FREQUENTLY ASKED BAR EXAM QUESTIONS and TOPICS
Q: Describe the power of taxation. May a legislative body enact
Taxation Law
GENERAL PRINCIPLES
Q: Distinguish direct taxes from indirect taxes, and give example
for each one. (Bar 1994, 2000, 2001, 2006)
A DIRECT TAX is one in which the taxpayer who pays the tax is directly
liable therefor, that is, the burden of paying the tax falls directly on the
person paying the tax.
An INDIRECT TAX is one paid by a person who is not directly liable
therefor, and who may therefore shift or pass on the tax to another person or
entity, which ultimately assumes the tax burden. (Maceda v. Macaraig, 197
SCRA 771)
Income tax, estate and donor's tax are considered as direct taxes. Value-
added tax, excise tax, other percentage taxes, and documentary stamp tax are
indirect taxes.
Q: May Congress, under the 1987 Constitution, abolish the power
to tax of local governments? (Bar 2001, 2003)
No. Congress cannot abolish what is expressly granted by the fundamental
law. The only authority conferred to Congress is to provide the guidelines
and limitations on the local government's exercise of the power to tax (Sec.5,
Art. X, 1987 Constitution).
Section 5, Art. X, 1987 Constitution
Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
local governments.
Alternative Answer:
No. The law centralizing the imposition and collection of all taxes in the
national government would contravene the Constitution which mandates
that: . . . Section 5, Art. X of the 1987 Constitution provides:
"Each local government unit shall have the power to create their own sources
of revenue and to levy taxes, fees, and charges subject to such guidelines and
limitations as Congress may provide consistent with the basic policy of local
autonomy."
It is clear that Congress can only give the guidelines and limitations on the
exercise by the local governments of the power to tax but what was granted
by the fundamental law cannot be withdrawn by Congress.
laws to raise revenues in the absence of a constitutional provision
granting said body the power to tax? (Bar 2003, 2005)
Yes. The legislative body may enact laws even in the absence of a
constitutional provision because the power to tax is inherent in the
government and not merely a constitutional grant. The power of taxation
is an essential and inherent attribute of sovereignty belonging as a matter
fright to every independent government without being expressly granted by
the people. (Pepsi-Cola Bottling Company of the Philippines, Inc.
v.Municipality ofTanauan, Leyte, G.R. No. L-31156, February 27,1976)
Q: From 1991 to 1995, X, who is a businessman, has not been
paying his income taxes. X is now being assessed for the unpaid
income taxes in the total amount ofP150,000.00. X claims his
income tax liability has already been compensated by the amount
of P300.000.00 which the government owes him for the
expropriation of his property. Decide. (Bar 1996, 2005)
The income tax liability of X cannot be compensated with the amount owed
by the Government as compensation for his property expropriated. Taxes are
of distinct kind, essence and nature than ordinary obligations. Taxes and
debts cannot be the subject of compensation because the Government and X
are not mutually creditors and debtors of each other and a claim for taxes is
not a debt, demand, contract, or judgment as is allowable to be set off.
(Francia vs. IAC. G.R 76749, June28. 1988)
Q: X, a lessor of a property, pays real estate tax on the premises, a
real estate dealer's tax based on rental receipts and income tax on
the rentals. X claims that this is double taxation? Decide. (Bar
1996, 2004)
There is no double taxation. DOUBLETAXATION means taxing for the same
tax period the same thing or activity twice, when it should be taxed but once,
by the same taxing authority for the same purpose and with the same kind or
character of tax. The REALESTATE TAX is a tax on property; the REAL
ESTATEDEALER'S TAX is a tax on the privilege to engage in business; while
the INCOME TAX is a tax on the privilege to earn an income. These taxes are
imposed by different taxing authorities and are essentially of different kind
and character (Villanueva vs. City of Iloilo, 26 SCRA578)
Q: Does a BIR ruling have a retroactive effect, considering the
principle that tax exemptions should be interpreted strictly
against the taxpayer? (Bar 2004, 2007)
Section 246, NIRC
Non-Retroactivity of Rulings. - Any revocation, modification or
 reversal of any of the rules and regulations promulgated in
accordance with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal
will be prejudicial to the taxpayers, except in the following cases:
"(a) Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
Bureau of Internal Revenue;
"(b) Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based; or
“(c) Where the taxpayer acted in bad faith.
No. A BIR ruling cannot be given retroactive effect if its retroactive
application is prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court
of Appeals et. Al. 267 SCRA 557 [1997])
Topic: Power to Tax (Bar 2003)
Q: Why is the power to tax considered inherent in a sovereign
State?
It is considered inherent in a sovereign State because it is a necessary
attribute of sovereignty. Without this power no sovereign State can exist or
endure. The power to tax proceeds upon the theory that the existence of a
government is a necessity and this power is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every independent
state or government. No sovereign state can continue to exist without the
means to pay its expenses; and that for those means, it has the right to
compel all citizens and property within its limits to contribute, hence, the
emergence of the power to tax. (51 Am. Jur.,Taxation 40).
Topic: Equality in Taxation (Bar 2003, 2004)
Q: The City of Makati, in order to solve the traffic problem in its
business districts, decided to impose a tax, to be paid by the
driver, on all private cars entering the city during peak hours
from 8:00 a.m. to 9:00 a.m. from Mondays to Fridays, but
exempts those cars carrying more than two occupants, excluding
the driver. Is the ordinance valid?
Section 28 (1), Art. VI, 1987 Constitution
The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
No. The ordinance is in violation of the Rule of Uniformity and Equality,
which requires that all subjects or objects of taxation, similarly situated must
be treated alike in equal footing and must not classify the subjects in an
arbitrary manner. In the case at bar, the ordinance exempts cars carrying
more than two occupants from coverage of the said ordinance. Furthermore,
the ordinance only imposes the tax on private cars and exempts public
vehicles from the imposition of the tax, although both contribute to the
traffic problem. There exists no substantial standard used in the
classification by the City of Makati. Another issue is the fact that the tax is
imposed on the driver of the vehicle and not on the registered owner of the
same. The tax does not only violate the requirement of uniformity, but the
same is also unjust because it places the burden on someone who has no
control
Where theover the route
taxpayer of the vehicle.
deliberately The ordinance
misstates is, therefore,
or omits material invalid
facts from his for
return or any docume
violating the rule of uniformity and equality as well as for being unjust.
SOURCE: UP Law Complex and Philippine Association of Law Schools
Q: A law was passed exempting doctors and lawyers from the
operation of the
Where the facts value added
subsequently tax. by
gathered Other professionals
the Bureau of Internalcomplained
Revenue are materially differen
and filed a suit questioning the law for being discriminatory and
violative of the equal protection clause of the Constitution since
complainants were not given same exemption. Is the suit
meritorious or not? Reason briefly.
Yes. The suit is meritorious. The VAT is designed for economic efficiency;
hence, should be neutral to those who belong to the same class. Professionals
are a class of taxpayers by themselves who, in compliance A with the rule of
equality of taxation, must be treated alike for tax purposes. Exempting
lawyers and doctors from a burden to which other professionals are
subjected will make the law discriminatory and violative of the equal
protection clause of the Constitution. While singling out a class for taxation
purposes will not infringe upon this constitutional limitation (Shell v. Vano,
94 Phil. 389 [1954]), singling out a taxpayer from a class will no doubt
transgress the constitutional limitation (Ormoc Sugar Co. Inc., v. Treasurer
of Ormoc City, 22 SCRA 603 [1968]). Treating doctors and lawyers as a
different class of professionals will not comply with the requirements of a
reasonable, hence valid classification, because the classification is not based
upon substantial distinction which makes real differences. The classification
does not comply with the requirement that it should be germane to the
purpose of the law either. (Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24
SCRA 789 [1968]).
Alternative Answer:
No. The suit is not meritorious. The equal protection clause of the
Constitution merely requires that all persons subjected to legislation shall be
treated alike, under like circumstances and conditions, both in the privileges
conferred and in the liabilities imposed. The equality in taxation rule is not
violated if classifications or distinctions are made as long as the same are
based on reasonable and substantial differences. {Pepsi-Cola Bottling Co.,
Inc. v. City of Butuan, 24 SCRA 789 [1968]).
Topic: Refunds and Set-off (Bar 1996, 2001)
Q: X is the owner of a residential lot situated at Quirino Avenue,
Pasay City. The lot has an area of 300 square meters. On June 1,
1994, 100 square meters of said lot owned by X was expropriated
by the government to be used in the widening of Quirino Avenue,
for P300.000.00 representing the estimated assessed value of
said portion. From 1991 to 1995, X, who is a businessman, has not
been paying his income taxes. X is now being assessed for the
unpaid income taxes in the total amount of P150,000.00. X claims
his income tax liability has already been compensated by the
amount of P300.000.00 which the government owes him for the
expropriation of his property. Decide.
The income tax liability of X cannot be compensated with the amount owed
by the Government as compensation for his property expropriated, taxes are
of distinct kind, essence and nature than ordinary obligations. Taxes and
debts cannot be the subject of compensation because the Government and X
are not mutually creditors and debtors of each other and a claim for taxes is
not a debt, demand, contract, or Judgment as is allowable to be set off.
(Francia vs. IAC. G.R 76749, June 28, 1988)
Q: May a taxpayer who has pending claims for VAT input credit or
refund, set-off said claims against his other tax liabilities? Explain
your answer.
No. Set-off is available only if both obligations are liquidated and
demandable. Liquidated debts are those where the exact amounts have
already been determined. In the instant case, the claim of the taxpayer for
VAT refund is still pending and the amount has still to be determined. A
fortiori, the liquidated obligation of the taxpayer to the government can not,
therefore, be set-off against the unliquidated claim which the taxpayer
conceived to exist in his favor. (Philex Mining Corp. v. CIR, GR No. 125704,
August 29, 1998).
INCOME TAXATION
Q: In its final adjustment return for the 2010 taxable year, ABC Corp. had
excess tax credits arising from its over-withholding of income payments.
It opted to carry over the excess tax credits to the following year.
Subsequently, ABC Corp. changed its mind and applied for a refund of the
excess tax credits. Will the claim for refund prosper? (Bar 2013, 2012)
Section 76, NIRC
Once the option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefor.
Carry-over Option is irrevocable
No. The claim for refund will not prosper. While the law gives the taxpayer an option
whether to carry-over or claim as refund the excess tax credits shown on its final
adjustment return, once the option to carry-over has been made, such option shall be
considered irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed. (Section 76, NIRC; CIR v. PL
Management International Phils., Inc., April 4, 2011, 647 SCRA 72 (2011) G.R. No.
160949).
Q: Are the revenues from tickets reserved by the Philippine office of an
off-line international carrier without any flight operations in the
Philippines subject to tax? (Bar 2007, 2005, 1994)
(Note: gray area)
Section 28 (A) (3), NIRC
(a) International Air Carrier. - '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: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a plane in a port
or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place
at any port outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine
Billings.
Yes. Income received in the Philippines from the sale of tickets by an “off-line” airline
is taxable as income from whatever source. (Commissioner v. BOAC, GR 65773-74,
April 30, 1987)
The source of income is the property, activity or service that produced the income.
The sale of tickets in the Philippines is the activity that produces the income. The
absence of landing rights in the Philippines cannot alter the fact that revenues were
derived from ticket sales within the Philippines. (Commissioner of Internal Revenue
v. Japan Air Lines, GR 60714, October 4, 1991 reiterating British Overseas Airways
Corp., Air India and American Arilines, Inc.)
Alternative Answer:
No. The origination of the flight is determinative of the sources of income of the
international carrier. If the flight originated from the Philippines to foreign
destination, the income is an income from within; if it originated in a foreign country
to any destination, the income is from without. In this situation, no flight will
originate from the Philippines. Hence, the income is not taxable in the Philippines
under section 28(A)(3), NIRC.
Q: Who are required to file individual income tax return? Who are not
required to file individual income tax return? (Bar 2001, 2000)
Section 51, NIRC
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following
 individuals are required to file an income tax return:
a) Every Filipino citizen residing in the Philippines;
b) Every Filipino citizen residing outside the Philippines, on his
income from sources within the Philippines;
c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.
(2) The following individuals shall not be required to file an income tax
return;
a) An individual whose gross income does not exceed his total
personal and additional exemptions for dependents under
Section 35: Provided, That a citizen of the Philippines and any
alien individual engaged in business or practice of profession
within the Philippine shall file an income tax return, regardless
of the amount of gross income;
b) An individual with respect to pure compensation income, as
defined in Section 32 (A)(1), derived from sources within the
Philippines, the income tax on which has been correctly
withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation
concurrently from two or more employers at any time during
the taxable year shall file an income tax return: Provided,
further, That an individual whose compensation income
derived from sources within the Philippines exceeds Sixty
thousand pesos (P60,000) shall also file an income tax return;
c) An individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of this Code; and
d) (d) An individual who is exempt from income tax pursuant to
the provisions of this Code and other laws, general or special.
Q: What are the tax implications of the payment to a law firm in terms of
income taxes? (Bar 2013, Bar 1995) Can we reconstruct the question to be
understood easier? (This phrase “what are the tax implications of”
usually appear in the bar exam. Hence, I’d rather not rephrase it as to
make the bar takers be familiarized with such question.)
If possible, please give an immediate and simplified answer first to avoid
giving the reader a difficult time finding for an answer from the law
quoted. (The simplified answer is provided after citing the relevant
provision of law. You may want to re-arrange by placing first the
paragraph answer before the law provision.)
Section 26, NIRC
Tax Liability of Members of General Professional Partnerships. - A
general professional partnership as such shall not be subject to the income
tax imposed under this Chapter. Persons engaging in business as partners in
a general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the
net income of the partnership shall be computed in the same manner as a
corporation.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
For income tax purposes, the compensation for services is part of the gross income of
the law partnership. From its total gross income derived within and without, it has to
compute its net income in the same manner as a corporation. The net income of the
partnership whether distributed or not will be declared by the partners as part of their
gross income who are to pay the income tax thereon in their individual capacity.
[Section 26, NIRC]
General Professional Partnerships (GPPs) are non-taxable entities. What is taxable
are the partners comprising the same and they are obligated to report as income their
share in the income of the GPP during the taxable year whether distributed or
not.[Ton vs. Del Rosario, GR No. 109289, October 1994]
Q: What are activities considered as royalties? What are the tax
implications on royalties paid by a domestic corporation to a non-
resident foreign corporation? What is the tax treatment on income of a
domestic corporation considered as royalty? (Bar 2010, 2002)
Section 42 (A) in relation to Section 28 (B)(1) and Section 24
(B)(1), NIRC
Section 42 (A) (4) Rentals and royalties. - Rentals and royalties from
property located in the Philippines or from any interest in such property,
including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines 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
paragraph (a), any such equipment as is mentioned in paragraph
(b) or any such knowledge or information as is mentioned in
paragraph (c);
(e) The supply of services by a nonresident 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 nonresident person;
(f) Technical advice, assistance or services rendered in connection
 with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;
and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television;
(iii) Tapes for use in connection with radio broadcasting.
Activities considered as royalties
The activities considered as royalties are those enumerated in Section 42 (A)
(4) of the NIRC.
Tax implications on royalties paid by a domestic corporation to
a non-resident foreign corporation
The royalties paid to the non-resident foreign corporation is subject to 30%
final withholding tax, unless a lower tax rate is prescribed under an existing
tax treaty. [Section 28 (B) (1), NIRC]
Tax treatment on income of a domestic corporation considered
as royalty
The income of a domestic corporation subject considered as royalty is subject
to the 20% final withholding tax. [Section 24 (B) (1), NIRC]
Topic: Tax Implication (Bar 1005, 2005, 2010)
Q: What are the tax implications on income derived from sources within
the Philippines by a non-resident alien who stayed in the Philippines for
less than 180 days?
Section 25 (A), NIRC
Section 25 (A) (1) - A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one
hundred eighty (180) days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines'.
Non-resident aliens not engaged in trade or business are not allowed personal
exemptions. Also, their income from within the Philippines is subject to 25% on such
gross income.
Non-resident aliens engaged in trade or business are allowed to avail of the itemized
deductions including personal and additional exemptions but subject to rule on
reciprocity on the personal exemptions.
Q: Taxable or non-taxable?
a. Illegal income (e.g., income from Jueteng)
b. Gain arising from Expropriation of property
c. Taxes paid and subsequently refunded
d. Recovery of bad debts previously charged off
e. Gain on the sale of a car used for personal purposes
a. Taxable. Gross income includes “all income derived from whatever source”
[Section 32(A), NIRC], which was interpreted as all income no expressly
excluded or exempted from the class of taxable income, irrespective of the
voluntary or involuntary action of the taxpayer in producing the income.
Thus, the income may proceed from a legal or illegal source such as from
jueteng. Unlawful gains, gambling winnings, etc. Are subject to income tax.
(CIR vs. Manning, GR No. L-28398, August 6, 1975)
b. Taxable. Sale exchange or other disposition of property to the government
of real property is taxable. It includes taking by the government through
condemnation proceedings. [Gonzales vs CTA, GR No. L-14532, May 26,
1965]
c. Taxable ONLY IF the taxes were paid and claimed as deduction and which
are subsequently refunded or credited. It shall be included as part of gross
income in the year of receipt to the extent of the income tax benefit of said
deduction. [Section 34(C)(1) NIRC] Not taxable if the taxes refunded were
not originally claimed as deduction.
d. Taxable under TAX BENEFIT RULE. Recovery of bad debts previously
allowed as deduction in the preceding years shall be included as part of the
gross income in year of recovery to the extent of income tax benefit of said
deduction. [Section 34 (E) (1), NIRC]
e. Taxable. Since the car is used for personal purposes, it is
considered as capital asset hence the gain is considered income.
[Section 32 (A) (3) and Section 39 (A) (1), NIRC]
DEDUCTIONS, EXEMPTIONS, EXCLUSIONS & INCLUSIONS
Q: What is the all-events test? If AAA Corporation rendered
services to BBB Corporation in 2007, but AAA billed BBB only in
2008 and collected the payment in the same year 2008, is BBB
allowed to claim the expense as a deduction? (Bar 2009, 2010)
The all-events test is a test applied in the realization of income and expense
by accrual-basis taxpayer. The test requires (1) the fixing of a right to the
income or liability to pay; and (2) the availability of reasonably accurate
determination of such income or liability, to warrant the inclusion of the
income or expense in the gross income or deductions during the taxable
year. (CIR vs. Isabela Cultural Corporation, GR No. 172231, February 12,
2007)
No. The expense is deductible in the year it complies with the all-events test.
The test is considered met if the liability is fixed, and the amount of such
liability to pay is already fixed in 2007 when the services were rendered, and
the amount of such liability is determinable with reasonable accuracy in the
same year. Hence, the deduction should have been claimed in 2007 and not
in 2008.
Q: In order to facilitate the processing of its application for a license from
a government office, Corporation A found it necessary to pay the amount
of Php100,000 as a bribe to the approving official. Is the Php100,000
deductible from the gross income of Corporation A? On the other hand, is
the Php100,000 taxable income of the approving official? (Bar 1998,
2001)
Section 34 (A) (1) (c) Bribes, Kickbacks and other Similar
Payments
No deduction from gross income shall be allowed under Subsection (A)
hereof for any payment made,
directly or indirectly, to an official or employee of the national government,
or to an official or employee of any local government unit, or to an official or
employee of a government-owned or controlled corporation, or to an official
or employee or representative of a foreign government, or to a private
corporation, general professional partnership, or a similar entity, if the
payment constitutes a bribe or kickback.
Section 32 (A) Gross Income; General Definition
Except when otherwise provided in this Title, gross income means all income
derived from whatever source xxx
Since the Php100,000 constitutes a bribe, it is not allowed as a deduction from the
gross income of Corporation A. However, to the recipient government official, the
same constitutes a taxable income. All income from legal or illegal sources are taxable
absent any clear provision of law exempting the same. This is the reason why gross
income had been defined to include income from whatever source derived. [Section
34 (A) (1) (c)]
SOURCE: UP Law Complex
Q: Company A decides to close its operations due to continuing losses and
to terminate the services of its employees. Under the Labor Code,
employees who are separated from service for such cause are entitled to a
minimum of one-half month pay for every year of service. Company A
paid the equivalent of one month pay for every year of service and the
cash equivalent of unused vacation and sick leaves as separation benefits.
Are such benefits taxable and subject to withholding tax under the Tax
Code? (Bar 1994, 1995, 1999, 2005)
Section 32 (B) (6) (b) Exclusions from Gross Income - Retirement
Benefits, Pensions, Gratuities, etc
Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from
the service of the employer because of death, sickness or other physical
disability or for any cause beyond the control of the said official or employee.
All of the benefits are not taxable, hence, they are not subject to withholding tax under
the Tax Code. Benefits received as a consequence of separation for any cause beyond
the control of the employees such as closure of business are excluded from gross
income. [Section 34 (A) (1) (c)]
SOURCE: UP Law Complex
Q: Mr. Jacobo worked for a manufacturing firm. Due to business
reverses, the firm offered voluntary redundancy program in order to
reduce overhead expenses. Under the program, an employee who offered
to resign would be given separation pay equivalent to his three month’s
basic salary for every year of service. Mr. Jacobo accepted the offer and
received Php400,000 as separation pay under the program.
After all the employees who accepted the offer were paid, the firm found
its overhead still excessive. Hence, various unprofitable departments
were closed pursuant to a retrenchment program. As a result, Mr.
Kintanar was separated from the service and received Php400,000 as a
separation pay.
1) Is the separation pay received by Mr. Jacobo subject to income
tax?
2) Is the separation pay received by Mr. Kintanar subject to income
tax? (Bar 1994, 1995, 1999, 2005)
Section 32 (B) (6) (b) Exclusions from Gross Income - Retirement
Benefits, Pensions, Gratuities, etc
Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from
the service of the employer because of death, sickness or other physical
disability or for any cause beyond the control of the said official or
employee.
1) Yes, Mr. Jacobo derived a taxable income when he received his separation
pay because his separation from employment was voluntary on his part in
view of his offer to resign. What is excluded from gross income is any
amount received by an official or employee from the service of the employer
for any cause beyond the control of the said official or employee.
SOURCE: UP Law Complex
2) No, Mr. Kintanar did not derive any income when he received his separation
pay because his separation from employment is due to causes beyond his
control. The separation was involuntary as it was a consequence of the
closure of various unprofitable departments pursuant to the retrenchment
program.
SOURCE: UP Law Complex
Q: XYZ Colleges is a non-stock, non-profit educational institution run by
the Archdiocese of BP City. It collected and received the following:
a) Tuition fees
b) Dormitory fees
c) Rentals from canteen concessionaires
d) Interest from money-market placements of the tuition fees
e) Donation of a lot and building by school alumni
Which of these above cited income and donation would not be exempt
from taxation? (Bar 1994, 2004)
Section 4 (3) Art XIV 1987 Constitution
All revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. xxx
Section 101 (A) (3) Exemption of Certain Gifts
Gifts in favour of an educational xxx institution or organization: Provided,
however, That not more than thirty percent (30%) of said gifts shall be used
by such done for administration purposes. xxx
All of the income derived by XYZ Colleges will be exempt from taxation provided they
are used actually, directly, and exclusively for educational purposes. [Section 4 (3) Art
XIV 1987 Constitution]
The donation is likewise exempt from donor’s tax if it is actually, directly, and
exclusively used for educational purposes, provided not more than 30% of the
donation is used by the done for administration purposes. [Section 101 (A) (3)]
SOURCE: UP Law Complex
Q: The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac.
The southern side and middle part are occupied by the Church and a
convent, the eastern side by a school run by the Church itself, the
southeastern side by some commercial establishments, while the rest of
the property, in particular the northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land?
(Bar 1996, 2002, 2005)
Section 28 (3) Art VI 1987 Constitution
Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.
No. The Church cannot claim tax exemption on the entire land. Only the southern,
middle, and eastern sides occupied by the Church, convent, school, respectively, are
exempt because these areas are being used actually, directly, and exclusively for
religious and educational purposes.
The southeastern side occupied by some commercial establishment is not tax exempt.
It is not exclusively used for the exempted purpose but it is subject to taxation. The
property must be exclusively (solely) used for religious or educational purposes.
(Lung Center of the Phils. V. Quezon City; GR No. 144104; June 29, 2004) The
northwestern side, which is idle or unoccupied, is also not exempt from taxation since
it is not actually, directly, and exclusively used for religious or educational purposes.
Q: Noel Santos is a very bright computer science graduate. He was hired
by Hewlett Packard. To entice him to accept the offer of employment, he
was offered the arrangement that part of his compensation would be an
insurance policy with a face value of P20 Million. The parents of Noel are
made the beneficiaries of the insurance policy.
1) Will the proceeds of the insurance form part of the income of the
parents of Noel and be subject to income tax?
2) Can the company deduct from its gross income the amount of the
premium? (Bar 2004, 2007)
Section 32 (B) (1) Exclusions from Gross Income - Life Insurance
The proceeds of life insurance policies paid to the heirs or beneficiaries upon
the death of the insured, whether in a single sum or otherwise, but if such
amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross
income.
Section 36 (A) (4) Items not Deductible - Premiums of Life
Insurance
Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
1) No. The proceeds of life insurance policies paid to the heirs of beneficiaries
upon the death of the insured are not included as part of the gross income of
the recipient. There is no income realized because nothing flows to Noel’s
parents other than a mere return of capital, the capital being the life of the
insured.
2) Yes. The premiums paid are ordinary and necessary business expenses of
the company. They are allowed as a deduction from gross income so long as
the employer is not a direct or indirect beneficiary under the policy of
insurance. Since the parents of the employee were made the beneficiaries,
the prohibition for their deduction does not exist.
Q: JR was a passenger of an airline that crashed. He survived the accident
but sustained serious physical injuries which required hospitalization for
3 months. Following negotiations with the airline and its insurer, an
agreement was reached under the terms of which JR was paid the
following amounts: Php500,000 for hospitalization; Php250,000 as
moral damages; and P300,000 for loss of income during the period of his
treatment and recuperation. Which, if any, of the amounts he received
are subject to income tax? (Bar 1995, 2003, 2005, 2007)
Section 32 (B) (4) Exclusions from Gross Income - Compensation
for Injuries or Sickness
Amounts received, through Accidentor Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
All the amounts received from the airline company are excluded from gross income.
Since the amounts received from the airline company were received as damages by
agreement on account of personal injuries, all shall be excluded from JR’s gross
income. The amounts having been received on account of the injuries suffered by JR,
is compensatory in nature, hence, is not considered as an income but a mere return of
capital. Income is any wealth which flows to the taxpayer other than a mere return of
capital. [Section 32 (B) (4)]
SOURCE: UP Law Complex
Q: Mr. Javier is a non-resident senior citizen. He receives monthly
pension from the GSIS which he deposits with the PNB. Is he exempt
from income tax and therefore not required to file an income tax return?
(Bar 2007, 2000)
Section 32 (B) (6) (c), NIRC
Exclusions from Gross Income.
(c) The provisions of any existing law to the contrary notwithstanding, social
security benefits, retirement gratuities, pensions and other similar benefits
received by resident or non-resident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government
agencies an other institutions, private or public.
Mr. Javier is exempt from income tax on his monthly GSIS pension [Section 32 (B)
(6) (c), NIRC] but not on the interest income that might accrue on the pensions
deposited with PNB which are subject to final withholding tax. Consequently, since
Mr. Javier’s sole taxable income would have been subject to a final withholding tax, he
is not required anymore to file an income tax return [Section 51 (A) (2) (c)].
Topic: Tax Exemptions and Tax Exempt Entities (Bar 2002, 2004)
Q: XYZ Foundation is a non-stock, non-profit association duly organized
for religious, charitable and social welfare purposes. Last January 3,
2000 it sold a portion of its lot used for religious purposes and utilized
the entire proceeds for the construction of a building to house its free Day
and Night Care Center for children of single parents. In order to subsidize
the expenses of the Day and Night Care Center and to support its
religious, charitable and social welfare projects, the Foundation leased
the 300square meter area of the second and third floors of the building
for use as a boarding house. The Foundation also operates a canteen and
a gift shop within the premises, all the income from which is used
actually, directly, and exclusively for the purposes for which the
Foundation was organized.
Considering the constitutional provision granting tax exemption to non-
stock corporations such as those formed exclusively for religious,
charitable or social welfare purposes, explain the meaning of the last
paragraph of said Sec. 30 of the 1997 Tax Code which states that “Income
of whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income
shall be subject to tax imposed under this Code."
Sec. 30, NIRC
Exemptions from tax on corporations. The following organizations
shall not be taxed under this Title in respect to income received by them as
such:(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inures to the benefit of any member, organizer, officer or any
specific person;
The exemption contemplated in the Constitution covers real estate tax on
real properties actually, directly and exclusively used for religious, charitable
or social welfare purposes. It does not cover exemption from the imposition
of the income tax which is within the context of Section 30 of the Tax Code.
As a rule, non-stock nonprofit corporations organized for religious,
charitable or social welfare purposes are exempt from income tax on their
income received by them as such. However, if these religious, charitable or
social welfare corporations derive income from their properties or any of
their activities conducted for profit, the income tax shall be imposed on said
items of income irrespective of their disposition. [YMCA, GR No. 124043,
1998]
Q: The Roman Catholic Church owns a 2-hectare lot, in a town in Tarlac
province. The southern side and middle part are occupied by the Church
and a convent, the eastern side by a school run by the Church itself, the
southeastern side by some commercial establishments, while the rest of
the property, in particular the northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with
reasons.
No. The Church cannot claim tax exemption on the entire land. Only the southern
side and middle part that are occupied by the Church and a convent and the eastern
side occupied by a school run by the Church itself are exempt, because such parts of
the 2-hectare lot are actually, directly and exclusively used for religious and
educational purposes. (Sec. 28[3], Art. VI, 1987 Constitution; Sec. 234, Local
Government Code). The southeastern side occupied by some commercial
establishment is not tax exempt. If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purpose but is subject to
taxation. 'Solely' is synonymous with 'exclusively.' (Lung Center of the Philippines v.
Quezon City, G.R. No. 144104, June 29, 2004) The property must be exclusively
(solely) used for religious or educational purposes. Of course, it is apparent that the
northwestern side, which is idle or unoccupied is not "actually, directly and
exclusively" used for religious or educational purposes, hence not exempt from
taxation.
Topic: Tax Evasion vs Tax Avoidance (Bar 1996, 2000)
Q: Distinguish tax evasion from tax avoidance.
Tax Evasion Tax Avoidance
Tax evasion is a scheme used outside of Tax avoidance and tax evasion are the
those lawful means to escape tax liability two most common ways used by
and, when availed of, it usually subjects taxpayers in escaping from taxation. Tax
the taxpayer to further or additional civil avoidance is the tax saving device within
or criminal liabilities. Tax avoidance, on the means sanctioned by law. This
the other hand, is a tax saving device method should be used by the taxpayer in
within the means sanctioned by law, good faith and at arms length. Tax
hence legal. evasion, on the other hand, is a scheme
used outside of those lawful means and
when availed of, it usually subjects the
taxpayer to further or additional civil or
criminal liabilities.
(CIR v Estate of Benigno Toda, G.R. No. 147188, September 14, 2004)
Q: Mr. Pascual's income from leasing his property reaches the maximum
rate of tax under the law. He donated one-half of his said property to a
non-stock, non-profit educational institution whose income and assets
are actually, directly and exclusively used for educational purposes, and
therefore qualified for tax exemption under Article XIV, Section 4 (3) of
the Constitution and Section 30 (h) of the Tax Code. Having thus
transferred a portion of his said asset, Mr. Pascual succeeded in paying a
lesser tax on the rental income derived from his property. Is there tax
avoidance or tax evasion? Explain.
There is tax avoidance. Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities [Jose C. Vitug and Ernesto D. Acosta,
Tax Law and Jurisprudence 44 (2nd ed., 2000)]. Thus, Mr. Pascual has exploited a
fully permissive alternative method to reduce his income tax by transferring part of
his rental income to a tax exempt entity through a donation of one-half of the income
producing property. The donation is likewise exempt from the donor's tax. The
donation is the legal means employed to transfer the incidence of income tax on the
rental income.
CAPITAL GAINS TAX
q: A, a Filipino citizen residing in Makati and a pure compensation
income earner, sold the following properties which he owns to B:
1) Land located in Batangas
2) Shares of stock in a domestic corporation not traded in the local
stock exchange
Is A liable for Philippine Income tax? If so, what is the tax base and tax
rate? (Bar 2010, Bar 2008)
Section 24 (C) and (D) (1), NIRC
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at
the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange.
Not over P100,000…………………………….. 5%
On any amount in excess of P100,000………… 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax
of six percent (6%) based on the gross selling price or current fair market
value as determined in accordance with Section 6(E) of this Code, whichever
is higher, is hereby 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, including pacto de retro sales
and other forms of conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this Subsection, at
the option of the taxpayer.
Yes. The income from sale of land is subject to capital gains tax of 6% of the higher
value between the selling price and fair market value of the real property (land).
The income from sale of shares of stock is subject to 5% on first P100,000 net capital
gain, and 10% for any amount in excess of P100,000 net capital gain.
Topic: Properties Exempt from Real Property Taxes Under the Local Government
Code (Bar 2002, 2006)
Q: Under the Local Government Code, what properties are exempt from
real property taxes?
The following properties are exempt from real property taxes: (Sec. 234, LGC)
1) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
2) All lands, buildings and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes by charitable
institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries;
3) All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power;
4) All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
5) Machinery and equipment used for pollution control and environmental
protection.
Q: The Constitution provides "charitable institutions, churches,
parsonages or convents appurtenant thereto, mosques, and non- profit
cemeteries and all lands, buildings, and improvements actually, directly
and exclusively used for religious, charitable or educational purposes
shall be exempt from taxation." This provision exempts charitable
institutions and religious institutions from what kind of taxes? Choose
the best answer. Explain.

a) from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real
property tax
b) from income tax only
c) from value-added tax only
d) from real property tax only
e) from capital gains tax only.
The provision exemptions charitable institutions and religious institutions from (d)
REAL PROPERTY TAXES only. Section 28 (3), Art. VI of the 1987 Constitution
provides:
“Charitable institutions, churches and personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall
be exempt from taxation.”
The exemption is only for taxes assessed as property taxes, as distinguished from
excise taxes (CIR v. CA, CTA & YMCA, G.R. No. 124043, October 14, 1998; Lladoc v.
Commissioner of Internal Revenue, L-19201, June 16,1965).
Topic: Real Property Tax of Machinery & Equipment Installed by Lessee (Bar
2001, 2003)
Q: Under Article 415 of the Civil Code, in order for machinery and
equipment to be considered real property, they must be placed by the
owner of the land and, in addition, must tend to directly meet the needs of
the industry or works carried on by the owner. Oil companies, such as
Caltex and Shell, install underground tanks in the gasoline stations
located on land leased by the oil companies from others. Are those
underground tanks which were not placed there by the owner of the land
but which were instead placed there by the lessee of the land, considered
real property for purposes of real property taxation under the Local
Government Code? Explain your answer.
Yes. The underground tanks although installed by the lessee, Shell and Caltex, are
considered as real property for purposes of the imposition of real property taxes. It is
only for purposes of executing a final judgment that these machinery and equipment,
installed by the lessee on a leased land, would not be considered as real property. But
in the imposition of the real property tax, the underground tanks are taxable as
necessary fixtures of the gasoline station without which the gasoline station would not
be operational. (Caltex Phils., Inc v. CBAA, 114 SCRA. 296).
Q: Under Article 415 of the Civil Code, in order for machinery and
equipment to be considered real property, the pieces must be placed by
the owner of the land and, in addition, must tend to directly meet the
needs of the industry or works carried on by the owner. Oil companies
install underground tanks in the gasoline stations located on land leased
by the oil companies from the owners of the land where the gasoline
stations [are] located. Are those underground tanks, which were not
placed there by the owner of the land but which were instead placed there
by the lessee of the land, considered real property for purposes of real
property taxation under the local Government Code? Explain.
Yes. The properties are considered as necessary fixtures of the gasoline station,
without which the gasoline station would be useless. Machinery and equipment
installed by the lessee of leased land is not real property for purposes of execution of a
final judgment only. They are considered as real property for real property tax
purposes as "other improvements to affixed or attached real property under the
Assessment Law and the Real Property Tax Code.
SOURCE: UP Law Complex and Philippine Association of Law Schools
TAX ON IDLE LANDS IN SUBDIVISION
Q: Aside from the basic real estate tax, give three (3) other taxes which
may be imposed by provincial and city governments as well as by
municipalities in the Metro Manila area. (Bar 2002)
The following real property taxes aside from the basic real property tax may be
imposed by provincial and city governments as well as by municipalities in the Metro
Manila area:
1) Additional levy on real property for the Special Education Fund (Sec.
235, LGC);
2) Additional Ad-valorem tax on Idle lands (Sec. 23§, LGC); and
3) Special levy (Sec. 240).
Topic: Tax on Idle Lands (Bar 2005)
Q: A city outside of Metro Manila plans to enact an ordinance that will
impose a special levy on idle lands located in residential subdivisions
within its territorial jurisdiction in addition to the basic real property tax.
If the lot owners of a subdivision located in the said city seek your legal
advice on the matter, what would your advice be? Discuss.
I would advise the lot owners that a city, even if it is outside Metro Manila, may levy
an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed
value of the property which shall be in addition to the basic real property tax. (Sec.
236, Local Government Code)
I would likewise advise them that the levy may apply to residential lots, regardless of
land area, in subdivisions duly approved by proper authorities, the ownership of
which has been transferred to individual owners who shall be liable for the additional
tax. (Last par., Sec. 237). The term "Idle Lands" means, land not devoted directly to
any crop or to any definite purpose for at least one year prior to the notice of
expropriation, except for reasons other than force majeure or any fortuitous event,
but used to be devoted or is suitable to such crop or is contiguous to land devoted
directly to any crop and does not include land devoted permanently or regularly to
other essential and more productive purpose. (Philippine Legal Encyclopedia, by
Sibal, 1986 Ed.)
Finally, I would advise them to construct or place improvements on their idle lands by
making valuable additions to the property or ameliorations in the land's conditions so
the lands would not be considered as idle. (Sec. 199[m]) In this manner their
properties would not be subject to the ad valorem tax on idle lands.
Topic: Imposition of Real Property Tax Rate (Bar 2002)
Q: An Ordinance was passed by the Provincial Board of a Province in the
North, increasing the rate of basic real property tax from 0.006% to 1 % of
the assessed value of the real property effective January 1, 2000.
Residents of the municipalities of the said province protested the
Ordinance on the ground that no public hearing was conducted and,
therefore, any increase in the rate of real property tax is void. Is there
merit in the protest? Explain your answer.
The protest is devoid of merit. No public hearing is required before the enactment of a
local tax ordinance levying the basic real property tax (Art. 324, LGC Regulations).
Alternative Answer:
Yes. There is merit in the protest provided that sufficient proof could be introduced
for the non-observance of public hearing. By implication, the Supreme Court
recognized that public hearings are required to be conducted prior to the enactment of
an ordinance imposing real property taxes. Although it was concluded by the highest
tribunal that presumption of validity of a tax ordinance can not be overcome by bare
assertions of procedural defects on its enactment, it would seem that if the taxpayer
had presented evidence to support the allegation that no public hearing was
conducted, the Court should have ruled that the tax ordinance is invalid. (Belen
Figuerres v. Court of Appeals, GRNo. 119172, March 25, 1999).
Topic: Fundamental Principles Governing Real Property Taxation (Bar 1997,
2000)
Q: State the fundamental principles underlying real property taxation in
the Philippines.
The following are the fundamental principles governing real property taxation:
1) Real property shall be appraised at its current and fair market value;
2) Real property shall be classified for assessment purposes on the basis of its
actual use:
3) Real property shall be assessed on the basis of a uniform classification within
each local government unit;
4) The appraisal, assessment, levy, and collection of real property tax shall not
be let to any private person; and
5) The appraisal and assessment of real property shall be equitable. (Sec. 198,
Real Property Tax Code)
Q: Give at least two (2) fundamental principles governing real property
taxation, which are limitations on the taxing power of local governments
insofar as the levying of the realty tax is concerned.
Two (2) fundamental principles governing real property taxation are: 1) The appraisal
must be at the current and fair market value; and 2) Classification for assessment
must be on the basis of actual use. (Sec. 198, Local Government Code)
Alternative Answer:
The examinee should be given credit if he chooses the above two (2) or any two (2) of
those enumerated below:
1) Assessment must be on the basis of uniform classification;
2) Appraisal, assessment, levy and collection shall not be let to private persons;
and
3) Appraisal and assessment must be equitable. (Sec. 198, Local Government
Code)
Topic: VAT on Sale of Services and Use or Lease of Properties (Bar 1996)
Q: What are the characteristics of the Value-Added Tax?
Sec. 1, R.A. No. 7716
SECTION 1. Section 99 of the National Internal Revenue Code, as amended,
is hereby further amended to read as follows:
"Sec. 99. Persons Liable. — Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be liable to the value-
added tax (VAT) imposed in Sections 100 to 102 of this Code.
"The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rules likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of this Act.
XX
The value-added tax is an indirect tax and the amount of tax may be shifted or passed
on to the buyer, transferee or lessee of the goods, properties or services.
Alternative Answer:
The value-added tax has the following characteristics:
1) It is an indirect tax where tax shifting is always presumed;
2) It is consumption-based;
3) It is imposed on the value-added in each stage of distribution;
4) It is a credit-invoice method value-added tax; and
5) It is not a cascading tax.
SOURCE: UP Law Complex and Philippine Association of Law Schools
Q: Who are liable for the payment of Value-Added Tax?
The persons liable for the value-added tax are sellers of goods and properties in the
course of trade or business; sellers of services in the course of trade or business,
including lessors of goods and properties; and importers of taxable goods, whether in
the course of business or not.
SOURCE: UP Law Complex and Philippine Association of Law Schools

Topic: VAT on Leased Properties (Bar 1996)
Q: What is the basis of the Value-Added Tax on taxable sales of real
property?
Section 106 (A), NIRC
(A) Rate and Base of Tax. - There shall be levied, assessed and collected
on every sale, barter or exchange of goods or properties, value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be
paid by the seller or transferor.
The basis of the Value-Added Tax on taxable sale of real property is "GROSS
SELLING PRICE" which is either selling price stated in the sale document or the
"Zonal Value", whichever is higher. In the absence of zonal values, the gross selling
price shall refer to the market value as shown in the latest tax declaration or the
consideration, whichever is higher.
Topic: VAT Refund (Bar 2001, 2006)
Q: May a taxpayer who has pending claims for VAT input credit or refund,
set-off said claims against his other tax liabilities? Explain your answer.
No. Set-off is available only if both obligations are liquidated and demandable.
Liquidated debts are those where the exact amounts have already been determined. In
the instant case, the claim of the taxpayer for VAT refund is still pending and the
amount has still to be determined. A fortiori, the liquidated obligation of the taxpayer
to the government can not, therefore, be set-off against the unliquidated claim which
the taxpayer conceived to exist in his favor. (Philex Mining Corp. v. CIR, GR No.
125704, August 29, 1998).
Alternative Answer:
No. Taxes and claims for refund cannot be the subject of set-off for the simple reason
that the government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and a claim for refund. Claims for
refunds just like debts are due from the government in its corporate capacity, while
taxes are due to the government in its sovereign capacity. (Philex Mining Corp. v.
CIR, GR No. 125704, August 29, 1998).
Q: Lily's Fashion, Inc. is a garment manufacturer located and registered
as a Subic Bay Freeport Enterprise under Republic Act No. 7227 and a
non-VAT taxpayer. As such, it is exempt from payment of all local and
national internal revenue taxes. During its operations, it purchased
various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted to Lily's
Fashion, Inc. the 10% VAT on the purchased items amounting to P
500,000.00. Lily's Fashion, Inc. filed with the BIR a claim for refund for
the input tax shifted to it by the suppliers. If you were the Commissioner
of Internal Revenue, will you allow the refund?
Sec. 112 [A], Tax Reform Act of 1997
Refunds or Tax Credits of Input Tax. (A) Zero-rated or Effectively
Zero-rated Sales. - any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax…
No. I will not allow the refund. Only VAT-Registered taxpayers are entitled to a
refund of their unapplied/unused Input VAT (Tax Reform Act, Section 112[A] [1997]).
Alternative Answer:
No. The exemption of Lily's Fashion, Inc. is only for taxes for which it is directly
liable. Hence, it cannot claim exemption for a tax shifted to it, which is not at all
considered a tax to the buyer but a part of the purchase price. Lily's fashion is not the
taxpayer in so far as the passed-on tax is concerned and therefore, it cannot claim for
a refund of a tax merely shifted to it (Phil. Acetylene Co., Inc. v. CIR, L-19707,Aug. 17,
1987).
COMPROMISE
Q: Under what conditions the Commissioner of Internal Revenue:
A. May be authorized to compromise the payment of any internal
revenue tax?
B. Abate or cancel a tax liability?
(Bar 1998, 2000, 2002, 2004, 2005, 2009, 2010)
A. Under Section 204 (A) of NIRC, the Commissioner of Internal Revenue
may be authorized to compromise the payment of any internal revenue
tax where:
 A reasonable doubt as to the validity of the claim against the
taxpayer exists; or
 The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax.
B. The Commissioner of Internal Revenue may abate or cancel a tax
liability when:
 The tax or any portion thereof appears to be unjustly or
excessively assessed; or
 The administration and collection costs involved do not justify
the collection of the amount due. [Sec. 204 (B), NIRC of 1997]
Q: Distinguish abatement of tax liabilities with compromise. (Bar 1998,
2000, 2002, 2004, 2005, 2009, 2010)
Abatement of tax liabilities is allowed if the tax appears to have been unjustly or
excessively assessed, or when the administration and collection costs involved do not
justify the collection of the amount due. On the other hand, a taxpayer asks for a
compromise based on reasonable doubt as to the tax liability of a taxpayer, or when he
is financially incapable of paying the tax. In abatement, there is no minimum payment
required. This is unlike compromise where certain minimum payments are required
by the NIRC, depending on the ground availed of by the taxpayer. (People v. Tan, GR
No.152532, 16 August 2005)
TAX REFUND
Q: State the conditions required by the Tax Code before the
Commissioner of Internal Revenue could authorize the refund or credit of
taxes erroneously or illegally received. (Bar 2000, 2002, 2004, 2005,
2008, 2009, 2010, 2013, 2014)
Under Sec. 204(C), NIRC, the following conditions must be met:
a. There must be a written claim for refund filed by the taxpayer with the
Commissioner.
b. The claim for refund must be a categorical demand for reimbursement.
c. The claim for refund must be filed within two (2) years from date of payment of the
tax or penalty regardless of any supervening cause.
Q: X Corporation was able to secure a favorable judgment from the courts
granting its claim for refund. The judgment became final. At the time the
judgment was to be executed, the BIR refused to grant the refund on the
ground that the corporation is presently subject of an audit by the BIR,
which might result to potential tax liabilities. Is the action of the BIR
proper? (Bar 2000, 2002, 2004, 2005, 2008, 2009, 2010, 2013, 2014)
No. While the general rule is that claims for refund and proceedings regarding the
determination of the liability of a taxpayer for deficiency taxes must, as far as
practicable, be settled only under one proceedings to avoid multiplicity of suits, the
said rule is not applicable in the present case since the entitlement of the taxpayer to
the refund was already determined with finality; hence, was removed already from the
jurisdiction of the BIR. (CIR v. Citytrust Banking Corporation, 22 August 2006)
Q: X’s filed his income tax return on 15 April 2006. On 15 April 2008, he
filed a Petition for Review with the CTA asking the tax court to grant to
him his claim for refund, considering that as of the said date, he has not
yet received any action from the BIR regarding his claim. The CTA denied
the claim for refund on the ground of prescription, considering that the
two-year period of X to file a claim for refund ended on 14 April 2008, in
view of the fact that during the year 2008, the month of February
consisted of 29 days (in view of the leap year). According to the CTA, since
one year, as per Civil Code provision, is equivalent to 365 days only, the
two year period would thus have 730 days; thus, the filing of the case for
refund on15 April 2008 was one day late. Is the CTA correct? (Bar 2000,
2002, 2004, 2005, 2008, 2009, 2010, 2013, 2014)
No. The CTA is not correct. It is true that under the Civil Code, a year is equivalent to
365 days whether it be a regular year or a leap year. However, Under Section 31,
Chapter VIII, Book I of the Administrative Code of 1987, a year is composed of 12
calendar months, regardless of the number of days. There obviously exists a manifest
incompatibility in the manner of computing legal periods under the Civil Code and the
Administrative Code of 1987.
For this reason, Section 31, Chapter VIII, Book I of the Administrative Code of 1987,
being the more recent law, governs the computation of legal periods. Lex posteriori
derogat priori. Applying Section 31, Chapter VIII, Book I of the Administrative Code
of 1987 to this case, the two-year
prescriptive period (reckoned from the time of the filing of the final adjusted return
on April 15, 2006) consisted of 24 calendar months, ending on April 15, 2008. Thus,
the Petition was filed within the period allowed by law. (CIR v. Primetown Property
Group, GR No. 162155, 28 August 2007).
JURISDICTION OF THE CTA
Q: Congress passed a law amending certain provisions of the NIRC.
Pursuant to the said law, the Secretary of Finance issued the
implementing revenue regulation thereof. Marian, a taxpayer aggrieved
by the amendment and its implementing rules, filed a petition for
prohibition and/or injunction before the Regional Trial Court, Cebu City,
seeking to prohibit and/or enjoin the enforcement of the said law and its
implementing rules. In her Petition, Marian advanced the argument that
the said law and its implementing rules are violative of certain provisions
of the Constitution. The Solicitor General, on the other hand, moved to
dismiss the case due to lack of jurisdiction on the ground that the case
should have been filed before the Court of Tax Appeals. If you were the
judge who will resolve the motion, would you grant it? (Bar 1999, 2001,
2002, 2004, 2005, 2006, 2009, 2010)
No. I would not grant the motion. While the CTA has the jurisdiction to resolve tax
disputes in general, where what is assailed is the validity or constitutionality of a law,
or a rule or regulation issued by the administrative agency in the performance of its
quasi-legislative function, the regular courts and the not the CTA have jurisdiction to
pass upon the same. (British American Tobacco v. Camacho, et al., G.R. No. 163583
dated August 20, 2008).
Q: Does the Court of Tax Appeals have jurisdiction to determine the
validity of a warrant of distraint and levy issued by the BIR and to rule if a
Waiver of Statute of Limitations was validly effected? (Bar 1999, 2001,
2002, 2004, 2005, 2006, 2009, 2010)
Yes. The appellate jurisdiction of the CTA is not limited to cases which involve
decisions of the Commissioner of Internal Revenue on matters relating to assessments
or refunds. The law also covers other matters or cases that arise out of the NIRC or
related laws administered by the Bureau of Internal Revenue. The wording of the
provision is clear and simple. It gives the CTA the jurisdiction to determine if the
warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of
Statute of Limitations was validly effected. (Philippine Journalists, Inc. v. CIR, G.R.
No. 162852, December 16, 2004)
ASSESSEMENT AND PRE-ASSESSMENT NOTICE, FINAL ASSESSEMNT NOTICE
Q: During the lifetime of a decedent, her business affairs were conducted
by a trustee. Two days after the death of the decedent on April 3, 1979, the
trustee filed the decedent’s income tax return for the taxable year 1978,
without indicating therein that the decedent had died. Subsequently, the
BIR found a deficiency income tax by the decedent for the taxable year
1977. Thus, it sent by registered mail a demand letter and assessment
notice addressed to the decedent “c/o the trustee.” The assessment was
actually sent to the trustee’s address, which was the address indicated in
the return filed by the trustee for the decedent for the taxable year 1978.
Was there valid service of the assessment? Did the assessment lapse into
finality? (Bar 1999, 2002, 2008, 2010, 2012, 2013, 2014)
There was no valid service of assessment. The first point to be considered is that the
relationship between the decedent and trustee was one of agency, which is a personal
relationship between agent and principal. Under Article 1919 (3) of the Civil Code,
death of the agent or principal automatically terminates the agency. In this instance,
the death of the decedent on April 3, 1979 automatically severed the legal relationship
between her and the trustee, and such could not be revived by the mere fact that the
trustee continued to act as her agent when, on April 5, 1979, it filed her Income Tax
Return for the year 1978.
Since the relationship between the trustee and the decedent was automatically
severed at the moment of the Taxpayer's death, none of the trustee’s acts or omissions
could bind the estate of the Taxpayer. Service on the trustee of the demand letter and
assessment notice was therefore improperly done.
Since there was never any valid notice of this assessment, it could not have become
final, executory and incontestable, and, for failure to make the assessment within the
three-year period provided in Section 203 of the NIRC, respondent's claim against the
petitioner Estate is barred.(Estate of the Late Juliana Diez Vda. De Gabriel v. CIR,
G.R. No. 155541, January 27, 2004.)
Q: A waiver of the statute of limitations to assess and collect internal
revenue taxes worth more than P1M was signed by the comptroller of a
corporate taxpayer. The waiver did not specify a definite agreed date
between the BIR and the taxpayer, within which the former may assess
and collect revenue taxes. The said waiver bore the acceptance of the
Revenue District Officer of the tax district where the principal place of
business of the taxpayer was located. Is the waiver valid? (Bar 1999,
2002, 2008, 2010, 2012, 2013, 2014)
No. The waiver is not valid. The NIRC, under Sections 203 and 222, provides for a
statute of limitations on the assessment and collection of internal revenue taxes in
order to safeguard the interest of the taxpayer against unreasonable investigation.
Unreasonable investigation contemplates cases where the period for assessment
extends indefinitely because this deprives the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time. The waiver subject of this case was unlimited in time,
hence violating Section 222 (b) of the NIRC.
The waiver is also defective from the government side because it was signed only by a
revenue district officer, not the Commissioner, as mandated by the NIRC and RMO
No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a
bilateral agreement between two parties to extend the period to a date certain. The
conformity of the BIR must be made by either the Commissioner or the Revenue
District Officer. This case involves taxes amounting to more than One Million Pesos
(P1,000,000.00) and executed almost seven months before the expiration of the
three-year prescription period. For this, RMO No. 20-90 requires the Commissioner
of Internal Revenue to sign for the BIR. (Philippine Journalists, Inc. v. CIR, G.R. No.
162852, December 16, 2004)
Q: What are the circumstances that would warrant the suspension of the
period to assess and collect? (Bar 1999, 2002, 2008, 2010, 2012, 2013,
2014)
The running of the Statute of Limitations provided in Sections 203 and 222 on the
making of assessment and the beginning of distraint or levy or a proceeding in court
for collection, in respect of any deficiency, shall be suspended for the period during
which the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the
taxpayer requests for a reinvestigation which is granted by the Commissioner; when
the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That, if the taxpayer informs the
Commissioner of any change in address, the running of the Statute of Limitations will
not be suspended; when the warrant of distraint or levy is duly served upon the
taxpayer, his authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and when the taxpayer is out of the
Philippines. [Sec. 223, NIRC]
Q: Distinguish the different forms of administratively protesting an
assessment. (Bar 1999, 2002, 2008, 2010, 2012, 2013, 2014)
The taxpayer may protest administratively an assessment by filing a written request
for reconsideration or reinvestigation:
(a) Request for reconsideration — refers to a plea for a re-evaluation of an assessment
on the basis of existing records without need of additional evidence. It may involve
both a question of fact or of law or both.
(b) Request for reinvestigation — refers to a plea for re-evaluation of an assessment
on the basis of newly discovered evidence or additional evidence that a taxpayer
intends to present in the investigation. It may also involve a question of fact or law or
both.
The main difference between these two types of protests lies in the records or
evidence to be examined by internal revenue officers, whether these are existing
records or newly discovered or additional evidence. A reevaluation of existing records
which results from a request for reconsideration does not toll the running of the
prescription period for the collection of an assessed tax. Section 223 of the NIRC
distinctly limits the suspension of the running of the statute of limitations to instances
when reinvestigation is requested by a taxpayer and is granted (given due course) by
the CIR. (CIR v. Philippine Global Communication, GR No. 167146, 31 October 2006)
Q: A taxpayer requested for reinvestigation of his tax liability. Did it
suspend the period to assess and collect? (Bar 1999, 2002, 2008, 2010,
2012, 2013, 2014)
No. A mere request for reinvestigation does not suspend the period to assess and
collect. Section 223 of the NIRC provides that the period shall be suspended “when
the taxpayer requests for a reinvestigation which is granted by the Commissioner.”
Thus, it is not only the request for reinvestigation which will toll the period. There
must be a showing that the same was granted by the CIR. (BPI v. CIR, GR No. 139736,
17 October 2005)
No. The law requires that the assessment itself should contain the facts and the law
upon which the assessment is based. Advice of tax deficiency given to the taxpayer’s
employee during the pre-assessment stage, as well as other preliminary stages, were
not valid substitutes for the mandatory notice in writing of the legal and factual bases
of the assessment. (Commissioner of Internal Revenue v. Enron Subic Power
Corporation, G.R. No. 166387 dated January 19, 2009)
Q: Will the failure to serve a Pre-Assessment Notice upon a taxpayer prior
to a formal assessment be considered as a denial of due process? (Bar
1999, 2002, 2008, 2010, 2012, 2013, 2014)

Q: After an audit by BIR examiners, a taxpayer received a notice from the No. The failure to serve a pre-assessment notice is not, in itself, amounting to a denial
BIR stating as follows: of due process. For as long as the formal assessment is issued and served upon a
taxpayer, the requirement of due process had been complied with. After all, the
taxpayer is still afforded ample administrative remedies such as protesting the
“Please be notified that after investigation by our examiners, you have an assessment. (CIR v. Menguito, 17 September 2008)
outstanding internal revenue tax liability amounting to Php750,000.00,
computed as follows:
Q: In the investigation of the withholding tax returns of AZ Medina
Security Agency (AZ Medina) for the taxable years 1997 and 1998, a
Basic Income Tax P500,000.00
discrepancy between the taxes withheld from its employees and the
Surcharge 125,000.00
amounts actually remitted to the government was found. Accordingly,
Interest 100,000.00
before the period of prescription commenced to run, the BIR issued an
Compromise Penalty 25,000.00
assessment and a demand letter calling for the immediate payment of the
TOTAL P750,000.00
deficiency withholding taxes in the total amount of P250,000.00. Counsel
for AZ Medina protested the assessment for being null and void on the
Please settle the foregoing amount on or before 30 August 2006 to avoid
ground that no pre-assessment notice had been issued. However, the
further
protest was denied. Counsel then filed a petition for prohibition with the
surcharges and penalty.”
Court of Tax Appeals to restrain the collection of the tax. Is the contention
of the counsel tenable? Explain (Bar 1999, 2002, 2008, 2010, 2012, 2013,
Is the above notice considered a valid assessment? (Bar 1999, 2002,
2014)
2008, 2010, 2012, 2013, 2014)
Section 228, NIRC
No. Under Section 228 of the NIRC, an assessment, to be valid, must contain the
Protesting of Assessment. - When the Commissioner or his duly
factual and legal bases upon which the assessment was based. The above notice
authorized representative finds that proper taxes should be assessed, he shall
merely contained a computation of the tax liability of the taxpayer, without any
first notify the taxpayer of his findings: Provided, however, That a
discussion on the factual and legal bases thereof.
preassessment notice shall not be required in the following cases:
Q: Internal Revenue Authorities issued a formal assessment against a
"(a) When the finding for any deficiency tax is the result of
taxpayer and indicated therein the supposed tax, surcharge, interest and
mathematical error in the computation of the tax as appearing on the face of
compromise penalty due thereon. The taxpayer, however, was not
the return; or
provided with the written basis of the law and facts on which the
assessment is based. Revenue authorities did not explain how it arrived at
"(b) When a discrepancy has been determined between the tax withheld
such an assessment and also failed to mention the specific provision of
and the amount actually remitted by the withholding agent; or
the NIRC or rules and regulations which were not complied with by the
taxpayer. The revenue officers, however, justified its action by stating that
"(c) When a taxpayer who opted to claim a refund or tax credit of excess
the basis of the assessment was advised upon the taxpayer during the pre-
creditable withholding tax for a taxable period was determined to have
assessment stage. Is the assessment valid? (Bar 1999, 2002, 2008, 2010,
carried over and automatically applied the same amount claimed against the
2012, 2013, 2014)
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or

"(d) When the excise tax due on excisable articles has not been paid; or

"(e) When an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment, machineries
and spare parts, has been sold, traded or transferred to non-exempt persons.
"The taxpayers shall be informed in writing of the law and the facts on which
the assessment is made; otherwise, the assessment shall be void.
"Within a period to be prescribed by implementing rules and regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner or his duly authorized representative shall issue
an assessment based on his findings.
"Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
"If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the said decision, or from the
lapse of the one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable.
No. The contention of the counsel is untenable. Section 228 of the Tax Code expressly
provides that no pre-assessment notice is required when a discrepancy has been
determined between the tax withheld and the amount actually remitted by the
withholding agent. Since the amount assessed relates to deficiency withholding taxes,
the BIR is correct in issuing the assessment and demand letter calling for the
immediate payment of the deficiency withholding taxes. (Sec. 228, NIRC).
PRESCRIPTION
Q: On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for
reconsideration of the deficiency withholding tax assessment on July 10,
1997, covering the taxable year 1994. After administrative hearings, the
original assessment of P150,000.00 was reduced to P75.000.00 and a
modified assessment was thereafter issued on August 05, 1999. Despite
repeated demands, Adamson failed and refused to pay the modified
assessment. Consequently, the BIR brought an action for collection in the
Regional Trial Court on September 15, 2000. Adamson moved to dismiss
the action on the ground that the government's right to collect the tax by
judicial action has prescribed. Decide the case. (Bar 2001, 2002, 2006,
2009, 2010, 2014)
The right of the Government to collect by judicial action has not prescribed. The filing
of the request for reconsideration suspended the running of the prescriptive period
and commenced to run again when a decision on the protest was made on August 5,
1999. It must be noted that in all cases covered by an assessment, the period to collect
shall be five (5) years from the date of the assessment but this period is suspended by
the filing of a request for reconsideration which was acted upon by the Commissioner
of Internal Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]).
Q: A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR)
on April 15, 1996 showing a net loss. On November 10, 1996, it amended
its 1995 ITR to show more losses. After a tax investigation, the BIR
disallowed certain deductions claimed by A Co., putting A Co. in a net
income position. As a result, on August 5, 1999, the BIR issued a
deficiency income assessment against A Co. A Co. protested the
assessment on the ground that it has prescribed: Decide. (Bar 2001,
2002, 2006, 2009, 2010, 2014)
The right of the BIR to assess the tax has not prescribed. The rule is that internal
revenue taxes shall be assessed within three years after the last day prescribed by law
for the filing of the return.
(Section 203, NIRC), However, if the return originally filed is amended substantially,
the counting of the three-year period starts from the date the amended return was
filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52).
There is a substantial amendment in this case because a new return was filed
declaring more losses, which can only be done either (1) in reducing gross income or
(2) in increasing the items of deductions, claimed.
Q: TY Corporation filed its final adjusted income tax return for 1993 on
April 12, 1994 showing a net loss from operations. After investigation, the
BIR issued a pre-assessment notice on March 30, 1996. A final notice and
demand letter dated April 15, 1997 was issued, personally delivered to and
received by the company's chief accountant. For willful refusal and failure
of TY Corporation to pay the tax, warrants of distraint and levy on its
properties were issued and served upon it. On January 10, 2002, a
criminal charge for violation of the Tax Code was instituted in the
Regional Trial Court with the approval of the Commissioner. The
company moved to dismiss the criminal complaint on the ground that an
act for violation of any provision of the Tax Code prescribes after five (5)
years and, in this case, the period commenced to run on March 30, 1996
when the pre-assessment was issued. How will you resolve the motion?
Explain your answer. (Bar 2001, 2002, 2006, 2009, 2010, 2014)
The motion to dismiss should not be granted. It is only when the assessment has
become final and unappealable that the 5-year period to file a criminal action
commences to run (Tupaz v. Ulop, 316 SCRA 118 [1999]). The pre-assessment notice
issued on March 30, 1996 is not a final assessment which is enforceable by the BIR. It
is the issuance of the final notice and demand letter dated April 15, 1997 and the
failure of the taxpayer to protest within 30 days from receipt thereof that made the
assessment final and unappealable. The earliest date that the assessment has become
final is May 16, 1997 and since the criminal charge was instituted on January 10,
2002, the same was timely filed.
Q: Mr. Reyes, a Filipino citizen engaged in the real estate business, filed
his 1994 income tax return on March 20, 1995. On December 15, 1995, he
left the Philippines as an immigrant to join his family in Canada. After the
investigation of said return/the BIR issued a notice of deficiency income
tax assessment on April 15, 1998. Mr. Reyes returned to the Philippines as
a balikbayan on December 8, 1998. Finding his name to be in the list of
delinquent taxpayers, he filed a protest against the assessment on the
ground that he did not receive the notice of assessment and that the
assessment had prescribed. Will the protest prosper? Explain. (Bar 2001,
2002, 2006, 2009, 2010, 2014)
Section 223, NIRC
Suspension of Running of Statute of Limitations. - The running of
the Statute of Limitations provided in Sections 203 and 222 on the making
of assessment and the beginning of distraint or levy or a proceeding in court
for collection, in respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the assessment
or beginning distraint or levy or a proceeding in court and for sixty (60) days
thereafter; when the taxpayer requests for a reinvestigation which is granted
by the Commissioner; when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the Commissioner of any
change in address, the running of the Statute of Limitations will not be
suspended; when the warrant of distraint or levy is duly served upon the
taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the
taxpayer is out of the Philippines.
Section 203, NIRC
Period of Limitation Upon Assessment and Collection. - Except as
provided in Section 222, internal revenue taxes shall be assessed within
three (3) years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period: Provided, That in a
case where a return is filed beyond the period prescribed by law, the three
(3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law
for the filing thereof shall be considered as filed on such last day.
No. Prescription has not set in because the period of limitations for the Bureau of
Internal Revenue to issue an assessment was SUSPENDED during the time that Mr.
Reyes was out of the Philippines or from the period December 15, 1995 up to
December 8, 1998. (Sec. 223 in relation to Sec. 203, both of the NIRC of 1997)
Q: On March 12, 2001, REN paid his taxes. Ten months later, he realized
that he had overpaid and so he immediately filed a claim for refund with
the Commissioner of Internal Revenue. On February 27, 2003, he
received the decision of the Commissioner denying REN's claim for
refund. On March 24, 2003, REN filed an appeal with the Court of Tax
Appeals. Was his appeal filed on time or not? Reason.Explain. (Bar 2001,
2002, 2006, 2009, 2010, 2014)
Section 229, NIRC
Recovery of Tax Erroneously or Illegally Collected. - No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or
duress.
"In any case, no such suit or proceeding shall be filed after the expiration of
two (2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That
the Commissioner may, even without a written claim therefor, refund or
credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid.
The appeal was not filed on time. The two-year period of limitation for filing a claim
for refund is not only a limitation for pursuing the claim at the administrative level
but also a limitation for appealing the case to the Court of Tax Appeals. The law
provides that "no suit or proceeding shall be filed after the expiration of two years
from the date of the payment of the tax or penalty regardless of any supervening cause
that may arise after payment (Section 229, NIRC). Since the appeal was only made on
March 24, 2003, more than two years had already elapsed from the time the taxes
were paid on March 12, 2003. Accordingly, REN had lost his judicial remedy because
of prescription.
\
TAX DEFICIENCY
Q: Is a deficiency tax assessment a bar to a claim for tax refund or tax
credit? Explain. (Bar 2002, 2005)
Yes. The deficiency tax assessment is a bar to a tax refund or credit. The Taxpayer
cannot be entitled to a refund and at the same time liable for a tax deficiency
assessment for the same year. The deficiency assessment creates a doubt as to the
truth and accuracy of the Tax Return. Said Return cannot therefore be the basis of the
refund.(Commissioner of Internal Revenue v. Alltel [2002], citing Commissioner of
Internal Revenue v. Court of Appeals, City Trust Banking Corporation and Court of
Tax Appeals, G.R. No. 106611, July 21, 1994)