2010 Taxation Review by Domondon 1

2010 Taxation Review by Domondon 1
PRIMUS PRE-BAR REVIEW DIVISION
“BAR STAR NOTES”
TAXATION
VER. 2010.08.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management
Consultant, Professor of Law and Pre-Bar Reviewer)
How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of questions and answers as
well as textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar
Reviewees who attended the 2010 Wrap-Up Lectures on TAXATION conducted by Primus Information,
Center, Inc., and the Bar Reviewees of various law schools and Review Centers where he was invited to lecture on
Taxation. Included in the presentation are doctrines contained in Supreme Court decisions up to April 2010.
The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material which
serves as “memory-joggers” for the September 12, 2010 Bar Examinations in Taxation. The author tries to second
guess what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be
formulated in the same manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all
probability be included in these Notes.
If pressed for time, the author suggests that the reader should focus his attention on the following:

Nice to know

Should know

Must know and master
It is further suggested that the reader should merely browse those without stars.
The BAR STAR NOTES in TAXATION is the 4 th in the series of Bar Star Notes the author has
prepared for all the eight Bar subjects. The other Bar Star Notes may be availed of by enrolling in the
2010 Wrap-Up lectures conducted by PRIMUS INFORMATION CENTER, INC.Please feel free to call Baby,
Tel. No. 816-07-68 or 817-84-49; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or
Venny, Mobile No. 0917-337-6479.
WARNING:
These materials are copyrighted and/or based on the writer’s books on Taxation and future revisions. It is
prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, including
photocopying without the written permission of the author. These materials are authorized for the use only of
PRIMUS Reviewees and others who attended the author’s lectures on Taxation. Unauthorized users shall not be
prosecuted but SHALL BE SUBJECT TO THE LAW OF KARMASUCH THAT THEY WILL NEVER PASS THE BAR
OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author.
THE BEST OF LUCK AND ADVANCE CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
 1.
State briefly and concisely the nature of taxation. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of government.

 2.
What is the nature of the State’s power to tax ? Explain briefly.
SUGGESTED ANSWER: The nature of the state’s power to tax is two-fold. It is both an inherent power and
a legislative power.
It is inherent in nature being an attribute of sovereignty. This is so, because
without the taxes, the state’s existence would be imperiled. There is thus, no need for a constitutional grant for the
state
to
exercise
this
power.
It is a legislative
power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid,
who pays the tax, to whom it should be paid, and when the tax should be paid.
 3.
What is the underlying theory of taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of the nation.
Without revenue raised from taxation,
the government will not survive, resulting in detriment to society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et
al., 158 SCRA 8, 16-17)
 4.
Marshall said that, “the power to tax involves the power to destroy.” On the other
hand,
Holmes stated
that
“the power
to tax
is
not
the
power to destroy while the court sits.”
Rec
oncile the statements.
In the alternative, what are the
implications that flow from the above statements ?
SUGGESTED
ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view refers to an invalid
tax.
a.
The imposition of a valid tax could not be judicially restrained merely
because
it
would
prejudice
taxpayer’s
property.
b.
An
illegal tax could be
judicially declared invalid and should not work to prejudice a taxpayer’s property.
 5.
Discuss
briefly
the
basis/bases,
or
rationale
of
taxation.
SUGGESTED
ANSWER: a.
Reciprocal
duties
of
protection
and
support
between
the state and its citizens and residents. Also called “symbiotic
relation” between
the
state
and its citizens.
b.
Jurisdiction by the state over persons and property within its territory.
 6.
Discuss briefly but comprehensively the objectives or purposes of taxation.
SUGGESTED
ANSWER: The
purposes
or
objectives
of
taxation
are
the
following:
a.
The
primary
purpose:
1)
Revenue
purpose.
b.
The
secondary
purposes
1)
Sumptuary
or
regulatory
purpose.
2)
Compensatory
purpose.
3)
To implement the power of eminent domain.
 7.
Distinguish a tax from a license fee.
SUGGESTED ANSWER: The following are the
distinctions:
a.
Purpose: Tax imposed for revenue while license fee for regulation. Tax for general
public
purposes
while
license
fee
for
regulatory
purposes
only.
b.
Basis: Tax imposed under power
of
taxation
while
license
fee
under
police
power.
c.
Amount: In taxation, no
limit as to amount while license fee limited to cost of the license and the expenses of police surveillance and
regulation.
d.
Time
of
payment: Taxes
normally
paid
after
commencement
of
business
while
license
fee
before.
e.
Effect of payment: Failure to pay a tax does not make the business
illegal while failure to pay license fee makes business illegal.
f.
Surrender: Taxes, being the
lifeblood of the state, cannot be surrendered except for lawful consideration while a license fee may be surrendered
with or without consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et
al., 49 Phil. 924)
 8.
How may the power to tax be utilized to carry out the social justice program of our
government ?
SUGGESTED ANSWER: The compensatory purpose of taxation is to
implement the social justice provisions of the constitution through the progressive system of taxation, which would
result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation
v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and
the protection of local industries as well as public welfare and similar objectives.
(Batangas Power Corporation v.
Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v.
City of Cabanatuan, G. R. No. 149110, April 9, 2003)
9.

Explain the sumptuary purpose of taxation.

SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect
the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power
where regulatory taxes are collected.
Taxation may be made the implement of the state’s police power. The motivation behind many taxation
measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that
the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of the July 8,
2004 Southern Cross decision.
The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive
intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
10.
Taxation distinguished from police power. Taxation is distinguishable from police power as to
the means employed to implement these public goals. Those doctrines that are unique to taxation arose from
peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves
the power to destroy and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the
government, their prompt and certain availability is of the essence.”
These considerations necessitated the evolution of taxation as a distinct legal concept from police
power. (Ibid.)
11.
How the power of taxation may be used to implement power of eminent domain. Tax
measures are but ”enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public
purpose.” In most recent years, the power to tax has indeed become a most effective tool to realize social justice,
public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizens discount may claim the discounts granted to senior
citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of
the discount shall be allowed as deduction from gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to
the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals,
et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]
 12. What are the three basic principles of a sound tax system? Explain each
briefly.
SUGGESTED ANSWER: The canons of a sound tax system, also known
as the characteristics or, principles of a sound tax system, are used as a criteria in order to determine whether a
tax system is able to meet the purposes or objectives of taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.
 13.
ANSWER:
b.
c.
d.
e.
f.
g.
h.

What

are

the

elements

or

characteristics
of
a
tax
a.
Enforced contribution.

?

SUGGESTED

Generally payable in money.
Proportionate in character.
Levied on persons, property or exercise of a right or privilege.
Levied by the state having jurisdiction.
Levied by the legislature.
Levied for a public purpose.
Paid at regular periods or intervals.

14.
State
the
requisites
of
a
valid
tax.
SUGGESTED
ANSWER:
a.
A valid tax should be within the jurisdiction of
the taxing authority.
b.
That the assessment and collection of certain kinds (The same as the inherent limitations of the
power of taxation) should be for a public purpose.
c.
The rule of taxation should be uniform.
d.
That either the person or property of taxes guarantees against injustice to individuals,
especially by way or notice and opportunity for hearing be provided.
e.
The tax must not impinge on the inherent and Constitutional limitations on the power of
taxation.
15. What are the classes or kinds of taxes according to the subject
matter
or
object
?
SUGGESTED

ANSWER:
a.
Personal, poll or capitalization – imposed on
all residents, whether citizen or not. Example – Community Tax.
b.
Property
- Imposed
on
property. Example
–
Real
property
tax.
c.
Excise
–
imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an
occupation. Example – income tax, estate tax.
16. What are the kinds of taxes classified as to who bears the burden ? Explain each
briefly.
SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or
as to who shall bear the burden of taxation, taxes may be classified into:
a.
Direct taxes. Those that are extracted from the very person who, it is intended or desired, should
pay them (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230,
December 15, 2005); they are impositions for which a taxpayer is directly liable on the transaction or business he
is engaged in, (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra)
which
liability cannot be shifted or transferred to another. Example – income tax, estate tax, donor’s tax, etc.
b.
Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person
in the expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine
Long Distance Telephone Company, supra) to someone else not as a tax but as part of the purchase
price. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005 citing various cases and authorities) Example – value added tax (VAT), documentary stamp
tax, excise tax, percentage tax, etc.
17.
Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from
Petron Corporation, which it uses for its operations. It now claims for refund or tax credit for the excise
taxes it paid claiming that it is exempt from the payment of excise taxes under the provisions of Sec. 135
of the NIRC of 1997 which provides that petroleum products are exempt from excise taxes when sold
to “Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their
use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities
or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies”
Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the
Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air
Transport Agreement between RP and Singapore) which reads: “Fuel, lubricants, spare parts, regular
equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party
by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation
of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from
the same customs duties, inspection fees and other duties or taxes imposed in the territories of the first
Contracting Party , even when these supplies are to be used on the parts of the journey performed over the
territory of the Contracting Party in which they are introduced into or taken on board. The materials referred to
above may be required to be kept under customs supervision and control.”
Silkair likewise argues that it is exempt from indirect taxes because the Air Transport
Agreement between RP and Singapore grants exemption “from the same customs duties, inspection
fees and other duties or taxes imposed in the territory of the first Contracting Party. It invokes Maceda
v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or
refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the
payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons:
a.
The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of,
an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal
Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318)
The NIRC provides that the excise tax
should be paid by the manufacturer or producer before removal of domestic products from place of production.
Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section
135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to
Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene
Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]
b.
Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197
SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground
that the NPC is exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230,
December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be
so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from “all taxes” granted to the National
Power Corporation (NPC) under its charter includes both direct and indirect taxes.
An exemption from “all taxes” excludes indirect taxes, unless the exempting statute, like NPC’s charter, is
so couched as to include indirect tax from the exemption. The amendment under Republic Act No. 6395
enumerated the details covered by NPC’s exemption. Subsequently, P.D. 380, made even more specific the details

of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in
its operation. Presidential Decree No. 938 [NPC’s amended charter] amended the tax exemption by simplifying the
same law in general terms. It succinctly exempts NPC from “all forms of taxes, duties, fees…” The use of the
phrase “all forms” of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been
enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport
Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as
including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged
by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6,
2008)
 18. What
are
the
different
kinds
of
taxes
classified
as
to
purpose
?
SUGGESTED
ANSWER:
a.
General,
fiscal
or
revenue
–
imposed for the
purpose
of
raising
public
funds
for
the
service
of
the
government.
b.
Special or regulatory – imposed primarily for the regulation of useful
or non-useful occupation or enterprises and secondarily only for the raising of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER
1.
Purpose for the limitations on the power of taxation.
The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in
the exercise of this otherwise unlimited and plenary power.
The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. A
violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax.
INHERENT LIMITATIONS
 1. What are the inherent limitations on the power of taxation ?
SUGGESTED ANSWERS:
a.
Public purpose. The revenues collected from taxation should be devoted to a public purpose.
b.
No improper delegation of legislative authority to tax. Only the legislature can exercise the power of
taxes unless the same is delegated to some other governmental body by the constitution or through a law which does
not violate any provision of the constitution.
c.
Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing
authority.
d.
Recognition of government exemptions; and
e.
Observance of the principle of comity. Comity is the respect accorded by nations to each other
because they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon
equals out of respect.
Some authorities include no double taxation.
 2.
What are the principles to consider in the determination of whether tax revenues are
devoted for a public purpose ?
SUGGESTED ANSWER:
a.
The tax revenues are for a public purpose if utilized for the benefit of the community in
general. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of
government.
b.
Inequalities resulting from the singling out of one particular class for taxation or exemption
infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation.
BASIS: The lifeblood theory.
c.
An individual taxpayer need not derive direct benefits from the tax.
REASON: The paramount consideration is the welfare of the greater portion of the population.
d.
A tax may be imposed, not so much for revenue purposes, but under police power for the
general welfare of the community. This would still be for a public purpose.
e.
Public purpose continually expanding. Areas formerly left to private initiative now lose
their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the
times.
f.
Tax revenue must not be used for purely private purposes or for the exclusive benefit of
private persons.
g.
Private persons may be benefited but such benefit should be merely incidental as its main object is
the benefit of the community in general.

h.
Determined at the time of enactment of tax law and not at the time of implementation.
i.
There is a presumption of public purpose even if the tax law does not specifically provide for its
purpose. (Santos & Co., v. Municipality of Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the traditional notion of use by the public but held synonymous
with public interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v.
Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
 3. A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds of which
are to be used exclusively for the protection and promotion of the coconut industry, namely, to improve
the working conditions in coconut mills and to conduct research on the use of coconut oil for motor
fuel. Some of the manufacturers of coconut oil challenge the validity of the law, contending that the
tax is to be used for a private purpose, and therefore, the law violates the rule that public revenues
shall not be appropriated for anything but a public purpose. Decide with reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the coconut industry is
one of the major industries supporting the national economy. It is, therefore, the state’s concern to make it a
strong and secure source not only of the livelihood of the significant segment of the population, but also
of export earnings, the sustained growth of which is one of the imperatives of economic growth. (Philippine
Coconut Producers Federation, Inc. (Cocofed v. Presidential Commission on Good Government, 178 SCRA 236,
252)
 4.
Requisites for taxpayers, concerned citizens, voters or legislators to have locus
standi to sue.
a.
In general, the case should involve constitutional issues. (David, et al., v. President Gloria
Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
b.
For taxpayers, there must be a showing:
1)
That tax money is “being extracted and spent in violation of specific constitutional
protections against abuses of
legislative power.” (Flast v. Cohen, 392 U.S.
83)
2)
That public money is being deflected to any
improper
purpose (Pascual v.
Secretary of Public Works, 110
Phil. 33) or a
claim of illegal disbursement of public funds
or that
the tax measure is unconstitutional. (David, supra)
3)
A taxpayer is allowed to sue where there is a
claim
that public funds are illegally
disbursed, or that public
money is being deflected to any improper purpose, or that
there is a wastage
of
public funds through the enforcement of
an invalid or
unconstitutional law. (Abaya v. Ebdane, G.
R.
No. 167919, February
14, 2007; Garcia v. Enriquez, Jr. G.R.
No. 112655 December 9,
1993,
Minute Resolution)
A taxpayer’s suit is properly brought only when there
is
an exercise of the spending or
taxing power of
Congress.
(Automotive Industry Workers Alliance (AIWA),etc., et al., v.
Romulo,
etc.
,et
al., G.
R.
No.
157509,
January
18,
2005
citing Gonzales
v.
Narvasa, G.
R. No. 140835, August 14, 2000, 337 SCRA
733, 741)
c.
For voters, there must be a showing of obvious interest in the validity of the election law in
question.
d.
For concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early.
e.
For legislators, there must be a claim that the official action complained of infringes upon their
prerogatives as legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May
3, 2006)
5.
Only those directly affected have locus standi to impugn the alleged encroachment by
the executive department into the legislative domain of Congress.
a.
Only those who shall be directly affected by such executive encroachment, such as for example
employees who would find themselves subject to disciplinary powers that may be imposed under the questioned
Executive Order as they have a direct and specific interest in raising the substantive issue therein (Automotive
Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or
employees who are going to be demoted, transferred or otherwise affected by any personnel action subject o the
rule on exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from the alleged executive encroachment of
the legislative function to amend, modify and/or repeal laws. (Automotive Industry Workers Alliance (AIWA),etc.,
et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)
6.
Locus standi being merely a matter of procedure, have been waived in certain instances
where a party who is not personally injured may be allowed to bring suit. The following are examples of
instances where suits have been brought by parties who have not have been personally injured by the operation of a
law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public
interest:
a.
Taxpayer’s suits to question contracts entered into by the national government or governmentowned or controlled corporations allegedly in contravention of the law.

b.
A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that
public money is being deflected to any improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)
 7. The VAT law provides that, the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after
any of the following conditions have been satisfied. “(i) value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).”
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to
the execution of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes what job must be done,
who must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely
the agent of the legislative department, to determine and declare the even upon which its expressed will takes
place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting
as the execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases citing various cases]]
8. Instances of proper delegation: When taxing power could be delegated: Exceptions to the
rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2),
Article VI of the Constitution.
b. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution.
c. The delegation to the President of the Philippines to enter into executive agreements, and to ratify
treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification
made by the President.
d.
Delegation to the people at large.
e. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et
al., G. R. No.168056, September 1, 2005], which is referred to as subordinate legislation.
In this instance, there is a requirement that the law is complete in all aspects so what is delegated is
merely the implementation of the law or there exists sufficiently determinate standards to guide the delegate and
prevent a total transference of the taxing power.
9.
“Paradigm shift” from exclusive Congressional power to direct grant of taxing power to
local legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987
Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28,
2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, “is not regarded as a transfer of general legislative power, but rather as the
grant of authority to prescribe local regulations, according to immemorial practice, subject, of course, to the
interposition of the superior in cases of necessity.” (People v. Vera, 65 Phil. 56)
10.
Taxing power of the local government is limited. The taxing power of local governments is
limited in the sense that Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with the onset of the 1987 Constitution, the
power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution, the basic doctrine on local taxation remains essentially the same, “the power to tax is [still] primarily
vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6,
2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)
11.
Further amplification by Bernas of the local government’s power to tax. “What is the
effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that
municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait
for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these
limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is

thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.” (Quezon City, et al.,
v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City,
et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)
12.
Reconciliation of the local government’s authority to tax and the Congressional general
taxing power. Congress has the inherent power to tax, which includes the power to grant tax exemptions. On
the other hand, the power of local governments, such as provinces and cities for example Quezon City, to tax is
prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any
exemption granted by any law or other special law, the City or a province may impose a franchise tax. It must be
noted that Section 137 of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over
and above the power of the local government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al.
v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)
“Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not
affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The
legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions
on municipal taxing powers, doubts must be resolved in favor of municipal corporations.” [Ibid., referring
to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao]
 13. General principles of income taxation in the Philippines or the source rule of income
taxation as provided in the NIRC of 1997.
a. A citizen of
the
Philippines residing therein
is
taxable
on all income
derived
from
sources withinand without the Philippines;
b.
A nonresident citizen is taxable only on income derived from sources within the Philippines;
c. An individual citizen of the Philippines who is working and deriving income abroad as anoverseas
contract worker is taxable only on income 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;
d.
An alien individual, whether a resident or not of the Philippines, is taxable only
onincome derived from sources within the Philippines;
e. A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only
on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)
14.
Juliane a non-resident alien appointed as a commission agent by a domestic corporation
with a sales commission of 10% all sales actually concluded and collected through her efforts. The local
company withheld the amount of P107,000 from her sales commission and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission is not taxable because the same was
a compensation for her services rendered in Germany and therefore considered as income from sources
outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services
is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment,
but the place where the services were actually performed.
Since the activity of securing the sales were in Germany, then the income did not originate from sources from
within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)
 15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines. It holds
40% of the shares of Philippine Stamping Plant, Inc.,., a Philippine company while the 60% is owned
by Fred Corporation, a Filipino-owned Philippine corporation. Ensite Co. also owns 100% of the shares
of Susanto Co., an Indonesian company which has a duly licensed Philippine branch. Due to worldwide
restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in Philippine Stamping
Plant, Inc. and Susanto Co. The negotiations for the buy-out and the signing of the Agreement of Sale
were all done in the Philippines. The Agreement provides that the purchase price will be paid to Ensite
Ltd’s bank account in the U.S. and that title to the Philippine Stamping Plant, Inc. and Susanto Co.
shall be transferred to General Co., in Toronto Canada where stock certificates will be
delivered. General Co. seeks your advice as to whether or not it will subject the payments of the
purchase price to withholding tax. Explain your advice.
SUGGESTED ANSWER: The

payments of the purchase price will be subject to withholding tax. Considering that all the activities (sales)
occurred within the Philippines, the income is considered as income from within, subject to Philippine income
taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from sources within the
Philippines.
 16.Ensite,
Ltd.
is
a
Canadian
corporation, which has a duly licensed Philippine branch engage in trading activities in the
Philippines. Ensite, Ltd.. also invested directly in 40% of the shares ofstock of Philippine Stamping
Plant, Inc.., a Philippine corporation. These shares are booked in the Head Office of Ensite, Ltd.. and
are not reflected as assets of the Philippine branch. In 2009, Philippine Stamping Plant, Inc.. declared
dividends to its stockholders. Before remitting the dividends to Ensite Ltd.,., Philippine Stamping Plant,
Inc. Co. seeks your advice as to whether it will subject the remittance to withholding tax. There is no
need
to
discuss
WT
rates,
if
applicable. Focus
your
discussion
on
what
is
the
issue.
SUGGESTED ANSWER: Philippine Stamping Plant, Inc..
should subject the remittance to withholding tax.. Since Philippine Stamping Plant. is a Philippine corporation, its
shares of stock have obtained a business situs in the Philippines, hence the dividends are considered as income
from within. Ensite. Ltd., being a foreign corporation, should be subject to tax on its income from within.
 17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive Larry who is
a Filipino citizen. Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia (Kuala Lumpur
Manufacturing, Inc.) and will assign Larry for an indefinite period to work full time for Kuala Lumpur
Manufacturing, Inc.. Larry will bring his family to reside in Malaysia and will lease out his residence in
the Philippines. The salary of Larry will be shouldered 50% by Philippine Stamping Plant, Inc.. while
the other 50% plus housing, cost of living and educational allowances of Larry’s dependents will be
shouldered by Kuala Lumpur Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the 50%
of Larry’s salary to his Philippine bank account. Larry will sign the contract of employment in the
Philippines. He will also be receiving rental income for the lease of his Philippine
residence.
Are these salaries,
allowances
and
rentals
subject
to
Philippine
income
tax? Explain
briefly.
SUGGESTED ANSWER: The salaries and allowances of Larry, being
derived from labor or personal services rendered outside of the Philippines is considered as income from
without. Since Larry is an OCW, then he is to be taxed only on his income derived from within the Philippines such
as the rentals on his Philippine residence, and not on his income from without.
18.
Obama Airlines, Inc., a foreign airline company which does not maintain any flight to and
from the Philippines sold air tickets in the Philippines, through a general sales agent, relating to the
carriage of passengers and cargo between two points, both outside the Philippines.
a.
Is Obama, Inc., subject to income taxes on the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source of income which is taxable is that “activity” which produced the
income. The ”sale of tickets” in the Philippines is the activity that determines whether such income is taxable in the
Philippines.
The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The
situs of the source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the
Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government. [Commissioner of Internal
Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the
Philippines and their income from sales of passage documents here is income from within the Philippines. Thus,
the off-line air carrier liable for the 32% (now 30%) tax on its taxable income. [South African Airways v.
Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 citingCommissioner of Internal Revenue
v. British Overseas Airways Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA
395]
b.
Supposing that Obama, Inc., sells tickets outside of the Philippines for passengers it carry
from Gold City, South Africa to the Philippines but returns to South Africa without any cargo or
passengers. Would it then be subject to any Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax because the
activity which generated the income (the sale of the tickets) was performed outside of the Philippines.
It is not subject to the carrier’s tax based on gross Philippine billings because there were no lifts that
originated from the Philippines. “Gross Philippine Billings” refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document.” [NIRC of 1997, Sec. 28(A)(3)(a)]
c.
Would your answer be the same if Obama, Inc. sold tickets outside of the Philippines for
travelers who are going to picked up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport at
Clark, Angeles, Pampanga, bound for Nairobi, Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the carrier’s tax based on Gross
Philippine Billings. (GPB).
“Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of

the place of sale or issue and the place of payment of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)
(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the Philippines,
income is included in GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010)
19.
No improper delegation of legislative authority to tax. The power to tax is inherent in the
State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are
taxed, and the grant must be made by the immediate representatives of the people; and where the people have
laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS
1.
Constitutional limitations on the power of taxation . The general or indirect constitutional
limitations as well as the specific or direct constitutional limitations.
2. The general or indirect constitutional limitations on the power of taxation are:
a.
Due process clause;
b.
Equal protection clause;
c.
Freedom of the press;
d.
Religious freedom;
e.
No taking of private property without just compensation;
f.
Non-impairment clause;
g.
Law-making process:
1)
Bill should embrace only one subject
expressed
in the title thereof;
2)
Three (3) readings on three separate days;
3)
Printed copies in final form distributed three
(3) days before passage.
h.
Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture
after conviction by final judgment.
3.
The specific or direct constitutional limitation.
a.
No imprisonment for non-payment of a poll tax;
b.
Taxation shall be uniform and equitable;
c.
Congress shall evolve a progressive system of taxation;
d.
All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives,
but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in an appropriation, revenue, or
tariff bill, but the veto shall not affect the item or items to which he does not object;
f.
Delegated power of the President to impose tariff rates, import and export quotas, tonnage and
wharfage dues:
1)
Delegation by Congress
2)
through a law
3)
subject to Congressional limits and
restrictions
4)
within the framework of national development program.
g.
Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto,
mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious,
charitable or educational purposes;
h.
No tax exemption without the concurrence of majority vote of all members of Congress;
i.
No use of public money or property for religious purposes except if priest is assigned to the armed
forces, penal institutions, government orphanage or leprosarium;
j.
Money collected on tax levied for a special purpose to be used only for such purpose, balance if any,
to general funds;
k.
The Supreme Court's power to review judgments or orders of lower courts in all cases involving the
legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above;
l.
Authority of local government units to create their own sources of revenue, to levy taxes, fees and
other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local
autonomy;
m.
Automatic release of local government's just share in national taxes;
n.
Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to
limitations provided by law including restrictions on dividends and provisions for reinvestment of profits;

p.
Tax exemption of grants, endowments, donations or contributions used actually, directly and
exclusively for educational purposes subject to conditions prescribed by law.
5.
Equal protection of the law clause is subject to reasonable classification. If the groupings
are characterized by substantial distinctions that make real differences, one class may be treated and regulated
differently from another. The classification must also be germane to the purpose of the law and must apply to all
those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
 6.
Requisites for valid classification. All that is required of a valid classification is that it be
reasonable, which means that
a.
the classification should be based on substantial distinctions which
make for real differences,
b.
that it must be germane to the purpose of the law;
c.
that it must not be limited to existing conditions only; and
d.
that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational
basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715,
August 14, 2008]
7.
Equal protection does not demand absolute equality. It merely requires that all persons
shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities
enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal protection and the person to which she is
being compared were indeed similarly situated, i.e., that they committed identical acts for which they were charged
with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in
their defense - yet, they were treated differently. (Santos, supra)
8.
Tests to determine validity of classification.
The United States Supreme Court has
established different tests to determine the validity of a classification and compliance with the equal protection
clause. The recognized tests are:
a.
The traditional (or rational basis) test.
b.
The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9.
The traditional (or rational basis) test used in order to determine the validity of
classification. The classification is valid if it is rationally related to a constitutionally permissible state interest.
The complainant must prove that the classification is “invidous,” “wholly arbitrary,” or ”capricious,”
otherwise the classification is presumed to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan
v. Maryland, 366 U.S. 420; United States Railroad Retirement Board v. Fritz, 449 U.S. 166)
10.
The strict scrutiny (or compelling interest) test used in order to determine the validity of
the classification. Government regulation that intentionally discriminates against a “suspect class” such as racial
or ethnic minorities, is subject to strict scrutiny and considered to violate the equal protection clause unless found
necessary to promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no alternative, less burdensome means is
available to accomplish the state interest.
Thus, it was held that denial of free public education to the children of illegal aliens imposes an enormous
and lasting burden based on a status over which the children have no control is violative of equal protection
because there is no showing that such denial furthers a “substantial” state goal. (Plyler v. Doe, 457 U.S. 202)
11.
The intermediate level of scrutiny (or quasi-suspect class) test used in order to
determine the validity of he classification. Classification based on gender or legitimacy are not “suspect,” but
neither are they judged by the traditional or rational basis test.
Intentional discriminations against members of a quasi-suspect class violate equal protection unless they
are substantially related to important government objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but not widowers, has been held valid for it
furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually
imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)
12.
Equality and uniformity of taxation may mean the same as equal protection. In such a
case, the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to
the same burdens and granted the same privileges without any discrimination whatsoever.
13.
It is inherent in the power to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that, "inequalities which result from a singling out of one particular class of
taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et
al., 277 SCRA 617)

 9. Benjie 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 Soliman 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 tax payers and discriminates against prompt
ones, Benjie demands that he be refunded an amount equivalent to one-half of the real property taxes
he paid. The municipal attorney rendered an opinion that Benjie cannot be reimbursed because the
ordinance did not provide for such reimbursement. Benjie files suit to declare the ordinance void on the
ground that it is a class legislation. Will his suit prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because there is no violation of the equal
protection suit. There is a valid classification between those who already paid their taxes and those who have
not. Furthermore, the taxing authority has the prerogative to select the subjects and objects of taxation, including
granting a 50% discount in the payment of unpaid real estate taxes, and the condonation of all penalties on fines
resulting from late payment.
10.
The rewards law to tax collectors does not violate equal protection. The equal protection
clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis
and not arbitrary. With respect to RA 9335, it’s expressed public policy is the optimization of the revenuegeneration capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation
capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should
logically pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC because they have the
common distinct primary function of generating revenues for the national government through the collection of
taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence,
the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal
protection. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)
11.
The prosecution of one guilty person while others equally guilty are not prosecuted,
however, is not, by itself, a denial of the equal protection of the laws. Where the official action purports to
be in conformity to the statutory classification, an erroneous or mistaken performance of the statutory duty,
although a violation of the statute, is not without more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to
those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in
it an element of intentional or purposeful discrimination. This may appear on the face of the action taken with
respect to a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory
design over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12.
Equal protection should not be used to protect commission of crime. While all persons
accused of crime are to be treated on a basis of equality before the law, it does not follow that they are to be
protected in the commission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of
murder because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons should be converted
into a defense for others charged with crime, the result would be that the trial of the district attorney for
nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement
of law would suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
 13.
Illustration of double taxation in local taxation. there is indeed double taxation if Coca-Cola
is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed:
(1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose –
to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing
authority – City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local
business tax imposed on gross sales or receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4, 2009)
14.
A lawful tax on a new subject, or an increased tax on an old one, does not interfere with a
contract or impairs its obligation, within the meaning of the constitution. (Tolentino v. Secretary of Finance,
et al., and companion cases, 235 SCRA 630)

15.
The withdrawal of a tax exemption should not be construed as prohibiting future grants of
exemption from all taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R.
No. 143867, August 22, 2001)
16.
Tax exemptions in franchises are always subject to withdrawal. A legislative franchise is
granted with the express condition that it is subject to amendment, alteration, or repeal. (1987 Constitution, Art.
XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix
obligations as between parties, but the reservation of essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes
the maintenance of a government which retains adequate authority to secure the peace and good order of society.
(Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al.,
etc., G. R. No. 143867, August 22, 2001 made the observation that since Smart’s franchise was granted after the
effectivity of the Local Government Code that its tax exemption privilege was reinstated. However,Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 is explicit in its
holding that Smart is not entitled to a tax exemption.
 17. When withdrawal of a tax exemption impairs the obligation of contracts. The Contract
Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a
tax exemption has been granted for a valid consideration. (Smart Communications, Inc. v. The City of Davao, etc.,
et al., G. R. No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G. R. No. 115455, August
25, 1994, 235 SCRA 630, 685) The author opines that since practically all franchises granted to
telecommunications companies are similarly worded that the above doctrine finds application to the others)
18. The primary reason for the withdrawal of tax exemption privileges granted to government
owned and controlled corporations and all other units of government was that such privilege resulted to serious
tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for
these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges
due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
19.
National Power Corporation (NPC) is of the insistence that it is not subject to the payment
of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the
Republic of the Philippines. It is thus, an instrumentality of the National Government which is exempt
from local taxation. As such it is not a private corporation engaged in “business enjoying franchise”
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc .,
G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose
and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously
enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax
notwithstanding the grant of tax exemption to them.
20.
“In lieu of all taxes” in the franchise of ABS-CBN does not exempt it from local franchise
taxes. It does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the
exemption would include both local, whether municipal, city or provincial, and national tax. Whether the “in lieu of
all taxes provision” would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly established and cannot be made out of
inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the “in lieu of all
taxes” provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered
by the exemption so claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another
telecommunications company Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the others.)
 21. “In lieu of all taxes” refers to national internal revenue taxes and not to local taxes. The
“in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. As appropriately
pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption
from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed
under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The
proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable

for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of
Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly
authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph
declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in
Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the
National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in
lieu of all taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes,
Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have
used the language in Section 9(b) of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any
authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x
x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all
taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict
construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national
and not to local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594
(2003)]
NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications
companies.
22.
The “in lieu of all taxes” clause in the franchise of ABS-CBN has become functus officio
with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding
Ten Million Pesos. The clause “in lieu of all taxes” does not pertain to VAT or any other tax. It cannot apply
when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with
yearly gross receipts exceeding ten million pesos has been abolished, the “in lieu of all taxes” clause has now
become functus officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another
telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the others.)
 23. Double taxation in its generic sense, this means taxing the same subject or object twice
during the same taxable period. In its particular sense, it may mean direct duplicate taxation, which is prohibited
under the constitution because it violates the concept of equal protection, uniformity and equitableness of
taxation. Indirect duplicate taxation is not anathematized by the above constitutional limitations.
 24. Elements of direct duplicate taxation:
a.
Same
1)
Subject or object is taxed twice
2)
by the same taxing authority
3)
for the same taxing purpose
4)
during the same taxable period
b.
Taxing all of the subjects or objects for the first time without taxing all of them for the second time.
If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the
constitution.
NOTES AND COMMENTS:
a.
Presence of the 2nd element violates the equal protection clause. If only the 1stelement is
present, taxing the same subject or object twice, by the same taxing authority, etc., there is no violation of the equal
protection clause because all subjects and objects that are similarly situated are subject to the same burdens and
granted the same privileges without any discrimination whatsoever,
The presence of the 2 nd element, taxing all of the subjects and objects for the first time, without taxing all for
the second time, results to discrimination among subjects and objects that are similarly situated, hence violative of
the equal protection clause.
25. Double taxation a valid defense against the legality of a tax measure if the double taxation is
direct duplicate taxation, because it would violate the equal protection clause of the constitution.
26.
When an item of income is taxed in the Philippines and the same income is taxed in
another country, this would be known as international juridical double taxation which is the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical
grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al.,G.R. No. 127105, June 25, 1999)

 27. Methods for avoiding double taxation (indirect duplicate taxation).
a.
Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign
taxation under the principle of reciprocity.
b.
Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid.
c.
Allowing foreign taxes as a deduction from gross income.
28.
Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an
allowance against the tax itself, or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after
applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G. R. No. 159647, April 15, 2005)
29.
A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is
allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due.
A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. ( Commissioner
of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)
 30.
The petitioners allege that the R-VAT law is constitutional because the Bicameral
Conference Committed has exceeded its authority in including provisions which were never included in
the versions of both the House and Senate such as inserting the stand-by authority to the President to
increase the VAT from 10% to 12%; deleting entirely the no pass-on provisions found in both the House
and Senate Bills; inserting the provision imposing a 70% limit on the amount of input tax to be credited
against the output tax; and including the amendments introduced only by Senate Bill No. 1950 regarding
other kinds of taxes in addition to the value-added tax. Thus, there was a violation of the constitutional
mandate that revenue bills shall originate exclusively from the House of Representatives.
Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate
the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and
modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it
for reconciliation.
The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative
practice of giving said conference committee ample latitude for compromising differences between the Senate and the
House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion
cases]
31. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of
taxation. Do you agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of
taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would have been prohibited with
the proclamation of the constitutional provision. Sales taxes are also regressive. . [Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of
Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]
32.
All revenues and assets of non-stock, non-profit educational institutions that are actually,
directly and exclusively used for educational purposes shall be exempt from taxation.
33.
Revenues and
cooperatively owned, may be
restrictions on dividends and
exemptions, other the exemptions

assets of proprietary educational institutions, including those which are
entitled to exemptions subject to limitations provided by law including
provisions for reinvestments. There is no law at the present which grants
granted to cooperatives.

OTHER CONCEPTS
1.

Distinguish tax from debt.
TAX

Basis

based on law

Failure to Pay

may result in
imprisonment
generally payable in
money
not assignable
unless it becomes a
debt is not subject to

Mode of
Payment
Assignability
Payment

DEBT
based on contract or
judgment
no imprisonment
payable in money,
property or service
assignable
may be a subject

Interest
Authority
Prescription

compensation or set-off
does not draw interest
unless delinquent
imposed by public
authority
Prescriptive periods for
tax under NIRC

draws interest if
stipulated or delayed
can be imposed by
private individuals
debt under the Civil
Code

WARNING: Do not use the above arrangement in answering Bar questions.
2.
Compensation takes place by operation of law, where the local government and the taxpayer are in
their own right reciprocally debtors and creditors of each other, and that the debts are both due and demandable, in
consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
 3. May there be compensation or set-off between a national tax and a debt ? Reason out your
answer.
SUGGESTED ANSWER: As a general rule, there could be no compensation or
set-off
between
a
tax
and
a
debt
for
the
following
reasons:
a.
Lifebl
ood theory.
b.
Taxes are not contractual
obligations but arise out of a duty to, and are the positive acts of government, to the making and enforcing of
which the personal consent of the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA
622)
c.
Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off.
Thus, it is correct to say that the offsetting of a taxpayer’s tax refund with its alleged tax deficiency is
unavailing under Art. 1279 of the Civil Code. (South African Airways v. Commissioner of Internal Revenue, G.R.
No. 180356, February 16, 2010 reiterating Caltex Philippines, Inc. v. Commission on Audit, which applied Francia
v. Intermediate Appellate Court)
4.
Exceptions:
When
set-off
or
compensation
allowed
for
local
taxes.
a.
Where both claims already become
overdue and demandable as well as fully liquidated. Compensation takes place by operation of law under Art. 1200
in relation to Arts. 1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443)
b.
Compensation takes place by operation of law, where the
government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the
debts are both due and demandable. This is in consequence of Article 1278 and 1279 of the Civil Code. ( Domingo
v. Garlitos, 8 SCRA 443)
c.
,The Supreme Court upheld
the validity of a set-off between the taxpayer and the government. In both cases, the claims of the taxpayers
therein were certain and liquidated. The claims were certain since there were no doubts or disputes as to their
refundability. In
fact,
the
government
admitted
the
fact
of
overpayment.
(Commissioner of
Internal Revenue v.
Esso
Standard
Eastern,
Inc., 172
SCRA
364)
d.
In case of a tax overpayment, the BIR’s obligation to refund or off-set arises
from the moment the tax was paid. REASON: Solutio indebeti. (Commissioner of Internal Revenue v. Esso
Standard
Eastern,
Inc 172
SCRA
364)
e.
While judgment
should be rendered in favor of Republic for unpaid taxes, judgment ought at the same time to issue for Sampaguita
Pictures commanding payment to the latter by the Republic of the value of the backpay certificates which the
Republic received. (Republic v. Ericta, 172 SCRA 623)
 5. Gilbert obtained a judgment for a sum of money against the municipality of Camiling.
The judgment has become final although execution has not issued. Upon receiving an assessment for
municipal sales taxes from the Municipal Treasurer, Gilbert executed a partial assignment of his
judgment sufficient to cover the assessment in favor of the Municipality. May the Municipal Treasurer
validly accept the assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are mutually debtors and creditors of each other, and
since both of the claims became overdue, demandable and fully liquidated, compensation takes place by operation
of law. Such was the holding in Domingo v. Garlitos, 8 SCRA 443, a case decided by the Supreme Court whose
factual
antecedents
are
similar
to
the
problem.
6.
In case of doubt, tax laws must be construed strictly
against the State and liberally in favor of the taxpayer because taxes, as burdens which must be endured by
the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
7.
Interpretation in the imposition of taxes, is not the similar doctrine as that applied to
tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax

unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words
for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens are not to
be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. [Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v. Court of
Appeals, 338 Phil. 322, 330-331 (1997)] As burdens, taxes should not be unduly exacted nor assumed beyond
the plain meaning of the tax laws. (Ibid., citing CIR v. Philippine American Accident Insurance Company, Inc.,G.R.
No. 141658, March 18, 2005, 453 SCRA 668)

8.
Strict interpretation of tax exemption laws. Taxes are what civilized people pay for civilized
society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly
shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is
the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA
667, 680) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the
exemption so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)
9.
Rationale for strict interpretation of tax exemption laws. The basis for the rule on strict
construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and
foster impartiality, fairness and equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He who claims an exemption from his share of
common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest
and most unambiguous language and not left to mere implications. It has been held that “exemptions are never
presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of
inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule and
exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous
terms. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
10.
Why are tax exemptions are strictly construed against the taxpayer and liberally in favor
of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.
11.
In case of a tax overpayment, where the BIR’s obligation to refund or set-off arises from
the moment the tax was paid under the principle of solutio indebeti. (Commissioner of Internal Revenue v.
Esso Standard Eastern, Inc, 172 SRCA 364)
12.
But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which held
that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that
its payment of the customs duties was in excess of what was required by the law at the time the subject 16
importations of milk and milk products were made. Unless shown otherwise, the disputable presumption of regularity
of performance of duty lies in favor of the Collector of Customs.
13.
Strict interpretation of a tax refund that partakes of the nature of a tax does not apply
to tax refund based on erroneous payment or where there is no law that authorizes collection of the
tax. There is parity between tax refund and tax exemption only when the former is based either on a tax
exemption statute or a tax refund statute. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.
R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the
legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another.
[Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City
of Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti,which
covers not only mistake in fact but also mistake in law. (Commissioner, supra citing CIVIL CODE,Arts. 2142, 2154
and 2155)
The Government is not exempt from the application of solutio indebiti. (Commissioner,
supraciting Commissioner of Internal Revenue v. Fireman’s Fund Insurance Co., G.R. No. L-30644, 9 March 1987,
148 SCRA 315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to refund
without any unreasonable delay what it has erroneously collected. (Commissioner, supra citingCommissioner of

Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, it must hold itself against the same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly enrich itself at the expense of taxpayers. [Commissioner,
supra citing AB Leasing and Finance Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn
citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And so, given its
essence, a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other
ordinary civil case. (Commissioner, supra)
14.
Tax refunds premised upon a tax exemption strictly construed, Tax exemption is a result
of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by
showing that the legislature intended to exempt him by words too plain to be mistaken. [Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated Mining
Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, 119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly and distinctly show that such was the intention.
[Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal Revenue, et al., 127 Phil. 461, 472
(1967); Manila Electric Company v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the
rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical
language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to
be mistaken. [Commissioner, supra with a note to see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732733; Philex Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999); Davao Gulf Lumber
Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-892 (1998); . Commissioner of Internal Revenue v.
Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer. A
reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, for
after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its
agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
16.
A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. (Philippine Banking Corporation, etc., v.
Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)
17.
The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to
start a clean slate, and to
b. give the government a chance to collect
uncollected tax from
tax evaders without having to
go
through the tedious process of a tax case. (Banas, Jr. v. Court
of Appeals, et al.,G.R. No. 102967,
February 10, 2000)
18.
Tax amnesty distinguished from tax exemption.
a.
Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from
nonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax exemption is an
immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others
are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b.
Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda,supra)
WHILE tax exemption has prospective application.
19.
Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the
use of illegal means to escape the payment of taxes.
20.
Tax evasion connotes the integration of three factors:
a.
The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due,
or the non-payment of tax when it is shown that a tax is due;
b.
an accompanying state of mind which is described as being “evil” on “bad faith,” “willful,” or
”deliberate and not accidental”; and
c.
a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The
Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)

21.
Tax avoidance distinguished from tax evasion.
a.
Tax avoidance is legal while tax evasion is illegal.
b.
The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax
evasion the object is to entirely escape the payment of taxes.
c.
Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax
avoidance does not.

22.
Tax sparing is a provision in some tax treaties which provides that the state of residence allows
as credit the amount that would have been paid, as if no reduction has been made. (Vogel, Klaus on Double
Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?, Philippine
Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income is exempt from taxation in order to encourage foreign
investments which may lead to economic development. If the tax credit method is used, there would be no more
tax to credit since there is no more tax to credit as a result of the tax exemption. Consequently, when the tax
method credit method is applied to these items of income, such incentives are siphoned off since, in effect, the tax
benefits are cancelled out. (Ibid.) Thus, the need for the tax sparing provision.
NATIONAL INTERNAL REVENUE CODE
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE
1.
Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry into bank
deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue is only authorized
to inquire into the bank deposits of:
a.
a decedent to determine his gross estate; and
b.
any taxpayer who has filed an application for compromise of his tax liability by reason of financial
incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997]
c.
A taxpayer who authorizes the Commissioner to inquire into his bank deposits.
2.
Purpose of the NIRC of 1997. Revenue generation has undoubtedly been a major
consideration in the passage of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G.
R.
Nos.
167274-75,
July
21,
2008)
3.
Purpose of shift from ad valorem system to specific tax system in
taxation
of
cigarettes. The
shift
from
the ad
valorem system
to
the
specific
tax
system
is likewise meant to promote fair competition among the players in the industries concerned, to ensure an
equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes, among others,
into high, medium and low-priced based on their net retail price and accordingly graduating tax
rates. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
TAX ON INCOME
1.
The Tax Code has included under the term “corporation” partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]
2.
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the term
partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is carried on.
3.
Certain business organizations do not fall under the category of “corporations” under the
Tax Code, and therefore not subject to tax as corporations, include:
a.
General professional partnerships;
b.
Joint venture or consortium formed for the purpose of undertaking construction projects engaging
in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or consortium agreement
under a service contract with the Government. [1st sentence, Sec. 22 (B), BIRC of 1997]
 4. Co-heirs who own inherited properties which produce income should not automatically
be considered as partners of an unregistered corporation subject to income tax for the following reasons:

a. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the returns are derived. There must be an
unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 436)
b.
There is no contribution or investment of additional capital to increase or expand the inherited
properties, merely continuing the dedication of the property to the use to which it had been put by their
forebears. (Ibid.)
c.
Persons who contribute property or funds to a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common stock capital, and no community of interest
as principal proprietors in the business itself from which the proceeds were derived. (Elements of the Law of
Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
5.
The common ownership of property does not itself create a partnership between the
owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among
themselves as to the management and use of such property and the application of the proceeds
therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal
Revenue, 166 SCRA 560)
6.
The income from the rental of the house, bought from the earnings of co-owned
properties, shall be treated as the income of an unregistered partnership to be taxable as a corporation
because of the clear intention of the brothers to join together in a venture for making money out of rentals.
7.
Income is gain derived and severed from capital, from labor or from both combined. For example,
to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of Internal Revenue
v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
8.
The term taxable income means the pertinent items of gross income specified in the Tax Code, less
the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax
Code or other special laws. (Sec. 31, NIRC of 1997)
9.
The cancellation and forgiveness of indebtedness may amount to (a) payment of income; (b)
gift; or to a (c) capital transaction depending upon the circumstances.
10.
If an individual performs services for a creditor who, in consideration thereof, cancels the
debt, it is income to the extent of the amount realized by the debtor as compensation for his services.
11.
An insolvent debtor does not realize taxable
forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th)

income

from

the

cancellation

or

12.
The insolvent debtor realizes income resulting from the cancellation or forgiveness of
indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)
13.
If a creditor merely desires to benefit a debtor and without any consideration therefor
cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included in the
latter’s income.
14.
If a corporation to which a stockholder is indebted forgives the debt, the transaction has
the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2)
15.
Members of cooperatives not subject to tax on the interest earned from their deposits with
the cooperative. No less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the
Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10
of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national
development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall
include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the
foregoing provisions, we find that an interpretation exempting the members of cooperatives from the imposition of the final tax
under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our
Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, G. R.
No.
182722,
January
22,
2010)
In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role

they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the
government, the State’s power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of
Justice Isagani A. Cruz: “The power of taxation, while indispensable, is not absolute and may be subordinated to the demands
of social justice.” (Ibid., citing Commissioner of Internal Revenue v. American Express International, Inc. (Philippine
Branch), 500 Phil. 586 (2005).
16.
The Global system of income taxation is a system employed where the tax system views
indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v.
del Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income taxation is a system employed where the income tax treatment
varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237
SCRA 324, 331)
18. Under the National Internal Revenue Code the global system is applicable to taxable
corporations and the schedular to individuals.
19.
Compensation income is considered as having been earned in the place where the service
was rendered and not considered as sourced from the place of origin of the money.
20.
Payment for services, other than compensation income, is considered as having been
earned at the place where the activity or service was performed.
21.
A non-resident alien, who has stayed in the Philippines for an aggregate period of more
than 180 days during any calendar year, shall be considered as a non-resident alien doing business in
the Philippines. Consequently, he shall be subject to income tax on his income derived from sources from within the
Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to
the rule on reciprocity.
 22. What are considered as de minimis benefits not subject to withholding tax on
compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER:
a.
Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;
b.
Medical cash allowance to dependents of employees not exceeding P750.00 per employee per
semester or P125 per month;
c.
Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than
P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f.
Laundry allowance not exceeding P300 per month;
g.
Employees achievement awards, e.g. for length of service or safety achievement, which must be in
the form of a tangible persona property other than cash or gift certificate, with an annual monetary value not
exceeding P10,000.00 received by an employee under an established written plan which does not discriminate in favor
of highly paid employees;
h.
Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee
per annum;
i.
Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on
account of illness, marriage, birth of a baby, etc.; and
j.
Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic
minimum wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in
determining the P30,000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code. However, if the
employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee
receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided, further, that any amount given
by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall
constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev.
Regs. No. 8-2000]
23.
Income subject to “final tax” refers to an income collected through the withholding tax
system. The payor of the income withholds the tax and remits it to the government as a final settlement of the
income tax as a final settlement of the income tax due on said income. The recipient is no longer required to include
the income subjected to a final tax as part of his gross income in his income tax return.

 24. Distinguish exclusions from deductions.
SUGGESTED ANSWER:
a.
Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part
of gross income for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is
exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of
income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the amounts which the law allows to be subtracted from
gross income in order to arrive at net income.
b.
Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation
of net income.
c.
Exclusions are something received or earned by the taxpayer which do not form part of gross income
WHILE deductions are something spent or paid in earning gross income.
An example of an exclusion from gross income are life insurance proceeds, and an example of a deduction are
losses.
 25. What are excluded from gross income ?
SUGGESTED ANSWER:
a.
Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured
whether in a single sum or otherwise.
b.
Amounts received by the insured as a return of premiums paid by him under life insurance,
endowment or annuity contracts either during the term, or at maturity of the term mentioned in the contract, or upon
surrender of the contract.
c.
Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or Workmen’s Compensation Acts as compensation
for personal injuries or sickness, plus the amounts of any damages received on whether by suit or agreement on
account of such injuries or sickness.
e.
Income of any kind to the extent required by any treaty obligation binding upon the Government of
the Philippines.
f.
Retirement benefits received under Republic Act No. 7641. Retirement received from reasonable
private benefit plan after compliance with certain conditions. Amounts received for beyond control
separation. Foreign social security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS
benefits.
 26.
What are the conditions for excluding retirement benefits from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
a.
Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with the employer’s reasonable private
benefit plan approved by the BIR.
b.
Retiring official or employee
1)
In the service of the same employer for at least ten (10) years;
2)
Not less than fifty (50) years of age at time of retirement;
3)
Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or
employee should not have previously availed of the privilege under the retirement plan of the same or another
employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]
 27. What kind of separation (retirement) pay is excluded from gross income, hence taxexempt ?
SUGGESTED ANSWER:
a.
Any amount received by an official, employee or by his heirs,
b.
From the employer
c.
As a consequence of separation of such official or employee from the service of the employer
because of
1)
Death, sickness or other physical disability; or
2)
For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRC of 1997],
such as retrenchment, redundancy and cessation of business. [1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
28.
What are the Itemized deductions from gross income and who may avail of them ?
a. Ordinary and necessary trade, business or professional expenses.
b.
The amount of interest paid or incurred within a taxable year on indebtedness in connection with
the taxpayer’s profession, trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic

corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
c. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
 d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
 e.
Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within
the taxable year, connected with profession, trade or business, not sustained between related parties.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
f.
Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
g.
Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a natural
resource.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
 h. Charitable and other contributions. Resident citizens, resident alien individuals and nonresident
alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
i. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer
in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account but
not chargeable to property of a character which is subject to depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.

k. Insurance premiums for health and hospitalization. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Nonresident citizens and nonresident alien individual
engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on their gross incomes and
from compensation income are allowed to deduct these premiums. Nonresident citizens on their gross incomes from
within may also deduct this expense. Nonresident alien individuals engaged in trade or business in the Philippines are
allowed to deduct these exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
 29. Distinguish ordinary expenses from capital expenditures.
SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of
the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable
year. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. Necessary
expenses are those which are appropriate or helpful to the business.
 30. What are the requisites for the deductibility of business expenses ?
SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses:
a.
Compliance with the business test:
1)
Must be ordinary and necessary;
2)
Must be paid or incurred within the taxable
year;
3)
Must be paid or incurred in carrying on a trade or business.
4)
Must not be bribes, kickbacks or other illegal
expenditures
b. Compliance with the substantiation test. Proof by evidence or records of the deductions allowed by law
including compliance with the business test.
 31. What are the requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a.
the expense must be ordinary and necessary;
b.
it must have been paid or incurred during the taxable year dependent upon the method of
accounting upon the basis of which the net income is computed.
c.
it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)
 32.
TMG Corporation is issuing the accrual method of accounting. In 2005 XYZ Law
Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the
following year 2006. Since the bills for legal and auditing services were received only in 2006 and paid in
the same year, TMG deducted the same from its 2006 gross income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legal fees in the
year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005, there was
already an obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural Corporation, G. R. No.
172231, February 12, 2007)
NOTES AND COMMENTS:
a.
Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
The two (2) principal accounting methods for recognition of income are the (a) accrual method; and the
(b) cash method.
b.
Recognition of income and expenses under the accrual method of accounting. Amounts of
income accrue where the right to receive them becomes fixed, where there is created an enforceable
liability. Liabilities, are incurred when fixed and determinable in nature without regard to indeterminacy merely of
time of payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12,
2007)
The accrual of income and expense is permitted when the all-events test has been met. (Ibid.)
c.
All-events test. This test requires:
1)
fixing of a right to income or liability to pay; and
2)
the availability of the reasonable accurate determination of such income or liability.
The test does not demand that the amount of such income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.

The all-events test is satisfied where computation remains uncertain; if its basis is unchangeable, the test
is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The
amount of liability does not have to be determined exactly,; it must be determined with “reasonable accuracy” implies
something less than an exact or completely accurate amount.
The propriety of an accrual must be judged by the fact that a taxpayer knew, or could reasonably be expected
to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction. (Commissioner of Internal Revenue v, Isabela cultural Corporation,G. R. No. 172231, February 12, 2007)
d.
Under the cash method income is to be construed as income for tax purposes only upon actual
receipt of the cash payment. It is also referred to as the “cash receipts and disbursements method” because both the
receipt and disbursements are considered. Thus, income is recognized only upon actual receipt of the cash payment
but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash.
33. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe
benefits furnished, granted or paid by the employer to the employee, except rank and file employees. [1st par., Sec.
2.33 (A), Rev. Regs. No. 3-98]
 34. What is meant by “fringe benefit” for purposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service, or other benefit
furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees),
such as but not limited to:
a.
Housing;
b.
Expense account;
c.
Vehicle of any kind;
d.
Household personnel, such as maid, driver and others;
e.
Interest on loan at less than market rate to the extent of the difference between the market rate and
actual rate granted;
f.
Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
g.
Expenses for foreign travel;
h.
Holiday and vacation expenses;
i.
Educational assistance to the employee or his dependents; and
j.
Life or health insurance and other non-life insurance premiums or similar amounts in excess of what
the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
35.
Fringe benefits that are not subject to the fringe benefits tax:
a.
When the fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer; or
b.
When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC of
1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c.
Fringe benefits which are authorized and exempted from income tax under the Tax Code or under
any special law;
d.
Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
e.
Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
f.
De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of
Finance upon recommendation of the Commissioner of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec.
2.33 (C), Rev. Regs. No. 3-98]
36. De minimis benefits are facilities and privileges (such as entertainment, medical services, or
so-called “courtesy discounts” on purchases), furnished or offered by an employer to his employees. They are not
considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or
furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
 37. Preferred shares are considered capital regardless of the conditions under which such shares
are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income
of corporations. (Revenue Memorandum Circular No. 17-71)
 38. Bad debts are those which result from the worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods
sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)

 39. Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a.
Members of the same family. The family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b.
An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual;
c.
Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual;
d.
A grantor and a fiduciary of any trust; or
e.
The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect
to each trust; or
f.
A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
 40. What are the requisites for valid deduction of bad debts from gross income ?
SUGGESTED ANSWER:
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 taxpayer’s 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; and
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. [Sec. 34 (E) (1), NIRC of 1997;
Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. 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. (Sec. 103,
Rev. Regs. No. 2)
:
 41. What is the “tax benefit” rule ?
SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as
deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.
NOTES AND COMMENTS:
a.
If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the
income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be
treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
b.
If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did
not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business
operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof
shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable
income. (Sec. 4, Rev. Regs. 5-99)
42.
Depreciation is the gradual diminution in the useful value of tangible property resulting from
ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of
intangible assets the use of which in the trade or business is definitely limited in duration.
43.
The methods of depreciation are the following:
a.
Straight line method;
b.
Declining balance method;
c.
Sum of years digits method; and
d.
Any other method prescribed by the Secretary of Finance upon the recommendation of the
Commissioner of Internal Revenue:
1)
Apportionment to units of production;
2)
Hours of productive use;
3)
Revaluation method; and
4)
Sinking fund method.
44.
What are personal and additional exemptions ?
SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of an individual allowed
to be deducted from the gross or net income of an individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the
minimum of subsistence, taking into account the personal status and additional qualified dependents of the
taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and
until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a

taxpayer are fixed as predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No.
159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)]
45. What is the amount allowed as basic personal exemption ?
SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand
pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouse is deriving gross income, only such spouse
shall be allowed the personal exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79
(I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the spouses may claim the
P50,000.00. Thus, the total familial basic personal exemption for spouses is P100,000.00.
Furthermore, the distinctions between the concepts of single, married and head of the family for purpose of
availing of the basic personal exemption has already been eliminated by Rep. Act No. 9504.
45. What are the amounts of additional exemptions ?
SUGGESTED ANSWER: “An individual,
a.
whether single or married,
b.
shall be allowed an additional exemption of Twenty-Five Thousand Pesos (P25,000.00)
c.
for each qualified dependent child,
d.
provided that the total number of dependents for which additional exemptions may be claimed
1)
shall not exceed four (4) dependents.” [1st par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by
Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as amended by Rep. Act
No. 9504]
NOTES AND COMMENTS:
a.
It is clear that under the amendment, single individuals may now claim for the additional
exemptions. Furthermore, the concept of head of a family does not find application anymore.
b.
“A dependent means
a.
a legitimate, illegitimate or legally adopted child
b.
chiefly dependent upon and living with the taxpayer
c.
if such dependent is
1)
not more than twenty-one (21) years of age,
2)
unmarried and
3)
not gainfully employed or
d.
if such dependent,
1)
regardless of age
2)
is incapable of self-support
3)
because of mental or physical defect.” [2nd par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended
by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997, as amended by Rep.
Act No. 9504]
c.
It is to be noted that under the NIRC of 1997, as amended by Rep. Act No. 9504, only qualified
dependent children are considered for additional exemptions. Grandparents, parents, as well, as brothers or
sisters, and other collateral relatives are not qualified dependents to be claimed as additional exemptions.
However, if they are senior citizens they may qualify as additional exemptions under the “Senior Citizens
Law” but not under the NIRC of 1997, as amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code, as
amended, and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the
privileges granted by the Code insofar as having dependents are concerned. [last par. Sec. 5 (a), Rep. Act No.
7432, as amended by Rep. Act 9257, “The Expanded Senior Citizens Act of 2003”]
47. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his
trade or business, and which are not included among the real properties considered as ordinary assets. (Sec. 2.a,
Rev. Regs. No. 7-2003)
The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or
business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year, or
c. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or
d. Property used in the trade or business, of a character which is subject to the allowance for depreciation; or real
property used in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering
and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
48.
a.

Examples of capital assets:
Stock and securities held by taxpayers other than dealers in securities;

b.
c.
d.
e.

Jewelry not used for trade and business;
Residential houses and lands owned and used as such;
Automobiles not used in trade and business;
Paintings, sculptures, stamp collections, objects of arts which are not used in trade or business;
f.
Inherited large tracts of agricultural land which were subdivided pursuant to the government
mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g.
“Real property used by an exempt corporation in its exempt operations, such as a corporation
included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and
therefore considered as capital asset.” (last sentence, 3rd par., Sec. 3.b, Rev. Regs. No. 7-2003)
h.
“Real property, whether single detached, townhouse, or condominium unit, not used in trade or
business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of
condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of
Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset.” (last par., Sec. 3.b.,
Rev. Regs. No. 7-2003)
49. Ordinary assets shall refer to all real properties specifically excluded from the definition of
capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of a taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business; or
c. Real property used in trade or business (i.e. buildings and/or improvements), of a character which is subject
to the allowance for depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)
 50.. Examples of ordinary assets hence not capital assets:
a.
The machinery and equipment of a manufacturing concern subject to depreciation;
b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of which are for rent or for sale;
d.
The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture factory;
e.
Inherited parcels of land of substantial areas located in the heart of Metro Manila, which were
subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not
for the purpose of simply liquidating the estate but to make them more saleable ; the employment of an attorney-infact for the purpose of developing, managing, administering and selling the lots; sales made with frequency and
continuity; annual sales income from the sales was considerable; and the heir was not a stranger to the real estate
business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good roads, concrete gutters, drainage and
lighting systems converts the property to an ordinary asset. The property forms part of the stock in trade of the
owner, hence an ordinary asset. This is so, as the owner is now engaged in the business of subdividing real estate.
(Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672)
51. Tax treatment of real properties that have been transferred. Real properties classified as
capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the
buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in
accordance with the following rules:
a. Real property transferred through succession or donation to the heir or donee who is not engaged in the
real estate business with respect to the real property inherited or donated, and who does not subsequently use such
property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.
b. Real property received as dividend by stockholders who are not engaged in the real estate business and
who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the
recipient even if the corporation which declared the real property dividend is engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary asset in the hands of the
transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is
engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business
the property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
 52. The tax is “imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as capital
assets.” [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined real property as having “the
same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the ‘Civil Code
of the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003)
 53. Transactions covered by the presumed capital gains tax on real property:
a.
sale,

b.
exchange,
c.
or other disposition, including pacto de retro sales and other forms of conditional sales. [Sec.
24 (D) (1), NIRC of 1997, numbering and arrangement supplied]
d. “
Sale, exchange, or other disposition” includes taking by the government through condemnation
proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121
Phil. 861)
54.
In case the mortgagor exercises his right of redemption within one (1) year from the issuance
of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital gains tax shall be imposed
because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized.
[Sec. 3 (1), Rev. Regs. No. 4-99]
55. In case of non-redemption of the property sold upon a foreclosure of mortgage sale, the presumed
capital gains tax shall be imposed, based on the bid price of the highest bidder but only upon the expiration of the one
year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid
within thirty (30) days from the expiration of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
 56. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the
higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or area as determined by the Commissioner of
Internal Revenue after consultation with competent appraisers both from the private and public sectors; or
2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. [Sec. 24
(D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]
It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains
tax. It is the transaction that is taxed not the gain.
57. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real
property considered as capital assets.
 58. The tax liability, of individual taxpayers (not corporate), if any, on gains from sales or
other dispositions of real property, classified as capital assets, to the government or any of its political
subdivisions or agencies or to government owned or controlled corporations shall be determined, at the option of the
taxpayer, by including the proceeds as part of gross income to be subjected to the allowable deductions and/or
personal and additional exemptions, then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of
the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6
(E), both of the NIRC of 1997]
59. The seller of the real property, classified as a capital asset, pays the presumed capital gains
tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24
(D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in relation to Sec. 24 (D)
(1), both of the NIRC of 1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
 60. Excepted from the payment of the presumed capital gains tax are those presumed to have
been realized from the disposition by natural persons of their principal place of residence
a.
the proceeds of which is fully utilized in acquiring or constructing a new principal residence;
b.
within eighteen (18) calendar months from the date of sale or disposition
c.
the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and
d.
the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D) (2), NIRC of
1997]
61.
MBC was incorporated in 1961 and engaged in commercial banking operations since
1987. On May 22, 1987, it ceased operations that year by reason of insolvency and its assets and
liabilities were placed under the charge of a government-appointed receiver. On June 23, 1999, the BSP
authorized MBC to operate as a thrift bank.

In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed in
accordance with the minimum corporate income tax (MCIT). It sought the BIR’s ruling on whether it is
entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. BIR then
ruled that cessation of business activities as a result of being placed under involuntary receivership may
be an economic reason for suspending the imposition of the MCIT.
As a result of the ruling MBC filed an application for refund of the P33 million. Due to the BIR’s
inaction, MBC filed a petition for review with the CTA.
The CTA denied the petition on the ground that MBC is not a newly organized corporation. In a
volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1, 1998 as it did not
close its business operations in 1987 but merely suspended the same. Even if placed under receivership,
the corporate existence was never affected. Thus, it falls under the category of an existing corporation
recommencing its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth taxable year immediately
following the year in which the corporation commenced its business operations. [Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date
when the Certificate of Authority to Operate was issued to it by the Monetary Board, whichever comes later. (Sec. 6,
Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it was authorized by
the BSP to operate as a thrift bank before the MCIT should be applied to it. (Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
NOTES AND COMMENTS:
a.
The MCIT and when should be imposed and the four (4) year grace period. “A minimum
corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following
the year in which such corporation commenced its business operations, when the minimum corporate income tax is
greater than the tax computed under Subsection (A) of this section for the taxable year.” [Sec. 27 (E) (1), NIRC of
1997]
b.
Period when a corporation becomes subject to the MCIT. “(5) Specific rules for determining
the period when a corporation becomes subject to the MCIT (minimum corporate income tax) For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which
the domestic corporation registered with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning
January 1, 1998. x x x” (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006 did not
apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically refers to thrift banks.)
c.
Purpose of the four (4) year grace period. The intent of Congress relative to the MCIT is to
grant a four (43) – year suspension of tax payment to newly organized corporations. Corporations still starting their
business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as
a surprise then when many companies reported losses in their initial years of operations.
Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the
lawmaking body saw the need to provide a grace period of four years from their registration before they pay their
minimum corporate income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue,G. R. No. 168118,
August 26, 2006)
ESTATE TAXES
1. In determining the gross estate of a decedent, are his properties abroad to be
included, and more particularly, what constitutes gross estate ?
SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or a resident alien.
The gross estate of a Filipino citizen or a resident alien comprises all his real property, wherever situated;
all his personal property, tangible, intangible or mixed, wherever situated, to the extent of his interest existing
therein at the time of his death.
The gross estate of a non-resident alien comprises all his real property, situated in the Philippines; all his
personal property, tangible, intangible or mixed, situated in the Philippines, to the extent of his interest existing
therein at the time of his death.
 2.
William
Smith, an American citizen, was a
permanent resident
of
the
Philippines. He died in San Francisco, California. He left 10,000 shares of San Miguel Corporation, a
condominium unit at the Twin
Towers
Building
at
Pasig,
Metro Manila and a house and lot in Miami, Florida.
What assets shall be included in the Estate Tax Return to be filed with the BIR ?
SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be filed with the BIR.
Smith, an American citizen and a permanent resident of the Philippines is considered, for Philippine estate tax
purposes, a resident alien. Consequently, the assets to be included in the Estate Tax Return to be filed with the

BIR should be all property, real or personal, tangible, intangible or mixed, wherever situated, to the extent of the
interest that Smith has at the time of his death. Thus, all of the properties enumerated in the problem irrespective
of where they are situated are includible in the gross estate of Smith.
 3. Proceeds of life insurance includible in a decedent’s gross estate.
a.
The decedent takes the insurance policy on his own life
1) The amounts are receivable by
a)
the decedent’s estate,
b)
his executor, or
c)
administrator irrespective of whether or not the insured retained the power
of revocation, OR
2)
The amounts are receivable by any beneficiary
designated in the policy
of insurance as revocable beneficiary.
[Sec. 85 (E), NIRC of 1997]
b.
One, other than the decedent takes the insurance policy on the life of the decedent
1)
The amounts are receivable by
a)
the decedent’s estate,
b)
his executor, or
c)
administrator
2)
irrespective of whether or not the insured retained the
power of revocation.

1997)

 4. Proceeds of life insurance NOT included in a decedent’s gross estate.
a.
The decedent takes the insurance policy on his own life, and
b.
the proceeds are receivable by a beneficiary designated as irrevocable. [Sec. 85 (E), NIRC of

NOTES AND COMMENTS: The beneficiary must not be the decedent’s estate, executor or administrator,
because the proceeds are includible as part of gross estate whether or not the decedent retained the power of
revocation. (Ibid.)
c.
Where the insurance was NOT taken by the decedent upon his own life and the beneficiary is not
the decedent’s estate, his executor or administrator.
4.
Items deductible from the gross estate of a resident or nonresident Filipino decedent or
resident alien decedent:
a.
Expenses, losses, claims, indebtedness and taxes;
b.
Property previously taxed;
c.
Transfers for public use;
d.
The Family Home up to a value not exceeding P1 million;
e.
Standard deduction of P1 million;
f.
Medical expenses not exceeding P500,000.00;
g.
Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917;
h.
Net share of the surviving spouse in the conjugal partnership.
5.
There is no transfer in contemplation of death if there is no showing that the
transferor “retained for his life or for any period which does not in fact end before his death: (1) the possession or
enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any
person, to designate the person who shall possess or enjoy the property or the income therefrom.” [Sec. 85 (B),
NIRC of 1997]
 6. Vanishing
deduction
(deduction
for
property
previously
taxed),
defined. The deduction allowed from the gross estates of citizens, resident aliens and nonresident estates for
properties which were previously subject to donor’s or estate taxes. The deduction is called a vanishing deduction
because the deduction allowed diminishes over a period of five (5) years.
It is also known as a deduction for property previously taxed.
 7. Vanishing deduction (property previously taxed) allowed as a deduction from the gross
estate of a Filipino citizen, whether resident or not, of a resident alien decedent, or of a nonresident
alien decedent.
a.
An amount equal to the value specified below of
b.
Any property forming a part of the gross estate situated in the Philippines
c
Of any person who died within five years prior to the death of the decedent, or transferred to
the decedent by gift within five years prior to his death,
d.
Where such property can be identified as having been received by the decedent from the donor by
gift, or from such prior decedent by gift, bequest, devise, or inheritance, or
e.
Which can be identified as having been acquired in exchange for property so received:

100% of the value if the prior decedent died within one year prior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his death;
80% of the value if the prior decedent died more than one year but not more than two years prior to the
death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
60% of the value if the prior decedent died more than two years but not more than three yearsprior to the
death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
40% of the value if the prior decedent died more than three years but not more than four yearsprior to the
death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
and
20% of the value if the prior decedent died more than four years but not more than five yearsprior to the
death of the decedent, or if the property was transferred to him by gift within the same period prior to his
death. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering, arrangement and underlining supplied]
 8.
The approval of the court sitting in probate, or as a settlement tribunal over the estate of
the deceased is not a mandatory requirement for the collection of the estate. The probate court is
determining issues which are not against the property of the decedent, or a claim against the estate as such, but is
against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the
decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same can no longer be contested by
means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)
DONOR’S TAXES
 1.
What is the donor’s tax rate if the donee is a stranger ?
SUGGESTED ANSWER:
When the donee or beneficiary is a stranger, the tax payable by the donor shall be
30% of the net gifts.
 2.
For purposes of the donor’s tax who is a stranger ?
SUGGESTED ANSWER: A stranger is a is person who is not a:
a.
Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
b.
Relative by consanguinity in the collateral line within the fourth degree of relationship.” [Sec. 99 (B),
NIRC of 1997]
NOTES AND COMMENTS: All relatives by affinity, irrespective of the degree, are considered as strangers.
3.
What is the tax base for donations ?
SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. 99 (A), NIRC of 1997]
4.
For purposes of the donor’s tax, what is meant by “net gifts ?”
SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. Accordingly,
if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage
liability, then the net gift is measured by deducting from the fair market value of the property the amount of the
mortgage assumed. (last par., Sec. 11, Rev. Regs.No.2-2003)
5.
How are gifts of personal property to be valued for donor’s tax purposes ?
SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered
the amount of the gift. (Sec. 102, NIRC of 1997)
6.
What is the valuation of donated real property for donor’s tax purposes ?
SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift.
However, the appraised value of the real property at the time of the gift shall be whichever is the higher of:
a.
the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or
b.
the fair market value as shown in the schedule of values fixed by the Provincial and City
Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997]
 7.
A died leaving as his only heirs, his surviving spouse B, and three minor children, X, Y and
Z. Since B does not want to participate in the distribution of the estate, she renounced her hereditary
share in the estate.
a.
Is the renunciation subject to donor’s tax ? Explain.
SUGGESTED ANSWER: No. The general renunciation by an heir, including the surviving spouse, as in the
case B, of her share in the hereditary estate left by the decedent is not subject to donor’s tax. (4 thpar., Sec. 11,
Rev. Regs. No. 2-2003)

This is so because the general renunciation by B was not specifically and categorically done in favor of
identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate.
b.
Supposing that instead of a general renunciation, B renounced her hereditary share in
A’s estate to X who is a special child, would your answer be the same ? Explain.
SUGGESTED ANSWER: My answer would be different. The renunciation in favor of X would be subject to
donor’s tax.
This is so because the renunciation was specifically and categorically done in favor of X and identified heir
to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4thpar., Sec. 11, Rev.
Regs. No. 2-2003)
 8. Give some donations that are exempt from donor’s tax.
SUGGESTED ANSWER:
a.
The first P100,000.00 net donation during a calendar year is exempt from donor’s tax [Sec. 99 (A),
NIRC of 1997] made by a resident or non resident;
b.
The donation by a resident or non-resident of a prize to an athlete in an international sports
tournament held abroad and sanctioned by the national sports association is exempt from donor’s tax (Sec. 1, Rep.
Act No. 7549)
c.
Political contributions made by a resident or non-resident individual if registered with the COMELEC
irrespective of whether donated to a political party or individual.
However, the Corporation Code prohibits corporations from making political contributions. (Corp. Code, Title
IV, Sec. 36.9)
d.
Dowries or gifts made on account of marriage and before its celebration or within one year
thereafter by residents who are parents to each of their legitimate, recognized natural, or adopted children to the
extent of the first ten thousand pesos (P10,000.00);
e.
Gifts made by residents or non-residents to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for profit, or to any political subdivisions of the said
Government;
f.
Gifts made by residents or non residents in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research
institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used
by such donee for administration purposes. [Sec. 101 (A), NIRC of 1997, numbering and arrangement supplied]
g.
Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from
donor’s taxes because taxation is basically territorial. The transaction, which should have been subject to tax was
made by non-resident aliens and took place outside of the Philippines.
 9. What is the concept of donation or gift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in
order to avail of lower donor’s taxes.
In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first cousin. The P200,000.00 is the
totality of the net gifts for 2008. If he donated the P200,000.00 in 2008 the first P100,000 would be exempt
and the remaining P50,000.00 would be subject to donor’s tax
If Leon spreads the P200,000 donation over two (2) calendar years, donating P100,000.00 on December
30, 2008 and the remaining P100,000.00 on January 1, 2009 the transaction would be exempt from donor’s
tax. This is so even if the donation is separated only by two days because the basis is the calendar year. Leon
would be enjoying the exemption for the first P100,000.00 net gifts for each calendar year.
10.
A, who is engaged in the car “buy and sell” business sold to B P7 million Jaguar for
only P4 million. The proper VAT on the sale was paid. If you are the BIR examiner assigned to review
the sale, would you issue a tax assessment on the transaction ? Explain your answer briefly.
SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of consideration.
Where property, other than real property that has been subjected to the final capital gains tax, is
transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which
the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of
Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling
price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar
year. (5th par., Sec. 11, Rev. Regs. No. 2-2003)
VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are sourced from VAT
and its concepts. This area is probably the most difficult area to forecast because there are no statistically perceived
patterns. The author has retained the “Stars System” for VAT. Considering the limited period of time, the reader is
advised to focus on areas marked with stars and just browse the unmarked areas.

1.
Value-added tax (VAT) is a tax which is imposed only on the increase in the worth,
merit or importance of goods, properties or services, and not on the total value of the goods or services being sold
or rendered.
2. Nature of VAT. VAT is an indirect tax that may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. As such, it should be understood not in the context of the person or
entity that is primarily, directly liable for its payment, but in terms of its nature as a tax on
consumption. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February
11, 2005 citing various authorities}
VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of
trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on
every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited
only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT
is an indirect tax and can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008)
3. Effect of exemptions from VAT which is an indirect tax. If a special law merely exempts a
party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser
from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not
exempt.
REASON: The VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller
to the purchaser of the goods, properties or services. [Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005)
4.
Illustration of effects of exemptions from VAT which is an indirect tax.
A VAT exempt
seller sells to a non-VAT exempt purchaser. The purchaser is subject to VAT because the VAT is merely added as
part of the purchase price and not as a tax because the burden is merely shifted. The seller is still exempt because
it could pass on the burden of paying the tax to the purchaser.
5.
The VAT is a tax on consumption. Meaning of consumption as used under the VAT
system. Consumption is "the use of a thing in a way that thereby exhausts it."
Applied to services, the term means the performance or "successful completion of a contractual duty, usually
resulting in the performer's release from any past or future liability x x x" Unlike goods, services cannot be
physically used in or bound for a specific place when their destination is determined. Instead, there can only be a
"predetermined end of a course" when determining the service "location or position x x x for legal purposes."
[Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8,
2007]
6.
Illustration of the meaning of consumption as used under the VAT system. For example
the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending
to a foreign client the drafts and bills it has gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the Philippines. Such facilitation service has no
physical existence, yet takes place upon rendition, and therefore upon consumption, in the
Philippines. [Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365,
June 8, 2007]
Who are liable for the value-added tax.
Any person who, in the course of his trade or business,
1)
Sells, barters, exchanges or leases goods
or
properties, or
2)
renders services, and
b.
any person who imports goods xxx
However, in the case of importation of taxable goods, the importer, whether an individual or corporation and
whether or not made in the course of his trade or business, shall be liable to VAT xxx. (Rev. Regs. No. 162005,Sec. 4.105-1, paraphrasing supplied)
7.
a.

8. Various VAT methods and systems.
a.
Cost deduction method. This is a single-stage tax which is payable only by the original
sellers.
(Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and
companion cases) This was subsequently modified and a mixture of “cost deduction method” and “tax credit
method” was used to determine the value-added tax payable. (Ibid.)
b.
Tax credit method. This method relies on invoices, an entity can credit against or subtract
from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [Commissioner of
Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005]

If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on
by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to
be paid.
If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding
quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from
acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited
against other internal revenue taxes. (Ibid.)
9.
How the VAT is imposed on the increase in worth, merit or improvement of the goods or
services. The VAT utilizes the concept of the output and input taxes.
Output VAT less Input VAT = VAT due on the increase in worth, merit or improvement f the goods or
services.
10.
The right to credit the input tax be limited by legislation because it is a mere creation of
law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are not
recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing a 10% multi-stage tax
on all sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and
services by VAT-registered persons against the output tax was established. This continued with the Expanded VAT
Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the
output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that a
person has no vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No.
168207, October 15, 2005, and companion cases, on the motion for reconsideration)
11.
Output tax is the value-added tax due on the sale or lease or taxable goods, properties
or services by any VAT-registered person.
12.
Input tax is the value-added tax due on or paid by a VAT-registered person on
importation of good or local purchases of goods or services, including lease or use of properties, in the course of
his trade or business. (Rev. Regs. No. 4.110-1, 1st par.)
13.
Included in the input tax.
a.
the transitional input tax and
b.
the presumptive input tax xxx.
It includes
c.
input taxes which can be directly attributed to transactions subject to the VAT plus a ratable
portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (Rev. Regs.
No. 4.110-1, 1st par., 2nd sentence,. And 2nd par., paraphrasing, arrangement and numbering supplied )
14.
Concept of transitional input tax credits on beginning inventories. Taxpayers who become
VAT-registered persons upon exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who
voluntarily register even if their turnover does not exceed P1,500,000.00 (except franchise grantees of radio and
television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input tax on the
inventory on hand as of the effectivity of their VAT registration, on the following:
a.
goods purchased for resale in their present condition;
b.
materials purchased for further processing, but which have not yet undergone processing;
c.
goods which have been manufactured by the taxpayer;
d.
goods in process for sale; or
e.
goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered
person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1st par., arrangement and numbering supplied]
15.
Concept of presumptive input tax credits. Persons or firms engaged in the processing of
sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant
meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%)
of the gross value in money of their purchases of primary agricultural products which are used as inputs to their
production.
As used in this paragraph, the term processing shall mean pasteurization, canning and activities which
through physical or chemical process alter the exterior texture or form or inner substance of a product in such a
manner as to prepare it for special use to which it could not have been put in its original form or condition. [Rev.
Regs. No. 16-2005, Sec.4.111-1, (b)]
16.
The VAT registration fee does NOT violate religious freedom. The VAT registration fee
imposed on non-VAT enterprises which includes among others, religious sects which sells and distributes religious
literature is not violative of religious freedom, although a fixed amount is not imposed for the exercise of a privilege
but only for the purpose of defraying part of the cost of registration.

The registration fee is thus more of an administrative fee, one not imposed on the exercise of a privilege,
much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases,235 SCRA 630)
17.
Interpretation of the term “In the Course of Trade or Business” as used in the VAT
system. The term "doing business" or “course of business” conveys the idea of business being done, not from
time to time, but all the time. It does not include isolated transactions. (Commissioner of Internal Revenue v.
Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
18.
Pursuant to a government program of privatization, NDC, a VAT-registered
entity created for the purpose of selling real property, decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell
in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner"
type vessels. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to
Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC.
The NMC shares and the vessels were
offered for public bidding. Among the stipulated terms and conditions for the public auction was that
the winning bidder was to pay "a value added tax of 10% on the value of the vessels." Magsaysay
Lines, Inc., offered to buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong . The bid was approved by
the Committee on Privatization, and a Notice of Award was issued to Magsaysay
Lines.
Is
the
sale
subject
to
VAT ?
SUGGESTED ANSWER: No. The term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of
business being done, not from time to time, but all the time. " Course of business" is what is usually done in the
management of trade or business.
"Course of business" or "doing business" connotes regularity of activity. In
the
instant
case,
the
sale
was
an
isolated
transaction.
The sale which was involuntary
and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on
with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal
property.
This finding is confirmed by the Revised Charter of the NDC which bears no indication that
the NDC was created for the primary purpose of selling real property. (Commissioner of Internal Revenue v.
Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
19.
Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or
exchange or goods and services. The VAT is also imposed on certain transactions “deemed
sales” which
include:
a.
Transfer, use or consumption n
ot in the course of business or properties originally intended for sale or for use in the course of business. xxx
b.
Distribution or transfer to:
1)
Shareholders or investors as share in the profits of the VAT- registered person; xxx or
2)
Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty (60) days following the date such
goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold.
d.
Retirement from or cessation of business, with respect to all goods on hand,
1)
whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement, or
cessation,
2)
whether or not the business is continued by the new owner or successor. xxx [Rev. Regs. No. 162005, Sec. 4.106-7, paraphrasing, arrangement and numbering supplied]
20.

Transactions considered retirement or cessation of business “deemed sale” subject to

VAT.

a.
Change of ownership of the business. There is change in the ownership of the business where a
single proprietorship incorporates; or
1)
the proprietor of a single proprietorship sells his entire business.
b.
Dissolution of a partnership and creation of a new partnership which takes over the
business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied]
21.
Sale of or lease of real properties subject to VAT. Sale of real properties primarily for sale to
customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. (Rev.
Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers are subject to VAT.
22.
On
September 4, 2009, XYZ, Inc., a domestic corporation engaged in the real estate business, sold a
building for P10,000,000.00. Is the sale subject to the value-added tax (VAT)? If so, how
much? Explain.

SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in the ordinary
course of trade of business of X, a domestic corporation engaged in the real estate business.
23.
The following sales of real properties are exempt from VAT, namely:
a.
Sale of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business;
b.
Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known
as the “Urban and Development Housing Act of 1992” and other related laws, such as RA No. 7835 and RA No.
8763.
xxx
xxx
xxx
c.
Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other
related laws wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the
HUDCC and the NEDA and other related laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and
below, or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos
(P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after November
1, 2005, provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated
herein shall be adjusted to its present value using the Consumer Price Index, as published by the National
Statistics Office (NSO); provided, further, that such adjustment shall be published through revenue regulations to
be issued not later than March 31 of each year.
If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of
utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do
not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax
declarations, when sold or disposed of to one and the same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing
and numbering supplied]
24.
a.
b.
c.

VAT on services and lease of properties.
There shall be levied, assessed, and collected,
a value-added tax equivalent to twelve percent (12%) of gross receipts
derived from the sale or exchange of services,
1)
including the use or lease of properties. [NIRC of
amended by R.A. No. 9337, arrangement and numbering supplied]

1997, Sec. 108 (A), as

25.
“Sale or exchange of services”, defined. The term “sale or exchange of services” means the
performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether
in
kind
or
in
cash,
including
those
performed
or
rendered
by
the
following:
a.
construction
and
service
contractors;
b.
stock, real estate, commercial, customs and
immigration
brokers;
c.
lessors
of
property, whether personal or real;
d.
persons engaged in warehousing
services
e.
lessors
or
distributors
of
cinematographic
films;
f.
persons engaged in milling, processing, manufacturing or repacking goods for
others;
g.
proprietors, operators or keepers of
hotels,
motels,
rest-houses,
pension
houses,
inns,
resorts;
theaters,
and
movie
houses;
h.
proprietors or operators of restaurants, refreshment parlors, cafes and
other
eating
places,
including
clubs
and
caterers;
i.
dealers
in
securities;
j.
lending
investors;
k.
transportation contractors on
their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common
carriers
by
land
relative
to
their
transport
of
goods
or
cargoes;
l.
common
carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines
to
another
place
in
the
Philippines;
m.
sales of electricity by
generation
companies,
transmission,
and/or distribution
companies;
n.
franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except
franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not
exceed
Ten
Million
Pesos
(P10,000,000.00),
and
franchise
grantees
of
gas
and
water
utilities;
o.
non-life
insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies;
and

p.
similar services regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 162005, Sec. 4,108-2, 1st par., arrangement and numbering supplied]
26.
Also included in the phrase “sale or exchange of services.
a.
The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
b.
The lease or the use of, or the right to use any industrial, commercial or scientific equipment;
c.
The supply of scientific, technical, industrial or commercial knowledge or information;
d.
The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or
any such knowledge or information as is mentioned in subparagraph (3) hereof; or
e.
The supply of services by a non-resident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus
purchased from such non-resident person;
f.
The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture, project of scheme;
g.
The lease of motion picture films, film tapes and discs;
h.
The lease or the use of or the right to use radio, television, satellite transmission and cable
television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2nd par.)
27.
Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or properties by
a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any
output tax.
However, the input tax on the purchases of goods, properties or services related to such zero-rated sale shall
be available as tax credit or refund in accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005,
1st par.)
28. Concept of VAT zero-rating. The tax rate is set at zero. When applied to the tax base, such
rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output
tax, but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. [Commissioner of
Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005]
Under a zero-rating scheme, the sale or exchange of a particular service is completely freed from the VAT,
because the seller is entitled to recover, by way of a refund or as an input tax credit, the tax that is included in the
cost of purchases attributable to the sale or exchange. The tax paid or withheld is not deducted from the tax
base. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005 citing various cases)
29.
Situs of taxation of zero-rated VAT services such as facilitating the collection of
receivables from credit card members situated in the Philippines and payment to service
establishments in the Philippines. The place where the service is rendered determines the jurisdiction to
impose the VAT
Performed in the Philippines, the service is necessarily subject to its jurisdiction for the State necessarily
has to have a “substantial connection” to it in order to enforce a zero rate. The place of payment is
immaterial much less is the place where the output of the service will be further or ultimately used.
This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of
a zero-rated service. (Commissioner of Internal Revenue v. American Express International, Inc. (Philipppine
Branch), G. R. No. 152609, June 29, 2005)
30.
Destination principle under the VAT System. As a general rule, the VAT system
uses the destination principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated,
while imports are taxed.
This is also known as the “Cross Border Doctrine.”
31.
Exception to the destination principle. The law clearly provides for an exception to
the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
[BSP]."
32.
Rationale for zero-rating of exports. The Philippine VAT system adheres to the Cross
Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. [Commissioner of Internal Revenue v.

Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross Border Doctrine” is
also known as the destination principle.
Hence, actual or
constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT;
while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT.
33.
Zero-rated sale distinguished from exempt transactions:
a.
A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt
transaction is not subject to the output tax.
b.
The input tax on the purchases of a VAT registered person who has zero-rated sales may be
allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt.
c.
Persons engaged in transactions which are zero rated being subject to VAT are required to register
WHILE registration is optional for VAT-exempt persons.
34.
Zero-rated sales by VAT-registered persons. The following sales by VAT-registered
persons shall be subject to zero percent (0%) rate:
a.
Export sales;
b.
Considered export sales under Executive Order No. 224;
c.
Foreign currency denominated sale; and
d.
Sales to persons or entities deemed tax-exempt under special law or international
agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd par., paraphrasing supplied)
35.
Sale of gold to the Central Bank considered as export sales. As export sales, the sale of gold
to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is primarily intended
to be enjoyed by the seller, which charges no output VAT but can claim a refund of or a tax credit certificate for the
input VAT previously charged to it by suppliers. (Commissioner of Internal Revenue v. Manila Mining
Corporation, G.R. No. 153204, August 31, 2005)
36.
Sales to ecozone, such as PEZA, considered export-sale. Notably, while an ecozone is
geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign
soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as
exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero
percent. (Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006
citing various authorities)
37.
“Ecozone”, defined. An ECOZONE or a Special Economic Zone has been described as
– [S]elected areas with highly developed or which have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds
are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers.
The
national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the
Customs Territory. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No.
150154, August 9, 2005]
38.
Zero-rated sale of service, defined. A zero-rated sale of service (by a VAT-registered
person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on
purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund
in accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics
supplied)
39. Service performed by American Express in facilitating the collection of receivables from
credit card members situated in the Philippines and payment to service establishments in the
Philippines in behalf of its Hong-Kong based client is subject to VAT but zero-rated. This is so because it
meets all the requirements for VAT imposition, as follows:
a.
It regularly renders in the Philippines the service of facilitating the collection and payment of
receivables belonging to a foreign company that is a clearly separate and distinct entity.
b.
Such service is commercial in nature; carried on over a sustained period of time; on a significant
scale with a reasonable degree of frequency; and not at random, fortuitous, or attenuated.
c.
For this service, it definitely receives consideration in foreign currency that is accounted for in
conformity with law.
d.
It is not an entity exempt under any of our laws or international agreements. (Commissioner, of
Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005)

40.
While the service performed by American Express is subject to VAT it is zero-rated, and
BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and
invalid. The VAT system uses the destination principle which posits that the goods and services are taxed only in
the country where they are consumed,
However, the law itself provides for clear exceptions under which the supply of services shall be zero-rated,
among which are the following:
a.
The service is performed in the Philippines;
b.
The services are within the categories provided for under the Tax Code; and
c.
It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas.
American Express renders assistance to its foreign clients by receiving the bills of service establishments
located in the country and forwarding them to their clients abroad. The services are performed or successfully
completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here, Its
services, having been performed in the Philippines are therefore also consumed in the Philippines. Thus, its
services are exempt from the destination principle and are zero-rated.
The BIR could not change the law. [Commissioner, of Internal Revenue v. American Express International,
Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005]