ADMU Tax Notes Bar

8/10/2019 ADMU Tax Notes Bar

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A. GENERAL PRINCIPLES

Q: What are the aspects of taxation ?

A: The aspects of taxation are as follows:

1. levy & imposition which is exercised by the legislature and which includes the power to determine the persons & property subject totax, the amount & rate of tax, the type of tax, the situs of taxation and the method of collection

2. collection & enforcement which is exercised by the executive, specifically the DOF, BIR and BOC

Q: What is the lifeblood theory of taxation?A: The lifeblood theory states that the assessment of a tax is enforceable despite its being contested because of the urgency to collect taxes, thisbeing the governments primary source of revenue. Otherwise, if the payment of taxes could be postponed by questioning their validity,government would be paralyzed. [CIR v. Cebu Portland].

Q: Where is the application of the lifeblood theory illustrated?

A: It is illustrated in the prohibition against set-off of taxes and in the rule that prohibits the issuance of an in junction to restrain the collection oftaxes. However, the latter admits of an exception which is provided both under the new (RA 9282) and the old (RA 1125) CTA laws wherein it isprovided that when in the opinion of the Court the collection may jeopardize the interest of the Government and/or the taxpayer, the Court at anystage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond fornot more than double the amount with the Court.

For the prohibition against set-off of taxes, note that the payment of taxes with Tax Credit Certificates is valid as this is expressly provided for inSection 204 (C) of the Tax Code.

Another illustration is in the principle of the presumption of correctness of assessments.

Q: What are the non-revenue or SUMPTUARY objectives of taxation?

A: a.) Taxation can strengthen anemic enterprises or provide incentive to greater production through the grant of tax exemptions or the creationof conditions conducive to their growth.

b.) Taxes may be increased in periods of prosperity to curb spending power and halt inflation or lowered in periods of slump to expandbusiness and ward off depression.

c.) Taxes on imports may be increased to protect local industries against foreign competition or decreased to encourage foreign trade.d.) Taxes on imported goods may also be used as a bargaining tool by a country by setting tariff rates first at a relatively high level before

trade negotiations are entered into with another country to enhance its bargaining power.e.) Taxes can discourage certain businesses such as in the case of the high taxes imposed on alcohol and tobacco products.f.) Taxes can also minimize inequity.


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Q: Was the Motor Vehicle Registration FEE (MVRF) imposed against Philippine Airlines considered a tax or a regulatory fee?A: The MVRF was considered tax notwithstanding its designation as a fee. The SC upheld the previous decision in the Calalangcase andbased its ruling on the fact that (1) the legislative intent clearly showed that the imposition was primarily levied as a tax and (2) more importantly,only 1/5 of the amount levied was reserved for the operating expenses of the collecting agency which is a clear indication that the main purpose ofMVRF was for revenue.

Q: How were direct taxes and indirect taxes distinguished in the recent case of CIR vs. PLDT ?A: Direct taxes were defined as those that are extracted from the very person who, it is intended or desired, should pay them while indirect taxesare defined as those that are demanded, in the first instance one person in expectation and intention that he can shift the burden to someoneelse.

Q: How are taxes classified?A:

As to subject mattera.) Personal Tax of a fixed amount, imposed on persons within a specified territory, whether citizens or not, without regard to their

property or the occupation or business in which they are engagedb.) Property Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other

reasonable methods of apportionmentc.) Excise Any tax which does not fall within the classification of a personal or a property tax. It is a charge imposed upon theperformance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession or business.

As to who bears the burdena.) Direct Demanded from the person who also shoulders the burden of the tax; the taxpayer is directly or primarily liable, and he

cannot shift the burden to another. Incidence and burden of tax are on the same person. (Example: income tax)b.) Indirect Demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another,

falling finally upon the ultimate purchaser or consumer. Incidence is on one person but the burden is shifted to another. (Example:VAT)

As to scopea.) National Tax imposed by the national governmentb.) Local Tax imposed by municipal corporations or local government units

As to ratea.) Progressive The rate increases as the tax base of bracket increasesb.) Regressive The rate decreases as the tax base or bracket increases

Q: Is a margin fee considered as tax?A: NO. A fee imposed to curb excessive demands on international reserve, such as the margin fee, is not a tax but a form of exchange control.As such, it may not be considered a deductible expense if it is being claimed as a tax under (now) Section 34 (C). [Esso Standard v. CIR]

Q: What is the effect of this distinction?


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A: The margin fee will not be considered as a deductible expense as a tax paid since it is not even considered as a tax. Neither is it deductible asa business expense because the expense merely pertained to the ability to remit profits and not the running of the business itself. [Esso Standardv. CIR]

Q: How do we distinguish a fee from a tax?

A: On the one hand, a fee is imposed for purposes of regulation and the amount imposed is related to cost of regulation. It is also an exercise ofpolice power. On the other hand, a tax is imposed for revenue generation purposes and there is no relation of the amount imposed to the cost.

Q: What are the basic principles of a sound tax system?A:

a.) Fiscal adequacy Sources of revenue should be sufficient to meet the demands of public expenditure in order to avoid fiscal deficit. It alsomeans that the revenues should be capable of expanding or contracting annually in response to variations in public expenditures. Anexample is raising taxes to avoid the current fiscal crisis.

b.) Equality or theoretical justice This is also called the ability-to-pay principle. The tax burden should be in proportion to the taxpayersability to pay. An example is the schedular system of taxation applied in the Philippines.

c.) Administrative Feasibility - Tax laws should be capable of convenient, just and effective administration. An example would be avoidingtaxing the government to reduce collection costs.

Q: What are the inherent limitations on the power of taxation?A: public purpose, international comity, non-delegability, exemption of government, territoriality --- PINET

Q: What principle related to taxes being levied for a public purpose was laid down in the case of Planters Products, Inc. vs. FertiphilCorporation (March 14, 2008)?

A: President Marcos issued an LOI which provided the imposition of a capital recovery component (CRC) on the domestic sales of all fertilizergrades. The same LOI provided that the CRC shall be collected until adequate capital is raised to make Petitioner PPI (a private company)viable. When Marcos left, Fertiphil sought a refund of the amounts it paid under the LOI. The SC ruled that:

(1) The LOI is an exercise of the power of taxation. While it is true that the power of taxation can be used as an implement of policepower, the primary purpose of the CRC is revenue generation given that the amounts collected were too excessive to serve a mereregulatory purpose given that it was collectible until adequate capital is raised to make PPI viable. The case cited PAL vs. Edu.

(2) Given its nature as a tax imposition, the fact that the ultimate beneficiary is PPI, a private company, makes the levy invalid for notserving a public purpose.

Q: Can the power of taxation be delegated? If so, what is the legal basis for this?A: The power of taxation can be delegated to the local government units, which power to delegate is granted under Art. X, Sec. 5 of theConstitution. The delegation is consistent with the recognition of the LGUs power to create its own sources of revenue. BUT the power is notinherent in the local government unlike in the national government.

Q: What is the doctrine enunciated in the case of John Hay Peoples Alternative ?


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A: In the John Hay case, it was stated that the exemption granted under RA 7227 only refers to Subic entities, hence inapplicable to John Hay.The fact that an Administrative Order was passed by President Ramos stating that the tax incentives available under RA 7227 should also apply toJohn Hay locators is a violation of the requirement that tax exemptions must be strictly and expressly provided for and that the power to grant taxexemption is only within powers of Congress. This same rule applied to the Clark locators in the case of Coconut Oil Refiners Association, Inc. vs.BCDA.

Note that R.A. 9400 was passed in March 2007 granting incentives to locators in Clark, John Hay, Poro Point and Morong economic zones.

Q: Are the land and buildings owned by Manila International Airport Authority subject to real property tax and leviable ?A: No. The recent case of MIAA vs. PARANAQUE (July 20, 2006) ruled that since MIAA is not a GOCC but a government instrumentality vestedwith corporate powers or a GOVERNMENT CORPORATE ENTITY (like Philippine Ports Authority, University of the Philippines, PhilippineFisheries Development Authority (2007 case) and Bangko Sentral ng Pilipinas), it is exempt from real property tax. Likewise, since the propertiesare owned by the government, they are outside the commerce of man and cant be auctioned. However, the portion of the property leased toprivate entities (such as the hangars) are subject to real property tax.

Q: Is the Expanded Value Added Tax Law unconstitutional for embodying a regressive system of taxation?A: Even if the VAT is regressive because it is an indirect tax, it is not prohibited since the Constitution does not prohibit regressive taxes. What it

simply provides is that Congress shall evolve a progressive system of taxation, which means that direct taxes are to be preferred and indirecttaxes minimized. [Tolentino v. Secretary of Finance]

Q: What were the points discussed in the VAT case of ABAKADA GURO PARTY LIST VS. ERMITA?A: The following points were discussed in this case

(1) There is no undue delegation of legislative power on the provision allowing increase of the VAT rate to 12% since what is delegated issimply the ascertainment of facts upon which the administration and enforcement of the increase rate under the law is contingent. Also,the fact that no discretion is exercised by the President is evident in the use of the term shall.(2) Petitioners contention that the 12% VAT rate is an unfair and unnecessary additional tax burden is beyond the scope of review of theCourt as it is a question of wisdom of legislation(3) The law is equitable as it imposes safeguards/limits in the form of VAT exemption granted to gross sales below P1.5 million.

Q: Was the classification freeze provision provided under RA 9334 and discussed in the case of British American Tobacco vs.Camacho (August 20, 2008) constitutional?

A: Yes. The SC ruled that the provision passes the rational basis test and addresses (i) concerns on the delegation of too much power to theDOF and BIR; (ii) simplification of tax administration of sin products; (iii) elimination of potential areas for abuse and corruption in tax collection;(iv) buoyant and stable revenue generation; and (v) ease of projection of revenues. It added that even if creates undue advantage to itscompetitors, it is not enough to declare the law unconstitutional since it does not show that Congress had this in mind but instead was moved byan earnest desire to improve tax administration. Finally, it was ruled that RA 9334 does not violate GATT as it does not discriminate on justimported products.

Q: Is the Attrition Law (RA 9335) constitutional?


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A: Yes. In the case of Abakada Guro Party List vs. Purisima (August 14, 2008), the SC ruled that the law giving incentives to BIR/BOCemployees if the exceeded their collections was valid as there are enough safeguard and penalties to ensure that the collectors do not becomebounty hunters. It was also ruled that there was no unequal protection since BIR/BOC are the only revenue collectors and are thus differentiatedfrom other government agencies. Likewise, it was found that sufficient standards existed for the President to determine revenue targets as basisfor rewards/penalties and thus did not create any issue on undue delegation. Finally, the SC said that the provision empowering the Congressional

Committee to review the laws implementing rules is an invalid provision since this is a function of the Executive (and review is by the Judiciaryand not Legislature) and is thus a violation of separation of powers.

Q: The YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. It leased part of its premises tosmall canteen owners and charged parking fees on the lots besides its building. The CIR wanted to tax YMCA for such income; howeverthe latter claimed that it is exempt from such. Which side is correct?

A: The CIR is correct that YMCA is liable to pay income tax. The assessment here was for deficiency INCOME tax on income derived from rentalof real property and NOT PROPERTY tax. Section 27 of the NIRC provides that even if non-profitable clubs are exempted, the last paragraphexpressly states that profits realized from real property from whatever source and wherever used is taxable (It is also taxable on income fromprofitable activities). On the other hand, the Constitutional exemption under Art. 6 Sec. 28 (3) of Constitution (charitable institutions, churches,non-profit cemeteries, etc.) refers to property taxes only. The Constitutional exemption under Art. 14 Sec. 4 (3) which states that non-stockeducational institution whose assets are used actually, directly and exclusively for educational purpose is exempt from tax applies to income taxBUT THIS DID NOT APPLY SINCE YMCA WAS UNABLE TO PROVE THAT IT IS AN EDUCATIONAL INSTITUTION.

Q: What is the decision of the Supreme Court in the recent case of Lung Center Hospital vs. Quezon City (June 29, 2004)A: The Court ruled that even if the hospital leases out portions for commercial purposes and admits both paying and non-paying patients, itdoes not lose its character as a charitable institution as long as the proceeds are used to further charitable purposes. However, even so, petitionerwas deemed as not exempt from real property tax on the portions of its property not actually, directly and exclusively used for charitablepurposes. Thus, portions leased out for commercial purposes are subject to real property tax while those used by hospital even if used for payingpatients are still exempt from the same tax.

Q: What is the effect of multiplicity of situs of taxation?A: Due to the variance in the concept of domicile for tax purposes, and considering the multiple distinct relationships that may arise with respectto intangible personality and the use to which the property may have been devoted, all of which may receive the protection of the laws of

jurisdiction other than the domicile of the owner thereto, the same income or intangible property may be subject to taxation in several taxingjurisdictions.

A simple example is an American decedent who died while residing in Japan and who has properties in the Philippines.

Q: How do we address multiplicity of situs?A: The taxing jurisdiction may:

1) Provide for exemptions or allowance of deduction or tax creditfor foreign taxes and;2) Enter into treatieswith other states.

Q: What are the elements of double taxation in its strict sense (direct duplicate taxation)?


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A:a.) taxing twice,b.) by the same taxing authority,c.) within the same jurisdiction or taxing district,d.) for the same purpose,

e.) in the same year (or taxing period),f.) some of the property in the territory.

Q: What are some examples of double taxation in its broad sense (indirect duplicate taxation)?A:

(1) income of corporation which is both subject to income tax and then to withholding tax when declared as dividends to individualshareholders(2) tax levied by two different states

Q: If a tax imposed is imposed on a taxpayers storage of copra (by the local government) and another tax is imposed on the sale oftaxpayers products such as soap, oil, margarine, etc. (by the national government), is there a case of double taxation ?

A: No. The activities being taxed and the taxing authority are different. [Procter & Gamble case]

Q: What happened in the case of CIR vs. TODA (September 14, 2004) as to justify the Courts finding that the taxpayers were guilty oftax evasion ?

A: CIC Corp. sold Cibeles building to Mr. Altonaga for 100 million who, on the same day, sold the same building to Royal Match Inc. for 200million. The assessment was based on the taxable gain not reported by virtue of the scheme adopted by the parties. The Court ruled that the threefactors in tax evasion are all present in this case, viz: (1) end to be achieved (payment of less tax) (2) evil or deliberate state of mind (not merelyaccidental) (3) course of action which is unlawful. The Court added that the two transfers were tainted with fraud since the intermediary transfer(from CIC to Altonaga) was prompted only by the desire to mitigate tax liabilities and not for any business purpose.

Q: What is the SUBSTANCE OVER FORM doctrine?A: Taxability is determined by the reality of the transaction rather than the appearance which may be contrived.

Q: Private respondents are locators within Subic Economic Zone and have been granted tax- and duty-free incentives under R.A. 7227.Subsequently, R.A. 9334 was passed in 2005 which stated that notwithstanding any special contrary, importation of cigarettes, spirits,liquors into the Philippines even if destined for tax and duty free shops, shall be subject to all applicable taxes and specific referencewas made to goods destined for the Subic Economic Zone. Will the Subic locators continue enjoying tax incentives even after R.A.9334?

A: No. The revocation of the tax- and duty-free exemption of importation of cigarettes is valid because(1) There is no vested right in tax exemption and may thus be modified or withdrawn at will by the granting authority.(2) Tax exemptions are strictly construed against claiming party.(3) While tax exemption may have been part of the inducement to carry on business within the zone, this exemption is not contractual

and, as such, the non-impairment clause of the Constitution can not be rightly invoked.


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(4) Whatever rights were granted in the certificates/licenses issued to the locators, the same must yield to exercise of police power(taxation may be made the implement of police power). [Republic of the Philippines vs. Caguioa, October 15, 2007]

Q: What is the LEGISLATIVE GRACE concept and how does it relate to the case of National Development Company?A: The concept provides that any tax relief provided is the result of specific acts of Congress that may be applied and interpreted strictly. In the

NDC case it was ruled that the fact the Secretary of Finance guaranteed the loans of NDC, the payments of NDC to the Japanese creditors cannot be exempt from withholding since the fact that the loan was is not tantamount to waiver of collection of taxes which must must be express.

Q: What are the requisites of a taxpayers suit?A: The two minimum requisites for taxpayer suit are that (1) public funds are disbursed and (2) the law violated affects the petitioner. This is whyin the case of Lozada vs. BP, petitioners action mandamus to call election to fill up BP vacancies was not considered a taxpayers suit becausethe failure to call elections does not involve public expenditure and in fact seeks government to spend funds.


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B. INCOME TAX

Q: What are the features of the Philippine tax system

A: the Philippine tax system is (1) direct; (2) progressive; and (3) semi-schedular (varying taxes imposed on passive income), semi-global (onerate for all types of gross income)

Q: What are the elements of a taxable income?A: 1) gain or profit (as opposed to mere reimbursements or return on capital; note also that stock dividends are generally not

considered as taxable income given that it is merely a return on capital as the same does not result in the increase in theproportional interest of the shareholder in the company)2) received or realized during taxable year (as opposed to the common examples of unrealized forex gains or mere revaluationincrements) --- REALIZATION concept

CONSTRUCTIVE RECEIPT doctrine ---An item is treated as income when it is credited to the account of the or madeunconditionally available to the taxpayer; no physical possession is required.

3) not exempt from income tax (example of exempt is de minimis benefits and professional fees of general professionalpartnerships)

EXAMPLE:Mr. X figured in an accident and got paid for (a) hospital cost (b) lost income (c) moral damages (compensatory only) and (d) FMV of carwreckedOnly (b) is taxable SINCE THE REST ARE MERE RETURN ON CAPITAL

Q: How does income differ from capital?A: Income is any wealth that flows into the taxpayer other than a return of capital while capital constitutes the investment which is the source ofincome. Therefore, capital is fund while income is the flow. Capital is wealth while income is the service of wealth. Capital is the tree while incomeis the fruit.

Q: How do you classify taxpayers?A: Abbreviated

A. According to source of income:Those taxed on WORLDWIDE income are only resident citizens and domestic corporations; ALL OTHER types of taxpayers aresubject only to tax on Philippine sourced income

B. According to tax base:Those taxed on GROSS income are only nonresident alien not engaged in trade or business in the Philippines and nonresidentforeign corporations; ALL OTHER types of taxpayers are subject to tax on net income (i.e., may claim deductions)

Q: How is the residency of an alien determined?


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A: An alien is considered a nonresident if he/she stays here for a DEFINITE SHORT PERIOD of time. An alien will be considered a resident if thestay here is either (a) DEFINITE AND EXTENDED or (b) INDEFINITE. Once determined to be a nonresident alien, the test to determine whetherthe alien is a nonresident alien ENGAGED in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days.

Nonresident aliens not engaged in business are subject to tax of 25% on gross income earned from all sources EXCEPT (1) interest from

FCDU/OBU deposits (exempt) and (2) CGT on sale of shares (5%/10%) and real property (6%) classified as capital asset. They are also notentitled to Optional Standard Deduction.

Q: What is the consequence of an income item being subjected to FINAL tax?A: Such income is no longer RETURNABLE, i.e.; it will no longer be declared as income in the Income Tax Return, hence will no longer besubject to the schedular rates on income tax (for individuals) or to 30% (for corporations).

Q: What income items are considered as passive income subject to final tax in the hands of an individual resident citizen?A: These are (i) interest from bank deposits; (ii) royalties; (iii) prizes exceeding P10,000; and (iv) dividends.

Q: How are prizes taxed under the Tax Code?A: The tax imposable will depend on the amount of the prize. If the prize is:

MORE THAN 10,000 = 20% FINAL TAX10,000 OR LESS = forms part of gross income which is subject to the SCHEDULAR rate

However, winnings from the PCSO and LOTTO are EXEMPT from tax.

Q: What is the taxability of dividends received by individuals?A: It depends. If the dividends are from a DOMESTIC COPRORATION, the recipients will be taxed as follows:

Citizens and resident aliens = 10%Nonresident aliens engaged in trade or business in the Philippines = 20%Nonresident aliens engaged NOT in trade or business in the Philippines = 25%

If the dividends are from a FOREIGN CORPORATION, then it will form part of the gross income of any type of taxpayer subject toscheduler rate (except NRANETB which is still the 25%) BUT note that the situs of the income becomes material except for aresident citizen who is taxed on worldwide income.

Q: What is the taxability of dividends received by corporations from a domestic corporation?A: It depends. If the dividends are from a DOMESTIC CORPORATION, the recipients will be taxed as follows:

Domestic or Resident Foreign corporation = 0% (as inter-corporate dividends)Nonresident foreign corporation =

Tax treaty rate, if any15% if no tax treaty but satisfies tax-sparing provision30% if no tax treaty and does not comply with tax-sparing provision

If the dividends are from a FOREIGN CORPORATION, then it will form part of the gross income of any type of taxpayer BUT notethat the situs of the income becomes material except for a domestic corporation which is taxed on worldwide income.


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Q: May parents and siblings be claimed as ADDITIONAL exemption?A: NO. Parents and siblings are considered dependents ONLY FOR PURPOSES OF QUALIFYING an individual to become a head of a familybut they CANNOT be claimed as additional exemptions.

Q: Are illegitimate children considered as additional exemption?A: YES.

Q: Are SENIOR CITIZENS supported and living with a taxpayer included for purposes of claiming additional exemptions?A: According to a BIR Ruling, senior citizens do not qualify for purposes of claiming additional exemptions because such does not have basis inlaw.

Q: What is the rule on senior citizen discounts granted by commercial establishments?A: In Carlos Superdrug Corp. vs. DSWS (June 29, 2007) and M.E. Holdings Corporation vs. CIR & CTA, the Supreme Court ruled that the rule willbe -- (i) prior to March 21, 2004, the discounts are treated as tax credit; (ii) after March 21, 2004 the same is treated as deductions.The Court distinguished tax credit vs. tax deduction by stating that a credit is a peso-for-peso deduction from the taxpayers tax liability or a fullrecovery while a tax deduction only benefits the taxpayer to the extent of 35% of the amount granted as discount. However, the Court ruled thatthe State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partlysubsidizing a government program. The Court recognized that the law is a legitimate exercise of police power. (Note that the 20% discount alsoapplies to movie admission fees, transport fares, hotel services, restaurant bills, etc.)

Q: What is the effect of a change in status of the taxpayer or the CHANGE-IN-STATUS rule?A: The rule of thumb is THAT WHICH WILL BE BENEFICIAL TO TAXPAYER (e.g., if taxpayer marries, thereby qualifying him for a biggerpersonal exemption of 32,000 instead of P25,000, then the law will treat him as if he married at the beginning of the year; but if a married personsspouse dies, thereby making him either a head of the family or single, in either case he will be entitled to lower personal exemption, then the lawwill treat him as if he was widowed at the end of the year and still get his 32,000 personal exemption.)

Q: Is a nonresident alien entitled to personal and additional exemption?A: It depends. If engaged in trade or business and country of residence allows exemptions to Filipinos = allow the lower of two amounts (i.e.,Philippines or foreign country). If NOT engaged, he will NOT be allowed the exemption.

Q: Are employees of ROHQs, OBUs and FCDUs entitled to personal and additional exemptions:A: No, these employees are subject to tax on gross income without the benefit of deduction/exemptions.

Q: What are the changes introduced by REPUBLIC ACT NO. 9504 (TAX EXEMPTION OF MINIMUM WAGE EARNES AND INCREASINGPERSONAL/ADDITIONAL EXEMPTIONS / CHANGE IN OSD) (June 17, 2008)?

A:


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Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Moreover, the holiday pay, overtime, nightshift differential pay, and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. The term statutoryminimum wage refers to the rate fixed by the Regional Tripartite Wage and Productivity Board.

Increases the amount of personal exemption for all individuals to a fixed amount of P50,000.00, from the previous varying amounts ofP20,000.00, P25,000.00 and P32,000.00. Also increases the additional exemption from P8,000.00 toP25,000.00 for each dependent, not

exceeding four (4). Amends Section 34(L) to ---

(1) Increase to 40% of gross sales or receipts the 10% Operational Standard Deduction (OSD) previously allowed to individuals (exceptnonresident aliens) engaged in business or earning income in the exercise of their profession; and

(2) Now allow corporations (except nonresident foreign corporations) to claim OSD, instead of itemized deductions, in an amount notexceeding 40% of their gross income.

If the taxpayer did not indicate in his or her return his or her intention to elect the OSD, he or she shall be considered as having availed(irrevocable for that year) of the itemized deductions. Hence, the election can be made on a yearly basis. An individual who opts for the OSDshall not be required to submit financial statements but a corporation availing of the OSD is still required to submit its financial statements.

Q: Who are the individuals who are NOT required to file an ITR?A:

(1) A compensation earner whose income does not exceed the allowable exemptions;(2) A compensation earner whose withholding taxes were correct EXCEPT if 2 employers OR exceeds 60T;(3) Those whose only income is subject to Final Withholding Tax;(4) Individuals exempt from income tax;(5) Those whose total compensation is below 60T.

However, an individual who is engaged in business is ALWAYS required to file an ITR regardless of the amount of income generated

Q: How do you differentiate between Capital Gains Tax on sale of shares of stock not traded in the local stock exchange and CapitalGainsTax on sale of real property considered as capital asset?

A: The sale of shares of stock not traded in the local stock exchange is subject to CGT at the rate of 5% for the first P100,000 and 10% on theamount in excess of P100,000. The tax base shall be only the GAIN on the sale. Such sale will always be subject to CGT without any

possibility of exemption. As for the sale of real property considered as capital asset, the rate is 6% and the tax base is the ENTIRESELLING PRICE, because under the law this is a PRESUMED GAIN from the sale. However, there is a possibility of exemption as whenthe proceeds of the sale will be utilized by the taxpayer to buy his principal residence, such purchase to be made within 18 months fromthe sale. The money in this case shall be put in escrow. The sale of real property classified as capital asset to the government may besubject to either the 6% CGT or form part of gross income of the taxpayer (in the latter case, only the gain forms part of the gross income),subject to the taxpayers choice.

Note that SHARES OF STOCK IS DEFINED TO INCLUDE warrants and/or options to purchase shares of stock, units of participation in apartnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations,associations, and RECREATION OR AMUSEMENT CLUBS (SUCH AS GOLF, POLO OR SIMILAR CLUBS), and mutual fund certificates.


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TAX ON CORPORATIONS

Q: What were the factors in the case of AFISCO that led the Court to consider the reinsurance pool as a taxable entity separate anddistinct from the individual insurance companies that made up the pool?

A: The factors were:(1) the pool had common fund from which admin. expenses were paid(2) the pool had an executive board(3) even if pool did not reinsure, it was indispensable for group members to set-up the pool for them to get their premiums

What was crucial in this case was the fact that there was continuity of dealings.

Q: Are professional fees paid to general professional partnerships subject to withholding tax?A: No, since the GPPs are exempt from tax, payments to them are also not subject to withholding tax. However, payments made BY them (or anyother tax exempt entity) are subject to withholding tax if the payee/income recipient is not similarly exempt from income tax.

Q: What is a JOINT VENTURE and what is its taxability?A: In a JV, there is:

(1) contribution of capital, skill(2) shared profits(3) mutual control(4) single business transaction undertaken for the purpose

A joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and otherenergy operations pursuant to an operating or consortium agreement under a service contract with the Government is exempt from incometax.

Q: In the cases of Obilos and Gatchalian, what were considered as the elements to establish that a taxable unregistered partnershipexisted?

A: The elements that were deemed necessary for a taxable unregistered partnership were (1) mutual contribution of funds and (2) joint interestin properties and gains. In the Obilos case the fact that a father bought land which he then transferred to his children who then resold them without

actually introducing improvements or subdividing was considered as NOT giving rise to a taxable unregistered partnership as opposed to theGatchalian case where they agreed to contribute funds to buy lotto tickets and then showed clear intent to divide profits.

Q: How are the rules on the taxability of schools under Tax Code summarized?

A: (1) EXEMPT --- Nonstock and no part of the income inures to the benefit of an individual. This is however subject to the last paragraph of Sec.30 which states that income from properties, real or personal, and activities conducted for profit are taxable. ES(2) SUBJECT TO 10% --- private school registered w/ DECS (proprietary) whose unrelated income does not exceed 50%(3) SUBJECT TO 30% = same requisite as that subject to 10% BUT unrelated income exceeds 50% (examples of unrelated income are dividends,rentals, interest on loans, gains on sale)


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Q: What is the taxability of non-stock non profit associations and schools under RMC 76-03?A: Associations are subject to:

20% Final Withholding Tax (FWT) on interest on bank deposits, royalties;7.5% FWT on FCDU deposits

Schools are:a. non-stock, non-profit educational institution

Exempt on revenues actually, directly and exclusively used for educational purposes, including the revenues of cafeterias andbookstores;

Exempt also from20% FWT on interest on bank deposits, royalties;7.5% FWT on FCDU deposits provided there are

(1) certification from bank as to amount;(2) certification of actual utilization; and(3) Board Resolution on proposed projects

Q: What is the taxability of the sale of realty to the government?

A: It will be subject to EITHER the regular income tax OR 6% CGT, at the option of the TAXPAYER

Q: Does the exemption on gains from the sale of bonds, debentures and other certificates of indebtedness with a maturity of morethan 5 years include exemption of interest income?

A: NO, it does NOT include interest income for the following reasons:1) gains derived from dealings in property and interest are separately indicated in Section 32 defining gross income2) the provisions of the Tax Code applicable to individuals (except nonresident alien not engaged in business) specifically exempt

interest from long-term deposits/investments (thus, if a corporation was meant to be exempt as well, the Tax Code would haveexpressly provided so)

3) U.S. rules clearly distinguish interest and gain from sale

Q: Are there exemptions from the MCIT?A: Yes. The following are exempt from the MCIT:

1. domestic corporations operating as proprietary educational institutions subject to tax at 10% on their taxable income2. domestic corporations engaged in hospital operations which are non-profit subject to tax at 10% on their taxable income3. domestic corporations engaged in business as depositary banks under the expanded foreign currency deposit system4. firms that are under a special income tax regime (e.g., PEZA, BCDA)

Q: When is the MCIT imposable on a domestic corporation?A: It is imposable on the fourth year following the year of operation

Q: Up to what period may the MCIT be carried over?A: It may be carried over up to the three (3) immediately succeeding taxable years.


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Q: How is the MCIT imposed?A: It is imposed if the computed 2% tax on gross (excludes passive income subject to final tax from gross income and with only direct costs asdeductions) is higher than the regular income tax (computed based on gross income less the deductions allowed under the Tax Code)

Q: Can the imposition of the MCIT be suspended?A: Yes, in cases of force majeure, labor strike or legitimate business reverses BUT note that only the Department of Finance can grant thesuspension.

Q: How is a company considered as a resident foreign corporation?A: The Tax Code defines such an entity as being engaged in trade or business or who, as defined in jurisprudence, undertakes continuousbusiness transaction. A BRANCH corporation is a RESIDENT FOREIGN CORPORATION while a SUBSIDIARY is a DOMESTICCORPORATION.

Q: Are offline carriers (i.e., no landing rights in the Philippines) which have general sales agent subject to Philippine tax?A: Yes, they may not be subject to the 2.5% gross Philippine billings but they are subject to tax on their ticket sales as nonresident foreigncorporations (the CTA cases of South African Airways has upheld the BOAC ruling)

Q: How is the BPRT computed?A: The BPRT is computed based on the profits earmarked for remittance and NOT on the actual remittance.

Q: Are there corporations exempt from the BPRT?A: YES. PEZA companies are not subject to BPRT.

Q: What is the difference between a Regional/Area Headquarters and a Regional Operating Headquarters?A: An R/AHQ can only perform supervisory, communication, coordination functions while an ROHQ can do planning, logistics, R&D, financialadvisory, etc. For income tax purposes, an R/AHQ is exempt from income tax primarily because it is not expected to generate any income whilethe ROHQ is subject to the preferential tax rate of 10%. For VAT purposes, services by an R/AHQ are VAT exempt while those of the ROHQ maybe VAT-taxable or VAT zero rated if, in the latter case, the services are performed for nonresidents and paid for in foreign currency.

Q: Will the 15% preferential rate for Filipinos occupying managerial and technical position in an ROHQ apply even if the position is not

concurrently held by expatriate ?A: Yes.

Q: How is the income of a head office which transacts business independently of the branch taxed?

A: The head office shall be treated as a nonresident foreign corporation with respect to the income it generated from the transaction carried outindependently of the branch [Marubeni case].An example is when a head office acquires shares of another company independently of its branchoffice in the Philippines, the dividends received by the head office is taxes as one received by a nonresident foreign corporation (i.e., (i) treaty rateor (ii) 15% if w/ tax sparing or (iii) 30% as part of gross income) and not a resident foreign corporation (i.e., exempt as intercorporate dividends).


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Q: How do you trace the ownership for purposes of determining whether corporation is closely-held for purposes of determiningexemption from the IAET ?

A: You trace it all the way up to the ultimate parent. An example would be if Company A improperly accumulates earnings and the company isowned 100% by Company B who is in turn owned by Company C who is in turn owned by Company D. Even if only Company D is a publiccompany, the same still inures to Company As benefit thus exempting it from IAET.

Q: Are there entities exempt from Improperly Accumulated Earnings Tax?A: YES.

1. banks and other non-bank financial intermediaries2. insurance companies3. publicly-held corporations4. taxable partnerships5. general professional partnerships6. non-taxable joint ventures7. enterprises duly registered with the PEZA, BCDA, and those under special income tax regimes

Q: Are there ways by which to avoid liability from the IAET?A: YES, when the accumulation of earnings is justified by reasonable needs of the business such as:

1. accumulation up to 100% of the paid-up capital2. for definite corporate expansion projects or programs3. for buildings, plants or equipment acquisitions4. for compliance with a loan covenant or pre-existing obligation under a legitimate business agreement5. when there is a legal prohibition for its distribution6. in the case of Phil. subsidiaries of foreign corporations, undistributed earnings intended or reserved for investments within the Philippines

Q: When improperly accumulated earnings are subjected to the IAET, will it still be subject to the tax on dividends when eventuallydeclared as dividends?

A: YES.

Q: In justifying the required corporate liquidity to justify exemption from IAET, is the Bardahl formula applicable to all corporations?

A: NO. The Bardahl formula may apply only to companies with shorter operating cycles. An operating cycle of 288.35 days does not justify ahigh liquidity as opposed to companies with operating cycle of 3.33 months [ CYANAMID (JANUARY 20, 2000)].

Q: What is the tax benefit rule?A: This rule states that the recovery of an amount previously written-off but which was subsequently collected is a taxable event TO THE EXTENTTHAT IT BENEFITED THE TAXPAYER, i.e., to the extent that the said deduction resulted in a lower taxable INCOME, hence a lower tax due.Thus, if the taxpayer was already in a taxable loss position before deducting the bad debts, then subsequent recovery of the bad debt will not betaxable since the bad debt did not benefit him with a reduced tax due.

Q: What is the rule on the taxability of STOCK dividends?


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A: Generally, STOCK dividends are not taxable EXCEPT when1. it changes the proportionate interest of a shareholder after its receipt2. the stock dividends are subsequently sold

Disguised dividends= excessive payments by a corporation to shareholders which may be interpreted as ways to avoid tax on dividends(example: interest and loan payments)

Liquidating dividend = dividends declared by a dissolving company. The tax implication to the shareholder is as if he/she sold his/her shares tothe liquidating company (i.e., actual gain computed as liquidating dividend less cost basis in the share subscription). The liquidating company isNOT subject to any tax.

Q: Define transfer pricing.A: It is the power of the Commissioner to distribute, apportion, allocation and shift income and expenses between related taxpayers toreflect their true taxable income or to prevent evasion of taxes.

Q: What is the tax implication of a forgiveness of debt?A: If the forgiveness of debt is made:

for services rendered, it shall be taxed as compensation income on the part of the recipientfor no consideration, it is subject to donors taxby a corporation in favor or a debtor who is likewise a stockholder of the creditor-corporation, it will be treated as a dividendby a stockholder in favor of a corporation-debtor, it will be treated as additional capital of the stockholder-lender on the corporation-debtor

[SEC. 50 OF RR 2]

Q: Are the income of property donated likewise excluded from gross income if the donors tax is paid ?A: No. Only the property donated will be excluded but not the income (ex. Dividends on shares donated)

Q: What are considered as exclusions from gross income:A:

1) life insurance paid to heirs of deceased

2) retirement pay if (i) at least 50 and 10 and (ii) plan registered w/ BIR and (iii) benefit availed only once --- Ruling in SANTOS VS. SERVIERPHILS. (11/28/08 NACHURA)3) benefits received under SSS/GSIS4) gifts (bec. subject to donors tax already) BUT income of property (ex. Dividends of shares) is TAXABLE5) 13

thmonth pay AND other benefits

6) income by foreign govt. from loans, bonds, stocks, deposits by foreign govt., financing institution owned, controlled or refinanced by govt., orinternational regional financial institution set-up by foreign govt.7) income derived by the government or its political subdivisions from any public utility or from the exercise of any essential governmental function


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8) prizes and awards to recognize religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if (i) the recipient wasselected without any action on his part to enter the contest or proceeding; and (ii) the recipient is not required to render substantial future servicesas a condition to receiving the prize or award.9) all prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines orabroad and sanctioned by their national sports associations.

Q: What are the de minimis benefits exempted from income tax?

A:

(a) Monetized unused VL not exceeding ten (10) days during the year(b) Medical cash allowance not exceeding 1,500 per year(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month(d) Uniform and clothing allowance not exceeding P3,000 per annum;(e) Actual yearly medical benefits not exceeding P10,000 per annum;(f) Laundry allowance not exceeding P300 per month;(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal

property other than cash or gift certificate, with an annual monetary value not exceeding P10,000(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a

baby, etc., and(j) DAILYmeal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage."

Q: What is the taxability of the refund of taxes?A: If the tax was previously c laimed as deduction then subsequently refunded, it will form part of gross income at the year of refund. However, ifsaid tax was not claimed as deduction in the first place as they are non-deductible types of taxes(such as income tax, estate tax, etc.), it will notconstitute taxable income [RMC 13-80].

Q: What is the taxability of terminal pay?A: Terminal leave pay is NOT subject to income tax because

(1) It is receive at the time when the taxpayer is ALREADY RESIGNED and thus it is not considered as salary, and(2) Separation pay received for causes beyond the control of the employee is exempt from income tax and compulsory retirement is deemed

a cause beyond the control of the employee [RE REQUEST OF ZIALCITA].

Q: Will separation pay received due to redundancy be exempt as well?A: YES. Redundancy is also considered as a cause beyond the control of the employee.

Q: What benefits are exempt from the FBT?A:

1. Benefits granted to rank and file employees


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Q: What are the requisites for business expense to be deductible?

A:

(1) paid or incurred(2) during the taxable year(3) related to the taxpayers business --- BUSINESS PURPOSE concept(4) supported by documents(5) withholding taxes, if required, were paid to the government

Q: Is money spent for bribery deductible?A: NO!

Q: What is the ceiling imposed on representation expense for purposes of deduction from gross income?A: for sale of goods: 0.50% of net sales

Sale of service: 1% of net revenueHowever, when supporting documents reflect a lower amount, then such lower amount shall be used. Note that the treatment of representation

expense will apply if the taxpayer is able to show that it was in fact NOT a fringe benefit granted. An example would be the club membershipswhich, if used to entertain clients, would be part of representation expenses but if only used by the employee-officer, will be subject to FBT.

Q: What is interest arbitrage?A: It results in the reduction of the interest expense by a percentage of the interest income subject to final tax. It is also defined as a circumstancewhich is presumed to exist because by putting excess funds in deposits/securities subject to 20% withholding, taxpayers are able to avoid the 32%tax which will happen if same funds are invested in revenue-generating activities (thus, margin is 12%). Another illustration of this is when ataxpayer borrows money from the bank (interest payments on which can then be claimed as expense and thus a 32% benefit) then deposits it in abank (and subsequently suffers only a 20% final withholding tax), thus benefiting by 12% representing the difference between the 32% deductionand the 20% withholding tax. It does not matter if taxpayer actually intended to save on taxes.

Q: Will interest payments between a parent company and its subsidiary be disallowed in view of Section 34 (B)(2)(b) in relation toSection 36 (B) of the Tax Code?

A: No. The prohibition on non-deductibility of interest expense refers to a case where the creditor and debtor are commonly owned by at least50%. The case of a parent and subsidiary loan does not refer to a case of commonly-owned entities but one where one entity owns the other.

Q: What is the treatment of interest paid to acquire property used for business?A: Interest incurred to acquire property used for business may either be claimed as a deduction or treated as capital expenditure

Q: Who may avail of tax credits for income tax purposes?A: Only those subject to tax on worldwide income (resident citizen and domestic corporation) because they pay taxes for foreign sourced incometwice (in the Philippines and abroad), and the tax credit is meant to lessen the impact of double taxation.


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Q: What are the non-deductible taxes?A:

(1) Income tax(2) estate and donor's taxes; and(3) taxes assessed against local benefits of a kind tending to increase the value of the property assessed (RPT)

Q: When is there a net operating loss carry-over (NOLCO)?A: When the allowable deductions exceed gross income.

Q: For how long may the NOLCO be carried over?A: It may be carried-over for 3 succeeding years. Any NOLCO remaining beyond said period is forfeited.

Q: Are there instances when a net operating loss may not be carried over?A: YES. When the net operating loss is incurred at the time when company not taxable (e.g., registered under the BOI), such net operating lossmay NOT be carried-over.

Q: A Corp. owns B Corp. which is the entity with the NOLCO. A Corp. then exchanges its shares in B Corp. for all of the shares in C

Corp. so that after the exchange A Corp. owns C Corp. which in turn owns B Corp. Will Bs NOLCO still be available for deduction afterthe exchange?

A: Yes. NOLCO carry-over is allowed if there is no substantial change in ownership (at least 75% of company still owned by same persons)which was the case here since A Corp.s mode of ownership over B Corp. only changed from direct to indirect.

Q: Can the depreciation expense exceed the amount of acquisition cost of the asset if the property is reappraised and it is shown thatthe reappraised value is higher than the acquisition cost?

A; No.

Q: What properties are subject to depreciation?A: Tangible and intangible assets which are limited in diration such as copyright, patent, franchise. Property not subject to depreciation would beinventories, LAND, properties not used for business and intangibles with unlimited use.

Q: Using the straight-line method, what is the annual depreciation of an equipment which was acquired for 5M and an estimated usefullife of 5 years and a salvage value of zero?

A: The annual depreciation will be 1M pesos computed as follows: (5,000,000 less 0) divided by 5 years .

Q: When are forex losses and re-appraisal adjustments deductible?A: The same are deductible only when there is already a close and completed transaction because it is only at such point when the loss isrealized. An example is when a $100 loan incurred when the exchange rate was P50:$1 is subsequently paid when the exchange rate is alreadyat P60:$1, the same will result in a deductible forex loss of P1000 which represents the additional amount of peso the borrower has to come up to


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pay the same amount of dollar loan (100). Before actual payment, there is as yet no closed and completed transaction which may be claimed as adeductible expense.

Q: When are bad debts deductible?A: When they are ascertained to be worthless and after having gone through the process of ascertainment such as by sending demand letters,etc. Note that in the cases of banks claiming the expense, the BSP must approve. On the other hand, if the bad debt being written off is from aninsurance company, the insurance company must be proven as being insolvent

Q: Philex entered into an agreement with Baguio Gold entitled Power of Attorney whereby Philex was made to manage and operateBaguio Golds mining claim in Sto. Nino, Benguet province. In return, Philex was to receive as compensation 50% of the net profit of theSto. Nino project. In the course of the project, Philex made advances of cash and property until the mine stopped operating due tolosses. Subsequently, Philex wrote off the indebtedness to Baguio Gold. The BIR disallowed the write-off as the same was consideredas investment in a partnership rather than as a loan. Is Philex entitled to the write-off of bad debts?

A: No. The amount advanced by Philex was meant to be investments (NOT loan) since (i) 50% share is too big to be interest (ii) no requirementto repay for Baguio Gold (iii) no collateral (iv) sharing of profit and creation of common fund are indicators of joint venture.PHILEX MINING CORPORATION vs. CIR (April 16, 2008). As such they are not bad debts that could be written off.

Q: When are donations deductible in full?

A: When the same are made to:(1) Government for PRIORITY ACTIVITIES in education, health, youth & sports, human settlements, science, economic development(2) Foreign institutions and intl. Orgs.(3) accredited NGOs, provided the following conditions are met:

a. it utilizes the same w/in the 15thday after the 3

rd month from close of the year,

b. the administrative expenses of such NGO does not exceed 30%,c. upon dissolution, the assets of such NGO are required to be transferred to another NGO, andd. its board members receive no compensation

Q: When is the amount of donation deductible subject to limitation? What is the limitation?A: When the donation is made to:

(1) the government for public purposes

(2) accredited domestic corporations for religious, charitable, scientific, etc. purposes(3) social welfare institutions(4) NGOs (not accredited according to conditions above)

The limitations are:10% of net income for individual taxpayers5% of net income for corporate taxpayers

Q: Are interest and penalties paid on a deficiency tax assessment deductible for tax purposes ?A: Only interest is deductible, the penalties paid are not.


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A: X Corp. transfers a parcel of land to Y Corp. in exchange for Y Corp. shares as a result of which transfer X Corp. gains control of Y Corp. (i.e.,shares transferred makes X Corp. owner of at least 51% of Y Corp.). Subsequent to the exchange, the cost basis of the assets transferred will beas follows: (1) land in the hands of Y Corp. same cost basis as in the hands of X Corp. / Y Corp. shares same cost basis as the landexchanged by X Corp.

Q: What is the purpose for the exemption/deferral accorded under Section 40?

A: To encourage corporations in pooling, combination or expanding resources to spur economy

Q: What is the situs of dividends?A: It is considered as sourced within the Philippines if the dividends are declared by:

1. A domestic corporation2. A foreign corporation, at least 50% of whose gross income for the three-year period ending with the close of its taxable year preceding the

declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources withinthe Philippines but pro rated (i.e., only in an amount which bears the same ratio to such dividends as the gross income of thecorporation for such period derived from sources within the Philippines bears to its gross income from all sources.

If the income derived from sources within the Philippines is less than 50% of the total gross income, the entire amount of income generated isNOT considered as Philippine-sourced.

Q: What is the situs of services?A: It is considered as sourced within the Philippines when performed in the Philippines

Q: What is the situs of sale of personal property?A: It situs is the place of sale EXCEPT:

(1) if what is sold are shares of a domestic corporation which is always considered as Philippine sourced income(2) if such personal property is manufactured abroad and sold here or manufactured here and sold abroad in which case the amount shall

be allocated

Q: What is the situs of rentals, royalties, and other intangibles?A: It is considered as sourced within the Philippines when the same is used in the Philippines

Q: What is the situs of insurance contracts?A: The situs of which is the place of activity (meaning the location of risk) and NOT the place of business (which reinsurers do not have in thePhilippines) [PHIL. GUARANTY].

Q: X Corp., a Philippine company, engaged Y Corp., a nonresident US company, to perform services abroad. Will X Corp.s paymentsbe subject to withholding tax?

A: No. Since Y Corp.s income is not subject to Philippine tax as it is earned by a nonresident foreign corporation and is considered as non-Philippine source income, the same is not subject to income tax and to the Philippine withholding taxes.

Q: What is meant by MOBILIA SEQUUNTUR PERSONAM as it relates to situs rules?


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A: Taxation follows the property or person who shall be subject to tax.

SALE ON INSTALLMENTS - BANAS VS. C.A. (FEBRUARY 10, 2000)Petitioner sold lots to Ayala and was paid less than 25%, the balance was covered by 4 checks.On the same day, the checks were discounted (meaning exchanged for cash at an amount lower than the face value) also to Ayala.Petitioner reported as income for the year of sale only the cash amount received from sale and excluded the amounts received from thediscounted checks. The balance was reported as income by the petitioner only in the next 4 years.Petitioner claims it was correct because initial payment excludes evidences of indebtedness including Promissory Notes.

SC = The transaction remains to be an installment (not cash) sale as the law expressly excludes evidence of indebtedness in thedetermination of how much was paid for the year. However, even if the proceeds of discounted note is not considered as part of initialpayment, the income realized from the discounting itself is still a separate taxable income in the year it was converted into cash

because it was at this year that there was actual gain on the discounted notes.

Q: When a taxpayer indicates in his ITR that the excess income tax paid shall be carried over to the succeeding taxable years, may hesubsequently apply for a tax credit or refund for the same amount?

A: NO. The option to carry-over, once exercised, is irrevocable [Section 76 of the Tax Code]. The same rule will apply even if the taxpayer did nottick the carry-over box in the year when the excess payment occurred but did indicate in the succeeding year that the excess amount was beingtreated as prior years excess credits. (Philam Asset Management vs. CIR December 14, 2005)

Q: What are the elements required to successfully file a claim for excess CWT payments?A: The elements required are:

a.) filing a claim within 2 yearsb.) the income upon which the taxes were withheld were included in the return of the claimantc.) the fact of withholding is established by certificate/s issued by the payor to the payee-claimant [Filinvest Development Corp. vs. CIR (August 9,

2007) Nachura]

Q: May a withholding agent file a claim for a refund on its overpayments made on withholding tax for payments to nonresident foreigncorporations ?

A: YES. Considering that it will be the withholding agent who shall be liable for deficiency assessment and penalties in case of failure to withhold, itshould likewise be given the authority to file the claim for refund.

Q: Who are required by law to withhold on income payments?

A:agents, employees of withholding agentspersons having control of the payment and claiming the expense (ex. Utility bills paid to SM by concessionaires)payor having control of the payment where payment is made thru brokers (ex. Travel agents)


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These are considered substitutes for testamentary dispositions although inter vivosin form, they are mortis causain substance.

Q: When is a transfer considered as one made in contemplation of death?A: When the motivating factor for such transfer is the thought of death, or if given near the time of death ex. old age, failing health, length of timebetween donation & death, concurrence with will-making.

Note: the 3 year presumption under PD. 1705 (which provides that transfers made within 3 years of death are presumed to have been done incontemplation of death) NO longer applies.

Q: Are there instances which DISPROVE that the transfer was made in contemplation of death?A: YES. When it is shown that the reason for the transfer was the decedents desire:

1. to see his children enjoy the property2. to save income taxes3. to settle family disputes4. to relieve donor from administrative burden5. to reward services rendered

Q: In determining whether a transfer is a donations inter vivosor a donation mortis causa, is a determination of the type of heir

relevant?A: YES. Where there is a donation inter vivosto a person who is NOT a forced heir, the presumption is that such transfer was inter vivos. But isthe recipient of the donated property is a forced heir, the transfer is presumed to be made merely to accelerate the inheritance, hence mortiscausa. However, the presumption may be rebutted by evidence to the contrary [VDA. DE ROCES v. POSADAS]

Q: What deductions are not available to nonresident estates?A: Nonresident estates can not deduct the 1 million standard deduction, medical expenses and family home.

Q: What are the indications of a donation inter vivos?A: When:

1. Property was donated out of love and affection2. When a reservation on the donation is made only with respect to the right of usufruct which denotes that naked ownership was already

transferred (ratio: why reserve such right if one remains to be the owner thereof?)3. When the transferors retained sufficient property only for the purpose of maintaining their status in life, thereby implying that it was

alright to part with the property even during the transferors lifetime4. Donee accepted donation since in a donation mortis causaacceptance is not required [Gestopa v. CA, October 5, 2000]

Q: Illustrate transfers for insufficient consideration.A:

Case A Case B Case C

FMV, transfer 1,000 1,000 1,000FMV, death 2,000 2,000 2,000


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Consideration received at the timeof transfer 700 1,000 0

Amount included in estate 1,300 0 2,000

In determining whether there was sufficient consideration, compare the FMV of the property at the time of transfer with the amount ofconsideration received at the time of transfer. However, the amount to be included in the estate is computed by taking the difference between theFMV of the property at the time of death and the amount of consideration received at the time of transfer.

Q: What is the reason behind allowing as deduction for estate tax purposes property which was previously taxed (vanishingdeduction)?

A: To mitigate the harshness of previous taxation.

Q: What are the conditions for the deductibility of property previously taxed or VANISHING DEDUCTION?A:

1. Present decedent must have acquired the property by inheritance or donation within 5 years prior to his death2. Property acquired formed part of gross estate of the prior decedent, or was a taxable gift of the donor

3. Estate tax or donors tax due thereon must have been paid4. The property must be identified as the one received from the prior decedent or from the donor5. The estate of the prior decedent has not previously availed of the vanishing deduction

Q: How do you compute for the vanishing deduction?A: Procedure

1) determine the FMV of the PPT at the time of the prior decedents death and the FMV at the time of the present decedents deaththen get the lower of these two amounts

2) prorate = [value in 1 above/gross estate] X deductions (except family home, medical expenses, standard deduction, R.A. 4917BUT includes transfer for public use)

3) subtract 2 from 14) Apply rate of vanishing deduction to 3 above (20% to 100%)

Example:In 2000, Y inherits a land at P500T. In 2003, Y died with the said land having a FMV of P600T. His gross estate amounted to P2M. Hisallowable deductions amounted to P400T.

Vanishing deduction= (500T) (500T/2M x 400T)

= 400T

! 400T x 60% = 240T


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Q: There were claims against the estate of the deceased which allegedly exceeded the gross estate which resulted in the administratorreporting a NIL estate tax liability. The BIR contested the amounts of the claims against the estate deductions stating that loweramounts were paid as compromise payments during the settlement of the estate and these amounts should be what will be consideredin arriving at the net estate. Will the compromise amounts be the amounts considered as deductions to the gross estate?

A: NO, the deduction allowable is that amount determined at the time of death. Post-death developments are not material in determining theamount of deduction, specially for the claims against the estate deduction. Thus, the Court applied the date-of-death valuation rulewhich is

the US rule on deductions and which is applicable also in the Philippines given no apparent reason to disregard the same. The amount deductibleis the debt which could have been enforced against the deceased in his lifetime, nothing more and nothing less. [ DIZON in his capacity as

Administrator of deceased Fernandez vs. CIR (April 30, 2008) Nachura]

Q: Are amounts in excess of the P500,000 medical expenses deductible still as claims against the estate?A: No.

Q: Are notarial fees and attorneys fees on guardianship proceedings deductible from gross estate?A: It depends. If the attorneys fees pertain to the collection of assets, payment of debts, or distribution of the property to the heirs then they aredeductible.

Q: When will the same be disallowed as deductions form gross estate?

A: When the same pertains to:payments are made to the trustee who was charged with the administration of the decedents assets for the benefit of an just an heir andthe bond filed by the administrator since it is in the nature of a qualification for the office and not necessary for the settlement of the assets of

the estate [CIR VS. PAJONAR (MARCH 22, 2000)]

Q: Should the BIR discover unpaid taxes due from the decedent already after the property has been distributed to the heirs, how canthe BIR recover such unpaid tax liabilities?

A: The BIR can recover in two ways:(1) it may recover said liability from all the heirs who shall share proportionately OR(2) it may go against the property held by an heir if the same is sufficient to cover the whole tax liability (in which case, the heir who paid can

seek reimbursement from his/her co-heirs)BUT in both instances, the respective heirs may not be held accountable for more that the share he/she inherited

Q: Who are considered as persons/officers who should require proof of payment of estate tax before acting upon a request by an heir?A: These would be the Register of Deeds, debtors, lawyers and banks all on transactions relating to their business.

Q: For purposes of imposing the donors tax, is donative intent always necessary?A: NO, as in the case of transfers for less than adequate consideration. However, for the donors tax to be imposed in this case, the followingrequirements must concur:

1. Property donated is NOT realty that is capital asset (otherwise it will be subject to 6% CGT on the entire gross selling price or FMV,whichever is higher)

2. the transfer is for less than adequate consideration


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3. the transfer is inter vivos

Q: Mr. A sold his lot not used for business to his brother Mr. B for 500,000 when at that time the lot was valued in the market at P1M.Mr. A bought it for P100,000. In addition, A sold some of the shares of his company, X Corp., to his senior executives. He sold the XCorp. shares for P300,000 when the market value was at P500,000. His original cost in the shares is P100,000. Are the sales subject todonors tax?

A: The sale of the lot is not subject to donors tax as it is a real property classified as a capital asset and as such is subject to the 6% capitalgains tax. The sale of the shares are, however, subject to the donors tax of 30% based on the difference between the selling price and the marketvalue.

Q: Are there deductions from the gross gift?A: Actually, there are really no deductions, only exemptions which are as follows:1. dowries up to a maximum amount of P10,0000, subject to the following conditions:

a. the donation is made before marriage or w/in 1 yr. thereafterb. it is made by parents to their children, whether legitimate, illegitimate, or adopted

2. gifts to the national govt. or to other created entities not made for profit3. gifts to religious, charitable, etc. provided that not more than 30% of the value of the gifts are used for admin. purposes4. encumbrance on the property if assumed by the donee

5. those specifically provided as diminution on property donated

Q: Are non-resident aliens entitled to all these deductions?A: NO. Only 2 to 5 are allowable

Q: Which is a more tax efficient mode of transferring property via donation mortis causa or inter vivos ?A: While the rates for donors tax are lower (2% to 15%) compared to those imposed for estate tax (5% to 20%), payment of donors tax arenecessarily earlier than estate tax.


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D. REMEDIES

Q: Who is the current Commissioner of Internal Revenue?

A: Sixto S. Esquivias IV

Q: What is the basic composition of the Bureau of Internal Revenue?A: The BIR is headed by the Commissioner and 4 deputy commissioners. There are Assistant Commissioners and division chiefs reporting to therespective departments.

Q: What are the powers of the Commissioner of Internal Revenue?A: The CIR has the power:

1. to interpret tax laws and decide tax casesa. interpretation of laws

exclusive and original subject to review by the Sec. Of Finance

b. decide tax cases exclusive appellate jurisdiction of the CTA

2. to obtain information, to summon, examine and take testimony of persons" but these powers do not empower the CIR to inquire into bank deposits except as provided under Section 6(F) of the NIRC

The Commissioner is hereby authorized to inquireinto the bank deposits of:(1) a decedent to determine his gross estate; and(2) any taxpayer who has filed an application for

compromise of his tax liability under Sec.204(A)(2) of this Code by reason of financial

incapacity to pay his tax liability. This requires asigned Waiver of the Secrecy of Bank Deposits.

3. to make assessments and prescribe additional requirements for tax administration and enforcementa. examination of returns and determination of tax due

once filed, the taxpayer may no longer withdraw it; but he may amend it, subject to the following requirements:1. it is made within 3 years from filing, and2. no notice for audit or investigation has been actually served to him

b. failure to submit required returns, statements, reports, and other documents" assessment to be based on best obtainable evidence


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c. authority to conduct inventory-taking, surveillance, and to prescribe presumptive gross sales and receiptsd. authority to terminate taxable period when the taxpayer is

i. retiring from businessii. intending to leave the countryiii. removing his propertyiv. obstructing tax collection

e. authority to prescribe real property valuesf. authority to inquire into bank deposits of

(1) a decedent to determine his gross estate; and(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A)(2) of this Code by reason

of financial incapacity to pay his tax liabilityg. authority to accredit and register tax agentsh. authority to prescribe additional procedural or documentary requirements

Q: Are all the powers of the Commissioner delegable?A: No. The following may not be delegated:

(1) Promulgation of rules & regulations

(2) Issuance of first impression rulings(3) Compromise or abate if the amount is over P500,000(4) Assign officers in charge of excisable articles

Q: May the CIR be compelled to make an assessment?A: NO. Mandamus lies only to perform ministerial functions; assessment is d iscretionary on the CIR. Absent showing of grave abuse, CIRs rightto interpret tax laws and enforce them is discretionary [MERALCO SECURITIES CORP.]

Q: When is the civil penalty of 25% imposable?A: It is imposable in case of:

1. failure to file return and pay tax due thereon2. filing with unauthorized revenue officer

3. failure to pay within time prescribed in assessment notice4. failure to pay part of the amount shown in ITR

Note: All the above simultaneously attract the 20% interest except number 2.

Q: If a taxpayer who files a return subsequently realizes that the return filed was insufficient, will his amended return be subject to the25% surcharge?

A: As long as the taxpayer files the amended return before the lapse of any demand by the BIR to pay his/her deficiency assessment, the taxpayeris not liable for any surcharge.


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Q: Taxpayer A filed and paid taxes on April 15, 2009 worth 5M. On May 15, 2009, he realized he should have paid P6M and thus paysthe additional P1M. Is he subject to the 25% surcharge?

A: No. None of the violations mentioned was committed by the taxpayer.

Q: Taxpayer B filed and paid taxes on April 15, 2009 worth 5M. On May 15, 2009, the BIR issued an assessment and required thatTaxpayer pay an additional P1M on or before June 15, 2009. If he pays before June 15, 2009 is he subject to the 25% surcharge?

A: No. None of the violations mentioned was committed by the taxpayer.

Q: Taxpayer C did not file any return nor pay any taxes on April 15, 2009. On May 15, 2009, he realized he should have paid P6M andthus pays the whole 6M. Is he subject to the 25% surcharge?

A: Yes. Taxpayer C failed to file return and pay tax due thereon which is the first type of act which requires a 25% surcharge imposition.

Q: Taxpayer D filed and paid taxes on April 15, 2009 worth 10M. On May 15, 2009, the BIR issued an assessment and required thatTaxpayer pay an additional P5M on or before June 15, 2009. If he pays after June 15, 2009 is he subject to any surcharge?

A: Yes. Taxpayer D will be subject to the 50% surcharge since (a) he failed to pay within the time prescribed in the notice of assessment and (b)the underdeclaration is 50% or in excess of the 30% threshold which raises the prima facie presumption of a false or fraudulent return. As suchallegation is only prima facie, it may be rebutted.

Q: Can the compromise offer of a taxpayer be lower the prescribed rates (10% for financial incapacity and 40% for doubtful validity) inthe Tax Code?

A: Yes, but the approval by the Evaluation Board which is composed of the CIR plus 4 Deputy Commissioners is required

Q: When may the interest on deficiency tax be waived?A: When the assessment is highly controversial as in the case of CAGAYAN ELECTRIC POWER & LIGHTwhere there was a withdrawal of itsexemption from income tax and a subsequent reinstatement of such exemption. Thus, non-payment during the short time when the taxpayer wasexempt was not subjected to interest payment.

Q: What remedies are available for the collection of taxes?A:

1. tax lien (Sec. 219)2. compromise (Sec. 204)3. distraint of goods (shares, debts, ect.)4. levy of real property5. civil or criminal action6. forfeiture7. suspension of business operations8. enforcement of admin. fines

The remedies may be resorted to all at the same time but 3 and 4 not available if less than 100 pesos.


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Q: May an assessment for deficiency estate tax attain finality when there is a pending case in the probate court?A: YES, when such assessment was not protested by the taxpayer administratively [MARCOS II v. CA]

Q: Will service of an assessment notice made to the agent of the decedent after the decedents death be effective?

A: NO. Service of assessment notice on the trust officer/agent of the decedent made after the death is invalid since at that time the legalrelationship between the principal and his agent had been automatically severed by the death of the principal even if the agent continued to act assuch by filing the decedents ITR. The fact of failure to file a notice of death will not alter this effect but will only expose the estate to penalties andwill not continue the relationship with the agent[ESTATE OF LATE JULIAN DIEZ VS. CIR (JANUARY 27, 2004)]

Q: What is the significance of the taxpayers indicating in the previous years ITR its new address?A: Any service of assessment notice on the old address subsequent to such previous year invalidates the assessment. [CIR VS. BPI ASLIQUIDATOR OF PARAMOUNT ACCEPTANCE CORP. (SEPTEMBER 23, 2003)]

Q: Does the dismissal of a civil action carry with it the dismissal of the civil aspect of tax collection?A: No, proceedings in tax cases are different since the tax liability not deemed included in criminal cases filed.

Q: Should the filing of a criminal complaint be preceded by assessment ?A: NO. In case of a false or fraudulent return, proceedings in court may be commenced without an assessment since under the Tax Code, civiland criminal aspects may be pursued simultaneously

Q: When does the governments right to assess prescribe?A: The general rule is that the governments right to assess prescribes in 3 yrs. from the date of the last day of filing.

However:1. If the return is filed after such date, the 3-yr. period is reckoned from the date of actual filing2. If return filed before last day, then considered as filed on the last day.

Q: May there be a proceeding in court when no assessment is made within such 3-year period?A: NO. Except under Sec. 222 which provides for the following instances:

a) If ---a. A false or fraudulent return is filed with intent to evade taxb. There is a failure to file returnThen ---a. tax may be assessed ORb. proceeding in court for collection may be filed without assessment--- at any time within 10 years from discovery of falsity, fraud or omission

(b)Waiver of PERIOD TO ASSESS is allowed before the end of period (Note: waivers must be consented to by the BIR and is not aunilateral act)


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Q: When is the running of the period of prescription suspended?A: It is suspended when ---

1. the CIR was prohibited from making the assessment or beginning distraint/levy and for 60 days thereafter (example: when injunctionallowed under the CTA law is availed of)

2. taxpayer requests reinvestigation which is granted by CIR

3. taxpayer cannot be located in address4. a warrant of distraint or levy is served (not only issued) and no property could be found5. taxpayer is out of the Philippines

Regular ITR No ITR, or false or fraudulent ITRCollection w/ prior assessment Collection w/ prior assessment

Assess within 3 yrs. from actual filing or last day to file (if the filingwas done prior to said last day)

Collection within 5 yrs. from date of assessmentby summary ORjudicial

Assess within 10 yrs. from discovery of falsity, fraud, omission

Collection within 5 yrs. from date of assessment by summary ORjudicial (Note: ONCE THERE IS AN ASSESSMENT, THEPERIOD TO COLLECT IS ALWAYS 5 YEARS EVEN IF THERETURN IS FRAUDULENT, FALSE OR WAS NOT FILED)

Collection w/o prior assessment Collection w/o prior assessmentCan not be done anymore in view of clear provision that there has to beassessment before collection

Collection within 10 yrs. from date of discovery of falsity, fraud,omission byjudicial proceedings only and not by summaryproceedings (this limitation on mode of enforcing collection is thedistinction if the government proceeds to collection withoutassessment)

Q: Is there a need to prove that the taxpayer actually received the assessment notice within the prescriptive period?A: No. As a general rule, the assessment is deemed made once the notice is mailed. However, if the receipt is disputed and for this presumptionof receipt of mail to apply, CIR must prove that (1) letter was properly addressed and (2) that it was mailed; otherwise, presumption of receipt cantapply.

Q: When may the collection of taxes be made?A: It may be made within 5 years from assessment orwithin the period agreed in the waiver. However, if the waiver refers to both assessmentand collection and interpreting it as such will in effect shorten the collection period, then it is deemed to refer to assessment only and not tocollection [RP v. LIM DE YU]

Q: What is the effect of a reinvestigation on the period to collect ?A: The period utilized for reinvestigation is deducted from the period within which to collect. Thus, if the assessment was made on 1/1/2000 andthe collection was made on 1/1/2006 but it was shown that from 1/1/2001 to 1/1/2003, or a period of 2 years, the assessment was beingreinvestigated, the action to collect has not yet prescribed since deducting the 2 year period when reinvestigation was made will only amount to 4years (6 years total minus 2 years of reinvestigation) and is thus still within the 5 year period to collect.


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Q: What is the difference between a request for reinvestigation and a request for reconsideration for purposes of tolling the running ofthe prescriptive period to collect?

A: A request for reconsideration is a reevaluation on the basis of existing records while a reinvestigation is a reevaluation on the basis of newly-discovered or additional evidence. It is a request for reinvestigation acted upon which suspends the prescriptive period to collect. (BANKOF THE PHIL. ISLANDS VS. CIR (OCTOBER 17, 2005)

Q: What are the requirements of a valid waiver?A: (a) specified period (b) signed by proper authority (for 1M or above = CIR must sign) and (c) taxpayer must be furnished a copy of the waiver inorder to perfect agreement since waiver is not a mere unilateral act (Philippine Journalists Inc. vs. CIR (December 16, 2004)

Q: An informer filed a case with the CTA against the taxpayer and the BIR. The informer was seeking to (1) declare the taxpayer ashaving an assessment and (2) as a consequence of (1), to collect his informers reward. This case was filed by the informer within 3years from the time that the taxpayer filed its return. However, apart from this action initiated by the informer, no other action was filedby the government seeking to collect against the taxpayer. Has the right to collect already prescribed?

A: No, this is a unique case but the BIR is deemed to be compliant with the requirement collection within 5 years from time of assessment since ifthe Petitioner-informant won, the CTA would have ordered the erring parties to pay the tax. At the very least, the filing by the informer of the casewould have suspended the running of the period because the BIR is prohibited from making collection because there was a pending case. [PNOC

vs. CA, April 26, 2005]

Q: Is there a difference between a false return and a fraudulent return?A: YES. A false return merely implies deviation from truth, whether intentional or not, while

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