
cannot say that it is unwise

Q: Can an ordinance which has been declared void for failure to publish for 3 weeks be “remedied” by passing another ordinance which purports to
amend the ordinance that has been declared void?
A: No, the new ordinance is still void since it cannot cure something which had never existed in the first place as the same was void ab initio. (Coca-Cola vs.
Manila)

Q: Give the requirements for the Sanggunian (not the mayor) to grant exemptions from local business tax?
A:

(1) natural calamities, civil disturbance, failure of crops

(2) through an ordinance
(3) shall similarly apply to all businesses similarly situated
(4) shall only take effect for the next calendar year and not to exceed 12 months

Q: Is the 6-year exemption from LBT for BOI-registered enterprises reckoned from date of BOI registration or from start of commercial operations?
A: As the law is clear on the matter, the exemption starts from registration with the BOI even if the actual operations started some time after due to force majeure
(Batangas Power Corp. vs. NPC)

Q: Petitioner was granted a legislative franchise under RA No. 7294 and on that basis filed a case stating that it was not liable for the franchise tax of
75% of 1% of gross annual receipts since its franchise states that it is only subject to franchise tax under the Tax Code (now, the VAT), income tax and
real property tax. The same franchise referred to provides that Petitioner “shall be liable to pay the same taxes on their real estate buildings and
personal property, exclusive of this franchise x x x “ Is Petitioner liable to pay the franchise tax to Davao City?
A: Yes, R.A. 7294 does not expressly provide what taxes Petitioner is exempt from and whether its exemption covers national or local taxes, or both. The
uncertainty of the “in lieu of all taxes” clause must be construed strictly against Petitioner as it is in the form of a tax exemption. In which case, Smart’s exemption
is interpreted to refer only to national and not local taxes. The Court noted that the “in lieu of all taxes” provision has become functus officio with the abolition of
franchise tax on telecommunication companies and its replacement with the VAT. It also discarded Smart’s argument that what it enjoys is tax exclusion (as it pays
other taxes) and not tax exemption and stated that either situation requires a strict interpretation against the taxpayer claiming the same. The findings of the
Bureau of Local Government Finance (BLGF) which Petitioner relies
upon to support its exemption from local franchise taxes are not conclusive on the courts. The BLGF is an administrative agency whose findings on questions of
fact are given weight and deference in the courts. The question raised in this case is a legal issue, which is not within the jurisdiction of the BLGF to decide.
Finally, Petitioner’s interpretation of the Public Telecommunications Policy Act provision “that any advantage, favor, privilege, exemption, or immunity granted to
Globe Telecommunications should likewise apply to Petitioner” is misplaced as the Court ruled that these advantages, etc. necessarily refer to exemption from
certain regulations and requirements since to sustain Petitioner’s theory would leave the Government with the burden of having to keep track of all granted
+
ADMG
Page 52 of 61
telecommunications franchises, lest some companies be treated unequally. [SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO (September 16, 2008)]
(Note: The same decision was reached in the February 27, 2009 case of Iloilo City vs. Smart Communications.)

Q: What are the rules on assessments?

A:
a) Assessment must be made within 5 years from the date they become due
b) If there is fraud or intent to evade payment of tax, assessment may be made within 10 years from discovery of fraud or intent to evade

Q: How does the taxpayer contest a local business tax assessment?

A: After the treasurer issues assessment, the taxpayer has 60 days to protest (NO PROTEST UNDER PAYMENT REQUIRED). The treasurer has 60 days to
decide. An appeal to the RTC is then available upon denial or 60-day inaction by the treasurer within 30 days from the denial or inaction. RTC’s decision is then
appealable to the CTA.

Q: What is the rule on collection?

A: Collection must be within 5 yrs. from assessment.

Q: May the running of prescriptive period be suspended?

A: Yes, in the following instances:

1. Treasurer is legally prevented from assessing/collecting

2. Taxpayer requests for reinvestigation AND executes waiver
3. Taxpayer is out of the country or cannot be located

Q: What is the rule on refunds?

A: Must file written claim within 2 yrs. from the date of payment of tax OR from the date when the taxpayer is entitled to refund. Thus, the SUPERVENING
CAUSE doctrine applies.

Q: Can an injunction be issued to enjoin the collection of local taxes?

A: Yes. The Local Government Code does not specifically prohibit an injunction enjoining the collection of taxes. This is different in the case of national taxes where
the Tax Code expressly provides that no court shall have the authority to grant an injunction to restrain the collection on national internal revenue tax, fee or charge
with the sole exception of when the CTA finds that the collection thereof may jeopardize the interest of the government and/or the taxpayer. Nevertheless, there
must still be proof of the existence of the requirements for injunction to be issued under the Rules of Court (i.e., clear right to be protected and urgent necessity to
prevent serious damage). (Angeles City vs. Angeles Electric Corporation)

+
ADMG
Page 53 of 61
H. REAL PROPERTY TAXATION

Q: Do all type of LGUs have the power to impose RPT ?

A: No. Municipalities outside Metro Manila and baranggays cannot impose RPT

Q: What types of machinery are subject to RPT?

A: Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus, which may or may not be attached, permanently or
temporarily to the real property.

Physical facilities for production, installations and appurtenant service facilities, those which are mobile, self-powered, or self-propelled and those not permanently
attached to the real property shall be classified as real property provided that:

(1) They are actually, directly, and exclusively used to meet the needs of the particular industry, business, or activity; and
(2) By their very nature and purpose are designed for, or necessary to manufacturing, mining, logging, commercial, industrial, or agricultural purposes.

Machinery which are of general purpose use including but not limited to office equipment, typewriters, telephone equipment, breakable or easily damaged containers
(glass or cartons), microcomputers, facsimile machines, telex machines, cash dispensers, furniture and fixtures, freezers, refrigerators, display cases or racks, fruit juice
or beverage automatic dispensing machines which are not directly and exclusively used to meet the needs of a particular industry, business or activity shall not be
considered within the definition of machinery under this Rule.

Q: Can machinery of general purpose be considered as real property for RPT purposes? For example, can coffee dispensing machines be considered as
real property?
A: Yes. If they are directly and exclusively used to meet the needs of a business such as if the coffee dispensing machines are used by Starbucks.

Q: What types of real property are subject to idle land tax?

A: The 5% tax on idle land is imposed on agricultural lands which are at least one (1) hectare or bigger or, (2) if non-agricultural and at least 1,000sqm. --- in both
cases where at least 50% of the land is unutilized

Q: What real properties are exempt from RPT

A: Those enumerated under Section 234 of the LGC.
(a) realty owned by government or political subdivision (excludes GOCC except if 3. below) except if beneficial use is granted to a taxable person even if
w/o consideration
(b) charitable, church, etc. and all lands and buildings actually directly exclusively used for religious, charitable or educational purposes
(c) all machineries actually directly exclusively used by local water districts and GOCC engaged in supply of water and electricity (THUS, ONLY
MACHINERIES ARE EXEMPT, IF THEY ARE LANDS OR BUILDINGS – IT WILL BE DEEMED AS “SPECIAL CLASS”) – it has to be a GOCC such as
NPC, etc.
(d) realty owned by registered cooperatives
(e) machinery and structures for pollution control and environment protection

+
ADMG
Page 54 of 61
 The local sanggunian can not add to the list of exempt properties but may allow condonation in cases of general failure of crops or decrease in agricultural
products.

Q: First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) Agreement with Petitioner National Power Corporation (NPC)
for the construction of a power plant. Under the agreement, Bauang Private Power Corporation (BPPC) was created to own, manage and operate the
power plant and assume and perform FPPC’s obligations under the contract. BPPC will convert NPC’s supplied diesel fuel into electricity for a fee and
deliver the power to NPC. After an agreed period of time, the power station shall be transferred by BPCC to NPC without payment of any compensation.
The BOT Agreement also provides that NPC shall be responsible for the payment of all real property taxes (RPT) in respect of the power plant,
buildings and improvements thereon. After BPPC was assessed for RPT, NPC filed a petition with the Local Board of Assessment Appeals (LBAA) to
declare the machineries as exempt from RPT under Section 234(c) of the Local Government Code (LGC), which provides for the RPT exemption of,
among others, “all machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or –
controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.”
The LBAA denied the Petition for Exemption and ruled that the exemption provided by the LGC applies only when a government-owned or –controlled
corporation (GOCC) such as Petitioner owns and/or actually uses the machineries and equipment for the generation and transmission of electric
power. NPC appealed to the Central Board of Assessment Appeals (CBAA). The CBAA affirmed the decision of the LBAA and ruled further that the
lower 10% assessment level for the valuation of the subject properties available to GOCCs for RPT purposes, cannot be availed of by BPPC since it is
not a GOCC. Is Petitioner NPC exempt from RPT on the machineries and equipment?
A: No, because it does not actually, directly and exclusively use the machineries and equipment in the generation and transmission of electric power. NPC’s
basis for its claimed exemption, Section 234(c) of the LGC, clearly provides that the RPT exemption shall apply to: (a) all machineries and equipment; (b) that are
actually, directly, and exclusively used by; (c) local water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission
of electric power. The machineries and equipment are owned by BPPC, subject only to the transfer of these properties to NPC after the lapse of the 15-year period
agreed upon. Moreover, BPPC’s use of the machineries and equipment are actual, direct and immediate, while NPC’s is contingent and, at this stage of the BOT
Agreement, not sufficient to support
its claim for tax exemption. In the same manner, the application of the lower 10% assessment level for the properties cannot be used by BPPC, since it is not a
GOCC engaged in the generation and transmission of electric power, but a private entity. (NPC vs. CBAA)

Q: Petitioner was granted a 25-year franchise to install, operate and maintain telecommunications systems throughout the Philippines under a law
which states that “The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise x x
x.” As they were not being issued a Mayor’s permit, Petitioner paid the RPT under protest. Petitioner argued that the phrase “exclusive of this
franchise” means that only the real properties not used in furtherance of its franchise are subject to RPT while those real properties which are used in
its telecommunications business are exempt from RPT. Are Petitioner’s real properties used in its telecommunications business exempt from RPT?
A: No, Petitioner’s real properties, whether or not used in its telecommunications business, are subject to RPT. Section 5 of RA No. 7678 categorically states that
Petitioner is liable to pay the same taxes on its real estate, buildings, and personal property “exclusive of this franchise” as other persons or corporations. The
phrase “exclusive of this franchise” qualifies the term “personal property.” This means that Petitioner’s legislative franchise, which is an intangible personal
property, shall not be subject to taxes. This is to put franchise grantees in parity with non-franchisees as the latter obviously do not have franchises which may
potentially be subject to realty tax. There is nothing in the first sentence of Section 5 which expressly or even impliedly exempts Petitioner from RPT. Finally,
Petitioner’s reliance on the BLGF’s opinion stating that real properties owned by telecommunications companies are exempt from RPT is without basis as the
BLGF has no authority to rule on claims for exemption from RPT. (Digital Telecommunications Philippines, Inc. vs, City of Batangas)

Q: FELS entered into a lease contract with NAPOCOR over two engine power barges at Balayan Bay, Batangas. The lease contract stipulated that
NAPOCOR shall be responsible for all taxes (including RPT on the barges), fees and charges that FELS may be liable to except (i) income tax of FELS
and its employees; and (ii) construction permit and environmental fees. FELS was assessed for RPT and the LBAA upheld the assessment by stating
that while the barges “may be classified as movable/personal property, they are considered as real property for tax purposes because they are
installed at a specific location with a character of permanency”. Are the power barges considered as realty for RPT purposes?
+
ADMG
Page 55 of 61
A: Yes, the barges are real property subject to RPT.
(1) The remedy from the decision of the Provincial Assessor is an appeal to the LBAA and not a Motion for Reconsideration. Failure to file the appeal to
the LBAA within the 60-day period provided by law makes the assessment final and unappealable.
(2) Further basis to consider power barges as real property is Article 415(9) of the Civil Code which provides that “docks and structures which, though
floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast”. As such they are categorized as immovable
property by destination.
(3) Neither can FELS claim exemption under Section 234 of the LGC given that the requirement is that to be exempt the machineries and equipment
must be actually, directly and exclusively used by GOCCs engaged in the generation of power. Since the agreement between FELS and NAPOCOR is
that FELS will own and operate the barges and not NAPOCOR, the condition is not met. The mere undertaking to pay real estate taxes does not infect
rd
the transaction with NAPOCOR’s tax exemption since, at best, it will be considered only as an arrangement between the parties not binding 3 parties.
(FELS Energy, Inc. vs. Province of Batangas)

Q: The City Treasurer of Paranaque City issued Warrants of Levy on Philippine Reclamation Authority’s (PRA) reclaimed properties within the city’s
jurisdiction. Is the PRA subject to real property tax?
A: No.. PRA, much like MIAA, Philippine Ports Authority, University of the Philippines, Philippine Fisheries Development Authortiy, GSIS, and BSP, is considered a
government instrumentality exercising corporate powers but which are not considered as GOCCs as they are neither a stock (for not having the authority to
distribute dividends) nor a non-stock (for not having members) corporation. In addition, the Constitution likewise provides that a GOCC is created under two
conditions: (a) established for a common good and (b) meets the test of economic viability. While test (a) is complied with, the PRA was undoubtedly not created to
engage in economic or commercial activities as it is the only entity engaged in reclamation which was described as essentially a public service. Thus, the
exemptions under Sections 234 (a) and 133(o) of the LGC apply. (Philippine Reclamation Authority vs. City of Paranaque)

Q: Are equipment/machineries in cement or wooden platform and which “were never used as industrial equipments to produce finished products for
sale nor to repair machineries offered to the general public for business or commercial purposes” considered as realty subject to RPT?
A: No. For equipment to be real property, they must be ESSENTIAL AND PRINCIPAL ELEMENTS (ex. machineries for production of soft drinks in breweries). In
addition, the machinery should be essential to carry on business in a building or piece of land and this was not the case since it was proven that the equipment was
not essential because it is used only for repairs which could actually be done elsewhere.
Q: Are tanks, pumps, etc. installed by Caltex in gas stations on leased land considered as realty subject to RPT even if the lessor does not become
the owner of the said assets?
A: Yes, because they are essential to the business of the taxpayer. The issue of whether the property was installed by owner (Davao Sawmill case) does NOT
apply since there the issue was on execution of judgment against the lessee.

Q: How is a RPT tax assessment disputed?

A:
1. Owner pays tax
2. Annotation of “paid under protest” in receipt
3. Protest filed with the treasurer of the LGU within 30 days from payment
4. Treasurer to decide within 60 days
5. Treasurer decision or inaction within 60 days appealable to LBAA within 60 days
6. LBAA to decided within 120 days
7. LBAA decision appealable to CBAA within 30 days
8. CBAA appealable to CTA NOW UNDER RA 9282 (EVEN IF THE LAW STATES THAT IT IS FINAL AND EXECUTORY)

Q: What are the rules on assessments?

A:
+
ADMG
Page 56 of 61
a) Assessment must be made within 5 years from the date they become due
b) If there is fraud or intent to evade payment of tax, assessment may be made within 10 years from discovery of fraud or intent to evade

Q: What is the rule on collection?

A: Collection must be within 5 yrs. from assessment.

Q: May the running of prescriptive period be suspended?

A: Yes, in the following instances:

1. Treasurer is legally prevented from assessing/collecting

2. Taxpayer requests for reinvestigation and executes waiver
3. Taxpayer is out of the country or can not be located

Q: What is the rule on refunds?

A: Must file written claim within 2 yrs. from the date of payment of tax OR from the date when the taxpayer is entitled to reduction or adjustment. Thus, the
SUPERVENING CAUSE doctrine also applies.

Q: What were the procedural issues addressed in the case of Lopez vs. City of Manila (February 19, 1999)
A:
1) Remedies on legality of tax ordinance ---
1. Sec. 187 – constitutionality or legality of ordinance – 30 days from effecitvity – DOJ
2. Sec. 226 – assessment of realty – 60 days from notice of assessment – LBAA
2) Steps for revision of Real Property assessments ---
1. preparation of schedule of FMVs
2. enactment of ordinance which (a) levies RPT and SEF (b) fix assessment levels and (c) adopts schedules of FMVs in 1. above
3) Procedural steps in computing RPT ---
1. ascertain assessment level
2. multiply Market Value with assessment level = assessed value
3. multiply tax rate with assessed value

Q: Can the petitioner file a case direct to the RTC if it claims that it was questioning the authority of the treasurer to assess and not only the amount
of assessment?
A: No, it was found that petitioner raised issues on prescription, double taxation, tax exemption. In which case, the correctness of the tax assessment has to be
dealt with and the treasurer has initial jurisdiction and his decision is appealable to the LBAA. [Olivares vs. Joey Marquez (September 22, 2004)]

Q: Petitioner CJHDC was assessed by Baguio City for its buildings within the John Hay Special Economic Zone. CJHDC protested the same and raised
as defense its alleged exemption from paying all taxes under the Bases Conversion Act. However, there was no payment under protest made by
CJHDC. Can the CBAA/CTA assume jurisdiction over a real property assessment case even if the taxpayer did not pay under protest?
A: No. A claim for tax exemption, whether full or partial, does not deal with the authority of local assessor to assess real property tax. Such claim questions the
correctness of the assessment and compliance with the provisions of the LGC and as such payment under protest is mandatory. Neither can CJHDC use the
argument that the rule on paying under protest will not apply to it since it is not a “taxpayer” as it is a tax-exempt entity. The Court replied by stating that the LGC
provides for a process by which an entity claiming exemption can comply with the same and hence it becomes a question of fact which would require and
administrative determination. (Camp John Hay Development Corporation vs. CBAA)

+
ADMG
Page 57 of 61
Q: An auction sale of the properties of a bank was conducted in May 30, 2003. The Certificate of Sale of Delinquent Property was registered with the
Register of Deeds of Quezon City on February 10, 2004. The bank tendered payment on June 10, 2004 but the Treasurer of Quezon City refused on the
ground that the one-year redemption period has lapsed. Did the bank still have the right to redeem?
A: Yes. While the LGC provides that the one year begins from the date of sale on which date the delinquent tax and other fees are paid (in this case May 30,
2003), the local ordinance of Quezon City provides that the period is reckoned from the date of annotation of the sale (in this case February 10, 2004). To
reconcile the conflicting provisions, the Court applied the rule laid down in the special law or the Quezon City ordinance. (City Mayor of Quezon City vs. Rizal
Commercial Banking Corporation)

+
ADMG
Page 58 of 61
I. CUSTOMS

Q: On September 29, 2001, a shipment described as “agricultural product” arrived at Subic Bay Freeport Zone. On October 23, the BOC issued a
Memorandum stating that upon examination the shipment was found to contain rice. The representative of the importer then stated that there was a
“misshipment” and manifested willingness to pay appropriate duties and taxes. The BOC then issued a Hold Order on October 25, 2001. Despite
several certifications for its clearance, Petitioner SBMA refused to allow the release of the rice shipment. Hence, on June 11, 2002, the respondent-
importers filed with the RTC of Olongapo City a complaint for Injunction and Damages against SBMA. Did the RTC have jurisdiction over the case?
A: No. The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and the regular courts can not interfere nor can it enjoin these
proceedings. This is the rule the moment the imported goods are in the possession or control of the Customs authorities even if no warrant for seizure or detention
had previously been issued. The actions of the BOC are then only appealed to the CTA. The Court also said that this rule, which is anchored upon the policy of
placing no unnecessary hindrance on the government’s drive to prevent smuggling and fraud and to collect correct duties, is absolute. THIS IS THE DOCTRINE
OF PRIMARY JURISDICTION IN CUSTOMS CASES (Subic Bay Metropolitan Authority vs. Rodriguez)

Q: When does importation begin and end?

A: Importation begins when goods enter the Philippine jurisdiction with intention to unlade and terminates upon payment of taxes or legal permit to withdraw has
been granted.

Q: Are all articles imported into the Philippines subject to duties even if the same was previously exported and/or are just replacement parts of
defective imported items?
A: Yes. Unless the importation can point to a specific exemption or is considered a conditionally-free importation, all imported articles are subject to duty even if
previously exported or even if imported as mere replacements.

Q: What are some notable conditionally-free importations?

A:
o Articles for repair, re-conditioning to be re-exported w/in 6 mos. (requires bond)
o Personal effects for balikbayans excluding cars, and must NOT be commercial quantity and NOT exceed P2000 – can be brought in 90 days after
arrival
o Articles to be donated to relief organizations (certified by DSWD, DECS)
o Samples not for commercial sales, including medicines (but should not be available in the Philippines)
o Economical, technical, vocational, scientific, philosophical, historical, cultural books/publications and bibles

Q: What are the 6 methods of valuation of imported goods used for duty purposes?\
A: The 6 methods which are applied sequentially (except methods 4 and 5 which are interchangeable at the sole discretion of the importer) are:
• Transaction Value --- Price actually PAID/PAYABLE when exported to the Philippines adjusted by adding ---
o Commissions / cost of containers / packing cost / cost of tools, engineering, artwork if supplied free of charge / royalties
o Value of subsequent resale accruing to the seller
o Cost of transport & loading/unloading charges from port of exportation to port of entry in RP (costs within RP already excluded)
o Insurance
• Transaction Value of Identical Goods
• Transaction Value of Similar Goods
• Deductive Value
+
ADMG
Page 59 of 61
 • Computed Value
• Fallback Value

Q: What are assists and what are examples of it?

A: Assists are the cost of tools, engineering, artwork, etc. if supplied free of charge or at a reduced rate by the importer to the exporter. An example would be if the
importer of imported shoes supplies leather materials free of charge or at a reduced rate to be used for the manufacture of shoes to the exporter. Since the supply
of the materials may effectively lower the transaction value, the same is added to the dutiable value.

Q: The Transaction Value method of valuation is not allowed to be used in cases where the importer and seller are related parties. Who are considered
as related parties for this purpose?
A: The buyer and the seller are related parties if they are business partners, employer-employee, at least 5% equity of both seller and buyer is held by one
th
person, entities that are under a common control, and relatives up to 4 degree. Please note that the BOC MUST have proof that relationship influenced the price
before it rejects transaction value (method one) and cannot set aside the same solely on basis of relationship.

Q: What are the special duties prescribed under the TCCP?

A: The TCCP provides for the following special duties:
• Anti-dumping
o Duty imposed on foreign article imported into the Philippines at a price less than the fair value, the importation of which might injure the
establishment of an industry producing like goods in the Philippines
o Action initiated by filing complaint alleging a) dumping, b) injury, and c) causal link between the dumped imports and the alleged injury
• Countervailing
o Duty imposed on articles, upon the production, manufacture or export of which any bounty or subsidy is directly or indirectly granted in the
country of origin, and the exportation into the Philippines will likely injure an industry in the Philippines. Bounty is the cash award paid to an
exporter while subsidy refers to fiscal incentives, not in the form of cash award, to encourage mnufacturers or exporters. The duty is equal to
the ascertained or estimated amount of the bounty or subsidy.
o There is deemed to be subsidy if there’s grant, foregone revenue, provision of goods/services
• Marking
o Duty imposed on imported articles or containers which have not been properly marked in any official language of the Philippines as to
indicate the name of the country or origin of the article. The purpose is to prevent the deception of consumers.
o Certain exceptions – if goods cannot be market without injury, crude substance, importer necessarily knows origin

• Discriminatory
• Duty imposed upon articles of a foreign country which discriminates against Philippine commerce in such a manner as to place it at a
disadvantage compared with the commerce of another foreign country. (WTO)
• Amount not to exceed 100% ad valorem

Q: What are the rules on abatement and refund for customs duties?
A: As a general rule, no abatement is allowed for damage of the goods suffered due to voyage. If there is deficiency in the contents or in case of dead animals, the
importer is required to certify before an abatement is processed. The claim must be filed within 15 days from the discharge of the goods from the vessel except if
the knowledge of the loss came later (upon exercise of due diligence) in which case the 15 days runs from the actual knowledge. Sections 1701-1708, Tariff and
Customs Code

Q: What is smuggling and are their various types of smuggling?

+
ADMG
Page 60 of 61
A: Smuggling is unlawful importation. If the goods enter the Philippine jurisdiction not through Customs, the same is considered pure smuggling. If the goods enter
through Customs but the same is unlawful (example, importation of prohibited items), then the same is treated as technical smuggling.

Q: What are the penalties imposed for smuggling?

A: The table below shows the penalties applied depending on the appraised value of the smuggled items.

Appraised value fine imprisonment

<P25 P50-P200
P25-P50 P800-P5000
P50,000-P150,000 P6,000-P8,000 5yrs-8yrs
>P150,000 P8,000-P10,000 8yrs-12yrs

Q: What penalties are imposed for failure to pay the correct taxes and duties but which do not constitute smuggling?
A: The penalties imposed depend on the revenue loss as follows:
(a) Negligence — When a deficiency results from an offenders failure to exercise reasonable care and competence to ensure that a statement
made is correct, it shall be determined to be negligent = fine equivalent to ½ to 2 times the revenue loss.
(b) Gross Negligence — When a deficiency results from an act or acts of omission or commission done with actual knowledge or wanton disregard
for the relevant facts it shall be determined to be grossly negligent = fine of 2 ½ to 5 times revenue loss.
(c) Fraud — When the material false statement or act in connection with the transaction was committed or omitted knowingly, voluntarily and
intentionally, as established by clear and convincing evidence, it shall be determined to be fraudulent = fine of 5 to 8 times revenue loss and
imprisonment of 2 to 8 years.

Q: In case the taxpayer-importer disputes any action related to its importation, what are his/her/its remedies?
A: The action is appealed to the Collector of Customs within 15 days. An adverse decision by the Collector may be appealed to the Commissioner of Customs also
within 15 days. The COC has 30 days to act on the appeal. A decision of the COC is appealed to Secretary of Finance within 15 days and the SOF has 30 days to
decide on the appeal. An adverse decision by either the COC or SOF is automatically appealed by the Government. All appeals by the taxpayer-importer requires
payment under protest.

PRAYER PREPARES YOU BEST.

+
ADMG
Page 61 of 61