Tax Preweek 2012

TAXATION LAW
PRE-WEEK 2012
2012 CENTRALIZED BAR OPERATIONS
Executive Committee
Over-all Chairperson Chairperson for Academics Chairperson for Hotel Operations Vice-Chair for Operations Vice-Chair for Secretariat Vice-Chair for Finance Vice-Chair for EDP Vice-Chair for Logistics MIKHAIL MAVERICK TUMACDER ARTHUR JOHN ARONGAT JASSEN RALPH LEE KIMBERLY JOY BARAOIDAN KATRINA AYN AYZA CUE IAN MICHEL GEONANGA JOSE ANGELO DAVID IAN LUIS AGUILA
Subject Committees
Political Law Labor Law and Social Legislation Civil Law Taxation Law Commercial Law Criminal Law Remedial Law Legal Ethics & Practical Exercises KRISYL CANCINO STEPHANIE GARAY INA BEATRIZ DE VERA RAHABANSA DAGALANGIT LAURIE PE KATRINE PAULA SUYAT PINKY VELOSO ZENAIDA RAZON
San Beda College of Law Administration

DEAN VIRGILIO B. JARA VICE DEAN PABLITO A. PEREZ ATTY. RISEL G. CASTILLO-TALEON
Centralized Bar Operations Adviser

ATTY. MARCIANO G. DELSON
San Beda College of Law

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TAXATION LAW
Subject Chair RAHABANSA DAGALANGIT Assistant Subject Chair ARIANNE MALABANAN Subject Committee EDP ARMIDA GERONIMO Subject Heads
General Principles DIANA FAJARDO Income Taxation AVRIL ELAINE GAMBOA Tax Administration and Enforcement MADONNA LYN CASARES Value-Added Tax BRYANT CANASA Transfer Taxes SHERWIN MARASIGAN NIRC Remedies APRIL MANUEL and GABRIEL GUY OLANDESCA Court of Tax Appeals ARNALDO MALABANAN, JR. Real Property and Local Taxation JOSE MARI ANGELO DIONIO Tariff and Customs Laws RAY ANN CO
Subject Committee Members

Baby Perian Arcega, Ethel Joy Arriola, Adrian Aumentado, Paula Tricia Bagnes , Benedicto Beley, Jingle Chua, Luis Voltaire Formilleza, Aiza Gonzales, Roniel Muoz, Gerwin Panghulan, Maria Katrina Rivera, April Salamatin, Eve Hazel Santos, Salvador Andrew Tugade, Neo Valerio, and Janice Ivy Valparaiso
Advisers
Justice Japar B. Dimaampao Atty. Dante R. Bravo Atty. Nicasio C. Cabaneiro Atty. Efren Vincent M. Dizon Atty. Anthony A. Dy

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GENERAL PRINCIPLES
Nature of the States power to tax is two-fold. It is both an inherent power and a legislative power. 1. It is inherent in nature being an attribute of sovereignty. This is so because without taxes, the states existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise this power. 2. It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax should be paid. Principles of a Sound Tax System 1. Fiscal Adequacy The sources (proceeds) of tax revenue should coincide with, and approximate the needs of government expenditures. Neither an excess nor a deficiency of revenue vis--vis the needs of government would be in keeping with the principle. 2. Theoretical Justice The tax system should be fair to the average taxpayer and based upon his ability to pay. The 1987 Constitution requires taxation to be equitable. 3. Administrative Feasibility The tax system should be capable of being properly and efficiently administered by the government and enforced with least inconvenience to the taxpayer. Tax exemption of properties for religious, charitable and educational purposes Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, and nonprofit cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation (Sec. 28(3), Art. VI, 1987 Constitution). 1. Exemption applies to real property tax only. The test is usage, not ownership. 2. The word exclusive means primarily rather than solely. Thus, the admission of pay patients does not detract from the charitable character of a hospital if all its funds are devoted exclusively to the maintenance of the institution as a public charity. Where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that profit has been made will not deprive the hospital of its benevolent character. 3. The exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes such as school for training nurses, nurses home, and recreational facilities. 4. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare institution shall be exempt from gift tax, provided that not more than 30% of said gift is used for administration purposes (Sec. 101(A), NIRC) Tax avoidance v. Tax evasion 1. Tax avoidance is legal while tax evasion is illegal 2. The objective of tax avoidance in most instance is merely to reduce the tax that is due while in tax evasion the object is to entirely escape the payment of taxes 3. Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax avoidance does not. Double taxation There is no constitutional prohibition against double taxation (Villanueva v. City of Iloilo, G.R. No. L26521, December 28, 1968) ! Direct Duplicate Taxation The objectionable kind or double taxation in its prohibited sense. This violates the equal protection clause of the Constitution, and is prohibited. Elements: 1. The same property or subject matter is taxed twice when it should be taxed only once;

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2. Both taxes are levied for the same purpose; 3. Imposed by the same taxing authority; a. Within the same jurisdiction; b. During the same taxing period; c. Covering the same kind or character of tax
Indirect Duplicate Taxation The permissible kind of double taxation, this arises in the absence of one or more of the above-mentioned elements of direct double taxation. o International Juridical Double Taxation the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. (Commissioner v. SC Johnson & Sons, Inc., G.R. No.127105, June 25, 1999). o Local Double Taxation- the imposition of taxes of similar nature both by the national government and the local government unit where the object of tax is located.
Usual methods of avoiding the occurrence of double taxations 1. Tax Credits an amount subtracted from an individuals or entitys tax liability to arrive at the total tax liability. 2. Tax Deductions tax write-off or reduction in the gross amount on which a tax is calculated. 3. Reduction of the Philippine income tax rate 4. Tax Exemptions a grant of immunity to particular persons or corporations from the obligation to pay taxes. 5. Tax Treaties Agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned.
TAX ADMINISTRATION AND ENFORCEMENT

Authority of the Commissioner to make assessments based on the Best Evidence Obtainable Best evidence obtainable - any data, record, papers, documents, or any evidence gathered by internal revenue officers from government offices or agencies, corporations, employers, clients or patients, tenants, lessees, vendees and from all other sources, with whom the taxpayer had previous transactions or from whom he received any income, after ascertaining that a report required by law as basis for the assessment of any internal revenue tax has not been filed or when there is reason to believe that any such report is false, incomplete or erroneous. The Commissioner may use the best evidence obtainable to assess the proper deficiency tax in the following cases: 1. When a report required by law as a basis of assessment has not been filed within the time fixed by laws, rules and regulations; or 2. There is reason to believe that the report is false, incomplete or erroneous. By using the best evidence obtainable, the Commissioner may make or amend the return from his own knowledge. The assessment made by the Commissioner is prima facie presumed correct. The burden of proof to show the incorrectness or inaccuracy of such assessment or its details lies with the taxpayer, contrary to the usual presumption of good faith and innocence. Authority of the Commissioner to delegate power The Commissioner may delegate the powers vested in him to any subordinate official with the rank equivalent of division chief or higher. However, the following cannot be delegated: 1. Power to recommend the promulgation of rules or regulations by the Secretary of Finance; 2. Power to issue rulings of first impressions or to reverse, revoke, and modify any existing ruling of the Bureau. 3. Power to compromise or abate any tax liability.

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Exceptions to Compromise: ! Assessments issued by the regional offices involving basic deficiency taxes of P500,000.00 or less; ! Minor criminal violations discovered by regional and district officials, may be compromised by the REGIONAL EVALUATION BOARD 4. Power to assign or re-assign internal revenue officers to establishments where articles subject to excise tax are produced or kept. Authority of the Commissioner to inquire into bank deposits The Commissioner of Internal Revenue is authorized to inquire in to the bank deposits of: 1. A decedent to determine his gross estate; 2. Any taxpayer who has filed an application to compromise his tax liability by reason of his financial incapacity to pay his taxes. 3. A specific taxpayer/s subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of. Does this power of the Commissioner conflict with R.A. 1405, Secrecy of Bank Deposits Law? No. The provisions of the Tax Code granting this power is an exception to the 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 writing 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. Non-retroactivity of rulings Rule: any revocation, modification, or reversal of any of the rules or regulations or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to taxpayers. Exceptions: 1. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; 2. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling was based; 3. Where the taxpayer acted in bad faith.(Sec. 246, NIRC)
INCOME TAXATION
When is income taxable? Income, gain, or profit is subject to income tax, when the following requisites are present: 1. There is income, gain or profit; 2. The income, gain or profit is received, accrued, or realized during the taxable year ;and 3. The income, gain or profit is not exempt from income tax. Return of capital is not subject to income tax. Thus, payment of loan principal is exempt from income tax. Cost of sales of manufacturers and dealers of goods, which represents return of capital, is not subject to income tax. Source Rules 1. Interests Residence of the debtor.

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2. Dividends Residence of the corporation paying the dividend. Dividends received from a foreign corporation are treated as income from within the Philippines, unless less than 50% of the gross income of the foreign corporation for the three-year period preceding the declaration of such dividend was derived from sources within the Philippines, in which case only the amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources shall be treated as income from sources within the Philippines. 3. Services Place of performance of the service. 4. Mining income location of the mines 5. Farming income place of farming activities 6. Rentals and royalties Location of property or interest in such property 7. Sale of real property Location of the property 8. Sale of personal propertya. Personal property purchased within and sold without or purchased without and sold within Country in which sold b. Personal property produced (in whole or in part) by the taxpayer within and sold without or produced (in whole or in part) without and sold - Sources partly within and partly without the Philippines c. Sale of Shares of Stock in a Domestic Corporation shall be treated as derived entirely from sources within the Philippines regardless of where said shares are sold. General Professional Partnership ! GPP is not a taxable entity. - not subject to income tax, but are required to file returns of their income for the purpose of furnishing information as to the share of each partner in the net gain or profit, which each partner shall include in his individual return. Co-ownership ! It is not taxable when the activities are limited merely to the preservation of the co-owned property but co-owners are liable for income tax in their separate and individual capacities. ! It is taxable when the income of the co-ownership is invested by the co-owners in business creating a partnership Joint venture A joint venture or consortium referred to in Section 22(B), NIRC is not considered as a separate taxable entity provided that two elements are present: (a) it must be unincorporated (entity not registered with the SEC); and (b) for purposes of undertaking construction or energy-related project. A joint venture is taxable when it is: (a) A domestic corporation jointly owned by individuals and by two or more existing domestic and/or foreign corporations that is incorporated under the laws of the Philippines, or duly registered with or licensed by the SEC, even if it is engaged in the business of construction or energy-related activity; or (b) An unincorporated joint venture or consortium (or unregistered partnership) engaged in any other line of business than construction or energy-related activity with operating contract with the government Common requisites of exempt corporations (Sec. 30 NIRC) 1. 2. 3. 4. Not organized and operated principally for profit; No part of the income inures to the benefit of any member or individual; No capital represented by shares or stock; and Educational or instructive in character.
Creditable withholding tax and final withholding tax The creditable and final withholding taxes are similar in that they are withheld-at-source at the time of payment or accrual, by the withholding agent who is making the payment of the income. The differences between the two are: a. Under the final withholding tax system, the amount of income tax withheld by the withholding agent is constituted as full and final payment of the income tax due from the payee on said

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income. However, in the case of creditable withholding tax, the amount withheld by the withholding agent is only a part of the income tax liability due from the recipient of income. b. The liability for payment of the final withholding tax rests primarily in the payor of income as a withholding agent, while the primary duty to declare the income, file the return and pay the tax rests on the recipient of income. c. The payee-recipient of income is not required to file an income tax return for the particular income subjected to final withholding tax, whereas the payee of income subject to creditable withholding tax must declare such income in his return and may credit the tax withheld from his income tax liability for the period, provided that the Certificate of Tax Withheld is attached to the return. Stock dividend A stock dividend representing the transfer of surplus to capital account is not subject to tax. However, if a corporation cancels or redeems stock issued as dividend at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part, essentially equivalent to the distribution of taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered taxable income to the extent that it represents a distribution of earnings or profits. Tax sparing rule (Dividend received by a non-resident foreign corporation from a domestic corporation) The TAX SPARING RULE provides that the Philippines will only impose 15% of tax on dividends and will spare the subsidiary from paying the difference of 15%, provided that the country in which the parent company is domiciled shall allow a credit against tax due from non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 15%, which represents the difference between the regular income tax of 30% and the 15% tax on dividends. ! Deemed paid does not imply tax credit actually granted by the foreign government. The fact that the country in which the NRFC is domiciled does not impose any tax on the dividends received by such corporation should be held as a full satisfaction of the condition for the availment of the 15% final tax. (CIR v. Wander Philippines Inc., G.R. No. L-68375, April 15, 1988) Minimum Corporate Income Tax The MCIT (2% of gross income) is a new concept introduced by R.A. 8424 to the Philippine taxation system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of corporations. It was devised as a relatively simple and effective revenueraising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector. (Chamber of Real Estate and Builders Association, Inc. v. Hon. Executive Secretary Romulo, et al., G.R. No. 160756, March 9, 2010) Note: Favorable business climate theory: Domestic corporations (Resident foreign corporation) owe their
corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to the public expenses.
Limitations: 1. MCIT does not apply if the DC or RFC is not subject to NCIT; 2. For DC whose operations are partly covered by the NCIT and partly covered under a special income tax system, the MCIT shall apply on operations covered by the NCIT; 3. For RFC, only the gross income from sources within the Philippines shall be considered for determining applicability of MCIT. When MCIT is applicable 1. If taxable income is zero or negative; or 2. If MCIT is greater than NCIT due.

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When does MCIT commence? th MCIT is imposed beginning the fourth (4 ) taxable year immediately following the year in which such corporation commenced its business operations, which is the year when the corporation registers with the BIR and NOT when the corporation started commercial operation. Rules on Carry Forward of the Excess MCIT: 1. The excess of MCIT over the NCIT can be carried forward on an annual and quarterly basis; 2. It can be credited against the NCIT due in the next 3 immediately succeeding taxable years; 3. Any excess not credited in the next 3 years shall be forfeited; 4. Carry forward (annually or quarterly) is possible only if NCIT is greater than MCIT; Imposition of MCIT may be suspended if substantial losses are sustained due to any of the following (Sec. 27(E)(3), NIRC); Memorandum No. 6-2002): 1. Prolonged labor dispute losses arising from a strike by the employees for more than 6 months within a taxable period causing temporary shutdown of business operations 2. Force majeure cause due to an irresistible force as by "act of god" like lightning, earthquake, storm, flood and the like; also include armed conflicts like war and insurgency 3. Legitimate business reverses include substantial losses sustained due to fire, robbery, theft, or embezzlement, or for other economic reasons as determined by the Secretary of Finance Entities EXEMPT from MCIT: 1. Domestic proprietary educational institutions; 2. Domestic non-profit hospital; 3. Domestic depository banks under the expanded foreign currency deposit system; 4. Resident foreign international carrier; 5. Resident foreign offshore banking units; 6. Resident foreign regional operating headquarters; and 7. Firms enjoying special income tax rate under the PEZA law, Bases Conversion and Development Act of 1992 and those enjoying income tax holiday incentives. Interest income derived from long term deposit or investment Characteristics/conditions that should be present to enjoy income tax exemption of interest income derived from long term deposit or investment (RMC No. 18-2011): 1. The depositor or investor is an individual citizen (resident or non-resident) or resident alien or nonresident alien engaged in trade or business in the Phil. and not a corporation. 2. The LTD or investments certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank. 3. The LTD or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP. 4. The LTD or investments must be issued by banks only and not by other financial institutions 5. The LTD or investments must have a maturity period of not less than 5 years. 6. The LTD or investments must be in denominations of P10,000 and other denominations as may be prescribed by the BSP. 7. Only the interest income from LTD or investments certificates are covered by the income tax exemption. 8. Income tax exemption does not cover any other income such as gains from trading, foreign exchange gain. th 9. The LTD or investments should not be terminated by the investor before the 5 year, otherwise it shall be subjected to the graduated rates of 5%, 12%, or 20% on interest income earnings. Ordinary asset and Capital asset Ordinary assets- assets that are used primarily in the ordinary course of trade or business: 1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or

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2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or 3. Property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or 4. Real property used in trade or business of the taxpayer. ! Ordinary gains are included in the gross income. Ordinary losses are deductible from gross income.
Capital asset- Include all property held by the taxpayer whether or not connected in trade or business but not including those enumerated as ordinary assets. ! Capital gains derived from sale of stocks of a domestic corporation are subject to capital gains tax. ! A capital gain derived from sale of real property in the Philippines is subject to capital gains tax but no loss is recognized because gain is presumed ! For other capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income and not subject to capital gains tax. Fringe Benefit Any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employees). What fringe benefits are not subject to fringe benefit tax? 1. Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; 2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; 3. Benefits given to rank and file employees, whether granted under a collective bargaining agreement or not; 4. De minimis benefits-are limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting health, goodwill, contentment, or efficiency of his employees 5. If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or 6. If the grant of the fringe benefit is for the convenience of the employer. Exclusions from gross income The following items shall not be included in gross income and shall be exempt from taxation 1. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise 2. Amounts received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. 3. Value of property acquired by gift, bequest, devise, or descent 4. Amounts received, through accident or health insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. 5. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. 6. Retirement benefits received under R.A 7641. Retirement received from reasonable private benefit plan after compliance with certain conditions. Amounts beyond control separation. Foreign social security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS benefits. What are the conditions for excluding retirement benefits from gross income? 1. Retirement benefits under R.A. 4917 where: i. Retiree employed for at least 10 years by the same employer
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ii. Retiree at least 50 years old iii. Avails of the benefit only once iv. BIR approved private benefit plan 2. Retirement benefits under R.A. 7641 where: i. No private benefit plan ii. Must have served the company for at least five years iii. Retiree at least 60 years old but not more than 65 years of age at the time of retirement 7. Miscellaneous Items What are the conditions for excluding Prizes and Awards from gross income? ! Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. Provided, the recipient was selected without any action on his part and is not required to render substantial future services. ! Prizes and awards granted to athletes in sports competitions locally or abroad and sanctioned by their national sports association. National Sports Associations are those duly accredited by the Philippine Olympic Committee (POC). Itemized deductions 1. Ordinary and necessary trade, business or professional expenses a) The expense must be ordinary and necessary b) It must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed c) It must be supported by receipts, records or other pertinent papers 2. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade or business a) There must be a valid and existing indebtedness; b) The indebtedness must be that of the taxpayer; c) The interest must be legally due and stipulated in writing; d) The interest expense must be paid or incurred during the taxable year; e) The indebtedness must be connected with the taxpayers trade, business or exercise of a profession; f) The interest payment arrangement must not be between related taxpayers; g) The interest is not expressly disallowed by law to be deducted from taxpayers gross income; and h) The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayers otherwise allowable deduction for interest expense shall be reduced by 33% (Tax arbitrage rule) 3. Taxes paid or incurred within the taxable year in connection with the taxpayers profession ! All taxes, national or local, paid or accrued during the taxable year in connection with the trade or business or profession of the taxpayer are deductible from gross income, except: a) Philippine income tax b) Foreign income tax, provided the taxpayer avails of the foreign tax credit, if not availed, may be claimed as deduction from gross income; c) Estate and donors tax d) Special assessment on real property e) Electric energy consumption tax f) Final taxes, being in the nature of income taxes g) VAT h) Taxes on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering (Sec. 127 [D], NIRC) i) Taxes paid for commodity not connected with the taxpayers business. 4. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses. Conditions for deductibility of losses a) The loss must be that of the taxpayer; b) The loss is actually sustained and charged off within the taxable year; c) The loss is evidenced by a closed and completed transaction; d) The loss is not claimed as a deduction for estate tax purposes;

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e) The loss is no compensated for by insurance or otherwise f) In the case of an individual, the loss must be connected with his trade, business or profession, or incurred in any transaction entered into for profit though not connected with his trade, business or profession; and g) In case of casualty loss, it has been reported to the BIR within forty-five days from date of occurrence of the loss. Net operating loss carry over (NOLCO)- It is the excess of allowable deductions over gross income of the business for any taxable year, which had not been previously offset as deduction from gross income. ! Loss shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss. Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under NOLCO 5. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within the taxable year, connected with profession, trade or business, not sustained between related parties. ! Reserves for bad debts are not allowed as deductions from gross income. Bad debts must be charged off during the taxable year to be allowed as deduction from gross income. The mere setting u of reserves will not give rise to any deduction. 6. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. 7. Depletion or deduction arising from the exhaustion of non-replaceable asset, usually a natural resource. 8. Charitable and other contributions. 9. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. 10. Contributions to pension trusts. 11. Insurance premiums for health and hospitalization. 12. Personal and additional exemptions.
ESTATE AND DONORS TAX

What comprises the gross estate of the decedent? Consists of the value of all property, real or personal, tangible or intangible, wherever situated, with the exception of non-resident aliens since they are only liable for property for property located in the Philippines. However, the following properties, although not owned by the decedent, still form part of the gross estate. 1. Decedents interest although ownership is not vested in the decedent but he had interest therein at the time of his death, the interest shall be considered as part of the gross estate. 2. Transfers in contemplation of death a transfer shall be considered as transfers in contemplation of death although transferred during the lifetime of the decedent but he still retained: a. Possession or enjoyment; b. Notwithstanding the transfer he continues to receive income or fruits; c. The right alone or in conjunction with any person, to designate the person who shall possess or enjoy the property. 3. Revocable transfers 4. Property passing under the general power of appointment 5. Proceeds of life insurance - includible in the gross estate of the decedent in the following cases: a. The beneficiary is the estate of the deceased, his executor, or administrator, irrespective of whether or not the insured retained the power of revocation; and
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b. The beneficiary is other than the decedents estate, executor, or administrator, when designation of beneficiary is not expressly made irrevocable. 6. Prior interests 7. Transfers for insufficient consideration What are the exemptions from the gross estate? 1. The merger of usufruct in the owner of the naked title; 2. Fideicommissary substitution; 3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and 4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, That not more than 30% of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes. Requisites for Deductibility of Vanishing Deduction a. Death -- the present decedent died WITHIN 5 YEARS from the receipt of the property from a prior decedent or donor; b. Identity --The property sought to be deducted is the one received from a prior decedent or donor; c. Previous determined and paid -- the donor's tax on the gift or estate tax on the prior succession was finally determined and paid; d. Inclusion -- The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or the total amount of the gifts of the donor; and e. No previous deduction NO vanishing deduction on the property was allowed to the estate of the prior decedent.
VALUE ADDED TAX

Doctrine on Effectively Zero-rated sales Although the law does not specifically mention PAGCORs exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes. (CIR v. Acesite Hotel Corp., G.R. No. 147295, February 16, 2007) What are the differences between Zero-Rated transactions and VAT-exempt transactions? 1. A zero-rated scale is a taxable transaction but does not result in an output tax. An exempt transaction is not subject to output tax. 2. An input tax may be credited against the output tax of a VAT-registered person with zero-rated sales. Seller in an exempt transaction is not entitled to credit his input tax. 3. Persons engaged in transactions which are zero-rated are required to register. VAT-exempt persons have the option either to be VAT-exempt or to be VAT-registered. 4. The input tax of a VAT-registered person with zero-rated sales may be (1) credited against the output tax or other NIRC taxes; or (2) claim it as refund. No such option for VAT-exempt. Differentiate Zero-Rated from Effectively Zero-Rated

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Although both are taxable and similar in effect, zero-rated transactions differ from effectively zerorated transactions as to their source. Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate. Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. (CIR v. Seagate Technology, G.R. No. 153866, February 11, 2005) A VAT-exempt person is given the option either to be VAT-exempt or to register and be subject to VAT. Why would a VAT-exempt person elect to be subjected to VAT? The rationale of this option is that such VAT-exempt person may incur a large amount of input tax in excess of his output tax and such input tax can be credited against any tax under the NIRC. This crediting shall not be possible unless he exercises such option. Note: The election is irrevocable for a period of 3 years from the quarter the election was made. What are the requisites for taxability of sale of goods and personal properties? 1. There is an actual or deemed sale, barter or exchange of goods or personal properties for a valuable consideration; 2. The sale is in the course of trade or business or exercise of profession in the Philippines; 3. The goods or properties are located in the Philippines and are for use or consumption therein; 4. The sale is not exempt from VAT under Section 109, NIRC, special law, international agreement binding upon the government of the Philippines. Note: Absence of any of the above requisites EXEMPTS the transaction from VAT. However, percentage taxes may apply. A lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P12,800.00 while others are leased out for more than P12,800.00 per unit. Determine his tax liability. The gross receipts from rentals not exceeding P12, 800.00 per month per unit shall be exempt from VAT REGARDLESS of the aggregate annual gross receipts. It is also exempt from percentage tax.The gross receipts from rentals exceeding P12,800.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P12,800.00) exceeds P1,919,500.00. Otherwise, the gross receipts will be subject to 3% percentage tax (Sec. 116, NIRC) (R.R. No. 16-2011) Note: The threshold of P1,919,500.00 does not apply if the monthly rental for residential units does not exceed P12, 800.00 per month. What are the transactions deemed sale? 1. Transfer, use, consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; 2. Distribution or transfer to: a. Shareholders or investors share in the profits of VAT-registered person; or b. Creditors in payment of debt or obligation;
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3. Consignments of goods if actual sale is not made within 60 days following the date such goods were consigned; and 4. Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation. Note: Deemed sales apply only to sale of goods and properties and not to sale and exchange of services. No actual sale but there shall be deemed sale by operation of law. Claim for Input Tax on Depreciable Goods Where a VAT registered person purchases or imports CAPITAL GOODS, which are depreciable assets for income tax purposes, the aggregate acquisition of which (exclusive of VAT) in a calendar month exceeds P1M regardless of the acquisition cost of each capital good: 1. Estimated useful life is 5 years or more Input Tax shall be SPREAD evenly over a period of 60 MONTHS to commence in the calendar month when the capital good is acquired; 2. Estimated useful life is less than 5 years - Input Tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life. Such claim on for Input Tax shall commence in the calendar month the capital good is acquired. Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported during any calendar month DOES NOT EXCEED P1M - the total amount of input taxes will be allowable as credit against output tax IN THE MONTH OF ACQUISITION.
Prescriptive Period for Refund and Tax Credit of Creditable Input Tax
Within 2 years after the close of the taxable quarter when the sales were made Section 112(A), NIRC provides that any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax x x x. The proviso clearly provides in no uncertain terms that unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not x x x. Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. (CIR v. Mirant Pagbilao Corporation, G.R. No. 172129, September 12, 2008) True or False: SM, an operator of cinema houses in its malls throughout the Philippines, is liable for VAT on its gross ticket sales. False. Among those included in the enumeration [of sale or exchange of services under Sec. 108] is the "lease of motion picture films, films, tapes and discs." This, however, is not the same as the showing or exhibition of motion pictures or films. Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the enumeration, it must be determined whether such activity falls under the phrase "similar services." The intent of the legislature is not to impose VAT on persons already covered by the amusement tax. (CIR v. SM Prime Holdings, Inc. and First Asia Realty Development Corp., G.R. No. 183505, February 26, 2010) True or False: Tommy operates a barbershop and received P1 million gross receipts during the year. His wife, Coral, who operates a beauty salon, had P800,000 gross receipts during the year. The combined gross receipts of the spouses are considered in determining whether or not they are subjects to VAT.

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False. For VAT purposes, the husband and the wife shall be considered as separate taxpayers. Each spouse engaged in taxable sale of goods, properties, or services must comply with the administrative requirements prescribed for VAT taxpayers. Note: Aggregation Rule- If a spouse is a professional, who derives income not only from his or her practice of profession but also from other lines of trades or businesses which are otherwise subject to VAT, the transactions shall be aggregated or combined for purposes of determining whether the threshold prescribed by law has been exceeded. True or False: The importation of second-hand motor vehicle into the Philippines with market value of P1 million is exempt from VAT. False. According to Section 107 NIRC, every importation of goods, whether or not in the course of trade or business, shall be liable to VAT. Since the law refers to any imported good, then the importation of the subject motor vehicle mentioned in the question is NOT exempt from VAT. Furthermore, the exemption of the general threshold for the year of P1,919,500 applies only to sale or lease of goods or properties or the performance of services other than the transactions mentioned in Section 109 of the NIRC. There is in the problem given an importation of goods. True or False: Sale of services by an unincorporated joint venture undertaking construction activity is subject to VAT. True. An unincorporated joint venture undertaking construction activity is considered as a special VAT person. Although the said entity is exempt from income tax, it is liable to VAT. N.B. The BIR has allowed certain arrangements through which the unincorporated joint venture is treated merely as a flow-through entity that does not effectively pay VAT. In such a case, the members of the joint venture are responsible for their respective obligations under the joint venture agreement and can claim input taxes on their purchases of taxable goods, properties, or services. True or False: Services performed in China by a VAT-registered contractor are zero-rated. False. Services performed in China by a VAT registered contractor shall not be subject to VAT due to situs-of-service principle which states that consumption takes place where the service is performed. Stated otherwise, VAT shall be assessed upon sale of services if performed in the Philippines. (Sec. 108, NIRC). Accordingly, services done outside the Philippines, including those done in special economic zone or freeport zone treated by fiction of law as a foreign territory, shall be exempt from the value added tax. True or False: Input tax in the amount of P36,000 paid by a VAT-registered manufacturer on locally purchased equipment cannot be credited in full against its output tax for the quarter. False. R.A. 9361, effective on the fourth quarter of 2006, repealed the 70% cap on input taxes previously applied by virtue of R.A. 9337. As such, whatever input tax paid or accrued on importation or local purchase of goods or services shall be immediately available as credit against the taxpayers output tax for the same taxable quarter. True or False: Only VAT-registered persons are subject to VAT. False. Although registration is an indispensable requirement under our VAT law, it does not however determine VAT liability. Thus, even a person who is required to register as a VAT person because he engages in VATable transactions, but failed to do so, shall still be liable to VAT. One of the penalties provided for him by the law is that he shall not be entitled to claim any input tax credit but shall be liable to the full amount of his output tax. True or False: PLDT and all other franchise grantees are subject to VAT.
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False. The term sale or exchange of services includes those performed or rendered by franchise grantees of electric utilities, telephone, and telegraph, radio and/or television broadcasting and all other franchise grantees. However, franchise grantees of radio and/or television broadcasting whose annual receipts of the preceding year do not exceed P10,000,000 and franchise grantees of gas and water utilities are not subject to VAT. (Sec.108(A), NIRC in relation to Sec. 4.108-1, RR No. 16-05)
Local Property Tax and Real Property Tax

Can a province or city impose a franchise tax on businesses enjoying a franchise within its territorial jurisdiction notwithstanding the said businesses liability to VAT? Yes. R.A. No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by telecommunications franchise holders and in its stead imposed a 10% VAT in accordance with Section 108, NIRC. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or municipalities. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government. VAT inures to the benefit of the national government, while the local franchise tax is a revenue of the local government unit. (Smart Communications Inc v. City of Davao, G.R. No. 155491, July 21, 2009) What properties are exempt from real property tax? 1. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; 2. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes; 3. All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or -controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; 4. All real property owned by duly registered cooperatives as provided for under R. A. No. 6938; and 5. Machinery and equipment used for pollution control and environmental protection. Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or controlled corporations are hereby withdrawn upon the effectivity of this Code. (Sec. 234, LGC) Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, the pieces must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil companies install underground tanks in the gasoline stations located on land where the gasoline stations are located. Are those underground tanks, which were not placed there by the lessee of the land, considered real property for purposes of real property taxation under the Local Government Code? YES. The properties are considered as necessary fixtures of the gasoline station, without which the gasoline station would be useless. Machinery and equipment installed by the lessee of leased land is not real property for purposes of execution of final judgment only. They are considered as real property for real property tax purposes as other improvements to affixed or attached real property under the Assessment Law and the Real Property Tax Code (Caltex v. Central Board of Assessment Appeals, L-50466, 31 May 1982)

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REMEDIES
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Prescription in Criminal Cases (Sec. 281) All violations of any provision of this Code shall prescribe after five years.! When does it begin to run? 1. From the day of the commission of the violation of the law; or 2. If the same be not known at the time, from the discovery thereof AND the institution of judicial proceedings for its investigation and punishment. Prescription of the Governments right to recover an erroneously refunded tax: three-year under Sec. 203 of the NIRC) because the demand of the Government on the taxpayer to pay the erroneously refunded tax is in effect an assessment for deficiency franchise tax (Guagua Electric v. CIR, G.R. No. L-23611, April 24, 1967) Does a withholding agent have the right to file an application for tax refund? Yes. A withholding agent should be allowed to claim for a tax refund, because under the law said agent is the one liable for any violation of the withholding tax law should such violation occur. What are considered indirect denial of protest? 1. Formal and final letter of demand from the BIR to the taxpayer 2. Civil action for collection 3. Issuance of a warrant of distraint and levy to enforce collection of deficiency assessment Can the BIR file a civil action for collection pending decision of the administrative protest? Yes. The request for reinvestigation and reconsideration was in effect considered denied by petitioner (CIR) when the latter filed a civil suit for collection of deficiency income. (CIR v. Union Shipping, May 21, 1990) Two remedies are accorded the taxpayer: 1. Administrative protest which is a protest against assessment and is filed before payment; and 2. Claim for refund filed with the CIR after payment. Can the taxpayer institute a direct action before a court of justice to protest the assessment? No because it will be a violation of the doctrine of exhaustion of administrative remedies. Under Sec. th 228 4 par., the assessment may be protested administratively by filing a request for reconsideration or reconsideration. What about the claim for refund? Still the answer is no. Under Sec. 229, no suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the CIR.
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NIRC 1. Court of Tax Appeal Division 2. Court of Tax Appeals en banc 3. Supreme Court Local Tax 1. Court of Competent Jurisdiction (MTC or RTCdepending on jurisdictional amount) 2. Appeal to: 3. RTC- decision of MTC; or 4. CTA Divisiondecision of RTC 5. CTA En Banc 6. Supreme Court Real Property Tax 1. LBAA 2. CBAA 3. CTA En Banc 4. Supreme Court Tariff and Customs Code 1. Commissioner of the Bureau of Customs Note: In case the decision of the COMMISSIONER is unfavorable to the government, there is an AUTOMATIC REVIEW by the Commissioner or the Secretary of Finance. If adverse decision against the taxpayer, appeal to no. 2 2. Court of Tax Appeals 3. Court of Appeals en banc 4. Supreme Court
Protest
Where to appeal in case of denial of protest AND Proper Courts wherein taxpayer should file appeal from each courts decision
Taxpayers Remedies After Payment Administrative Remedies 1. Tax Refund actual reimbursement of the tax. A refund is a written claim for the payment of cash for taxes erroneously or illegally paid by the tax payer to the government. (Mamalateo, p. 809) 2. Tax Credit the government issues a tax credit certificate or a tax credit memo covering the amount determined to be reimbursable can be applied after proper verification against any sum that may be due and collectible from the taxpayer. Grounds for filing a claim for tax refund or tax credit (EPS): 1. Tax is collected Erroneously or illegally 2. Penalty is collected without authority. 3. Sum collected is excessive or in any manner wrongfully collected. Tax Refund vs. Tax Credit Tax Refund The taxpayer asks for restitution of the money paid as tax Two-year period to file claim with the CIR starts after the payment of the tax or penalty Refund and credit are mutually exclusive Under Sec. 76, NIRC, a taxable corporation with excess quarterly income payments may apply for either a tax refund or a tax credit, but not both. Failure to indicate a choice, however, will not bar a valid request for a refund, should this option be chosen by the taxpayer later on. Once the carry-over option is taken, actually or constructively, it becomes irrevocable. (Philam Asset Management, Inc. v. CIR, G.R. Nos. 156637 & 162004, December 14, 2005) Forfeiture Of Cash Refund And Of Tax Credit SECTION 230. Forfeiture of Cash Refund and of Tax Credit. Tax Credit The taxpayer asks that the money so paid be applied to his existing tax liability Two-year period starts from the date such credit was allowed (in case credit is wrongly made).

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(A) Forfeiture of Refund. A refund check or warrant issued in accordance with the pertinent provisions of this Code, which shall remain unclaimed or uncashed within five (5) years from the date the said warrant or check was mailed or delivered, shall be forfeited in favor of the Government and the amount thereof shall revert to the general fund. (B) Forfeiture of Tax Credit. A tax credit certificate issued in accordance with the pertinent provisions of this Code, which shall remain unutilized after five (5) years from the date of issue, shall, unless revalidated, be considered invalid, and shall not be allowed as payment for internal revenue tax liabilities of the taxpayer, and the amount covered by the certificate shall revert to the general fund. (C) Transitory Provision. For purposes of the preceding Subsection, a tax credit certificate issued by the Commissioner or his duly authorized representative prior to January 1, 1998, which remains unutilized or has a creditable balance as of said date, shall be presented for revalidation with the Commissioner or his duly authorized representative or on before June 30, 1998. SECTION 231. Action to Contest Forfeiture of Chattel. In case of the seizure of personal property under claim of forfeiture, the owner desiring to contest the validity of the forfeiture may, at any time before sale or destruction of the property, bring an action against the person seizing the property or having possession thereof to recover the same, and upon giving proper bond, may enjoin the sale; or after the sale and within six (6) months, he may bring an action to recover the net proceeds realized at the sale.
TARIFF AND CUSTOMS CODE

Absolutely Prohibited Importations: 1. Weapons of war Exception: when authorized by law 2. Insidious or seditious written or printed articles in any form; 3. Obscene or immoral or insidious articles; 4. Articles used for producing unlawful abortion; 5. Gambling devices; 6. Lottery and sweepstakes tickets, advertisements thereof, and lists of drawings therein; Exception: those tickets authorized by the Philippine Government 7. Any article manufactured in whole or in part of gold, silver or other precious metals or alloys thereof, he stamps, brands or marks or which do not indicate the actual fineness of quality of said metals or alloys; 8. Any adulterated or misbranded articles of food or drug in violation of the provisions of the "Food and Drugs Act; and 9. Narcotics and prohibited drugs; How Smuggling is Committed Under Section 3601, TCCP, smuggling is committed by any person who: (1) fraudulently imports or brings into the Philippines or assists in importing or bringing into the Philippines any article, contrary to law; or (2) receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment or sale of such articles after importation, knowing the same to have been imported contrary to law. Importation begins when the vessel or aircraft enters the jurisdiction of the Philippines with intention to unload and is deemed terminated upon payment of the duties, taxes and other charges due upon the articles and the legal permit for the withdrawal shall have been granted. If the articles are free of duties, taxes, and other charges, importation is terminated until the articles shall have legally left the jurisdiction of the customs. (Rodriguez v. CA, G.R. No. 115218, September 18, 1995) Doctrine of Hot Pursuit
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Customs officials are given the power to continue the seizure of a vessel or imported articles, when there is violation of the Philippine tariff and customs laws, EVEN BEYOND THE JURISDICTIONAL LIMITS. 1. When a vessel becomes subject to seizure by reason of an act done in Philippine waters in violation of tariff and custom laws, a pursuit of such vessel which began within the jurisdictional waters may continue beyond the maritime zone and the vessel may be seized on high seas 2. Imported articles which may be the subject of seizure for violation of tariff and custom laws may be pursued in their transportation in the Philippines by land, water or air and such jurisdiction extend over them at any place therein as may be. What are the special customs duties? 1. Anti-dumping Duty. A special duty imposed on the importation of a product or commodity or articles of commerce into the Philippines at less than its normal value when destined for domestic consumption in the exporting country which importation is causing or threatening to cause material injury to a domestic industry, or materially retards the establishment of a domestic industry producing like product. 2. Countervailing Duty. Additional custom duties imposed whenever any product, commodity or article of commerce is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product, commodity or article, and the importation of such subsidized product, commodity or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. 3. Marking Duty. Additional customs duties imposed on foreign articles (or its container if the article itself cannot be marked) not marked in any official language of the Philippines in a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate purchaser in the Philippines the name of country of origin. 4. Discriminatory Duty. New or additional customs duty imposed upon articles which wholly or in part are the growth or product, or imported in a vessel, of any foreign country whenever he shall find as a fact that such country: a. Imposes, directly or indirectly, upon any Philippine product unreasonable charge, exaction, regulation, or limitation which is not equally enforced upon like articles of other foreign countries. b. Discriminates in fact against the commerce of the Philippines, as to place the Philippines at a disadvantage compared with the commerce of any foreign country. 5. Safeguard Duty. A General Safeguard Duty is a duty imposed upon a positive final determination of the Commission that a product is being imported to the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat to the domestic industry. A Special Safeguard Duty is a duty on an agricultural product, consistent with Philippine international treaty obligations, if its cumulative import volume in a given year exceeds its trigger volume subject to the conditions stated in Sec.23 of R.A. 8800, or but not concurrently; its actual C.I.F. import price is less than its trigger price subject to the conditions stated in Sec 24 of R.A. 8800. State and explain the basis of dutiable value of imported articles subject to an ad valorem tax under the Tariff and Customs Code. The dutiable value of an imported article subject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines plus other costs incurred by the buyer but not included in the price. If such value could not be determined, then the following values are to be utilized in their sequence: transaction value of identical goods; transaction value of similar goods; deductive value; computed value; and fallback value. (Sec. 201, TCCP, amended by R.A. 9135) N.B. Transaction value means the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding: (a) commissions and brokerage fees; (b) cost of containers; (c) cost of packing, whether for labor or materials; (d) value of materials, components, parts and similar

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items incorporated in the imported goods; (e) amount of royalties and license fees related to the goods; (f) cost of transport of the imported goods from the port of exportation to the port of entry in the Philippines; (g) loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Philippines; and (h) cost of insurance (R.A. No. 9135, implemented by Customs Administrative Order No. 004-04, Nov. 8, 2004). What is the Doctrine of Primary Jurisdiction in Seizure and Forfeiture Proceedings? The Bureau of Customs acquires exclusive jurisdiction over imported goods, for the purposes of enforcement of the custom laws, from the moment the goods are actually in the possession or control, even if no warrant of seizure or detention had previously been issued by the Collector of Customs in connection with seizure and forfeiture proceedings. (Republic v. CFI of Manila, G.R. No. L-43747, September 2, 1992) What is the Nature of Forfeiture Proceedings? It is administrative and civil in nature and is directed against the thing itself. These are actions in rem. The issue is limited to whether the imported goods should be forfeited and disposed of in accordance with law for violation of the TCCP. It is of no defense that the owner of the vessel sought to be forfeited had no actual knowledge that his property was used illegally. The absence or lack of actual knowledge of such use is a defense personal to the owner himself, which cannot in any way absolve the vessel from the liability of forfeiture. (Commissioner of Customs v. Manila Star Ferry, Inc., G.R. Nos. 31776-78, October 21, 1993). Settlement of Forfeiture Cases Settlement of cases by payment of fine or redemption of forfeited property is allowed. However, it is unavailing in three (3) instances, namely, when there is fraud, where the importation is absolutely prohibited, or where the release of the property would be contrary to law. (Transglobe International v. CA, G.R. No. 126634, January 25, 1999) What is abandonment? What are its effects? Abandonment is the renunciation by an importer of all his interests and property rights in imported articles. 1. The owner, importer, consignee or other interested party shall be deemed to have renounced all his interest and property rights over the imported article; 2. An abandoned article shall ipso facto be deemed the property of the Government and shall be disposed of in accordance with the provisions of TCCP; 3. It does not relieve the owner from any criminal liability which may arise from any violation of law committed in connection with the importation of the abandoned article. 4. If the abandoned articles are transferred to a customs bonded warehouse, the operator shall be liable for the payment of duties and taxes in the case of loss of the stored abandoned imported articles. (R.V. Marzan Freight, Inc. v. C.A., G.R. No. 128064, March 4, 2004) What is the extent of duty and tax free privilege of returning residents? Personal effects and household goods used by him abroad for at least 6 months and the dutiable value of which is NOT more than P10,000 are exempt from duties and taxes. Any amount in EXCESS of P10,000 is subject to 50% duty to the first P10,000 exemption across the board as provided for under Sec.105(F), TCCP.
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PRACTICE QUESTIONS*
ABC is a non-stock, non-profit domestic corporation and educational institution. CIR issued an LoA for the audit of ABCs books of account for 2003 & Unverified Prior Years. The CIR assessed ABC for deficiency income, VAT & DST (documentary stamp tax) arising from its lease of premises (e.g. cafeteria) operated by concessionaires, bank deposits and loan transactions for fiscal years 2001, 2002 and 2003. ABC protested the assessment and argued that the said income was used actually, directly and exclusively for educational purposes and thus, exempt from tax pursuant to Section 4(3), Article XIV of the Constitution. As the CIR failed to act on the protest, ABC filed a Petition for Review with the CTA. I. Was the LoA issued by the BIR valid? No. The practice of issuing an LOA covering audit of unverified prior years is prohibited by Revenue Memorandum Order (RMO) No. 43-90. An LOA should cover a taxable period not exceeding one taxable year. An examination conducted or an assessment made beyond the authority given to a Revenue Officer is invalid. Thus, the deficiency assessment against ABC for income tax, VAT and DST for fiscal years 2001 and 2002 is void.
II. Is ABC liable for deficiency income tax from its rental income from cafeterias or canteens inside the school premises operated by concessionaires? Not subject to tax. The resolution of the issues anchors on the application of Section 4, Article XIV of the 1987 Constitution. It reads: "All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. The SC gave only two requirements that must be proved before applying the above-quoted provision, which are: (1) the educational institution falls under the classification non-stock, nonprofit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. (Ateneo de Manila University Inc. v. CIR, C.T.A. Case No. 7246 & 7293, March 11, 2010) III. Is income from interest on bank deposits and yields from deposit substitutes automatically exempt from income taxation? No. There must be a showing that the income is included in the schools annual information return and duly audited financial statements, together with (a) certifications from depositary banks as to the amount of interest income earned from passive investments not subject to the final withholding tax (b)certification of actual, direct, exclusive utilization of said income for educational purpose and (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 purpose. IV. ABC also received a letter from RDO No. 143 requiring an explanation for its failure to affix the P15.00 DST on school diplomas issued to its graduates. No notice of assessment was issued to ABC. ABC replied and argued that, as a non-stock, non-profit educational institution, it is exempt from DST. ABCs letter-reply was forwarded to CIR who subsequently issued BIR Ruling No. 5254 stating that while non-stock, non-profit educational institutions are exempt from the DST, such educational institutions are collecting agents of the BIR for purposes of remitting the DST due on diplomas and transcript of records issued in favor of non-exempt persons or entities. The ruling also held that educational institutions who fail to remit the DST on diplomas and transcripts of record will be held liable for the tax due. ABC filed a Petition for Review with the CTA contesting the ruling issued by the CIR. Does the CTA have jurisdiction to rule on ABCs petition against the ruling issued by the CIR?

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No. The CTA does not have jurisdiction to rule on the constitutionality or validity of a law, rule or regulation. Also, ABC failed to properly exhaust administrative remedies as it did not appeal the ruling with the Secretary of Finance. The CTAs jurisdiction to resolve tax disputes excludes the power to rule on the constitutionality or validity of a law, rule or regulation. This authority is vested before the regular courts. Section 4, NIRC also provides that the power to interpret provisions therein is within the exclusive and original jurisdiction of the CIR, subject to review by the Secretary of Finance. BIR Ruling No. 5254 was issued in the exercise of the CIRs power to interpret tax laws. ABCs administrative remedy was to appeal the adverse ruling with the Secretary of Finance. The validity of BIR Ruling No. 5254 should have been elevated to the Secretary of Finance and, eventually, to the regular courts, and not to the CTA. (CTA, 2nd Division, Case No. 8217, November 9, 2011) V. If ABC is a proprietary educational institution does the exemption from income tax still apply? No. Proprietary educational institutions shall pay a tax of ten percent (10 %) on their taxable income (Sec. 27 [B] NIRC). A proprietary educational institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA). VI. Will your answer in number 5 be the same if the income from unrelated activity of the proprietary educational institution is fifty five percent (55%) of the total gross income from all sources? No, the taxable income of ABC will be subject to thirty percent (30%). If the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived from all sources the tax prescribed for domestic corporations shall be imposed on the entire taxable income (Sec. 27(B), NIRC). The term unrelated trade, business or other activity means undertakings that are NOT substantially related to the exercise or performance by such educational institution of its primary purpose or function.
Pursuant to a tax audit conducted for taxable year 1999, the BIR issued a Preliminary 15-day letter to Metro Corp., stating the deficiency taxes due from the corporation. 5 months later, Metro Corp. received a Formal Letter of Demand from the BIR for the same deficiency taxes. After being served with a Warrant of Distraint and/ or Levy to enforce the collection of taxes, Metro Corp. appealed to the BIR but was denied. Claiming that it did not receive a Preliminary Assessment Notice (PAN) and was, therefore, not accorded due process, Metro Corp. appealed to the CTA. Petitioner CIR argued that a PAN was mailed, although Metro Corp. denied receiving it. The CIR also argued that even assuming that no PAN was issued, Metro Corp. was nevertheless accorded due process since it was a Formal Letter of Demand. I. Is the Formal Letter of Demand valid even if Metro Corp. was not served with Preliminary assessment notice? No. Section 228, NIRC clearly states that a PAN shall be sent and that the taxpayers must be informed of the facts and the law upon which the assessment is made. The PAN is a substantive and not merely a formal requirement. To collect the alleged deficiency tax without first establishing the issuance of a valid assessment violates the cardinal principle in administrative investigations, which is, that taxpayers should be able to present their case and adduce supporting evidence.
II. Did the CIR need to prove that the mailed PAN was received by Metro Corp. after the latter denied receiving the same? Yes. While there is a disputable presumption that a mailed letter is received by the addressee in the ordinary course of mall, a direct denial of the receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee. The CIR could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN. The CIR also offered no explanation as to why there was failure to comply with the requirement of service of the PAN. (CIR v. Metro Star Superama Inc., G.R. No. 185371, December 8, 2010)
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III. If after the denial of appeal by the CIR, Metro Corp. filed a motion for reconsideration before the CIR, does the filing of MR toll the period of filing an appeal to the CTA? No. If the protest is denied in whole or in part, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision. Otherwise, the decision shall become final, executory and demandable. Instead of appealing to the CTA at once, the taxpayer may first opt to file a MR of the denial of the administrative protest with the Commissioner. However, this MR of the denial of the administrative protest does not toll the 30-day period to appeal to the CTA. (Fishwealth Canning Corporation v. CIR, G.R. No. 179343, January 21, 2010). IV. If CIR does not act on the appeal of Metro Corp. within 180 days from appeal, did the assessment become final, executory and demandable because of DEFs failure to appeal to the CTA within 30 days from the lapse of the 180 day period? No. A taxpayer has 2 options in case the CIR fails to act on a disputed assessment within 180 days from submission by the taxpayer of relevant documents in support of its protest, namely: (1) file a petition for review with the CTA within 30 days from the expiration of the 180-day period, or (2) wait for the final decision of the CIR on the disputed assessment and appeal such final decision to the CTA within 30 days from receipt. These options are consistent with Section 3(A)(2), Rule 4 of the Revised Rules of the CTA. (Lascona Land Co., Inc. vs. CIR, G.R. No. 171251, March 5, 2012) GHI questioned the validity of the impending imposition of VAT on tollway operators. They argued that when Congress enacted the Tax Code, it did not intend to include toll fees within the meaning of sale of services that are subject to VAT. Moreover, a toll fee is a users tax and not a fee for sale of services and that imposing VAT on toll fees would be tantamount to a tax. On the other hand, the Secretary of Finance and CIR countered that the Tax Code imposes VAT on all kinds of services of franchise grantees, including tollway operations. I. Are tollway operators subject to VAT? Yes. Tollway operators are subject to VAT, being franchise grantees which render services to others for a fee. Section 108 of the Tax Code imposes VAT on the gross receipts derived from the sale or exchange of services as well as from the use or lease of properties. VAT is imposed on all kinds of services rendered in the Philippines for a fee, including services of franchise grantees except those subject to franchise tax under Section 119 of the Tax Code. Tollway operators construct, maintain, and operate expressways or tollways, and in exchange, are allowed to collect government-approved fees from motorist using the tollways. Clearly, tollway operators render services for a fee. Moreover, tollway operators come under the specific class described in Section 108 as all other franchise grantees that are subject to VAT. A tollway operator need not hold a legislative franchise to be considered a franchise grantee. The term franchise has been broadly construed as referring, not only to authorizations that directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant franchises has been delegated by Congress.
II. Will the imposition of VAT on tollway operators amount to a tax on tax, and not a tax on service? No. Fees paid by the public to tollway operators for use of the tollway operators for use of the tollways are not taxes, as these are not imposed under the taxing power of government principally for the purpose of raising revenues to fund public expenditures. Instead, toll fees are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. What is transferred is not the sellers liability but merely the burden of the VAT. Thus, the seller remains directly and legally liable for payment of the VAT, but the buyers bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part

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of the cost that the buyer must pay to purchase the good, property or service (Renato v. Diaz, et al v. Secretary of Finance, G.R. No. 193007, July 19, 2011) St. Lukes Hospital operates a hospital pharmacy which sells medicines to in-patients and outpatients alike. The BIR assessed deficiency VAT against the hospital for the sales of medicines of all patients. The hospital argues that selling medicines to patients is part of hospital services which is exempt from VAT. Is the BIR correct? The BIR is correct with respect to sales of medicines to out-patients and wrong with respect to sales of medicines to in patients. As ruled by the Court, sales of medicines to in patients is considered part of the medical/hospital services being provided by the hospital; Hence, exempt from VAT. (St. Lukes Medical Center v. CTA and CIR, 1998) 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 donation, the real property has a fair market value of P2 million. I. Are Mario and Maria subject to income tax the value of the real property donated to them? Explain. No. The value of property acquired by gift is an exclusion from gross income (Sec. 32(B)(3), NIRC).
II. 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. Yes. Jose and Clara are subject to donors tax. Since the real property is either conjugal or absolute community of property, each spouse is deemed to have made separate donation of onehalf of the value of the property. (Tang Ho vs. Board of Tax Appeals, G.R. No. L-5949, November 19, 1955) For Jose, he is considered to have made two donations: one in favor of his son who is a relative, and two, in favor of his sons wife who is a stranger. The taxable gift to the son is P490,000 computed by deducting from the gross gift the dowry exclusion of P10,000. The net gift is subject to the graduated tax rates of 2% to 15%. The taxable gift to his sons wife is P500,000 subject to the 30% flat rate on donation to strangers. (Sec.99 and 101, NIRC) Clara is subject to the donors tax in exactly the same manner as Jose, being considered to have effected likewise, two donations. On December 28, 2008, the same spouses Arvin and Frances Hayes- donated a house and lot in Quezon City which they acquired in 2005 at a price of P3,000,000, which has now a fair market value of P8,000,000, in favor of their only son Aaron, who got married to Kimberly in June 2007. Aaron accepted the donation on the same deed. On the same date, the spouses also made donation of cash in favor of the Philippine National Red Cross in the total amount of P500,000. On January 2, 2009, the spouses donated jewelries worth P200,000, in favor of their daughter Natalie. I. How many donations were there in December 2008? Why is the number and value of donations made during the year important for donors tax purposes? There were two (2) donations in December 2008: first, the donation made in favor of their son Aaron; and second, the donation made in favor of the Philippine National Red Cross. The number of donations made during the year is important for donors tax purposes since the said tax is computed on the basis of the total net gifts made during the taxable year. (Sec. 99(A), NIRC) This method of computing the donors tax liability is known as the Cumulative method and finds significance if there are two or more donations made in favor of relatives during the same taxable year. The value of the donation is significant because donations made in favor of relatives are subject to graduated rates. The donor may therefore exempt himself from tax liability provided that his donations in a taxable year in favor of a relative does not exceed P100,000.
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II. How much is the net gift of the spouses for the year 2008? For the donation of the house and lot made in favor of their son Aaron, the net gift of the spouses Hayes amounts to P8,000,000. Gifts made in property shall be valued at its fair market value at the time of the gift. (Sec. 102, NIRC) The exemption of donations made on account of marriage to the extent of P10,000 will not be applicable in the problem given since it was not made before or within 1 year after the celebration of the marriage. For the donation made in favor of the Philippine National Red Cross, the same may be exempt from donors tax as a gift in favor of an educational and/or charitable, religious, cultural, or social welfare corporation, institution, accredited non government organization, trust, or philantrophic organization or research institution or organization provided that not more than 30% of the said gift shall be used by the donee for administration purposes. (Sec. 101(A)(3), NIRC) III. Are the spouses liable to pay donors tax in 2009? Yes. The donation made by the spouses to their daughter Natalie in January 2009 in the amount of P200,000 shall be taxed at 2% in the amount in excess of P100,000. (Sec.99(A), NIRC) Only donations made in favor relatives not exceeding P100,000 during a calendar year shall be exempt from donors tax. On June 10, 2008, X Corporation, a domestic corporation, donated to Y Corporation, one of its subsidiaries, a real property which had a fair market value of P20 million. The latter entity accepted said donation. No donors tax was paid thereon. In December, 2008, the BIR assessed X Corporation for deficiency donors tax of P6 million. The President of X Corporation comes to you for tax advice. I. Can a corporation donate to another corporation? Yes. Sec. 98, NIRC provides that: There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. The term person means an individual, a trust, estate, or corporation under Section 22(A) of the NIRC. Furthermore, Section 10(B) of RR No. 02-03 provides that: Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger. II. If so, is the tax properly computed? Yes. Since donations made between business organizations are considered as donations made to strangers, the tax payable by the donor shall be 30% of the net gifts. (Sec. 99(B), NIRC) 30% of P 20 million (30% of P 20,000,000) amounts to P6,000,000. III. Will your answer be the same if the donation was made to the President of X Corporation? Yes. The answer is the same by virtue of the Section 10(B) of RR No. 02-03 providing that donations made between an individual and a business organization shall be considered as a donation made to a stranger. The applicable rate of tax in this case therefore is similarly 30% of the net gift. Spice is engaged in the buy and sell of a books and school supplies. She registered as a nonVAT person on February 1, 2012. In 2012, her sales amounted to P2M (books) and P1M (school supplies). I. Is Spice liable to VAT in 2012? No. The sale of books is a VAT Exempt transaction under Sec.109(R), NIRC. The P1M sales on school supplies is also VAT Exempt under Sec. 109(V), NIRC which provides for the exemption of the sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs the gross annual sales and/or receipts do not exceed the amount of P1,919,500.

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II. If Spice issued VAT receipts on his sales of books and supplies, can BIR make her liable for VAT? Yes. If a person who is not VAT-registered issues any Vat receipts, the erroneous issuance shall result to the following: the non VAT person shall be liable to the percentage taxes applicable to his transactions and the VAT due on the transactions under Sec.106 or 108, NIRC without benefit of any input tax credit and 50% surcharge under Sec. 248(B). (Sec.113(D), NIRC) III. In B above, can the buyers claim input taxes on those purchases? Yes. The VAT in B above shall be recognized as an input tax credit to the purchaser provided that the requisite information is shown on the receipt or invoice. (Sec.113(D), NIRC) The City of Manila passed a new Revenue Code. A taxpayer questioned the legality of the ordinance on the ground of non-compliance with the procedural requirements provided by law. The Secretary of Justice ruled against the validity of the ordinance for non-compliance with the procedural requirements. On appeal, the RTC ruled that the appellate power of the Secretary to rule on the validity of tax ordinances is unconstitutional because it grants the Secretary the power to control local government units, in violation of the constitutional policy of local autonomy and the specific provision that the President shall exercise only the power of supervision over local government units. I. What are the procedural requirements provided by law for the adoption of local tax ordinance? The procedural requirements are: a. There must be a Public Hearing conducted prior to the enactment of the local tax ordinance (Sec 187, LGC). b. There must be compliance with quorum, voting and approval and/or veto requirements (Sections 53-55, LGC) c. There must be Publication of the local tax ordinance within ten days from approval for 3 consecutive days in a newspaper of general circulation and/or posting in at least 2 conspicuous and publicly accessible places (Sec 188, LGC).
II. Is the appellate power of the Secretary unconstitutional? No. It is constitutional. An officer in control lays down the rules in the doing of an act. If they are not followed, he may, in his discretion, order the act undone or re-done by his subordinate or he may even decide to do it himself. The supervisor, on the other hand, merely sees to it that the rules are followed, but he himself does not lay down such rules, nor does he have the discretion to modify or replace them. Section 187 authorizes the Secretary of Justice to review only the constitutionality or legality of the tax ordinance and, if warranted, to revoke it on either or both of these grounds. When he alters or modifies or sets aside a tax ordinance, he is not also permitted to substitute his own judgment for the judgment of the local government that enacted the measure. Therefore he merely exercises the power of supervision. The contention of the RTC is untenable. (Drilon v. Lim, G.R. No. 112497, August 4, 1994) The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported lien, and to the judicial remedy of filing an action in court. When does the Bureau of Customs normally avail itself of: I. the administrative, instead of the judicial remedy: The Bureau of Customs normally avails itself of the administrative remedy of seizure, such as by enforcing the tax lien on the imported articles, instead of the judicial remedy when the goods to which the lien attaches, regardless of ownership, is still in the custody or control of the government. In the case, however, of importation which, are prohibited or undeclared, the remedy of seizure and forfeiture may still be exercised by the Bureau of Customs even if the goods are no longer in its custody.
II. or the latter, instead of the former, remedy?
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When the goods are properly released and thus beyond the reach of tax lien, the government can seek payment of the tax liability through judicial action since the tax liability of the importer constitutes a personal debt to the government; therefore, enforceable by action. In this case, judicial remedy is normally availed of instead of the administrative remedy. Steel Corp. is registered with the BIR as a VAT entity. On September 30, 2004, it filed a claim for refund of input VAT for the period July 1, 2002 to September 30, 2004 with the CIR. On the same day, it filed a Petition for Review with the CTA of its claim for tax refund of the same input VAT. The BIR disputed the claim on the basis that I. It was filed beyond the prescriptive period, given that 2004 is a leap year. Filed on time. The right to claim the refund must be reckoned from the close of the taxable quarter when the sales were made in this case September 30, 2004. Thus, the claim was filed on time even if 2004 was a leap year since the sanctioned method of counting is the number of months. Furthermore, as between the Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of 1987, which states that a year is composed of 12 calendar months, it is the latter that must prevail being the more recent law.
II. The filing of the judicial claim was premature Premature. The 2 year prescriptive period for VAT refund applies only to the administrative claim before the CIR. In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004. Steel Corp. did not wait for the decision of the CIR or the lapse of the 120-day period within which the CIR must render a decision. Its assertion that the nonobservance of the 120-day period is not fatal to the filing of a judicial claim as long as both the administrative and the judicial claims are filed within the 2 year prescriptive period has no legal basis. There is nothing in Section 112 of the NIRC to support this view. In fact, applying the 2 year period to judicial claims would render nugatory Sec. 112(C), NIRC, which envisions two scenarios for filing an appeal with the CTA: (1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. Thus, the 120day period is crucial, mandatory and jurisdictional in filing an appeal with the CTA. The premature filing of the claim for refund before the CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA. In 1986, Mid Corp, was voluntarily surrendered to the Republic of the Philippines. Included in its properties are 3 parcels of land located in Manila, portions of which are leased to different business establishments. In 2003, the Manila City Assessors Office sent Mid Corp. 3 notices of tax delinquency for failure to pay real property tax on said properties from 1987 to 2001 totaling to P150M. A notice of final demand was subsequently issued. Mid Corp. paid P10M partial payment under protest. A month after, Mid Corp. received 3 warrants of levy on the properties. The City Treasurer offered the properties for sale at public auction. Since there was no other bidder, Pasig City bought the properties and was issued the corresponding certificates of sale. Mid Corp. argued that I. The 3 parcels of land are exempt from real property tax since they are owned by the government Partially correct. Under Section 234(a) of LGC, properties owned by the Republic of the Philippines are exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. Thus, the portions of the properties not leased to taxable entities are exempt from real estate tax while the portions of the properties leased to taxable entities are subject to real estate tax. The law imposes the liability to pay real estate tax on the Republic of the Philippines for the portions of the properties leased to taxable entities.
II. Corollary, the properties cannot be levied. Can be levied. It is true that property of public dominion cannot be levied and be sold at public auction to satisfy the tax delinquency. However, in the present case the parcels of land are not properties of public dominion because they are not intended for public use nor for some public

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service or for the development of the national wealth. Mid Corp. leases portions of the properties to different business establishments. Thus, the portions of the properties leased to taxable entities are not only subject to real estate tax, they can also be sold at public auction to satisfy the tax delinquency. On November 2005, Ms. Lee entered into a Trust Agreement with Equi Bank by virtue of which Equi Bank Trust Account No. 123 was established, whereby the Ms. Lee as trustor conveyed to Equi Bank P7M in trust for herself and reserving unto herself the right to revoke, amend and terminate the trust. Pursuant to the terms of the agreement, Equi Bank purchased, with the trusts funds, a condominium unit and registered it in the trust account. The bank subsequently merged with PH Bank, with the surviving entity being Equi PH Bank. Ms. Lim now wants the trust res, particularly the condo unit to be transferred to her own name by virtue of a Deed of Conveyance. Is such conveyance subject to any of the following internal revenue taxes: 1. capital gains tax 2. creditable withholding tax 3. VAT 4. Donors tax
Not liable for any of the mentioned taxes. The transfer of title of the property by the trustee in favor of the beneficiary, who is the beneficial owner thereof is not subject to capital gains tax nor to the creditable withholding tax because the conveyance is not motivated by a valuable consideration and it is made by the trustee in favor of the trustor which the former acquired by virtue of the trust agreement which is not to be treated as another transfer separate and distinct from the sale between the original owner and the trustee. The conveyance is merely a continuation and confirmation of title in favor of the ultimate and real beneficiary of the subject properties. The conveyance is likewise not subject to 12% VAT because the property is not held primarily for sale to customers or for lease in the ordinary course of trade or business. Neither is it subject to donors tax even if the conveyance was made without any monetary consideration since there is no donative intent on the part of the trustee. Trent Pension Foundation was organized to the hold title to and administer the employees retirement funds established for the benefit of the employees of VMC Corp. The trust fund bought a parcel of land through and with its employer. What materialized was a co-ownership of the land by and between the employer and the fund, the latter owning 49.59%. However, the TCT is registered solely in the name of said employer. Since said fund claims that it needed cash to pay the retirement and pension benefits of its beneficiaries and to reimburse advances made by its employer, the subject lot was sold. Income tax was paid upon the consummation of the sale. The trustee now asserts that the funds share in the tax paid should be refunded considering that the fund is exempt from the payment of income tax. Consequently, it filed a claim for tax refund. Is Trent entitled to the refund and if so, is it the proper party to ask for such refund? Yes. Income of employees trust funds is exempt from income tax and thus entitled to refund. Under Sec. 60, NIRC an employees trust which form part of a pension plan of an employer for the benefit of some or all of his employees is exempt from income tax if 1) contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and 2) under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees. Furthermore, although the TCT is in the employers name, it does not forestall the possibility that the property is owned by another entity because Article 1452 of the Civil Code expressly authorizes a person to purchase a property with his own money and to take conveyance in the name of another. Trent invested funds sourced from the employees' trust fund to purchase the lot. Since said lot was registered in the employers name only, a resulting trust is created by operation of law. Based on this, the employees trust fund is considered the beneficial co-owner of the lot. The absence of Trents
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name in the TCT does not prevent it from claiming before the BIR that the employees trust fund is the beneficial owner of 49.59% of the lot and that the employer merely holds 49.59% of the lot in trust, for the benefit of the fund. Since the trustor-beneficiary exists for the purpose of holding title to, and administering, the tax-exempt employees trust fund established for the benefit of the employees, it has personality to claim tax refunds due the employees trust fund. Astra Corp., a VAT registered person, provides complete marine services to ship owners, operators and any entity engaged in international marine and maritime business such as, but not limited to full and partial crewing of ocean-going vessels and trading in maritime supplies and equipment. Such vessels also transport passengers, goods and cargoes within the Philippines. Astra is claiming that such services rendered to foreign owned vessels should be subjected to VAT at 0%. Rule on the contention. The contention is partly meritorious. Under Sec. 108(B)(4), NIRC, services rendered to vessels engaged in international shipping or international air transport operations, including leases of property for use thereof are subject to VAT at 0%. However, it must be stressed that this entitlement of Astra to VAT zero-rating does NOT extend to its services rendered to common carriers by sea with respect to their transport of passengers, goods or cargoes from one place to another within the Philippines, the same being subject to 12% VAT in accordance to Sec. 108(A) (Sec. 4.108-5(b)(4), RR No. 16-2005, as amended by RR 4-2007) GRC Co. and MCC Co., in order to promote efficiency and reduce administrative and operating costs of their mining business, entered into a tax-free merger. GRC is the surviving corporation. Pursuant to the Plan of Merger, MCC conveyed all its assets and liabilities to GRC. MCC also has an existing unutilized NOLCO. May GRC make use of such NOLCO? No. Net operating loss carry-over (NOLCO) under Sec. 34(D)(3), NIRC, as implemented by RR No. 14-2011, of the absorbed corporation, MCC, is NOT one of the assets of the latter that can be transferred and absorbed by the surviving corporation, GRC, as this privilege or deduction can be availed of merely by the absorbed corporation. Accordingly, the tax-free merger between MCC and GRC does not cover the NOLCO of the former that can be transferred and absorbed by the latter corporation.
*These are additional questions based on the pre-week lecture as well as the result of consultations with the advisers of the Bar Operations Tax Committee. The answers can be a combination of statutes, jurisprudence and recent BIR Rulings.

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TAXATION LAW

San Beda College of Law Administration

Centralized Bar Operations Adviser

San Beda College of Law

Subject Committee Members

San Beda College of Law

San Beda College of Law

TAX ADMINISTRATION AND ENFORCEMENT

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San Beda College of Law

San Beda College of Law

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ESTATE AND DONORS TAX

San Beda College of Law

VALUE ADDED TAX

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San Beda College of Law

San Beda College of Law

San Beda College of Law

Local Property Tax and Real Property Tax

San Beda College of Law

San Beda College of Law

San Beda College of Law

TARIFF AND CUSTOMS CODE

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San Beda College of Law

San Beda College of Law

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San Beda College of Law

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II. or the latter, instead of the former, remedy?

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