San Beda College of Law

Centralized Bar Operations 2001

PRELIMINAR NO!ES
!a"ation Law
1# $%at are &ad de&ts and w%at are t%e re'(isites for a )alid ded(*tion of &ad
de&ts fro+ gross in*o+e,
Bad debts refer to those debts resulting from the worthlessness or uncollectibility,
in whole or in part, of amounts due the taxpayer by others, arising from money lent or
from uncollectible amounts of income from goods sold or services rendered.
The requisites for a valid deduction of bad debts from gross income are:
(a.) There must be an existing, valid and legally demandable indebtedness due
to the taxpayer
(b.) The same must be connected with the taxpayer!s trade, business or practice
of profession
(c.) The same must not be sustained in a transaction entered into between
related parties enumerated under "ec. #$(B) of the Tax %ode of &''(
(d.) The same must be actually charged off the boo)s of accounts of the taxpayer
as of the end of the taxable year and
(e.) The same must be actually ascertained to be worthless and uncollectible as
of the end of the taxable year.
2# If t%e ad)an*es &etween two *orporations were +ade p(rs(ant to a partners%ip
agree+ent rat%er t%an a *ontra*t of loan- *o(ld t%e. &e later on *lai+ed as &ad
de&ts,
*o. + bona fide debt is one which arises from a debtor,creditor relationship
based upon a valid and enforceable obligation to pay a fixed or determinable sum of
money. (Philex Mining Corporation vs. Commissioner of Internal Revenue, CTA
Case No. 52, August 2!, !""#$.
/# $%at are t%e &asi* pro*ed(ral steps in ta" assess+ents as set fort% (nder BIR
Re)en(e Reg(lation No# 12011,

I# 2(e pro*ess re'(ire+ent 3 Prior Noti*e R(le
&. Noti*e of Infor+al Conferen*e to the taxpayer in case he is not amenable to
the internal officer!s findings that he is liable for deficiency tax. -e has &. days to
respond, otherwise he will be declared in default.
/. Preli+inar. Assess+ent Noti*e to the taxpayer if there exists sufficient basis to
assess the taxpayer for any deficiency tax. -e has &. days to respond, otherwise
he will be declared in default.
II# E"*eptions to t%e prior noti*e r(le
&. 0hen the finding for any deficiency tax is the result of mathematical error.
/. 0hen it is determined that there is a discrepancy between the tax withheld and the
amount remitted by withholding agent.
#. 0hen it is determined that a claim for refund1credit has been applied to tax liabilities.
2. 0hen excise tax due on excisable articles has not been paid.
.. 0hen an article locally purchased or imported by an exempt person has been sold,
traded, or transferred to non,exempt persons.
III# 4or+al Letter of 2e+and and Assess+ent Noti*e
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To be issued by the %67 or his representative in accordance with form
prescribed by law (state facts, the law, regulations, or 8urisprudence, otherwise it is void).
This is to be sent to the taxpayer only by registered mail or by personal delivery.
I8# 2isp(ted Assess+ent
&. The taxpayer may protest administratively against the assessment within #9 days
from date of receipt thereof. :therwise, assessment becomes final, executory, and
demandable.
/. 6f there are deficiency tax(es) attributable to undisputed issues, the taxpayer must
first pay them before any action can be had for his protest. ;rescription for collection
of taxes on disputed assessment is suspended.
#. The taxpayer must submit supporting documents within $9 days from the date of
filing the protest, otherwise the assessment becomes executory, final and
demandable.
2. The protest must also state the facts, laws, regulations, or 8urisprudence on which it
is based, otherwise it is void.
8# If protest is denied
&. <levate the matter to the %67 within #9 days from receipt of final decision of %67!s
duly authori4ed representative. :therwise, the assessment shall be final, executory,
and demandable.
/. +ppeal to the %T+ within #9 days from receipt of final decision of %67 or his duly
authori4ed representative.
#. 6f the %67 or his duly authori4ed representative fails to act on the protest within &=9
days from date of submission by taxpayer, the latter may appeal within #9 days from
lapse of the &=9 day period, otherwise the assessment shall be final, executory, and
demandable.
2. >ecision of the %67 or his duly authori4ed representative (a) must state the facts,
law, rules and regulations, or 8urisprudence on which such decision is based,
otherwise it is void, and (b) must indicate that it is his final decision.
9# $%at is Mini+(+ Corporate In*o+e !a" :MCI!;, $%at are its i+portant
feat(res,
+ ?%6T of /@ of the Aross 6ncome (A6) as of the end of the taxable year is
imposed upon any domestic corporation and resident foreign corporation beginning
on the 2
th
taxable year immediately following the year in which such corporation
commence its business.
6mportant Beatures
a. 6mposed only where /@ of the A6 is more than the normal income tax rates.
b. <xcess of ?%6T (/@) over the normal income tax (*6T) shall be carried forward
and credited against the *6T for the three immediately succeeding years.
c. This provision is to be applied on +**3+C B+"6" and not to be used in the
quarterly corporate returns.
d. The "ec. of Binance is authori4ed to suspend this ?%6T on account of:
i. ;rolonged labor dispute
ii. Borce ma8eure
iii. Cegitimate business reverses
<# 2oes t%e fo(r0.ear gra*e period for MCI! appl. to a *orporation reopened after
re*ei)ers%ip pro*eedings,
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+ corporation that has been reopened after a long period of inactivity while under
receivership proceedings may qualify for suspension of the ?%6T. The corporation
shall be sub8ect to ?%6T beginning on the fourth taxable year from the year of
commencement of business operations which shall be ta)en as the year the
company reopened.
=# E"plain t%e *on*ept of NOLCO#
*et operating loss >:<" *:T pertain to all the operating losses of the taxpayer.
6t refers :*CD to the excess of allowable deduction which he is unable to ><>3%T
on the year it was incurred.
The loss which he is unable to deduct is allowed by law to be carried over for the
next three (#) years.
Bor example, E %orporation obtained an operating loss of ;/ million for &''=.
But E %orp. is allowed only a deduction of ;&.. million for &''=. The undeducted
loss of ;.99,999.99 can be deducted as a loss in the next operating years
immediately following the year of such loss.
># $%at is t%e effe*t of a +erger on t%e *onstit(ent *orporations? NOLCO and
MCI!,
The aggregate *:C%: balances of the absorbed corporations and the surviving
corporation may be claimed by the latter as a deduction from gross income under
"ection #2(>)(#) of the &''( Tax %ode. Ci)ewise, the excess ?%6T of the absorbed
corporations shall be carried forward and credited against the normal income tax due
of the surviving corporation for the three immediately succeeding taxable years
pursuant to "ection /((<)(#) of the same %ode (%IR Ruling No. !&'("" )ate) August
&!, !"""$.
=. Is interest in*o+e re*ei)ed &. a foreign e+&ass. fro+ its foreign *(rren*.
deposit wit% a lo*al &an@ ta"a&le, Aow a&o(t t%e deposit of its diplo+ati*
personnel,
*o. 6nterest income received by the embassy from its foreign currency time deposit
with a local ban) is considered Fincome derived from interest on deposits in ban)s in
the ;hilippines by foreign governmentsG, and excluded from the computation of gross
income. -ence, such income is exempt from the final tax on the interest from ban)
deposits including the (..@ interest from foreign currency deposit.
Des. 3nder +rt. #2 of the &'$& Hienna %onvention on >iplomatic 7elations,
exemption of diplomatic agents from all dues and taxes, personal or real, national,
regional or municipal does not include exemption from tax on private income having
its source in the receiving "tate. +ccordingly, its diplomatic personnel are sub8ect to
withholding tax on interest from their accounts maintained with local ban)s.
'. Is t%e profit fro+ t%e sale of apart+ents w%i*% %a)e &een leased to tenants for
se)eral .ears s(&Be*t to *apital gains ta",
*o. %apital assets, as defined in "ection #' (+)(&) of the 7evenue %ode include
all the properties of a taxpayer whether or not connected with his trade of business,
except
&) stoc) in trade or other property included in the taxpayer!s inventory
/) property primarily for sale to customers in the ordinary course of his trade or
business
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#) property used in the trade or business of the taxpayer and sub8ect to
depreciation allowance and
2) real property used in trade or business.
6f the taxpayer sells or exchanges any of the properties above mentioned, any
gain of loss relative thereto is an ordinary gain or an ordinary loss. The sale of
properties which form part of the rental business of the taxpayer cannot be
characteri4ed as other than sales of non,capital assets (Tuason , *r. vs. +inga), 5#
,CRA !'$. The gains derived therefrom are sub8ect to the regular income tax.
10# Is t%e sale of land w%i*% is to &e de)oted stri*tl. for religio(s p(rposes &. t%e
C%(r*% e"e+pt fro+ t%e *apital gains ta",
*o, the transaction is not exempt from the capital gains tax. 6t is due from the
seller of the land. 0hile it is true that "ec. /=(#), +rticle H6 of the %onstitution
recogni4es tax exemptions of land actually, directly and exclusively used for religious
purposes, this tax exemption refers only to real property and not to capital gains tax.
11# Cnder t%e C!RP- is t%e *on*ept of t%e P1 +illion Standard 2ed(*tion fro+ t%e
5ross Estate t%e sa+e wit% t%e 10D Optional Standard 2ed(*tion fro+ t%e
5ross In*o+e,
*:. 6t is in addition to all other deductions from the gross estate. 6t must not be
confused with the &9@ standard deduction from Aross 6ncome which is optional on
the part of the taxpayer in lieu of the itemi4ed deductions allowed under "ec. #2.
12# Is t%e real propert. fore*losed and sold in a p(&li* a(*tion s(&Be*t to *apital
gains ta", If t%e +ortgagee a*'(ires t%e propert. and wit%in t%e rede+ption
period s(&se'(entl. sells %is +ortgage rig%t and interest to anot%er- is %e
li@ewise s(&Be*t to *apital gains ta",
Des. %apital gains tax is payable by the debtor,mortgagor. The tax covers
involuntary sale li)e that in execution and expropriation. (*B: 6n expropriation sale,
$@ Binal Tax or *ormal Tax 7ate, at the option of the taxpayer).
*o. The sale by the mortgagee of his mortgage right and interest over the
property in favor of another is not sub8ect to capital gains tax. The vendee of the
mortgage right and interest and later on as owner due to the consolidation of his title
to the property is also not sub8ect to the capital gains tax.
1/# Aarr. E(ing'(ing was prose*(ted for willf(ll. atte+pting to e)ade t%e in*o+e
ta" i+posed &. t%e BIR# Aarr. E(ing'(ing arg(ed t%at %e *o(ld not &e
prose*(ted &e*a(se t%ere was no assess+ent .et wit% respe*t to %is ta"
o&ligations# Ae e)en *ited t%e re*ent r(ling of t%e S(pre+e Co(rt in t%e *ase of
CIR )s# CA and L(*io !an :2<> SCRA 200; w%ere it was %eld t%at a ta"pa.er
*o(ld not &e %eld *ri+inall. lia&le wit%o(t t%e pre)io(s iss(an*e of
assess+ent# 2e*ide#
-arry Iuingquing!s contention is without merit. "ec. /// of the *67% provides
that a proceeding in court for the collection of tax maybe filed without assessment in
the case of a false or fraudulent return with intent to evade tax or of failure to file a
return. The "upreme %ourt upheld this in its ruling in the case of 3ngab vs. %usi.
The Cucio Tan case has not reversed the 3ngab case because the latter was
decided by the "upreme %ourt sitting en banc while the former was decided only by
2
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the "upreme %ourt!s &
st
division. -owever, the two rulings can be reconciled. +n
assessment was required in the Cucio Tan case because the said case is based on
the alleged misrepresentation on manufacturer!s wholesale price. "uch amount was
pre,approved. The 3ngab case on the other hand involved sale proceeds which
were never included as part of the gross income stated in the return, and therefore
no assessment is necessary in order to ma)e him liable.
19# Is ter+inal lea)e pa. re*ei)ed &. go)ern+ent e+plo.ee s(&Be*t to ta" in*o+e,
*o, because terminal leave pay is retirement benefits and not a part of the gross
salary or income. This is so because the government encourages unused leaves to
be accumulated. The government recogni4ed that for most public servants,
retirement pay is always less than generous. Terminal leave payments are given not
only at the same time but for the same policy considerations governing benefits (%67
vs, %+, (/ "%7+ /9#).
1<# Can a *lai+ for ref(nd prosper e)en if t%e ta" was not paid (nder protest,
es# "ec. /'' (%T7;). 7ecovery of Tax <rroneously or 6llegally %ollected.
1=# $%at is !ransa*tion 8al(e (nder RA F1F1,
6t is the invoice value of the goods plus freight, insurance, costs, expenses and
other necessary expenses which is used as basis for the determination of dutiable
value. This replaces the -ome %onsumption Halue which is based on the value
declared in the consular, commercial, trade, or sales invoice. The change to
transaction value was a consequence of the ;hilippine!s participation in the 3ruguay
7ound of the A+TT.
1># Cnder t%e Re)en(e Reg(lation No# F01F of t%e *apital gains ta"G
a; $%o s%o(ld file t%e ret(rn,
&; $%o s%o(ld pa. t%e ta",
*; $%en is t%e period wit%in w%i*% said ta" is to &e paid,
d; !o w%o+ pa.+ent s%all &e +ade,
a) "eller
b) "eller
c) &) :n transaction basis, upon the filing within thirty (#9) days following each sale
or other disposition of real property
/) 6n installments, in case the taxpayer is qualified, and so elects, the tax for each
6nstallment payment of the buyer shall be paid within thirty (#9) days from receipt
of such installment
d) +uthori4ed +gent Ban) located within 7evenue >istrict :ffice having 8urisdiction
over the place where the property being transferred is located.
1F# $%at is t%e differen*e &etween a sale of real propert. on a deferred pa.+ent
s*%e+e and t%e sale of real propert. on install+ent,
"ale of real property on a deferred payment scheme means sale of real property,
the initial payments of which in the year of sale exceed /.@ of the gross selling
price.
"ale of real property on installment plan means sale by a real estate dealer
whereby initial payments in the year do not exceed /.@ of the gross selling price.
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11# A par*el of land owned &. Songla@ was e"propriated &. t%e National
5o)ern+ent )al(ed at P<M# At t%at ti+e- Songla@ was assessed &. t%e BIR for
t%e pa.+ent of in*o+e ta"es wort% P/M# !%e P<M )al(e of t%e e"propriated
land was at t%e ti+e of t%e assess+ent re+ained (npaid to Songla@ &. t%e
5o)ern+ent# Songla@ now *lai+s t%at %e is not re'(ired to settle %is ta"
o&ligation &e*a(se s(*% *lai+ %as &een set0off wit% t%e a+o(nt t%e
5o)ern+ent owes %i+# R(le on Songla@?s *ontention#

"ongla)!s contention is untenable and therefore he has to pay the income tax.
7<+":*": (&) Cifeblood Theory (/)Taxes are not contractual obligations and (#)
The government and the taxpayer are not mutual creditors and debtors of each
other.
20# $%. are intra*orporate di)idends of do+esti* *orporation and resident foreign
*orporation NO! s(&Be*t to intra*orporate di)idend- $AILE non0resident
foreign *orporation are s(&Be*t to intra*orporate di)idend,
>omestic and resident foreign corporations are not sub8ect to intracorporate
dividend tax because said corporations are not the end recipient of the said dividend.
"uch intracorporate dividend shall eventually be given as dividend to their respective
stoc)holders which shall be sub8ect to B6*+C T+E. J"ec. /2B(/)K
21# Are all fringe &enefits ta"a&le, $%at are t%e r(les,
Aeneral 7ule: D<".
6f given to ran) and file employees L Bringe benefits shall be included in
their gross compensation income sub8ect to the graduated rates of .@ ,
#/@.
6f given to employees other than ran) and file (i.e. managerial and
supervisory employees), said benefits are sub8ect to final withholding tax
of #/@ (effective Man. &, /999) based on the Arossed,up ?onetary Halue.
<xceptions:
&. >e ?inimis Benefits
/. Benefits that were given to ran),and,file employees
#. Those where the grant of the benefits is required of, or necessary to
trade, business1profession of the employer.
2. Those for the convenience of the employer.
.. Those exempt from tax under special laws.
$. Those contributions of the employer for the benefit of the employee to
insurance, retirement, and hospitali4ation benefit plans.
22# San&(ll Corporation is a do+esti* *orporation w%i*% s(ffered a net loss on its
fift% .ear of operations# Belie)ing t%at no ta" is d(e fro+ it- it de*ided not to
file an in*o+e ta" ret(rn# Is San&(ll?s a*tion proper, $%at will &e San&(ll?s
lia&ilit. for its fail(re to file an in*o+e ta" ret(rn,
*:. The filing of income tax returns in case of ;hilippine corporations is
mandatory. + net loss on the part of a corporation does not automatically exempt it
from the payment of income tax particularly in the instant case wherein "anbull is
already covered by the minimum corporate income tax.
$
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2/# $%at are t%e Rates of S(r*%arges in *ase of ta" delin'(en*.,
&. .9@ of tax or deficiency tax L in case of false or fraudulent returns.
/. .9@ of tax L in case of willful neglect to file return.
#. /.@ of amount due L in case there is neglect to file return or neglect in payment
which is not willful
2. /.@ of amount due L in case where 7eturn is not filed with officer designated by
law.
29# $%en is interest i+posed,
Brom the date prescribed for payment until amount is fully paid L at the rate of
/9@ per annum or such higher rate as may be prescribed by 7ules and 7egulations.
2<# Is t%ere a li+itation on t%e rig%t of t%e ta"pa.er to file an a+ended ret(rn,
Des. + taxpayer is allowed to amend any tax return filed within three years from
the date of filing but before the service of a notice for audit for the examination of the
said return ( "ec.$ +).
2=# $%at are t%e *lasses of interest,
&. >eficiency interest L on any deficiency on the tax due
/. >elinquency interest L in case of failure to pay:
the amount of tax due in the return
the amount of tax due for which no return is required
a deficiency tax, or any surcharge or interest thereon
#. 6nterest on <xtended ;ayment L where tax is payable on installment
2># $%at are 4C2Cs, 2is*(ss possi&le ad)antages and disad)antages in t%e
i+position of >#<D ta" on 4C2CS#
B%>3s are Boreign %urrency >eposit 3nits. B%>3s are formerly exempt from
taxes. The %T7; imposes a (..@ tax on B%>3s.
- :pponents of the imposition of this tax states that this will discourage B%> in the
;hilippines. This will in turn lessen the foreign reserves of the %entral Ban)
because ban)s are required to deposit certain percentage of said B%>3s.
- ;roponents on the tax argued that this will increase the income of the
government. Burthermore, the depositors of B%>3s also consider the stability of
the ban)ing sector and not 8ust the interest.
2F# Baleleng A&( is t%e owner of a par*el of land sit(ated in Batangas Cit.# In
1110- t%e Cit. Assessor ser)ed %er a noti*e of assess+ent# !%ereafter- s%e
filed a re'(est for re*onsideration wit% t%e Cit. Assessor# !%e latter granted
%er re'(est &. red(*ing t%e assessed )al(e of t%e propert.# A new noti*e of
assess+ent was s(&se'(entl. iss(ed# $as t%e Cit. Assessor?s a*t (nder t%e
foregoing *ir*(+stan*es proper,
*:. The "upreme %ourt in the case of %allanta vs. :mbudsman (Man. /9, &''=)
held that the local assessor is automatically divested of any 8urisdiction to entertain
any request for a review or read8ustment of the assessed value of the sub8ect
(
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property once he sends notice to the owner or lawful possessor of real property of its
assessed value.
21# Is t%e infor+er?s reward in t%e 2is*o)er. of 8iolation of NIRC and 2is*o)er.
and Seiz(re of S+(ggled 5oods s(&Be*t to ta", $%at rate,
es# 6t is sub8ect to &9@ Binal 0ithholding Tax (7ev. 7eg. /,'=)
/0#Can an i+porter go dire*tl. to t%e Co(rt of !a" Appeals (pon t%e re*eipt of t%e
de*ision of Colle*tor w%i*% was &ased on t%e opinion earlier gi)en &. t%e
Co++issioner of C(sto+s3 Se*# of 4inan*e, $%at are t%e steps w%i*% %e
+(st follow,
a.) *o. There is no exhaustion of administrative remedies. The %omm. of %ustoms
and the "ec. :f Binance must both be given the opportunity to correct their mista)es.
b.) ;ay under protest, then follow this procedure:
&. +dverse ruling of the %ollector of %ustoms may be protested by :
a. presenting to the %ollector at the time when payment of the amount
claimed to be due the gov!t is made or within &. days thereafter
b. a written protest setting forth of his ob8ection to the ruling together with
the reasons therefor. ("ec. /#9=, T%%)
/. *o protest shall be considered unless payment of the amount due has first
been made and the corresponding doc)et fees paid.
#. 3pon termination of the hearing, the %ollector shall render a decision within
#9 days
a. 6f the protest is sustained, the entry is liquidated. ("ec. /#&/, T%%)
b. 6f the protest is denied, the aggrieved has &. days after notification in
writing, to appeal to the %ommissioner of %ustoms. ("ec. /#&#, T%%)
2. The person aggrieved by the decision of the %ommissioner has #9 days from
receipt of decision to appeal to the %ourt of Tax +ppeals. ("ec. /#&., /29/,
T%%)
/1# 2oes t%e Se*retar. of 4inan*e %a)e t%e a(t%orit. to order re0assess+ent of
d(ties,
+s provided under "ec. /#&. of T%%;, decision of the %ollector of %ustoms on
the assessment of duties which is adverse to the government shall be automatically
elevated to and reviewed by the %ommissioner. 6f the decision is affirmed by the
%ommissioner, it shall automatically elevated for review by the "ec. of Binance.
-owever, pursuant to "ec. &29( of the T%%;, appraisal, classification or return
approved by the %ollector may not be altered or modified in any manner except:
0ithin one year after payment of the duties, upon statement of error as approved
by the %ollector
0ithin &. days after payment, upon request by the %ollector for reappraisal or
reclassification if the appraisal or classification is deemed to be low and
3pon request for reappraisal or reclassification in the form of a timely protest.
/2# $%en does an i+portation end,
. Bor articles sub8ect to customs duties, importation ends when the regular permit
for withdrawal shall have been issued. 6mportation is not yet ended if falsified
=
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documents were used to effect the release of the articles.. %onsequently, the
prescriptive period is not tolled.
//# 5i)e so+e )alid reasons for e"tension of estate ta" pa.+ent, $%at are t%e
re'(ire+ents,
0here the ;hilippine estate consists of real properties which cannot be liquidated
and ban) accounts which cannot be withdrawn, deadline for the payment of the
estate tax may be extended up to two years. -owever, the executor, administrator
or beneficiary is required to furnish the %ommissioner a bond at least amounting to
the tax sue and the estate shall be liable for the corresponding interest accrued up to
the time of payment of the tax.
/9# Are prizes fro+ a go)ern+ent0sponsored raffle e"e+pted fro+ ta",
+ final tax at the rate of /9@ is imposed on, among others, pri4es and winnings
derived by individuals from sources within the ;hilippines. The tax shall be withheld
by the organi4er as withholding agent. The fact that the raffle is government,
sponsored does not constitute a valid ground for the exemption of winners.
%orporate winners, however, are not sub8ect to the final withholding tax but their
winnings are sub8ect to the corporate income tax.
/<# Can a foreign *orporation &e a**redited as a donee *orporation,
3nder "ec. #2(h) of the Tax %ode, contributions or gifts may be deductible from
gross income for tax purposes if paid to accredited domestic corporations or
associations organi4ed and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational purposes or for the
rehabilitation of veterans. "aid section specifically mentions of Faccredited domestic
corporations or associationsG and Fnon,government organi4ationsG which is defined
to mean a non,profit domestic corporation. -ence, a foreign corporation cannot be
accredited as a donee corporation.
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