University of Santo Tomas

Faculty of Civil Law

TAXATION LAW
Questions Asked More
Than Once
(QuAMTO 2017)

*QUAMTO is a compilation of past bar questions with answers as suggested by

UPLC and other distinct luminaries in the academe, and updated by the UST
Academics Committee to fit for the 2017 Bar Exams.

*Bar questions are arranged per topic in accordance with the bar syllabus
released by the Supreme Court and were selected based on their occurrence
on past bar examinations from 1987 to 2016.
 ACADEMICS COMMITTEE
CAMILLE ANGELICA B. GONZALES SECRETARY GENERAL

EMNIE VALERIE B. DURAN

IRVIN L. PALANCA
EXECUTIVE COMMITTEE
LARA NICOLE T. GONZALES
MARIELLA A. MARASIGAN

CAMILLE ANGELICA B. GONZALES LAYOUT AND DESIGN

QUAMTO COMMITTEE MEMBERS

JACKIELYN KRYSTYL NIHAMA BANA

KARL ANTHONY BULAONG
MERVIN MARCOS
KELLY ANN RUBIN
NESTOR FERNANDO SIAZON

ATTY. AL CONRAD B. ESPALDON

ADVISER
 QUAMTO (1987-2016)
TAXATION QUAMTO
GENERAL PRINCIPLES OF TAXATION
NATURE AND CHARACTERISTICS OF TAXATION (1996,
2003, 2005)
Q: Describe the power of taxation. May a legislative
body enact laws to raise revenues in the absence of a
constitutional provision granting said body the power
to tax? Explain. (2005 Bar)
A:The power of taxation is inherent in the State being an
attribute of sovereignty. As an incident of sovereignty, the
power to tax has been described as unlimited in its range,
acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of
the legislature which imposes the tax on the constituents
who are to pay it. (Mactan Cebu International Airport
Authority v. Marcos, 261 SCRA 667)
Being an inherent power, the legislature can enact laws to
raise revenues even without the grant of said power in the
Constitution. It must be noted that Constitutional
provisions relating to the power of taxation do not operate
as grants of the power of taxation to the Government, but
instead merely constitute limitations upon a power which
would otherwise be practically without limit. (Cooley,
Constitutional Limitations, 1927 8th Ed., p. 787)
Power of Taxation as distinguished from Police Power
and Eminent Domain (1989, 1991, 2003)
Q: The City of Manila passed an ordinance imposing an
annual tax of P5,000.00 to be paid by an operator of a
massage clinic and an annual fee of P50.00 to be paid by
every attendant or helper in the said clinic. Is the
imposition a tax or a license fee? (1989 Bar)
A:The imposition on the operator of the massage clinic is
both a tax and a license fee. The amount of P5,000.00
exceeds the cost of regulation, administration and control
but it is likewise imposed to regulate a non-useful business
in order to protect the health, safety and morals of the
citizenry in general. The P50.00 impositions on the helpers
or attendants are license fees sufficient only for regulation,
administration and control.
Theory and Basis of Taxation (1991, 2016)
Q: Briefly explain the following doctrines: lifeblood
doctrine xxx (2016 Bar)
A: Lifeblood doctrine. Taxes are the lifeblood of the
government [Chamber of Real Estate and Builders
Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] for
without taxes, the government can neither exist nor endure.
(National Power Corporation v. City of Cabanatuan, G.R. No.
149110, April 9, 2003 citing various cases)
INHERENT LIMITATIONS
Q: Enumerate the four (4) inherent limitations on
taxation. Explain each item briefly. (2009 Bar)
A: The inherent limitations on the power to tax are:
1. Taxation is for a public purpose The proceeds of the
tax must be used (a) for the support of the State or (b)
for some recognized objective of the government or to
directly promote the welfare of the community.
2. Taxation is inherently legislative Only the legislature
has full discretion as to the persons, property,
1
occupation or business to be taxed provided these are
all within the States territorial jurisdiction. It can also
finally determine the amount or rate of tax, the kind of
tax to be imposed and the method of collection. (1
Cooley 176184)
3. Taxation is territorial Taxation may be exercised only
within the territorial jurisdiction of the taxing authority
(61 Am. Jur. 88). Within the territorial jurisdiction, the
taxing authority may determine the place of taxation
or tax situs."
4. Taxation is subject to international comity This is a
limitation which is founded on reciprocity designed to
maintain a harmonious and productive relationships
among the various states. Under international comity, a
state must recognize the generally-accepted tenets of
international law, among which are the principles of
sovereign equality among states and of their freedom
from suit without their consent, that limit the authority
of a government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on
its property held, and activities undertaken in that
capacity.
Public Purpose (1989, 1991)
Q: An ordinance of Quezon City on the operation of
market stalls and the collection of market stall fees
created a market committee to formulate, recommend
and adopt subject to the ratification of the
SangguniangPanglungsod regulations in the operations
of the market stalls. It also entrusted the collection of
the market stall fees to a private corporation. Does the
entrusting of the collection of the market stall fees
destroy the public purpose of the ordinance? (1989
Bar)
A: Yes, because a portion of the fees collected would be
diverted as fees to private corporation. Entrusting of the
collection of the market stall fees violates the limitation that
local government units shall in no case let to any private
person the collection of local taxes, fees, charges and other
impositions. [Sec. 130 (c), R.A. No. 7160, The Local
Government Code] As a result of this prohibition, public
funds are therefore utilized for a private purpose, which is
to pay the private corporation for its services.
CONSTITUTIONAL LIMITATIONS
Equality and Uniformity (1988, 2000, 2003, 2004)
Q: RC is a law-abiding citizen who pays his real estate
taxes promptly. Due to a series of typhoons and adverse
economic conditions, an ordinance is passed by MM
City granting a 50% discount for payment of unpaid
real estate taxes for the preceding year and the
condonation of all penalties on fines resulting from the
late payment.
Arguing that the ordinance rewards delinquent
taxpayers and discriminates against prompt ones, RC
demands that he be refunded an amount equivalent to
one-half of the real taxes he paid. The municipal
attorney rendered an opinion that RC cannot be
reimbursed because the ordinance did not provide for
such reimbursement. RC files suit to declare the
ordinance void on the ground that it is a class
legislation. Will his suit prosper? Explain your answer
briefly. (2004 Bar)
A: The suit will not prosper. The remission or condonation
of taxes due and payable to the exclusion of taxes already
collected does not constitute unfair discrimination. Each set
of taxes is a class by itself and the law would be open to
attack as class legislation only if all taxpayers belonging to
 TAXATION LAW
one class were not treated alike. [Juan Luna Subdivision, Inc.,
v. Sarmiento, 91 Phil 371 (1952)]
Non Impairment of Obligations of Contracts (1997,
2004)
Q: A law was passed granting tax exemption to certain
industries and investments for a period of five years.
But three years later, the law was repealed. With the
repeal, the exemptions were considered revoked by the
BIR, which assessed the investing companies for unpaid
taxes effective on the date of the repeal of the law.
NPC and KTR companies questioned the assessments
on the ground that, having made their investments in
full reliance with the period of exemption granted by
the law, its repeal violated their constitutional right
against the impairment of the obligations and
contracts. Is the contention of the companies tenable or
not? Reason briefly.
A: The contention is not tenable. The exemption granted is
in the nature of a unilateral tax exemption. Since the
exemption given is spontaneous on the part of the
legislature and no service or duty or other remunerative
conditions have been imposed on the taxpayers receiving
the exemption, it may be revoked at will by the
legislature.[Manila Railroad Company v. Insular Collector of
Customs, 12 PhiL 146 (1915)]
KINDS OF TAXES
Direct and Indirect Taxes (1994, 2000, 2001, 2006)
Q: Distinguish direct taxes from indirect taxes". Give
examples. (2006 Bar)
A: Direct taxes are demanded from the very person who, as
intended, should pay the tax which he cannot shift to
another; while an indirect tax is demanded in the first
instance from one person with the expectation that he can
shift the burden to someone else, not as a tax, but as part of
the purchase price. (Maceda v. Macaraig, Jr., 223 SCRA 217
[1993]) Examples of direct taxes are income tax, estate tax
and donors tax. Examples of indirect taxes are value-added
tax, percentage tax and excise tax on excisable articles.
CONSTRUCTION AND INTERPRETATION OF TAX LAWS
Tax Exemption and Exclusion (1996,2005, 2007)
Q: Why are tax exemptions strictly construed against
the taxpayer? (1996 Bar)
A: Tax exemptions are strictly construed against the
taxpayer because such provisions are highly disfavored and
may almost be said to be odious to the law (Manila Electric
Company vs. Vera, 67 SCRA351). The exception contained in
the tax statutes must be strictly construed against the one
claiming the exemption because the law does not look with
favor on tax exemptions, they being contrary to the life-
blood theory which is the underlying basis for taxes.
Q: An alien employee of the Asian Development Bank
(ADB) who is retiring soon has offered to sell his car to
you which he imported tax-free for his personal use.
The privilege of exemption from tax is granted to
qualified personal use under the ADB Charter which is
recognized by the tax authorities. If you decide to
purchase the car, is the sale subject to tax? Explain.
(2005 Bar)
A: Yes. The sale is subject to tax. Section 107 (B) of the NIRC
provides that: "In the case of tax-free importation of goods
into the Philippines by persons, entities or agencies exempt
from tax where such goods are subsequently sold,
UST BAR OPERATIONS
transferred or exchanged in the Philippines to non-exempt
persons or entities, the purchasers, transferees or
recipients shall be considered the importer thereof, who
shall be liable for any internal revenue tax on such
importation. Tax exemptions are to be construed strictly
and are not considered transferable in character.
DOUBLE TAXATION (1996, 1997, 2004, 2015)
Q: Differentiate between double taxation in the strict
sense and in a broad sense and give an example of each.
(2015 Bar)
A: Double taxation in the strict sense pertains to the direct
double taxation. This means that the taxpayer is taxed twice
by the same taxing authority, within the same taxing
jurisdiction, for the same property and same purpose.
Example: Imposition of final withholding tax on cash
dividend and requiring the taxpayer to declare this tax-paid
income in his income tax returns.
On the other hand, double taxation in the broad sense
pertains to indirect double taxation. This extends to all
cases in which there is a burden of two or more impositions.
It is the double taxation other than those covered by direct
double taxation (CIR v.Solidbank Corp., 436 SCRA 416).
Example: Subjecting the interest income of banks on their
deposits with other banks to the 5% gross receipts tax
(GRT) despite of the same income having been subjected to
20% final withholding tax (FWT), is only a case of indirect
double taxation. The GRT is a tax on the privilege of
engaging in business while the FWT is a tax on the privilege
of earning income.
Q: X, a lessor of a property, pays real estate tax on the
premises, a real estate dealers tax based on rental
receipts and income tax on the rentals. X claims that
this is double taxation. (1996 Bar)
A: There is no double taxation. Double taxation means
taxing for the same tax period the same thing or activity
twice, when it should be taxed but once, by the same taxing
authority for the same purpose and with the same kind or
character of tax. The real estate tax is a tax on property; the
real estate dealers tax is a tax on the privilege to engage in
business; while the income tax is a tax on the privilege to
earn an income. These taxes are imposed by different taxing
authorities and are essentially of different kind and
character (Villanueva v. City of Iloilo, 26 SCRA 578).
ESCAPE FROM TAXATION (TAX AVOIDANCE V. TAX
EVASION)
Tax avoidance and Tax Evasion (1989, 1996, 2000,
2005, 2008, 2014, 2016)
Q: Distinguish tax evasion from tax avoidance. (1996
Bar)
A: Tax evasion is a scheme used outside of those lawful
means to escape tax liability and, when availed of, it usually
subjects the taxpayer to further or additional civil or
criminal liabilities. Tax avoidance, on the other hand, is a tax
saving device within the means sanctioned by law, hence
legal.
Q:Maria Suerte, a Filipino citizen, purchased a lot in
Makati City in 1980 at a price of P1 million. Said
property has been leased to MAS Corporation, a
domestic corporation engaged in manufacturing paper
products, owned 99% by Maria Suerte. In October
2007, EIP Corporation, a real estate developer,
expressed its desire to buy the Makati property at its
fair market value of P300 million, payable as follows:
(a) P60 million down payment; and (b) balance,
2
 QUAMTO (1987-2016)
payable equally in twenty four (24) monthly
consecutive installments. Upon the advice of a tax
lawyer, Maria Suerte exchanged her Makati property
for shares of stock of MAS Corporation. A BIR ruling,
confirming the tax-free exchange of property for shares
of stock, was secured from the BIR National Office and a
Certificate Authorizing Registration was issued by the
Revenue District Officer (RDO) where the property was
located. Subsequently, she sold her entire
stockholdings in MAS Corporation to EIP Corporation
for P300 million. In view of the tax advice, Maria Suerte
paid only the capital gains tax of P29,895,000
(P100,000x 5% plus P298,900,000 x 10%), instead of
the corporate income tax of P104,650,000 (35% on
P299 million gain from sale of real property). After
evaluating the capital gains tax payment, the RDO
wrote a letter to Maria Suerte, stating that she
committed tax evasion.
Is the contention of the RDO tenable? Or was it tax
avoidance that Maria Suerte had resorted to?
Explain.(2008 Bar)
A: The contention of the RDO is not tenable. Maria Suerte
resorted to tax avoidance and not tax evasion. Tax
avoidance is the use of legal means to reduce tax liability
and it is the legal right of a taxpayer to decrease the amount
of what otherwise would be his taxes by means which the
law permits. (Heng Tong Textiles Co., Inc. v. Commissioner).
There is nothing illegal about transferring first the property
to a corporation in a tax free exchange and later selling the
shares obtained in the exchange at a lower tax than what
could have been imposed if the property was sold directly.
Q: Lucky V Corporation (Lucky) owns a 10-storey
building on a 2,000 square meter lot in the City of
Makati. It sold the lot and building to Rainier for P80
million. One month after, Rainier sold the lot and
building to Healthy Smoke Company (HSC) for P200
million, Lucky filed its annual return and declared its
gain from the sale of the lot and building in the amount
of P750, 000.00.
An investigation conducted by the BIR revealed that
two months prior to the sale of the properties to
Rainier, Lucky received P40 million from HSC and not
from Rainier. Said amount of P40 million was debited
by HSC and reflected in its trial balance as other inv.
Lucky Bldg. The BIR concluded that there is tax
evasion since the real buyer of the properties of Lucky
is HSC and not Rainier. It issued an assessment for
deficiency income tax in the amount of P79 million
against Lucky. Lucky argues that it resorted to tax
avoidance or a tax saving device, which is allowed by
the NIRC and BIR rules since it paid the correct taxes
based on the sale to Rainier. On the other hand, Rainier
and HSC also paid the prescribed taxes arising from the
sale by Rainier to HSC. Is the BIR correct in assessing
taxes on Lucky? Explain. (2016 Bar)
A: Yes. The BIR is correct in assessing the taxes on Lucky.
There was no tax avoidance, instead there was tax evasion
on the part of Lucky because of the simulated sale to Rainier
which had its apparent purpose to reduce the income tax to
be paid by Lucky on the sale to HSC.
The sale to Rainier was simulated as evidenced by the fact
that two months prior to the sale of the properties to
Rainier, Lucky received P40 million from HSC and not from
Rainier.
The intermediary transaction (the simulated sale to
Rainier), was prompted more on the mitigation of tax
3
liabilities than for legitimate business purpose constitutes
one of tax evasion.
EXEMPTION FROM TAXATION
Constitutional Limitation to the power of Congress in
granting tax exemptions (1989, 1992)
1) The President of the Philippines and the Prime
Minister of Japan entered into an executive
agreement in respect of a loan facility to the
Philippines from Japan whereby it was stipulated
that interest on loans granted by private Japanese
financial institutions to private financial
Institutions in the Philippines shall not be subject
to Philippine income taxes. (1992 Bar)
Is this tax exemption valid? Explain.
A: Yes. The tax exemption is valid because an executive
agreement has the force and effect of a treaty under the
provision of the Revenue Code. Taxation is subject to
International Comity.
ALTERNATIVE ANSWER:
a) The act of tax exemption is an act of taxation which is
inherently legislative. Therefore, a mere executive
agreement cannot provide for a tax exemption.
COMPENSATION AND SET-OFF (1990, 1992, 1996,
2001, 2005)
Q: May taxes be the subject of set-off or compensation?
Explain. (2005 Bar)
A: No. Taxes cannot be the subject of set-off or
compensation for the following reasons: (1) taxes are of
distinct kind, essence and nature, and these impositions
cannot be classed in merely the same category as ordinary
obligations; (2) the applicable laws and principles
governing each are peculiar, not necessarily common, to
each; and (3) public policy is better subserved if the
integrity and independence of taxes are maintained.
[Republic v. Mambulao Lumber Company, 4 SCRA 622
(1962)].
However, if the obligation to pay taxes and the taxpayers
claim against the government are both overdue,
demandable, as well as fully liquidated, compensation takes
place by operation of law and both obligations are
extinguished to their concurrent amounts. [Domingo v.
Garlitos, 8 SCRA 443 (1963)].
Q: Can an assessment for a local tax be the subject of set-
off or compensation against a final judgment for a sum
of money obtained by the taxpayer against the local
government that made the assessment? Explain. (2005
Bar)
A: No. Taxes and debts are of different nature and character;
hence, no set-off or compensation between these two
different classes of obligations is allowed. The taxes
assessed are the obligations of the taxpayer arising from
law, while the money judgment against the government is
an obligation arising from contract, whether express or
implied. Inasmuch that taxes are not debts, it follows that
the two obligations are not susceptible to set-off or legal
compensation. [Francia v. Intermediate Appellate Court, 162
SCRA 753 (1988)].
It is only when the local tax assessment and the final
judgment are both overdue, demandable, as well fully
 TAXATION LAW
liquidated may set-off or compensation be allowed.
[Domingo v. Garlitos, 8 SCRA 443 (1963)].
TAXPAYERS SUIT (1990, 1996)
Q: When may a taxpayers suit be allowed? (1996)
A: A taxpayer's suit may only be allowed when an act
complained of, which may include a legislative enactment,
directly involves the illegal disbursement of public funds
derived from taxation. (Pascual vs. Secretary of Public
Works, 110 Phil. 331)
Q: A law imposes a tax of 1/5 of 1% if the export price
of prawns produced in the Philippines. The law
provides that the proceeds of the tax shall be turned
over to the Philippine Prawn Growers Association, Inc.
(PPGA), a non-profit private corporation registered
with the Securities and Exchange Commission to be
used by PPGA exclusively to undertake activities that
promote the growth of the Philippine prawns industry,
such as undertaking research on how to improve the
productivity of prawn farms in the Philippines,
undertaking marketing activities that will directly
further the growth of the industry.
The members of PPGA constitute 90% of all the Prawn
growers in the country representing 100% of the
countrys prawn exports. JN, a practicing lawyer and
taxpayer, filed a suit with the Supreme Court
questioning the constitutionality of the law on the
ground that the funds raised through taxation will be
used for a private purpose. Will said suit prosper?
Explain. (1990 Bar)
A: No, because Atty. JN is not prejudiced by the law. It is not
his tax money that is being used. In short, he has no locus
standi. Furthermore, assistance to the prawn industry is for
a public purpose because the industry is one of the pillars of
the economy contribution to employment and foreign
exchange (Domondon, Remedies, pg 815)
POWERS AND FUNCTIONS OF THE COMMISSIONER OF
INTERNAL REVENUE
Power to inquire into bank deposits (1998, 1999, 2000,
2003, 2012)
Q: Can the Commissioner of Internal Revenue inquire
into the bank deposits of a taxpayer? If so, does this
power of the Commissioner conflict with RA 1405
(Secrecy of Bank Deposits Law) (1998 Bar)
A: The Commissioner of Internal Revenue is authorized to
inquire into the bank deposits of:
1. any taxpayer upon his written consent;
2. a decedent to determine his gross estate;
3. any taxpayer who has filed an application for
compromise of his tax liability by means of financial
incapacity to pay his tax liability;
4. A specific taxpayer or taxpayers subject of a request for
the supply of tax information from a foreign tax
authority pursuant to an international convention or
agreement on tax matters to which the Philippines is a
signatory. [Sec. 6(F), NIRC]
The limited power of the Commissioner does not conflict
with R.A. No. 1405 because 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
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unless and until he waives in writing his privilege under
R.A. No. 1405, and such waiver shall constitute the authority
of the Commissioner to inquire into the bank deposits of the
taxpayer.
NATIONAL TAXATION
REALIZATION AND RECOGNITION OF INCOME (1989,
1993, 2009, 2010, 2012)
Q: What is the all event test? Explain Briefly. (2010
Bar)
A: The all events test is a test applied in the realization of
income and expense by an accrual-basic taxpayer. The test
requires (1) the fixing to the right to the income or liability
to pay; and (2) the availability of reasonably accurate
determination of such income or liability, to warrant the
inclusion of the income or expense the gross income or
deductions during the taxable year. (CIR v. Isabela Cultural
Corporation, GR No. 172231, Feb 12, 2007)
Q: Mr. Jose Castillo is a resident Filipino Citizen. He
purchased a parcel of land in Makati City in 1970 at a
consideration of P1 Million. In 2011, the land, which
remained undeveloped and idle, had a fair market
value of P20Million. Mr. Antonio Ayala, another Filipino
citizen, is very much interested in the property and he
offered to buy the same for P20 Million. The Assessor of
Makati City re-assessed in 2011 the property at P10
Million. Is Mr. Castillo liable for income tax in 2011
based on the offer to buy by Mr. Ayala? Explain your
answer. (2012 Bar)
A: No. Mr. Castillo is not liable for income tax in 2011
because no income is realized by him during that year. Tax
liability for income tax attaches only if there is a gain
realized resulting from a closed and complete transaction
(Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918)
CLASSIFICATION OF INCOME SUBJECT TO TAX
Taxable Income
Fringe Benefits (1991, 1993, 1995, 2001, 2003, 2016)
Q: A fringe benefit is defined as being any good,
service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee.
Would it be the employer or the employee who is legally
required to pay an income tax on it? Explain. (2003 Bar)
A: It is the employer who is legally required to pay an
income tax on the fringe benefit. The fringe benefit tax is
imposed as a final withholding tax placing the legal
obligation to remit the tax on the employer, such that, if the
tax is not paid the legal recourse of the BIR is to go after
theemployer. Any amount or value received by the
employee as a fringe benefit is considered tax paid hence,
net of the income tax due thereon. The person who is legally
required to pay (same as statutory incidence as
distinguished from economic incidence) is that person who,
in case of non-payment, can be legally demanded to pay the
tax.
Q: In 2011, Solar Computer Corporation (Solar)
purchased a proprietary membership share covered by
Membership certificate No. 8 from the Mabuhay Golf
Club, Inc. for P500, 000.00. On December 27, 2012, it
transferred the same to David, its American consultant,
to enable him to avail of the facilities of the Club. David
executed a Deed of Declaration of Trust and
Assignment of Shares wherein he acknowledged the
absolute ownership of Solar over the share; that the
4
 QUAMTO (1987-2016)
assignment was without any consideration; and that
the share was placed in his name because the Club
required it to be done. In 2013, the value of the share
increased to P800,000.00.
Is the said assignment a gift and, therefore, subject to
gift tax? Explain. (2016 Bar)
A: No. The assignments are not gratuitous, and there is no
intent to transfer ownership hence not subject to gift tax.
The value of the right to avail of the privileges attendant to
Mabuhay Golf Club, Inc. Membership Certificate is due to
Davids merits or services as a computer consultant. It is a
fringe benefit taxable to the employer. [NIRC of 1997, Sec.
33 (B) (6)]
INCOME FROM DEALINGS IN PROPERTY (1987, 1988,
1989, 1991, 1992, 1993, 1994, 1997, 1998, 2001, 2003,
2005, 2007, 2008, 2009, 2012, 2014, 2015)
Q: Distinguish a capital asset" from an ordinary
asset". (2003 Bar)
A: The term capital asset regards all properties not
specifically excluded in the statutory definition of capital
assets, the profits or loss on the sale or the exchange of
which are treated as capital gains or capital losses.
Conversely, all those properties specifically excluded are
considered as ordinary assets and the profits or losses
realized must have to be treated as ordinary gains or
ordinary losses. Accordingly, capital assets includes
property held by the taxpayer whether or not connected
with his trade or business, but the term does not include any
of the following, which are consequently considered
ordinary assets:
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;
2. property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
3. property used in the trade or business of a character
which is subject to the allowance for depreciation
provided in Section 34 (F) of the Tax Code; or
4. real property used in trade or business of the taxpayer.
The statutory definition of capital assets practically
excludes from its scope, it will be noted, all property held by
the taxpayer if used in connection with his trade or
business.
Q: What is the rationale for the rule prohibiting the
deduction of capital losses from ordinary gains?
Explain. (2003 Bar)
A: It is to insure that only costs or expenses incurred in
earning the income shall be deductible for income tax
purposes consonant with the requirement of the law that
only necessary expenses are allowed as deductions from
gross income. The term necessary expenses presupposes
that in order to be allowed as deduction, the expense must
be business connected, which is not the case insofar as
capital losses are concerned. This is also the reason why all
nonbusiness connected expenses like personal, living and
family expenses, are not allowed as deduction from gross
income. [Section 36(A)(1) of the 1997 Tax Code]
ALTERNATIVE ANSWER:
The prohibition of deduction of capital losses from ordinary
gains is designed to forestall the shifting of deductions from
an area subject to lower taxes to an area subject to higher
taxes, thereby unnecessarily resulting in leakage of tax
5
revenues. Capital gains are generally taxed at a lower rate
to prevent, among others, the bunching of income in one
taxable year which is a liberality in the law begotten from
motives of public policy (Rule on Holding Period). It stands
to reason therefore, that if the transaction results in loss, the
same should be allowed only from and to the extent of
capital gains and not to be deducted from ordinary gains
which are subject to a higher rate of income tax.
Q: In 1990, Mr. Naval bought a lot for P1, 000, 000.00 in
a subdivision with the intention of building his
residence on it. In 1994, he abandoned his plan to build
his residence on it because the surrounding area
became a depressed area and land values in the
subdivision went down; instead, he sold it for P800,
000.00. At the time of the sale, the zonal value was
P500, 000.00.
1. Is the land a capital asset or an ordinary asset?
Explain.
A: The land is a capital asset because it is neither for sale in
the ordinary course of business nor a property used in the
trade or business of the taxpayer. (Sec. 33. NIRC).
2. Is there any income tax due on the sale? Explain.
(1994 Bar)
A: Yes. Mr. Naval is liable to the 6% capital gains tax
imposed under the Tax Code based on the gross selling
price of P800, 000.00 which is an amount higher than the
zonal value.
Q: In January 1970, Juan Gonzales bought one hectare
of agricultural land in Laguna for P100, 000. This
property has a current fair market value of P10 million
in view of the construction of a concrete road traversing
the property. Juan Gonzales agreed to exchange his
agricultural lot in Laguna for a one-half hectare
residential property located in Batangas, with a fair
market value of P10 million, owned by Alpha
Corporation, a domestic corporation engaged in the
purchase and sale of real property. Alpha Corporation
acquired the property in 2007 for P9 million.
What is the nature of the real properties exchanged for
tax purposes - capital asset or ordinary asset? Explain.
A: The one hectare agricultural land owned by Juan
Gonzales is a capital asset because it is not a real property
used in trade or business. The one-half hectare residential
property owned by Alpha Corporation is an ordinary asset
because the owner is engaged in the purchase and sale of
real property. (Section 39, NIRC, Revenue Regulations No. 7-
03)
Is Juan Gonzales subject to income tax on the exchange
of property? If so, what is the tax base and rate? Explain.
A: Yes. The tax base in a taxable disposition of a real
property classified as a capital asset is the higher between
two values: the fair market value of the property received
in exchange and the fair market value of the property
exchanged. Since the fair market value of two properties are
the same, the said fair market value should be taken as the
tax base which is P10 million. The income tax rate is 6%.
[Section 24(D) (1), NIRC].
Is Alpha Corporation subject to income tax on the
exchange of property? If so, what is the tax base and
rate? Explain. (2008 Bar)
A: Yes. The gain from the exchange constitutes an item of
gross income, and being a business income, it must be
reported in the annual income tax return of Alpha
 TAXATION LAW
Corporation. From the pertinent items of gross income,
deductions allowed by law from gross income can be
claimed to arrive at the net income which is the tax base for
the corporate income tax rate of 35%. (Section 27 (A) and
Section 31, NIRC)
Exemptions from capital gains tax
Q: Mr. H decided to sell the house and lot wherein he
and his family have lived for the past 10 years, hoping
to buy and move to a new house and lot closer to his
childrens school. Concerned about the capital gains tax
that will be due on the sale of their house, Mr. H
approaches you as a friend for advice if it is possible for
the sale of their house to be exempted from capital
gains tax and the conditions they must comply with to
avail themselves of said exemption. (2015 Bar)
A: I would advise Mr. H that he may be exempted from the
payment of the capital gains tax on the sale or disposition of
the house and lot where his family lives because the sale of
principal residence by a natural person is exempt provided
the following conditions are complied with:
1. The proceeds of the sale is fully utilized in acquiring or
construction new principal residence within 18
calendar months from the date of the sale or
disposition;
2. The historical cost or adjusted basis of the real property
sold or disposed will be carried over to the new
principal residence built or acquired;
3. The Commissioner has been duly notified, through a
prescribed return, within 30 days from the date
of sale or disposition of the persons intention to avail
of the tax exemption; and
4. The exemption was availed only once every 10 years.
[Sec 24 (d)(2), NIRC]
Q: Cebu Development Inc. (CDI) has an authorized
capital stock of P5, 000, 000.00 divided into 50,000
shares with a par value of One Hundred Pesos
(P100.00) per share. Of the authorized capital stock,
twenty-five thousand (25,000) shares have been
subscribed. Mr. Juan Legaspi is a stockholder of CDI
where he has subscription amounting to 13,000 shares.
To fully pay his unpaid subscription in the amount of
P950, 000.00, Mr. Legaspi transferred to the
corporation a parcel of land that he owns by virtue of a
Deed of Assignment. Upon investigation, the BIR
discovered that Mr. Legaspi acquired said property for
only P500,000.00. Is Mr. Legaspi liable for any taxable
gain? (1991 Bar)
A: The transfer by Mr. Legaspi to the corporation of the
parcel of land in payment of his unpaid subscription did not
increase his stockholdings in the corporation. It cannot be
said that he acquired control of the corporation by virtue of
the transfer of the land. His percentage of stockholdings in
the capital stock of the corporation remains the same after
the transfer as before. Therefore, Mr. Legaspi derived
taxable gain for his economic gain which was realized by
virtue of the exchange of the land for the liability for the
subscription.
ALTERNATIVE ANSWER: Mr. Legaspi is not liable for any
taxable gain. The transaction amounted to an exchange of
shares of property for shares of stock as a result of which
the property transferor acquired control of the corporation.
The 13,000 shares of stock acquired in exchange of
property was more than fifty percent (50%) of the total
subscribed capital stock of Cebu Development, Inc. (CDI)
that qualified the transaction as a tax-exempt under the
provisions of Sec. 34 (c) (2) of the National Internal
Revenue Code.
UST BAR OPERATIONS
PASSIVE INVESTMENT INCOME (1994, 1995, 1997,
2000, 2003, 2005, 2015)
Q: BBB, Inc., a domestic corporation, enjoyed a
particularly profitable year in 2014. In June 2015, its
Board of Directors approved the distribution of cash
dividend to its stockholders. BBB, Inc. has individual
and corporate stockholders. What is the tax treatment
of the cash dividends received from BBB, Inc. by the
following stockholders:
1. A resident citizen
A: A final withholding tax for ten percent (10%) shall be
imposed upon the cash dividends actually or constructively
received by a resident citizen from BBB, Inc. (Sec. 24 (b)(2),
NIRC).
2. Non-resident alien engaged in trade or business
A: A final withholding tax of twenty percent (20%) shall be
imposed upon the cash dividends actually or constructively
received by a non-resident alien engaged in trade or
business from BBB, Inc. (Sec. 25 (a)(2), NIRC).
3. Non-resident alien not engaged in trade or business
A: A final withholding tax equal to twenty-five percent
(25%) of the entire income received from all sources within
the Philippines, including the cash dividends received from
BBB, Inc. (Sec. 25(b), NIRC).
4. Domestic corporation
A: Dividends received by a domestic corporation from
another domestic corporation, such as BBB, Inc., shall not
be subject to tax (Sec. 27(d)(4), NIRC).
5. Non-resident foreign corporation
A: Dividends received by a non-resident foreign
corporation from a domestic corporation are generally
subject to an income tax of 30% to be withheld at source
(Sec. 28(b)(1), NIRC). However, a final withholding tax of
fifteen percent (15%) is imposed on the amount of cash
dividends received from a domestic corporation like BBB,
Inc. if the tax sparing rule applies (Sec. 28(B)(5)(b), NIRC).
Pursuant to this rule, the lower rate of tax would apply if the
country in which the non-resident foreign corporation is
domiciled would allow as tax credit against the tax due from
it, taxes deemed paid in the Philippines of 15% representing
the difference between the regular income tax rate and the
preferential rate.
Q: Mr. Javier is a non-resident senior citizen. He
receives a monthly pension from the GSIS which he
deposits with the PNB-Makati Branch. Is he exempt
from income tax and therefore not required to file an
income tax return? (2000 Bar)
A: Mr. Javier is exempt from income tax on his monthly GSIS
pension [Sec. 32(B)(6)(f). NIRC of 1997] but not on the
interest income that might accrue on the pensions
deposited with PNB which are subject to final withholding
tax.
Consequently, since Mr. Javiers sole taxable income would
have been subjected to a final withholding tax, he is not
required anymore to file an income tax return. [Sec. 51 (A)
(2) (c)NIRC].
Q: What are disguised dividends in income taxation?
Give an example. (1994 Bar)
A: Disguised dividends are those income payments made by
a domestic corporation, which is a subsidiary of a non-
resident foreign corporation, to the latter ostensibly for
6
 QUAMTO (1987-2016)
services rendered by the latter to the former, but which
payments are disproportionately larger than the actual
value of the services rendered. In such case, the amount
over and above the true value of the service rendered shall
be treated as a dividend, and shall be subjected to the
corresponding tax of 35% on Philippine sourced gross
income, or such other preferential rate as may be provided
under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding
licensing agreement.
ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR
OTHER TYPES OF INSURANCE (1988, 1991, 2003,
2005, 2007)
Q: Noel Santos is a very bright computer science
graduate. He was hired by Hewlett Packard. To entice
him to accept the offer of employment, he was offered
the arrangement that part of his compensation would
be an insurance policy with a face value of P20 Million.
The parents of Noel are made the beneficiaries of the
insurance policy.
Will the proceeds of the insurance form part of the
income of the parents of Noel and be subject to income
tax? Reason briefly. (2007 Bar)
A: No. The proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the insured are not
included as part of the gross income of the recipient.
[Section 32(B)(1), NIRC] There is no income realized
because nothing flows to Noels parents other than a mere
return of capital, the capital being the life of the insured.
Q: Born of a poor family on 14 February 1944. Mario
worked his way through college. After working for
more than 2 years in X Manufacturing Corporation,
Mario decided to retire and avail of the benefits under
the very reasonable retirement plan maintained by his
employer. He planned to invest whatever retirement
benefits he would receive in a business that will
provide his employer with the needed raw materials.
On the day of his retirement on 30 April 1985, he
received P400, 000.00 as retirement benefit. In
addition, his endowment insurance policy, for which he
was paying an annual premium of P1, 520.00 since
1965 also matured. He was then paid the face value of
his insurance policy in the amount of P50, 000.00.
Is his P50, 000.00 insurance proceeds exempt from
income taxation? (1991 Bar)
A: The P50, 000.00 insurance proceeds is not totally exempt
from income tax. The excluded amount is only that portion
which corresponds to the premiums that he had paid since
1965. At the rate of P1,520.00 per year multiplied by twenty
(20) years which was the period of the policy, he must have
paid a total of P30, 400.00. Accordingly, he will be subject to
report as taxable income the amount of P 19,600.00.
PRIZES AND AWARDS (1993, 1996, 2000, 2015)
Q: Mr. A, a citizen and resident of the Philippines is a
professional boxer. In a professional boxing match held
in 2013, he won prize money in United States (US)
dollars equivalent to P300, 000.00.
a. Is the prize money paid to and received by Mr. A in
the US taxable in the Philippines? Why?
A: Yes. Under the Tax Code, the income within and without
of a resident citizen is taxable. Since Mr. A is a resident
Filipino citizen, his income worldwide is taxable in the
Philippines. [Sec. 23 (A), NIRC]
7
b. May Mr. As prize money qualify as an exclusion
from his gross income? Why?
A: No. Under the law, all prizes and awards granted to
athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations are
excluded from gross income. The exclusion find application
only to amateur athletes where the prize was given in an
event sanctioned by the appropriate national sports
association affiliated with the Philippine Olympic
Committee and not to professional athletes like Mr. A.
Therefore, the prize money would not qualify as an
exclusion from Mr. As gross income. [SEC 32 B (7)(d), NIRC]
c. The US already imposed and withheld income taxes
from Mr. As prize money. How may Mr. A use or
apply the income taxes he paid on his prize money
to the US when he computes his income tax liability
in the Philippines for 2013? (2015 Bar)
A: The income taxes withheld and paid to the US
government maybe claimed by Mr. A, either as a deduction
from his gross income or as a tax credit from the income tax
due when he computes his Philippine income tax liability
for taxable year 2013. [Sec. 34 (C) (1) (b), NIRC]
PENSIONS, RETIREMENT BENEFIT OR SEPARATION
PAY (1988, 1991, 1994, 1995, 1996, 1999, 2000, 2005,
2007)
Q: Z is a Filipino immigrant living in the United States
for more than 10 years. He is retired and he came back
to the Philippines as a balikbayan. Every time he comes
to the Philippines, he stays here for about a month. He
regularly receives a pension from his former employer
in the United States, amounting to US$1,000 a month.
While in the Philippines, with his pension pay from his
former employer, he purchased three condominium
units in Makati which he is renting out for P15, 000 a
month each.
Does the US$1,000 pension become taxable because he
is now residing in the Philippines? Reason briefly.
(2007 Bar)
A: No. The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by a
resident citizens of the Philippines , such as Z, from a foreign
private institutions, is excluded from income taxation. [Sec.
32 (B) (6) (c), NIRC]
Q: X, an employee of ABC Corporation died. ABC
Corporation gave Xs widow an amount equivalent to
Xs salary for one year. Is the amount considered
taxable income to the widow? Why? (1996)
A: No. The amount received by the widow from the
decedents employer may either be a gift or a separation
benefit on account of death. Both are exclusions from gross
income pursuant to provisions of Section 28(b) of the Tax
Code.
ALTERNATIVE ANSWER: No. Since the amount was given
to the widow and not to the estate, it becomes obvious that
the amount is more of a gift. In one U.S. tax case (Estate of
Hellstrom vs. Commissioner, 24 T.C. 916), it was held that
payments to the widow of the president of a corporation of
the amount the president would have received in salary if
he lived out the year constituted a gift and not an income.
The controlling facts which would lead to the conclusion
that the amount received by the widow is not an income are
as follows:
 TAXATION LAW
a. the gift was made to the widow rather than the estate:
b. there was no obligation for the corporation to make
further payments to the deceased;
c. the widow had never worked for the corporation;
d. the corporation received no economic benefit; and
e. the deceased had been fully compensated for his
services. [Estate of Sydney Carter us. Commissioner, 453
F. 2d 61 (2d Cir. 1971)]
Q: A, an employee of the Court of Appeals, retired upon
reaching the compulsory age of 65 years. Upon
compulsory retirement, A received the money value of
his accumulated leave credits in the amount of P500,
000.00. Is said amount subject to tax? Explain. (1996
Bar)
A: No. The commutation of leave credits, more commonly
known as terminal leave pay, ie., the cash equivalent of
accumulated vacation and sick leave credits given to an
officer or employee who retires, or separated from the
service through no fault of his own, is exempt from income
tax. (BIR Ruling 238-91 dated November 8, 1991;
Commissioner v. CA and Efren Castaneda, GR No. 96016,
October 17, 1991)
Q: Under what conditions are retirement benefits
received by officials and employees of private firms
excluded from gross income and exempt from taxation?
(2000 Bar)
A: Retirement benefits received under R.A. No. 7641 and
those received by officials and employees of private firms,
whether, individual or corporate, in accordance with the
employers reasonable private benefit plan approved by the
BIR, are excluded from gross income and exempt from
income taxation if the retiring official or employee was:
1. In service of same employer for at least 10 years;
2. Not less than fifty years of age at time of retirement;
3. Availed of the benefit of exclusion only once. [Sec. 32
(B) (6) (a), NIRC]
4. The retiring official or employee should not have
previously availed of the privilege under the retirement
plan of the same or another employer [RR 2-98, Section
2.78 (B) (1), 1st par.]
INCOME FROM ANY SOURCE WHATSOEVER (1989,
1995, 2001, 2005)
Q: Explain briefly whether the following items are
taxable or non- taxable:
a) Income from jueteng
b) xxx (2005 Bar)
A: It is taxable. The law imposes a tax on income from any
source whatever which means that it includes income
whether legal or illegal. [Sec. 32(A), NIRC]
TAXABLE INCOME
Gross Income (2012, 2013, 2014, 2015)
Q: Mr. Gipit borrowed from Mr. Maunawain
P100,000.00, payable in five (5) equal monthly
installments. Before the first installment became due,
Mr. Gipit rendered general cleaning services in the
entire office building of Mr. Maunawain, and as
compensation therefor, Mr. Maunawain cancelled the
indebtedness of Mr. Gipit up to the amount of
P75,000.00. Mr. Gipit claims that the cancellation of his
indebtedness cannot be considered as gain on his part
which must be subject to income tax, because according
to him, he did not actually receive payment from Mr.
Maunawain or the general cleaning services. Is Mr. Gipit
correct? Explain. (2014 Bar)
UST BAR OPERATIONS
A: No. Section 50 of Rev. Regs. No. 2, otherwise known as
Income Tax Regulations, provides that if a debtor performs
services for a creditor who cancels the debt in consideration
for such services, the debtor realizes income to that amount
as compensation for his services. In the given problem, the
cancellation of Mr. Gipits indebtedness up to the amount of
Php 75,000.00 gave rise to compensation income subject to
income tax, since Mr. Maunawain condoned such amount as
consideration for the general cleaning services rendered by
Mr. Gipit.
Q: In 2010, Mr. Platon sent his sister Helen $1, 000 via a
telegraphic transfer through the Bank of PI. The bank's
remittance clerk made a mistake and credited Helen
with $1,000,000 which she promptly withdrew. The
bank demanded the return of the mistakenly credited
excess, but Helen refused. The BIR entered the picture
and investigated Helen. Would the BIR be correct if it
determines that Helen earned taxable income under
these facts? (2013 Bar)
(A) No, she had no income because she had no right to
the mistakenly credited funds.
(B) Yes, income is income regardless of the source.
(C) No, it was not her fault that the funds in excess of
$1,000 were credited to her.
(D) No, the funds in excess of$1,000 were in effect
donated to her.
A: (B) Yes, income is income regardless of the source.
Section 32 of the NIRC defines gross income as all income
derived from whatever source. Consequently, the flow of
wealth, without any distinction as to the lawfulness of its
source, is subject to income tax. In other words, the phrase
income from whatever source discloses a legislative
policy to include all income not expressly exempted within
the class of taxable income under the law
EXCLUSIONS FROM GROSS INCOME
EXCLUSIONS UNDER THE TAX CODE
Proceeds of life insurance policy (1988, 1991, 2003,
2005, 2007)
Q: State with reasons the tax treatment of the following
in the preparation of annual income tax returns:
a. Proceeds of life insurance received by a child as
irrevocable beneficiary;
b. xxx (2005 Bar)
A: The proceeds of life insurance received by a child as
irrevocable beneficiary are not to be reported in the annual
income tax returns, because they are excluded from gross
income. This kind of receipt does not fall within the
definition of income Many wealth which flows into the
taxpayer other than a mere return of capital. Since
insurance is compensatory in nature, the receipt is merely
considered as a return of capital. [Section 32(B)(1), NIRC;
Fisher v. Trinidad, 43 Phil. 73 (1922)]
Gifts, bequests and devises (1988, 1995, 1996, 1997,
2008)
Q: Mr. Rodrigo, an 80-year old retired businessman, fell
in love with 20-year old Tetchie Sonora, a night club
hospitality girl. Although she refused to marry him she
agreed to be his live-in" partner.
In gratitude Mr. Rodrigo transferred to her a
condominium unit, where they both live, under a deed
of sale for P10 Million. Mr. Rodrigo paid the capital
gains tax of 5% of P10 Million.
8
 QUAMTO (1987-2016)
The Commissioner of Internal Revenue found that the
property was transferred to Tetchie Sonora by Mr.
Rodrigo because of the companionship she was
providing him. Accordingly, the Commissioner made a
determination that Sonora had compensation income
of P10 Million in the year the condominium unit was
transferred to her and issued a deficiency income tax
assessment.
Tetchie Sonora protests the assessment and claims that
the transfer of the condominium unit was a gift and
therefore excluded from income.
How will you rule on the protest of Tetchie Sonora?
Explain. (1995 Bar)
A: I will grant the protest and cancel the assessment. The
transfer of the property by Mr. Rodrigo to Ms. Sonora was
gratuitous. The deed of sale indicating a P10 million
consideration was simulated because Mr. Rodrigo did not
receive anything from the sale. The problem categorically
states that the transfer was made in gratitude to Ms.
Sonoras companionship. The transfer being gratuitous is
subject to donors tax. Mr. Rodrigo should be assessed
deficiency donors tax and a 50% surcharge imposed for
fraudulently simulating a contract of sale to evade donors
tax. [Sec. 91(b), NIRC]
Awards and agreements for damages paid on account of
or resulting from injuries or sickness (1995, 2003,
2005, 2007)
Q: Mr. Infante was hit by a wayward bus while on his
way to work. He survived but had to pay P400, 000.00
for his hospitalization. He was unable to work for six
months which meant that he did not receive his usual
salary of P10,000.00 a month or a total of P60, 000.00.
He sued the bus company and was able to obtain a final
judgment awarding him P400, 000.00 as
reimbursement for his hospitalization, P60, 000 for the
salaries he failed to receive while hospitalized, P200,
000.00 as moral damages for his pain and suffering, and
P100,000.00 as exemplary damages. He was able to
collect in full from the judgment.
How much income did he realize when he collected on
the judgment? Explain. (1995 Bar)
A: None. The P200.000 moral and exemplary damages are
compensation for injuries sustained by Mr. Infante. The
P400, 000.00 reimbursement for hospitalization expenses
and the P60, 000.00 for salaries he failed to receive are
amounts of any damages received whether by suit or
agreement on account of such injuries. Section 28(b)(5) of
the Tax Code specifically exclude these amounts from the
gross income of the individual injured. [Section 28(b), NIRC;
Sec. 63 Rev. Reg. No. 2]
Q: JR was a passenger of an airline that crashed. He
survived the accident but sustained serious physical
injuries which required hospitalization for 3 months.
Following negotiations with the airline and its insurer,
an agreement was reached under the terms of which JR
was paid the following amounts: P500, 000.00 for his
hospitalization; P250, 000.00 as moral damages; P300,
000.00 for loss of income during the period of his
treatment and recuperation. In addition, JR received
from his employer the amount of P200,000.00
representing the cash equivalent of his earned vacation
and sick leaves. Which, if any, of the amounts he
received are subject to income tax? Explain. (2005 Bar)
A: The amount of P200,000.00 that JR received from his
employer is subject to income tax except the money
9
equivalent of ten (10) days unutilized vacation leave credits
which is not taxable. Amounts of vacation allowances or
sick leave credits which are paid to an employee constitutes
compensation. [Sec. 2.78(A)(7), RR No. 2-98, as amended by
RR No. 10-2000]
The amounts that JR received from the airline are excluded
from gross income and not subject to income tax because
they are compensation for personal injuries suffered from
an accident as well as damages received as a result of an
agreement (negotiation) on account of such injuries. [Sec.
32(B)(4), NIRC]
Retirement benefits, gratuities, pensions etc. (1988,
1991, 1994, 1995, 1996, 1999, 2000, 2005, 2007)
Q: A Co., a Philippine corporation, has two divisions
manufacturing and construction. Due to the economic
situation, it had to close its construction division and
lay-off the employees in that division. A Co. has a
retirement plan approved by the BIR, which requires a
minimum of 50 years of age and 10 years of service in
the same employer at the time of retirement.
There are 2 groups of employees to be laid off:
a. Employees who are at least 50 years of age and has
at 10 years of service at the time of termination of
employment.
b. Employees who do not meet either the age or length
of service, A Co. plans to give the following:
For category (A) employees the benefits under the BIR
approved plan plus an ex gratia payment of one month
of every year of service.
For category (B) employees one month for every year
of service. For both categories, the cash equivalent of
unused vacation and sick leave credits.
A Co. seeks your advice as to whether or not it will
subject any of these payments to WT. Explain your
advice. (1999)
A: For category A employees, all the benefits received on
account of their separation are not subject to income tax,
hence no withholding tax shall be imposed. The benefits
received under the BIR-approved plan upon meeting the
service requirement and age requirement are explicitly
excluded from gross income. The ex gratia payment also
qualifies as an exclusion from gross income being in the
nature of benefit received on account of separation due to
causes beyond the employees' control. [Section 32(B), NIRC]
The cash equivalent of unused vacation and sick leave
credits qualifies as part of separation benefits excluded
from gross income. (CIR v. Court of Appeals, GR No. 96016,
October 17, 1991)
For category B employees, all the benefits received by them
will also be exempt from income tax, hence not subject to
withholding tax. These are benefits received on account of
separation due to causes beyond the employees' control,
which are specifically excluded from gross income. [Section
32(B), NIRC]
ALTERNATIVE ANSWER: All of the payments are not
subject to income tax and should not also be subject to WT.
The employees were laid off, hence separated for a cause
beyond their control. Consequently, the amounts to be paid
by reason of such involuntary separation are excluded from
gross income, irrespective of whether the employee at the
time of separation has rendered less than ten years of
service and/or is below fifty years of age. [Section 32(B),
NIRC]
 TAXATION LAW
Prizes and awards (1993, 1996, 2000, 2015)
Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup Boxing Council,
a sports association duly accredited by the Philippine
Boxing Association. Onyoc received the amount of
P500,000 as his prize which was donated by Ayala Land
Corporation. The BIR tried to collect income tax on the
amount received by Onyoc and donors tax from Ayala
Land Corporation, which taxes, Onyoc and Ayala Land
Corporation refuse to pay. Decide. (1996 Bar)
A: The prize will not constitute a taxable income to Onyoc,
hence the BIR is not correct in imposing the income tax. RA.
No. 7549 explicitly provides that All prizes and awards
granted to athletes in local and International sports
tournaments and competitions held in the Philippines or
abroad and sanctioned by their respective national sports
associations shall be exempt from income tax".
Neither is the BIR correct in collecting the donors tax from
Ayala Land Corporation. The law is clear when it
categorically stated That the donors of said prizes and
awards shall be exempt from the payment of the donors
tax."
DEDUCTIONS FROM GROSS INCOME
ITEMIZED DEDUCTIONS
Ordinary and necessary trade, business or professional
expenses (1988, 1989, 1990, 1993, 2006, 2009, 2016)
QPeter is the Vice-President for Sales of Golden Dragon
Realty Conglomerate, Inc. (Golden Dragon). A group of
five (5) foreign investors visited the country for
possible investment in the condominium units and
subdivision lots of Golden Dragon. After a tour of the
properties for sale, the investors were wined and dined
by Peter at the posh Conrad's Hotel at the cost of
P150,000.00. Afterward, the investors were brought to
a party in a videoke club which cost the company
P200,000.00 for food and drinks, and the amount of
P80,000.00 as tips for business promotion officers.
Expenses at Conrad's Hotel and the videoke club were
receipted and submitted to support the deduction for
representation and entertainment expenses. Decide if
all the representation and entertainment expenses
claimed by Golden Dragon are deductible. Explain.
(2016 Bar)
A: Not all of the representation and entertainment expenses
claimed by Golden Dragon are deductible. Only those that
are reasonable in amount and nature should be deductible.
It should be noted that the total expenses is P430,000.00 for
the five (5) investors or P86,000.00 each.
I would allow only a deduction in such amounts as are
reasonable under the circumstances but in no case shall all
deductions for representation and entertainment expenses,
including those above enumerated, exceed 0.50% of net
sales. [NIRC of 1997, Sec. 34 (A) (1) (iv); RR 10-2002]
(Domondon)
Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to protect its
brand franchise for one of its line products. In its
income tax return, MFC included the advertising
expense as deduction from gross income, claiming it as
an ordinary business expense. Is MFC correct? Explain.
(2009 Bar)
A: No. The protection of taxpayers brand franchise is
analogous to the maintenance of goodwill or title to ones
property which is in the nature of a capital expenditure. An
UST BAR OPERATIONS
advertising expense, of such nature does not qualify as an
ordinary business expense, because the benefit to be
enjoyed by the taxpayer goes beyond one taxable year. [CIR
v. General Foods Inc., 401 SCRA 545 (2003)]
Losses (1993, 1998, 1999, 2010)
Q: Give the requisites for deductibility of a loss. (1998
Bar)
A:
1. They must be ordinary losses that are incurred by a
taxable entity as a result of its day to day operations
conducted for profit or otherwise, or casualty losses.
2. They must have been losses that are actually sustained
during the taxable year.
3. Must not have been compensated for by insurance or
other forms of indemnity.
4. If they are casualty losses, they are of property
connected with trade, business, or profession and the
lose arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.
5. Must not have been claimed as a deduction for estate
tax purposes in the estate tax return.
Q: A is a travelling salesman working full time for Nu
Skin Products. He receives a monthly salary plus 3%
commission on his sales in a Southern province where
he is based. He regularly uses his own car to maximize
his visits even to far flung areas. One fine day a group of
militants seized his car. He was notified the following
day by the police that the marines and the militants had
a bloody encounter and his car was completely
destroyed after a grenade hit it.
A wants to file a claim for casualty loss. Explain the legal
basis of your tax advice. (2010 Bar)
A: A is not entitled to claim a casualty loss because all of his
income partake the nature of compensation income.
Taxpayers earning compensation income arising from
personal services under an employer-employee
relationship are not allowed to claim deduction except that
allowed under Section 34(M) referring only to the P2,400
health and/or hospitalization insurance premium; perforce,
the claim of casualty loss has no legal basis. (Sec. 34, NIRC)
Bad Debts (1999, 2004, 2016)
Q: Rakham operates the lending company that made a
loan to Alfonso in the amount of P120,000.00 subject of
a promissory note which is due within one (1) year
from the notes issuance. Three years after the loan
became due and upon information that Alfonso is
nowhere to be found, Rakham asks you for advice on
how to treat the obligation as bad debt. Discuss the
requisites for deductibility of a bad debt. (2016 Bar)
A: I shall advise Rakham to treat the obligation as bad debt
by deducting the same from his income tax return, and
proving compliance with the following requisites for the
deductibility of a bad debt.
The requisites for the deductibility of a bad debt are:
a. There must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable.
b. The same must be connected with the taxpayers trade,
business or practice of profession.
c. The same must not be sustained in a transaction
entered into between related parties.
d. The same must be actually charged off the books of
accounts of the taxpayer as of the end of the taxable
year.
10
 QUAMTO (1987-2016)
e. The debt must be actually ascertained to be
worthless and uncollectible during the taxable year.
f. The debts are uncollectible despite diligent effort
exerted by the taxpayer. [NIRC of 1997, Sec. 34 (E) (1),
arrangement and numbering supplied; RR No. 5-99, Sec.
3, reiterated in RR No. 25-2002; Philippine Refining
Corporation v. Court of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income
tax return of the current or prior years. (RR No. 2, Sec.
103)
Depreciation (1989, 1998, 1999)
Q: Explain if the following items are deductible from
gross income for income tax purposes. Disregard who
is the person claiming the expense.
xxx
b. Depreciation of goodwill. (1999 Bar)
A: Depreciation for goodwill is not allowed as deduction
from gross income. While intangibles maybe allowed to be
depreciated or amortized, it is only allowed to those
intangibles whose use in the business or trade is definitely
limited in duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17)
Such is not the case with goodwill.
ALTERNATIVE ANSWER: Depreciation of goodwill is
allowed as a deduction from gross income if the goodwill is
acquired through capital outlay and is known from
experience to be of value to the business for only a limited
period. (Section 107, Revenue Regulations No. 2) In such
case, the goodwill is allowed to be amortized over its useful
life to allow the deduction of the current portion of the
expense from gross income, thereby paving the way for a
proper matching of costs against revenues which is an
essential feature of the income tax system.
Charitable and other contributions (1993, 1996, 1998)
Q: The Filipinas Hospital for Crippled Children is a
charitable organization. X visited the hospital, on his
birthday, as was his custom. He gave P100, 000.00 to
the hospital and P5, 000.00 to a crippled girl whom he
particularly pitied. A crippled son of X is in the hospital
as one of its patients. X wants to exclude both the P100,
000.00 and the P5, 000.00 from his gross income.
Discuss. (1993 Bar)
A: Under the National Internal Revenue Code, charitable
contributions to be deductible must be:
a. actually paid or made to domestic corporations or
associations organized and operated exclusively for
religious, charitable, scientific, youth and sports
development, cultural or educational purposes or for
rehabilitation of veterans or to social welfare
institutions no part of which inures to the benefit of any
private individual;
b. made within the taxable year;
c. not more than 10% (for individuals) of 5% (for
corporations) of the taxpayers taxable income to be
computed without including the contribution.
Applying the above-provisions of law to the case at bar, it is
clear therefore that only the P100,000.00 contribution of X
to Filipinas Hospital for Crippled Children qualified as a
deductible contribution.
The NIRC expressly provides that the same must be actually
paid to a charitable organization to be deductible. Note that
the law accorded no privilege to similar contributions
extended to private individuals. Hence, the P5,000.00
11
contribution to the crippled girl cannot be claimed as a
deduction.
ALTERNATIVE ANSWER:
a. The P100,000.00 donation may properly be deducted
from Xs gross income, but not the P5, 000.00 donated
to the crippled girl, as charitable and other
contributions that may be deducted from taxable
income do not contemplate those given to individuals.
While it may be that Xs son is a patient in the hospital,
it cannot be said that part of its net income inures to the
benefit of X as to be disallowed as a deduction from
taxable income.
b. Assuming X is a self-employed individual, he may not
deduct the donations made because under Section 29 of
the NIRC as amended by RA 7496 better known as
SNITS, only contribution to the government or to an
accredited relief organization for the rehabilitation of
calamity stricken areas declared by the President may
be deducted for income tax purposes. Clearly, the
donees do not qualify as relief organizations.
c. Assuming X is receiving purely compensation income,
he can only deduct from gross compensation income
personal exemption, additional personal exemption
and special additional personal exemption. (Section 29,
NIRC as amended)
OPTIONAL STANDARD DEDUCTION (2009, 2015)
Q: In 2012, Dr. K decided to return to his hometown to
start his own practice. At the end of 2012, Dr. K found
that he earned gross professional income in the amount
of P1,000,000.00. While he incurred expenses
amounting to P560,000.00 constituting mostly of his
office space rent, utilities, and miscellaneous expenses
related to his medical practice. However, to Dr. Ks
dismay, only P320,000.00 of his expenses were duly
covered by receipts. What are the options available for
Dr. K so he could maximize the deductions from his
gross income? (2015 Bar)
A: In order to maximize his deductions, Dr. K may avail of
the optional standard deduction (OSD) which is an amount
not exceeding forty percent (40%) of his gross sales or
gross receipts. The OSD can be claimed without being
required to present proof or evidence of expenses paid or
incurred Sec. 34 (L), NIRC; Rev. Regs. 16-08, as amended by
him. []
PERSONAL AND ADDITIONAL EXEMPTIONS (1993,
1998, 2004, 2006, 2012, 2014, 2015)
Q: Mr. E and Ms. F are both employees of AAA Corp. They
got married on February 14, 2011. On December 29,
2011, the couple gave birth to triplets. On June 25,
2013, they had twins. What were the personal
exemptions/deductions which Mr. E and Ms. F could
claim in the following taxable years? (2015 Bar)
a. For 2010
A: For 2010, Mr. E and Ms. F are each entitled to personal
exemptions of P50,000.00. [Sec. 35 (A), NIRC]
b. For 2011
A: For 2011, Mr. E and Ms. F are each entitled to basic
personal exemption of P50,000.00. In addition to his basic
personal exemption, Mr. E could claim additional personal
exemptions for three qualified dependent children in the
amount of P25, 000.00 for each child. [Sec. 35 (B), NIRC]
c. For 2013
 TAXATION LAW
A: For 2013, Mr. E and Ms. F are each entitled basic personal
exemptions of P50,000.00. Mr E could claim additional
personal exemptions for four qualified dependent children
in the amount of P25,000.00 for each child. [Sec 35 (B),
NIRC]
ITEMS NOT DEDUCTIBLE
Premiums paid on life insurance policy(1989, 2004,
2007)
Q: OXY is the president and chief executive officer of
ADD Computers Inc. When OXY was asked to join the
government service as director of a bureau under the
Department of Trade and Industry, he took a leave of
absence from ADD. Believing that its business outlook,
goodwill and opportunities improved with OXY in the
government, ADD proposed to obtain a policy of
insurance on his life. On ethical grounds, OXY objected
to the insurance purchase but ADD purchased the
policy anyway. Its annual premium amounted to
P100,000. Is said premium deductible by ADD
Computers, Inc.? Reason. (2004 Bar)
A: No. The premium is not deductible because it is not an
ordinary business expense. The term "ordinary is used in
the income tax law in its common significance and it has the
connotation of being normal, usual or customary. (Deputy v.
Du Pont, 308 US 48) Paying premiums for the insurance of a
person not connected to the company is not normal, usual
or customary.
Another reason for its non-deductibility is the fact that it
can be considered as an illegal compensation made to a
government employee. This is so because if the insured, his
estate or heirs were made as the beneficiary (because of the
requirement of insurable interest), the payment of
premium will constitute bribes which are not allowed as
deduction from gross income. [Section 34(A)(1)(c), NIRC]
On the other hand, if the company was made the
beneficiary, whether directly or indirectly, the premium is
not allowed as a deduction from gross income. [Section
36(A)(4), NIRC]
Q: Noel Santos is a very bright computer science
graduate. He was hired by Hewlett Packard. To entice
him to accept the offer of employment, he was offered
the arrangement that part of his compensation would
be an insurance policy with a face value of P20 Million.
The parents of Noel are made the beneficiaries of the
insurance policy.
xxx
b. Can the company deduct from its gross income the
amount of the premium? Reason briefly. (2007 Bar)
A: Yes. The premiums paid are ordinary and necessary
business expenses of the company. They are allowed as a
deduction from gross income so long as the employer is not
a direct or indirect beneficiary under the policy of
insurance. [Section 36(A)(4), NIRC] Since the parents of the
employee were made the beneficiaries, the prohibition for
their deduction does not exist.
Bribes (1993, 1998, 2014)
Q: Freezy Corporation, a domestic corporation engaged
in the manufacture and sale of ice cream, made
payments to an officer of Frosty Corporation, a
competitor in the ice cream business, in exchange for
said officers revelation of Frosty Corporations trade
secrets.
UST BAR OPERATIONS
May Freezy Corporation claim the payment to the
officer as deduction from its gross income? Explain.
(Bar)
A: No. The payments made in exchange for the revelation of
a competitors trade secrets is considered as an expense
which is against law, morals, good customs or public policy,
which is not deductible. (3M Philippines, Inc. v. CIR, GR No.
82833, 1988) Also, the law will not allow the deduction of
bribes, kickbacks and other similar payments. Applying the
principle of ejusdem generis, payment made by Freezy
Corporation would fall under other similar payments
which are not allowed as deduction from gross income.
[Section 34(A)(1)(c). NIRC]
INCOME TAX ON INDIVIDUALS
Income tax on Resident Citizens, Non-resident Citizens
and Resident Aliens(1997, 1999, 2000, 2001, 2002,
2007, 2015, 2016)
Q: Patrick is a successful businessman in the United
States and he is a sole proprietor of a supermarket
which has a gross sales of $10 million and an annual
income of $3 million. He went to the Philippines on a
visit and in a party, he saw Atty. Agaton who boasts of
being a tax expert. Patrick asks Atty. Agaton: if he
(Patrick) decides to reacquire his Philippine
citizenship under RA 9225, establish residence in this
country, and open a supermarket in Makati City, will
the BIR tax him on the income he earns from his U.S.
business? If you were Atty. Agaton, what advice will you
give Patrick? (2016 Bar)
A: I will advise Patrick that if he reacquires his Philippine
citizenship and establish residence in the Philippines, he
shall be considered as a resident citizen subject to tax on
incomes derived from sources within or without the
Philippines. [NIRC of 1997, Sec. 23 (A)]
Consequently, the BIR could now tax him on his income
derived from sources without the Philippines which is the
income he earns from his U.S. business. (Domondon)
Q: Mr. Sebastian is a Filipino seaman employed by a
Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manages
their business, filed a joint income tax return for 1997
on March 15,1998. After an audit of the return, the BIR
issued on April 20, 2001 a deficiency income tax
assessment for the sum of P250,000.00, inclusive of
interest and penalty. For failure of Mr. and Mrs.
Sebastian to pay the tax within the period stated in the
notice of assessment, the BIR issued on August 19,2001
warrants of distraint and levy to enforce collection of
the tax.
What is the rule of income taxation with respect to Mr.
Sebastian's income in 1997 as a seaman on board the
Norwegian vessel engaged in international shipping?
Explain your answer. (2002 Bar)
A: Mr. Sebastians income as seaman on board the
Norwegian vessel engaged in international shipping shall
not be subjected to income tax. An individual citizen of the
Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on
income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines
and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an
overseas contract worker. [Sec. 23(C), NIRC] Mr. Sebastian
shall be considered as an overseas contract worker. His
income as seaman, which is an income from without the
12
 QUAMTO (1987-2016)
Philippines, shall not be liable for income tax in the
Philippines.
EXCLUSIONS
De minimis benefits (1994, 2005, 2015, 2016)
Q: Mapagbigay Corporation grants all its employees
(rank and file, supervisors, and managers) 5% discount
of the purchase price of its products. During an audit
investigation, the BIR assessed the company the
corresponding tax on the amount equivalent to the
courtesy discount received by all the employees,
contending that the courtesy discount is considered as
additional compensation for the rank and file
employees and additional fringe benefit for the
supervisors and managers. In its defense, the company
argues that the discount given to the rank and file
employees is a de minimis benefit and not subject to
tax. As to its managerial employees, it contends that the
discount is nothing more than a privilege and its
availment is restricted.
Is the BIR assessment correct? Explain. (2016 Bar)
A: No. The 5% discount of the purchase price of its products,
so-called courtesy discounts on purchases, granted by
Mapagbigay Corporation to all its employees (rank and file,
supervisors, and managers) otherwise known as de
minimis benefits, furnished or offered by an employer to
his employees merely as a means of promoting the health,
goodwill, contentment, or efficiency of his employees, are
not considered as compensation subject to income tax and
consequently to withholding tax. [Rev. Regs. 2-98, Sec. 2.78.1
(A) (3), as amended by RR No. 8-2000, RR No. 5-2008, RR No.
10-2008, RR No. 5-2011, and RR No. 8-2012]
As such, de minimis benefits, if given to supervisors and
managerial employees, they are also exempt from the fringe
benefits tax.
Q: What are de minimis benefits and how are these
taxed? Give three (3) examples of de minimis benefits.
(2015)
A: De minimis benefits are facilities and privileges
furnished or offered by an employer to his employees,
which are not considered as compensation subject to
income tax and consequently to withholding tax, if such
facilities or privileges are of relatively small value and are
offered or furnished by the employer merely as means of
promoting the health, goodwill, contentment, or efficiency
of his employees. If received by rank-and-file employees,
they are exempt from income tax on wages; if received by
supervisory or managerial employees, they are exempt
from the fringe benefits tax (RR No. 2-98, as amended by RR
No. 8-2000).
The following shall be considered as de minimis benefits:
1. Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year;
2. Monetized value of vacation and sick leave credits paid
to government officials and employees;
3. Medical cash allowance to dependents of employees,
not exceeding P750 per employee per semester or
P125 per month;
4. Rice subsidy pf P1,500 or 1 sack of 50 kg rice per month
amounting to not more than P1,500;
5. Uniform and clothing allowance not exceeding P5,000
per annum;
6. Actual medical assistance not exceeding PP10,000 per
annum;
7. Laundry allowance not exceeding P300 per month
13
8. Employees achievement awards, e.g., for length of
service or safety achievement, which must be in the
form of a tangible personal property other than cash or
gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under an
established written plan which does not discriminate in
favor of highly paid employees;
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum
10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis;
11. Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes combined do not
exceed P10,000 per employee per taxable year (Rev.
Regs. 2-98, as amended).
Leave Credits (1991, 1996)
Q: A, an employee of the Court of Appeals, retired upon
reaching the compulsory age of 65 years. Upon
compulsory retirement, A received the money value of
his accumulated leave credits in the amount of
P500,000.00.
A: No. The accumulated leave credits in the amount of
P500,000.00 is not subject to tax. The monetized value of
leave credits paid to government officials and employees
shall not be subject to income tax and consequently to
withholding tax. [RR No. 3-98, Sec. 2.78.1 (A) (7), 3rd sentence,
as amended by RR No. 10-2000]
INCOME TAX ON CORPORATIONS
Minimum Corporate Income Tax (2001, 2015)
Q: KKK Corp. secured its Certificate of Incorporation
from the Securities and Exchange Commission on June
3, 2013. It commenced business operations on August
12, 2013. In April 2014, Ms. J, an employee of KKK Corp.
in charge of preparing the annual income tax return of
the corporation for 2013, got confused on whether she
should prepare payment for the regular corporate
oncome tax or the minimum corporate income tax.
a. As Ms. Js supervisor, what will be your advice?
A: As Ms. Js supervisor, I will advise that KKK Corp. should
prepare payment for the regular corporate income tax and
not the minimum corporate income tax. Under the Tax
Code, minimum corporate income tax is only applicable
beginning on the fourth taxable year following the
commencement of business operation. [Sec. 27 (e) (1),
NIRC]
b. What are the distinctions between regular
corporate income tax and minimum corporate
income tax? (2015 Bar)
A: As to taxpayer: Regular corporate income tax applies to
all corporate taxpayers; while minimum corporate income
tax applies to domestic corporations and resident foreign
corporations.
As to tax rate: Regular corporate income tax is 30%; while
minimum corporate income tax is 2%.
As to tax base: Regular corporate income tax is based on the
net taxable income; while minimum corporate income tax is
based on gross income.
As to period of applicability: Regular corporate income tax
is applicable beginning on the fourth taxable year following
 TAXATION LAW
the commencement of business operation, while minimum
corporate income tax is applicable beginning on the fourth
taxable year following the commencement of business
operation.
As to imposition: The minimum corporate income tax is
imposed whenever it is greater than the regular corporate
income tax of the corporation [Sec. 27 (A) and (E), NIRC; RR
No. 9-98]
Off-line International carriers (1987, 1990, 1994, 2005,
2009)
Q: Kenya International Airlines (KIA) is a foreign
corporation, organized under the laws of Kenya. It is
not licensed to do business in the Philippines. Its
commercial airplanes do not operate within Philippine
territory, or service passengers embarking from
Philippine airports. The firm is represented in the
Philippines by its general agent, Philippine Airlines
(PAL), a Philippine corporation.
KIA sells airplane tickets through PAL, and these tickets
are serviced by KIA airplanes outside the Philippines.
The total sales of airline tickets transacted by PAL for
KIA in 1997 amounted to P2,968,156.00. The
Commissioner of Internal Revenue assessed KIA
deficiency income taxes at the rate of 35% on its taxable
income, finding that KIAs airline ticket sales
constituted income derived from sources within the
Philippines.
KIA filed a protest on the ground that the P2,968,156.00
should be considered as income derived exclusively
from sources outside the Philippines since KIA only
serviced passengers outside Philippine territory.
Is the position of KIA tenable? Reasons. (2009 Bar)
A: KIAs position is not tenable. The revenue it derived in
1997 from sales of airplane tickets in the Philippines,
through its agent PAL, is considered as income from within
the Philippines, subject to the 35% tax based on its taxable
income pursuant to the Tax Code. The transacting of
business in the Philippines through its local sales agent,
makes KIA a resident foreign corporation despite the
absence of landing rights, thus, it is taxable on income
derived from within. The source of an income is the
property, activity or service that produced the income. In
the instant case, it is the sale of tickets in the Philippines
which is the activity that produced the income. KIAs
income being derived from within, is subject to Philippine
income tax. [CIR v. British Overseas Airways Corporation, 149
SCRA 395, (1987)]
Tax on Co-ownerships (1990, 1991, 1994, 1997)
Q: Mr. Santos died Intestate in 1989 leaving his spouse
and five children as the only heirs. The estate consisted
of a family home and a four-door apartment which was
being rented to tenants. Within the year, an
extrajudicial settlement of the estate was executed
from the heirs, each of them receiving his/her due
share. The surviving spouse assumed administration of
the property. Each year, the net income from the rental
property was distributed to all, proportionately, on
which they paid respectively, the corresponding
income tax.
In 1994, the income tax returns of the heirs were
examined and deficiency income tax assessments were
is-sued against each of them for the years 1989 to 1993,
inclusive, as having entered into an unregistered
partnership. Were the assessments justified? (1997
Bar)
UST BAR OPERATIONS
A: Yes. the assessments were justified because for income
tax purposes, the co-ownership of inherited property is
automatically converted into an unregistered partnership
from the moment the said properties are used as a common
fund with intent to produce profits for the heirs In
proportion to their shares in the inheritance.
From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and
the income thereof, for each of them to manage and dispose
of as exclusively his own without the intervention of the
other heirs, and, accordingly, he becomes liable individually
for all taxes in connection therewith. If after such partition,
he allows his shares to be held in common with his co-heir
under a single management to be used with the intent of
making profit thereby in proportion to his share, there can
be no doubt that, even if no document or instrument were
executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed (Lorenzo Ona, et al v.
CIR, 45 SCRA 74).
ALTERNATIVE ANSWER: No, the assessments are not
justified. The mere sharing of income does not of itself
establish a partnership absent any clear intention of the co-
owners who are only awaiting liquidation of the estate.
Tax on General Professional Partnerships (1988, 1989,
1990, 2013, 2014)
Q: A, B, and C, all lawyers, formed a partnership called
ABC Law Firm so that they can practice their profession
as lawyers. For the year 2012, ABC Law Firm
received earnings and paid expenses, among which
are as follows:
Earnings:
1. Professional/legal fees from various clients;
2. Cash prize received from a religious society in
recognition of the exemplary service of ABC Law
Firm;
3. Gains derived from sale of excess computers and
laptops.
Payments:
1. Salaries of office staff;
2. Rentals for office space;
3. Representation expenses incurred in meetings
with clients.
a. What are the items in the above mentioned
earnings which should be included in the
computation of ABC Law Firms gross income?
Explain.
A: The three (3) items of earnings should be included in the
computation of ABC Law Firms gross income. The
professional/legal fees from various clients is included as
part of gross income being in the nature of compensation
for services. [Section 32(A)(1), NIRC] The cash prize from a
religious society in recognition of its exemplary services is
also included there being no law providing for its
exclusion. This is not a prize in recognition of any of the
achievements enumerated under the law hence, should
form part of gross income. [Section 32(B)(7)(c), NIRC]
The gains from sale of excess computers and laptops
should also be included as part of the firms gross
income because the term gross income specifically
includes gains derived from dealings in property. [Section
32(A)(3), NIRC]
b. What are the items in the above-mentioned
payments which may be considered as
14
 QUAMTO (1987-2016)
deductions from the gross income of ABC Law Firm?
Explain.
A: The law firm being formed as general professional
partnership is entitled to the same deductions allowed to
corporation. (Section 26, NIRC) Hence, the three (3) items of
deductions mentioned in the problem are all deductible,
they being in the nature of ordinary and necessary expenses
incurred in the practice of profession. [Section 34(A), NIRC]
However, the amount deductible for representation
expenses incurred by a taxpayer engaged in sale of services,
including a law firm, is subject to a ceiling of 1% of net
revenue. (RR No. 10-2002)
c. If ABC Law Firm earns net income in 2012, what, if
any, is the tax consequence on the part of ABC Law
Firm insofar as the payment of income tax is
concerned? What, if any, is the tax consequence on
the part of A, B, and C as individual partners,
insofar as the payment of income tax is concerned?
(2014 Bar)
A: The net income having been earned by the law firm
which is formed and qualifies as a general professional
partnership, is not subject to income tax because the earner
is devoid of any income tax personality. Each partner shall
report as gross income his distributive shares, actuality or
constructively received, in the net income of the
partnership. The partnership is merely treated for income
tax purposes as a pass-through entity so that its net income
is not taxable at the level of the partnership but saidnet
income should be attributed to the partners, whether or not
distributed to them, and they are liable to pay the income
tax based on their respective taxable income as individual
taxpayers. (Section 26, NIRC)
TRANSFER TAXES
TIME AND TRANSFER OF PROPERTIES (DATE OF
DEATH VALUATION RULE) (1994, 2007, 2008,)
Q: Jose Cernan, Filipino citizen, married to Maria
Ceman, died in a vehicular accident in NLEX on July 10,
2007. The spouses owned, among others, a 100-hectare
agricultural land in Sta. Rosa, Laguna with current fair
market value of P20 million, which was the subject
matter of a Joint Venture Agreement about to be
implemented with Star Land Corporation (SLC), a well-
known real estate development company. He bought
the said real property for P2 million fifty years ago. On
January 5, 2008, the administrator of the estate and SLC
jointly announced their big plans to start conversion
and development of the agricultural lands in Sta. Rosa,
Laguna, into first-class residential and commercial
centers. As a result, the prices of real properties in the
locality have doubled.
The Administrator of the Estate of Jose Cernan filed the
estate tax return on January 9,2008, by including in the
gross estate the real property at P2 million. After 9
months, the BIR issued deficiency estate tax
assessment, by valuing the real property at P40 million.
a. Is the BIR correct in valuing the real property at
P40 million? Explain.
A: No. The value of the property for estate tax purposes
shall be the fair market value thereof at the time of death.
[Section 88(B), NIRC]
b. If you disagree, what is the correct value to use for
estate tax purposes? Explain. (2008 Bar)
15
A: The correct value to use for estate tax purposes is P20
million which is the current fair market value of the
property at the time of the decedent's death. [Section 88(B),
NIRC]
CLASSIFICATION OF DECEDENT FOR PURPOSES OF
DETERMINING COMPOSITION OF GROSS ESTATE
(1987, 1990, 1994, 2010)
Q: Cliff Robertson, an American citizen, was a
permanent resident of the Philippines. He died in
Miami, Florida. He left 10, 000 shares of Meralco, a
condominium unit at the Twin Towers Building at
Pasig. Metro Manila and a house and lot in Los Angeles,
California.
What assets shall be included in the Estate Tax Return
to be filed with the BIR? (1994 Bar)
A: All of Mr. Robertsons assets consisting of 10, 000 shares
in the Meralco, a condominium unit in Pasig, and his house
and lot in Los Angeles, California are taxable. The properties
of a resident alien decedent like Mr. Robertson are taxable
wherever situated.
ITEMS TO BE INCLUDED AS PART OF GROSS ESTATE
Transfers in Contemplation of Death (2001, 2013)
Q: A, aged 90 years and suffering from incurable cancer,
on August 1, 2001 wrote a will and, on the same day,
made several inter-vivos gifts to his children. Ten days
later, he died. In your opinion, are the inter-vivos gifts
considered transfers in contemplation of death for
purposes of determining properties to be included in
his gross estate? Explain your answer. (2001 Bar)
A: Yes. When the donor makes his will within a short time
of, or simultaneously with, the making of gifts, the gifts are
considered as having been made in contemplation of death.
(Roces v. Posadas, 58 Phil. 108) Obviously, the intention of
the donor in making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees are
likewise his forced heirs who are called upon to inherit, it
will create a presumption juris tantum that said donations
were made mortis causa, hence, the properties donated
shall be included as part of A's gross estate.
Proceeds of Life Insurance Policy(2003, 2005, 2007)
Q: Antonia Santos, 30 years old, gainfully employed, is
the sister of Eduardo Santos. She died in an airplane
crash. Edgardo is a lawyer and he negotiated with the
airline company and insurance company and they were
able to agree to a total settlement of P10 Million. This is
what Antonia would have earned as somebody who was
gainfully employed. Edgardo was her only heir.
Is the P10 Million subject to estate tax? Reason briefly.
(2007 Bar)
A: No. The estate tax is a tax on the privilege enjoyed by an
individual in controlling the disposition of her properties to
take effect upon her death. The P10M is not a property
existing as of the time of decedents death; hence, it cannot
be said that she exercised control over its disposition. Since
the privilege to transmit the property is not exercised by the
decedent, the estate tax cannot be imposed thereon.
(Definition of Estate Tax p. 184, Vitug, Compendium of Tax
Law and Jurisprudence, Third Revised Edition).
DEDUCTIONS FROM GROSS ESTATE
Vanishing Deduction (2008, 2009)
 TAXATION LAW
Q: In 1999, Xavier purchased from his friend, Yuri, a
painting for P500,000.00. The fair market value (FMV)
of the painting at the time of the purchase was P1
million. Yuri paid all the corresponding taxes on the
transaction. In 2001, Xavier died. In his last will and
testament, Xavier bequeathed the painting, already
worth P1.5 million, to his only son, Zandro. The will also
granted Zandro the power to appoint his wife, Wilma,
as successor to the painting in the event of Zandros
death. Zandro died in 2007, and Wilma succeeded to the
property.
xxx
c. May a vanishing deduction be allowed in either or
both of the estates? Explain. (2009 Bar)
A: Vanishing deduction shall be allowed to the estate of
Xavier but only to the extent of the property which is the
portion acquired by gift. (Section 100, NIRC) The donation
took place within 5 years (1999 to 2001) from the death of
Xavier; hence, there is a vanishing deduction. However,
Zandros estate will not be entitled to claim vanishing
deduction because, first and foremost, the property
previously taxed is not includable in his gross estate and
second, even if it is includable, the present decedent died
more than 5 years from the death of the previous decedent,
and that a vanishing deduction is already claimed by the
previous estate involving the same property.
Standard Deduction (2000, 2008)
Q: While driving his car to Baguio last month, Pedro
Asuncion, together with his wife Assunta, and only son,
Jaime, met an accident that caused the instantaneous
death of Jaime. The following day, Assunta also died in
the hospital. The spouses and their son had the
following assets and liabilities at the time of death:
Assunta Jaime
Exclusive Conjugal Exclusive
Cash P 10,000,000 P 1,200,000
Cars P 2,000,000 500,000
Land P 5,000,000 2,000,000
Residential house 4,000,000
Mortgage payable 2,500,000
Funeral expenses 300,000
a. Is the Estate of Jaime Asuncion liable for estate tax?
Explain. (2008)
A: No. The estate comprised of properties of only P1.2
million is not liable to any estate tax. The estate is entitled
to a standard deduction of P1 million deductible from the
gross estate without the benefit of substantiation, thereby
placing the net estate at only P200,000. Under the
graduated tax rates of the estate tax, a net estate of P200,
000 is exempt. [Section 86(A)(5) and Section 84, NIRC]
Medical Expenses (2010, 2015)
Q: State the conditions for allowing the following as
deductions from the gross estate of a citizen or resident
alien for the purpose of imposing estate tax:
xxx
b. Medical Expenses (2015 Bar)
UST BAR OPERATIONS
A: The conditions for the allowance of medical expenses as
deductions from the gross estate of a citizen or resident
alien are:
1. The medical expenses must have been incurred within
one (1) year before the death of the decedent;
2. That the medical expenses are duly substantiated with
receipts; and
3. The total amount thereof, whether paid or unpaid, does
not exceed P500, 000.00. [Sec. 86A(6), NIRC]
Claims against the Estate (2010, 2015)
Q: State the Conditions for allowing the following as
deductions from the gross estate of a citizen or resident
alien for the purpose of imposing estate tax:
a. Claims against the estate (2015 Bar)
A: In order that claims against the estate may be allowed as
deductions from the gross estate of a citizen or resident
alien for purposes of imposing the estate tax, the law
requires at the time the indebtedness was incurred, the
debt instrument was duly notarized. In addition, if the loan
was contracted within three (3) years before the death of
the decedent, the executor or administrator shall submit a
statement showing the disposition of the proceeds of the
loan. [Sec. 86 (a) (1) (c), NIRC]
Period for Filing of Estate Tax Return, Payment and
Extension (2000, 2007, 2010)
Q: Mr. Felix de la Cruz, a bachelor resident citizen
suffered from a heart attack while on a business trip to
the USA. He died intestate on June 15, 2013 in New York
City, xxx xxx where shall the return be filed and estate
tax be paid? (2000 Bar)
A: The estate tax return shall be filed within six (6) months
from the decedents death [Sec. 90 (B), NIRC of 1997],
provided that the Commissioner of Internal Revenue shall
have authority to grant in meritorious cases, a reasonable
extension not exceeding thirty (30) days for filing the
return. [Sec. 90 (c) Ibid]
Except in cases where the Commissioner of Internal
Revenue otherwise permits, the estate tax return shall be
filed with an authorized agent bank, or Revenue District
Officer, Collection Officer, or duly authorized Treasurer of
Pasig City, the City in which the decedent Mr. de la Cruz was
domiciled at the time of his death. [Sec. 90 (D), NIRC of 1997]
Q: Remedios, a resident citizen, died on November 10,
2006. She died leaving three condominium units in
Quezon City valued at P5 Million each. Rodolfo was her
only heir. He reported her death on December 5, 2006
and filed the estate tax return on March 30,2007.
Because he needed to sell one unit of the condominium
to pay for the estate tax, he asked the Commissioner of
Internal Revenue to give him one year to pay the estate
tax due. The Commissioner approved the request for
extension of time provided that the estate tax be
computed on the basis of the value of the property at
the time of payment of the tax.
a. Does the Commissioner of Internal Revenue have
the power to extend the payment of estate tax? If so,
what are the requirements to allow such extension?
(2007 Bar)
A: Yes. The Commissioner may allow an extension of time
to pay the estate tax if the payment on the due date would
impose undue hardship upon the estate or any of the heirs.
The extension, in any case, will not exceed two years if the
estate is not under judicial settlement or five years if it is
under judicial settlement. The Commissioner may also
16
 QUAMTO (1987-2016)
require the posting of a bond to secure the payment of the
tax. [Section 91(B), NIRC]
ALTERNATIVE ANSWER: Yes. The requirements to be
complied with so that an extension may be allowed are: (1)
a request for extension must be filed before the expiration
of the original period to pay which is within 6 months from
death; (2) there must be a finding that the payment on the
due date of the estate tax would impose undue hardship
upon the estate or any of the heirs; (3) the extension must
be for a period of not exceeding 5 years if the estate is
settled judicially or 2 years if settled extrajudicially; and (4)
the Commissioner may require the posting of a bond in an
amount not exceeding double the amount of tax to secure
the payment thereof. [Section 91(B), NIRC]
Collection of Estate Taxes pending probate proceeding
(1998, 2004, 2005)
Q: Is the approval of the court, sitting as probate or
estate settlement court, required in the enforcement
and collection of estate tax? Explain. (2005 Bar)
A: No. The approval of the court, sitting in probate, is not a
mandatory requirement in the collection of estate tax. On
the contrary, under Section 94 of the NIRC, it is the probate
or settlement court which is forbidden to authorize the
executor or judicial administrator of the decedents estate,
to deliver any distributive share to any party interested in
the estate, unless a certification from the Commissioner of
Internal Revenue that the estate tax has been paid is shown.
[Marcos II v. Court of Appeals, 273 SCRA 47 (1997)].
Power of the Commissioner of Internal Revenue to
inquire into bank accounts for purposes of determining
the Gross Estate of a Decedent (1992, 2003)
Q: X dies in year 2000 leaving a bank deposit of P2,
000,000.00 under joint account with his associates in a
law office. Learning of Xs death from the newspapers,
the Commissioner of Internal Revenue wrote to every
bank in the country asking them to disclose to him the
amount of deposits that might be outstanding in his
name or jointly with others at the date of his death. May
the bank holding the deposit refuse to comply on the
ground of the Secrecy of Bank Deposit Law? Explain.
(2003 Bar)
A: No. The Commissioner of Internal Revenue has the
authority to inquire into bank deposit accounts of a
decedent to determine his gross estate notwithstanding the
provisions of the Bank Secrecy Law. Hence, the banks
holding the deposits in question may not refuse to disclose
the amount of deposits on the ground of secrecy of bank
deposits. [Section 6(F) of the 1997 Tax Code] The fact that
the deposit is a joint account will not preclude the
Commissioner from inquiring thereon because the law
mandates that if a bank has knowledge of the death of a
person, who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal from
the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon have been paid.
(Sec. 97, 1997 Tax Code) Hence, to be able to give the
required certification, the inclusion of the deposit is
imperative, which may be made possible only through the
inquiry made by the Commissioner.
DONORS TAX
TRANSFERS WHICH MAY BE CONSTITUTED AS
DONATION
17
Sale/exchange/transfer of property for insufficient
consideration (1989, 1991, 1993, 1995, 1996, 1999)
Q: The employees of Travellers, Inc. staged a strike. X,
a non-union member joined the strike and volunteered
to picket the company premises from 8:00 A.M. to 12:00
P.M., Monday to Friday. Six months into the strike, X ran
out of money and asked financial aid from the union
since he has no other source of income and needed
financial assistance in order to live. The union gave him
P1, 000.00 a month to take care of his food
requirements plus P500.00 to take care of his monthly
rent. When X filed his return, he excluded these benefits
from his gross income. The exclusion was denied by the
BIR Decide. (1993 Bar)
A: The P1, 500.00 is not compensation income because
compensation income arises out of employer-employee
relationship as payment for services without compensation.
The P1, 500.00 is a gift from the labor union. According to
Section 28 (b) (3) of the NIRC, gifts are to be excluded from
gross income. Thus, the BIR's denial is not valid.
ALTERNATIVE ANSWER: Under the law, gross income
consists of all gains, profits, and income of the taxpayer
during a taxable year of whatever kind and in whatever
form derived from any source, whether legal or illegal,
except items of gross income subject to final income tax and
income exempt from taxation under Sec. 28 (b) of the NIRC.
Moreover, in the case of Gutierrez vs. Collector of Internal
Revenue, CTA Case No. 65, 31 August 1965, it was held that
the phrase income from whatever source derived covers all
other forms of income. It discloses a legislative policy to
include all income not expressly exempted, as within the
class of taxable income under our laws, irrespective of the
voluntary or involuntary action of the taxpayer in
producing the gain.
Therefore based on the foregoing considerations, the
benefits subject in the case at bar, not expressly exempted
by law, are considered as income.
Q: A, an individual, sold to B, his brother-in-law, his lot
with a market value of P1, 000.000 for P600.000. As
cost in the lot is P100, 000. B is financially capable of
buying the lot.
A also owns X Co., which has a fast growing business. A
sold some of his shares of stock in X Co. to his key
executives in X Co. These executives are not related to
A. The selling price is P3, 000.000, which is the book
value of the shares sold but with a market value of
P5,000,000. As cost in the shares sold is P1 , 000, 000.
The purpose of A in selling the shares is to enable his
key executives to acquire a propriety interest in the
business and have a personal stake in its business.
Explain if the above transactions are subject to donor's
tax. (1999)
A: The first transaction where a lot was sold by A to his
brother-in-law for a price below its fair market value will
not be subject to donor's tax if the lot qualifies as a capital
asset. The transfer for less than adequate and full
consideration, which gives rise to a deemed gift, does not
apply to a sale of property subject to capital gains tax.
(Section 100, NIRC). However, if the lot sold is an ordinary
asset, the excess of the fair market value over the
consideration received shall be considered as a gift subject
to the donor's tax.
The sale of shares of stock below the fair market value
thereof is subject to the donor's tax pursuant to the
 TAXATION LAW
provisions of the Tax Code. The excess of the fair market
value over the selling price is a deemed gift.
ALTERNATIVE ANSWER: The sale of shares of stock below
the fair market value will not give rise to the imposition of
the donor's tax. In determining the gain from the transfer,
the selling price of the shares of stocks shall be the fair
market value of the shares of stocks transferred. (Section 6,
RR No. 2- 82). In which case, the reason for the imposition
of the donor's tax on sales for inadequate consideration
does not exist.
CLASSIFICATION OF DONORS (1992, 1996, 2009)
Situs of Donors Tax
Q: Mr. Bill Morgan, a Canadian citizen and a resident of
Scarborough, Ontario, sends a gift check of
$20,000.00to his future Filipino daughter-in-law who is
to be married to his only son in the Philippines.
Is the donation by Mr. Morgan subject to tax? Explain.
(1992 Bar)
A: Yes. While the gift has been made on account of marriage,
to qualify for exemption to the extent of the first P10, 000.00
(now P50, 000.00) of the value thereof, such gift should
have been given to a legitimate, recognized natural or
adopted child of the donor.
ALTERNATIVE ANSWER: It is not subject to tax because
the gift was made outside the Philippines.
DETERMINATION OF GROSS GIFT
Renunciation of share of surviving spouse (2010, 2013)
Q: In the settlement of the estate of Mr. Barbera who
died intestate, his wife renounced her inheritance and
her share of the conjugal property in favor of their
children. The BIR determined that there was a taxable
gift and thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (2013 Bar)
A: The BIR is correct that there was a taxable gift but only
insofar as the renunciation of the share of the wife in the
conjugal property is concerned. This is a transfer of
property without any consideration which takes effect
during the lifetime of the transferor/wife and thus qualifies
as a taxable gift (RR No. 2-2003).
But the renunciation of the wifes share in the inheritance
during the settlement of the estate is not a taxable gift
considering that the property is automatically transferred
to the other heirs by operation of law due to her repudiation
of her inheritance (BIR Ruling DA No. 333-07)
EXEMPTION OF GIFTS FROM DONORS TAXES
Gift Splitting (1995, 2001, 2008)
Q: Your bachelor client, a Filipino residing in Quezon
City, wants to give his sister a gift of Php200, 000.00. He
seeks your advice, for purposes of reducing if not
eliminating the donors tax on the gift, on whether it is
better for him to give all of the Php200, 000.00 on
Christmas 2001 or to give Php100, 000.00 on Christmas
2001 and the other Php100,000.00 on January 1, 2002.
Please explain your advice. (2001 Bar)
A: I would advice him to split the donation. Giving the
Php200, 000 as a one-time donation would mean that it will
be subject to a higher tax bracket under the graduated tax
structure thereby necessitating the payment of donor's tax.
On the other hand, splitting the donation into two equal
amounts of Php100, 000 given on two different years will
UST BAR OPERATIONS
totally relieve the donor from the donors tax because the
first Php100,000 donation in the graduated brackets is
exempt. (Section 99, NIRC) While the donors tax is
computed on the cumulative donations, the aggregation of
all donations made by a donor is allowed only over one
calendar year.
Donations in favor of the government, educational,
charitable, religious etc. insitutions (1992, 1994, 2000,
2002, 2007, 2014)
Q: On December 06, 2001, LVN Corporation donated a
piece of vacant lot situated in Mandaluyong City to an
accredited and duty registered non-stock, non-profit
educational institution to be used by the latter in
building a sports complex for students.
A. May the donor claim in full as deduction from its
gross income for the taxable year 2001 the amount
of the donated lot equivalent to its fair market
value/zonal value at the time of the donation?
Explain your answer.
A: No. Donations and/or contributions made to qualified
donee institutions consisting of property other than money
shall be based on the acquisition cost of the property. The
donor is not entitled to claim as full deduction the
fairmarket value/zonal value of the lot donated. [Sec. 34(H),
NIRC]
B. In order that donations to non-stock, non-profit
educationalinstitution may be exempt from the
donors gift tax, what conditions must be met by the
donee? (2002 Bar)
A: In order that donations to non-stock, non-profit
educational institution may be exempt from the donors gift
tax, it is required that not more than 30% of the said gifts
shall be used by the donee-institution for administration
purposes. [Sec. 101(A)(3), NIRC]
VALUE ADDED TAX
CONCEPT, NATURE AND CHARACTERISTICS OF VAT
(1988, 1996, 2015)
Q: In June 2013, DDD Corp., a domestic corporation
engaged in the business of leasing real properties in the
Philippines, entered into a lease agreement of a
residential house and lot with EEE, Inc., a non-resident
foreign corporation. The residential house and lot will
be used by officials of EEE, Inc. during their visit to the
Philippines. The lease agreement was signed by
representatives from DDD Corp. and EEE, Inc. in
Singapore. DDD Corp. did not subject the said lease to
VAT believing that it was not a domestic service
contract. Was DDD Corp. correct? Explain. (2015 Bar)
A: DDD Corp. is not correct. Lease of properties shall be
subject to VAT irrespective of the place where the contract
of lease was executed if the property is leased or used in the
Philippines [Sec. 108(A), NIRC].
Q: What are the characteristics of the Value-Added Tax?
(1996)
A: The value-added tax is an indirect tax and the amount of
tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services.
ALTERNATIVE ANSWER: The value-added tax has the
following characteristics:
18
 QUAMTO (1987-2016)
a. It is an indirect tax where tax shifting is always
presumed;
b. It is consumption-based;
c. It is imposed on the value-added in each stage of
distribution;
d. It is a credit-invoice method value-added tax; and
e. It is not a cascading tax.
VAT on Sale of Properties (1988, 1998, 2014)
Q: MasarapKumain, Inc. (MKI) is a Value-Added Tax
(VAT)-registered company which has been engaged in
the catering business for the past 10 years. It has
invested a substantial portion of its capital on flat
wares, table linens, plates, chairs, catering equipment,
and delivery vans. MKI sold its first delivery van,
already 10 years old and idle, to Magpapala Gravel and
Sand Corp. (MGSC) a corporation engaged in the
business of buying and selling gravel and sand. The
selling price of the delivery van was way below its
acquisition cost.
Is the sale of the delivery van by MKI to MGSC subject to
VAT? (2014 Bar)
A: Yes, the sale of the delivery van is subject to VAT being a
transaction incidental to the catering business which is a
VAT-registered activity of MKI. Transactions that are
undertaken incidental to the pursuit of a commercial or
economic activity are considered entered into in the course
of trade or business. (Sec 105, NIRC) A sale of a fully
depreciated vehicle that has been used in business is
subject to VAT as an incidental transaction, although such
sale may be considered isolated. (Mindanao II Geothermal
Partnership v. CIR)
VAT ON SERVICES
Zero-rated Sale of Services (1998, 2010, 2013, 2015
2016)
Q: Pursuant to Sec. 11 of the "Host Agreement" between
the United Nations and the Philippine government, it
was provided that the World Health Organization
(WHO), "its assets, income and other properties shall
be: a) exempt from all direct and indirect taxes."
Precision Construction Corporation (PCC) was hired to
construct the WHO Medical Center in Manila. Upon
completion of the building, the BIR assessed a 12% VAT
on the gross receipts of PCC derived from the
construction of the WHO building. The BIR contends
that the 12% VAT is not a direct nor an indirect tax on
the WHO but a tax that is primarily due from the
contractor and is therefore not covered by the Host
Agreement. The WHO argues that the VAT is deemed an
indirect tax as PCC can shift the tax burden to it. Is the
BIR correct? Explain. (2016 Bar)
A: No. The BIR is not correct.
While it is true that the VAT is an indirect tax, it is clear from
the agreement that WHO is exempt from all direct and
indirect taxes. Since the 12% VAT is an indirect tax whose
burden was shifted by PCC to WHO then it is evident that
the BIR is not correct. [CIR v. John Gotamco & Sons, Inc., G.R.
No. L-31092, Feb. 27, 1987, 148 SCRA 36 (1987)]
To allow the shifting of the burden to WHO would negate its
exemption and in violation of the international agreement
entered into by the Philippines. (Domondon)
Q: MMM, Inc., a domestic telecommunications company,
handles incoming telecommunications services for
non-resident foreign companies by relaying
international calls within the Philippines. To broaden
19
the coverage of its telecommunications services
throughout the country, MMM, Inc. entered into various
interconnection agreements with local carriers. The
non-resident foreign corporations pay MMM, Inc. in US
dollars inwardly remitted through Philippine banks, in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas.
MMM, Inc. filed its Quarterly VAT Returns for 2000.
Subsequently, MMM, Inc. timely filed with the BIR an
administrative claim for the refund of the amount of
P6,321,486.50, representing excess input VAT
attributable to its effectively zero-rated sales in 2000.
The BIR ruled to deny the claim for refund of MMM, Inc.
because the VAT official receipts submitted by MMM,
Inc. to substantiate said claim did not bear the words
"zero-rated" as required under Section 4.108-1 of
Revenue Regulations (RR) No. 7-95. On appeal, the CTA
division and the CT A en bane affirmed the BIR ruling.
MMM, Inc. appealed to the Supreme Court arguing that
the NIRC itself did not provide for such a requirement.
RR No. 7-95 should not prevail over a taxpayer's
substantive right to claim tax refund or credit. (2015)
1. Rule on the appeal of MMM, Inc.
A: The appeal of MMM, Inc. must be denied. MMM, Inc.s
position that the requirements under RR No. 7-95 should
not prevail over a taxpayers substantive right to claim tax
refund or credit is unmeritorious. The Secretary of Finance
has the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions
of the National Internal Revenue Code (NIRC). Such rules
and regulations are given weight and respect by the courts
in view of the rule-making authority given to those who
formulate them and their specific expertise in their
respective fields.
An applicant for a claim for tax refund or tax credit must not
only prove entitlement tot eh claim, but also compliance
with all the documentary and evidentiary requirements.
Consequently, the Court of Tax Appeal (CTA), and the CTA
en banc correctly ruled that the failure to indicate the words
zero-rated on the invoices and receipts issued by a
taxpayer, would result in the denial of the claim for refund
or tax credit (Eastern Telecommunications Philippines, Inc.
v. CIR, G.R. No. 183531, March 25, 2015).
2. Will your answer in (a) be any different if MMM, Inc.
was claiming refund of excess input VAT
attributable to its effectively zero-rated sales in
2012?
A: No, my answer will not be different if the claim for refund
is for effectively zero-rated sales in 2012. The requirement
to print the word zero-rated is no loinger by mere
regulations, but is now clearly provided by law as follows
If the sale is subject to zero percent (0%) value-added tax,
the term zero-rated sale shall be written or printed
prominently on the invoice or receipt. Failure to comply
with this invoicing requirement is fatal to a claim for refund
of input taxes attributable to the zero-rated sale (Sec.
113B)(2)(c), NIRC).
Moreover, as recently ruled by the Supreme Court, the
subsequent incorporation of Sec. 4.108-1 of RR 7-95 in Sec.
113 of the NIRC as introduced in R.A. No. 9337, actually
confirmed the validity of the imprinting requirement on
VAT invoices or official receipts a case falling under the
principle of legislative approval of administrative
interpretation by reenactment (Northern Mindanao Power
Corp. v. CIR, G.R. No. 185115, February 18, 2015).
 TAXATION LAW
Q: State whether the following transactions are: a) VAT
exempt; b) subject to VAT at 12%; or c) subject to VAT
at 0%:
xxx xxx xxx
b. Services rendered by Jakes Construction Company,
a contractor to the World Health Organization in
the renovation of its offices in Manila. (1998 Bar)
A: VAT at 0%. Since Jake's Construction Company has
rendered services to the World Health Organization, which
is an entity exempted from taxation under international
agreements to which the Philippines is a signatory, the
supply of services is subject to zero percent (0%) rate.
VAT EXEMPT TRANSACTIONS
Sale or importation of agricultural and marine food
products in their original state and certain kinds of
livestock, poultry, breeding stock and genetic materials
(1998, 2010)
Q: State whether the following transactions are: a) VAT
Exempt; b) subject to VAT at 10%; or c) subject to VAT
at 0%:
a. Sale of fresh vegetables by AlingIning at the
Pamilihang Bayan ngTreceMartirez. (1998 Bar)
A: VAT exempt. Sale of agricultural products, such as fresh
vegetables, in their original state, of a kind generally used
as, or producing foods for human consumption is exempt
from VAT.
Sale of certain Real Estate (1996, 2009)
Q: Melissa inherited from her father a 300-square-
meter lot. At the time of her fathers death on March 14,
1995, the property was valued at P720, 000.00. On
February 28, 1996, to defray the cost of the medical
expenses of her sick son, she sold the lot for P600,
000.00, on cash basis. The prevailing market value of
the property at the time of the sale was P3, 000.00 per
square meter.
xxxxxxxxx
b. Is Melissa liable to pay Value Added Tax (VAT) on
the sale of the property? If so, how much and why?
If not, why not? (2009 Bar)
A: No. The real property sold, being in the nature of a capital
asset, is not subject to VAT. The sale is subject to VAT only
if the real property sold is held primarily for sale to
customers or held for lease in the ordinary course of trade
or business. A real property classified as a capital asset does
not include a real property held for sale or for lease, hence,
its sale is not subject to VAT. (Section 39 and Section 106,
NIRC)
Q: Give at least three (3) real estate transactions which
are not subject to the Value-Added Tax. (1996 Bar)
A: Real estate transactions which are exempt from the
value-added tax are:
a. Sale of real property not primarily held for sale or lease
in the ordinary course of trade or business;
b. Sale of real property utilized for socialized housing
under RA. No. 7279;
c. Sale of real property utilized under the low-cost
housing under BP Big. 220.
Lease of residential unit (1998, 2008, 2009)
Q: Emiliano Paupahan is engaged in the business of
leasing out several residential apartment units he
UST BAR OPERATIONS
owns. The monthly rental for each unit ranges from P8,
000.00 to P10, 000.00. His gross rental income for one
year is P1, 650,000.00. He consults you on whether it is
necessary for him to register as a VAT taxpayer. What
legal advice will you give him, and why? (2009 Bar)
A: I will advise Emiliano that he is not required to register
as a VAT taxpayer. His transactions of leasing residential
units for an amount not exceeding P12,800.00 per unit per
month are exempt from VAT irrespective of the aggregate
amount of rentals received annually.
Q: Greenhills Condominium Corporation incorporated
in 2001 is a non-stock, non-profit association of unit
owners in Greenhills Tower, San Juan City. To be able to
reduce the association dues being collected from the
unit owners, the Board of Directors of the corporation
agreed to lease part of the ground floor of the
condominium building to DEF Savings Bank for
P120,000 a month or P1.44 million for the year, starting
January 2007.
a. Is the non-stock, non-profit association liable for
value added tax in 2007? If your answer is in the
negative, is it liable for another kind of business
tax?
A: No. Since the associations annual gross receipts do not
exceed P1, 919,500.00, it is exempt from the VAT. It is,
however, liable to the 3% percentage tax which is imposed
on persons exempt from value-added tax on account of
failure to reach the P1, 919, 500 threshold.
b. Will the association be liable for value added tax in
2008 if it increases the rental to P150,000 a month
beginning January 2008? Explain. (2008 Bar)
A: Yes. When it increased the rentals to P150,000 per
month, its gross annual receipts will now exceed
P1,919,500.00. It is liable to the VAT beginning January
2008.
Refund or tax credit of excess input tax (2014, 2015,
2016)
Q: Amor Powers, Inc. (API) is a domestic corporation
registered with the BIR as a value-added taxpayer. API
incurred excess input VAT in the amount of
P500,000,000.00 on August 3, 2008. Hence, it filed with
the BIR an administrative claim for the refund or credit
of these input taxes on August 15, 2010. Without
waiting for the CIR to act on its claim, API filed a Petition
for Review with the CTA on September 15, 2010 before
the lapse of two years after the close of the taxable
quarter concerned.
In its Comment on the Petition, the CIR argues that API's
Petition should be dismissed as it was filed before the
lapse of the 120-day period given to the CIR by Sec.
112(D) of the NIRC, which became effective on January
1, 1998. For the CIR, the 120-day period is mandatory
and jurisdictional so that any suit filed before its
expiration is premature and, therefore, dismissible.
API, on the other hand, invokes BIR Ruling No. DA-489-
03 issued by the CIR on December 10, 2003 in answer
to a query posed by the Department of Finance
regarding the propriety of the actions taken by Lazi Bay
Resources Development, Inc., which filed an
administrative claim for refund with the CIR and,
before the lapse of the 120-day period from its filing,
filed a judicial claim with the CTA. BIR Ruling No. DA-
489-03 stated that the taxpayer-claimant need not wait
for the lapse of the 120-day period before it could seek
judicial relief with the CTA.
20
 QUAMTO (1987-2016)
Will API's Petition for Review prosper? Decide with
reasons. (2016 Bar)
A: Yes. APIs petition for review will prosper. Since APIs
petition for review was filed on September 15, 2010, it is an
exception to the general rule. The premature filing is
allowed because it was filed between 10 December 2003
and 5 October 2010, when BIR Ruling No. DA-489-03 was
still in force. (Mindanao II Geothermal Partnership v.
Commissioner of Internal Revenue, G.R. No. 193301, March
11, 2013 and companion case)
Q: For calendar year 2011, FFF, Inc., a VAT-registered
corporation, reported unutilized excess input VAT in
the amount of Pl ,000,000.00 attributable to its zero-
rated sales. Hoping to impress his boss, Mr. G, the
accountant of FFF, Inc., filed with the Bureau of Internal
Revenue (BIR) on January 31, 2013 a claim for tax
refund/credit of the Pl,000,000.00 unutilized excess
input VAT of FFF, Inc. for 2011. Not having received any
communication from the BIR, Mr. G filed a Petition for
Review with the CTA on March 15, 2013, praying for the
tax refund/credit of the Pl,000,000.00 unutilized
excess input VAT of FFF, Inc. for 2011. (2015)
1. Did the CTA acquire jurisdiction over the Petition of
FFF, Inc.?
A: The CTA has not acquired jurisdiction over the Petition
of FFF, Inc. because the judicial claim has been prematurely
filed on March 15, 2013. The Supreme Court ruled that the
30-day period after the expiration of the 120-day period
fixed by law for the Commissioner of Internal Revenue to
act on the claim for refund is jurisdictional and failure to
comply would bar the appeal and deprive the Court of Tax
Appeals of its jurisdiction to entertain the appeal (CIR v.
Aichi Forgin Company of Asia, Inc., G.R. No. 183421, October
22, 2014, 632 SCRA 422).
In this case, Mr. G filed the administrative claim on January
31, 2013. The petition for relief should have been filed on
June 30, 2013. Filing the judicial claim on March 15, 2013 is
premature, this the CTA did not acquire jurisdiction.
2. Discuss the proper procedure and applicable time
periods for administrative and judicial claims for
refund/credit of unutilized excess input VAT.
A: The administrative claim must be filed with the
Commissioner of Internal Revenue (CIR) within two years
from the close of the taxable quarter when the zero-rated
sales were made. The CIR has 120 days from the date of
submission of the complete documents in support of the
claim to decide. If the CIR decides within the 120-day period
or the 120-day period expires without the CIR rendering a
decision, the taxpayer has 30 days to file a petition for
review with the CTA reckoned from the receipt of adverse
decision or from the lapse of the 120-day period.
As a general rule, the 30-day period to appeal is both
mandatory and jurisdictional. As an exception to the
general rule, premature filing is allowed only if filed
between December 10, 2003 and October 5, 2010, when BIR
Ruling No. DA-489-03 was still in force prior to the reversal
of the aforesaid ruling by the CTA in the Aichi case on
October 6, 2010 (Mindanao II Geothermal Partnership v.
CIR, G.R. No. 204745, December 8, 2014, 713 SCRA 645).
TAX REMEDIES
REMEDIES AVAILABLE TO TAXPAYERS UNDER THE
NIRC, IN GENERAL (1992, 2000)
21
Q: Describe separately the procedures on the legal
remedies under the Tax Code available to an aggrieved
taxpayer both at the administrative and judicial levels.
(Bar)
A: The legal remedies of an aggrieved taxpayer under the
Tax Code, both at the administrative and judicial levels, may
be classified into those for assessment, collection and
refund.
The procedures for the administrative remedies for
assessment are as follows:
a. After receipt of the Pre-Assessment Notice, he must
within fifteen (15) days from receipt explain why no
additional taxes should be assessed against him.
b. If the Commissioner of Internal Revenue issues an
assessment notice, the taxpayer must administratively
protest or dispute the assessment by filing a motion for
reconsideration or reinvestigation within thirty (30)
days from receipt of the notice of assessment. (4th par.,
Sec. 228, NIRC of 1997)
c. Within sixty (60) days from filing of the protest, the
taxpayer shall submit all relevant supporting
documents.
The judicial remedies of an aggrieved taxpayer relative to
an assessment notice are as follows:
a. Where the Commissioner of Internal Revenue has not
acted on the taxpayers protest within a period of one
hundred eighty (180) days from submission of all
relevant documents, then the taxpayer has a period of
thirty (30) days from the lapse of said 180 days within
which to interpose a petition for review with the Court
of Tax Appeals.
b. Should the Commissioner deny the taxpayer's protest,
then he has a period of thirty (30) days from receipt of
said denial within which to interpose a petition for
review with the Court of Tax Appeals.
In both cases the taxpayer must apply with the Court of Tax
Appeals for the issuance of an injunctive writ to enjoin the
Bureau of Internal Revenue from collecting the disputed tax
during the pendency of the proceedings.
The adverse decision of the Court of Tax Appeals is
appealable to the Court of Appeals by means of a petition
for certiorari within a period of fifteen (15) days from
receipt of the adverse decision, extendible for another
period of fifteen (15) days for compelling reasons, but the
extension is not to exceed a total of thirty (30) days in all.
The adverse decision of the Court of Appeals is appealable
to the Supreme Court by means of a petition for review on
certiorari within a period of fifteen (15) days from receipt
of the adverse decision of the Court of Appeals.
The employment by the Bureau of Internal Revenue of any
of the administrative remedies for the collection of the tax
like distraint, levy, etc. may be administratively appealed by
the taxpayer to the Commissioner whose decision is
appealable to the Court of Tax Appeals under other matter
arising under the provisions of the National Internal
Revenue Code. The judicial appeals starts with the Court of
Tax Appeals, and continues in the same manner as shown
above.
Should the Bureau of Internal Revenue decide to utilize Its
judicial tax remedies for collecting the taxes by means of an
ordinary suit filed with the regular courts for the collection
of a sum of money, the taxpayer could oppose the same by
going up the ladder of judicial processes from the Municipal
 TAXATION LAW
Trial Court (as the case may be) to the Regional Trial Court,
to the Court of Appeals, thence to the Supreme Court.
The remedies of an aggrieved taxpayer on a claim for refund
is to appeal the adverse decision of the Commissioner to the
CTA in the same manner outlined above.
ASSESSMENT
Requisites of a valid assessment (2008, 2013)
Q:After examining the books and records of EDS
Corporation, the 2004 final assessment notice, showing
basic tax of P1,000,000., deficiency interest of
P400,000, and due date for payment of April 30, 2007
but without the demand letter, was mailed and released
by the BIR on April 15, 2007. The registered letter,
containing the tax assessment, was received by the EDS
Corporation on April 25, 2007.
a. What is an assessment notice? What are the
requisites of a valid assessment? Explain.
A: An assessment notice is a formal notice to the taxpayer
stating that the amount thereon is due as a tax and
containing a demand for the payment thereof. [Alhambra
Cigar and Cigarette Mfg. Co. v. Collector, 105 PR 1337 (1959);
CIR v. Pascor Realty and Development Corp., 309 SCRA 402
(1999)] To be valid, the taxpayer must be informed in
writing of the law and the facts on which the assessment is
made. (Section 228, NIRC)
ANOTHER SUGGESTED ANSWER: An assessment is a
written notice and demand made by the Bureau on the
taxpayer for the settlement of a tax liability that is due,
definitely set and fixed therein. The requisites of a valid
assessment are:
1. It must be made within the prescriptive period to
assess; (Section 203, NIRC)
2. There must be a preliminary assessment previously
issued, except in those instances allowed by law;
(Section 228, NIRC)
3. The taxpayer must be informed in writing about the law
and facts on which the assessment is based; (Section
228, NIRC) and
4. It must be served upon the taxpayer or any of his
authorized representatives. [Estate of Juliana Diezvda.
De Gabriel v. CIR, 421 SCRA 266(2004)]
b. As tax lawyer of EDS Corporation, what legal
defense(s) would you raise against the assessment?
Explain. (2008 Bar)
A: I will question the validity of the assessment because of
the failure to send the demand letter which contains a
statement of the law and the facts upon which the
assessment is based. If an assessment notice is sent without
informing the taxpayer in writing about the law and facts on
which the assessment is made, the assessment is void.
[Section 228, NIRC; Azucena T. Reyes v. CIR, 480 SCRA 382
(2006)].
Prescriptive Period for Assessment
General Rule (1989, 1997, 1999, 2000, 2002, 2006)
Q: Mr. Sebastian is a Filipino seaman employed by a
Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manages
their business, filed a joint income tax return for 1997
on March 15, 1998. After an audit of the return, the BIR
issued on April 20, 2001 a deficiency income tax
assessment for the sum of P250, 000.00, inclusive of
interest and penalty. For failure of Mr. and Mrs.
Sebastian to pay the tax within the period stated in the
notice of assessment, the BIR issued on August 19, 2001
UST BAR OPERATIONS
warrants of distraint and levy to enforce collection of
the tax.
a. xxx
b. If you are the lawyer of Mr. and Mrs. Sebastian, what
possible defense or defenses will you raise in behalf
of your clients against the action of the BIR in
enforcing collection of the tax by the summary
remedies of warrants of distraints and levy?
Explain your answer. (2002 Bar)
A: I will raise the defense of prescription. The right of the
BIR to assess prescribes after three years counted from the
last day prescribed by law for the filing of the income tax
returns when the said return is filed on time. (Section 203,
NIRC) The last day for filing the 1997 income tax return is
April 15,1998. Since the assessment was issued only on
April 20, 2001, the BIRs right to assess has already
prescribed.
False or fraudulent returns and non-filing of returns
(1989, 1996, 1998, 2002, 2009)
Q: Distinguish a false return from a fraudulent return.
(1996 Bar)
A: The distinction between a false return and a fraudulent
return is that the first merely implies a deviation from the
truth or fact whether intentional or not, whereas the second
is intentional and deceitful with the sole aim of evading the
correct tax due. (Aznar vs. Commissioner, L-20569. August
23, 1974)
ALTERNATIVE ANSWER: A false return contains
deviations from the truth which may be due to mistakes,
carelessness or ignorance of the person preparing the
return. A fraudulent return contains an intentional
wrongdoing with the sole object of avoiding the tax and it
may consist in the intentional under declaration of income,
intentional over declaration of deductions or the
recurrence of both. A false return is not necessarily tainted
with fraud because the fraud contemplated by law is actual
and not constructive. Any deviation from the truth on the
other hand, whether intentional or not, constitutes falsity.
(Aznar vs. Commissioner, L-20569, August 23, 1974)
Q: Mr. Castro inherited from his father, who died on
June 10, 1994, several pieces of real property in Metro
Manila. The estate tax return was filed and the estate
tax due in the amount of P250, 000.00 was paid on
December 06, 1994. The Tax Fraud Division of the BIR
investigated the case on the basis of confidential
information given by Mr. Santos on January 06, 1998
that the return filed by Mr. Castro was fraudulent and
that he failed to declare all properties left by his father
with intent to evade payment of the correct tax. As a
result, a deficiency estate tax assessment for P1, 250,
000.00, inclusive of 50% surcharge for fraud, interest
and penalty, was issued against him on January 10,
2001. Mr. Castro protested the assessment on the
ground of prescription.
Decide Mr. Castros protest. (2002 Bar)
A: The protest should be resolved against Mr. Castro. What
was filed is a fraudulent return making the prescriptive
period for assessment ten (10) years from discovery of the
fraud. (Section 222, NIRC) Accordingly, the assessment was
issued within the prescriptive period to make an
assessment based on a fraudulent return.
Issuance of Preliminary Assessment Notice (2002,
2014)
22
 QUAMTO (1987-2016)
Q: Mr. Tiaga has been a law-abiding citizen diligently
paying his income taxes. On May 5, 2014, he was
surprised to receive an assessment notice from the
Bureau of Internal Revenue (BIR) informing him of a
deficiency tax assessment as a result of a mathematical
error in the computation of his income tax, as
appearing on the face of his income tax return for the
year 2011, which he filed on April 15, 2012. Mr. Tiaga
believes that there was no such error in the
computation of his income tax for the year 2011.
Based on the assessment received by Mr. Tiaga, may he
already file a protest thereon? (2014 Bar)
A: Yes. Mr. Tiaga may consider the assessment notice as a
final assessment notice and his right to protest within 30
days from receipt may now be exercised by him. When the
finding of a deficiency tax is the result of mathematical error
in the computation of the tax appearing on the face of the
return, a pre-assessment notice shall not be required, hence
the assessment notice is a final assessment notice.
COLLECTION
Prescriptive Periods (1994, 1997, 2001, 2002, 2009)
Q: A final assessment notice was issued by the BIR on
June 13, 2000, and received by the taxpayer on June 15,
2000. The taxpayer protested the assessment on July
31, 2000. The protest was initially given due course, but
was eventually denied by the Commissioner of Internal
Revenue in a decision dated June 15, 2005. The
taxpayer then filed a petition for review with the Court
of Tax Appeals (CTA), but the CTA dismissed the same.
Assume that the CTAs decision dismissing the petition
for review has become final. May the Commissioner
legally enforce collection of the delinquent tax? Explain.
(2009 Bar)
A: No. The protest was filed out of time and, therefore, did
not suspend the running of the prescriptive period for the
collection of the tax. Once the right to collect has prescribed,
the Commissioner can no longer enforce collection of the
tax liability against the taxpayer. (CIR v. Atlas Mining and
Development Corp., February 14, 2000)
TAXPAYERS REMEDIES
PROTESTING AN ASSESSMENT
Forms of Administrative Protest (1992, 2012)
Q: What are the differences between a request for
reconsideration and a request for reinvestigation?
(2012 Bar)
A:
1. A request for reinvestigation suspends the running of
the prescriptive period for collection of taxes while a
motion for reconsideration does not.
2. A request for reinvestigation requires the presentation
of newly discovered or additional evidence while a
motion for reconsideration does not.
3. The period of 60 days for submission of the relevant
supporting documents finds application only to a
request for reinvestigation and not to a request for
reconsideration.
4. The failure of the Commissioner of Internal Revenue to
act on the request for reconsideration after a period of
180 days from filing thereof authorizes the taxpayer to
file a petition for review with the CTA within a period
23
of 30 days from the expiration of such 180 day period
while for a request for reinvestigation the period is the
expiration of the 180 day period from the submission
of the complete supporting documents.
Effect of failure to file protest (1997, 2009)
Q: A final assessment notice was issued by the BIR on
June 13, 2000, and received by the taxpayer on June 15,
2000. The taxpayer protested the assessment on July
31, 2000. The protest was initially given due course, but
was eventually denied by the Commissioner of Internal
Revenue in a decision dated June 15, 2005. The
taxpayer then filed a petition for review with the Court
of Tax Appeals (CTA), but the CTA dismissed the same.
a. Is the CTA correct in dismissing the petition for
review? Explain your answer. (2009)
A: Yes. The protest was filed out of time, hence the CTA does
not acquire jurisdiction over the matter. [CIR v. Atlas Mining
and Development Corp. (2000)]
Q:
a. A taxpayer received, on 15 January 1996, an
assessment for an internal revenue tax deficiency.
On 10 February 1996, the taxpayer forthwith filed
a petition for review with the Court of Tax Appeals.
Could the Tax Court entertain the petition?
A: No. Before taxpayer can avail of judicial remedy he must
first exhaust administrative remedies by filing a protest
within 30 days from receipt of the assessment. It is the
Commissioner's decision on the protest that give the Tax
Court jurisdiction over the case provided that the appeal is
filed within 30 days from receipt of the Commissioners
decision. An assessment by the BIR is not the
Commissioner's decision from which a petition for review
may be filed with the Court of Tax Appeals. Rather, it is the
action taken by the Commissioner in response to the
taxpayer's protest on the assessment that would constitute
the appealable decision.
b. Under the above factual setting, the taxpayer,
instead of questioning the assessment he received
on 15 January 1996, paid on 01 March 1996 the
"deficiency tax" assessed. The taxpayer requested a
refund from the Commissioner by submitting a
written claim on 01 March 1997. It was denied. The
taxpayer, on 15 March 1997, filed a petition for
review with the Court of Appeals. Could the petition
still be entertained? (1997 Bar)
A: No, the petition for review cannot be entertained by the
Court of Appeals, since decisions of the Commissioner on
cases involving claim for tax refunds are within the
exclusive and primary jurisdiction of the Court of Tax
Appeals.
Decision/Inaction of the Commissioner on the protest
filed (1987, 1999, 2005, 2009, 2012, 2014)
Q: In the examination conducted by the revenue
officials against the corporate taxpayer in 2010, the BIR
issued a final assessment notice and demand letter
which states: It is requested that the above deficiency
tax be paid immediately upon receipt hereof, inclusive
of penalties incident to delinquency. This is our final
decision based on investigation. If you disagree, you
may appeal this final decision within 30 days from
receipt hereof, otherwise said deficiency tax
assessment shall become final, executory and
demandable. The assessment was immediately
appealed by the taxpayer to the Court of Tax Appeals,
 TAXATION LAW
without filing its protest against the assessment and
without a denial thereof by the BIR. If you were the
judge, would you deny the petition for review filed by
the taxpayer and consider the case as prematurely
filed? Explain you answer. (2012 Bar)
A: No, the Petition for Review should not be denied. The
case is an exception to the rule on exhaustion of
administrative remedies. The BIR is estopped from claiming
that the filing of the Petition for Review is premature
because the taxpayer failed to exhaust all administrative
remedies. The statement of the BIR in its Final Assessment
Notice and Demand Letter led the taxpayer to conclude that
only a final judicial ruling in his favor would be accepted by
the BIR. The taxpayer cannot be blamed for not filing a
protest against the Formal Letter of Demand with
Assessment Notices since the language used and the tenor
of the demand letter indicate that it is the final decision of
the respondent on the matter. The CIR should indicate, in a
clear and unequivocal language, whether his action on a
disputed assessment constitutes his final determination
thereon in order for the taxpayer concerned to determine
when his or her right to appeal to the tax court accrues.
Although there was no direct reference for the taxpayer to
bring the matter directly to the CTA, it cannot be denied that
the word appeal under prevailing tax laws refers to the
filing of a Petition for Review with the CTA. (Allied Bank vs
CIR, GR No 175097, February 5, 2010)
Q: On March 27, 2012, the Bureau of Internal Revenue
(BIR) issued a notice of assessment against Blue Water
Industries Inc. (BWI), a domestic corporation,
informing the latter of its alleged deficiency corporate
income tax for the year 2009. On April 20, 2012, BWI
filed a letter protest before the BIR contesting said
assessment and demanding that the same be cancelled
or set aside.
However, on May 19, 2013, that is after more than a
year from the filing of the letter protest, the BIR
informed BWI that the latters letter protest was denied
on the ground that the assessment had already become
final, executory and demandable. The BIR reasoned
that its failure to decide the case within 180 days from
filing of the letter protest should have prompted BWI to
seek recourse before the CTA by filing a petition for
review within 30 days after the expiration of the 180-
day period as mandated by the provisions of the last
paragraph of Section 228 of the NIRC. Accordingly,
BWIs failure to file a petition for review before the CTA
rendered the assessment final, executory and
demandable.
Is the contention of the BIR correct? Explain. (2014 Bar)
A:No, the contention of BIR is not correct. The right of BWI
to consider the inaction of the Commissioner on the protest
within 180 days as an appealable decision is only optional
and will not make the assessment final, executory and
demandable. (Sec 228, NIRC; Lacsona Land Co., Inc. v. CIR, GR
No. 171251, March 5 2012)
COMPROMISE OF TAXES
Authority, Grounds and Conditions to Compromise
taxes (1989, 1996, 2000, 2009)
Q: Under what conditions may the Commissioner of
Internal Revenue be authorized to:
a. Compromise the payment of any internal revenue
tax? (2000 Bar)
UST BAR OPERATIONS
A: The Commissioner of Internal Revenue may be
authorized to compromise the payment of any internal
revenue tax where:
1. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax.
Tax cases which may be subject of compromise (1998,
2002, 2005)
Q: State and discuss briefly whether the following cases
may be compromised or may not be compromised:
a. Delinquent accounts;
b. Cases under administrative protest, after issuance
of the final assessment notice to the taxpayer,
which are still pending;
c. Criminal tax fraud cases;
d. Criminal violations already filed in court;
e. Cases where final reports of reinvestigation or
reconsideration have been issued resulting in the
reduction of the original assessment agreed to by
the taxpayer when he signed the required
agreement form. (2005 Bar)
A:
a. Delinquent accounts may be compromised if either of
the two conditions is present: (1) the assessment is of
doubtful validity, or (2) the financial position of the
taxpayer demonstrates a clear inability to pay the tax.
[Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 30-
2002]
b. These may be compromised, provided that it is
premised upon doubtful validity of the assessment or
financial incapacity to pay. (ibid)
c. These may not be compromised, so that the taxpayer
may not profit from his fraud, thereby discouraging its
commission. (ibid)
d. These may not be compromised in order that the
taxpayer will not profit from his criminal acts. (ibid)
e. Cases where final reports of reinvestigation or
reconsideration have been issued resulting in the
reduction of the original assessment agreed to by the
taxpayer when he signed the required agreement form,
cannot be compromised. By giving his conformity to the
revised assessment, the taxpayer admits the validity of
the assessment and his capacity to pay the same. (Sec. 2
of Revenue Regulations No. 30-2002)
ABATEMENT OF TAXES
Authority and Conditions to abate taxes (1989, 1996,
2000)
Q: Under what conditions may the Commissioner of
Internal Revenue be authorized to:
a. Xxx
b. Abate or cancel a tax liability (2000 Bar)
A: The Commissioner of Internal Revenue may abate or
cancel a tax liability when:
1. The tax or any portion thereof appears to be unjustly or
excessively assessed; or
2. The administration and collection costs involved do not
justify the collection of the amount due. [Sec. 204 (B).
NIRC of 1997]
RECOVERY OF TAX ERROUNEOUSLY OR ILLEGALY
COLLECTED
24
 QUAMTO (1987-2016)
Conditions for the grant of a refund or credit (2002,
2005)
Q: State the conditions required by the Tax Code before
the Commissioner of Internal Revenue could authorize
the refund or credit of taxes erroneously or illegally
received. (2005 Bar)
A: The conditions are:
1. A written claim for refund is filed by the taxpayer with
the Commissioner of Internal Revenue. (NIRC);
2. The claim for refund must be a categorical demand for
reimbursement. [Bermejo v. Collector of Internal
Revenue, 87 Phil. 96 (1950)];
3. The claim for refund or tax credit must be filed with the
Commissioner, or the suit or proceeding therefore must
be commenced in court within 2 years from date of
payment of the tax or penalty regardless of any
supervening cause (NIRC).
OPTION TO CARRY OVER EXCESS QUARTERLY INCOME
TAX PAID(2012, 2013)
Q: In its final adjustment return for the 2010 taxable
year, ABC Corp. had excess tax credits arising from its
overwithholding of income payments. It opted to carry
over the excess tax credits to the following year.
Subsequently, ABC Corp. changed its mind and applied
for a refund of the excess tax credits.
Will the claim for refund prosper? (2013 Bar)
A: No. The claim for refund will not prosper. While the law
gives the taxpayer an option whether to carry-over or claim
as refund the excess tax credits shown on its final
adjustment return, once the option to carry over has been
made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed (Sec. 76,
NIRC; CIR v. PL Management International Phils, Inc., GR No.
160949, April 4, 2011)
Period for filing claim for refund or credit (1992, 1994,
1997, 2008)
Q: DEF Corporation is a wholly owned subsidiary of
DEF, Inc., California, USA. Starting December 15, 2004.
DEF Corporation paid annual royalties to DEF, Inc., for
the use of the latter's software, for which the former, as
withholding agent of the government, withheld and
remitted to the BIR the 15% final tax based on the gross
royalty payments. The withholding tax return was filed
and the tax remitted to the BIR on January 10 of the
following year. On April 10, 2007, DEF Corporation filed
a written claim for tax credit with the BIR, arising from
erroneously paid income taxes covering the years 2004
and 2005. The following day, DEF Corporation filed a
petition for review with the Court of Tax Appeals
involving the tax credit claim for 2004 and 2005.
a. As a BIR lawyer handling the case, would you raise
the defense of prescription in your answer to the
claim for tax credit? Explain. (2008 Bar)
A: YesThe claim for refund for the 2004 erroneously paid
income tax was filed out of time because the claim was only
filed after more than two years had elapsed from the
payment thereof. [Section 204 (c) and 229, NIRC]
WITHHOLDING AGENT AS A PROPER PARTY TO FILE A
CLAIM FOR REFUND OR CREDIT (1992, 1999, 2995,
2008, 2009)
25
Q: ABCD Corporation (ABCD) is a domestic corporation
with individual and corporate shareholders who are
residents of the United States. For the 2nd quarter of
1983, these U.S.-based individual and corporate
stockholders received cash dividends from the
corporation. The corresponding withholding tax on
dividend income 30% for individual and 35% for
corporate non-resident stockholders was deducted
at source and remitted to the BIR.
On May 15,1984, ABCD filed with the Commissioner of
Internal Revenue a formal claim for refund, alleging
that under the RP-US Tax Treaty, the deduction
withheld at source as tax on dividends earned was fixed
at 25% of said income. Thus, ABCD asserted that it
overpaid the withholding tax due on the cash dividends
given to its non-resident stockholders in the U.S. the
Commissioner denied the claim.
On January 17, 1985, ABCD filed a petition with the
Court of Tax Appeals (CTA) reiterating its demand for
refund.
a. Does ABCD Corporation have the legal personality
to file the refund on behalf of its non-resident
stockholders? Why or why not? (2009 Bar)
A: Yes, withholding agents is not only an agent of the
government but is also an agent of the taxpayer/income
earner. Hence, ABCD is also an agent of the beneficial owner
of the dividends with respect to the actual payment of the
tax to the government, such authority may reasonably be
held to include the authority to file a claim for refund and to
bring an action for recovery of such for refund and to bring
an action for recovery of such claim [CIR v. Procter& Gamble,
204 SCRA 377, (1991)]
GOVERNMENT REMEDIES
Non-availability of injunction to restrain collection of
tax (1996, 1998, 2001)
Q: May the courts enjoin the collection of revenue
taxes? Explain your answer. (2001 Bar)
A: As a general rule, the courts have no authority to enjoin
the collection of revenue taxes. (NIRC) However, the Court
of Tax Appeals is empowered to enjoin the collection of
taxes through administrative remedies when collection
could jeopardize the interest of the government or
taxpayer. (RA 1125)
JUDICIAL REMEDIES
JURISDICTION OF THE COURT OF TAX APPEALS (1989,
1997, 1998, 2004, 2006, 2014, 2015, 2016)
Q: State At least five (5) cases under the exclusive
appellate jurisdiction of the Court of Tax Appeals (CTA)
(2016 Bar)
A: Exclusive original or appellate jurisdiction to review by
appeal the following:
1. Decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
 TAXATION LAW
2. Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue where
the National Internal Revenue Code or other applicable
law provides a specific period for action: Provided, that
in case of disputed assessments, the inaction of the
Commissioner of Internal Revenue within the one
hundred eighty day-period under Section 228 of the
National Internal Revenue Code shall be deemed a
denial for purposes of allowing the taxpayer to appeal
his case to the Court and does not necessarily constitute
a formal decision of the Commissioner of Internal
Revenue on the tax case; Provided, further, that should
the taxpayer opt to await the final decision of the
Commissioner of Internal Revenue on the disputed
assessments beyond the one hundred eighty day-
period abovementioned, the taxpayer may appeal such
final decision to the Court under Section 3 (a),Rule 8 of
these Rules; and Provided, still further, that in the case
of claims for refund of taxes erroneously or illegally
collected, the taxpayer must file a petition for review
with the Court prior to the expiration of the two-year
period under Section 229 of the National Internal
Revenue Code.
3. Decisions, resolutions or orders of the Regional Trial
Courts in local tax cases decided or resolved by them in
the exercise of their original jurisdiction;
4. Decisions of the Commissioner of Customs in cases
involving liability for customs duties,fees or other
money charges, seizure, detention or release of
property affected, fines, forfeitures or other penalties in
relation thereto or other matters arising under the
Customs Law or other laws administered by the Bureau
of Customs;
5. Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from decisions
of the Commissioner of Customs adverse to the
Government under Section 2325 of the Tariff and
Customs Code; and
6. Decisions of the Secretary of Trade and Industry, in the
case of nonagricultural product, commodity or article,
and the Secretary of Agriculture, in the case of
agricultural product, commodity or article, involving
dumping and countervailing duties under Sections 301
and 302, respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to impose
or not to impose said duties. [RRCTA, Rule 4, Sec. 3 (a)]
The Court en banc shall exercise exclusive appellate
jurisdiction to review by appeal the following:
a. Decisions or resolutions on motion for reconsideration
or new trial of the Court in Divisions in the exercise of
its exclusive appellate jurisdiction over:
1. Cases arising from administrative agencies
Bureau of Internal Revenue, Bureau of Customs,
Department of Finance, Department of Trade and
Industry, Department of Agriculture;
2. Local tax cases decided by the Regional Trial Courts
in the exercise of their original jurisdiction; and
3. Tax collection cases decided by the Regional Trial
Court in the exercise of their original jurisdiction
involving final and executory assessments for
taxes, fees, charges and penalties, where the
principal amount of taxes and penalties claimed is
less than one million pesos;
b. Decisions, resolutions or orders of the Regional Trial
Courts in local tax cases decided or resolved by them in
the exercise of their appellate jurisdiction;
UST BAR OPERATIONS
c. Decisions, resolutions or orders of the Regional Trial
Courts in tax collection cases decided or resolved by
them in the exercise of their appellate jurisdiction;
d. Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in division in
the exercise of its exclusive original jurisdiction over
tax collection cases;
e. Decisions of the Central Board of Assessment Appeals
(CBAA) in the exercise of its appellate jurisdiction over
cases involving the assessment and taxation of real
property originally decided by the provincial or city
board of assessment appeals;
f. Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in Division in
the exercise of its exclusive original jurisdiction over
cases involving criminal offenses arising from
violations of the National Internal Revenue Code or the
Tariff and Customs Code and other laws administered
by the Bureau of Internal Revenue or Bureau of
Customs;
g. Decisions, resolutions or orders on motion for
reconsideration or new trial of the Court in Division in
the exercise of its exclusive appellate jurisdiction over
criminal offenses mentioned in the preceding
subparagraph; and
h. Decisions, resolutions or orders of the Regional Trial
Courts in the exercise of their appellate jurisdiction
over criminal offenses mentioned in subparagraph (f).
(RRCTA, Rule 4, Sec. 2)
Q: On May 15, 2013, CCC, Inc. received the Final Decision
on Disputed Assessment issued by the Commissioner of
Internal Revenue (CIR) dismissing the protest of CCC,
Inc. and affirming the assessment against said
corporation. On June 10, 2013, CCC, Inc. filed a Petition
for Review with the Court of Tax Appeals (CTA) in
division. On July 31, 2015, CCC, Inc. received a copy of
the Decision dated July 22, 2015 of the CT A division
dismissing its Petition. CCC, Inc. immediately filed a
Petition for Review with the CT A en banc on August 6,
2015. Is the immediate appeal by CCC, Inc. to the CTA en
banc of the adverse Decision of the CTA division the
proper remedy? (2015 Bar)
A: No. CCC, Inc. should first file a motion for reconsideration
or motion for new trial with the CTA Division. Before the
CTA en banc could take cognizance of the petition for review
concerning a case falling under its exclusive appellate
jurisdiction, the litigant must sufficiently show that it
sought prior reconsideration or moved for a new trial with
the concerned CTA Division (Commissioner of Customs v.
Marina Sale, G.R. No. 183868, November 22, 2010, 635
SCRA 606; Rule 8, Sec. 1 of the Revised Rules of Court of Tax
Appeals).
Q: GGG, Inc. offered to sell through competitive bidding
its shares in HHH Corp., equivalent to 40% of the total
outstanding capital stock of the latter. JJJ, Inc. acquired
the said shares in HHH Corp. as the highest bidder.
Before it could secure a certificate authorizing
registration/tax clearance for the transfer of the shares
of stock to JJJ, Inc., GGG, Inc. had to request a ruling from
the BIR confirming that its sale of the said shares was at
fair market value and was thus not subject to donor's
tax. In BIR Ruling No. 012-14, the CIR held that the
selling price for the shares of stock of HHH Corp. was
lower than their book value, so the difference between
the selling price and the book value of said shares was
a taxable donation. GGG, Inc. requested the Secretary of
Finance to review BIR Ruling No. 012-14, but the
Secretary affirmed said ruling. GGG, Inc. filed with the
Court of Appeals a Petition for Review under Rule 43 of
the Revised Rules of Court. The Court of Appeals,
26
 QUAMTO (1987-2016)
however, dismissed the Petition for lack of jurisdiction
declaring that it is the CTA which has jurisdiction over
the issues raised. Before which Court should GGG, Inc.
seek recourse from the adverse ruling of the Secretary
of Finance in the exercise of the latter's power of
review? (2014)
A: GGG, Inc. should seek recourse with the Court of Tax
Appeals (CTA) which has jurisdiction.
There is no provision in law that expressly provides where
exactly the adverse ruling the Secretary of Finance under
Section 4 of the NIRC is appealable. However, RA No. 1125,
as amended, addresses the seeming gap in the law as it vests
upon the CTA, albeit impliedly, with jurisdiction over the
case as other matters arising under the NIRC or other laws
administered by the BIR. Furthermore, the Supreme Court
held that the jurisdiction to review the rulings of the
Secretary of finance on the issues raised against a ruling of
the Commissioner of Internal Revenue, pertains to the
Court of Tax Appeals in the exercise of its appellate
jurisdiction (Philamlife v. The Sec. of Finance and CIR, G.R.
No. 210987, November 24, 2014).
Q: Mr. Abraham Eugenio, a pawnshop operator, after
having been required by the Revenue District Officer to
pay value-added tax pursuant to a Revenue
Memorandum Order (RMO) of the Commissioner of
Internal Revenue, filed with the Regional Trial Court an
action questioning the validity of the RMO.
If you were the judge, will you dismiss the case? (2006
Bar)
A: Yes. A RMO is in reality a ruling or an opinion issued by
the Commissioner in implementing the provisions of the
Tax Code dealing with the taxability of pawnshops. The
power to review rulings issued by the Commissioner is
lodged with the Court of Tax Appeals (CTA) and not with the
Regional Trial Court. A ruling falls within the purview of
other matters arising under the Tax Code, appealable
only to the CTA. [CIR v. Leal, 392 SCRA 9 (2002)]
CRIMINAL ACTIONS
Q: After filing an Information for violation of Section
254 of the National Internal Revenue Code (Attempt to
Evade or Defeat Tax) with the CTA, the Public
Prosecutor manifested that the People is reserving the
right to file the corresponding civil action for the
recovery of the civil liability for taxes. As counsel for the
accused, comment on the People's manifestation.
(2015)
A: The manifestation is not proper. The criminal action and
the corresponding civil action for the recovery of the civil
liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in
the same proceeding before the Court of Tax Appeals (CTA).
The filing of the criminal action is deemed to necessarily
carry with it the filing of the civil action, and no right to
reserve the filing of such civil action separately from the
criminal action shall be recognized (Sec. 7(b)(1) of Republic
Act No. 9282; Judy Ann Santos v. People, G.R. No. 173176,
August 26, 2008, 563 SCRA 341).
Necessity of an assessment in criminal prosecution
(1998, 2005)
Q: In 1995, the BIR filed before the Department of
Justice (DOJ) a criminal complaint against a
corporation and its officers for alleged evasion of taxes.
The complaint was supported by a sworn statement of
the BIR examiners showing the computation of the tax
27
liabilities of the erring taxpayer. The corporation filed
a motion to dismiss the criminal complaint on the
ground that there has been, as yet, no assessment of its
tax liability; hence, the criminal complaint was
premature. The DOJ denied the motion on the ground
that an assessment of the tax deficiency of the
corporation is not a precondition to the filing of a
criminal complaint and that in any event, the joint
affidavit of the BIR examiners may be considered as an
assessment of the tax liability of the corporation.
Is the ruling of the DOJ correct? Explain. (2005 Bar)
A: Yes. The ruling of the DOJ in denying the motion is
correct. The issuance of the deficiency assessment notice
prior to prosecution is not necessary because the facts of
the case show that the crime of evasion is complete since
the violator has knowingly and willfully filed a fraudulent
return with intent to evade/defeat a part or all of the tax.
[Ungab v.Cusi, Jr., 97 SCRA 877 (1980)] What is involved here
is not the collection of taxes but a criminal prosecution for
violation of the National Internal Revenue Code.
However, the contention that the joint affidavit of the BIR
examiners showing the computation of tax liabilities maybe
considered an assessment is erroneous. It is not an
assessment which may entitle the taxpayer to protest. [CIR
v. Pascor Realty 81 Development Corp., 309 SCRA402 (1999)]
An assessment is a formal notice to the taxpayer stating that
the amount thereon is due as a tax and containing a demand
for the payment thereof. [Alhambra Cigar & Cigarette Mfg.
Co. v. Collector, 105 Phil. 1337 (1959)]
LOCAL GOVERNMENT CODE OF 1991
NATURE AND SOURCE OF TAXING POWER
Grant of Local Taxing power under the local
government code (1987, 1998, 2001, 2003, 2007)
Q: What is the nature of the taxing power of the
provinces, municipalities and cities? How will the local
government units be able to exercise their taxing
powers? (2007 Bar)
A: The taxing power of the provinces, municipalities and
cities is directly conferred by the Constitution by giving
them the authority to create their own sources of revenue.
The local government units do not exercise the power to tax
as an inherent power or by a valid delegation of the power
by Congress, but pursuant to a direct authority conferred by
the Constitution. (Mactan Cebu International Airport
Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of
Cabanatuan, 401 SCRA 259 [2003])
The local government units exercise the power to tax by
levying taxes, fees and charges consistent with the basic
policy of local autonomy, and to assess and collect all these
taxes, fees and charges which will exclusively accrue to
them. The local government units are authorized to pass tax
ordinances (levy) and to pursue actions for the assessment
and collection of the taxes imposed in said ordinances.
(Section 129, and 132, Local Government Code)
Q: May Congress, under the 1987 Constitution, abolish
the power to tax of local governments? (2003 Bar)
A: No. Congress cannot abolish what is expressly granted by
the fundamental law. The only authority conferred to
Congress is to provide the guidelines and limitations on the
local governments exercise of the power to tax. (Sec. 5, Art
X, 1987 Constitution)
 TAXATION LAW
CHALLENGING LOCAL TAX ORDINANCES (1991, 2003,
2015)
Q: What is the proper procedural remedy and
applicable time periods for challenging a tax
ordinance? (2015 Bar)
A: Any question on the constitutionality or legality of tax
ordinances may be raised on appeal within 30 days from the
effectivity to the Secretary of Justice. The Secretary of
Justice shall render a decision within 60 days from the date
of receipt of the appeal. Thereafter, within 30 days after
receipt of the decision or the lapse of the sixty-day period
without the Secretary of Justice acting upon the appeal, the
aggrieved party may file the appropriate proceedings with
the Regional Trial Court. (Section 187, LGC)
TAXING POWER OF PROVINCES
Tax on transfer of real property ownership (1991,
2016)
Q: The City of Maharlika passed an ordinance imposing
a tax on any sale or transfer of real property located
within the city at a rate of fifty percent (50%) of one
percent (1%) of the total consideration of the
transaction. Jose sold a parcel of land in the city, which
he inherited from his deceased parents, and refused to
pay the aforesaid tax. He instead filed a case asking that
the ordinance be declared null and void since the tax it
imposed can only be collected by the national
government, as in fact he has paid the Bureau of
Internal Revenue (BIR) the required capital gains tax. If
you were the City Legal Officer of Maharlika, what
defenses would you raise to sustain the validity of the
ordinance? (2016 Bar)
A: The defenses I would raise are the following:
a. Cities like the City of Maharlika have the power to pass
an ordinance imposing a tax on the sale, donation,
barter, or on any other mode of transferring ownership
of title to real property located within its territorial
boundaries; (LGC, Sec. 135, in relation to Secs. 142 and
151)
b. The required capital gains tax collected by the national
government is different from the tax that is imposable
by the local government units such as the City of
Maharlika;
c. The transfer tax imposed and collected by cities are not
among those included in the common limitations on the
power of taxation which are reserved solely for the
exercise by the national government;
d. There is no direct duplicate taxation because there are
two different taxing authorities, the national
government and a local government unit. (Domondon)
PROFESSIONAL TAX (1991, 2005)
Q: Mr. Fermin, a resident of Quezon City, is a Certified
Public Accountant-Lawyer engaged in the Practice of
his two professions. He has his main office in Makati
City and maintains a branch office in Pasig City. Mr.
Fermin pays his professional tax as a CPA in Makati City
and his professional tax as a lawyer in Pasig City.
a. May Makati City, where he has his main office,
require him to pay his professional tax as a lawyer?
Explain.
A: No. Mr. Fermin is given the option to pay either in the city
where he practices his profession or where he maintains his
principal office in case he practices his profession in several
places. The professional tax paid as a lawyer in Pasig City, a
place where he practices his profession, will entitle him to
UST BAR OPERATIONS
practice his profession in any part of the Philippines
without being subjected to any other national or local tax,
license, or fee for the practice of such profession. (Sec. 139
in relation to 151, Local Government Code)
b. May Quezon City, where he has his residence and
where he also practices his two professions, go
after him for the payment of his professional tax as
a CPA and a lawyer? Explain. (2005 Bar)
A: No. The professional tax shall be paid only once for every
taxable year and the payment shall be made either in the
city where he practices his profession or where he
maintains his principal office. The city of residence cannot
require him to pay his professional taxes. (Sec. 139 in
relation to Sec. 151, Local Government Code)
TAXING POWERS OF MUNICIPALITIES
Fees and charges for regulation and licensing (2008,
2009)
Q: The Sangguniang Bayan of the Municipality of
Sampaloc, Quezon, passed an ordinance imposing a
storage fee of ten centavos (P0.10) for every 100 kilos
of copra deposited in any bodega within the
Municipalitys jurisdiction. The Metropolitan
Manufacturing Corporation (MMC), with principal
office in Makati, is engaged in the manufacture of soap,
edible oil, margarine, and other coconut oil-based
products. It has a warehouse in Sampaloc, Quezon, used
as storage space for the copra purchased in Sampaloc
and nearby towns before the same is shipped to Makati.
MMC goes to court to challenge the validity of the
ordinance, demanding the refund of the storage fees it
paid under protest.
Is the ordinance valid? Explain your answer. (2009)
A: Yes. The municipality is authorized to impose reasonable
fees and charges as a regulatory measure in an amount
commensurate with the cost of regulation, inspection and
licensing. (Section 147, LGC) In the case at bar, the storage
of copra in any warehouse within the municipality can be
the proper subject of regulation pursuant to the police
power granted to municipalities under the Revised
Administrative Code or the general welfare clause. A
warehouse used for keeping or storing copra is an
establishment likely to endanger the public safety or likely
to give rise to conflagration because the oil content of the
copra, when ignited, is difficult to put under control by
water and the use of chemicals is necessary to put out the
fire. It is, thus, reasonable that the Municipality impose
storage fees for its own surveillance and lookout (Procter &
Gamble Philippine Manufacturing Corporation v.
Municipality of Jagna, Province of Bohol, 94 SCRA 894
[1979]).
COMMON LIMITATIONS ON THE TAXING POWERS OF
LGUS
Levy upon goods carried into, leaving or passing
through and LGUs territorial boundaries (1987, 2015)
Q: In 2014, M City approved an ordinance levying
customs duties and fees on goods coming into the
territorial jurisdiction of the city. Said city ordinance
was duly published on February 15, 2014 with
effectivity date on March 1, 2014.
Is there a ground for opposing said ordinance? (2015
Bar)
A: Yes, on the ground that the ordinance is ultra vires. The
taxing powers of local government units such as M City,
cannot extend to the levy of taxes, fees and charges already
28
 QUAMTO (1987-2016)
imposed by the national government, and this includes,
among others, the levy of customs duties under the Tariff
and Customs Code (Sec. 133 (e), LGC)
REAL PROPERTY TAXATION
Actual Use Principle (1988, 1990, 2000, 2005)
Q: The Roman Catholic Church owns a 2-hectare lot in a
town in Tarlac province. The southern side and middle
part are occupied by the Church and a convent, the
eastern side by a school run by the Church itself, the
southeastern side by some commercial establishments,
while the rest of the property, in particular the
northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land?
Decide with reasons. (2005 Bar)
A: No. The portions of the land occupied and used by the
church, convent and school run by the church are exempt
from real property taxes while the portion of the land
occupied by commercial establishments and the portion,
which is idle, are subject to real property taxes. The usage
of the property and not the ownership" is the determining
factor whether or not the property is taxable. [Lung Center
of the Philippines v. Q.C., 433 SCRA 119 (2004)].
Real properties for purposes of taxation (2001, 2003,
2009)
Q: 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 leased by the oil
companies from the owners of the land where the
gasoline stations [are] located. Are those underground
tanks, which were not placed there by the owner of the
land but which were instead placed there by the lessee
of the land, considered real property for purposes of
real property taxation under the local Government
Code? Explain. (2003 Bar)
A: 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 a 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, 114 SCRA 296
(1982)]
Q: Republic Power Corporation (RPC) is a government-
owned and controlled corporation engaged in the
supply, generation and transmission of electric power.
In 2005, in order to provide electricity to Southern
Tagalog provinces, RPC entered into an agreement with
Jethro Energy Corporation (JEC), for the lease of JECs
power barges which shall be berthed at the port of
Batangas City. The contract provides that JEC shall own
the power barges and the fixtures, fittings, machinery,
and equipment therein, all of which JEC shall supply at
its own cost, and that JEC shall operate, manage and
maintain the power barges for the purpose of
converting the fuel of RPC into electricity. The contract
also stipulates that all real estate taxes and
29
assessments, rates and other charges, in respect of the
power barges, shall be for the account of RPC.
In 2007, JEC received an assessment of real property
taxes on the power barges from the Assessor of
Batangas City. JEC sought reconsideration of the
assessment on the ground that the power barges are
exempt from real estate taxes under Section 234 [c] of
R.A. 7160 as they are actually, directly and exclusively
used by RPC, a government-owned and controlled
corporation. Furthermore, even assuming that the
power barges are subject to real property tax, RPC
should be held liable therefore, in accordance with the
terms of the lease agreement. Is the contention of JEC
correct? Explain your answer. (2009 Bar)
A: The contention of JEC is not correct. The owner of the
power barges is JEC which is required to operate, manage
and maintain the power barges for the purpose the claim
that RPC, a government-owned and controlled corporation
engaged in the supply, generation and transmission of
electric power, is the actual, direct and exclusive user of the
barge, hence, does not fall within the purview of the
exempting provision of Section 234[c] of R.A. 7160.
Likewise, the argument that RPC should be liable to the real
property taxes consonant with the contract is devoid of
merit. The liability for the payment of the real estate taxes
is determined by law and not by the agreement of the
parties. [FELS Energy Inc. v. The Province of Batangas, 516
SCRA 186 (2007)]
EXEMPTION FROM REAL PROPERTY TAX
Constitutional Exemptions (1987, 1988, 1990, 1996,
2000, 2005, 2006)
Q: The Constitution exempts from taxation charitable
institutions, churches, parsonages or convents
appurtenant thereto, mosques and non-profit
cemeteries and lands, buildings and improvements
actually, directly and exclusively used for religious,
charitable and educational purposes.
Mercy Hospital is a 100-bed hospital organized for
charity patients. Can said hospital claim exemption
from taxation under the above-quoted constitutional
provision? Explain.
A: Yes. Mercy Hospital can claim exemption from taxation
under the provision of the Constitution, but only with
respect to real property taxes provided that such real
properties are used actually, directly and exclusively for
charitable purposes.
Exemptions under the LGC (1987, 1990 2002, 2006,
2009, 2015, 2016)
Q: Philippine National Railways (PNR) operates the rail
transport of passengers and goods by providing train
stations and freight customer facilities from Tutuban,
Manila to the Bicol Province. As the operator of the
railroad transit, PNR administers the land,
improvements and equipment within its main station
in Tutuban, Manila.
Invoking Section 193 of the Local Government Code
(LGC) expressly withdrawing the tax exemption
privileges of government-owned and controlled
corporations upon the effectivity of the Code in 1992,
the City Government of Manila issued Final Notices of
Real Estate Tax Deficiency in the amount of P624, 000,
000.00 for the taxable years 2006 to 2010. On the other
hand, PNR, seeking refuge under the principle that the
 TAXATION LAW
government cannot tax itself, insisted that the PNR
lands and buildings are owned by the Republic.
Is the PNR exempt from real property tax? Explain your
answer. (2016 Bar)
A: Yes. The Philippine National Railways (PNR) was
created as a corporation to serve as an instrumentality of
the Government of the Philippines (Rep. Act No. 10638,
amending Sec. 1 of Rep. Act No. 4156) upon which the local
governments are not allowed to levy taxes, fees or other
charges including real property taxes. [Manila
International Airport Authority v. Court of Appeals, et al., G.
R. No. 155650, July 20, 2006; Manila International Airport
Authority v. City of Pasay, G. R. No. 163072, April 2, 2009, 583
SCRA 234 (2009) citing Philippine Fisheries Development
Authority v. Court of Appeals, G.R. No. 150301, 2 October
2007, 534 SCRA 490]
PNR is not a government and controlled corporation but an
instrumentality of the government hence it is not included
in the withdrawal of exemptions. Finally, under the
common limitations on local government units power of
taxation, it shall not extend to the levy of taxes, fees or
charges of any kind on the National Government, its
agencies and instrumentalities, and local government
units. [LGC, Sec. 133 (o), paraphrasing supplied)
The railroad tracks, train stations, freight customer
facilities, land improvements, and equipment within its
main station in Tutuban, Manila are properties of public
dominion intended for public use, and as such are exempt
from real property tax under Section 234 (a) of the Local
Government Code (LGC). (Manila International Airport
Authority v. City of Pasay, supra)
Q: LLL is a government instrumentality created by
Executive Order to be primarily responsible for
integrating and directing all reclamation projects for
the National Government. It was not organized as a
stock corporation, nor was it intended to operate
commercially and compete in the private market.
By virtue of its mandate, LLL in 2008 reclaimed several
portions of the foreshore and offshore areas of the
Manila Bay, some of which were within the territorial
jurisdiction of Q City. Certificates of titles to the
reclaimed properties in Q City were issued in the name
of LLL in 2008. In 2014, Q City issued warrants of Levy
on said reclaimed properties of LLL based on the
assessment for delinquent property taxes for the years
2010 to 2013.
a. Are the reclaimed properties registered in the
name of LLL subject to real property tax?
A: The reclaimed properties are not subject to real property
tax because LLL is a government instrumentality. Under the
law, real property owned by the Republic of the Philippines
is exempt from real property tax unless the beneficial use
thereof has been granted to a taxable person. (Sec 234, LGC)
When the title of the real property is transferred to LLL, the
Republic remains the owner of the real property. Thus, such
arrangement does not result in the loss of the tax
exemption. (Republic of the Philippines, represented by The
Philippine Reclamation Authority v. City of Paranaque)
ALTERNATIVE ANSWER: No. LLL is an instrumentality of
the national government which cannot be taxed by local
government units. LLL is not a government-owned or
controlled corporation taxable for real property taxes. (City
of Lapu-Lapu v. PEZA, GR No. 184203, Nov. 26, 2014)
b. Will your answer be the same in (a) if from 2010 to
the present time, LLL is leasing portions of the
UST BAR OPERATIONS
reclaimed properties for the establishment and use
of popular fastfood restaurants J Burgers, G Pizza,
and K Chicken? (2015 Bar)
A: No. As a rule, 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. When LLL
leased out portions of the reclaimed properties to taxable
entities, such as the popular fast food restaurants, the
reclaimed properties are subject to real property tax. [Sec.
234(a), LGC; GSIS v. City Treasurer and City Assessor of the
City of Manila]
Q: The Philippine-British Association, Inc. (Association)
is a non-stock, non-profit organization which owns the
St. Michael's Hospital (Hospital). Sec. 216 in relation to
Sec. 215 of the LGC classifies all lands, buildings and
other improvements thereon actually, directly, and
exclusively used for hospitals as "special." A special
classification prescribes a lower assessment than a
commercial classification.
Within the premises of the Hospital, the Association
constructed the St. Michael's Medical Arts Center
(Center) which will house medical practitioners who
will lease the spaces therein for their clinics at
prescribed rental rates. The doctors who treat the
patients confined in the Hospital are accredited by the
Association.
The City Assessor classified the Center as "commercial"
instead of "special" on the ground that the Hospital
owner gets income from the lease of its spaces to
doctors who also entertain out-patients. Is the City
Assessor correct in classifying the Center as
"commercial?" Explain. (2016 Bar)
A: No. The City Assessor is not correct in classifying the
Center as commercial.
The fact alone that the separate St. Michaels Medical Arts
Center will house medical practitioners who shall treat the
patients confined in the Hospital and are accredited by the
Association takes away the said Medical Arts Center from
being categorized as commercial since a tertiary hospital
is required by law to have a pool of physicians who
comprise the required medical departments in various
medical fields. [City Assessor of Cebu City v Association of
Benevola de Cebu, Inc., 524 SCRA 128 (2007)] (Domondon)
REFUND OR CREDIT OF REAL PROPERTY TAX
Payment under protest (1988, 1991, 1993, 2014)
Q: Madam X owns real property in Caloocan City. On July
1, 2014, she received a notice of assessment from the
City Assessor, informing her of a deficiency tax on her
property. She wants to contest the assessment.
a. What are the administrative remedies available to
Madam X in order to contest the assessment and
their respective prescriptive periods? (2014 Bar)
A: The administrative remedies available to Madam X to
contest the assessment and their respective prescriptive
periods are as follows:
1. Pay the deficiency real property tax under protest (Sec
252, LGC);
2. File the protest with the local treasurer The protest in
writing must be filed within 30 days from payment of
the tax to the provincial, city or municipal treasurer, in
the case of municipality within Metro Manila Area, who
shall decide the protest within 60 days from receipt
(Sec. 252, LGC)
30
 QUAMTO (1987-2016)
3. Appeal to the LBAA If the protest is denied or upon
the lapse of the 60-day period for the treasurer to
decide, the taxpayer may appeal to the LBAA within 60
days and the case decided within 120 days (Sec. 226 and
229)
4. Appeal to the CBAA If not satisfied with the decision
of the LBAA, appeal to the CBAA within 30 days from
receipt of a copy of the decision. [Sec. 229 (c), LGC]
b. May Madam X refuse to pay the deficiency tax
assessment during the pendency of her appeal?
(2014 Bar)
A: No. The payment of the deficiency tax is a condition
before she can protest the deficiency assessment. It is the
decision on the protest or inaction thereon that gives her
the right to appeal. This means that she cannot refuse to pay
the deficiency tax assessment during the pendency of the
appeal because it is the payment itself which gives rise to
the remedy. The law provides that no protest (which is the
beginning of the disputation process) shall be entertained
unless the taxpayer first pays the tax. (Section 252, LGC)
TARIFF AND CUSTOMS CODE
Basis of dutiable value (1989, 2005, 2008)
Q: What are the bases for and purposes of computing
customs duties and VAT? (2008 Bar)
A: The tax base for the customs duties is the transaction
value while for VAT purposes, the tax base is the value used
in computing customs duties plus customs duties, excise
taxes and other charges incident to importation. [Section
107 (A), NIRC] These taxes on importation must be paid to
the Bureau of Customs before the Authority to Release
Imported Goods will be issued by the BIR. (Revenue
Regulations No. 16-2005)
SPECIAL DUTIES
Dumping Duties (1995, 1997, 2005)
Q: Under the Tariff and Customs Code, what are:
a. dumping duties
A: Dumping duties are special duties imposed by the
Secretary of Finance upon recommendation of the Tariff
Commission when it is found that the price of the imported
articles is deliberately or continually fixed at less than the
fair market value or cost of production, and the importation
would cause or likely cause an injury to local industries
engaged in the manufacture or production of the same or
similar articles or prevent their establishment.
Countervailing Duties (1995,1997, 2005)
Q: Under the Tariff and Customs Code, what are:
a. xxx
b. countervailing duties
A: Countervailing duties are special duties imposed by the
Secretary of Finance upon prior investigation and report of
the Tariff Commission to offset an excise or inland revenue
tax upon articles of the same class manufactured at home or
subsidies to foreign producers or manufacturers by their
respective governments.
Marking duties (1995, 1997)
Q: Under the Tariff and Customs Code, what are:
31
a. xxx
b. xxx
c. marking duties
A: Marking duties are special duties equivalent to 5% ad
valorem imposed on articles not properly marked. These
are collected by the Commissioner of Customs except when
the improperly marked articles are exported or destroyed
under customs supervision and prior to final liquidation of
the corresponding entry. These duties are designed to
prevent possible deception of the customers.
Discriminatory duties (1995, 1997)
Q: Under the Tariff and Customs Code, what are:
a. xxx
b. xxx
c. xxx
d. discriminatory duties
A: Discriminatory duties are special duties collected in an
amount not exceeding 100% ad valorem, imposed by the
President of the Philippines against goods of a foreign
country which discriminates against Philippine commerce
or against goods coming from the Philippines and shipped
to a foreign country.
FLEXIBLE TARIFF CLAUSE (1991, 2001)
Q: What do you understand by the term flexible tariff
clause" as used in the Tariff and Customs Code? (1991
Bar)
A: The term "flexible tariff clause "refers to the power of the
President upon recommendation of the NEDA to increase,
reduce or remove existing protective tariff rates of import
duty, but in no case shall be higher than 100% ad valorem,
to establish import quota or to ban importation of any
commodity as may be necessary and to impose additional
duty on all import not exceeding 10% ad valorem whenever
necessary. (Sec. 102, CMTA)
Q: In view of the unfavorable balance of payment
condition and the increasing budget deficit, the
President of the Philippines. upon recommendation of
the National Economic and Development Authority,
issues during a recess of Congress an Executive Order
imposing an additional duty on all imports at the rate
of ten (10%) percent ad valorem. The Executive Order
also provides that the same shall take effect
immediately. Ricardo San Miguel, an importer,
questions the legality of the Executive Order on the
grounds that only Congress has the authority to fix the
rates of import duties and, in any event, such an
Executive Order can take effect only thirty (30) days
after promulgation and the President has no authority
to shorten said period.
Are the objections of Mr. San Miguel tenable? (2001
Bar)
A: No. Under the Flexible Tariff clause, any order issued by
the President pursuant to the provision shall take effect
thirty (30) days after promulgation, except in the
imposition or additional duty not exceeding ten (10)
percent ad valorem which shall take effect at the discretion
of the President. [Section 1608 (d), CMTA]
BEGINNING AND ENDING OF IMPORTATION (1995,
2015)
Q: Under the Tariff and Customs Code, as amended,
when does importation begin and when is it deemed
terminated? (2015 Bar)
 TAXATION LAW
A: Importation begins when the carrying vessel or aircraft
enters the jurisdiction of the Philippines with intention to
unload therein. (Sec. 103, 1st par., CMTA) Importation is
deemed terminated upon payment of the duties, taxes and
other charges due upon the articles or secured to be paid at
a port of entry and the legal permit for withdrawal shall
have been granted [Sec. 103 (a), CMTA], or in case said
articles are free of duties, taxes and other charges, until they
have legally left the jurisdiction of Customs. [Sec. 103 (b),
CMTA]

UST BAR OPERATIONS 32