REVIEWER ON TAXATION
BY: ATTY. VICTORINO C. MAMALATEO 1
TABLE OF CONTENTS CHAPTER I: GENERAL PRINCIPLES & LIMITATIONS ON THE POWER OF TAXATION 3 CHAPTER II: INHERENT AND CONSTITUTIONAL LIMITATIONS .............................. 9 CHAPTER III: INCOME AND WITHHOLDING TAXES ...............................................15 CHAPTER IV: KINDS OF TAXPAYERS .....................................................................17 CHAPTER V: GROSS INCOME .................................................................................24 CHAPTER VI: EXCLUSIONS FROM GROSS INCOME .................................................45 CHAPTER VII: RETURN OF CAPITAL ......................................................................53 CHAPTER VIII: TAX BASES AND RATES .................................................................65 CHAPTER IX: ORDINARY ASSETS AND CAPITAL ASSETS .......................................67 CHAPTER X: TAX-FREE EXCHANGES .......................................................................70 CHAPTER XI: ACCOUNTING METHODS AND PERIODS ............................................72 CHAPTER XII: WITHHOLDING TAXES ....................................................................74 CHAPTER XIII: ESTATE TAX ..................................................................................75 CHAPTER XIV: DONOR’S TAX .................................................................................81 CHAPTER XV: INTRODUCTION TO VAT ..................................................................87 CHAPTER XVI: PERSONS LIABLE TO TAX ...............................................................88 CHAPTER XVII: OUTPUT TAX ON SALE OF GOODS OR PROPERTIES & SERVICES .. 89 CHAPTER XX: RATES OF VAT .................................................................................93 CHAPTER XXI: EXEMPT TRANSACTIONS ................................................................94 CHAPTER XXIV: INTRODUCTION – TAX REMEDIES ................................................95 CHAPTER XXV: ADMINISTRATIVE REMEDIES OF GOVERNMENT ............................97 CHAPTER XXVI: JUDICIAL REMEDIES OF GOVERNMENT ......................................101 CHAPTER XXVII: CIVIL PENALTIES .....................................................................102 CHAPTER XXVIII: REMEDIES OF TAXPAYERS ......................................................104 CHAPTER XXIX: ASSESMENT AND PROTEST ........................................................105 CHAPTER XXX: PRESCRIPTION ............................................................................109 CHAPTER XXXI: TAX CREDIT OR REFUND ............................................................114 CHAPTER XXXII LOCAL BUSINESS TAXES ............................................................121 CHAPTER XXXIII: REAL PROPERTY TAX ..............................................................127
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CHAPTER I: GENERAL PRINCIPLES AND LIMITATIONS ON THE POWER OF TAXATION Q: Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? Explain. A: The power of taxation is inherent in the State, being an attribute of sovereignty. As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it (Mactan Cebu Int’l Airport Authority v. Marcos) Q: It is an attribute of sovereignty A: The power of taxation is an essential and inherent attribute of sovereignity, belonging as a matter of right to every independent government, without being expressly conferred by the people (Pepsi-Cola Bottling Co v Mun of Tanauan, Leyte) Q: Why is the power to tax considered inherent in a sovereign State? A: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity. The power to tax is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent State. No sovereign State can continue to exist without the means to pay its expenses, and for those means, it has the right to compel all citizens and property within its limits to contribute; hence, the emergence of power to tax. Q: May Congress under the 1987 Constitution, abolish the power to tax of local governments? A: No, Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide guidelines and limitations on the local government’s exercise of the power to tax (Sec. 5, Art. X, 1987 Constitution) Q: In our jurisdiction, which of the following statements may be erroneous? Justify your answer. Taxes are pecuniary in nature Taxes are enforced charges and contributions Taxes are imposed on persons and property within the territorial jurisdiction of a State Taxes are levied by the executive branch of government Taxes are assessed according to a reasonable rule of apportionment A: Taxes are levied by the executive branch of government. This statement is erroneous because “levy” refers to the act of imposition by the legislature which is done through the enactment of a tax law. Levy is an exercise of the power to tax, which is exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v Albay) Q: Enumerate the 3 stages or aspect of taxation. Explain each. A: The 3 stages or aspects of taxation are: Levy – this refers to the enactment of a law by Congress imposing a tax. Assessment and collection – this is the act of administration and implementation of the tax law by the executive department through the administrative agencies Payment – this is the act of compliance by the taxpayer including such options, schemes or remedies as may be legally available to him
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Q: Discuss the meaning and the implications of the following statement: “Taxes are the lifeblood of government and their prompt and certain availability is an imperious need” A: The phrase “taxes are the lifeblood of government, etc.” expresses the underlying basis of taxation which is governmental necessity, for indeed, without taxation, a government can neither exist nor endure. Taxation is the indispensable and inevitable price for civilized society; without taxes, the government would be paralyzed. This phrase has been used to justify the validity of the laws providing for summary remedies in the collection of taxes. In Valley Trading Co. v CFI, when the Supreme Court ruled that the damages that may be caused to the taxpayer by being made to pay the taxes cannot be said to be a irreparable as it would be against the government’s inability to collect taxes. Q: Justice Holmes once said: “The power to tax is not the power to destroy while this Court (the Supreme Court) sits.” Describe the power to tax and its limitations A: The power to tax is an inherent power of the sovereign, which is exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying basis for its exercise is governmental necessity for without it no government can exist nor endure. Accordingly, it has the broadest scope of all the powers of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme. The two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court’s role to see to it that the exercise of the power does not transgress these limitations. Q: For failure to comply with certain corporate requirements, the stockholders of ABC Corp. were notified by the SEC that the corporation would be subject to involuntary dissolution. The stockholders did not do anything to comply with the requirements, and the corporation was dissolved. Can the stockholders be held personally liable for the unpaid taxes of the dissolved corporation? Explain briefly. A: No. As a general rule, stockholders cannot be held personally liable for the unpaid taxes of a dissolved corporation. The rule prevailing under our jurisdiction is that a corporation is vested by law with a personality that is separate and distinct from those persons composing it (Sunio v NLRC). However, stockholders may be liable for the unpaid taxes of a dissolved corporation, if it appears that the corporate assets have passed into their hands (Tan TIong Bio v CIR). Likewise , when the stockholders have unpaid subscriptions to the capital of the corporation, they can be made liable for unpaid taxes of the corporation. Q: Among the taxes imposed by the BIR are income tax, estate tax and donor’s tax, value added tax, excise tax, other percentage taxes and documentary stamp tax. Classify these taxes into direct and indirect taxes, and differentiate direct from indirect taxes. A: Income tax, estate tax and donor’s tax are considered as direct taxes. On the other hand, VAT, excise tax, OPT and DST are indirect taxes. A direct tax is demanded from the very person who, as intended should pay the tax which he cannot shift to another, while an indirect tax is demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as a tax but as part of the purchase price (Maceda v. Macaraig). Q: The police power, the power to tax and the power of eminent domain are inherent powers of government. May a tax be validly imposed in the exercise of
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the police power and not of the power to tax? If your answer is in the affirmative, give an example. A: The police power may be exercised for the purpose of requiring licenses for which licenses fees may have to be paid. The amount of the license fees for the regulation of useful occupations should only be sufficient to pay for the cost of the license and the necessary expense of police surveillance and regulations. For non-useful occupations, the license fee may be sufficiently high to discourage the particular activity sought to be regulated. It is clear from the foregoing that police power may not be exercised by itself alone for the purpose of raising taxes. However, police power may be exercised jointly with the power of taxation for the purpose of raising revenues (Lutz v. Araneta). Q: “X” is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of 300 square meters. On June 1, 1994, 100 sq meters of said lot owned by “X” was expropriated by the government to be used in the widening of Quirino Avenue for P300,000.00, representing the estimated assessed value of said portion. From 1991 to 1995, “X”, who is a businessman, has not been paying his income tax. X is now being assessed for the unpaid income taxes in the total amount of P150,000.00. X claims his income tax liability has already been compensated by the amount of P300,000.00 which the government owes him for the expropriation of his property. Decide. A: The income tax liability cannot be compensated with the amount owed by the government as compensation for his expropriated property. Taxes are distinct kind, essence and nature than ordinary obligations. Taxes and debts cannot be subject of compensation because the government and X are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand contract or judgment as it is allowable to be set off (Francis v. IAC). Q: A municipality, BB, has an ordinance which requires that all stores, restaurants and other establishments selling liquor should pay a fixed annual fee of P20,000.00. Subsequently, the municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the amount paid for the purchase or consumption of liquor in stores, restaurants and other establishments. The municipal mayor, CC, refused to sign the ordinance on the ground that it would constitute double taxations. Is the refusal of the mayor justified? Reason briefly. A: No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed annual fee is in the nature of a license fee imposed through the exercise of police power, while the 5% tax on purchase or consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article and this is not in violation of the rule against double taxation (Compania General de Tobacos de Filipinas v. City of Manila). Q: (a) Is double taxation a valid defense against the legality of tax measure? (b) When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation? (c) What are the unusual methods of avoiding the occurrence of double taxation? A: (a) No, double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against legality of a tax measure (Pepsi-Cola Bottling Company of the Phil v. Mun of Tanauan, Leyte). However, if double taxation amounts to a direct duplicate taxation, in that the same subject is taxed twice when it should be taxed but once, in a fashion that both taxes are imposed for the same purpose by the same taxing authority, within the same jurisdiction or taxing district, for the same taxable period and for the same
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kind or character of a tax, then it becomes legally objectionable for being oppressive and inequitable. (b) Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities. (c) The usual methods of avoiding the occurrence of double taxation are: 1. Allowing reciprocal exemption either by law or by treaty; 2. Allowance of tax credit for foreign taxes paid; 3. Allowance of deduction for foreign taxes paid; and 4. Reduction of the Philippine tax rate Q: X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based on rental receipts and income tax on the rentals. He claims that this is double taxation. Decide A: There is no double taxation. “Double taxation” means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind or character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to engage in business; while the income tax is a tax on the privilege to earn an income. These taxes are impose by different taxing authorities and are essentially of different kind and character. Q: Why are tax exemptions strictly construed against the taxpayer? A: Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law (Manila Electric Company v. Vera). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions, they being contrary to the lifeblood theory which is underlying basis for taxes. The natural rule is that everyone in the state must contribute to the support of government. Exemptions are in derogation of sovereignty; hence, they must be strictly construed against the person claiming it (Commissioner v. Guerrero). Q: As an incentive for investors, a law was passed giving newly established companies in certain economic zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was organized and was granted such incentive. In the course of business, ABC Corp purchased mechanical equipment from XYZ, Inc. (a) Normally, the sale is subject to a sales tax. XYZ, Inc. claims, however, that since it sold the equipment to ABC Corp., which is tax exempt, XYZ should not be liable to pay sales tax. Is this claim tenable? (b) Assume arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found, however, that XYZ merely shifted or passed on to ABC the amount of the sales tax by increasing the purchase price. ABC Corp. now claims for a refund from the BIR in an amount corresponding to the tax passed on to it, since it is tax exempt. Is the claim of ABC Corp meritorious? A: (a) No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer grantee is directly liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYX, Inc. is directly liable for the sales tax and no tax exemption privilege is ever given to it, therefore its claim that the sale is exempt is not tenable. A tax exemption is construed in strictissimi juris and it cannot be permitted to exist upon vague implications (Asiatic Petroleum Co Ltd v Llanes). (b) No. The claim of ABC Corp is not meritorious. Although the tax was shifted to ABC Corp. by the seller, what is paid by it is not a tax but part of the cost it has assumed. The taxpayer who can file a claim for refund is the person statutorily liable for the payment of the tax. Since ABC Corp. is not said taxpayer, it has no capacity to file a claim for refund.
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Q: Due to an uncertainty w/n a new tax law is applicable to printing companies, DEF Printers submitted a legal query to the BIR on that issue. The BIR issued a ruling that printing companies are not covered by the new law. Relying on this ruling, DEF Printers did not pay said tax. Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax covers printing companies. Could the BIR now assess DEF for back taxes corresponding to the years before the new ruling? Reason briefly. A: No. The reversal of a ruling shall not be given a retroactive application, if said reversal will be prejudicial to the taxpayer. Therefore, BIR cannot assess DEF Printers for back taxes because it would be violative of the principle of non-retroactivity of ruling and doing so would result in grave injustice to the taxpayer who relied on the first ruling in good faith. Q: In view of the unfavorable balance of payment, condition and the increasing budget deficit, the President of the Philippines, upon recommendation of the NEDA, issues during a recess of Congress, an EO imposing an additional duty on all imports at the rate of 10% ad valorem. The EO also provides that the same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the EO on the grounds that only Congress has the authority to fix the rates of import taxes and in any event, such an EO can take effect only 30 days after promulgation and the President has no authority to shorten said period. Are objections of Mr. San Miguel tenable? A: No, the objections are not tenable as the EO cannot take effect immediately. Being an external law and having the effect of law, the EO cannot become effective without publication, a requirement of due process (Tañada v Tuvera). Q: Mr. Pascual’s income tax from leasing his property reaches the maximum rate of tax under the law. He donated ½ of his said property to non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4(3) of the Constitution and Section 3(h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. A: There is tax avoidance. Mr. Pascual exploited a legally permissive alternative method to reduce his income tax for transferring part of his rental income to a tax exempt entity through a donation of one half of the income producing property. The donation is likewise exempt from the donor’s tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income. Q: Distinguish tax evasion from tax avoidance. A: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax saving device within the means sanctioned by law; hence, lega. Q: When may a taxpayer suit be allowed? A: A taxpayer’s suit may only be allowed when an act complained of, which may include a legislative enactment, directly involves the illegal disbursement of public funds derived from taxation (Pascual v. Secretary of Public Works). No money shall be paid out of the Treasury, except in pursuance of an appropriation made by law. (Sec 29, Art VI, 1987 Constitution). Q: May taxes be the subject of set-off or compensation? Explain.
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A: No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common, to each; and (3) public policy is better subserved if the integrity and independence of taxes are maintained (Republic v. Mambulao Lumber Company). Q: Can an assessment for a local tax be the subject of set-off or compensations against a final judgment for a sum of money obtained by the taxpayer against the local government that made the assessment? Explain. A: No. Taxes and debts are of different nature and character; hence, no set-off or compensation between these two different classes of obligations is allowed. The taxes assessed are the obligation of the taxpayer arising from law, while the money judgment against the government is an oblgation arising from contract, whether express or implied. Inasmuch as taxes are not debts, it follows that the two obligations are not susceptible to set-off or legal compensation. It is only when the local tax assessment and final judgment are both overdue, demandable, as well as fully liquidated may set-off or compensation be allowed.
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CHAPTER II: INHERENT AND CONSTITUTIONAL LIMITATIONS Q: To provide means for rehabilitation and stabilization of the sugar industry so as to prepare it for the eventuality of the loss of the quota allocated to the Philippines resulting from the lifting of US sanctions against an African country, Congress passes a law increasing the existing tax on the manufacture of sugar on a graduated basis. All collections made under the law are to accrue to a special fund to be spent only for the purpose enumerated therein, among which are to place the sugar industry in a position to maintain itself and ultimately to insure its continued existence despite the loss of that quota, and to afford laborers employed in the industry a living wage and to improve their working conditions. X, a sugar planter, files a suit questioning the constitutionality of the law alleging that the tax is not for public purpose as the same is being levied exclusively for the aid and support of the sugar industry. Decide the case. A: The suit filed by the sugar planter questioning the constitutionality of the sugar industry stabilization measure is untenable. Taxation is no longer merely for raising revenue to support the existence of the government; the power may also be exercised to carry out legitimate objects of the government. It is a legitimate object of government to protect is local industry on which the national economy largely depends. Where the aim of the tax measure is to achieve such a governmental objective, the tax imposition can be said to be for a public purpose (Gaston v Republic Bank) Q: The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of real property located within the municipality at arate of ¼ of 1% of the total consideration of such transaction. X sold a parcel of land in Malolos which he inherited from his deceased parents and refused to pay the aforesaid tax. He instead filed appropriate case asking that the ordinance be declared null and void since such a tax can only be collected by the national government, as in fact he has paid BIR the required CGT. The Municipality countered that under the Constitution, each local government is vested with the power to create its own sources of revenue and to levy taxes, and it imposed the subject tax in the exercise of said constitutional authority. Resolve the controversy. A: The ordinance passed by the Municipality of Malolos imposing a tax on the sale-ortransfer of real property is void. The Local Tax Code only allows provinces and cities to impose a tax on the transfer of ownership of real property (Secs 7 and 23, Local Tax Code). Municipalities are prohibited from imposing said tax that provinces are specifically authorized to levy (Sec 22, Local Tax Code). While it is true that the Constitution has given broad powers of taxation to LGU’s, this delegation, however, is subject to such limitations as may be provided by law (Sec 5, Art X, 1987 Constitution). Q: Ace Tobacco Corp bought a parcel of land situated in Pateros and donated it to the Municipal Gov’t of Pateros for the sole purpose of devoting the said land as a relocation site for the less fortunate constituents of said municipality. In accordance therewith, the Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of Award giving them the respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998, the said municipal government ordained that the lots awarded to the awardees/donees be finally transferred and donated to them. Determine the tax consequence of the foregoing dispositions with respect to the Municipal Government of Pateros. A: The Municipality of Pateros is not subjected to any donor’s tax on the value of land it subsequently donated, it being exempt from taxes as a political subdivisions of National Government.
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Q: Mr. Cortez is a non-resident alien based in HK. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregate period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines? A: Mr. Cortez, being a non-resident alien individual who has stayed for an aggregate period of more than 180 days during the calendar year 1999, hsall for that taxable year be deemed to be a non-resident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines (Sec. 25[A][1], NIRC). Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in relation to Sec. 25[A][1] and Sec. 35[D], NIRC). Q: X, a multinational corporation doing business in the Philippines, donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines. What is the tax liability, if any, of X corporation? A: Foreign corporations effecting a donation are subject to donor’s tax only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of resident employees is not subject to donor’s tax. However, if 85% of the business of the foreign corporation is located in the Philippines or the shares donated have acquired business situs in the Philippines, the donation may be taxed in the Philippines subject to the rule of reciprocity. Q: The President of the Philippines and the Prime Minister of Japan entered into an executive agreement in respect of a loan facility to the Philippines from Japan, whereby it was stipulated that interest on loans granted by private Japanese financial institutions to private financial institutions in the Philippines shall not be subject to Philippine income taxes. Is this tax exemption valid? Explain. A: Yes. The tax exemption is valid because an executive agreement has the force and effect of a treaty under the provision of Revenue Code. Taxation is subject to international comity. Q: An EO was issued pursuant to law, granting tax and duty incentives only to businesses and residents within the “secured area” of the Subic Economic Special Zone, and denying said incentives to those who live within the Zone but oustside such “secure area”. Is the constitutional right to equal protection of the law violated by the EO? Explain. A: No. Equal protection of the law clause is subject to reasonable classification. Classification, to be valid, must: (a) rest on substantial distinctions; (b) be germane to the purpose of the law; (c) not be limited to existing conditions only; and (d) apply equally to all member of the same class. There are substantial differences between big investors being in the “secured area” and the business operations outside the “secured area”. Q: Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes. A: The tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic, but simply a geographical uniformity. Uniformity does not require the same treatment; it simply requires reasonable basis for classification. Q: The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid by the driver, on all private cars entering the
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city during peak hours from 8am to 9am from Mondays to Fridays, but it exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid? Explain. A: The ordinance is in violation of the rule of uniformity and equality, which requires that all subjects or objects of taxation, similarly situated must be treated alike and must not be classified in an arbitrary manner. In the case at bar, the ordinance exempts cars carrying more than two occupants from the said ordinance. Furthermore, the ordinance imposes the tax only on private cars and exempts public vehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no substantial standard used in the classification used by the City of Makati. Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner thereof. The ordinance does not only violate the requirement of uniformity; the same is also unjust because it places the burden on someone who had no control over the route of the vehicle. Hence, the ordinance is invalid for violating the rules of uniformity and equality as well as for being unjust. Q: X Corporation was the recipient in the 1990 of two tax exemptions both from Congress, one law exempting the company’s bond issues from taxes and the other exempting the company from taxes in the operation of its public utilities. The two laws extending the tax exemptions were revoked by Congress before their expiry dates. Were the revocations constitutional? A: Yes. The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers. Since taxations is the rule and tax exemption is the exception, any tax exemption unilaterally granted can be withdrawn at the pleasure of the taxing authority without violating the Constitution (Mactan Cebu Int’l Airport Authority v Marcos). Q: A law was passed granting tax exemption to certain industries and investments for a period of fiver years. But the three years later, the law was repealed. With the repeal, the exemptions were considered revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of th repeal of the law. NPC and KTR companies questioned the assessments on the ground that, having made their investments in full reliance with the period of exemption granted by the law, its repeal violated their constitutional right against the impairment of the obligations and contracts. Is the contention of the companies tenable or not? Reason. A: The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since the exemptions is spontaneous on the part of the legislature and no service or duty or other remunerative conditions have been imposed on the taxpayers receiving the exemption, it may be revoked at will by the legislature. What constitutes an impairment of the obligation of contracts is the revocation of an exemption which is founded on a valuable consideration because it takes the form and essence of a contract. Q: ART VI Section 28(3) of the 1987 Constitution provides that charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. (a) To what kind of tax does this exemption apply? (b) Is proof of actual use necessary for tax exemption purposes under the Constitution? A: (a) This tax exemption applies only to property taxes. What is exempted is not the institution itself but the lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes.
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(b) Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, RPT is based on use and not on ownership; hence, the same rule must also be applied for RPT exemptions. Q: The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side, by a school run by the Church itself, the southern side, by some commercial establishments, while the rest of the property, in particular, the northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons. A: No, The portions of land occupied and used by the Church, convent and school run by the church are exempt from real property taxes, while the portion of the land occupied by commercial establishments and the portion, which is idle, are subject to real property taxes. The usage of the property and not the ownership is the determining factor whether or not the property is taxable. Q: The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients. May said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain. A: Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with respect to real property taxes provided that such real properties are used actually, directly and exclusively for charitable purposes. Q: In 1991, Imelda gave her parents a Christmas gift of P100,000.00 and a donation of P80,000.00 to her parish church. She also donated a parcel of land for the construction of a building to the PUP Alumni Association, a non-stock, nonprofit organization. Portions of the building shall be leased to generate income for the association. Is the donation to the parish church subject to tax? A: The donation of P80,000.00 to the parish church, even assuming that it is exclusively for religious purposes, is no tax-exempt because exemption granted under ART VI, Section 28(3) of the Constitution applies only to real estate taxes. Q: X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for religious purposes by the Church. When the Church tried to register the title of the land, the Registry of Deeds refused claiming that the CGT was not paid. Is the transaction exempt from the CGT? Reason. A: No. Under section 21(e) in relation to Section 49(a)(4) of the NIRC, the seller is the one liable for the payment of the CGT from the sale of real property by an individual taxpayer. Meanwhile, the Church in this instant case is the buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts church lands, buildings and improvements, does not apply because the obligation to pay the CGT herein is imposed on X, the seller, and not on the Church. Since payment of the CGT is a condition precedent for the registration of the transfer certificate of the title to real property, the non-payment herein by the seller is a valid reason for the Registry of Deeds to deny the transfer of title to the subject land. Q: Under Article XIV, Section 4(3) of the 1987 Constitution, all revenues and assets of non-stock, non-profit educational Institutions, used actually, directly and
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exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain. A: no. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from taxation. There must be a showing that the income are included in the school's annual information return and duly audited financial statements, together with: (a) certifications from depository banks as to the amount of interest income earned from passive investments not subject to the 20% FWT; and (b) certification of actual, direct and exclusive utilization of said income for educational purposes; (c)!Board resolution on proposed project to be funded out of the money deposited in banks or placed in money market placements, which must be used actually, directly and exclusively for educational purposes. The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to be noted that the 1987 Constitution does not distinguish with respect to the sources or origin of the income. Th distinction is with respect to the use which should be actual, direct and exclusive for educational purposes. Consequently, the provisions of Section 30 of the NIRC, that a non-stock and non-profit educational institution is exempt from taxation only in respect to income received By them as such could not affect the constitutional tax exemption. Where the Constitution does not distinguish with respect to sources or origin, the Tax Code should not make distinctions. Q: The HR introduced HB No. 7000, which was envisioned to levy a tax on various transactions. After the bill was approved by the House, the bill was sent to Senate as so required by the Constitution. In the upper house, instead of a deliberation on the House Bill, the Senate introduced Senate Bill no. 8000 which was its own version of the same tax. The Senate deliberated on this Senate Bill and approved the same. The House bill and Senate billNewer then consolidated in the Bicameral Committee. Eventually, the consolidated bill was approved and sent to the President who signed the same. The private sectors affected by the new law questioned the validity of the enactment on the ground that the constitutional provision requiring that all revenue bills should originate from the HR had been violated. Resolve the issue. A: There is no violation of the constitutional requirement that all revenue bills should originate from the HR. What is prohibited is for the Senate to enact revenue measures on its own without a bill originating from the House. But once the revenue bill was passed by the House and sent to the Senate, the latter's power to propose or concur with amendments. This follows from the co-equality of the two chambers of Congress. Q: XYZ Colleges is a non-stock, non-profit educational institution, run by the Archdiocese of BP City. It collected and received the following: Tuition fees; Dormitory fees; Rentals from canteen concessionaires; Interest from money market placements of the tuition fees; Donation of a lot and building by school alumni. 1. Which of these above-cited income and donation would not be exempt from taxation? Explain briefly. 2. Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop's family, rather than the Archdiocese, which of those above-cited income and donation would be exempt from taxation? A: (1) All of the income derived by the non-stock, non-profit educational institution will be exempt from taxation, provided they are used actually, directly and exclusively for educational purposes are exempt from taxation. The donation is likewise exempt from
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donor’s tax, if actually, directly and exclusively used for educational purposes, provided that not more than 30% of the donation is used by the done for administration purposes. The donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation, subject to conditions prescribed by law. Accordingly, none of the cited income and donation collected and received by the non-stock, non-profit educational institution would not be exempt from taxation. (2) If XYZ Colleges is a proprietary educational institution, all of its income from schoolrelated and non-school-related activities will be subject to the income tax, based on its aggregate net income derived from both activities. Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and building will likewise be subject to the donor’s tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is proprietary educational institution, the donation is taxable. Q: Anne Lapada, a student activist, wants to impugn the validity of a tax on text messages. On what grounds may she do so? A: She may claim that the law adversely affects her since she sends messages by text and that the tax money is being extracted and spent in violation of the constitutionally guaranteed right to freedom of communication.
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CHAPTER III: INCOME AND WITHHOLDING TAXES Q: Distinguish “scheduler treatment” from “global treatment” as used in income taxation. A: Under a schedular system, the various types/items of income (e.g. compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. Under the global system, all income received by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate. Q: (a) Discuss the meaning of the global and schedular systems of taxation. (b) To which system would you say that the method of taxation under the NIRC belong? A: (a) A global system of taxation in one where the taxpayer is required to lump all items of income earned during a taxable period and pay tax under a single set of income tax rules on these different items of income. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. (b) The current method of taxation under the Tax Code belongs to a system which is partly schedular and partly global. Q: (1) What are the basic features of the present “income tax system?” A: Our present income tax system can be said to have the following basic features: (a) It has adopted a comprehensive tax situs by using the nationality, residence and source rules. This makes citizens and resident aliens taxable on their income derived from all sources while non-resident aliens are taxed only on their income derived from within the Philippines. Domestic corporations are also taxed on universal income while foreign corporations are taxed only on income from within. [NOTE: If the question is asked today, the answer should be: Resident citizens and domestic corporations are subject to tax on their worldwide income, while the other types of taxpayers (whether individual or corporation) are taxed only from sources within the Philippines beginning Jan 1, 1998 under RA 8424] (b) The individual income tax system is mainly progressive in nature in that it provides graduated rates of income tax. Corporations in general are taxed at a flat rate of 35% on net income [NOTE: tax rates 1998 = 34%; 1999 = 33%; 2000 = 32%; Nov 1 2005 = 35%; Jan 1 2009 = 30%] (c) It has retained more schedular than global features with respect to individual taxpayers but has maintained a more global treatment on corporations. Q: Distinguish a direct tax from an indirect tax. A: A direct tax is on in which the taxpayer who pays the tax is directly liable therefor; that is, the burden of paying the tax falls directly on the persons paying the tax. The impact and incidence of taxation remain with the person upon whom the tax was imposed. An indirect tax is one paid by a person who is not directly liable therefor, and who may therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax burden. In this case, the impact of taxation is with the taxable seller of goods or service; while the incidence of taxation rests with the final consumer. Q: When is income taxable?
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A: Income, gain or profit is subject to income tax, when the following requisites are present: (a) The money or property received is income, gain or profit (and not return of capital) (b) The income, gain or profit is receid (actually,or constructively), accrued, or realized during the taxable year; and (c) The income, gain or profit is not exempt from income tax under the Constitution, treaty or statute
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CHAPTER IV: KINDS OF TAXPAYERS Q: Juan, a Filipino citizen, has emigrated to the US in 1997, where he is now a permanent resident. He owns certain income earning property in the Philippines from which he continues to derive substantial income. He also receives income form the employment in the United States on which the US income tax is paid. On which of the above income is the taxable. If at all in the Philippines, and how, in general terms, would such income or income be taxed? A: Juan will be taxed on both his income from the Philippines and on his income from the US because his being a citizen makes him taxable on all income wherever derived. For the income he derives from his projects in the Philippines, Juan shall be taxed on his net income under the Simplified Net Income Taxation Scheme whereby he shall be considered as a selfemployed individual. His income as employee in the US, on the other hand, shall be taxed in accordance with the schedular graduated rates of 1%, 2% and 3%, based on the adjusted gross income derived by non-resident citizens from all sources without the Philippines during each taxable year. [Note: New law beginning 1998 = income from sources within the Philippines of a non-resident citizen remains subject to Philippine income tax, but his income from sources outside the Philippines is exempt) Q: Federico, a Filipino citizen, migrated to the US some 6 years ago and got a permanent resident status or green card. Should he pay his Philippine income tax on the gains he derived from the sale in the NYSE in PLDT, a Philippine corporate whose shares are listed thereat? A: Yes. The gains from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines, regardless of where the said shares are sold. By this provision of law, the gain if any from the sale of shares of stocks of a domestic corporation by any person shall be treated for income the Philippines. Q: From what sources of income are the following persons/corporations taxable by the Philippine government? 1. Citizen of the Philippines and Residing therein 2. Nonresident citizen 3. Citizen who is working and deriving income from abroad as an overseas contract worker 4. An alien individual, whether a resident or not of the Philippines; 5. A domestic corporation. A: 1. Taxable on all income within and without the Philippines 2. Taxable on income derived from sources within the Philippines 3. Taxable only on income from sources within the Philippines. 4. Taxable on income derived from sources within the Philippines 5. Taxable on all income derived from sources within and without. Q: Four Catholic parishes hired the services of Frank Binatra, a foreign nonresident entertainer, to perform for four nights at the Folk Arts Theatre, Binatra was paid P200,000.00 a night. The parishes earned P1,000,000.00which they can be used for the support of the orphans in the city. Who are liable to pay taxes? A: (a) The four Catholic parishes because the income received by them, not being income earned as such in the performance of their religious functions and duties, is taxable income under the last paragraph of Section 26; in relation to Section 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an on activity conducted for profit.
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(b) The income of Frank Binatra, a non-resident alien under our law, is taxable at the rate of 30% (now 25%) FWT based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines. Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy to enforce collection of the tax. (a) What is the rule of income taxation with respect to Mr. Sebastian’s income in 1997 as a seaman on board the Norwegian vessel engaged in international shipping? Explain your answer. (b)If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraint and lavy? Explain your answer. A: (a) The 1997 income of Mr. Sebastian as a seaman is considered as income of a nonresident citizen derived from without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar equivalent) from without the Philippines shall be declared by him for income tax purposes using a separate income tax return which will not include his income from business derived within the Philippines (to be covered by another return). He is entitle of $4,500 and foreign national income taxes paid to arrive at his adjusted income during the year. His adjusted income will be subject to the graduated tax rates of 1% to 3% (Note: The above provision was amended already by RA 8424 [Tax Code of 1997] effective January 1, 1998. Income from foreign sources of nonresident citizens is exempt from income tax) (b) I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of income tax return, when the said return is filed on time. The last day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on April 20, 2001, the BIR’s right to assess has already prescribed Q: Alain Descartes, a French citizen permanently residing in the Philippines, received several items of income during the taxable year, such as consultancy fees received for designing a computer program and installing the same in the Shanghai facility of a Chinese firm; interests from his deposits in a local bank of foreign currency earned abroad converted to Philippine pesos; dividends received from an American corporation which derived 60% of its annual gross receipts from Philippine sources for the past 7 years; and gains derived from the sale of his condominium unit located in Taguig City to another resident alian. Which item of income is not subject to Phlippine income tax? A: The consultancy fees are not subject to Philippine income tax. Being an alien, it is subject to income tax only on income from sources within the Philippines. Since the consultancy fees are received by him for designing a computer program and installing the same in China, the same shall be treated as income from sources outside the Philippines. Q: Newtex International (Phils), Inc. is an American firm dully authorized to engage in business in the Philippines as a branch office. In its activity of acting as a buying agent for foreign, buyers of shirts and dresses abroad and performing liaison work between its home office and the Filipino garment manufacturers and
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exporters, Newtex does not generate any income. To finance its office expenses here, its head office abroad regularly remits to it the needed amount. To oversee its operations and manage its office here, which had been in operation for two years, the head office assigned three foreign personnel. Are the three foreign personnel subject to Philippine income tax? A: The three foreign personnel are subject to tax on the income that they receive for services rendered in the Philippines. Non-resident aliens are subject to tax on income from sources within the Philippines. Income is deemed derived from sources within the country when it is earned for services rendered in the Philippines. Q: Mr. Cortez is a nonresident alien based in HK. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? A: Mr. Cortez being a nonresident alien individual who has stayed for an aggregate period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a nonresident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as a resident citizen on taxable income received from all sources within the Philippines. Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions, but subject to the rule on reciprocity on the personal exemptions. Q: Jonny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny’s 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. (a) What advice will you give the trustee? (b) Will your advice be the same, if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority. Why or why not? A: (a) It depends. Where the trust document transferring the property is revocable, the rental income shall be included in computing the taxable income of the grantor. On the other hand, if the trust document is irrevocable and the donor’s tax on the value of the transferred property was duly paid by the grantor at the time of the creation of the trust, the rental income shall be reported by the trustee in the income tax return to be filed by her. Income tax shall apply to the income of the property held in trust, including income which is to be distributed currently by the fiduciary to the beneficiary. However, the taxable income of the trust shall be computed by allowing as deduction the amount of the income of the trust for the taxable year, which is to be distributed currently by the fiduciary to the beneficiary, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiary, whether distributed to them or not. (b) No, my advice will be different if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority. Income tax shall also apply to income accumulated or held for future distribution under the terms of the trust document. However, the trustee is allowed as an additional deduction in computing he taxable year, which is property paid or credited during such year to any beneficiary, but the amount so allowed as deduction shall be included in computing the taxable income of the beneficiary. Q: Mr. Santos died intestate in 1989 leaving his spouse and five children as the only heirs. The estate consisted of a family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial settlement of the estate was executed from the heirs, each of them receiving his/her due share. The surviving spouse assumed administration of the property. Each year, the net
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income from the rental property was distributed to all, proportionately, on which they paid respectively, the corresponding income tax. In 1994, the income tax returns of the heirs were examined and deficiency income tax assessments were issued against each of them for the year 1989 to 19993, inclusive, as having entered into an unregistered partnership. Were the assessments justified? A: Yes, the assessments were justified because for income tax purposes, the co-ownership of inherited property is automatically converted into an unregistered partnership form the moment the said properties are used as a common fund with intent to produce profits for the heirs in proportion to their shares in the inheritance. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of as exclusively their own, without the intervention of the other heirs, and accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his shares to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. Q: Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with SEC, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and P500,000.00 for parcel B. 1. The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the BIR correct? 2. The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR correct? A: (1) The BIR is not correct , since there is not showing that the acquisition of the property by Noel and Jovy Langit as pro indivisio owners, and prior to the formation of the partnership, was used, intended for use, or bears any relations whatsoever to the pursuit or conduct of the partnership business. The sale of parcel A shall therefore not be treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset, and hence will be subject to the 5% (now 6%) CGT and documentary stamp tax on transfers of real property, said taxes to be borne equally by the co-owners. (2) The BIR is correct, since a “corporation” as deemed under the Tax Code includes partnerships, no matter how created or organized, except general professional partnerships. The business partnership, in the instant case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B. The sale shall thus be subject to the creditable withholding tax on the sale of parcel B, and the partnership shall report the gain realized from the sale when it files its income tax return. Q: Roberto Ruiz and Conrado Cruz bought 3 parcels of land from Rodrigo Sabado on 4 May 1976. Then on 8 July 1977, they bought 2 parcel of land from Miguel Sanchez. In 1988, they sold the first three parcels of land to Central Realty, Inc. In 1989, they sold the two parcels to Jose Guerrero. Ruiz and Cruz realized a net profit of P100,000.00 for the sale in 1988 and P150,000.00 for the sale in 1989. The corresponding CGT were individually paid by Ruiz and Cruz. On 20 September 1990, however, Ruiz and Cruz received a letter from the Commissioner of Internal Revenue assessing them deficiency corporate income taxes for the years 1988 and 1989 because, according to the Commisioner, during said years they, as co-owners in the real estate transactions, formed an unregistered partnership or joint venture taxable as a corporation and that the unregistered partnership was subject to corporate income tax, as distinguished
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from profits derived from the partnership by them, which is subject to individual income tax. Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax? A: Roberto Ruiz and Conrado Cruz are not liable for corporate income tax. Evidently abandoning the Gatchalian ruling,, the Supreme Court in a recent ruling in Pascual v. Court of Tax Appeals (G.R. No. 78133, October 18, 1988) held that isolated transactions by two or more persons do not warrant their being considered as an unregistered partnership. They will instead be considered as mere co-owners, no corporate income tax is due on mere coownerships. It was, therefore, correct for Ruiz and Cruz to merely pay their individual tax income tax liabilities on the gain from sale of real estate transactions. Q: Five years ago, Marquez, Peneyra, Jayme, Posadas, and Manguit, all lawyers, formed a partnership which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter issued Revenue Regulations[s] No. 2-93 implementing R.A.7496, known as the Simplified Net Income Taxation Scheme (SNITS). Revenue Regualtion[s] No. 2-93 provides in part: “Sec. 6. General Professional Partnership. - The general professional partnership and the partners are covered by R.A. 7496. Thus, in determining profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct costs are not deductible from his gross income.” (1)Marquez and Peneyra Law Offices Law Offices filed a taxpayer’s suit alleging that Revenue Regulations No. 2-93 violates the principle of uniformity in taxation because general professional partnerships are now subject to payment of income tax and that there is a difference in the tax treatment between individuals engaged in the practice of their respective professions and partners in general professional partnership. Is this contention correct? Explain. (2)Is Revenue Regulations No. 2-93 now considered as having adopted a gross income method instead of retaining the net income taxation scheme? Explain. A: (1) The contention is not correct. General professional partnerships remain to be a nontaxable entity. The partners comprising the same are taxable and they are obligated to report as income their share in the income of the general professional partnership during the taxable year, whether distributed or not. The Simplified Net Income Tax System (SNITS) treats professionals as one class of taxpayers so that they shall be treated alike, irrespective of whether they practice their profession alone or in association with other professionals under a general professional partnership. What are taxed differently are individuals and corporations. All individuals similarly situated are taxed alike under the regulations. Therefore, the principle of uniformity in taxation is not violated. On the contrary, all the requirements of a valid regulation have been complied with. (2) No. Revenue Regulation No. 2-93, implementing RA No. 7496, has indeed significantly reduced the items of deduction by limiting it to direct costs and expenses, or 40% of gross receipts maximum deduction in cases where the direct costs are difficult to determine. The allowance of the limited deductions, however, is still in consonance with the net income taxation scheme rather than the gross income method. While it is true that not all the expenses of earning the income might be allowed, this can well be justified by the fact that deductions are not matters of right but are matters of legislative grace. Q: Another Banking Corporation, which was organized in 2000 and existing under the laws of the Philippines and owned by the Sy Family of Makati City, set up in 2010 a branch office in Shanghai City, China, to take advantage of the presence of many Filipino workers in that area and its booming economy. During the year, the
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bank management decided not to include the P20 million net income of the Shanghai Branch in the annual Philippine income tax return filed with the BIR, which showed a net taxable income of P30 million, because the Shanghai Branch is treated as a foreign corporation and is taxed only on income from sources within the Philippines, and since the loan and other business transactions were done in Shanghai, these incomes are not taxable in the Philippines (a) Is the bank correct in excluding the net income of its Shanghai Branch in the computation of its annual corporate income tax for 2010? Explain your answer (b)Should the Shanghai Branch of another Bank remit profit to its Head Office in the Philippines in 2011, is the branch liable to the 15% branch profit emittance tax imposed under Section 28A(A)(5) of the 1997 Tax Code? Explain your answer. A: (a) No. A domestic corporation is taxable on all income derived from sources within and without the Philippines (Sec. 23, NIRC). The income of the foreign branch and that of the Head Office will be summed up for income tax purposes, following the “single entity” concept and will all be included in the gross income of the domestic corporation in the annual Philippine income tax return. (b) No. The branch profit remittance tax is imposed only on remittance by branches of foreign corporation in the Philippines to their Head Office abroad. It is the outbound branch profits that is subject to the tax, not the inbound profits. Q: XYZ Law Offices, a law partnership in the Philippines and a VAT-registerd taxpayer, received a query by email from Gainsburg Corporation, a corporation organized under the laws of Delaware, USA, but the email came from California, where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines. XYZ Law Offices rendered its opinion on the query and billed Gainsburg $1,000 from the opinion. Gainsburg remitted its payment through Citibank, which converted the remitted $1,000 to pesos. What are the implications of the payment to XYZ Law offices in terms of VAT and income taxes? A: The payment of XYZ Law Offices by Gainsburg Corporation is subject to income tax and VAT in the Philippines. For income tax purposes, the compensation for services is part of the gross income of the law partnership. From its total gross income within and without, it has to compute its nect income in the same manner as a corporation. The net income of the partnership, whether distributed or not, will be declare by the partners based on their agreement as part of their gross income who are to pay the income tax thereon in their individual capacity (Sec. 26, NIRC). For VAT purposes, the transaction is a zero-rated sale of services where the output tax is zero percent and XYZ is entitled to claim as refund or tax credit certificate the input taxes attributable to the zero rated sale, if the same is not utilized by the partnership. The services were rendered to a nonresident person, engaged in business outside the Philippines, which services are paid for in foreign currency inwardly remitted through the banking system, thereby making the sale of services subject to tax at zero-rated. Q: HK Co. is a Hong Kong company, which has a duly licensed Philippine branch engaged in trading activities in the Philippines. HK Co. also invested directly in 40% of the shares of stack of A Co., a Philippine corporation. These shares are booked in the Head Office of HK Co. and are not reflected as assets of the Philippine branch. In 1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A Co. seeks your advice as to whether it will subject the remittance to withholding tax. No need to discuss withholding tax rates, if applicable. Focus your discussion on what is the issue.
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A: I will advise A Co. to withhold and remit the withholding tax on the dividends. While the general rule is that a foreign corporation is the same juridical entity as its branch office in the Philippines, when, however, the corporation transacts business in the Philippines directly and independently of its branch, the taxpayer would be the foreign corporation itself and subject to the dividend tax similarly imposed on nonresident foreign corporation. The dividends earned by a resident foreign corporation, which is exempt from tax. Q: Foster Corporation (FC) is a Singapore-based foreign corporation engaged in construction and installation projects. In 2010, Global Oil Corporation (GOC), a domestic corporation engaged in the refinery of petroleum products, awarded an anti-pollution project to Foster Corporation, whereby FC shall design, supply machinery, and equipment, and install an anti-pollution device for GOC’s refinery in the Philippines, provided that the installation part of the project may be subcontracted to a local construction company. Pursuant to the contract, the design and supply contracts were done in Singapore by FC, while the installation works were subcontracted by FC with Philippine Construction Corporation (PCC), a domestic corporation. The project with a total cost of P100M was completed in 2011 at the following cost components; (design – P20M, machinery and equipment – P50M and installation – P30M). Assume that the project was 40% complete in 2010 and 100% complete in 2011, based on the certificates issued by the architects and engineers working on the poject. GOC paid FC as follows: P60M in 2010 and P40M in 2011, and FC paid PCC in foreign currency through a Philippine bank as follows: P10M in 2010 and P20M in 2011. (a) Is FC liable to Philippine income tax, and if so, how much revenue shall be reported by it in 2010 and in 2011? Explain your answer. (b)Is PCC, which adopted the percentage of completion method of reporting income and expenses, liable to value added tax in 2010 and in 2011? Explain your answer. A: (a) No. FC is not liable to Philippine income tax. The revenues from the design and supply contracts, having been all done by FC (a foreign corporation), hence, not taxable to a foreign corporation in the Philippines. With respect to the installation works which was subcontracted by FC to PCC, a domestic corporation, it is PCC (not FC) that does the work in the Philippines and should report the income thereon. (b) Yes. PCC is liable to VAT as seller of services done in the Philippines for a fee. However, the sale of services to FC is subject to VAT at zero percent. Services rendered by a VATregistered local contractor to a nonresident foreign corporation who is outside the Philippines, paid for in foreign currency inwardly remitted through the Philippine banking system are zero-rated sales of services Q: Aplets Corporation is registered under the laws of the British Virgin Islands. It has extensive operations in Southeast Asia. In the Philippines, its products are imported and sold at a mark-up by its exclusive distributor, Kim’s Trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets’ net income derived from its exports to Kim. Is the BIR correct? A: No. Aplets Corporation is a non-resident foreign corporation not engaged in trade or business in the Philippines and its sources of income from outside the Philippines. As a foreign corporation, it is subject to Philippine income tax only on income from sources within the Philippines. Gains, profits and income from the sale of personal property outside the Philippines shall be treated as income from sources outside the Philippines.
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CHAPTER V: GROSS INCOME Q: 1. What is gross income for purposes of income tax? 2. How does income differ from capital? Explain. A: 1. Gross income means all income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, and similar items; gross income from business; gains derived from dealings in property; interest; royalties; dividends; annuities; prized and winnings; pensions; and partner’s distributive share of the gross income of general professional partnership 2. Income differs from capital in that income is any wealth which 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 fruit. Income is liable to income tax, while capital ore return of capital is exempt from tax. Q: Mr. Francisco borrowed P10,000.00 from his friend, Mr. Gutierrez, payable in one year without interest. When the loan became due, Mr. Francisco told Mr. Gutierrez that he was unable to pay because of business reverses. Mr. Gutierrez took pitty on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the P10,000.00 and at the time the loan was condoned. Did Mr. Francisco derived any income from the cancellation or condonation of his indebtedness? Explain. No. Mr Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since it is obvious that the creditor merely desired to benefit the debtor in view of the absence of consideration for the cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included in the latter’s gross income. The gift may, however, be subject to donor’s tax at 30%, since Mr. Francisco and Mr. Gutierrez are not members of the same family. Q: Bates advertising Company is a nonresident corporation duly organized and existing under the laws of Singapore. It is not doing business and has no office in the Philippines. Pilipinas Garment, Inc., a domestic corporation, retained the services of Bates to do all the advertising of its products abroad. For said services, Bates’ fees are paid through outward remittances. Are the fees received by Bates subject to any withholding tax? A: The fees paid to Bates Advertising Company, a non-resident foreign corporation, are not subject to withholding tax, since they are not subject to Philippine income tax. They are exempt because they do not constitute income from Philippine sources, the same being compensation for labor or personal services performed outside the Philippines. Q: A Co., is an off-line international carrier without any flight operation in the Philippines. It has, however, a liaison office in the Philippines which is duly licensed, with the SEC, established for the purpose of providing passenger and flight information, reservation and ticketing services. Are the revenues of A Co. from tickets reserved by its Philippine office subject to tax? A: The revenues in the Philippines of A Co. as an off-line airline from ticket reservation services are taxable income from whatever source under Section 28(a) of the Tax Code. This case in analogous to Commissioner v. BOAC, where the SC ruled that income received in the Philippines from the sale of tickets by an off-line airline is taxable as income from whatever source. Q: An international airline with no landing rights in the Philippines sold tickets in the Philippine s for air transportation. Is income derived from such sales of tickets
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considered taxable income of the said international air carrier from Philippine sources under the Tax Code? Explain. A: No. While the tickets are sold here by the international airline, this is for carriage of persons, excess baggage, cargo and mail not originating from the Philippines, because the airline has no landing rights in the Philippines. The income from the sale of tickets is actually the gross revenue derived from the carriage of persons, excess baggage, cargo and mail and these revenues are considered as income from Philippine sources only if the flight originates from the Philippines in a continuous and uninterrupted flight, irrespective of the place of payment of the ticket or passage document. Accordingly, the income mentioned is not derived from Philippine sources. Q: Pacific, Inc. is engaged in overseas shipping. It time chartered one of its ships to a Japanese company on a five-year term. The charter was consummated through the efforts of Kamino Moto, a Tokyo based broker. The negotiation took place in Tokyo. The agreement calls the Pacific, Inc. to pay Kamino Moto $50,000.00. Your opinion is sought whether Pacific, Inc. should withhold the tax before sending the compensation of Kamino Moto. A: The compensation of Kamino Moto is not subject to withholding tax. Compensation for labor or personal services performed outside the Philippines are considered as income from sources without the Philippines. Kamino Moto’s effort in consummating the Charter is a form of labor or services. Considering further that Kamino Moto is a Tokyo-based broker, presumably a non-resident foreign corporation, it is taxable only on income within the Philippines. Q: ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-resident foreign corporation based in the US. Under the agreement which the parties forged in the US, XYZ granted ABC the right to use a computer system program and to avail of technical know-how relative to such program. In consideration for such rights, ABC agreed to pay 5% of the revenues it receives from customers who will use and apply the program in the Philippines. Discuss the tax implications of the transactions. The royalty received by XYZ from ABC will be subject to Philippine income tax because the source of the royalty income is from the Philippines. Rentals and royalties from property located in the Philippines or from any interest in such property shall be treated as income from sources within the Philippines. Considering that XYZ is a nonresident foreign corporation, such royalty income is subject tot the 30% final withholding income tax under Section 29 (B) of the Tax Code, such tax to be withheld by ABC and paid in the same manner as provided in Section 58 of the Tax Code. XYZ does not have to file a Philippine income tax return on the royalty income. For VAT purposes, ABC must withhold and assume the payment of the 12% VAT on the royalty income, which input tax can be credited against ABC’s output tax for the taxable period. Q: A is a resident Filipino citizen. He purchased a parcel of land in Makati city in 1970 at a consideration of P1M. In 2011, the land, which remained undeveloped and idle, had a fair market value of P20M. Mr. B, another Filipino citizen, is very much interested in the property and he offered to buy the same for P20M. (a) Is A liable for income tax in 2011 based on the offer to buy by MR B? (b) Should A agree to sell the land in 2012 for P20M, subject to the condition as stated in the Deed of Sale that the buyer shall assume the capital gains tax thereon, how much is the income tax due on the transaction and when must the tax return be filed and tax be paid by the taxpayer? A: (a) A is not liable for income tax in 2011 because no income is realized by him during that year. Tax liability for income tax attaches only if there is a gain realized resulting from
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a closed and complete transaction. (b) He shall be liable to pay the 6% capital gains tax based on the gross selling price of the property of P20M plus the capital gains tax assumed by the buyer (following the doctrine of constructive receipt of income). He should file the return within 30 days from the date of sale and pay the tax as he files the return. Q: What is meant by taxable income? A: Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. Q: ABC Computer Corp. purchased some years ago Membership Certificate No. 7 from the Calabar Golf Club, Inc. for P300,000.00. In September 4, 1985, it transferred the same to Mr. John Johnson, its American computer consultant, to enable him to avail of the facilities of the Club during his stay here. The consultancy agreement expired two year later in the meantime, the value of the Club share appreciated and what was purchased by the corporation at P300,000.00, commanded a market value of P800,000.00 in 1987. Before he returned home a few days after his tenure ended, Mr. Johnson transferred the subject share to Mr. Robert James, the new consultant of the firm and the newly designated playing representative, under a Deed of Declaration of Trust and Assignment of Shares, wherein the former acknowledged the absolute ownership of ABC Computer Corp. over the share, that the assignment was without any consideration and that the share was placed in his name because the Club required it to be done. (a) Is the assignment/transfer of the shares from Johnson to James subject to income tax? (b) Is the said assignment a gift and, therefore, subject to gift tax? A: (a) The assignment or transfer of shares from Johnson to James is not subject to income tax. There had been no real change of ownership that took place. There having been no actual sale or exchange, no income tax incidence can be said to have occurred. In addition, there was really no income realized or received considering that in the Deed of declaration of Trust and Assignment of Shares, the absolute ownership of ABC Computer Corp was explicitly recognized. (b) The assignment can neither be held to be a gift. To be considered a gift within the context of the NIRC, there must be a transfer of ownership or a quantifiable interest. More importantly, the transfer of the membership certificate was merely a designation of the consultant to be the “playing representative” of ABC Computer Corporation in the Calabar Golf Club. Q: X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines. (1)What is the tax liability, if any, of X corporation? (2)Assuming the shares of stocks were given to Mr. Yin consideration of his services to the corporation which are the tax implication? Explain. A: (1) Foreign corporations effecting a donation are subject to donor’s tax only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of a resident employee is not subject to donor’s tax. However, if 85% of the business of the foreign corporation is located in the Philippines of the shares donated have acquired business situs in the Philippines the donation may be taxed in the Philippines subject to the rule of reciprocity. (2) If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall constitute taxable compensation income to the recipient because it is a compensation for services rendered under an employee-employer relationship, hence, subject to income tax.
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Q: X is employed as a driver of a corporate lawyer and he receives a monthly salary of P 5,000.00 with free board and lodging with an equivalent value of P 1,500.00. 1. What will be the basis of X’s income tax? Why? 2. Will your answer in question (1) be the same if X’s employer is an obstetrician? Why? A: 1. The basis of X’s income tax would depend on whether his employer is an employee or a practicing corporate lawyer. If his employer is an employee, the basis of X’s income tax is P 6,500.00 equivalent the total of the basic salary and the value of the board and lodging. This is so because the employer has no place of business where the free board and lodging may be given. On the other hand, if the corporate lawyer is a practicing lawyer (selfemployed), X should be taxed only on P 5,000.00, provided that the free board and lodging is given in the business premises of the lawyer and for his convenience, and that the free lodging was given to X as a condition for his employment. 2. If the employer is an obstetrician who is self-employed, the basis of his income will only be P 5,000.00, if it is proven that the free board and lodging is given within premises of said employer for his convenience and that the free lodging is required to be accepted by X as condition for employment. Otherwise, X would be taxed on P 6,500.00. Q: A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen, A Co. has a subsidiary in Hong Kong (HK Co.] and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in HK and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational allowances of P’s dependents will be shouldered by HK Co. A Co. will credit the 50% of P’s salary to P’s Philippine bank account. P will sign the contract of employment in the Philippines. P will also be receiving rental income for the lease of his Philippine residence. Are these salaries, allowances and rentals subject to the Philippine income tax? A: The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a non-resident citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the time during the taxable year (Sec. 22[E], NIRC). A non-resident citizen is taxable only on income derived from Philippine sources (Sec. 23, NIRC). The salaries and allowances received from being employed abroad are incomes from without because these are compensation for services rendered outside of the Philippines (Sec. 42, NIRC). However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived from within, the leased property being located in the Philippines (Sec. 42, NIRC). Q: Citing Section 10, Article VIII of the 1987 Constitution, which provides that salaries of judges shall be fixed by law and that during their continuance in office their salary shall not be decreased, a judge of MM Regional Trial Court questioned the deduction of withholding taxes from his salary since it results into a net
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deduction of his pay. Is the contention of the judge correct? Reason briefly. A: No. The contention is incorrect. The salaries of judges are not tax-exempt and their taxability is not contrary to the provisions of Section 10, Article VIII of the Constitution on the non-diminution of the salaries of the judiciary during their continuance in office. The clear intent of the Constitutional Commission that framed the Constitution is to subject their salaries to tax as in the case of all taxpayers. Hence, the deduction of withholding taxes, being a manner of collecting the income tax on their salary, is not a diminution contemplated by the fundamental law (Nitafan, et al. v. Commissioner, 152 SCRA 284 [1987]). Q: A “Fringe benefit” is defined as being any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an income tax on it? Explain. A: It is the employer who is legally required to pay an income tax on the fringe benefit paid to supervisory or managerial employee. The fringe benefit paid to supervisory or managerial employee. The fringe benefit tax is imposed as a final withholding income tax on the fringe benefits of the employee, but the legal obligation to remit the tax is placed on the employer, such that if the tax is not paid, the legal recourse of the BIR is to go after the employer. Any amount or value received by the employee as a fringe benefit is considered tax-paid, or net of the income tax due thereon. The person who is legally required to pay is that person who, in case of non-payment, can be legally demanded to pay the tax. However, fringe benefit paid to a rank-and-file employee is taxable to said employee, which the employer is required to deduct the corresponding withholding tax, unless it is considered as de minimis benefit exempt from income tax. Q:1. Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer provides him with the following benefits: free use of a residential house to an exclusive subdivision, free use of a limousine and membership in a country club where he can entertain customers of the corporation. Which of these benefits, if any, must Mr. Adrian report as income? Explain. 2. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the government gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the camp. Are these benefits income to Capt. Canuto? Explain. 3. Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay P400,000.00 for his hospitalization. He was unable to work for six months which meant that he did not receive his usual salary of P10,000.00 a month or a total of P60,000.00. he sued the bus company and was able to obtain a final judgment awarding him P 400,000.00 as reimbursement for his hospitalization, P60,000.00 for the salaries he failed to receive while hospitalized, P200,000.00 as moral damages for his pain and suffering, and P100,000.00 as exemplary damages. He was able to collect in full from the judgment. How much income did he realize when he collected on the judgment? Explain. A: 1. Mr. Adrian must report the imputed rental value of the house and limousine as
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income. If the rental value exceeds the personal needs of Mr. Adrian because he is expected to provide accommodation in said house for company guests or the car is used partly for business purpose, then Mr. Adrian is entitled only to a ratable rental value of the house and limousine as exclusion from gross income and only a reasonable amount should be reported as income. This is because the free housing and use of the limousine are given partly for the convenience and benefit of the employer (Henderson v. Collector, 1 SCRA 548). 2. No, the free uniforms, free living quarters and the free meals inside the camp area are not income to Capt. Canuto because these are facilities or privileges furnished by the employer for the employer’ convenience which are necessary incidents to proper performance of the military personnel’s duties. 3. None. The P200,000.00 moral and exemplary damages are compensation for injuries sustained by Mr. Infante. The P400,000.00 reimbursement for hospitalization expenses and the P60,000.00 for salaries he failed to receive are amounts of any damages received whether by suit or agreement on account of such injuries. Section 28(b)(5) of the Tax Code specifically excludes these amounts from the gross income of the injured individual (Sec. 28[b], NIRC and Sec. 63, Rev. Regs. No. 2). Q: The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a bookstore inside the campus. It also operates two dormitories for its students, one of which is in the campus. Is the University liable to pay income taxes for the operation of the: 1. Canteen? 2. Bookstore? 3. Two dormitories? A: 1. For the operation of the canteen inside the campus, the income thereon being incidental to the operations of the university as a school, is exempt (Art. XIV[4][3], Constitution; DECS Regulations No. 137-87, December 16. 2. For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises. 3. The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in the campus, for same reasons as the foregoing. However, the latter shall be liable for income taxes on income from operations of the dormitory located outside the school premises. Q: Spouses Pablo Gonzales and Teresita Gonzales, both resident citizens, acquired during their marriage a residential house and lot located in Makati City, which is being leased to a tenant for a monthly rental of P100,000. Mr. Pablo Gonzales is the President of PG Corporation and he receives P50,000 salary per month. The spouses have only one minor child. In late June 2010, he was immediately brought to the hospital because of a heart attack and he was pronounced dead on June 30, 2010. With no liabilities, the estate of the late Pablo Gonzales was settled extra-judicially in early 2011.
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1. Is Mr. Gonzales required to file income tax return for 2010? If so, how much income must he declare for the year? How much personal and additional exemption is he entitled to? 2. Is Mrs. Gonzales required to file income tax return for 2010? If so, how much income must be declare for the year and how much personal exemption is she entitled to? 3. Is the Estate of the late Pablo Gonzales required to file income tax return for 2010? If so, how much income must it declare for the year and how much personal exemption is it entitled to? A: 1. Yes, Mr. Pablo Gonzales is required to file income tax return and pay income tax on the following incomes for 2010: P300,000 – rental income (P100,000 / 2 x 6 months), and P300,000 (P50,000 x 6 months) – salary, from January to June 30. Only 50% of the rental is to be reported by him because the leased property is a property of the conjugal partnership of gains belonging to the spouses. He will be entitled to personal exemption of P50,000 and additional personal exemption of P25,000 for one minor child. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent as if he died at the close of such year (Sec. 35, NIRC). 2. Yes, Mrs. Teresita Gonzales is required to file her income tax return and pay income tax on P600,000 (P50,000 x 12 months), rental income for the year (January to December 2010). If any income of the spouses cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between them for the purpose of determining their respective taxable income (Sec. 24 [A], NIRC). Since the deceased husband already claimed the additional personal exemption for the minor child, Mrs. Gonzales could no longer claim the additional personal exemption (Sec. 35[B], NIRC). 3. Yes, the Estate of the late Pablo Gonzales (through his Administrator or Executor) is also required to file its income tax return and pay tax, if applicable. Income tax imposed by Title II upon individuals shall apply to the income of estates, including income received by estates of deceased persons during the period of administration or settlement of the estate (Sec. 60, NIRC), and the estate of a decedent (which shall have its own TIN) shall be entitled to personal exemption of P20,000 (Sec. 61, NIRC). It is believed, however, that since the personal exemption of individuals has been increased to P50,000 under R.A. 9504 (social legislation) in 2008, the same amount of P50,000 shall also be extended to estates and trusts. The rental income to be reported by the estate shall be P300,000 (P100,000 / 2 x 6 months (from July 1 to December 31, 2010). Q: Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriques for ten years at a rental of P12,000.00 per year. The condition is that Mr. Enriquez will erect a building on the land which will become the property of Mr. Domingo at the end of the lease without compensation or reimbursement whatsoever for the value of the building. Mr. Enriquez erects the building. Upon completion, the building had a fair market value of P1 million. At the end of the lease, the building is worth only P900,000.00 due to depreciation. Will Mr. Domingo have income when the lease expires and becomes the owner of the building with a fair market value of P900,000.00? How much income must he report on the building? Explain.
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A: When building is erected by a lessee in the leased premises in pursuance of an agreement with the lessor that the building becomes the property of the lessor at the end of the lease, the lessor has the option to report income as follows: a. The lessor may report as income the market value of the building at the time when such building is completed; or b. The lessor may spread over the life of the lease the estimated depreciated value of such building a the termination of the lease and report as income for each year of the lease an aliquot part thereof (Sec. 49, Rev. Regs. No. 2). Q: John McDonald, a U.S. citizen residing in Makati City, bought shares of stocks of a domestic corporation whose shares are listed and traded in the Philippine Stock Exchange, at the price of Php2 million. Yesterday, he sold the shares of stocks through his favorite Makati stockbroker at a gain of Php200,000. Is John McDonald directly sold the shares to his best friend, who is another U.S. citizen residing in Makati, at a gain of Php 200,000. Is he liable to Philippine income tax? If so, what is the tax base and rate? A: 1. No, John McDonald is exempt from Philippine income from his sale of shares of stocks of a domestic corporation that are listed and traded in the Philippine Stock Exchange by express provision of law (Sec. 24[c], NIRC, as amended by B.P. 221, May 25, 1982). He is, however subject to the stock transaction tax equivalent to one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold or exchanged (Sec. 127[A], NIRC). 2. Yes, John McDonald will be subject to Philippine income tax on the Php 200,000 gain arising from his direct sale of the listed shares of stocks of a domestic corporation to his friend residing in Makati. An alien individual, whether or not a resident of the Philippines, is taxable on income derived from sources within the Philippines (Sec. 23[D], NIRC). Gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within Philippines, regardless of where the said shares are sold (Sec. 42[E], NIRC). A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale of shares of stock in a domestic corporation, except shares sold or disposed of through the stock exchange: Not over P100,000 On any amount in excess of P100,000 (Sec. 24[c], NIRC)
5% 10%
Q: In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the property as his and his family’s principal residence. It is now year 2013 and he is thinking of selling the property to buy a new one. He seeks your advice on how much income tax he would pay if he sells the property. The total zonal value of the property is P5,000,000 and the fair market value per tax declaration is P2,500,000. He intends to sell it for P6,000,000. What material considerations will you take into account in computing the income tax? Please explain the legal relevance of each of these considerations. A: Since the planned sale involves a real property classified as a capital asset, the material considerations to take into account to compute the income tax are:
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1. The current fair market value of the property to be sold. The current fair market value is the higher between the zonal value and the fair market value per tax declaration; 2. The gross selling price of the property; 3. Determination of the tax base, which is the higher amount between the gross selling price and the current fair market value of the property. The income tax is computed at 6% of the tax base, which is in the nature of a final capital gains tax (Sec. 24[D][1], NIRC). However, since the property to be sold is a principal residence and the purpose is to buy a new one, I will advise Mr. Belen that the sale can be exempt from the 6% capital gains tax if he is willing to comply with the following conditions: a. He must utilize the entire proceeds of sale in acquiring a new principal residence within 18 months from date of disposition; b. He should notify the Commissioner of his intention to avail of the exemption within 30 days from date of sale; c. He should open an escrow account with a bank and deposit the 6% capital gains tax due on the sale. If he compliers with the utilization requirement, he will be entitled to get back his deposit of the tax payment; otherwise, the deposit will be applied against the capital gains tax due (Sec. 24[D][2], NIRC). Q: Melissa inherited from the father a 300-sq.m. lot. At the time of her father’s death on March 14, 1995, the property was valued at P720,000. On February 28, 1996, to defray the of the medical expenses of her sick son, she sold the lot for P600,000 on cash basis. The prevailing market value of the property at the time of sale was P3,000 per sq. m. 1. Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? 2. Is Melissa liable to pay VAT on the sale of the property? If so, how much and why? If not, why not? A: 1. Melissa is liable to pay the 6% capital gains tax based on the gross selling price (P600,000) or fair market value at the time of sale (P900,000 = P3,000 x 300 sq. m.), whichever is higher. The capital gains tax is P54,000 (P900,000 x 6%). Although Melissa actually incurred a loss in the sale of the real property, this loss is disregarded for income tax purposes because Section 24(D) of the Tax Code presumes that the seller realized a gain from the sale of such real property classified as a capital asset and it imposes the tax on the higher amount between the gross selling price and the fair market value, The real property is a capital asset, since it is not used in the trade or business of Melissa (Sec. 39[A], NIRC). 2. No. Melissa is exempt from VAT on the sale of the real property classified as a capital asset. To be subject to VAT, the real property must be classified as an ordinary asset, the seller must be engaged in the real estate business, and the amount of gross sales must have exceeded P1.5 million. In this case all the above requisites are not present. Q:Josel agreed to sell his condominium unit to Jess for P2.5 million. At the time of the sale, the property had a zonal value of P2.0 million. Upon the advice of a tax
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consultant, the parties agreed to execute two deeds of sale, one indicating the zonal value P2.0 million as the selling price and the other, showing the true selling price of P2.5 million. The tax consultant filed the capital gains tax return, using the deed of sale showing the zonal value of P2.0 million as the selling price. Discuss the tax implications and consequences of the action taken by the parties. A: The capital gains tax due on the sale shall be based on the actual selling price of P2.5 million, which is higher than the zonal value of the property (Sec. 24[D][1], NIRC). The documentary stamp tax on the conveyance of real property shall likewise be based on the higher value (Sec. 196, NIRC). Accordingly, a deficiency capital gains tax and documentary stamp tax are due from Josel plus the 50% surcharge imposable on a fraudulent return. Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear that the three (3) requisite factors to constitute tax evasion are present, viz.; (1) the end to be achieved, which is the payment of less than that known by them to be legally due; (2) an accompanying state of mind, which is evil, in bad faith, willful or deliberate and not merely accidental and (3) a course of action, which is unlawful (CIR v. Estate of Benigno P. Toda, Jr., 438 SCRA 290 [240]). Q: Juan Panalo won a damage suit for P500,000.00 against Juana Talo. Panalo got a writ of execution and made a levy on the lot of Talo. The lot was sold at public auction where Panalo was the highest bidder for P500,000.00 Panalo refused to pay any capital gains tax on his purchase of said lot. Your opinion. A: The capital gains tax from sales of real property is payable by the seller (Section 21[e] in relation to Section 49[a][4] of the NIRC). Hence, Panalo cannot refuse to pay the capital gains tax on his purchase of said lot, because he is treated as the statutory seller. Q: Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San Francisco, California, U.S.A., which he acquired in 2000 for P15,000,000. On January 10, 2006, he sold said real property to Juan Mayaman, another Filipino citizen residing in Quezon City, for P20,000,000. On February 9, 2006, Manalo filed the capital gains tax return and paid P1,200,000 representing 6% capital gains tax. Since Manalo did not derive any ordinary income, no income tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed Manalo for deficiency income tax computed as follows: P5,000,000 (P2,000,000 less P15,000,000) x 35% = P1,750,000, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate broker who said that the P1,200,000 capital gains tax should be credited from the P1,750,000 deficiency income tax. 1. Is the BIR officer’s tax assessment correct? Explain. 2. If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. A: 1. A resident citizen like Pedro Manalo is taxable on all income derived from sources within and without the Philippines (Sec. 23[A], NIRC). Gains, profits and income from the sale of real property located without the Philippines are considered as incomes from sources without the Philippines (Sec. 42[C][5], NIRC). The vacation house and lot in California, USA is a capital asset, since it is not used in the taxpayer’s trade or business (Sec. 39[A][1], NIRC). However, it is not subject to the 6%
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capital gains tax under Section 24(D)(1) of the Tax Code, since the real property is not located in the Philippines. Said preferential rate of income tax applies only when the seller is a resident citizen and the real property is classified as a capital asset located in the Philippines. Accordingly, the gain of P5 million (P20 million less P15 million) shall be included in the taxable income of Pedro Manalo for 2006 subject to the graduated income tax rates of 5% to 32% (Sec. 24[A][1], NIRC). It is, therefore, erroneous for the BIR to apply the corporate income tax rate of 35% on the taxable income of Pedro Manalo, a resident citizen. 2. The amount of P1,200,000 (6% times P15 million), representing capital gains tax erroneously paid by Pedro Manalo, may be credited against the ordinary income tax due on the taxable income for 2006, since capital gains tax is another form of income tax under Title II of the Tax Code. If the BIR official insists on not allowing such tax credit of capital gains tax erroneously paid against ordinary income tax due for the year, I would advise my client to file a written claim for tax credit or refund for the capital gains tax erroneously paid with the BIR within two (2) years from the date of payment (Secs. 204[c] and 229, NIRC). Q: Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City for Ten million pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio City. What conditions must be met in order that the capital gains presumed to have been realized from such sale may not be subject to capital gains tax? A: The conditions are: 1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the sale or disposition of the principal residence; 2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired; 3. The Commissioner of Internal Revenue must have been informed by Mr. & Mrs. Peter Camacho within thirty (30) days from the date of sale or disposition on July 12, 2000, through a prescribed statement / return of their intention to avail of the tax exemption; 4. That the said exemption can only be availed of once every ten (10) years; and 5. If there is no full utilization of the proceeds of sale or disposition, the unused portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax (Sec. 24[D][2],NIRC). Q: Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development company in the country and in 2010, he was promoted to VicePresident of the company. With more responsibilities comes higher pay. In 2011, he decided to buy a new car worth P2 million and he traded-in his old car with a market value of P800,000, and paid the difference of P1.2 million to the car company. The old car, which was bought three (3) years ago by the father of Mr. Pedro Aguirre at a price of P700,000, was donated by him and registered in the name of his son. The corresponding donor’s tax thereon was duly paid by the father.
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1. How much is the cost basis of the old car to Mr. Aguirre? 2. What is the nature of the old car – capital asset or ordinary asset? 3. Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car? A: 1. P700,000. The basis of the property in the hands of the done-son is the carry-over basis, the same basis as if it would be in the hands of the donor-father (Sec. 40[B][3], NIRC). 2. The old car is a capital asset. It is a property held by the taxpayer (whether or not connected with his trade or business), but is not stock in trade 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 year, or property held primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business of a character subject to depreciation, or real property used in trade or business of the taxpayer (Sec. 39[A],NIRC). 3. Yes, he is liable to income tax on his capital gain of P100,000 (P800,000 less P700,000), but only 50% of the taxable gain shall be recognized and subject to income tax, considering that the holding period of the old car is more than one year (Sec. 39, NIRC). Q: In 2007, Mr. & Mrs. Renato Garcia, an overseas Filipino contract worker in Hong Kong, opened peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. During the year, the bank paid interest income of Php10,000 on the peso deposit and US$1,000 on the dollar deposit. The bank withheld final income tax equivalent to 20% of the entire interest income and remitted the same to BIR. 1. Are the interest incomes on the bank deposits of Mr. & Mrs. Renato Garcia subject to income tax? Explain. 2. Is the ban correct in withholding the 20% final tax on the entire interest income? Explain. A: 1. The interest income on the foreign currency deposit of Renato Garcia, a non-resident citizen, with the FCDU of HK Bank in Makati is exempt from Philippine income tax by express provision of law (Sec. 24[B] in relation to Sec. 28[A][7][b], NIRC). His interest income on peso deposit with HK Bank in Makati will be subject to the 20% final withholding tax (Sec. 24[B][1], NIRC in relation to Secs. 23[B] and 57[A], NIRC). The interest income on the foreign currency deposit of Mrs. Garcia, a resident citizen, with the FCDU of HK Bank in Makati is subject to the 7.5% final withholding tax (Sec. 24[B][1], NIRC), while her interest income on the peso deposit with the bank will be subject to the 20% final withholding tax. 2. No, as discussed above, the 20% final withholding tax applies only on the interest income on peso deposits. Since 20% FWT is higher that the 7.5% FWT on interest income on foreign currency deposit of Mrs. Garcia, she can file a written claim for refund or tax credit for the excess tax paid, and Renato Garcia can also file a written claim for refund or tax credit for the 20% FWT erroneously deducted and remitted to the BIR on his interest income on foreign currency deposit which is exempt from income tax. Q: On 3 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the capital stock of Y Corporation, a domestic company. On 3 January 2000, Y Corporation declared, out of the profits of the company earned after 1 January 1998, a hundred percent (100%) stock dividends on all stockholders of record as of 31 December 1999 as a result of which X
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holding in Y Corporation became two hundred (200) shares. Are the stock dividends received by X subject to income tax? Explain. A: No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code, imposing a tax on dividend income covers cash and property dividends only, making stock dividends in the equivalent of cash or property dividend, as when the distribution results to a change in ownership interest of the shareholders, the stock dividends will be subject to income tax (Sec. 24[B][2]; Sec. 2[A] and [B]; Sec. 28[B][5][b], NIRC). Q: In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, USA. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. 1. What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? 2. Would you answer in 1 be the same, if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the difference in treatment for Philippine income tax purposes. A:1. In order to lessen the impact of double taxation on the same income, I would advise Caruso to credit the U.S. income tax on the dividend paid to the U.S. Federal Government against the Philippine income tax to be paid to the Philippine Government. This privilege is, however, subject to limitation as to amount and proof of tax payment made to the U.S. government must be attached to the Philippine income tax return. 2. If Caruso became an immigrant in 2008 and thus became a non-resident Filipino citizen, such dividend income received from a U.S. corporation will be treated as a foreign-source income, exempt from the Philippine income tax. A non-resident Filipino citizen is taxed only on income from sources within the Philippines (Sec. 23[B],NIRC), and dividends received from a foreign corporation whose gross income for the three-year period was derived from sources outside the Philippines (Sec. 42[B], NIRC). Q: What do you think is the reason why cash dividends, when received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of 10% and not at the progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your answer. A: The reason for imposing final withholding tax (rather than the progressive tax schedule) on cash dividends received by a resident citizen or alien from a domestic corporation is to ensure the collection of income tax on said income. If we subject the dividend to the progressive tax rate, which can only be done through the filing on income tax returns, there is no assurance that the taxpayer will declare the income, especially when there are other items of gross income earned during the year. It would be extremely difficult for the BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is very easy to check compliance because there are fewer withholding agents compared to the number of income recipients. Likewise, the imposition of a final withholding tax will make the tax available to the government at an earlier time. Finally, the final withholding tax will be a sure revenue to the government unlike when the dividend is treated as a returnable income where the recipient
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thereof who is in a tax loss position is given the change too offset such loss against dividend income thereby depriving the government of the tax on said dividend income. Q: What are disguised dividends in income taxation? Give an example. A: Disguised dividends are those income payment made by a domestic corporation, which is a subsidiary of a non-resident foreign corporation, to the latter ostensibly for services rendered by the latter to the former, but which payments are disproportionately larger than the actual value of the services rendered. In such case, the amount over and above the true value of the service rendered shall be treated as a dividend, and shall be subjected to the corresponding tax of 35% on Philippine sourced gross income, or such other preferential rate as may be provided under a corresponding Tax Treaty. Example: Royalty payments under a corresponding licensing agreement. Q: The MKB-Phils is a BOI-registered domestic corporation licensed by the MKB of the United Kingdom to distribute, support and use in the Philippines its computer software systems, including basic and related materials for banks. The MKB-Phils provides consultancy and technical services, incidental thereto by entering into licensing agreements with banks. Under such agreements, the MKB-Phils will not acquire any proprietary rights in the licensed systems. The MKB-Phils pays royalty to the MKB-UK, net of 15% withholding tax prescribed by the RP-UK Tax Treaty. Is the income of the MKB-Phils under the licensing agreement with banks considered royalty subject to 20% final withholding tax? Why? If not, what kind of tax will its income be subject to? Explain. A: Yes. The income of MKB-Phils under the licensing agreement with banks shall be considered as royalty subject to 20% final withholding tax. The term royalty is broad enough to include technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme (Sec. 42[4][f], NIRC). Accordingly, the consultancy and technical services rendered by MKB-Phils which are incidental to the distribution, support and use of the computer systems of MKB-UK are taxable as royalty. Q: X is employed as security guard o Excel Supermarket, Inc. X lives in a room within the compound of Excel but he is not charged any rent. The rental value of the room is P300.00 a month. X wants your opinion on whether BIR can tax the value of the free use of his room. A: The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memorandum Order No. 1-87 provides that if the lodging is furnished in the business premises of the employer and the employee is required to accept such lodging as a condition of his employment, then the value of said lodging will be not taxable. It is merely for the convenience, comfort and pleasure of the employer. Q: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.
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A: The prize will not constitute a taxable income to Onyoc; hence, the BIR is not correct in imposing the income tax R.A. No. 7549 explicitly provides that “All prized and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax.” Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it categorically stated that the donor of said prizes and awards shall be exempt from the payment of the donor’s tax. Q: Evelyn is a graduate student of U.P. In January 1991, she won the Palanca Award for an outstanding short story she wrote. The award was P25,000.00 in cash. In February, 1991, she was also named Most Valuable Player of the Varsity volleyball team and she was given a trophy plus P10,000.00. Finally, in March 1991, she received a Fellowship Award from the University of California to pursue a master’s degree in American literature. The fellowship is for $10,000.00 plus free board and lodging for two (2) semesters. Should Evelyn include these awards and fellowship in her gross income? Reason. A: Gross income include prizes and winnings (Sec. 27, NIRC), except those stated in Section 28B(8), (E) of the NIRC, to wit: “(E) Prizes and awards made primarily in recognition of religious charitable, scientific, educational, artistic, literary, or civil achievement but only if: i. ii.
The recipient was selected without any action on his part to enter the contest or proceeding; and The recipient is not required to render substantial future services as a condition to receiving the prize or award.”
The first award granted to Evelyn was a Palanca award. This kind of award requires submission of literary works. Hence, this is included in the gross income because it fails to meet the legal requisites provided for in the afore-quoted provisions of law specifically item (i). The second award granted to Evelyn was the Most Valuable Player Award. In this kind of award, Evelyn did not file any application to enter into any contest. The award was given to her in recognition for her outstanding performance in the field of sports. However, the recognition in the field of sports is not among those stated in the afore-quoted provision of law. Thus, the award granted to her does not fall under the afore-quoted provision of law. The last award granted to her was the Fellowship Award. This requires also submission of application to quality for such award. Hence, it fails to meet the necessary requisites of the afore-quoted provision of law specifically item (1). Q: Is the prize of one million pesos awarded by the Reader’s Digest subject to withholding tax? Who is responsible for withholding the tax? What are the liabilities for failure to withhold such tax? A: It depends. If the prize is considered as winning derived from sources within the Philippines, it is subject to withholding of final tax (Sec. 24[B] in relation to Sec. 57[A], NIRC). If derived from sources without the Philippines, it is not subject to withholding of final tax because the Philippine tax law and regulations could not reach out to foreign
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jurisdictions. The tax shall be withhold by the Reader’s Digest or local agent who has control over the payment of the prize. Any person required to withhold or who willfully fails to withhold, shall, in addition to the other penalties provided under the Code, be liable upon conviction to a penalty equal to the total amount of tax not withheld (Sec. 251, NIRC). In case of failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payer / withholding agent (1st par., Sec. 2.S7[A], Rev. Regs. No. 2-98). Any person required under the Tax Code or by rules and regulations to withhold taxes at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction be punished by a fine of not less than Ten thousand pesos (Php10,000.00) and suffer imprisonment of not less than one (1) year but not more than ten (10) years (1st par., Sec. 255, NIRC). Q: Jose Miranda, a young artist and designer, received a prize of P100,000.00 for winning in the on-the-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purpose? Explain. A: No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the amount thereof being in excess of P10,000.00 (Sec. 24[B][1], NIRC). The prize constitute a taxable income because it was made primarily in recognition of artistic achievement which he won due to an action on his part to enter the contest (Sec. 32[B][7][c], NIRC). Since it is an on-the-spot contest, it is evident that he must have joined the contest in order to earn the prize or award. Q: Mr. Lajojo is a big-time swindler. In one year he was able to earn P1 million from his swindling activities. When the Commissioner of Internal Revenue discovered his income from swindling, the Commissioner assessed him a deficiency income tax for such income. The lawyer of Mr. Lajojo protested the assessment on the following grounds: 1) The income tax applies only to legal income, not to illegal income; 2) Mr. Lajojo’s receipts from his swindling did not constitute income because he was under obligation to return amount he had swindled, hence, his receipt from swindling was similar to a loan, which is not income, because for every peso borrowed he has a corresponding liability to pay one peso; and 3) If he has to pay the deficiency income tax assessment, there will be hardly anything left to return to the victims of the swindling. How will you rule on each of the three grounds for the protest? Explain. A:1. The contention that the income tax applies to legal income and not to illegal income is not correct. Section 28(a) of the Tax Code includes within the purview of gross income all income from whatever source derived. Hence, the illegality of the income will not preclude the imposition of the income tax thereon. 2. The contention that the receipts from his swindling did not constitute income because of his obligation to return the amount swindled is likewise not correct, When a taxpayer
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acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, he has received taxable income, even though it may still be claimed that he is not entitled to retain the money, and even thought he may still be adjudged to restore its equivalent (James v. U.S., 366 US 213, 1961). To treat the embezzled funds not as taxable income would perpetuate injustice by relieving embezzlers of the duty of paying income taxes on the money they enrich themselves with through embezzlement, while honest people pay their taxes on every conceivable type of income. 3. The deficiency income tax assessment is a direct tax imposed on the owner which is an excise on the privilege to earn an income. It will not necessarily be paid out of the same income that was subjected to the tax. Mr. Lajojo’s liability to pay the tax is based on his having realized a taxable income from his swindling activities and will not affect his obligation to make restitution. Payment of the tax is a civil obligation imposed by law while restitution is a civil liability arising from a crime. Q: Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive , mentioned to the latter that this (Osorio) bank had just opened a business relationship with a big foreign Importer of goods which Perez’ company manufactures. Perez requested Osorio to introduce him to this foreign Importer and put in a good word for him (Perez), which Osorio did. As a result, Perez was able to make a profitable business deal with the foreign importer. In gratitude, Perez, in behalf of his manufacturing firm, send Osorio an expensive car as a gift. Osorio called Perez and told him that there was really no obligation on the part of Perez or his company to give such an expensive gift. But Perez insisted that Osorio keep the car. The company of Perez deducted the cost of the car as a business expense. The Commissioner of Internal Revenue included the fair market value of the car as income of Osorio who protested that the car was a gift and therefore excluded from income. Who is correct, the Commissioner or Osorio? Explain. A: The Commissioner is correct. The car, having been given to Mr. Osorio in consideration of having introduced Mr. Perez to a foreign imported which resulted to a profitable business deal, is considered to be a compensation for services rendered. The transfer is not a gift because it is not made out of a detached or disinterested generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business deduction for the payment indicates that it was considered as a pay rather than a gift. Hence, the fair market value of the car is includible in the gross income pursuant to Section 28(a)(1) of the Tax Code (See 1974 Federal Tax Handbook, p. 145). A payment though voluntary, if it is in return for services rendered, or proceeds from the constraining force of any moral or legal duty a benefit characterized as a “gift” by the payor (Commissioner v. Duberstein, 363 U.S. 278). Q: An insolvent company had an outstanding obligation of P100,000.00 form a creditor. Since it could not pay the debt, the creditor agreed to accept payment through dacion en pago a property which had a market value P30,000.00. In the dacion en pago document, the balance of the debt was condoned. 1. What is the tax effect on the discharge of the unpaid balance of the obligation
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on the debtor corporation? 2. Insofar as the creditor is concerned, how is he affected tax-wise as a consequence of the transaction? A:1. The condonation of the unpaid balance of the obligation has the effect of a donation made on the part of the creditor. It is obvious that the creditor merely desires to benefit the debtor and without any consideration therefore cancels the debt, the amount of the debt cancelled is a gift from the creditor to the debtor and need not be included in the latter’s gross income (Sec. 50, Rev. Regs. No. 2). 2. For the difference of P70,000.00, the creditor shall be subject to donor’s tax at the applicable rates provided for under the National Internal Revenue Code. Q: Mr. Francisco borrowed P10,000.00 from his friend, Mr. Gutierrez, payable in one year without interest. When the loan became due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the P10,000.00 and at the time the loan was condoned. Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain. A: No. Mr. Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since it is obvious that the creditor merely desired to benefit the debtor in view of the absence of consideration for the cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included in the latter’s gross income. Q: During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business; (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (e) proceeds under an insurance policy in the loss of goods. In preparing the corporate income tax return, what should be the tax treatment on each of the above items? A:The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20% dividends from domestic corporations are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The proceeds under an insurance policy on the loss of goods in of an item of income is but merely a return of capital; hence, not taxable. Q: XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. Last January 3, 2000, it sold a portion of its lot used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Day and Night Care Center for children of single parents. In order to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social welfare projects, the
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Foundation leased the 300 square meter area of the second and third floors of the building for use as a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the income from which is used actually, directly, and exclusively for the purposes for which the Foundation was organized. 1. Considering the constitutional provision granting tax exemption to non-stock corporations, such as those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the last paragraph of said Section 30 of the 1997 Tax Code, which states that "Income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income shall be subject to tax imposed under this Code.” 2. Is the income derived by XYZ Foundation form the sale of a portion of its lot, rentals from its boarding house and the operation of its canteen and gift shop subject to tax? Explain. A: 1. The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and exclusively used for religious, charitable or social welfare purposes. It does not cover exemption from the imposition of income tax, which is within the context of Section 30 of the Tax Code. As a rule, non-stock, non-profit corporations organized for religious, charitable or social welfare purposes are exempt from income tax on their income received by them as such. However, if these religious charitable or social welfare corporations derive income from their properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income, irrespective of their disposition (Sec. 30, NIRC; Commissioner v. YMCA, G.R. No. 124043, October 14, 1998; CIR v. St. Luke’s Medical Center, G.R. No. 195909, September 26, 2012). 2. Yes, The income derived from the sale of lot and rentals from its boarding house are considered as income from properties which are subject to tax. Likewise, the income from its activities conducted for profit, which are subject to tax. The income tax attaches irrespective of the disposition of these incomes. Q: Explain briefly whether the following items are taxable or non-taxable: (a) income from jueteng; (b) gain arising from expropriation of property; (c) taxes paid and subsequently refunded; (d) recovery of bad debts previously charged off; and (e) gain on the sale of a car used for personal purposes. A: a. It is taxable, The law imposes a tax on ‘income from any source whatever,’ which means that is includes income whether legal or illegal (Sec. 32[A], NIRC). b. Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains from dealings in property are part of gross income (Sec. 32[A][3], NIRC). c. It depends. Taxes paid which are allowed as a deduction from gross income are taxable when subsequently refunded but only to the extent of the income tax benefit of said deduction (Sec. 34[C][1], NIRC). If follows that taxes paid which are not allowed as deduction from gross income, i.e., income tax, donor’s tax and estate tax, are not taxable when refunded. d. Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said deduction (Sec. 34[E][1], NIRC). e. Gain on the sale of a car used for personal purposes is taxable. This is a gain derived
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from dealing in property which is part of the taxpayer’s gross income (Sec. 32[A][3], NIRC). There is a materials gain, not excluded by law, realized out of a closed and completed transaction. Q: State with reasons the tax treatment of the following in the preparation of annual income tax returns: 1. Proceeds of life insurance received by a child as irrevocable beneficiary; 2. 13th month pay and de minimis benefits; 3. Dividends received by a domestic corporation from (i) another domestic corporation; and (ii) a foreign corporations; 4. Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign bank; 5. Income realized from sale of (i) capital assets, and (ii) ordinary assets. A: 1. The proceeds of life insurance received by a child as irrevocable beneficiary are not to be reported in the annual income tax return, because they are excluded from gross income. This kind of receipt does not fall within the definition of income – “any wealth which flows into the taxpayer other than a mere return of capital.” Since insurance is compensatory in nature, the receipt is merely considered as a return of capital (Sec. 32 [B][1], NIRC); Fisher v. Trinidad, 43 Phil. 73 [1992]). 2. 13th month pay is excluded from gross income for income tax purposes to the extent of P30,000. Any excess will be included in the gross income as part of gross compensation income (Sec. 32[B][7][e], NIRC). 3.i. De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return because they are tax exempt. They are also exempt from the imposition of the fringe benefits tax (Sec. 33[C], NIRC). 3.ii. Dividends received by a domestic corporation from another domestic corporation are not subject to income tax; hence, should not be declared in the income tax return (Se. 27[D][4], NIRC). 4.i. Dividends received by a domestic corporation from a foreign corporation are subject to income tax and shall form part of the gross income. There is no law exempting this type of dividend from income tax (Sec. 32[7], NIRC). 4.ii. Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of 20% the interest on deposit with a local offshore banking unit of a foreign bank is a passive income subject to a final withholding tax rate of 7.5% (Sec. 24[B][1],NIRC). Both interest incomes are not to be declared as part of gross income in the income tax return. 5.i. Generally, income realized from the sale of capital assets are not to be reported in the income tax return, as they are already subject to final taxes (capital gains tax on real property located in the Philippines and shares of stocks of a domestic corporation). What are to be reported in the annual income tax return are the capital gains derived from the disposition of capital assets other than real property located in the Philippines or shares of stocks in domestic corporations which are not subject to final taxes. 5.ii. Income realized from the sale of ordinary assets is taxable and the said income shall be declared in the annual income tax return. The income constitutes either income derived from the conduct of trade or business or a gain derived from dealings in property (Sec. 32[A][2] and [3], NIRC).
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CHAPTER VI: EXCLUSIONS FROM GROSS INCOME
Q: On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00 He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance of P1,000,000.00, but in a latter designation, reserving his right to substitute him for another. On 1 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X’s life insurance policy. Are the proceeds of the insurance subject to income tax on the part of Y and Z for their respective shares? Explain. A: No. The law explicitly provides that proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income and is exempt from taxation. The proceeds of life insurance received upon death of the insured constitutes a compensation for the loss of life; hence, a return of capital, which is beyond the scope of income taxation (Sec. 32[B][1], NIRC). [NOTE: The reservation as to his right to designate or substitute the beneficiary for another is not important for income tax purposes, although it is material for estate tax purposes.] Q: X, while driving home from his office, was seriously injured when his automobile was bumped from behind by a bus driven by a reckless driver. As a result, he had to pay P200,000.00 to his doctor and P100,000.00 to the hospital where he was confined for treatment. He filed a suit against the bus driver and the bus company and was awarded and paid actual damages of P300,000.00 (for his doctor and hospitalization bills), P100,000.00 by way of moral damages, and P50,000.00 for what he had to pay his attorney for bringing his case to court. Which, if any, of the following awards are taxable income to x and which are not? Explain. A: Nothing is taxable. Under the Tax Code, any amount received as compensation for personal injuries or sickness, plus the amounts for any damages received whether by suit or agreement, on account of such injuries or sickness shall be excluded from gross income. Since the entire amount of P450,000.00 received represents award of damages on account of the injuries sustained, all shall be excluded from his gross income. Obviously, these damages are considered by law as mere return of capital (Sec. 32[B][4], NIRC). Q: JR was a passenger on an airline that crashed. He survived the accident but sustained serious physical injuries which required hospitalization for 3 months. Following negotiations with the airline and its insurer, an agreement was reached under terms of which JR was paid the following amounts: P500,000.00 for his hospitalization; P250,000.00 as moral damages; P300,000.00 for loss of income during the period of his treatment and recuperation. In addition, JR received from his employer the amount of P200,000.00, presenting the cash equivalent of his earned vacation and sick leaves. Which, if any, of the amounts he received are subject to income tax? Explain. A: The amount of P200,000.00 that JR received from his employer is subject to income tax, except the money equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation allowances or sick leave credits which are paid to an employee constitutes compensation (Sec. 2.78[A][7], Rev. Regs. No. 2-98, as amended by Rev. Regs
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No. 10-2000). The amounts that JR received from the airlines are excluded from gross income and not subject to income tax because they are compensation for personal injuries suffered from an accident as well as damages received as a result of an agreement on account of such injuries (Sec. 32[B][4], NIRC). Q: Company A decides to close its operations due to continuing losses and to terminate the services of its employees. Under the Labor Code, employees who are separated from service for such cause are entitled to minimum of one-half month pay for every year of service. Company A paid the equivalent of one month pay for every year of service and the cash equivalent of unused vacation and sick leaves as separation benefits. Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons. A: The separation benefits paid by Company A to its employees are excluded from gross income, being in the nature of benefits given to employees whose services were terminated due to causes beyond their control (Sec. 32[B][6][b], NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax under the Tax Code. Q: A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital’s use and not more than 30% of its funds were used for administrative purposes. Is the hospital subject to tax on its income? If it is, at what rate? A: Yes, a non-stock, non-profit hospital organized for charitable purpose, although generally exempt from income tax, becomes taxable on income derived from activities conducted for profit. Services rendered to paying patients are considered activities conducted for profit which are subject to income tax, regardless of the disposition of the said income. The rate is 10% of net income, considering that the income earned appears to be derived solely from hospital-related activities (CIR v. St. Luke’s Medical Center, ibid). Private educational institution that engages in profitable undertaking is subject to tax. – A private educational institution which deviates from its purely educational purposes and activities shall be treated like any private domestic corporation engaged in business for profit with respect to income derived there from. The protective mantle of income tax benefit or exemption cannot be extended to a private educational institution which chooses to descend from its high pedestal of tax preference or immunity to the level of an ordinary private corporation engaged in profitable undertaking or business (Xavier School, Inc. v. Commissioner, CTA Case 1682, October 8, 1969). Q: 1. X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to X’s salary for one year. 2. Is the amount considered taxable income to the widow? Why? 3. Is said amount subject to tax? Explain. A: 1. No. the amount received by the widow from the decedent’s employer may either be a gift or a separation benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of the Tax Code. 2. A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65
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years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P 500,000.00. 3. No. The commutation of leave credits, more commonly known as terminal leave pay, i.e., the cash equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or separated from the service through no fault of his own, is exempt from income tax (BIR Ruling No. 238-91, November 8, 1991; Commissioner v. Castañeda, G.R. No. 96016, October 17, 1991). Q: Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the interest income from a time deposit of P 500,000.00 with ABC bank. Is Miss Santos liable to pay any tax on her income? A: Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28[b][7][F], NIRC). However, as regards her time deposit, the interest she receives thereon is subject to 20% final withholding tax (Sec. 21[a][c], NIRC). Q: X owns a half-hectare property in Bacoor, Cavite which in 1980 was expropriated by the national government, through the Department of Public Works and Highways. After 10 years, X was paid P 2,000,000.00 as just compensation plus 6% annual interest by the DPWH but minus the withholding tax. Is the action of DPWH proper? Reason. A: No, the action of DPWH is not proper. In the case of Province of Tayabas v. Perez (66 Phil. 467), just compensation was defined as “the just and complete equivalent of the loss which the owner of a thing expropriated has to suffer by reason of the expropriation.” Further, in BIR Ruling No. 61-91, “just compensation” was defined as that which is paid by the Government equivalent to the value of the property at the time of its taking. It is the fair and full equivalent for the indemnity. Based on the foregoing it is clear therefore that the amount received after 10 years as just compensation is not in any way a profit, gain or income on the part of X, in the same vein, the 6% annual interest paid by DPWH is not income. The same partakes of the nature of a penalty or indemnity due and accruing to X for having been deprived of the use and benefit by not being paid of the fair market value of the property since its taking 10 years ago. Hence, the DPWH should not have withheld taxes. Q: The employees of Travelers, Inc. staged a strike. X, a non-union member joined the strike and volunteered to picket the company premises from 8:00 A.M. to 12: P.M. Monday to Friday. Six months into the strike. X ran out of money and asked financial aid from the union since he has no other source of income and needed financial assistance in order to live. The union gave him P 1,000.00 a month to take care of his food requirements plus P 500.00 to take care of his monthly rent. When X filed his return, he excluded these benefits from his gross income. The exclusion was denied by the BIR. Decide. A: The P 1,500.00 is not compensation income because compensation income arises out of employer-employee relationship as payment for services without compensation. The P 1,500.00 is a gift from the labor union. According to Section 28(b)(3) of the NIRC, gifts are to be excluded from gross income. Thus, the BIR’s denial is not valid.
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Q: Born of a poor family on 14 February 1944, Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985, he received P 400,000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of P 1,520.00 since 1965, also matured. He was then paid the face value of his insurance policy in the amount of P 50,000.00. 1. Is Mario’s P 400,000.00 retirement benefit subject to income tax? 2. Is his P 50,000.00 insurance proceeds exempt from income taxation? A: 1. Mario’s P 400,000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must have been extended to an employee who is at least 50 years of age and who would have worked for at least ten (10) years with the employer. The amount cannot be considered as a separation pay that would have exempted benefits from income tax since it was Mario who had decided to retire instead of being required to do so (Sec. 28, NIRC). 2. The P 50,000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is only that portion which corresponds to the premiums that he had paid since 1965. At the rate of P 1,520.00 per year multiplied by twenty (20) years which was the period of the policy, he must have paid a total of P 30,400.00. Accordingly, he will be subject to report as taxable income the amount of P 19,6000.00 (Sec. 28, NIRC). Q: Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the compulsory retirement age of 65. Would the amount he is entitled to receive by way of commutation of his accumulated leave credits, of his terminal leave pay, be subject to income tax? A: The amount that Emmanuel Perez is to receive should not be subjected to income tax, and such was the ruling by the Supreme Court in the Re: Zialcita Administrative Case (Adm. Matter No. 90-6015-SC, October 18, 1990). The ruling apparently repudiated, or at least is inconsistent with, its earlier decision in Commissioner v. Victoriano, G.R. No. 83176, August 10, 1989. Q: Pedro Reyes, an official of Corporation X, asked for an “earlier retirement” because he was emigrating to Australia. He was paid P 2,000,000.00 as separation pay in recognition of is valuable services to the corporation. Juan Cruz, another official of the same company, was separated for occupying a redundant position. He was given P 1,000,000.00 as separation pay. Jose Bautista was separated due to his falling eyesight. He was given P 5,000.00 as separation pay. All the three (3) were not qualified to retire under the BIRapproved pension plan of the corporation. 1. Is the separation pay given to Reyes subject to income tax? 2. How about the separation pay received by Cruz? 3. How about the separation pay received by Bautista? A: 1. The separation pay given to Reyes is subject to income tax as compensation income because it arises from a service rendered pursuant to an employer-employee relationship. It
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is not considered an exclusion from gross income because the rule in taxation is tax construed in strictissimi juris or the rule on strict interpretation of tax exemptions. 2. The separation pay received by Cruz is not subject to income tax because his separation from the company was involuntary (Sec. 28[b][7], NIRC). 3. The separation pay received by Bautista is likewise not subject to his separation is due to disability, hence involuntary. Under the law, separation pay received through involuntary causes is exempt from taxation. Q: A Co., a Philippine corporation, has two divisions – manufacturing and construction. Due to the economic situation, it had to close its construction division and lay-off the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are 2 groups of employees to be laid off: (a) Employees who are at least 50 years of age and has at least 10 years of service at the time of termination of employment; and (b)Employees who do not meet either the age or length of service. A Co. plans to give the following: For category (A) employees – the benefits under the BIR approved plan plus an ex gratia payment of one month of every year of service. For category (B) employees – one month for every year of service. For both categories, the cash equivalent of unused vacation and sick leave credits. A Co. seeks your advice as to whether or not it will subject any of these payments to withholding tax. Explain your advice. A: For category ‘A’ employees, all the benefits received on account of their separation are not subject to income tax; hence, no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income, being in the nature of benefit received on account of separation due to causes beyond he employees’ control (Sec 32[B], NIRC). The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income (CIR v. Court of Appeals, G.R. No. 96016, October 17, 1991). For category ‘B’ employees, all the benefits received by them will also be exempt from income tax; hence, not subject to withholding tax. These are benefits received on account of separation due to causes beyond the employees’ control, which are specifically excluded from gross income (Sec. 32[B], NIRC). Q: Mr. Jacobo worked for a manufacturing firm. Due to business reverse the firm offered voluntary redundancy program in order to reduce overhead expenses. Under the program an employee who offered to resign would be given separation pay equivalent to his three month’s basic salary for every year of service. Mr. Jacobo accepted the offer and received P 400,000.00 as separation pay under the program.
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After all the employees who accepted the offer were paid, the firm found its overhead still excessive. Hence it adopted another redundancy program. Various unprofitable departments were closed. As a result, Mr. Kintanar was separated from the service. He also received P 400,000.00 as separation pay. Did Mr. Jacobo derive income when he received his separation pay? Explain. A: Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any amount received by an official or employees as a consequence of separation of such official or employee from the service of the employer for any cause beyond the control of the said official or employee (Sec. 28, NIRC). Q: Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months’ salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital’s retirement plan. In view of his loyalty and Invaluable services for forty-five years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (a) it was a retirement pay, and (b) it was a gift. 1. Is Mr. Quiroz correct in claiming that the additional P1 Million was retirement pay and therefore excluded from income? Explain. 2. Is Mr. Quiroz correct in claiming that the additional P1 Million was gift and therefore excluded from income? Explain. A:1. No. The additional P1 Million is not a retirement pay but a part of the gross compensation income of Mr. Quiroz. This is not a retirement benefit received in accordance with a reasonable private benefit plan maintained by the employer as it was not paid out of the retirement plan. Accordingly, the amount received in excess of the retirement benefits that he is entitled to receive under the BIR-approved retirement plan would not quality as an exclusion from gross income. 2. No. The amount received was in consideration of his loyalty and invaluable services to the company which is clearly a compensation income received on account of employment. Under the employer’s motivation test, ‘emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for giving him the gravity; hence it should constitute a taxable income. The payment would only qualify as a gift if there is nothing but good will, esteem and kindness’ which motivated the employer to give the gratuity (Stanton v. U.S., 186 F. Supp. 393). Such is not the case in the herein problem. Q: XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. Last January 3, 2000, it sold a portion of its lot used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Day and Night Care Center for children of single parents. In order to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social welfare projects, the Foundation leased the 300 square meter area of the second and third floors of the building for use as a boarding house. The Foundation also operates a canteen and
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a gift shop within the premises, all the income from which is used actually, directly, and exclusively for the purposes for which the Foundation was organized. 1. Considering the constitutional provision granting tax exemption to non-stock corporations, such as those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the last paragraph of said Section 30 of the 1997 Tax Code, which states that "Income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income shall be subject to tax imposed under this Code.” 2. Is the income derived by XYZ Foundation form the sale of a portion of its lot, rentals from its boarding house and the operation of its canteen and gift shop subject to tax? Explain. A: 1. The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and exclusively used for religious, charitable or social welfare purposes. It does not cover exemption from the imposition of income tax, which is within the context of Section 30 of the Tax Code. As a rule, non-stock, non-profit corporations organized for religious, charitable or social welfare purposes are exempt from income tax on their income received by them as such. However, if these religious charitable or social welfare corporations derive income from their properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income, irrespective of their disposition (Sec. 30, NIRC; CIR v. CA and YMCA, 298 SCRA 83). 2. Yes, The income derived from the sale of lot and rentals from its boarding house are considered as income from properties which are subject to tax. Likewise, the income from its activities conducted for profit, which are subject to tax. The income tax attaches irrespective of the disposition of these incomes. (Sec. 30, NIRC; CA and CIR v. YMCA, ibid.). Q: X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for religious purposes by the Church. When the Church tried to register the title of the land, the Register of Deeds refused, claiming that the capital gains tax was not paid. Is the transaction exempt from the capital gains tax? Reason. A: 1. No. Under Section 21(e) in relation to Section 49(a)(4) of the National Internal Revenue Code, the seller is the one liable for the payment of the capital gains tax from the sale of real property by an individual taxpayer. Meanwhile, the Church in this instant case is the buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts church lands, buildings and improvements, does not apply because the obligation to pay the capital gains tax herein is imposed on X, the seller, and not on the Church. Since payment of the capital gains tax is a condition precedent for the registration of the transfer certificate of title to real property, the non-payment herein by the seller is a valid reason for the Registry of Deeds to deny the transfer of title to the subject land. 2. No. The tax exemption granted to churches in the Constitution refers to property tax and not to capital gains tax which is an income tax. Besides, the capital gains tax is the liability of the seller X and not the purchaser. Q: Under Article XIV, Section 4(3) of the 1987 Philippine Constitution, all revenue s and assets of non-stock, non-profit education institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are
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income derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain. A: No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from taxation. There must be a showing that the incomes are included in the school’s annual information return and duly audited financial statements together with: 1. Certifications from depository banks as to the amount of interest income earned from passive investments not subject to the 20% final withholding tax;
2. Certification of actual, direct and exclusive utilization of said income for education purposes; 3. Board resolution on proposed project to be funded out of the money deposited in banks or placed in money market placements (Finance Department Order No. 149-95, November 24, 1995), which must be used actually, directly and exclusively for educational purposes. The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to be noted that the 1987 Philippine Constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should be actual, direct and exclusive for educational purposes. Consequently, the provisions of Section 30 of the NIRC of 1997, that a non-stock and nonprofit educational institution is exempt from taxation only “in respect to income received by them as such” could not affect the constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax Code should not make distinctions.
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CHAPTER VII: RETURN OF CAPITAL
Q: In 1990, X started constructing a commercial building with spaces for lease to the public. X required Y, a prospective lessee to sign a pre-lease agreement, which principally provided: (a) that the lessee shall extend to the lessor a non-interest bearing loan of P100,000.00 payable within twelve (12) months; and (b) that in consideration of the loan, the lessee shall be given preference in the lease and his rentals shall not be increased while the loan remains unpaid. Upon completion of the building, Y extended the loan of P100,000.00 to X and he was given a space in its ground floor. May the BIR consider the P100,000.00 as taxable income of X? Reason. A: Section 28 of the NIRC defines “gross income” as all income from whatever sources derived including but not limited to the following items: a) b) c) d) e) f) g) h) i) j) k)
Compensation for services, including fees, commissions, and similar items; Gross income derived from business; Gains derived from dealings in property; Interest; Rents; Royalties; Dividends; Annuities; Prizes and winnings; Pensions; and Partner’s distributive share of the gross income of general professional partnership.
Further, under Section 36 of Revenue Regulations No. 2, “taxable income” in a broad sense means all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of the income specifically described as gains and profits, including gains derived from the sale or other disposition of assets. Gross income, means income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by law. Applying the above provision of law to the case at bar, the amount P100,000.00, being a loan or an indebtedness, is an outlay, not a taxable income or gain. Q: Distinguish “Exclusion from Gross Income” from “Deductions From Gross Income.” Give an example of each. A: Exclusive from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; (3) it does not come within the definition of income (Sec. 61, Rev. Regs. No. 2). Deductions from gross income, on the other hand, are the amounts, which the law allows to be deducted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deduction pertain to the computation of net income.
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Exclusions are something received or earned by the taxpayer, which do not form part of gross income while deductions are something spent or paid in earning gross income. Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 13 th month pay of an employee not exceeding P30,000.00, which is an income not recognized for tax purposes. Example of a deduction is business rental. Q: Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty. Gambino, in accordance with its articles of partnership. In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim, such as purchase of law books, entertainment expenses, car insurance and car depreciation. The BIR disallowed the deductions. Was the BIR correct? A: No, the BIR is wrong in disallowing the deduction claimed by Atty. Gambino. It appears that the general professional partnership claimed itemized deductions from its gross revenues in arriving at its distributable net income. The share of a partner in the net income of the partnership must be reported by him as part of his gross income from practice of profession and he is allowed to claim further deductions which are reasonable, ordinary and necessary in the practice of profession and were not claimed by the partnership in computing its net income (Sec. 26, NIRC; Rev. Regs. No. 16-2008, February, 2010). [NOTE: The examinee may want to qualify his answer further by citing the rules on (a) purchases of law books, which can be a capital expenditure; (b) entertainment of law books, which can be a capital ceiling for sellers of services; (c) car insurance and depreciation, which are deductible only to the extent that it was used for business or practice of law]. Q: Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included he advertising expense as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? A: In 1995, respondent paid P9.4 million for advertising a product. This was disallowed by the BIR as ordinary and necessary expense and considered the same as capital expenditure, since the amount was staggering, which was incurred to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. The court held that “goodwill” generally denotes the benefit arising from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not (ordinary and necessary) business expenses but are capital expenditures (that are not deductible pursuant to the provisions of Section 36 of the Tax Code) (Commissioner v. General Foods Phils., G.R. No. 143672, April 24, 2003). Q: In December 1993, the Sangguniang Bayan authored a Christmas bonus of P3,000.00, a cash gift of P5,000.00, and transportation and representation allowance of P6,000.00 for each of the municipal employees. 1) Is the Christmas bonus subject to any tax? 2) How about the cash gift?
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3) How about the transportation and representation allowances? A: 1.The Christmas bonus given by the Sangguniang Bayan to the municipal employees is taxable as additional compensation (Sec. 21 [a], NIRC). 2. The cash gift per employee of P5,000.00 being substantial may be considered taxable also. It is n the nature of additional compensation income as it is highly doubtful if municipal governments are authorized to make gifts in substantial sums such as this. It is not furthermore gift of “small value” which employers might give to their employees on special occasions like Christmas – items which could be exempt under BIR Revenue Audit Memorandum Order No. 1-87. [NOTE: It is considered as de minimis benefits under Rev. Regs. No. 3-98, as amended; hence exempt from income tax and fringe benefits tax.] 3. The transportation and representation allowances are actually reimbursements for expenses incurred by the employee for the employer. Said allowances spent by the employee for the employer are designed to enhance the quality of the service that the employer is supposed to perform for its clientele like the people of the municipality. Q: Gold and Silver Corporation gave extra 14th month bonus to all its officials and employees in the total amount of P75 million. When it filed its corporate income tax return the following year, the corporation declared a net operating loss. When the income tax return of the corporation was reviewed by the BIR the following year, it disallowed as item of deduction the P75 million bonus the corporation gave its officials and employees on the ground of unreasonableness. The corporation claimed that the bonus is an ordinary and necessary expense that should be allowed. A: I will rule against the deductibility of the bonus. The extra bonus is both not normal to the business and unreasonable. Admittedly, there is no fixed test for determining the reasonableness of a bonus as an additional compensation. This depends upon many factors, such as the payment must be made in good faith; the character of the taxpayer’s business; the volume and amount of its net earnings; the locality; the type and extent of the services rendered; the salary policy of the corporation; the size of the particular business; the employees’ qualification and contributions to the business venture; and general economic conditions (C.M. Hoskins & Co., Inc. v. CIR, 30 SCRA 434 [1969]). Giving an extra bonus at a time that the company suffers operating loss is not a payment in good faith and is not normal to the business; hence unreasonable and not qualify as ordinary and necessary expense. Q: X just hurdled the bar examinations and immediately engaged in the practice of law. In preparing his income tax return he listed the following as deductible items: (a) fees paid to the Supreme Court to be able to take the bar examinations; (b) fees paid to a law school to enroll in its pre-bar review classes; (c) malpractice insurance; and (d) amount spent to entertain a judge who decided his first case. Which deductions are allowable? Reason. A: Section 29 of the National Internal Revenue Code on deductions, among other things, provide: “(a) Expenses
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1) Business Expenses (a) In General – All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in the pursuit of a trade, profession or business: rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade, profession or business of property to which the taxpayer has not taken nor is not taking title or in which he has no equity.” Further, Section 69 of Revenue Regulations No. 2, as amended, otherwise known as “Income Tax Regulations,” reads: “Sec. 69. Professional Expenses - A professional may claim as deductions the cost of supplies used by him or in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues not professional societies and subscriptions to professional journals; the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc. used on such offices, and me hire of office assistants. Amounts currently expended for books, furniture and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture and professional instruments and equipment of a permanent character are not allowable deductions.” From the foregoing provisions of law that ordinary and necessary expenses incurred during a taxable year pertaining directly to the practice of a profession may be allowed as deductions, it may be inferred from a keen reading of Section 69 of Revenue Regulations No. 2 that aside from personal exemptions, only direct costs or overhead expenses incurred in the actual practice of a profession may be claimed; i.e., supplies, fuel, light, electricity, salaries, etc. Applying the above considerations in the case at bar, it appears that among the expenses, the same being an ordinary and necessary expense in the pursuit of a profession as defined by Section 29 of the NIRC and further qualified by Revenue Regulations No. 2. The tuition fees for the pre-bar classes and the bar examination fees paid to the Supreme Court by X do not qualify as deductible expenses under Revenue Regulations No. 2. As for the amount spent by X to entertain the Judge who decided his first case, the same may not be claimed as an expense. A business expenses to be deductible must be sustained by adequate proof and that the same must not be against the law or public policy (Consolidated Mines v. Court of Tax Appeals and Commissioner, 58 SCRA 618). Q: X is the Advertising Manager of Mang Douglas Ham, Inc. X had dinner with Y, owner of a chain of burger restaurants, to convince the latter to carry Mang Douglas’ hamburger. After Y agreed, both X and Y went their separate ways. X celebrated by going to as single’s bar. He picked up a partner and consumed a bottle of beer. He drove home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as a result of the accident. X settled the case extra-judicially by paying the heirs of the pedestrian P50,000.00. The money, however, came from Mang Douglas Hamburger, Inc. Discuss whether the P50,000.00 can be claimed by Mang Douglas Hamburger, Inc. as an ordinary and necessary expense. A: No. As the expenditure had not been incurred in carrying on his trade or business, the
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same cannot be considered an ordinary and necessary expense for which deduction may be claimed. Such expense is a personal expense which is not deductible form the gross income pursuant to Section 36 of the 1997 Tax Code. Q: MC Garcia, a contractor who won the bid for the construction of a public highway, claims as expenses, facilitation fees which according to him are standard operating procedure in transactions with the government. Are these expenses allowable as deduction from gross income? A: No. The alleged facilitation fees which he claims as standard operating procedure in transactions with the government comes in the form of bribes or “kickback” which are not allowed as deductions from gross income (Sec. 34 [A][l][c], NIRC). Q: In order to facilitate the processing of its application for a license from a government office, Corporation A found it necessary to pay the amount of Php100,000 deductible from the gross income of Corporation A? On the other hand, is the Php100,000 taxable income of the approving official? Explain your answers. A: Since the amount of Php100,000 constitutes a bribe, it is not allowed as a deduction from gross income of Corporation “A” (Sec. 34[A][1][c], NIRC). However, to the recipient government official, the same constitutes a taxable income. All income from legal or illegal sources is taxable absent any clear provision of law exempting the same. This is the reason why gross income had been defined to include income derived from whatever source (Sec. 32[A], NIRC). Illegally acquired income constitutes realized income under the claim of right doctrine (Rutkin v. U.S., 343 U.S. 130). Q: (1993) Q: X is the proprietor of Vanguard, which is a security and detective agency. X was able to get the contract to provide the security services of a government agency calling for the deployment of 100 security guards on a 24-hour basis. The director, X gives him at the end of the month P100,000.00 per guard hired. May X deduct from his income the money he paid to the director? Reasons. A: The money to please the director is not deductible. This is a form of bribery. Deductions shall not be allowed if the expense is contrary to law, public policy or for immoral purposes (Zamora v. Commissioner, 8 SCRA 163; Roxas v. CTA and Commissioner, 23 SCRA 276). Q: Are contributions to a candidate in an election subject to donor’s tax? On the part of the contributor, is it allowable as a deduction from gross income? A: 1. No, provided the recipient candidate had complied with the requirement for filing of returns of contributions with the Commission on Elections as required under the Omnibus Election Code. 2. The contributor is not allowed to deduct the contributions because the said expenses is not directly attributable to, the development, management, operation and/or conduct of a trade, business or profession (Sec. 34[A][l][a], NIRC). Furthermore, if the candidate is an incumbent government official or employee, it may even be considered as a bribe or a kickback (Sec. 34[A][l][c], NIRC). Q: Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock of San Miguel Corporation. For failure to file a donor’s return on the donation
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within the statutory period, the taxpayer was assessed the sum of P102,000.00, as donor’s tax plus 25% surcharge or P25,500.00 and 20% interest or P20,400,00 which he paid on June 24, 1985. On April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for interest amounting to P9,500.00 and reported a taxable income of P96,000.00. On November 10, 1986, the taxpayer filed an amended income tax return for the same calendar year 1985, claiming therein an additional deduction in the amount of P20,400.00 representing interest paid on the donor’s gift tax. A claim for refund of alleged overpaid income tax for 1985 was filed with the Commissioner which was subsequently denied. Upon appeal with the Court of Tax Appeals, the Commissioner took issue with the Court of Tax Appeals’ determination that the amount paid by the taxpayer for interest on his delinquent taxes is deductible from the gross income for the same year pursuant to Section 29 (b)(1) of the National Internal Revenue Code. The Commissioner of Internal Revenue pointed out that a tax is not indebtedness. He argued that there is a fundamental distinction between a “tax” and a “debt”. According to the Commissioner, the deductibility of interest on indebtedness from a person’s income tax cannot extend to interest on taxes. What is your opinion on the argument of the Commissioner that a tax is not indebtedness so that deducibility on the interest on taxes should not be allowed? A: The Commissioner’s argument is misplaced because the interest on the donor’s tax is not one that can be considered as having been incurred in connection with the taxpayer’s trade, business or exercise of profession. Tax obligations constitute indebtedness for purposes of deduction from gross income of the amount of interest paid on indebtedness (CIR v. Palanca, 18 SCRA 496). Although interest payment for delinquent taxes is not deductible as tax, the taxpayer is not precluded from claiming said interest as deduction as such (Collector v. Magalona, L-15802, September 30, 1960). Q: Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense. 1) Interest on loans used to acquire capital equipment or machinery; 2) Depreciation of good will. A:1. This is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of a profession (Sec. 34[B][3], NIRC). 2. Depreciation for goodwill is not allowed as deduction from gross income. While intangibles may be allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration (Basilan Estates v. CIR, 21 SCRA 17). Such is not the case with goodwill. Q: A Co., a Philippine corporation, issued preferred shares of stock with the following features: 1. Non-giving;
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2. Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any period the amount is covered by earnings or projects; 3. In the event of dissolution of the issuer, holders of preferred stock shall be paid in full ratably as the assets of the issuer may permit before any distribution shall be made to common stockholders; and 4. The issuer has the option to redeem the preferred stock. A Co. declared dividends on the preferred stock and claimed the dividends as interest deductible from its gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains that the preferred shares with their features are really debt and therefore the dividends are really interest. Decide. A: The dividends are not deductible from gross income. Preferred shares shall be considered capital, regardless of the conditions under which such shares are issued and, therefore, dividends paid thereon are not considered “interest” which are allowed to be deducted from the gross income of the corporation (RMC No. 17071, July 12, 1971). Q: “A” is a travelling salesman working full time for Nu Skin Products. He received a monthly salary plus 3% commission on his sales in a Southern province where he is based. He regularly uses his own car to maximize his visits even to far-flung areas. One fine day, a group of militants seized his car. He was notified the following day by the police that the marines and the militants had a bloody encounter and his car was completely destroyed after a grenade hit it. “A” wants to file a claim for casually loss. Explain the legal basis of your tax advice. A: I would advise “A” not to file a claim for casualty loss deduction from gross income, because he derives purely compensation income, which includes the 3% commission on his sales, from his employer. An individual who receives compensation income under an employer- employee relationship is not entitle to any kind of deduction (whether itemized or the standard deduction) from gross income (Sec. 34, NIRC). Indeed, he is allowed to deduct from his gross compensation income only the personal and additional exemptions authorized in Section 35 of the Tax Code. Besides, to be deductible from gross income, casualty loss must relate to a property connected with the trade, business or profession of the taxpayer (Sec. 34[D][2], NIRC). Q: Give the requisites for deductibility of a loss. A: The requisites for deductibility of a loss are: (a) loss belongs to the taxpayer; (b) actually sustained and charged off during the taxable year; (c) evidenced by a closed and completed transaction; (d) not compensated by insurance or other forms of indemnity; (e) not claimed as a deduction for estate tax purposes in case of individuals taxpayers; and (f) if it is a casualty loss it is evidenced by a declaration of loss filed within 45 days with the BIR. Q: X is a traveling salesman in Jolo, Sulu. In the course of this travel, a band of MNLF seized his car by force and used it to kidnap a foreign missionary. The next day, X learned that the military and the MNLF band had a chance encounter. Using heavy weapons, the military fired at the MNLF band that tried to escape with the use of X’s car. All the members of the band died and X’s car was a total wreck. Can X deduct the value of his car from his income as casualty loss? Reason.
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A: Section 29(1)(c) of the National Internal Revenue Code provides that in cases of individual taxpayers, losses to be deductible must: a) Actually be sustained and charged off within the taxable year; b) Have been incurred in trade, profession or business or in any transaction entered into for profit, though not connected with trade, profession, or business; c) Be evidenced by a closed and completed transaction. Moreover, Section 1 of Revenue Regulations No. 12-77 defined “casualty loss” as a complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature. It denotes accidents, some sudden invasion by hostile agency, and excludes progressive deterioration. Based on the above-mentioned laws the circumstances of the case at bar, the value of the wrecked car is deducible as casualty loss provided the regulations governing substantiation requirements for losses are complied with. Q: Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the deduction. 1) Reserves for bad debts; 2) Worthless securities. A: 1. Reserves for bad debts are not allowed as deduction from gross income. Bad debts must be charged off during the taxable year to be allowed as deduction from gross income. The mere setting up of reserves will not give rise to any deduction (Sec. 34[E],NIRC). 2. Worthless securities, which are ordinary assets, are not allowed as deduction from gross income because the loss is not realized. However, if these worthless securities are capital assets, the owner is considered to have incurred a capital assets, the owner is considered to have incurred a capital loss as of the last day of the taxable year and, therefore, deductible to the extent of capital gains (Sec. 34[D][4], NIRC). This deduction, however, is not allowed to a bank or trust company (Sec. 34[E][2], NIRC). Q: PQR Corporation claimed as a deduction in its tax return the amount of P1,000,000.00 as bad debts. The corporation was assessed by the Commissioner of Internal Revenue for deficiency taxes on the ground that the debts cannot be considered as “worthless,” hence, they do not quality as bad debts. The company asks for your advice on “What factors will hold in determining whether or not the debts are bad debts?” Answer and explain briefly. A: In order that debts shall be considered as bad debts because they have become worthless, the taxpayer should establish that during the year for which it became evident in the exercise of sound, objective business judgment that there remained no practical, but only vaguely theoretical , prospect that the debt would ever be paid (Collector of Internal Revenue v. Goodrich International Rubber Co., 21 SCRA 1336 [1967]). “Worthless” is not determined by an inflexible formula or slide rule calculation, but upon the exercise of sound business judgment. The factors to be considered include, but are not limited to, the following: (a) the debtor has no property nor visible income; (b) the debtor has been adjudged bankrupt or insolvent; (c) collateral with small amounts of debts and further action on the accounts would entail expenses exceeding the amounts sought to be collected.
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Q: 1. What is meant by the “tax benefit rule”? 2. Give an illustration of the application of the tax benefit rule. A: 1. Tax benefit rule states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written-off and claimed as deduction from gross income. It also applies to taxes previously deducted from gross income but which were subsequently refunded or credited. The taxpayer is also required to report as taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit of the taxpayer enjoyed when such taxes were previously claimed as deduction from income. 2. X Company has a business connected receivable amounting to P100,000.00 from Y who was declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not able to pay, prompting X Company to write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for income tax purposes reducing the taxable net income of X Company to only P1,000,000.00. Three 93) years later, Y voluntarily paid his obligation previously written-off to X Company. In the year of recovery, the entire amount constitutes part of gross income of X Company because it was able to get full tax benefit three (3) years earlier. Q: 1. What is the proper allowance for depreciation of any property used in trade or business? 2. What is the annual depreciation of a depreciable fixed asset with a cost of P100,000.00 and an estimated useful life of 20 years and salvage value of P10,000.00 after its useful life? A: 1. The proper allowance of depreciation of any property used in trade or business refers to the reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) said property. The reasonable allowance shall include, but not limited to, an allowance computed under any of the following methods: (a) straight-line method; (b) declining-balance method; (c) sum-of-years-digit method; and (d)any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (Sec. 34[F], NIRC). 2. The annual depreciation of the depreciable fixed asset may be computed on the straightline method which will allow the taxpayer to deduct an annual depreciation of P4,500, arrived at by dividing the depreciable value of P100,000 by the estimated useful life (20 years). Q: The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital, on his birthday, as was his custom. He gave P1,000,000.00 to the hospital and P5,000.00 to a crippled girl whom he particularly pitied. A crippled son of X is in the hospital as one of its patients. X wants to exclude both the P100,000.00 and the P5,000.00 from his gross income. Discuss. A: Under Section 29 (h)(1) of the National Internal Revenue Code charitable contributions to be deductible must be: a. Actually paid or made to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for rehabilitation of veterans or
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to social welfare institutions no part of which inures to the benefits of any private individuals; b. Made within the taxable year; c. Not more than 6% (for individuals) or 3% (for corporations) of the taxpayer’s taxable income to be computed without including the contribution. Applying the above-provisions of law to the case at bar, it is clear therefore that only the P100,000.00 contribution of X to Filipinas Hospital for Crippled Children qualified as a deductible contribution. Section 29(h)(1) of the NIRC expressly provides that the same must be actually paid to a charitable organization to be deductible. Note that the law accorded no privilege to similar contributions extended to private individuals. Hence, the P5,000.00 contribution to the crippled girl cannot be claimed as a deduction. Q: X’s favorite charity organization is the Philippine National Red Cross (PNRC). To raise money, PNRC sponsored a concert featuring the Austria Boys Choir. X advanced P100,000.00 to the PNRC for which he was issued a promissory note. Before its maturity, X cancelled and returned the note to PNRC. An advertising man, X also undertook the promotions of the Austria Boys Choir. Part of the promotions campaign was to ask prominent personalities to publicly donate blood to the PNRC a day before the concert. X himself donated 100cc. of blood. X intends to claim as deductions the value of the note, the cash value of the promotions campaign and the cash value of the blood he donated. Give your legal advice. A: The value of the note can be claimed as deduction as charitable contribution. While the amount was originally a loan, it can be considered to have become a gift or contribution when X cancelled and returned the note to PNRC, a charitable organization. On the other, the cash value of the promotions campaign cannot be claimed as a d deduction. Advertising expenses can only be deducted from the revenues where the expense were incurred. In the case at hand, PNRC is the revenue-producing entity not X. X did not derive any revenue. Thus, the cash value of his promotions campaign cannot be claimed as deduction. Finally, the cash value of the blood donated by X cannot be claimed as deduction. Blood has no monetary value in this case as it is not disbursed in the form of expense. Q: Taxpayers, whose only income consist of salaries and wages from their employers, have long been complaining that they are not allowed to deduct any item from their gross income for purposes of computing their net taxable income. With the passage of the Comprehensive Tax Reform Act of 1997, is this complaint still valid? Explain your answer. A: No more. Gross compensation income earners are now allowed at least an item of deduction in the form of premium payments on health and / or hospitalization insurance in an amount not exceeding P2,400.00 per annum (Sec. 34[M], NIRC). This deduction is allowed if the aggregate family income do not exceed P 250,000.00 and by the spouse, in case of married individual, who claims additional personal exemption for dependents. Q: Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 2007, claiming optional standard deductions. Realizing that he has enough
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documents to substantiate his profession-connected expenses, he now plans to file an amended income tax return for 2007, in order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto to allowed to amend his return? Why or why not? A: Ernesto will not be allowed to file an amended return for 2007, not because of Section 6(A) of the 1997 Tax Code which allows the filing of amended tax return provided that no audit notice has been served upon him by the BIR in the meantime, but because of Section 34 (L) of the Tax Code, which provides that “Such election (of the itemized or standard deduction) when made in the return shall be irrevocable for the taxable year for which the return is made.” Q: Distinguish allowable deductions from personal exemptions. Give an example of an allowable deduction and another example for personal exemption. A: The distinction between allowable deductions and personal exemptions are as follows: 1. As to amount – Allowable deductions generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession while personal exemptions are arbitrary amounts allowed by law. 2. As to nature – Allowable deductions constitute business expenses while personal exemptions pertain to personal expenses. 3. As to purpose – Deductions are allowed to enable the taxpayer to recoup his cost of doing business while personal exemptions are allowed to cover personal, family and living expenses. 4. As to claimants – Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while personal exemptions can be claimed only by individual taxpayers. Q: Mar and Joy got married in 1990. A week before their marriage, Joy received, by way of donation, a condominium unit worth P750,000.00 from her parents. After marriage, some renovations were made at a cost of P150,000.00. The spouses were both employed in 1991 by the same company. On 30 December 1992, their first child was born, and a second child was born on 07 November 1993. In 1994, they sold the condominium unit and bought a new unit. Under the foregoing facts, what were the events in the life of the spouses that had income tax incidence? A: The events in the life of Spouses Mar and Joy, which have income tax incidences, are the following: a. Their marriage in 1990 qualifies them to claim personal exemption for married individuals; b. Their employment in 1991 by the same company will make them liable to the income imposed on gross compensation income; c. Birth of the first child in December 1992 would give rise to an additional exemption of P5,000.00 (now P25,000.00) for the taxable year 1992; d. Birth of their second child in November 1993 would likewise entitle them to claim additional exemption of P5,000.00 (now P25,000.00) raising their additional personal exemptions to P10,000.00 for taxable year 1993;
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e. Sale of their condominium unit in 1994 shall make the spouses liable to the 5% (now 6%) capital gains tax on the gain presumed to have been realized from the sale. Q: RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to twins. Unfortunately, however, LISA died in the course of her delivery. Due to complications, one of the twins also died on December 15, 2003. In preparing his income tax return for the year 2003, what should RAM indicate in the return as his civil status; (a) single; (b) married; (c) head of the family; (d) widower, (e) none of the above? Why Reason. A: RAM should indicate “(b) married” as his civil status in preparing his income tax return for the year 2003. The death of his wife during the year will not change his status because should the spouse die during the taxable year, the taxpayer may still claim the same exemptions (that of being married) as if the spouse died at the close of such year (Sec. 35[c], NIRC). Q: OXY is the president and chief executive officer of ADD Computers, Inc. When OXY was asked to join the government service as director of a bureau under the Department of Trade and Industry, he took a leave of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with OXY in the government, ADD proposed to obtain a policy of insurance on this life. On ethical grounds, OXY objected to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to P100,000.00. Is said premium deductible by ADD Computers? Reason. A: No. The premium is not deductible because it is not an ordinary business expense. The term “ordinary” is used in the income tax law in its common significance and it has the connotation of being normal, usual or customary (Deputy v. Du Pont, 308 US 488 [1940]). Paying premium for the insurance of a person not connected to the company is not normal, usual or customary. Another reason for its non-deductibility is the fact that it can be considered as an illegal compensation made to a government employee. This is so because if the insured, his estate or heirs were made as the beneficiary (because of the requirement of insurable interest), the payment of premium will constitute bribes which are not allowed as deduction from gross income (Sec. 34[A][1][c], NIRC). On the other hand, if the company was made the beneficiary, whether directly or indirectly, the premium is not allowed as a deduction from gross income (Sec. 36[A][4], NIRC).
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CHAPTER VIII: TAX BASES AND RATES Q: ABC, a domestic corporation, sold in 1989 two (2) condominium units of Legaspi Towers in Roxas Boulevard for P8,158,142.00. The corporation declared in its income tax return for taxable year 1989 its gains derived from the sale of two (2) condominium units as follows:
UNIT A
UNIT B
(316.5 sq.ft.)
(322 sq.ft.)
P3,933,679
P4,224,463
(a) Acquisition costs (Deed of Sale 9/9/83)
1,501,295
1,529,755
(b)Payments of Realty Tax
49,248
55,413
Total of (a)(b)
1,550,543
1,585,168
Gains
2,383,136
2,639,295
Proceeds from sale Less:
Without going into computations, answer the following question: Since ABC derived gains from the sale of the condominium units, should it pay the 5% capital gains tax, 35% corporate income tax or none of the above because the corporation is not a real estate dealer? Discuss. A: ABC Corporation must pay the 35% corporate income tax. The National Internal Revenue Code does not provide for the payment by corporations of 5% (now 6%) capital gains tax on the sale of real property, whether considered capital assets or not. Such income is included in the computation of net income (gross taxable income less deductions) and is subject to the tax rate of 35%. [NOTE: Existing law imposes the final tax of 6% on the gain presumed to have been realized on the sale of lands and/or buildings of corporations treated as capital assets. The applicable corporate income tax rate beginning January 1, 2000 under R.A. 8424 is 32% and starting November 1, 2005 under R.A. 9337 is 35%, but starting January 1, 2009, the rate is 30%].
Q: What is the “immediacy test”? Explain briefly.
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A: To determine the reasonable needs of the business in order to justify an accumulation of earnings (and not impose the 10% tax on improperly accumulated earnings of corporations), the “immediacy test” under American jurisprudence has been adopted in the Philippines. Thus, the term “reasonable needs of the business” is construed to mean the immediate needs of the business to accumulate earnings and profits (instead of declaring dividends to shareholders), including reasonably anticipated needs.
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CHAPTER IX: ORDINARY ASSETS AND CAPITAL ASSETS Q: Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned without any consideration this share to X, one of its foreign consultants, to enable him to use its facilities for the duration of his stay in the Philippines. X signed a Declaration of Trust where he acknowledged that the share is owned by Oriental, Inc. and where he promised to transfer the same to whoever will succeed him as consultant. When X’s contract with Oriental, Inc. expired, he left the Philippines and assigned for free the share to Y, his successor in office. What tax, if any, can be imposed by the BIR on the transaction? A: The BIR cannot impose any tax because there was no real transfer of the ownership of the subject Capitol Golf Club, Inc. (“Capitol”) proprietary share from X to Y. Oriental, Inc. is the true owner of the Capitol proprietary share. It remained the true owner from the time of the Capitol share’s use by X, to the transfer of the Capitol share’s use to Y. Oriental remained the legal owner thereof all throughout, while X and Y are only the beneficial owners. Q: X-land Condominium Corporation was organized by the owners of units in Xland Building Corporation in accordance with the Master Deed with Declaration of Restrictions. The X-land Building Corporation, the developer of the building, conveyed the common areas in favor of the X-land Condominium Corporation. Is the conveyance subject to tax? A: The conveyance is not subject to any tax. The same is without consideration, and not in connection with a sale made to X-land Condominium Corporation, and the purpose of the conveyance to the latter is for the management of the common areas for the common benefit of the unit owners. The same is not subject to income tax since no income was realized as a result of the conveyance, which was made pursuant to the Condominium Act (R.A. 4264), and the purpose of which was merely to vest title to the common areas in favor of the X-land Condominium Corporation. There being no monetary consideration, neither is the conveyance subject to the creditable withholding tax imposed under Resume Regulation No. 1-90, as amended. The second conveyance was actually no conveyance at all because when the units were sold to the various buyers, the common areas were already part and parcel of the sale of said units pursuant to the Condominium Act. However, the Deed of Conveyance is subject to documentary stamp tax. Q: In 1990, Mr. Naval bought a lot for P1,000,000.00 in a subdivision with the intention of building his residence on it. In 1994, he abandoned his plan to build his residence on it because the surrounding area became a depressed area and land values in the subdivision went down; instead, he sold it for P800,000.00. At the time of the sale, the zonal value was P500,000.00. Is the land a capital asset or an ordinary asset? Explain. Is there any income tax due on sale? Explain. A: (1) The land is a capital asset because it is neither for sale in the ordinary course of business nor a property used in the trade or business of the taxpayer (Se. 33, NIRC). Yes, Mr. Naval is liable to the 5 % (now 6%) capital gains tax imposed under Section 21(e) of the Tax Code based on the gross selling price of P800,000.00, which is an amount higher than the zonal value. Q: In January, 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agrees to exchange his agricultural lot in Laguna for a one-half hectare
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residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the buy and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. What is the nature of the real properties exchanged for tax purposes--capital asset or ordinary asset? Explain. Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. A: a. The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include 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 property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation, or real property used in trade or business, of a character which is subject to the allowance for depreciation, or real property used in trade or business of the taxpayer (Sec. 39[A][1], NIRC). Based on the foregoing definition, the agricultural land of Juan Gonzales is a capital asset, while the residential property of Alpha Corporation is an ordinary asset. Yes, Juan Gonzales is subject to the capital gains tax equal to 6% of the gross selling price or fair market value at the time of the exchange, whichever is higher, on the agricultural land in Laguna he exchanged to Alpha Corporation. In this case, the law presumes that Juan Gonzales makes a profit from sale or transfer of property (Sec. 24[D][1], NIRC). Yes, Alpha Corporation is liable to pay corporate income tax on the net taxable income (gross sales less cost of sales and deductions) realized by it from the sale or exchange of its Batangas property for the agricultural land in Laguna owned by Juan Gonzales. The net profit of P1 million (P10 million selling price less P9 million cost) will be added to the other ordinary incomes and from such gross income, business expenses and other allowable deductions will be deducted to arrive at net taxable income for the year to which we will apply the regular corporate income tax rate of 35%. Q:1. What is the difference between capital gains and ordinary gains? What does the term “ordinary income” include? A: 1. Capital gains are gains realized from the sale or exchange of capital assets, while ordinary gains refer to gains realized from the sale or disposition of ordinary assets. The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset. These are the gains derived from the sale or exchange of property such as 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 property held by the taxpayer primarily for sale to customers in the course of his trade or business, or property used in trade or business of a character which is subject to the allowance for depreciation, or real property used in trade or business of the taxpayer (Sec. 22[Z] in relation to Sec. 39[A][1], NIRC). Q: An individual, who owns a ten (10)-door apartment with a monthly rental of P10,000.00 each residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the capital gains tax? A: No. The seller is not liable to pay the capital gains tax because the property sold is an ordinary asset, i.e., real property used in trade or business. It is apparent that the taxpayer is engaged in the real estate business, regularly renting out the 10-door apartment. Q: A corporation, engaged in real estate development, executed deeds of sale on various subdivided lots. One buyer, after going around the subdivision, bought a
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corner lot with a good view of the surrounding terrain. He paid P1.2 million, and the title to the property was issued. A year later, the value of the lot appreciated to a market value of P1.6 million, and the buyer decided to build his house thereon. Upon inspection, however, he discovered that a huge tower antenna had been erected on the lot frontage totally blocking his view. When he complained, the realty company exchanged his lot with another corner lot with an equal area but affording a better view. Is the buyer liable for capital gains tax on the exchange of the lots? A: Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market value of the property transferred at the time of the exchange of the fair market value of the property received, whichever is higher (Sec. 21[e], NIRC). Real property transaction subject to capital gains tax are not limited to sales but also exchanges of property unless exempted by a specific provision of law. Q: A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment in 1990 for Php1 million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so the land was sold only for Php800,000 which was then the fair market value of the land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not have any actual gain on the sale. Is his contention correct? Why? A: No. The 6% capital gains tax on sale of real property held as capital asset is imposed on the income presumed to have been realized from the sale which is the fair market value or selling price thereof, whichever is higher (Sec. 24[D], NIRC). Actual gain is not required for the imposition of the tax, but it is the gain by fiction of law which is taxable Q: What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain. A: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges (Sec. 39[c], NIRC). Thus, capital losses are not deductible from ordinary gains. The rationale for this rule is that a capital asset refers to property held which is not considered as an ordinary asset. Generally, capital assets are properties of the taxpayer that are not used in his trade or business, as distinguished from ordinary assets which are used in the trade or business of the taxpayer. To allow the deduction of non-business (capital) losses from business (ordinary) income or gain could mean the reduction or even elimination of taxable income of the taxpayer through personal, non-business related expenses, resulting in substantial losses of revenue to the government.
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CHAPTER X: TAX-FREE EXCHANGES Q: HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares of A Co., a Philippine company, while the 60% is owned by P Co., a Filipino-owned Philippine corporation. HK Co. also owns 100% of the shares of B Co., an Indonesian company which has a duly licensed Philippine branch. Due to worldwide restructuring of the HK Co. group, HK Co. decided to sell all its shares in A and B Companies. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The agreement provides that the purchase price shall be subject to withholding tax. Explain your advice. A: P Co. should not subject the payments of the purchase price to withholding tax. While the seller is a non-resident foreign corporation which is not normally required to file returns in the Philippines and therefore, ordinarily all its income earned from Philippine sources is taxed via the withholding tax system, this is not the procedure availing with respect to sales of shares of stock. The capital gains tax on the sale of shares of stock of a domestic corporation is always required to be paid through capital gains tax return filed. The sale of the shares of stock of the Indonesian Corporation is not subject to income tax under our jurisdiction because the income derived therefrom is considered as a foreign-source income. Q: Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000.00 divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock, Legaspi is a stockholder of CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of P950,000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi acquired said property for only P500,000.00. 1) Is Mr. Legaspi liable for any taxable gain? 2) Is the CDI liable for any taxable gain? A: 1) The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did not increase his stockholdings in the corporation. It cannot be said that he acquired control of the corporation by virtue of the transfer of the land. His percentage of the stockholding in the capital stock of the corporation remains the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his economic gain which was realized by virtue of the exchange of the land for the liability for the subscription. CDI itself is not liable for any taxable gain since subscription payments are not considered as taxable income being merely investments in the corporation. However, a taxable incidence may occur as and when the corporation sells the parcel of land for a price over and above the value of the shares of stock or in this case over and above P950,000.00. Until such time, however, there is no realizable income on the part of the corporation. Q: 1) In a qualified tax-free exchange of property for shares under Section 34(c)(2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the corporation; and (b) the sale of the shares received by the stockholders in exchange of the assets? In a qualified merger under Section 34(c)(2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) thesale of the assets received by the surviving corporation from the absorbed corporation; and (b) the sale of the shares of stock received by the stockholders from the surviving corporation? A: 1) In a qualified tax-free exchange of property for shares of stock under Section 34(c)(2) of the Tax Code, the tax basis for computing the gain on the:
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sale of the assets received by the corporation shall be the original/historical cost (i.e., purchase price plus expenses of acquisition) of the property/assets given in exchange of the shares of stock. sale of the shares of stock received by the stockholders in exchange of the assets shall be the original/historical cost of the property given in exchange of the shares of stock. In a qualified merger under Section 34(c)(2) of the Tax Code, the tax basis for computing the capital gains on: the sale of the assets received by the surviving corporation from the absorbed corporation shall be the original/historical cost of the assets when still in the hands of the absorbed corporation. the sale of the shares of stock received by the stockholders from the surviving corporation shall be the acquisition/historical cost of assets transferred to the surviving corporation. Q: Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at P3.0 million which they held in co-ownership. In 1995, they transferred the property to a newly organized corporation as their equity which was placed at the zonal value of P6.0 million. In exchange for the property, the three brothers thus each received shares of stock of the corporation with a total par value of P2.0 million or, altogether, a total of P6.0 million. No business was done by the Corporation, and the property remained idle. In the early part of 1997, one of the brothers, who was in dire need of the funds, sold his shares to the two brothers for P2.0. Is the transaction subject to any internal revenue tax (other than the documentary stamp tax)? A: Yes. The exchange in 1995 is a tax-free exchange so that the subsequent sale of one of the brothers of his shares to the other two (2) brothers in 1997 will be subject to income tax. This is so because the tax-free exchange merely deferred the recognition of income on the exchange transaction. The gain subject to income tax in the sale is measured by the difference between the selling price of the shares transferor at the time of exchange which is the fair market value of his share in the real property at the time of inheritance (Sec. 34[b][2], NIRC). The net gain from the sale of shares of stock is subject to the schedular capital gains tax of 10% for the first P100,000.00 and 20% for the excess thereof (Sec. 21[d], NIRC). [NOTE: The current capital gains tax rates are 5% on the first P100,000.00 net capital gain and 10% on the amount over P100,000.00]. Q: Last July 12, 2000, Mr. and Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City, for ten million pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio City. What conditions must be met in order that the capital gains presumed to have been realized from such sale may not be subject to capital gains tax? A: When the real property sold or disposed by a natural person (e.g., citizen or resident alien) is a capital asset and his principal residence, the capital gains presumed to have been realized from the sale or disposition thereof shall be exempt from the 6% capital gains tax, provided that: The proceeds of sale is fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or disposition; The Commissioner is duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and The tax exemption is availed only once every 10 years. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired.
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CHAPTER XI: ACCOUNTING METHODS AND PERIODS Q: What is the "all events test"? Explain briefly. A: Accrual of income and expense is permitted when the "all events test" has been met. This test requires (1) fixing a right to the income or the liability to pay, and (2) availability of reasonably accurate determination of such income or liability. It does not, however, demand that the amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount. Q: Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS, which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return? A: Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32[B][6][f], NIRC), but not on the interest income that might accrue on the pensions deposited with PNB which are subject to final withholding tax. Consequently, since Mr. Javier's sole taxable income would have been subjected to a final withholding tax, he is not required anymore to file an income tax return (Sec. 51[A][2][c], NIRC). Q: In the year 2000, X worked part time as a waitress in a restaurant in Mega Mall for 8am to 4pm and then as a cashier in a 24-hour convenience store in her neighborhood. The total income of X for the year from the two employees does not exceed her total personal and additional exemption for the year 2000. Was she required to file an income tax return last April? Explain your answer. A: Yes. An individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return (Sec. 51[A][2][b], NIRC). Q: Robert Patterson is an American who first arrived in the Philippines in 1944 as a member of the US Armed Forces that liberated the Philippines. After the war he returned to the United States but came back to the Philippines in 1958 and stayed here up to the present. He is presently employed in the United States Naval Base, Olongapo City. For the year 1985, he earned US$10,856.00. Sometime in 1986, the District Revenue Office of the Bureau of Internal Revenue served him a notice, informing him that he did not file his income tax return for the year 1985 and directing him to file said return in 10 days. He refused to file any return claiming that he is not a resident alien and is therefore not required to file any income tax return. Is Patterson's claim correct? A: Patterson's claim is not correct. While Patterson is exempt from income tax, an exemption from income tax does not, however, necessarily mean an exemption likewise from the filing of an income tax return (Garrison v Court of Appeals, 187 SCRA 525). Q: a) How often does a domestic corporation file income tax return for income earned during a single taxable year? Explain the process. b) What is the reason for such procedure? A: a) A domestic corporation is required to file income tax returns four (4) times for income earned during a single taxable year. Quarterly returns are required to be filed for the first three quarters where the corporation shall declare its quarterly summary of gross income and deductions on a cumulative basis (Sec. 75, NIRC). Then, a final adjustment return is required to be filed covering the total taxable income for the entire year, calendar or fiscal (Sec. 76, NIRC).
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b) The reason for this procedure is to ensure the timeliness of collection tomeet the budgetary needs of the government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an installment payment scheme, rather than requiring the payment of the tax on a lump-sum basis after the end of the year.
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CHAPTER XII: WITHHOLDING TAXES Q: What is meant by income subject to "final tax"? Give at least two examples of income of resident individuals that is subject to the final tax. A: Income subject to the final tax refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, the payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due on said income. The recepient is no longer required to include the item of income subjected to "final tax" as part of his gross income in his income tax returns. Examples of income subject to final tax are divided income, interest from bank deposits, royalties, etc. Q: Is a non-resident alien who is not engaged in trade or business or in the exercise of profession in the Philippines but who derived rental income from the Philippines required to file an income tax return on April of the year following his receipt of said income? If not, why not? A: No. The income tax on all income derived from Philippine sources by a non-resident alien who is not engaged in trade or business in the Philippines is withheld by the lessee as a Final Withholding Tax (Sec. 57[A], NIRC). The government cannot require persons outside of its territorial jurisdiction to file a return; for this reason, the income tax on income derived from within must be collected through the withholding tax system and thus relieve the recipient of the income the duty to file income tax returns (Sec. 51, NIRC). Q: To start a business of his own, Mr. Mario de Guzman oped for an early retirement from a private company after ten (10) years of service. Pursuant to the company's qualified and approved private retirement plan, he was paid his retirement benefit which was subjected to the withholding tax. Is the employer correct in withholding the tax? Explain. Under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? A: (a) It depends. An employee retiring under a company's qualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee must have been in service of the same employer for at least 10 years; (2) that he is not less than 50 years of age at the time of retirement; and (3) the benefit is availed of only once. In the instant case, there is no mention whether the employee has likewise complied with requisites number (2) and (3). The conditions to be met in order that retirement benefits received by officials and employees of private firms are excluded from gross income and exempt from taxation are as follows: Under R.A. 4917 (those received under a reasonable private benefit plan): the retiring official or employee must have been in service of the same employer for at least 10 years; that he is not less than 50 years of age at the time of retirement; and that the benefit is availed of only once. Under R.A. 7641 (those received from employers without any retirement plan): Those received under existing collective bargaining agreement and other agreements are exempt; and In the absence of retirement plan or agreement providing for retirement benefits, the benfits are excluded from gross income and exempt from income tax if: (i) retiring employee must have served at least five (5) years; and (ii) that he is not less than 60 years of age but not more than 65.
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CHAPTER XIII: ESTATE TAX Q: (1) What is the principle of mobilia sequuntur personam? (2) Are donations inter vivos and donations mortis causa subject to estate taxes? A: (1) Principle of mobilia sequuntur personam refers to the principle that taxation of intangible personal property generally follows the residence or domicile of the owner thereof. Donations inter vivos are subject to donor's gift tax (Sec. 91[a], Tax Code) while donations mortis causa are subject to estate tax (Sec. 77, Tax Code). However, donations inter vivos constituted lifetime like transfers in contemplation of death or revocable transfers (Sec. 78[b] and [c], Tax Code) may be taxed for estate tax purposes, the theory being that the transferor's control thereon extends up to the time of his death. Q: John Cerna, Filipino citizen, married to Maria Cerna, died in a vehicular accident in NLEX on July 10, 2007. The spouses owned, among others a 100-hectare agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million, which was subject matter of a Joint Venture Agreement about to be implemented with Star Land Corporation (SLC), a well-known real estate development company. He bought the said real property for P2 million fifty [50] years ago. On January 5, 2208, the administrator of the estate and SLC jointly announced their big plans to start conversion and development of the agricultural lands in Sta. Rosa, Laguna into first-class residential and commercial centers. As a result, the prices of real properties in the locality have doubled. The administrator of the Estate of Jose Cernan filed the estate tax return on January 9, 2008, by including in the gross estate the real property at P2 million. After 9 months, the BIR issued deficiency estate tax assessment, by valuing the real property at P40 million. (a) Is the BIR correct in valuing the real property at P40 million? (b) If you disagree, what is the correct value to be used for estate tax purposes? A: a. No, BIR is wrong in valuing the real property at P40 million. The P40 million represents the value of the real property in 2008, after the announcement by the joint venture partners that development plans would be pursued in the area. The value of the gross estate of the decedent shall be determined by including the value at the time of death in 2007 of all property, real or personal, tangible or intangible, wherever situated (Sec. 85, NIRC). Since the fair market value of the real property at the time of death of Mr. Jose Cerna in 2007 was P20 million, this market value should be the one used for purposes of determining the gross estate. Whatever is the value of the property after his death--whether it increases or decreases-- is of no moment for estate tax purposes. Q: Ralph Donald, an American Citizen, was a top executive of a U.S. company in the Philippines until he retired in 1999. He came to like the Philippines so much that following his retirement, he decided to spend the rest of his life in the country. He applied for and was granted a permanent resident status the following year. In the spring of 2004, while vacationing in Orlando, Florida, USA, he suffered a heart attack and died. At the time of his death, he left the following properties: (a) bank deposits with Citibank Makati and Citibank Orlando, Florida; (b) a rest house in Orlando, Florida; (c) a condominium unit in Makati; (d) shares of stock in the Philippine subsidiary of the U.S. company where he worked; (e) shares of stock in San Miguel Corp. and PLDT; (f) shares of stock in Disney World in Florida; (g) U.S. treasury bonds; and (h) proceeds from a life insurance policy issued by a U.S. corporation. Which of the following assets shall be included in the taxable gross estate in the Philippines? Explain.
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A: Being a resident of the Philippines at the time of his death, the gross estate of Ralph Donald shall include all his property, real or personal, tangible or intangible, wherever situated at the time of his death (Sec. 85, NIRC). Thus, the following shall be included in his taxable gross estate in the Philippines: a. bank deposits with Citibank Makati and Citibank Orlando, Florida b. a rest house in Orlando, Florida c. a condominium unit in Makati d. shares of stock in the Philippine subsidiary of the U.S. company e. shares in San Miguel Corp. and PLDT f. shares of stock in Disney World in Florida g. U.S. treasury bonds The proceeds from a life insurance policy issued by a U.S. corporation is included as part of the gross estate of Ralph Donald, if the designation of the beneficiary is revocable or irrespective of the nature of the designation, if the designated beneficiary is either the estate of the deceased, his executor or administrator. If the designated beneficiary is other than the estate, executor or administrator and the designation is irrevocable, the proceeds shall not form part of his gross estate (Sec. 85[E], NIRC). Q: Jose Ortiz owns 100 hectares of agricultural land planted to coconut trees. He died on May 30, 1994. Prior to his death, the government, by operation of law, acquired under the Comprehensive Agrarian Reform Law all his agricultural lands except five (5) hectares. Upon the death of Ortiz, his widow asked you how she will consider the 100 hectares of agricultural land in the preparation of the estate tax return. What advice will you give her? A: The 100 hectares of land, which Jose Ortiz owned but which prior to his death on May 30, 1994 were by the government under CARP, are no longer part of his taxable gross estate, with the exception of the remaining five (5) hectares which under Section 78(a) of the Tax Code still forms part of "decedent's interest." Q: Cliff Robertson, an american citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He left 10,000 shares of Meralco, a condominium unit at the Twin Towers Building at Pasig, Metro Manila and a house and lot in Los Angeles, California. What assets shall be included in the Estate Tax Return to be filed with the BIR? A: All of Mr. Robertson's assets, consisting of 10,000 shares in the Meralco, a condominium unit in Pasig, and his house and lot in Los Angeles, California, are taxable. The properties of a resident alien decedent like Mr. Robertson are taxable wherever situated (Secs. 77, 78 and 98, NIRC). Q: Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration, a house and lot to his son. He died one year later. In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross estate for estate tax purposes. Is the BIR correct? A: No. The house and lot were not transferred in contemplation of death; therefore, these properties should not form part of the decedent's gross estate. To qualify as a transfer in contemplation of death, the transfer must be either without consideration or for insufficient consideration. Since the house and lot were sold for valuable and sufficient consideration, there is no transfer in contemplation of death for estate tax purposes (Sec. 85[B], NIRC). Q: A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter vivos gifts to his children. Ten days later, he died. In your opinion, are the inter vivos gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate? Explain your answer.
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A: Yes. When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the gifts are considered as having made in contemplation of death (Roces v. Posadas, 58 Phils. 108). Obviously, the intention of the donor in making the inter vivos gifts is to avoid the imposition of the estate tax and since the donees are likewise his forced heirs who are called upon to inherit, it will create a presumption juris tantum that said donations were made mortis causa; hence, the properties donated shall be included as part of A's estate. Q: In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000. The fair market value of the painting at the time of purchase was P1 million. yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5 million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Sandro died in 2007, and Wilma succeeded to the property. (a) Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? (b) Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to estate tax? (c) May a vanishing deduction be allowed in either or both of the estates? A: a. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated (Sec. 85, NIRC). Accordingly, the fair market value of the painting in 2001, which was owned by Xavier at the time of his death, should be included in the gross estate of Xavier and be subject to estate tax. The value of the painting in 2007, which was bequeathed by Xavier to Zandro by will in 2001 with power to appoint his wife, Wilma, as successor to the painting, should not be included in the gross estate of Zandro. Only property passing under a general power of appointment is included in the gross estate of the decedent. In this case, the painting has to be transferred by Zandro to his wife, Wilma, based on the will of his father, Xavier, and since the power of appointment granted by Xavier to Zandro is specific (i.e. only to his wife), such property should not be included in his gross estate in 2007. No, vanishing deduction is not available to both Estates of Xavier and Zandro because in the case of Xavier, he acquired the painting by purchase, and in the case of Zandro, the painting shall not be included in his gross estate; hence, there would be no double taxation of the same property, for estate tax purposes. Moreover, the two (2) deaths must occur within a period of five (5) years. In this case, the death of Zandro occurred in 2007, and more than five (5) years have, therefore, elapsed from the date of death of Xavier in 2001. Q: In June 2000, X took out a life insurance policy of his own life in the amount of P2,000,000.00. He designated his son, Z, as his beneficiary with respect to P1,000,000.00, reserving his right to substitute him for another. X died in September 2003. are the proceeds of life insurance to form part of the gross estate of X? Explain. A: Only the proceed of P1,000,000,00 given to the son, Z, shall form part of the gross estate of X. Under the Tax Code, proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the amount receivable by the beneficiary designated in the policy of insurance except when it is expressly stipulated that the designation of the beneficiary is irrevocable. As stated in the problem, only the designation of Y is irrevocable, and the decedent reserved the right to substitute Z as beneficiary for snother person. Accordingly, the proceeds received by Y shall be excluded, while the proceeds received by Z shall be included in the gross estate of X (Sec. 85[E],NIRC). Q: A died, survived by his wife and three children. The estate tax was properly paid and the estate settled and divided and distributed among the four heirs.
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Later the BIR found out that the estate failed to report the income received by the estate during administration. The BIR issued a deficiency income tax assessment plus interest, surcharges and penalties. Since the 3 children are residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR correct? A:Yes. The BIR is correct. In a case where the estate has been distributed to the heirs, the collection remedies available to the BIR in collecting tax liabilities of an estate may either (1) sue all the heirs and collect from each of them the amount of tax proportionate to the, inheritance received or (2) by virtue of the lien created under Section 219, sue only one heir and subject the property he received from the estate to the payment of the estate tax. The BIR, therefore, is correct in pursuing the second remedy although this will give rise to the right of the heir who pays to seek reimbursement from the other heirs (Collector v. Pineda, 21 SCRA 105). In no case, however, can the BIR enforce the tax liability in excess of the share of the widow in the inheritance. Q: While driving his car to Baguio City last month, Pedro Asuncion, together with his wife, Assunta, and only son, Jaime, met an accident that caused the instantaneous death of Jaime. The following day, Assunta also died in a hospital. The spouses and their son had the following assets and liabilities at the time of death: Assunta Exclusive Cash Cars
2,000,000
Conjugal
Jaime
P10,000,000
P1,200,000
500,000
Land
5,000,000
Residential house
4,000,000
Mortgage payable
2,500,000
Funeral expenses
300,000
2,000,000
a. Is the Estate of Jaime Asuncion liable to estate tax? Explain. b. Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain. A: a. The Estate of Jaime Asuncion is not liable to estate tax. At the time of death, his gross estate amounted to P1,200,000. Since his estate is entitled to standard deduction of P1 million and funeral expenses equivalent to 5% of his gross estate not exceeding P200,000, plus the fact that the first P200,000 of his net estate is exempt from estate tax, there would be no estate tax due on his net estate. No, there would be no vanishing deduction allowed to the Estate of Assunta Asuncion, since she did not inherit or receive any property from her deceased son, Jaime, that was previously subjected to estate tax or donor's tax. While her estate could be entitled to receive one-half of P1.2 million (or P600,000) cash deposit from her deceased son, this is exempt from estate tax, as explained above. To be entitled to the vanishing deduction, it is important that the property (cash of P600,000 in the instant case) must have been taxed in the estate of a prior decedent.
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Q: What is vanishing deductions in estate taxation? A: Vanishing deductions or property previously taxed in estate taxation refers to the diminishing deductibility/exemption, at the rate of 20% over a period of five (5) years until it is lost after the fifth year, of any property (situated in the Philippines) forming part of the gross estate, acquired by the decedent from a prior decedent who died within a period of five (5) years from the decedent's death. Q: Vanishing deduction is availed of by taxpayers to: a. correct his accounting records to reflect the actual deductions made; b. reduce his gross income; c. reduce his output value-added tax liability; d. reduce his gross estate. Choose the correct answer. Explain. A: I choose (d), reduce his gross estate. Vanishing deduction or property previously taxed is one of the items of deductions allowed in computing the net estate of a decedent (Sec. 86[A][2] and 86[B][2], NIRC). Q: Mr. Castro inherited from his father, who died in June 10, 1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on December 6, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment, on the ground of prescription. A. Decide Mr. Castro's protest. B. What legal requirement must Mr. Santos comply with so that he can claim his reward? Explain. A: A. The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive period for assessment 10 years from discovery of the fraud (Sec. 222, NIRC). Accordingly, the assessment was issued within the prescriptive period to make an assessment based on a fraudulent return. B. The legal requirements that must be satisfied by Mr. Santos to entitle him to reward are as follows: He should voluntarily file confidential information under oath with the Law Division of the Bureau of Internal Revenue alleging therein the specific violations constituting fraud; The information must not yet be in the possession of the Bureau of Internal Revenue, or refer to a case already pending or previously investigated by the Bureau of internal Revenue; Mr. Santos should not be a government employee or a relative of a government employee within the sixth degree of consanguinity; and The information must result to collections of revenues and/or fines and penalties (Sec. 282, NIRC). Q: a) Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15, 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in san Miguel Corporation; cash in bank; and personal belongings. The decedent is
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heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid? A: a) The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated to the extent of the interest therein of the decedent at the time of his death (Sec. 85[A], NIRC). These properties shall have a situs of taxation in the Philippines; hence, subject to Philippine estate taxes. On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate, provided that with respect to intangible personal property, we apply the rule of reciprocity. The gross estate shall be determined by including the value at the time of his death all of the properties mentioned, to the extent of interest he had at the time of his death because he is a Filipino citizen (Sec. 85[A], NIRC). With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or administrator, under policies taken out by decedent upon his own life, irrespective of whether or not the insured retained the power of revocation or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable (Sec. 85[E], NIRC). The deductions that may be claimed by the estate are: The actual funeral expenses or in an amount of equal to five percent (5%) of the gross estate, whichever is lower , but in no case to exceed two hundred thousand pesos (P200,000.00) (Sec. 86[A][1][a],NIRC); The judicial expenses in the testate or intestate proceedings (Sec. 86[A][1], NIRC); The value of the decedent's family home located in Valle Verde, Pasig City in an amount not exceeding one million pesos (P1,000,000.00) and upon presentation of a certification of the barangay captain of the locality that the same has been the decedent's family home (Sec. 86[A][4], NIRC); The standard deduction of P1,000,000.00 (Sec. 86[A][5], NIRC); Medical expenses incurred within one year from death in an amount not exceeding P500,000.00 (Sec. 86[A][6], NIRC). The estate tax return shall be filed within six (6) months from the decedent's death (Sec. 90[B], NIRC), provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return (Sec. 90[C], NIRC). Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the City in which the decedent, Mr. de la Cruz, was domiciled at the time of his death (Sec. 90[D], NIRC).
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CHAPTER XIV: DONOR’S TAX Q: Celia donated P110,000 to her friend Victoria, who was getting married. Celia gave no other gift during the calendar year. What is the donor's tax implication on Celia's donation? A: Celia shall pay a 30% donor's tax on the P100,000 cash donation, since Victoria, the donee, is a stranger to her. A "stranger" is a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or a relative by consanguinity in the collateral line within the fourth civil degree of relationship (Sec. 99[B], NIRC). Celia is not entitled to deduct the amount of P10,000 as dowry or gift on account of marriage because that privilege is given only to parents of the donee who is getting married (Sec. 101[A], NIRC). Q: X, a multinational corporation doing business in the Philippines, donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines. What is the tax liability, if any, of X corporation? Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation, what are the tax implications? Explain. A: (1) Foreign corporations effecting a donation are subject to donor’s tax only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of resident employees is not subject to donor’s tax (BIR Ruling No. 018-87, January 26, 1987). However, if 85% of the business of the foreign corporation is located in the Philippines or the shares donated have acquired business situs in the Philippines, the donation may be taxed in the Philippines subject to the rule of reciprocity. If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall constitute taxable compensation income to the recipient because it is a compensation for services rendered an employer-employee relationship; hence, subject to income tax. The par value or stated value of the shares issues also constitutes deductible expense to the corporation, provided it is subjected to withholding tax on wages. Q: Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario sends a gift check of $20,000.00 to his future Filipino daughter-in-law who is to be married to his only son in the Philippines. Is the donation by Mr. Morgan subject to tax? Explain. What is the tax consequence, if any, to the donee (Filipino daughter-in-law of Mr. Morgan)? Can you name one kind of gift that is exempt from donor’s tax which is extendible to both residents and non-residents or non-citizens of the Philippines? Include qualifications, if any. A: 1) Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first P10,000.00 of the value thereof, such gift should have been given to a legitimate, recognized natural or adopted child of the donor. The gift, with respect to the donee, is excluded from the gross income and is exempt from income taxation. There is no donee’s gift tax. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government, are exempt from gift tax with respect to both residents and non-residents. Q: In the settlement of the estate of Mr. Barbera who died Intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their
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children. The BIR determined that there was a taxable gift and thus assessed Mrs. Barbera as a dono. Was the BIR correct? A: The BIR is correct that there was a taxable gift but only insofar as the renunciation of the share of the wife in the conjugal property is concerned. This is a transfer of property without consideration, which takes effect during the lifetime of the transfer/wife, and it thus qualifies as a taxable gift (Rev. Regs. No. 2-2003). Q: Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to them. At the time of the donation, the real property has a fair market value of P2 million. Are Mario and Maria subject to income tax for the value of the real property donated to them? Explain. Are Jose and Clara subject to donor’s tax? If so, how much is the taxable gift of each spouse and what rate shall be applied to the gift? Explain. A: a) Mario and Maria, donees, are exempt from income tax on the value of the real property received by them through donation of their parents. The value of the property acquired by gift, bequest, devise, or descent, shall not be included in the gross income of the donees. However, income from such property shall be included in their gross incomes during the year (Sec. 23[B][3], NIRC). Spouses Jose and Clara are subject to donor’s tax on the fair market value (P2 million) of real property donated to their son, Mario, and on the donation made to Mario’s wife, Maria. There are four (4) taxable donations of P500,000 made by the spouses. Donor Jose made P500,000 donation to his son, Mario, and another donation of P500,000 to his daughter-inlaw, Maria. Donor Clara also made P500,000 donation to her son, Mario, and another donation of P500,000 to her daughter-in-law, Maria. Since the donations to their son, Mario, were made by the Spouses Jose and Clara on account of his marriage, Jose and Clara can each deduct P10,000 from his or her gross gift. Their net gifts of P490,000 (P500,000 less P10,000) will be subject to the graduated donor’s tax rates ranging from 2% to 15% (Sec. 99[A], NIRC). With respect to their donations to their daughter-in-law, Maria, their gross gifts of P500,000 shall be subject to the 30% donor’s tax rate, considering that the donee is a stranger in relation to the donors. A “stranger” is a person who is not a: (i) brother, sister (whether by whole or half-blood), spouse, ancestor and lineal ascendant; or (ii) relative by consanguinity to the collateral line within the fourth degree of relationship (Sec. 99[B], NIRC). Q: Ace Tobacco Corporation bought a parcel of land situated at Pateros and donated it to the Municipal Government of Pateros for the sole purpose of devoting the said land as a relocation site for the less fortunate constituents of aid municipality. In accordance therewith, the Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of Award giving to them the respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998, the said municipal government ordained that the lots awarded to the awardees be finally transferred and donated to them. Determine the tax consequence of the foregoing dispositions with respect to Ace Tobacco Corporation, the Municipal Government of Pateros, and the occupants/beneficiaries. A: The donation by Ace Tobacco Corporation is exempt from the donor’s tax because it qualifies as a gift to or for the use of any political subdivision of the National Government (Sec. 101[2], NIRC). The conveyance is likewise exempt from documentary stamp tax because it is a transfer without consideration. Since the donation is to be used as a relocation site for the less fortunate constituents of the municipality, it may be considered as an undertaking for human settlements; hence, the value of the land may be deductible in
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full from the gross income of Ace Tobacco Corporation if it is in accordance with National Priority Plan determined by the National Economic Development Authority (Sec. 34[H][2][a], NIRC). If the utilization is not in accordance with a National Priority Plan determined by the National Economic Development Authority, then Ace Tobacco Corporation may deduct the value of the land donated only to the extent of five percent (5%) of its taxable income derived from trade or business as computed without the benefit of the donation (Sec. 34[H][2][a] in relation to Sec.34[H][1], NIRC). The Municipality of Pateros is not subject to any donor’s tax on the value of land it subsequently donated, it being exempt from taxes as a political subdivision of the National Government. The occupants/beneficiaries are subject to real property taxes because they now own the land. Q: A, an individual, sold to B, his brother-in-law, his lot with a market value of P1,000,000.00 for P600,000.00. A’s cost in the lot is P100,000.00. b is financially capable of buying the lot. A also owns X Co., which has a fast growing business. A sold some of shares of stock in X Co. to his key executives in X Co. These executives are not related to A. The selling price is P3,000,000.00 which is the book value of the shares sold but with a market value of P5,000,000.00. A’s cost in the shares sold is P1,000,000.00. The purpose of A in selling the shares is to enable his key executives to acquire proprietary interest in the business and have a personal stake in the business. Explain if the above transactions are subject to donor’s tax. A: The first transaction where a lot was sold by A to his brother-in-law for a price below its fair market value will not be subject to donor’s tax if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration which gives rise to a deemed gift, does not apply to a sale of property subject to capital gains tax (Sec. 100, NIRC). However, if the lot sold is an ordinary asset, the excess of the fair market value over the consideration received shall be considered as a gift subject to the donor’s tax. The sale of shares of stock below the fair market value thereof is subject to the donor’s tax pursuant to the provisions of Section 100 of the Tax Code. The excess of the fair market value over the selling price is a deemed gift. Q: Levox corporation wanted to donate P5 million as prize money for the world professional billiard championship to be held in the Philippines. Since the Billiard Sports Federation of the Philippines does not recognize the event, it was held under the auspices of the International Professional Billiards Association, Inc. Is Levox subject to donor’s tax on its donation? A: Yes, since the national sports association for billiards does not sanction the event, and the donation is not included among the exempt donations under the law. Q: On December 6, 2001, LVN Corporation donated a piece of vacant lot situated in Mandaluyong City to an accredited and duly registered non-stock, non-profit educational institution to be used by the latter in building a sports complex for students. May the donor claim in full as deduction from its gross income for the taxable year in 2001 the amount of the donated lot equivalent to its fair market value/zonal value at the time of the donation? Explain your answer. In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s gift tax, what conditions must be met by the donee? A: a. No. Donations and/or contributions made to qualified donee institutions consisting of property other than money shall be based on the acquisition cost of the property. The donor
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is not entitled to claim as full deduction the fair market value/zonal value of the lot donated (Sec.34[H], NIRC). In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s gift tax, it is required that not more than 30% of the said gifts shall be used by the donee-institution for administration purposes (Sec. 101[A][3], NIRC). Q: In 1991, imeda gave her parents a Christmas gift of P100,000.00 and a donation of P80,000.00 to her parish church. She also donated a parcel of land for the construction of a building to the PUP Alumni Association, a non-stock, nonprofit organization. Portions of the building shall be leased to generate income for the association. (1) Is the Christmas gift of P100,000.00 to Imelda’s parents subject to tax? (2) How about the donation to the parish church? (3) How about the donation to the PUP Alumni Association? A: (1) The Christmas gift of P100,000.00 (now P200,000.00) given by Imelda to her parents is taxable up to P50,000.00 (now P100,000.00) because under the law (Sec. 92[a] now Sec. 99[A], NIRC), net gifts not exceeding P50,000 are exempt. The donation of P80,000.00 to the parish church even assuming that it is exclusively for religious purposes is not tax-exempt because the exemption granted under Article VI, Section 28(3) of the Constitution applies only to real estate taxes (Lladoc v. Commissioner, 14 SCRA 292). The donation to the PUP Alumni Association does not also qualify for exemption both under the Constitution and the afore-cited law because it is not an educational or research organization, corporation, institution, foundation or trust. Q: Are contributions to a candidate in an election subject to donor’s ta? On the part of the contributor, is it allowable as a deduction from gross income? A: No, provided the recipient candidate had complied with the requirement for filing of returns of contributions with the Commission on Elections as required under the Omnibus Election Code. The contributor is not allowed to deduct the contributions because the said expense is not directly attributable to, the development, management, operation and/or conduct of a trade, business or profession (Sec. 3[A][1][a], NIRC). Furthermore, if the candidate is an incumbent government official or employee, it may even be considered as bribe or a kickback (Sec. 34[A][1][c], NIRC). Q: Miguel, a citizen and resident of Mexico, donated US$1,000 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property. (a) Is Miguel entitled to claim a dowry exclusion? Why or why not? (b) Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor’s tax? Why or why not? A: a. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural or adopted children to the extent of the first Ten thousand pesos (P10,000) is exempt from donor’s tax (Sec. 101[A], NIRC). To be entitled to the dowry exemption under the donor’s tax law, the donor must be a resident of the Philippines. SInce Miguel is a non-resident alien, he does not qualify to claim such exemption. Miguel is not entitled to the rule of reciprocity in order to be exempt from the Philippine donor’s tax. In the first place, the donation by Miguel, a non-resident Mexican citizen, of the shares of stock of Barack Motors Corporation, a Mexican company, which has not acquired business situs in the Philippines, to his son, Miguelito, is exempt from donor’s tax
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under Section 104 of the 1997 TAx Code, which provides that “...where the donor was a non-resident alien at the time of his donation, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his ‘gross gift.’” In other words, there is nothing to be subject to donor’s tax, and there is no reciprocity rule necessary to claim exemption. Q: Kenneth Yusoph owns a commercial lot which he bought many years ago for P1 million. It is now worth P20 million although the zonal value is only P15 million. He donates one-half pro indiviso interest in the land to his son Dino on 31 December 1994, and the other one-half pro indiviso interest to the same son on 2 January 1995. How much is the value of the gifts in 1994 and 1995 for purposes of computing the gift tax? Explain. The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He says that since there were only two (2) days separating the two (2) donations they should be treated as one, having been made within one year. Is he correct? Explain. Dino subsequently sold the land to a buyer for P20 million. How much did Dino gain on the sale? Explain. Suppose, instead of receiving the lot by way of donation, Dino received it by inheritance. What would be his gain on the sale of the lot for P20 million? Explain. A: (1) The value of the gifts for purposes of computing the gift tax shall be P7.5 million in 1994 and P7.5 million in 1995. In valuing a real property for gift tax purposes the property should be appraised at the higher of two values as of the time of donation which are (a) the fair market value as determined by the Commissioner (which is the zonal value fixed pursuant to Sec.16[e] of the Tax Code), or (b) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. The fact that the property is worth P20 million as of the time of donation is immaterial, unless it can be shown that this value is one of the two values mentioned as provided under Section 81 of the Tax Code. The Revenue District Officer is not correct because the computation of the gift tax is cumulative but only insofar as gifts made within the same calendar year. Therefore, there is no legal justification for treating two (2) gifts effected in two (2) separate calendar years as one gift. Dino gained an income of P19 million from the sale. Dino acquires a carry-over basis which is the basis of the property in the hands of the donor or P1 million. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain (Sec. 34[a], NIRC). Since the property was acquired by gift, the basis for determining gain shall be the same as if it would be in the hands of the donor or the last preceding owner by whom the property was not acquired by gift. Hence, the gain is computed by deducting the basis of P1 million from the amount realized which is P20 million. If the commercial lot was received by inheritance the gain from the sale for P20 million is P5 million because the basis is the fair market value as of the date of acquisition. The steppedup basis of P1.5 million which is the value for estate tax purposes is the basis for determining the gain (Sec. 34[b][2], NIRC). Q: Your bachelor client, a Filipino residing in Quezon City, wants give his sister a gift of P200,000. He seeks your advice, for purposes of reducing if not eliminating the donor’s tax on the gift, on whether it is better for him to give all of the P200,000 on Christmas 2001 or to give P100,000 on Christmas 2001 and the other P100,000 on January 1, 2002. Please explain your advice. A: I would advice him to split the donation. Giving the P200,000 as a one-time donation would mean that it will be subject to a higher tax bracket under the graduated tax
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structure, thereby necessitating the payment of donor’s tax. On the other hand, splitting the donation into two equal amounts of P100,000 given on two (2) different years will totally relieve the donor from the donor’s tax because the first P100,000 donation in the graduated brackets is exempt (Sec. 99, NIRC). While the donor’s tax is computed on the cumulative donations, the aggregation of all donations made by a donor is allowed only over one calendar year. Q: a) When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, who is a stranger? What conditions must concur in order that all grants, donations and contributions to non-stock, non-profit private educational institutions may be exempt from the donor’s tax under Section 101(a) of the Tax Code? A: a) A “stranger” is a person who is not a: Brother or sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or Relative by consanguinity in the collateral line within the fourth degree of relationship (Sec. 98[B], NIRC) The following are the conditions: Not more than 30% of said gifts shall be used by such donee for administration purposes; The educational institution is incorporated as a non-stock, non-profit, paying no dividends, governed by trustees who receive no compensation, and devoting all its income. whether students’ fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation (Sec. 101[A][3], NIRC).
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CHAPTER XV: INTRODUCTION TO VAT Q: Characteristics of Value Added Tax A: 1. It is a tax on the value added by the taxpayer. It is collected through the “tax credit method” or “invoice method.” It is a transparent form of sales tax. It is a broad-based tax on consumption of goods, properties or services in the Philippines as it applies to all stages of manufacture, production, and distribution of goods and services. It is an indirect tax. The Philippines adopted the “separate indication of tax method.” There is no cascading in the value added tax system.
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CHAPTER XVI: PERSONS LIABLE TO TAX Q: Greenhills Condominium Corporation is an existing non-stock, non-profit association of unit owners in Greenhills Tower, San juan City since 2001. To be able to reduce the association dues being collected from the unit owners, the Board of directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF Savings Bank for P120,000 a month starting January, 2007. Is the non-stock, non-profit association liable to value added tax in 2007? If your answer is in the negative, is it liable to another kind of business tax? Will the association be liable to value added tax in 2008, if it increases the rental to P150,000 a month beginning January, 2008? Explain. A: a. No, Greenhills Condominium Corporation will not be subject to value added tax, since its gross rental income for the year 2007 will be P1,440,000 (P120,000 times 12). The sale or lease of goods or properties or the performance of properties other than the transactions mentioned in the preceding paragraphs, where the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000), shall be exempt from value added tax (Sec. 109[V], NIRC). However, it would be subject to the 3% percentage tax on its gross rental income under Section 116 of the Tax Code. Yes. If Greenhills Condominium Corporation increases the monthly rental income to P150,000, it will be subject to the 12% value added tax beginning November 1, 2008, unless it registers as a VAT person effective January 1, 2008. The reason for this is that the gross annual rental income of the association for 2008 would be P1,800,00 (P150,000 times 12) (Sec. 109[V], NIRC). Moreover, the association will be deemed to be engaged in the leasing, despite its being a non-stock, non-profit organization. The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person, regardless of whether or not the person engaged therein is a non-stock,non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity (Sec. 105, NIRC). Q: Newtex International (Phils.), Inc. is an American firm duly authorized to engage in business in the Philippines as a branch office. In its activity as a buying agent for foreign buyers of shirts and dresses abroad and performing liaison work between its home office and the Filipino garment manufacturers and exporters, Newtex does not generate any income. To finance its office its office expenses here, its head office abroad regularly remits to it the needed amount. To see its operation and manage its office here, which had been in operation for two years, the head office assigned three foreign personnel. Is Newtex subject to VAT? A: Newtex is not subject to VAT. The VAT is imposed on sellers and not on buyers. The branch office did not derive any income or compensation so as to possibly permit the imposition of a value added tax on compensation for services rendered. In addition, since the transactions are direct export sales, the VAT does not apply. Export sales are among those that are either zero-rated or exempt from value added tax (Secs. 99-100,NIRC
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CHAPTER XVII: OUTPUT TAX ON SALE OF GOODS OR PROPERTIES AND SERVICES Q: Deemed sale A: The following transactions are considered as deemed sales: Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; Distribution or transfer to shareholders or investors as share in the profits of the VATregistered persons or to creditors in payment of debt; Consignment of goods, if actual sale is not made within sixty days following the date such goods were consigned; and Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. Q: An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you, which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal use under the ADB Charter, which is recognized by the tax authorities. If you decide to purchase the car, is the sale subject to tax? Explain. A: Yes. The sale is subject to tax. Section 107(B) of the Tax Code provides that “[I]n the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax, where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees, or recipients shall be considered the importer thereof, who shall be liable for any internal revenue tax on such importation.” Q:State whether the following transactions are (a) VAT exempt; (b) subject to VAT at 10% (now 12%); or (c) subject to VAT at 0%: Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece Martirez; Services rendered by Jake’s Construction Company, a contractor to the World Health Organization in the renovation of its offices in Manila; Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers; Sale of RTW by Cely’s Boutique, a Filipino dress designer, in her dress shop and other outlets; Fees for lodging paid by students to Bahay-Bahayan dormitory (monthly fee P1,500). A: 1. VAT exempt. Sale of agricultural products such as fresh vegetables in their original state, of a kind generally used as, or producing foods for human consumption, is exempt from VAT (Sec. 109[c], NIRC). VAT at 10%. Since Jake’s Construction Company has rendered services to the World Health Organization, which is an entity exempted from taxation under international agreements to which the Philippines is a signatory, the supply of services is subject to zero percent (0%) rate (Sec. 108[B][3], NIRC). VAT at 10%. Tractors and other agricultural implements fall under the definition of goods which include all tangible objects which are capable of pecuniary estimation (Sec. 106[A][1], NIRC), the sales of which are subject to VAT at 10%. This is subject to VAT at 10%. This transaction also falls under the definition of goods, the sales of which are subject to VAT at 10%. VAT exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding P8,000 (now P10,000), which is exempt from VAT, regardless of the amount of aggregate rentals received by the lessor during the year (Sec. 109[x], NIRC). The term “unit” shall mean per person in the case of dormitories, boarding houses, and bed spaces (Sec. 4.103-1, Rev. Regs. No. 7-95).
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Q: Your client, United Market Cooperative, is requesting the Commissioner of Internal Revenue to exempt it from the payment of VAT on its purchases of prime commodities from food suppliers/manufacturers on the ground that it is exempt from all taxes, including VAT, under R.A. No. 6938, the Cooperative Code of the Philippines. Do you think our client can obtain the necessary exemption from the BIR? If your answer is in the affirmative, explain the basis for the grant. If your answer is in the negative, state the basis for the rejection of the request. A: 1. An exemption is not necessary. The value added tax is not imposed on the purchaser but on the seller, except in importation of goods. No. The exemption to which the taxpayers are entitled to refers to those that are levied on the exempt taxpayer or directly imposed on the exempted goods. The value added tax is imposed on the sellers of goods and services, not on the purchasers. Q:Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being gold to the Bangko Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral are considered export sales subject to zerorated VAT. Is Royal Mining’s claim meritorious? Explain. A:No, Royal Mining’s claim is not meritorious because it is the sale of gold (and not silver) to the BSP that is considered as export sale subject to zero-rated VAT. Q:Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000 to P10,000. His gross rental income for one year is P1,650,000. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? A:Since the rental income per unit per month of his apartment units (which ranges from P8,000 to P10,000) does not exceed the threshold provided for in the VAT law in the amount of P10,000, his rental income is exempt from VAT under Section 109(Q) of the 1997 Tax Code. In view, thereof, it does not matter whether or not he has exceeded the general threshold for the preceding twelve months of P1,500,00 prescribed in Section 109(V) of the Tax Code. Thus, my advice is for him not to register as a VAT person. He will be exempt from VAT under Section 109(Q) and for the 3% percentage tax under Section 116 of the Tax Code. Q:Mr. Abraham Eugenio, a pawnshop operator, after having been requested by the Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO. If you were the judge, will you dismiss the case? A:Yes. An RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions of the Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the Commissioner is lodged with the CTA and not with the RTC. A ruling falls within the purview of “other matters arising under the Tax Code,” appealable only to the CTA (CIR v. Leal, 392 SCRA 9 [2002]). Q: In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede;s 2009 return was fraudulent. Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable year. Decide.
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A: The contention of Mr. Abcede is not tenable. While the general rule is to the effect that for income tax purposes, a taxpayer must be subject to examination and inspection by the internal revenue officers only once in a taxable year, this will not apply if there is a fraud, irregularity, or mistakes as determined by the Commissioner. In the instant case, what triggered the second examination is the findings by the BIR that Mr. Abcede’s 2009 return was fraudulent. Accordingly, Mr. Abcede the examination is legally justified. (Sec. 235, NIRC) Q: “A” Co., a Philippine corporation, is a big manufacturer of consumer good and has several suppliers of raw materials. The BIR suspects that some of the suppliers are not properly reporting their income on the sales to “A” Co. The CIR therefore: (a) Issued an access letter to “A” Co. to furnish the BIR information on sales and payment to its suppliers. (b) Issued an access letter to a bank (“X” Bank) to furnish the BIR on deposits of some suppliers of “A” Co. on the alleged ground that the suppliers are committing tax evasion. “A” Co., “X” Bank and the suppliers have not been issued by the BIR letter of authority to examine. “A” Co. and “X” Bank believe that the BIR is on a “fishing expedition” and come to you for counsel. What is your advice? A: I will advice “A” Co. and “X” Bank that the BIR is justified only in getting information from the former but not from the latter. The BIR is authorized to obtain information from the other persons than those whose internal revenue tax liability is subject to audit or investigation. However, this power shall not be constructed as granting the Commissioner the authority to inquire into bank deposits (Sec. 5, NIRC) Q: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so does this power of the Commissioner conflict with R.A. 1405, Secrecy of Bank Deposits Law? A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposit of: (1) A decedent to determine his gross estate. (2) Any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to pay his tax liability (Sec. 6[F], NIRC). The limited power of the Commissioner does not conflict with R.A. No. 1405 because of the provisions of the Tax Code granting this power is an exception to Secrecy of Bank Deposits Law as embodied in a later legislation. Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writings his privilege under R.A. 1405, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. Q:X dies in year 2000 leaving a bank deposit of P 2,000,000.00 under joint account with his associates in a law firm. Learning of X’s death from the newspapers, the Commissioner wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain. A: No. The commissioner has the authority to inquire into bank deposit accounts of a decedent to determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question may not refuse to disclose the amount of deposits on the ground of secretary of bank deposits (Sec. 6 [F], NRC). The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law mandates that if a bank has knowledge of the death of a person, who maintained a bank deposit account alone or jointly with another, it shall not allow any
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withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon have been paid (Sec. 97, NIRC0. Hence, to be able to gibe the required certification, the inclusion of the deposit is imperative. Q: A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer? A: No, as this would be violative of R.A. 1405, the Bank Deposits Secrecy Law. The Commissioner or his duty authorized representative may be allowed to inquire or look into the bank deposits of a taxpayer in the following cases: For the purpose of determining the gross estate of a decedent; Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability (Sec. 6[F], NIRC); Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to inquire into the bank deposits.
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CHAPTER XX: RATES OF VAT
Q:Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being gold to the Bangko Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral are considered export sales subject to zerorated VAT. Is Royal Mining’s claim meritorious? Explain. A:No, Royal Mining’s claim is not meritorious because it is the sale of gold (and not silver) to the BSP that is considered as export sale subject to zero-rated VAT.
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CHAPTER XXI: EXEMPT TRANSACTIONS Q:Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000 to P10,000. His gross rental income for one year is P1,650,000. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? A:Since the rental income per unit per month of his apartment units (which ranges from P8,000 to P10,000) does not exceed the threshold provided for in the VAT law in the amount of P10,000, his rental income is exempt from VAT under Section 109(Q) of the 1997 Tax Code. In view, thereof, it does not matter whether or not he has exceeded the general threshold for the preceding twelve months of P1,500,00 prescribed in Section 109(V) of the Tax Code. Thus, my advice is for him not to register as a VAT person. He will be exempt from VAT under Section 109(Q) and for the 3% percentage tax under Section 116 of the Tax Code. Q:Mr. Abraham Eugenio, a pawnshop operator, after having been requested by the Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO. If you were the judge, will you dismiss the case? A:Yes. An RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions of the Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the Commissioner is lodged with the CTA and not with the RTC. A ruling falls within the purview of “other matters arising under the Tax Code,” appealable only to the CTA (CIR v. Leal, 392 SCRA 9 [2002]).
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CHAPTER XXIV: INTRODUCTION – TAX REMEDIES Q: In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede;s 2009 return was fraudulent. Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable year. Decide. A: The contention of Mr. Abcede is not tenable. While the general rule is to the effect that for income tax purposes, a taxpayer must be subject to examination and inspection by the internal revenue officers only once in a taxable year, this will not apply if there is a fraud, irregularity, or mistakes as determined by the Commissioner. In the instant case, what triggered the second examination is the findings by the BIR that Mr. Abcede’s 2009 return was fraudulent. Accordingly, Mr. Abcede the examination is legally justified. (Sec. 235, NIRC) Q: “A” Co., a Philippine corporation, is a big manufacturer of consumer good and has several suppliers of raw materials. The BIR suspects that some of the suppliers are not properly reporting their income on the sales to “A” Co. The CIR therefore: (a) Issued an access letter to “A” Co. to furnish the BIR information on sales and payment to its suppliers. (b) Issued an access letter to a bank (“X” Bank) to furnish the BIR on deposits of some suppliers of “A” Co. on the alleged ground that the suppliers are committing tax evasion. “A” Co., “X” Bank and the suppliers have not been issued by the BIR letter of authority to examine. “A” Co. and “X” Bank believe that the BIR is on a “fishing expedition” and come to you for counsel. What is your advice? A: I will advice “A” Co. and “X” Bank that the BIR is justified only in getting information from the former but not from the latter. The BIR is authorized to obtain information from the other persons than those whose internal revenue tax liability is subject to audit or investigation. However, this power shall not be constructed as granting the Commissioner the authority to inquire into bank deposits (Sec. 5, NIRC) Q: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so does this power of the Commissioner conflict with R.A. 1405, Secrecy of Bank Deposits Law? A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposit of: (1) A decedent to determine his gross estate. (2) Any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to pay his tax liability (Sec. 6[F], NIRC). The limited power of the Commissioner does not conflict with R.A. No. 1405 because of the provisions of the Tax Code granting this power is an exception to Secrecy of Bank Deposits Law as embodied in a later legislation. Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in
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writings his privilege under R.A. 1405, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. Q:X dies in year 2000 leaving a bank deposit of P 2,000,000.00 under joint account with his associates in a law firm. Learning of X’s death from the newspapers, the Commissioner wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain. A:No. The commissioner has the authority to inquire into bank deposit accounts of a decedent to determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question may not refuse to disclose the amount of deposits on the ground of secretary of bank deposits (Sec. 6 [F], NRC). The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law mandates that if a bank has knowledge of the death of a person, who maintained a bank deposit account alone or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon have been paid (Sec. 97, NIRC0. Hence, to be able to gibe the required certification, the inclusion of the deposit is imperative.
Q:A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud.
May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer? A:No, as this would be violative of R.A. 1405, the Bank Deposits Secrecy Law.
The Commissioner or his duty authorized representative may be allowed to inquire or look into the bank deposits of a taxpayer in the following cases: a) For the purpose of determining the gross estate of a decedent; b) Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability (Sec. 6[F], NIRC); c) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to inquire into the bank deposits.
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CHAPTER XXV: ADMINISTRATIVE REMEDIES OF GOVERNMENT Q: For failure of Oceanic Company, Inc.(OCEANIC) to pay deficiency taxes of Php20 Million, the Commissioner of Internal Revenue issued warrants of distraint on OCEANIC's personal properties and levy on its real properties. Meanwhile, the Department of Labor through the Labor Arbiter rendered a decision ordering OCEANIC to pay unpaid wages and other benefits to its employees. Four barges belonging to OCEANIC were levied upon by the sheriff and later sold at public auction. The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and enjoin the sheriff from disposing the proceeds thereof. The employees of OCEANIC opposed the motion contending that Article 110 of the Labor Code gives first preference to claims for unpaid wages. Resolve the motion. Explain. A: The motion filed by the Commissioner should be granted because the claim of the government for unpaid taxes is generally preferred over the claims of laborers for unpaid wages. The provision of Article 110 of the Labor Code, which gives laborers' claims for preference, applies only in case of bankruptcy or liquidation of the employer's business. In the instant case, OCEANIC is not under bankruptcy or liquidation at the time the warrants of distraint and levy were issued; hence, the lien of the employees is unwarranted (CIR v.NLRC,G.R. No.74965,November 9,1994). Q: Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and sale of real properties of the decedent without first securing the authority of the court sitting in probate court over the supposed will of the decedent? A: Yes. The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon and sale of real properties of a decedent, without the cognition and authority of the court sitting in probate over the supposed will of the deceased, because the collection of estate tax is executive in character. As such, the estate tax is exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government (Marcos II v.CA and CIR,273 SCRA 47). Q: Is the BIR authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the pendency of his protest against the assessment with the BIR or appeal with the Court of Tax Appeals? A: The BIR is authorized is issue a warrant of garnishment against the bank account of a taxpayer despite the pendency of protest (Yabes v.Flojo,15 SCRA 278).Nowhere in the Code is the Commissioner required to rule first on the protest before he can institute collection proceedings on the tax assessed. The legislative policy is to give the Commissioner much latitude in the speedy and prompt collection of taxes because it is in taxation that the Government depends to obtain the means to carry on its operations (Republic v.Lim Tian Teng Sons,16 SCRA 584). Q: State and discuss briefly whether the following cases may be compromised or may not be compromised: a. Delinquent accounts; b. Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are still pending; c. Criminal tax fraud cases; d. Criminal violations already filed court;
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e. Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form. A: a. Delinquent accounts may be compromised, if either of the two conditions is present:(1) the assessment is of doubtful validity, or (2) the financial position of the taxpayer demonstrates a clear inability to pay the tax (Sec.204[A],NIRC;Sec.2,Rev.Regs.No.30-2002); b. These may not be compromised, provided that it is premised upon doubtful validity of the assessment or financial incapacity to pay; c. These may not be compromised, so that the taxpayer may not profit from his fraud, thereby discouraging its commission; d. These may not be compromised in order that the taxpayer will not profit from his criminal acts; e. Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form, cannot be compromised. By giving his conformity to the revised assessment, the taxpayer admits the validity of the assessment and his capacity to pay the same (Sec.2,Rev.Regs.No.30-2002). Q: After the tax assessment had become final and unappealable, the Commissioner of Internal Revenue initiated the filing of a civil action to collect the tax due from NX. After several years, a decision was tendered by the court ordering NX to pay the tax due plus penalties and surcharges. The judgment became final and executory, but attempts to execute the judgment award were futile. Subsequently, NX offered the Commissioner a compromise settlement of 50% of the judgment award, representing that this amount is all he could really afford. Does the Commissioner have the power to accept the compromise offer? Is it legal and ethical? Explain briefly. A: Yes. The Commissioner has the power to accept the offer of compromise, if the financial position of the taxpayer clearly demonstrates a clear inability to pay the tax (Sec.204, NIRC). As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an offer for compromise based on financial incapacity which the Commissioner shall not accept, unless accompanied by a waiver of the secrecy of bank deposits (Sec.6[F],NIRC).The waiver will enable the Commissioner to ascertain the financial position of the taxpayer, although the inquiry need not be limited only to the bank deposits of the taxpayer but also as to his financial position as reflected in his financial statements or other records upon which his property holdings can be ascertained. If indeed the financial position of NX as determined by the Commissioner demonstrates a clear inability to pay the tax, the acceptance of the offer is legal and ethical because the ground upon which the compromise was anchored is within the context of the law and the rate of compromise is well within and far exceeds the minimum prescribed by law, which is only 10% of the basic tax assessed. A: Yes. The commissioner has the power to accept the offer of compromise, if the financial position of the taxpayer clearly demonstrates a clear inability to pay the tax (Sec. 204, NIRC). As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an offer for compromise based on financial incapacity which the Commissioner shall not accept, unless accompanied by a waiver of the secrecy of bank
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deposits (Sec. 6[F], NIRC). The waiver will enable the Commissioner to ascertain the financial position of the taxpayer, although the inquiry need not be limited only to bank deposits of the taxpayer but also as to his financial position as reflected in his financial statements or other records upon which his property holdings can be ascertained. If indeed he financial position of NX as determined by the Commissioner demonstrates a clear inability to pay the tax, the acceptance of the offer is legal and ethical because the ground upon which the compromise was anchored is within the context of the law and the rate of compromise is well within and far exceeds the minimum prescribed by law, which is only 10% of the basic tax assessed. Q: Under what conditions may the Commissioner of Internal Revenue be authorized to: a. Compromise the payment of any internal revenue tax? A:The Commissioner of Internal Revenue maybe authorized to compromise the payment of any internal revenue tax where: 1) A reasonable doubt as to the validity of the claim against the taxpayer exists;or 2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. 3) Abate or cancel a tax liability? A: The Commissioner of Internal Revenue may abate or cancel a tax liability when: 1) The tax or any portion thereof appears to be unjustly or excessively assessed;or 2) The administration and collection costs involved do not justify the collection of the amount due (Sec.204[B], NIRC). Q: An Information was filed in court for willful non-payment of income tax, the assessment of which has become final. The accused, through counsel, presented a motion that be allowed to compromise his tax liability subject of the information. The prosecutor indicated his conformity to the motion. Is this procedure correct? A: No. Criminal violations, if already filed in court, may not be compromised (Sec.204[B], NIRC). Furthermore, the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provisions of the Tax Code (Sec.247[a], NIRC). Finally, there is no showing that the prosecutor in the problem is a legal officer of the Bureau of Internal Revenue to whom the conduct of criminal actions is lodged by the Tax Code. Q: May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax? A: No. A taxpayer who is constituted as withholding agent who has deducted and withheld at source the tax on the income payment made by him holds the taxes as trust funds for the government (Sec.58[D],NIRC) and is obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit the tax withheld is not a ground for compromise; because the withholding tax is not a tax upon the withholding agent but it is only a procedure for the collection of a tax. Q: Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax treatment under a special law. After investigation of its withholding tax returns for the taxable year 1997,the BIR issued a deficiency withholding tax assessment in the amount of Php150,000.00.On May 15,1999,because of financial difficulty, the deficiency tax remained unpaid, as a
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result of which the assessment became final and executory. The BIR also found that, in violation of the provisions of the NIRC, Minolta did not file its final corporate income tax return for the taxable year 1998, because it allegedly incurred net loss from its operations. On May 17, 2002 the BIR filed with the RTC an action for collection of the deficiency withholding tax for 1997. A. Will the BIR's action for collection prosper? As counsel of Minolta, what action will you take? Explain. B. May criminal violations of the Tax Code be compromised? If Minolta makes voluntary offer to compromise the criminal violations for non-filing and non-payment of taxes for the year 1998, may the Commissioner accept the offer? Explain. A: A. Yes. BIR’s action for collection will prosper because the assessment is already final and executor. It can already be enforced through judicial action. As counsel of Minolta, I will introduce evidence that the income payment was reported by the payee and the income tax was paid thereon in 1997 so that my client may be allowed to pay only the civil penalties for non-withholding pursuant to Revenue memorandum Order No. 38-83. B. All criminal violations of the Tax code may be compromised except those already filed in court or those involving fraud (Sec. 204, NIRC). Accordingly, if Minolta makes a voluntary offer to compromise the criminal violations for non-filing and non-payment of taxes for the year 1998, the Commissioner may accept the offer which is allowed by law. However, if it can be established that a tax has not been paid as a consequence of non-filing of the return, the civil liability for taxes may be dealt with independently of the criminal violations. The compromise settlement of the criminal violations will not relieve the taxpayer from its civil liability. But the civil liability for taxes may also be compromised if the financial position of the taxpayer demonstrates a clear inability to pay the tax. Q: A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by a non-resident foreign corporation. In addition to the civil penalties provided for under the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty? A: No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal Revenue with the agreement and conformity of the taxpayer (Wonder Mechanical Engineering Corporation v.Court of Tax Appeals, et al.,64 SCRA 555).
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CHAPTER XXVI: JUDICIAL REMEDIES OF GOVERNMENT Q: When is an internal revenue tax considered delinquent? A: An internal revenue tax is considered delinquent when it is unpaid after the lapse of the last day prescribed by law for its payment. Likewise, it could also be considered as delinquent where an assessment for deficiency tax has become final and the taxpayer has not paid it within the period given in the notice of assessment. Q: Antonio Cruz was appointed by the Regional Trial Court as administrator in the testate proceedings for the settlement of the estate of his deceased father. On 12 February 1987 the Commissioner of Internal Revenue issued a deficiency estate tax assessment for the estate. The notice of deficiency assessment was received by the latter's office two (2) days later, the Administrator requested for a reconsideration of the assessment on the ground that the same is contrary to law and is not supported by sufficient evidence. He also requested for a period of fifteen (15) days within which to submit the estate's position paper. On 4 August 1988,not having received the promised position paper, the Commissioner filed with the Court a motion for allowance of claim and for an order of payment of estate taxes, praying therein that the administrator be required to pay the BIR the aforementioned deficiency tax. The administrator opposed the motion alleging that by reason of the pendency of his request for reconsideration the deficiency assessment has not become final and executory and, therefore, the absence of a decision on the disputed assessment is a bar against collection of taxes. He further argued that it is the Court of Tax Appeals, and not the Regional Trial Court, which has exclusive jurisdiction over the claim. Resolve the motion and issues raised. A: Evidently, the request for reconsideration referred to did not express or specify the grounds therefor. A request for reconsideration in the tenor stated in the problem is insufficient, not being substantiated,to stop the running of the 30-day period within which the assessment may be disputed (Dayrit v. Cruz,G.R. No.39919,September 26,1988).The failure of the taxpayer to submit the promised position paper within the said 30-day period had the effect of rendering the assessment final and executory.In addition,the pendency of a decision on a disputed assessment does not bar the collection of the taxes,and no injunction may be issued by any court (except by the Court of Tax Appeals as an incident to a timely petition for review).In the absence of a petition for review with the Court of Tax Appeals which may be brought by a taxpayer within 30 days from the receipts of the final decision of the Commissioner, the Court of Tax Appeals has no jurisdiction to take cognizance thereof (See Sec.11,R.A. 1125).Premises considered, the action taken by the Commissioner with the Regional Trial Court was appropriate and in accordance with law. The taxpayer's failure to dispute the assessment effectively by complying with the conditions laid down by the BIR, such as specifying under oath the grounds of his protest, paying one-half of the amount assessed and putting up a bond for the balance, provided a legal basis for the government to collect the taxpayer's liability by ordinary civil action (Republic v. Ledesma, G.R. No.L-18759,February 28,1967).
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CHAPTER XXVII: CIVIL PENALTIES Q: Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his income tax return and the payment of the tax due. The accountant filed a falsified tax return by under-declaring the sales and overstating the expense deductions of Danilo. Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the accountant? Discuss. A: Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable for the fraud penalty because the accountant acted beyond the limits of his authority. A tax return which does not correctly reflect taxable income may only be false but not necessarily fraudulent, where it appears that the return was not prepared by the taxpayer himself but by his accountant. Accordingly, the 50% surcharge for fraud could not be imposed (Azanr v. CTA, 58 SCRA 719 [1974]). Q: Businessman Stephen Yang filed an income tax return for 1993 showing business net income of 350,000.00 Pesos on which he paid an income tax of 61,000.00 Pesos. After filing the return, he realised that he forgot to include an item of business income in 1993 for 50,000.00 Pesos. Being an honest taxpayer, he included this income in his return for 1994 and paid the corresponding income tax thereon. In the examination of his 1993 rerun, the BIR examiner found that Stephen Yang failed to report this item of 50,000.00 Pesos and assessed him a deficiency income tax on this item, plus 50% fraud surcharge. 1. Is the examiner correct? 2. If you were the lawyer of Stephen yang, what would you have advised your client before he included in his 1994 return the amount of 50,000.00 Pesos as 1993 income to avoid the fraud surcharge? 3. Considering that Stephen yang had already been assessed a deficiency income tax for 1993 for his failure to report the 50,000.00 Pesos income, what would you advise him to do to avoid the penalties for tax delinquency? 4. What would you advise Stephen to do with regard to the income tax he paid for the 50,000.00 Pesos in his 1994 return? In case your remedy falls, what is your other recourse? A: 1. The examiner is correct in assessing a deficiency income tax for table year 1993 but not in imposing the 50% fraud surcharge. The amount of all items of gross income must be included in gross income during the year in which received or realised (Sec. 38, NIRC). The 50% fraud surcharge attaches only if a false or fraudulent return is wilfully made by Mr. Yang (Sec. 248, NIRC). The fact that Mr. Yang included the income in his 1994 return belies any claim of wilfulness but is rather indicative of an honest mistake which was sought to be rectified by a subsequent act, that is the filing of the 1994 return. 2. Mr. Yang should have amended his 1993 income tax return to allow for the inclusion of the 50,000.00 income during the taxable period it was realised. 3. Mr. Yang should file a protest questioning the 50% surcharge and ask for abatement thereof 4. Mr. Yang should file a written claim for refund with the Commissioner of Internal revenue of the taxes paid on the 50,000.00 income included in 1994 within two years from payment pursuant to Section 204(3) of the Tax Code. Should this remedy fail in administrative level, a judicial claim for refund can be instituted before the expiration of the two-year period. Q: 1. What is a deficiency interest” for the purposes of the income tax? illustrate
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2. What is a “delinquency interest” for purposes of the income tax? illustrate A: 1. Deficiency interest for purposes of the income tax is the interest due on any amount of tax due or instalment thereof which is not paid on or before the date prescribed for its payment computed at the rate of 20% per annum or the Manila reference rate, which is higher, from the date prescribed for its payment until it is fully paid. If for example after the audit of the books of XYZ Corp. for taxable year 1993 there was found to be due a deficiency income tax of 125,000.00 Pesos inclusive of the 25% surcharge imposed under Section 248 of the Tax Code, the interest will be computed on the 125,000.00 from April 15, 1994 up to its date of payment. 2. Delinquency interest is the interest of 20% or the Manila reference rate, whichever is higher, required to be paid in case of failure to pay: a. the amount of the tax due on any return required to be filed; or b. the amount of tax due for which return is required; or c. the deficiency tax or any surcharge or interest thereon, on the due date appearing in the notice and demand of the Commissioner of Internal Revenue. If in the above illustration the assessment notice was real eased on December 31, 1994 and the amount of deficiency tax, incisive of surcharge and deficiency interest, was computed up to January 30, 1995 which is the due date for payment per assessment notice, failure to pay on this latter date will render the tax delinquent and will require the payment of delinquency interest. The imposition of 1% monthly [now 20% annual] interest is but a just compensation to the state for the delay in paying the tax for the concomitant use by the taxpayer of funds that rightfully should be in the government’s hands (U.S. v. Goldstein, 189 F[2d] 752). The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory (Aguinaldo Industries Corporation v. Commissioner and CTA, L-29790, February 25,1982).
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CHAPTER XXVIII: REMEDIES OF TAXPAYERS Q: Compare the taxpayers remedies under the national Internal Revenue Code and the Tariff and Customs Code. A: The taxpayers remedies under the National Internal Revenue Code may be categorised into remedies before payment and remedies after payment. The remedy before payment consists of administrative remedy which is the filing of protest within 30 days from receipt of assessment , and judicial remedy which is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals, thereafter to the Court of appeals and finally with the Supreme Court. The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of assessment and the filing of a claim for refund or tax credit of these taxes on the ground that they are erroneously paid within two years from date of payment.if there is a denial of the claim, appeals of the CTA shall be made within 30 days from receipt of denial but within two years from date of payment. if the Commissioner fails to act on the claim for refund or tax credit and the two years period is about to expire, the taxpayer should consider the continuous inaction of the Commissioner as a denial and elevate the case to the CTA before the expiration of the two year period. Under the Tariff and Customs Code, taxpayer’s remedies arise only after payment of duties. The administrative remedies consist of filing a claim for refund which may take the form of abatement or drawback. The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs duties.if the decision of the Collector is adverse to the taxpayer, he can notify the Collector within 15 days from receipt of said decision of his desire to have his case reviewed by the Commissioner Government, is automatically elevated of the Commissioner, the same shall be automatically elevated to and finally reviewed by the secretary of Finance. Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the adverse decision to the CTA. Q: On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010 issue by the Commissioner of Internal Revenue (CIR) for deficiency income tax for 2008.It failed to protest the PAN. The CIR thereupon issued final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was received by the corporation on May 10, 2010, following which or on May 25 2010,it filed its protest against it. The CIR denied the protest on the ground that the assessment had already become final and executory, the corporation having failed to protest the PAN. Is the CIR correct? Explain. A: No. Failure to file a Reply of PAN makes the taxpayer in default and authorises the revenue official to issue the FAN. However, no liability for additional or deficiency tax arises from such failure. Indeed, Revenue Regulation No. 12-99 makes the filing of such Reply to PAN merely directory, i.e the taxpayer may or may not reply to the PAN is for the CIR to issue a FAN, since the corporation timely filed the protest against the FAN, it cannot be said that the final assessment notice had already become final and executory.
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CHAPTER XXIX: ASSESMENT AND PROTEST Q: Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels. A: The legal remedies of an aggrieved taxpayer under the tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. a. After receipt of the Pre- Assessment Notice (PAN), he must within 15 days from receipt explain why no additional taxes should be assessed against him. b. if the Commission of Internal revenue issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within 30 days from receipt of the notice of assessment (4th par, Sec. 228, NIRC). Q: After examining the book and records of EDS Corporation, the 2004 final assessment notice, showing basic tax of 1,000,000 Pesos, deficiency interest of 400,000 Pesos, and due for payment of April 20, 2007, but without the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter containing the tax assessment, was received by the EDS Corporation on April 25, 2007. a. What is an assessment notice? What are the requisites of a valid assessment? Explain. b. As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain. A: a. The assessment notice, without the demand letter, is void. Section 228 of the Tax Code expressly provides that “the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.” Since the assessment notice merely contains the basic tax, interest and due date for payment, it does not comply with the requirements of the law that it must state the factual and legal bases; hence, it is void. b. The demand letter is important not only because in such letter does the BIR makes a demand for the payment of the deficiency tax but more importantly, because of the findings of the facts and computations of the deficiency taxes by the revenue officers as we'll as the legal basis for such assessment are adequately explained therein. Q: What are the requisites before a taxpayer’s request for reinvestigation may be granted by the BIR? Discuss briefly. A: A request for reinvestigation refers to a plea for re-evaluation of an assessment on the basis of newly discovered evidence or additional evidence the taxpayer intends to present in the re-investigation. Q: The BIR issued in 2010 a final assessment notice and demand letter against X Corporation covering deficiency income tax deficiency for the year 2008 in the amount of PHP10 Million. X Corporation earlier requested the advice of a lawyer on whether or not it should file a request for reconsideration or a request for reinvestigation. The lawyer said it does not matter whether the protest filed against the assessment is a request for reconsideration or a request for reinvestigation, because it has the same consequences or implications. (a) What are the differences between a request for reconsideration and a request for reinvestigation? (b) Do you agree with the advice of the lawyer? A: a. Request for reconsideration is a plea for evaluation of the assessment on the basis of existing records without the need of presentation of additional evidence (Rev. Regs. No. 1299). It does not suspend the period to collect the deficiency tax (Sec. 223, NIRC). The 180-
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day period within which the BIR shall act on the protest starts from the filing of the request for reconsideration (Sec. 228, NIRC). On the other hand, a request for reinvestigation is a plea for re-evaluation of the assessment on the basis of additional or newly discovered evidence which are to be introduced for examination for the first time. It suspends the running of the prescriptive period to collect. The 180-year period within which the BIR shall act on the protest starts only from the date of submission of the additional or newly discovered evidence (Sec. 228, NIRC; RCBC v. CIR, cited in Royal Bank of Scotland [Phil.] v. CIR, CTA EB Case No. 446, October 23, 2009) b. No, in view of the aforesaid differences between the request for reconsideration and the request for reinvestigation. Q: A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested on July 31, 2000. The protest was initially given due course, but was eventually denied by the CIR in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the CTA, but the CTA dismissed the same. (a) is the CTA correct in dismissing the petition for review (b) Assume that the CTA’s decision dismissing the petition for review has become final. May the CIR legally enforce collection of the delinquent tax? A: a. Yes. The CTA is correct in dismissing the petition for review because the assessment had already become final and executory by the time the protest was filed on July 31, 2000. The fact that the petition for review was filed by the taxpayer before the CTA within 30 days from the date of receipt of the CIR’s final decision in the disputed assessment, this is not, however, relevant in this case because the taxpayer filed its protest against the assessment after the 30-day period mandated by law. b. Since the assessment had already become final and executory for failure of the taxpayer to file a timely protest against the assessment, particularly where the decision of the CTA also becomes final executory, the CIR can legally enforce the collection of the delinquent tax by administrative remedies through the issuance of warrants of distraints/garnishments and levy and/or by judicial remedies through the filing of civil actions or criminal actions within the time prescribed by law. Q: In the examination conducted by the revenue officials against the corporation taxpayer in 2010, the BIR issued a final assessment notice and demand letter which states: “It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you may appeal this decision within 30 days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.” The assessment was immediately appealed by the taxpayer to the court of Tax appeals, without filing its protest against the assessment and without a denial thereof by the BIR. If you were the judge, would you deny the petition for review filed by the taxpayer and consider the case as prematurely filed? A: No, the petition for review should not be denied. The case is an exception to the rule on exhaustion of administrative remedies. The BIR is estopped from claiming that the filing of the petition for review is premature because the taxpayer failed to exhaust all administrative remedies. The statement of the BIR in its final assessment notice and demand letter led the taxpayer to conclude that only a final judgment ruling in his favor would be accepted by the BIR. The taxpayer cannot be blamed for not filing a protest against the assessment since the language used and the tenor of the demand letter indicate that it is the final decision of the BIR on the matter. The CIR should indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her
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right to appeal to the tax court accrues. Although there was no direct reference for the taxpayer to bring the matter directly to the CTA, it cannot be denied that the word “appeal” under prevailing tax laws refers to the filing of a petition for review with the CTA (Allied Bank Corporation v. CIR, G.R. No. 175097, February 5, 2010). Q: On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency documentary stamp tax in the amount of 55 million. On June 20, 2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Global Bank a warrant of distraint to collect the deficiency tax. If you were the counsel, what will be your advice to the bank? Explain. A: The denial of the request for reconsideration is a final decision of the Commissioner of Internal Revenue. I would advise Global Bank to appeal the Commissioner’s denial to the Court of Tax Appeals (CTA) within 30 days from receipt, if the remedy of appeal is still available, I will further advise the bank to file a motion for injunction with the CTA to enjoin the Commissioner from enforcing the assessment pending resolution of the appeal. While n appeal to the CTA will not suspend the payment, levy, distraint and/or sale of any property of the taxpayer for the satisfaction of its tax liability, the CTA is authorized to give injunctive relief if the enforcement would jeopardize the interest of the taxpayer, as in this case where the assessment has not become final. Q: A taxpayer received a tax deficiency assessment of 51.2 million from the BIR demanding payment within 180 days; otherwise, it would collect through summary remedies. The taxpayer requested for a reconsideration stating the grounds therefor. Instead of resolving the request for reconsideration, the BIR sent a Final Notice Before Seizure to the taxpayer. May this action of the Commissioner of Internal Revenue be deemed a denial of the request for reconsideration of the taxpayer to entitle him to appeal to the CTA? Decide with reasons. A: Yes. The action of the CIR is deemed a denial of the request for reconsideration of the taxpayer, thus entitling him to appeal to the CTA. The Notice was the only response received by the taxpayer and its content and tenor supports the theory that it was the BIR final act regarding the request for reconsideration. The very title of the Notice indicated that it was a “Final Notice Before Seizure” which means that the taxpayer’s properties will be subjected to seizure to enforce the deficiency assessment. Thus, in one decided case, the Supreme Court ruled that the Final Notice Before Seizure is a final decision of the Commissioner on the disputed assessment (CIR v Isabela Cultural Corp., 361 SCRA 71 [2001]). Q: RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the Commissioner of Internal revenue, filed an appeal with the Court of Tax Appeals. While the appeal is pending, the BIR served a warrant of levy on the real properties of RR to enforce the collection of the disputed tax. Granting arguendo that the BIR can legally levy on the properties, what could RR do to stop the process? Explain briefly. A: RR should file a motion for injunction with the CTA to stop the administrative collection process. An appeal to the CTA shall not suspend the enforcement of the tax liability, unless a motion to that effect shall have been presented in court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Government (Pirovano v. CIR, 14 SCRA 832 [1965]). The CTA is empowered to suspend the collection of internal revenue taxes and customs duties in cases pending appeal only when: (1) in the opinion of the court the
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collection by the BIR will jeopardize the interest of the government and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount being collected or to file a surety bond for not more than double the amount of the tax to be fixed by the court (Sec. 11, R.A. 1125). Q: On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 1997 against the Valera Group of Companies (Valera) in the amount of P10 million. Counsel for Valera protested the assessment and requested a reinvestigation of the case. During the investigation, it was shown that Valera had been transferring its properties to other persons. As no additional evidence to dispute the assessment had been presented, the BIR issued on June 16, 2000 warrants of distraint and levy on the properties and ordered the filing of an action in the RTC for the collection of the tax, Counsel for Valera filed an injunctive suit in the RTC to compel the BIR to hold the collection of the tax in abeyance until the decision on the protest was rendered. A. Can the BIR file the civil action for collection, pending decision on the administrative protest? Explain. B. As counsel for Valera, what action would you take in order to protect the interest of your client? Explain your answer. A: A. Yes, because there is no prohibition for this procedure considering that the filing of the civil action for collection during the pendency of an administrative protest constitutes the final decision of the Commissioner on the protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]). B. I will wait for the filing of the civil action for collection and consider the same as an appealable decision. I will not file an injunctive suit because it is not an available remedy. I would then appeal the case to the Court of Appeals and move for the dismissal of the collection case with the RTC. Once the appeal to the CTA is filed on time the CTA has exclusive jurisdiction over the case. Hence, the collection case in the RTC should be dismissed (Yabes v. Flojo, 115 SCRA 278 [1982]). Q: CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received a letter from the BIR assessing it delinquency income taxes. CFB filed a letter of protest. One month after, a warrant of distraint and levy was served on CFB Corporation. If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what steps will you take for your client? A: I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and seek from the BIR Commissioner a denial of the protest “in clear and unequivocal language.” This is so because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the protest filed by CFB Corporation (CIR v Union Shipping Corp., 185 SCRA 547). Within 30 days from receipt of such denial “in clear and unequivocal language,” I shall then file a petition for review with the CTA. Q: Spanflex Intl, Inc. received a notice of assessment from the BIR. It seasonably filed a protest with all the necessary supporting documents, but the BIR failed to act on the protest. Thirty days from the lapse of 180 days from filing the protest, Spanflex still has not elevated the matter to the CTA. What remedy, if any, can Spanflex take? A: Spanflex may wait for the final decision on the disputed assessment of the BIR and appeal it to the CTA within 30 days from receipt of such decision.
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CHAPTER XXX: PRESCRIPTION Q: Mia, a compensation income earner, filed her income tax return for the year 2007 on March 30, 2008. On May 20, 2011, Mia received an assessment notice and letter of demand covering the year 2007, but the postmark on the envelope shows April 10, 2011. Her return is not a false or fraudulent return. Can she raise the defense of prescription? A: No. the 3-year prescriptive period started to run only on April 15, 2008 (and not on March 30, 2008). Internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). Accordingly, the period to assess the deficiency tax for 2007 has not yet expired on April 10, 2011. Q: DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Every December 15 of the year, DEF Corporation paid annual royalties to DEF, Inc. for the use of the latter’s software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return is filed and the tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the CTA involving the tax credit claim for 2004 and 2005. a. As a BIR lawyer handling the case, would you raise the defense of prescription in your Answer to the claim for tax credit? Explain. b. Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such claim for tax credit? Explain. A: a. No credit or refund of taxes shall be allowed, unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax. (Sec. 204, NIRC). No suit or proceeding shall be maintained in any court for the recovery of any tax hereafter alleged to have been erroneously or illegally assessed or collected, until a claim for refund or credit has been duly filed with the Commissioner. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax, regardless of any supervening cause that may arise after the payment (Sec. 229, NIRC). Based on the foregoing, the BIR lawyer can raise the defense of prescription for the year 2004, but not for 2005. Since the withholding tax return for 2004 was filed on January 10, 2005, and considering that the claim for refund or credit was filed only on April 10, 2007, more than two years have elapsed between the date of payment and the date of filing the written claim for refund or credit. b. The proper person to claim refund or tax credit is the person on whom the tax is imposed by the statute. In one case, the Supreme Court ruled that the BIR should not be allowed to defeat an otherwise valid claim for refund by raising the question of the withholding agent’s alleged incapacity to file the claim for refund for the first time on appeal. The Government must follow the same rules of procedure which bind private parties (Commissioner v Proctor & Gamble PMC, 204 SCRA 377). Q: Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by: (a) The National Internal Revenue Code (b)The Tariff and Customs Code; and (c) The Local Government Code.
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A: The rules that have been adopted on prescription are as follows: (a) National Internal Revenue Code—The Statute of Limitation for assessment of tax if a return is filed within three (3) years from the last day prescribed by law for the filing of the return, or if filed after the last day, within three years from the date of the actual filing. If no return is filed or the return filed is false or fraudulent, the period to assess is within ten years from discovery of the omission, fraud or falsity. The period to collect the tax is within three years from date of assessment. In the case, however, of omission to file or if the return filed is false or fraudulent, the period to collect is within ten years from discovery without need of assessment. (b) Tariff and Customs Code—It does not express any general Statute of Limitation. It provided, however, that “when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of import entry was merely tentative” (Sec. 1603, TCC). (c) Local Government Code—Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. In case of fraud or intent to evade the payment of taxes, fees or charges, the same may be assessed within ten years from discovery of the fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within five (5) years from date of assessment (Sec. 194, LGC). Q: the Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year 2000 last July 31, 2006 in the amount of P10 million, inclusive of surcharge and interests. If the delinquent taxpayer is your client, what steps will you take? What is your defense? A: Since my client has already lost the right to protest (the assessment having been issued on July 31, 2006, and that he is already categorized as a delinquent taxpayer), I will advise him to wait for a collection action to be instituted by the Commissioner. Once collection is pursued, I will file a petition for review with the CTA to question the validity of the Commissioner’s action. My defense would be prescription. Since the assessment was issued beyond the prescriptive period to assess, the assessment is invalid and any action to collect an invalid assessment is not warrant (Phil. Journalists, Inc. v. CIR, 447 SCRA 214 [2004]). Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manage their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000 inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy to enforce collection of the tax. If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraint and levy? Explain your answer. A: I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time (Sec. 203, NIRC). The last day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on April 20, 2001, the BIR’s right to assess has already prescribed.
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Q: Mr. Castro inherited from his father, who died on June 10, 1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on December 6, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment, on the ground of prescription. Decide Mr. Castro’s protest. A: The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive period for assessment 10 years from discovery of the fraud (Sec. 222, NIRC). Accordingly, the assessment was issued within the prescriptive period to make an assessment based on a fraudulent return. Q: On September 19, 1973, the BIR sent a notice of assessment to X to pay P300,000.00 as forest charges for the years 1970-1973. X made a partial payment of P100,000.00 on September 28, 1973. X died in November 1977. On July 29, 1979, the BIR filed in the Testate Estate Proceedings of X a claim for P200,000.00, the unpaid forest charges left by X. The administrator of the estate opposed the claim on the ground of prescription. Decide. A: Where the assessment was made, the tax may be collected within five (5) years (now three [3] years) from the date of assessment (Collector v. Pineda, 2 SCRA 401). In the case at bar, X, on the basis of the notice of assessment, voluntarily made partial payment to the BiR in the amount of P100,000.00. However, it took the BIR almost more than five (5) years to take the necessary legal action to collect the remaining amount of taxes due. This is clearly beyond the five (5) (now three [3] year) period for the collection of taxes. Hence, the claim filed by the BIR against the Estate of X for the payment of P200,000.00 has prescribed. (NOTE: Under R.A. 8424 [1998], the period to collect an assessed tax is five years from the date of the assessment.) Q: A Co., a Philippine Corporation, filed its 1995 income Tax Return (ITR) on April 15, 1996 showing a net loss. On Nov. 10, 1996, it amended its 1995 ITR to show more losses. After a tax investigation, the BIR disallowed certain deductions claimed by A Co., putting A co. in a net income position. As a result, on august 5, 1999, the BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that it has prescribed. Decide. A: The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). However, if the return originally filed is amended substantially, the counting of the three-year period starts from the date the amended return was filed (CIR v Phoenix Assurance Co., 14 SCRA 52). There is a substantial amendment in this case because a new return was filed declaring more losses, which can only be done either (1) in reducing gross income, or (2) in increasing the items of deductions claimed. Q: (1)Distinguish a false return from a fraudulent return. (2)Explain the extent of the authority of the Commissioner of internal Revenue to compromise and abate taxes. A:
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(1) The distinction between a false return and a fraudulent return is that the first merely implies a deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the sole aim of evading the payment of the correct tax due. (2) The authority of the Commissioner to compromise encompasses both civil and criminal liabilities of the taxpayer. The civil compromise is allowed only in cases (a) where the tax assessment is of doubtful validity, or (b) when the financial position of the taxpayer demonstrates a clear inability to pay the tax. The compromise of the tax liability is possible at any stage of litigation and the amount of compromise is left to the discretion of the Commissioner, except with respect to final assessments issued against large taxpayers wherein the Commissioner cannot compromise for less than 50%. Any compromise involving large taxpayers lower than 50% shall be subject to the approval of the Secretary of Finance. [NOTE: this requirement had been deleted in R.A. 8424.] All criminal violations except those involving fraud, can be compromised by the Commissioner but only prior to the filing of the information with the Court. Q: What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on the deficiency tax due from a taxpayer? Explain. A:There is a prima facie evidence of false or fraudulent return when the taxpayer substantially under-declared his taxable sales, receipts or income, or substantially overstated his deductions. The taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and over-declaration, respectively, and will justify the imposition of the 50% surcharge on the deficiency tax due from the taxpayer (Sec. 248, NIRC). Q: What constitutes prima facie evidence of a false or fraudulent return? A: There is prima facie evidence of a false or fraudulent return when the taxpayer has willfully and knowingly filed it with the intent to evade a part or all of the tax legally due from him (Ungab v. Cusi, 97 SCRA 877). There must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake, which is not culpable in respect of its value, would not constitute a false return (Words and Phrases, Vol. 16, page 173). Q: On August 5, 1997, Adamson co., Inc. (Adamson) filed a request for reconsideration of the deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings, the original assessment of P150,000.00 was reduced to P75,000.oo and a modified assessment was thereafter issued on August 5, 1999. Despite repeated demands, Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an action for collection in the RTC on September 15, 2000. Adamson moved to dismiss the action on the ground that the government’s right to collect the tax by judicial action has prescribed. Decide the case. A: The right of the Government to collect by judicial action has not prescribed. The filing of the request for reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the protest was made on August 5, 1999. It must be noted that in all cases covered by an assessment, the period to collect shall be five (5) years from the date of the assessment but this period is suspended the filing of a request for reconsideration which was acted upon by the Commissioner (Commissioner v. Wyeth Suaco Laboratories, 202 SCRA 125 [1991]).
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Q: Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. After the investigation of said return, the BIR issued a notice of deficiency of income tax assessment on April 15, 1998. Mr. Reyes returned to the Philippines as a balikbayan on December 8, 1998. Finding his name to be in the list of delinquent taxpayers, he filed a protest against the assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed. Will the protest prosper/ Explain. A: No. Prescription has not set in because the period of limitations for the BIR to issue an assessment was suspended during the time that Mr. Reyes was out of the Philippines or from the period December 15, 1995 up to December 8, 1998 (Sec. 223 in relation to Sec. 203, NIRC).
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CHAPTER XXXI: TAX CREDIT OR REFUND
Q:Congress enacts a law granting grade school and high school students a 10%discount on all school-prescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit. 1. If in taxable year a bookstore has no tax due on which to enjoy the tax credit, can the bookstore claim from the BIR a tax refund in lieu of tax credit? Explain 2. Can the BIR require the bookstore to deduct the amount of the discount from their gross income? Explain. 3. If a bookstore closes its business due to losses without being able to recoup the discount, can it claim reimbursement of the discount from the government on the ground that without such reimbursement, the law constitutes taking of private property for public use without just compensation? Explain. A: 1. No, the law is clear that bookstores can only claim the discount as a tax credit. The term “tax credit” connotes that the amount, when claimed, shall only be treated as a reduction from any tax liability, plain and simple. There is nothing in the law that grants a refund when the bookstore has no tax liability against which the tax credit can be used. (CIR v Central Luzon Drug Corp., 456 SCRA 414 [2005]). 2. No, tax credit which reduces the tax liability, is different from a tax deduction, which merely reduces the income to arrive at the tax base. Since the law allowed the bookstores to claim in the full discount as a tax credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v Central Luzon Drug Corp., ibid.). 3. No, the bookstore cannot claim reimbursement The tax credit privilege given to it is the compensation for the subsidy taken by the government for the benefit of a class of taxpayers to which the students belong. However, the privilege granted is limited only to the reduction of a present or future tax liability, because by its nature, it is the existence of a lack of a tax liability that determines whether the discount can be used as a tax credit. Accordingly, if the business continues to operate at a loss and no other taxes are due, compelling the business to close shop, the credit can never be applied and will be lost altogether. (CIR v Central Luzon Drug Corp., ibid.). Q:On April 6, 2012, the corporation filed its annual corporate income tax return for 2011, showing an overpayment of income tax of P1 million, which is to be carried over to the succeeding year(s). On May 15, 2012, the corporate sought advice from you and said that it contemplates to files an amendment return for 2011, which shows that instead of carryover of the excess income tax payment, the same shall be considered as a claim for tax refund and the small box shown as “refund” in the return will be filled up. Within the year, the corporation will file the formal request for refund for the excess payment. (a) Will you recommend to the corporation such a course of action and justify that the amendment return is the latest official act of the corporation as to how it may treat such overpayment of tax or should you consider the option granted to taxpayers as irrevocable, once previously exercised by it? (b) Should the petition for review filed with the CTA on the basis of the amended tax return be denied by the BIR and CTA, could the corporation still carry over such excess payment of income tax in the succeeding
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years, considering that there is no prescriptive period provided for in the income tax law with respect to carry over of excess income tax payments? A: a. No. Once the option to carry over and apply the excess quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable years has been made, such options shall be considered irrevocable for the taxable year and no application for tax refund or issuance of tax credit certificate shall be allowed therefor (Sec. 76, NIRC). b. Yes. The carryover of excess income tax payments is no longer limited to the succeeding taxable year. Unutilized excess income tax payments may now be carried over to the succeeding taxable years until fully utilized. In addition, the option to carry over excess income tax payments is now irrevocable. Hence, unutilized excess income tax payments may no longer be refunded. (Belle Corporation v CIR, G.R. No. 181298, January 10, 2011; CIR v P.L. Management Int’l Phils, Inc., G.R. No. 160949. April 4, 2011). Q: a. State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize the refund or credit of taxes erroneously or illegally received. b. Does a withholding agent have the right to file an application for tax refund? Explain. A: a. The conditions are: (1) a written claim for refund is filed by the taxpayer with the Commissioner of Internal Revenue (Sec. 24, NIRC); (2) the claim for refund must be a categorical demand for reimbursement (Bermejo v Collector of Internal Revenue, 87 Phil 96 [1950]) ; (3) the claim for refund or tax credit must be filed with the Commissioner, or the suit or proceeding therefor must be commenced in court within two years from date of payment of the tax or penalty, regardless of any supervening cause, (Sec. 29, NIRC). b. Yes. A withholding agent should be allowed to claim for tax refund, because under the law, said agent is the one who is held liable for any violation of the withholding tax law should such violation occur (Commissioner v Wander Philippines, 160 SCRA 570 [1988]). Furthermore, since the withholding agent is made personally liable to deduct and withhold any tax under Section 53(c) of the Tax Code, it is imperative that he be considered the taxpayer for all legal intents and purposes. Thus, by any reasonable standard, such person should be regarded as a party-in-interest to bring suit for refund of taxes (Commissioner v Procter & Gamble PMC and CTA, 204 SCRA 377 [1991]). Q:On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so he immediately filed a claim for refund with the Commissioner of Internal Revenue. On February 27, 2003, he received the decision of the Commissioner, denying REN’s claim for refund. On March 24, 2003, REN filed an appeal with the CTA. Was his appeal on time or not? Reason. A:The appeal was not filed on time. The two-year period of limitation for filing a claim for refund is not only a limitation for pursuing the claim at the administrative level but also a limitation for appealing the case to the CTA. The law provides that “no suit or proceeding shall be filed after the expiration of two years from the date of payment of the tax or
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penalty, regardless of any supervening cause that may arise after payment” (Sec. 29, NIRC). Since the appeal was only made on March 24, 2003, more than two years had already elapsed from the time taxes were paid on March 12, 2003. Accordingly, REN had lost his judicial remedy because of prescription. Q:Apple Computer Corp. (ACC) is a foreign corporation doing business in the Philippines through a local branch located at Makati, Metro Manila. In 1985, the local branch applied with the Central Bank for authority to remit to ACC branch profits amounting to P8,000.00. After paying the 15% branch remittance tax of P1,200,000.00, the branch office remitted to ACC the balance of P6,800,000.00. In January 1986, the branch office was advised by its legal counsel that it overpaid the branch remittance tax since the basis of the computation thereof should be the amount actually remitted and not the amount applied for. Accordingly, the branch office applied for a refund in the amount of P180,000.00. If you were the Commissioner of Internal Revenue, would you grant the claim for refund? A:If I were the Commissioner of Internal Revenue, I would allow the claim for refund. The remittance tax should be computed on the amount actually remitted (Marubeni Corporation v Commissioner, G.R. No. 76573, September 14, 1989). In the refund of taxes, the claim therefor can be filed within two years from the time of the payment so long as the tax payment was made before an assessment by the Commissioner has become final (Sec. 230, NIRC). Q: XCEL Corporation filed its quarterly income tax return for the first quarter of 1985 and paid an income tax of P500,000.00 on May 15, 1985. In the subsequent quarters, SCEL suffered losses so that on April 15, 1986, it declared a net loss of P1,000,000.00 in its annual income tax return. After failing to get refund, XCEL filed on March 1, 1988 a case with the Court of Tax Appeal store cover the P500, 000.oo in taxes paid on May 15, 1985. Is the action to recover the taxes filed timely? A:The action for refund was filed in the Court of Tax Appeals on time. In the case of Commissioner v TMX Sales, Inc., 205 SCRA 184, which is similar to this case, the Supreme Court ruled that in the case of overpaid quarterly corporate income tax, the two year period for filing claims for refund in the BIR as well as in the institution of an action for refund in the CTA, the two year prescriptive period for tax refunds (Sec 230, NRIC) is counted from the filing of the final, adjustment return under section 67 of the Tax Code, and not from the filing of the quarterly return and payment of the quarterly tax. The CTA action on March 1, 1988 was clearly within the reglementary two year period from the filing of the final adjustment return of the corporation on April 15, 1986. Q: A corporation files its income tax return on a calendar year basis. For the first quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of P3.0 million. On 20 August 1993, it paid the second quarterly income tax of P0.5 million. The third quarter resulted in a net loss, and no tax was paid. For the fourth and final return for 1993, the company reported a net loss for
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the year, and the taxpayer indicated in the income tax return that it opted to claim a refund of the quarterly income tax payments. On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for the refund of P3.5 million. BIR failed to act on the claim for refund; hence, on 2 March 1996, the corporation filed a petition for review with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993 quarterly income tax. BIR, in its answer to the petition, alleged that the claim for refund was filed beyond the reglementary period. Did the claim for refund prescribe? A:The claim for refund has prescribed. The counting of the two year prescriptive period for filing a claim for refund is counted not from the date when the quarterly income taxes were paid but on the date when the final adjustment return or annual income tax return was filed (CIR v TMX Sales, G.R. No. 83736, January 15, 1992; CIR v Philam Life Insurance Co., Inc., G.R. No. 105208, May 29,1995). It is obvious that the annual income tax return was filed before January 10, 1994 because the written claim for refund was filed with the BIR on January 10, 1994. Since the two-year prescriptive period is not only a limitation of action for bringing the case to the judicial stage, the petition for review filed with the CTA on March 2, 1996 is beyond the reglementary period. Q: A.What must a taxpayer do in order to claim refund of, or tax credit of, taxes and penalties which he alleged to have been erroneously, illegally or excessively assessed or collected? A. Can the Commissioner grant a refund or tax credit even without a written claim for it? A: A. The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected: 1. He should file a written claim for refund with the Commissioner within two years after the date of payment of the tax or penalty (Sec. 204, NIRC); 2. The claim filed must state a categorical demand for reimbursement (Mermejo v Collector, 87 Phil. 96 [1950]); 3. The suit or proceeding for recovery must be commenced in court within two years from date of payment of the tax or penalty regardless of any supervening event that will arise after payment (Sec. 229, NIRC). [NOTE: If the answer given is only number 1, it is suggested that the same shall be given full credit, considering that this is the only requirement for the Commissioner to acquire jurisdiction over the claim.] B. Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refund/claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit without the need for a written claim. This is so, because a return filed showing an overpayment shall be considered as a written claim for credit or refund (Secs. 76 and 204, NIRC). Moreover, the law provides that the Commissioner may, even without a written claim therefore, refund or credit any tax where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid (Sec. 229, NIRC).
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Q: On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with the finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a petition with the Court of Tax Appeals (CTA) praying for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a petition for review with the Court of Tax Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR. a) Is the stand of the Commissioner correct? Reason. A: A.Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time. b) Why is the filing of an administrative claim with the BIR necessary? B: The filing of an administrative claim for refund with the BIR is necessary in order: 1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers (Gonzales v CTA, et al., 14 SCRA 79); and 2) To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures (Bermejo v Collector; G.R.No. L-3028, July 29, 1950) Q:Is a protest at the time of payment of taxes/duties a requirement to preserve the taxpayer’s right to claim a refund? Explain. A:For taxes imposed under the NIRC, protest at the time of payment is not required to preserve the taxpayers’ right to claim refund. This is clear under Section 230 of NIRC which provides that a suit or proceeding may be maintained for the recovery of national internal revenue tax or penalty alleged to have been erroneously assessed or collected, whether such tax or penalty has been paid under protest or not. For duties imposed under the Tariff and Customs Code, a protest at the time of payment is required to preserve the taxpayers’ claim for refund. The procedure under the TCC is to the effect that when a ruling or decision of the Collector of Customs is made whereby liability for duties is determined, the party adversely affected may protest such ruling or decision by presenting to the Collector, at the time when payment is made, or within fifteen days thereafter, a written protest setting forth his objections to the ruling or decision in question (Sec. 2308, TCC). Q:ABCD Corporation is a domestic corporation with individual and corporate shareholders who are residents of the US. For the 2nd quarter of 1983, these US-
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based individual and corporate shareholders received cash dividends from the corporation. The corresponding withholding tax on dividend income – 30% for individual, and 35% for corporate nonresident stockholders – was deducted at source and remitted to the BIR. On May 15, 1984, ABCD filed with the CIR a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction of withholding tax on dividends was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the US. The Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the CTA, reiterating its demand for refund. (a) Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? (b) Is the contention of ABCD Corporation correct? A: a. In Procter & Gamble PMC, supra, involving the refund of alleged over-withheld final withholding tax on dividends paid out to a non-resident foreign corporation, the defense of the Government against the claim to the effect that a mere withholding agent is not the proper party that should claim such refund, was not interposed by the Government in the lower court but was raised only for the first time on appeal. The Supreme Court sustained the Government’s position and ruled that estoppel does not preclude the Government from its right to bring up such defense even for the first time on appeal. However, the Supreme Court, in a subsequent resolution, ruled that the BIR should not be allowed to defeat an otherwise valid claim for refund by raising the question of the withholding agent’s alleged incapacity to file the claim for refund for the first time on appeal. The Government must follow the same rules of procedure which bind private parties. (Commissioner v Procter & Gamble, PMC, 204 SCRA 377). a. Yes, ABCD is correct. The applicable final withholding income tax rate on the cash dividends paid it to non-resident shareholders is only 25% of the gross dividend, pursuant to the RP-US Tax Treaty. Considering that the final withholding taxes deducted and remitted to BIR are 30% (for individuals) and 35% (for corporations), there was overpayment of income tax. Q: Lily’s Fashion Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During its operations, it purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted to Lily’s Fashion, Inc. the 10% VAT on the purchased items amounting to P500,000.00. Lily’s Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If you were the Commissioner of Internal Revenue, will you allow the refund? A: No. The exemption of Lily’s Fashion, Inc. is only for taxes for which it is directly liable; hence, it cannot claim exemption for a tax shifted to it, which is not at all considered a tax to the buyer but a part of the purchase price. Lily’s Fashion, Inc. is not the taxpayer insofar as the passed-on tax is concerned and therefore, it cannot claim a refund of a tax merely shifted to it. Only taxpayers are allowed to file a claim for refund (Phil. Acetylene Co. v CIR, 20 SCRA 1056 [1987]).
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Q: A Co. is the wholly owned subsidiary of B Co., a non-resident German company. A Co. has a trademark licensing agreement with B Co. On February 10, 1995, A Co. remitted to B Co. royalties of P10,000,000.00, which A Co. subjected to a WT of 25% or P2,500,000.00 with the BIR. Upon advice of counsel, A Co. realized that the proper WT rate is 10%. On March 20, 1996, A Co. filed a claim for refund of P2,500,000.00 with the BIR. The BIR denied the claim on November 15, 1996. On November 28, 1996 A Co. filed a petition for review with the CTA. The BIR attacked the capacity of A Co., as agent, to bring the refund case. Decide the issue. A: A Co., the withholding agent of the non-resident foreign corporation, is entitled to claim the refund of excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding agent, it is the one held liable for any violation of the withholding tax law should such a violation occur. In the same vein, it should be allowed to claim a refund in case of over-withholding. (CIR v Wander Phils., Inc., GR No. 68378, April 15, 1988, 160 SCRA 573; CIR v Procter & Gamble PMC, 204 SCRA 377).
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CHAPTER XXXII LOCAL BUSINESS TAXES Q:Congress, after much public hearing and consultations with various sectors of society, came to the conclusion that it will be good for the country to have only one system of taxation by centralizing the imposition and collection of all taxes in the national government. Accordingly, it is thinking of passing a law that would abolish the taxing power of all local government units. In your opinion, would such a law be valid under the present Constitution? Explain your answer. A: No. The law centralizing the imposition and collection of all taxes in the national government would contravene the Constitution which mandates that: “Each local government unit shall have the power to create their own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local autonomy.” It is clear that Congress can only give the guidelines and limitations on the exercise by the local governments of the power to tax but what was granted by the fundamental law cannot be withdrawn by Congress. Q: In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called “elevator tax”, every time a person rides any of the high-tech elevators in the city hall during the hours of 8:00am to 10:00 am and 4:00pm to 6:00 pm. Is the “elevator tax” a valid imposition? Explain. A: No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code shall be exercised by the Sanggunian of the local government unit concerned through an approporiate ordinance (Sec. 132, LGC). The city mayor alone could not order the collection of the tax. As such, the “elevator tax” is an invalid imposition. Q:The City of Manila enacted an ordinance, imposing 5% tax on gross receipts on rentals of space in privately-owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain. A: Bo, I do not agree with the position of BAT Corporation. The 5% tax on gross receipts of rentals of space in privately-owned public markets imposed under the ordinance of City of Manila is not an income tax, which may not be imposed by the city government, but a valid license tax or fee for the regulation of business. (Progressive Development Corporation v Quezon City, GR No. 36081, April 24, 1989). Q: XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and West Coast of the U.S. The company’s vessels load and unload cargoes at the Port of Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch in Makati which is also the company’s principal office. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the city government of Manila legally impose said levy on the corporation?
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A: The situs is the place or incident of an event or location of property, and the situs of a tax is, therefore, the place where the tax has to be paid. Section 150 of the LGC provides for the situs of the tax imposed on taxpayers enumerated therein. The recording of sales of goods and services subject to the local business taxes shall be made in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality or city where such branch or sales outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality (Sec. 150[a], LGC). In this case, the principal office in Makati City which issued the bills of landing and the invoices to the customers has no branch in the City of Manila, where the business transactions take place. In view thereof, the sales allocation shall be made as follows: 30% to the sales recorded in the principal office in Makati City shall be taxable by the city where the principal office is located, and 70% of the total sales recorded in Makati City shall be taxable by the City of Manila, where transaction is had (Sec. 150[b], LGC). Q: What is the basis for the computation of business tax on contractors under the Local Government Code? A: “Gross sales or receipts” include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or the materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding discounts if determinable at the time of sales, sales return, excise tax, and value added tax (Sec.131 [n], LGC). Q: ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? A: No. The corporation cannot be considered as a contractor because it does not render services for a fee. A contractor is one whose activity consists essentially in the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or its employees. To be considered as a contractor, the corporation must derive income from doing active business of selling services and not from deriving purely passive income. Only income arising from the performance of services to its customers is subject to local business tax. Accordingly, a mere holding company cannot be assessed by the City of Makati as a contractor (Sec. 131 [h], LGC; Orlyete Company [Phil. Branch]) v City of Makati, CTA, November 14, 2012). Q: Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-Lawyer engaged in the practice of his two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City.
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a. May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain. b. May Quezon City, where he has his residence and where he also practices his two professions, go after him for the payment of his professional tax as a CPA and a lawyer? Explain. A: a. No. Mr. Fermin is given the option to pay either in the city where he practices his profession or where he maintains his principal office in case he practices his profession in several places. The professional tax paid as a lawyer in Pasig City, a place where he practices his profession, will entitle him to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession (Sec. 139, in relation to Sec. 151, LGC). b. No. The professional tax shall be paid only once for every taxable year and the payment shall be made either in the city where he practices his profession or where he maintains his principal office. The city of residence cannot require him to pay his professional taxes (Sec. 139, in relation to Sec. 151, LGC). Q: MNO Corporation was organized on July 1, 2006 to engage in trading of school supplies, with principal place of business in Cubao, Quezon City. Its book of accounts and income statement show the following date: July 1, 2006 to December 31, 2006 P5,000,000 January 1,2007 to June 30, 2007 10,000,000 July 1, 2007 to December 31, 2007 15,000,000 Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it paid its 2%business tax for fiscal year ended June 30,2007 based on gross sales of P15,000,000. However, the Quezon City treasurer assesses the corporation for deficiency business tax for 2007 based on gross sales of P25,000,000, alleging that local business taxes should be computed based on calendar year. a. Is the position of the city treasurer tenable? Explain. b. May the deficiency business tax be paid on installments without surcharge and interest? Explain. A: a. Yes, the City Treasurer is correct in using the gross sales for the calendar year of P25 million for purposes of computing the 2% local business tax for the year 2007. The tax period of local taxes, fees and charges is the calendar year, except when otherwise provided in the Code (Sec. 165, LGC). The use of the fiscal year by corporations for purposes of computing taxes is allowed only under the National Internal Revenue Code, but not under the Local Government Code. b. The local levies may be paid on quarterly installments (Sec. 165, LGC) within the first twenty days of each quarter. The time for payment may be extended by the Sanggunian concerned, without surcharges or penalties, but only for a period not exceeding six months (Sec. 167, LGC). Q: Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City, where most of its workers live. Its principal office in Quezon City is also a sales office. Sales of finished product for 2009 in the amount of P10 million were made at the following locations: (i) Cebu – 25%; (ii)
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Dacao – 15%’ and (iii) Quezon City – 60%. Where should the applicable local taxes on the shoes be paid? A: The sales made in the Cebu branch (25%) and the Davao branch (15%) shall be reported by the respective branches in their books and the local taxes due thereon will be paid to the city of Cebu and Davao, respectively. However, the sales recorded in the books of Quezon City to the extent of 60% shall be allocated as follows: 30% of 60% shall be paid to the Quezon City government, while the 70% of the 60% shall be allocated and paid to the Marikina City government, where the factory is located. Q:The municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals practicing in the municipality to pay a tax equivalent to 2% of their gross income. A certified true copy of the ordinance was sent to the Secretary of Finance for review on March 1, 1989 and was received by him on the same day. On 15 August 1989 even as the tax ordinance remained unacted upon by the Secretary of Finance, the municipality started collecting the tax to question. The members of the Philippine Bar in the municipality questioned the legality of the ordinance and sought the suspension of the collection of the tax, but the municipality argued that since the Secretary has not taken any action on the ordinance for more than one hundred twenty days after his receipt thereof, the legality of the ordinance can no longer be questioned and insisted on the collection of the tax. Is the tax ordinance in question legal? A: No, the tax ordinance is not legal as the Local Tax Code allows provinces and cities, to the exclusion of municipalities, to impose an annual occupation tax on all persons engaged in the exercise of practice of their profession or calling in specified amounts which in the case of lawyers is P75.00 per annum (Secs 11 and 12 in relation to Sec. 23, Local Tax Code). A person authorized to practice his profession or calling shall pay the tax to the province where he practices his professions or calling or maintains his office. No local government unit can impose a tax on income (Sec. 5. Local Tax Code). 2) Is the Municipality correct in insisting on collecting the tax? B: No, the Municipality was incorrect in insisting on the collection of the tax. Once the tax on occupation is paid as stated in paragraph (a) above, the lawyer is entitled to practice his profession or calling in all parts of the Philippines without being subject to any other national or local tax, license or fee for the practice of such profession or calling. 3) Will the inaction of the Secretary of Finance bar the professionals in the Municipality from questioning the legality of that ordinance? C: The inaction of the Secretary of Finance does not bar the professionals in the Municipality from questioning the legality of the ordinance. While it is true that the Secretary of Finance may himself suspend the tax ordinance within a 120-day period from receipt thereof, his failure to do so, however, has no preclusive effect on taxpayers who may be adversely affected by the ordinance. 4) What remedies are available to the taxpayer to enable him to question the legality of that ordinance? D: The taxpayer may pursue his remedies either administratively or judicially. He may, as the case warrants, file a formal protest with the Secretary of Finance or query with the Provincial Fiscal whose opinion is appealable to the Secretary of Justice whose decision may be contested in the proper court. The other remedy would be to file a special civil action for
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declaratory relief (if circumstances still warrant) or to pay the tax and thereafter to file an action for refund within six [now 2] years after such payment. Q: 1. Tax lien- Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exerciseo f privilege with respect to which the lien is imposed. The lien may be extinguished upon full payment of the delinquent local tax fee or charge, including related surcharges or interest (Sec. 173, LGC). 2. Distraint and levy – The civil remedies for the collection of local taxes, fees or charges, including the applicable surcharges and interests, fees or charges, may either be (a) by the administrative remedies of distraint of personal property of whatever kind, including securities and bank accounts, and levy of real property and interest therein, or (b) by judicial action. Either of these remedies, or both, may be pursued concurrently or simultaneously at the discretion of the local government unit concerned (Sec. 174, LGC). 3. Judicial action. – The local government may institute an ordinary civil action with the regular courts of proper jurisdiction for the collection of delinquent taxes, fees, charges or revenues (Sec. 183, LGC). The term “civil action” would preclude a criminal case as a proper remedy for the collection of delinquent local taxes (Republic v Patanao, 20 SCRA 712) Q: How are retiring businesses taxed under the Local Government Code? A: Upon the termination of business subject to tax under Section 143 of the Local Government Code, it is required to submit a sworn statement of gross sales or receipts for the current year. If the tax paid during the year be less than the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired (Sec 145, LGC). Q: On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of P1,500,000 from Pasay City Treasurer. On June 30, 2009, the corporation contested the assessment by filing a written protest with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial Court. (a) Was the protest of the corporation filed on time? (b) Was the appeal with the Pasay RTC filed on time? A: a.Yes. Since the business tax assessment was received on May 15, 2009 and the protest thereto was filed on June 30, 2009, or a total period of 49 days, the taxpayer thus timely filed such protest. The law allows the taxpayer to files its protest within 60 days from the date of receipt of assessment. b.The taxpayer shall, within 30 days from receipt of the denial of the protest or from the lapse of the 60-day period prescribed within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable. The fifth sentence of Section 195 of the LGC of 1991 does not provide for any administrative appeal. Hence, the taxpayer can only appeal to a court of competent jurisdiction. In this case, the
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local treasurer is acting as a quasi-judicial agency. Under Section 49 of the 1997 Rules of Civil Procedure, appeals from quasi-judicial agencies, in the exercise of judicial functions, shall be brought to the Court of Appeals. In this case, the appeal was brought by the corporation to the Pasay RTC, which is not the court of competent jurisdiction. Thus, the appeal was not filed on time. Q: X, a taxpayer who believes that an ordinance passed by the City Council of Pasay is unconstitutional for being discriminatory against him, wants to know from you, his tax lawyer whether or not he can file an appeal. In the affirmative, he asks you where such appeal should be made: the Secretary of Finance, or the Secretary of Justice, or the Court of Tax Appeals, or the regular courts. What would you advice your client, X? A: The appeal should be filed with the Secretary of Justice. Any question on the constitutionality or legality of a tax ordinance may be raised on appeal with the Secretary of Justice within 30 days from the effectivity thereof (Sec. 187, LGC; Hagonoy Market Vendor Association v Mun. of Hagonoy, GR No. 137621, February 6, 2002).
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CHAPTER XXXIII: REAL PROPERTY TAX Q: Mr. Jose Castillo is a citizen, who purchased a parcel of land in Makati City in 1970 at a consideration of P1 million. In 2011, the land, which remained undeveloped and idle, had a fair market value of P20 million. The Assessor of Makati re-assessed in 20122 the property at P10 million. When is Mr. Castillo liable for real property tax on the land based on the re-assessed fair market value, beginning 2011 or 2012? A. Mr. Castillo shall be liable to the real property tax based on the re-assessed fair market value of P10 million beginning 2012. All re-assessments made after the first day of any year shall take effect on the first of January of the succeeding year (Sec. 21, LGC). The fair market value of P20 million as determined by the Commissioner shall be used only for the purposes of national internal revenue taxes. Q: A city outside of Metro Manila plans to enact an ordinance that will impose a special levy on idle lands located in residential subdivisions within its territorial jurisdiction in addition to the basic real property tax. If the lot owners of a subdivision located in the said city seeks your legal advice on the matter, what would your advice be? Discuss. A: My advice would be that the city’s plan to enact on ordinance that will impose such special levy on idle lands is not legally allowed, unless these lands are specially benefited by a public works projects or improvements funded by the city government (Sec. 240, LGC). I will likewise advise them that before the city council could enact an ordinance imposing a special levy, it shall conduct a public hearing thereon; notify in writing the owners of the real property to be affected or the persons having legal interest therein as to the date and place thereof and afford the latter the opportunity to express their positions or objections relative to the proposed ordinance (Sec. 242, LGC). Q: In view of the street widening and cementing of roads and the improvement of drainage and sewers in the district of Ermita, the City Council of the City of Manila passed on an ordinance imposing and collecting a special levy on lands in the district. Jose Reyes a landowner and resident of Ermita, submitted a protest again the special levy fifteen (15) days after the last publication of the ordinance alleging that the special levy was exorbitant since the rate thereof was more than the maximum rate of two percent (2%) of the assessed value of the real properties allowed by Section 39 of Presidential Decree No. 464, as amended. Assuming that Jose Reyes is able to prove that the rate of the special levy is more than the aforesaid percentage limitation of 2%, will his protest prosper? A: The special levy under the Real Property Tax Code on lands, specially benefited by the proposed infrastructure, may not exceed 60% of the cost of said improvement. All lands comprised within the district benefited are subject to the special levy except lands exempt from the real property tax (Sec. 47, Real Property Tax). The protest shall be filed not later than 30 days after the publication of the ordinance and may be submitted to the City Sanggunian signed by a majority of the landowners affected by the proposed work. If no such protest is filed in the manner above specified, the city ordinance shall become final and
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effective. The levy imposed under the ordinance should be within the limit of 60% of the total cost of the proposed improvement. The rate of two percent (2%) of the assessed value under Section 39 of P.D. 464 refers to the real property tax and not to special levies. Q: May local governments impose an annual reality tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions? A: Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area (Sec. 232, LGC) may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Sec. 236, LGC) of idle or vacant residential lots in a subdivision, duty approved by proper authorities regardless of area (Sec. 237, LGC)
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