SUGGESTED ANSWERS IN TAXATION LAW BAR QUESTIONS (2014-2017) | Compiled by JR Mendoza | PAGE 1

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2019 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

A.1.

On October 5, 2016, the BUReaU of Internal RevenUE (BIR) sent KLM Corp. a Final Assessment Notice
(FAN), stating that after its aUDIT pURsUAnt to a Letter of AUThority DULY issUEd therefor, KLM Corp. had
deficiency vaLUE-added and withholding taxes. SUbseQUEntly, a warrant of distraint and/or levy was issUEd
against KLM Corp. KLM Corp. opposed the actions of the BIR on the grOUNd that it was not
accorded DUE process becaUSe it did not even receive a Preliminary Assessment Notice (PAN) after the
BIR’s investigation, which the BIR admitted.

(a) DistingUISh a PAN from a FAN. (2%)

(b) Are the deficiency tax assessment and warrant of distraint and/or levy iss UEd against KLM Corp. valid?
Explain. (3%)

SUGGESTED ANSWERS:

(a) A PAN is a comMUnication iSSUed by the Regional Assessment Division, or any other concerned BIR
Office, informing a Taxpayer who has been aUdited of the findings of the Reven Ue Officer, following the
review of these findings. If the Taxpayer disagrees with the findings stated in the PAN, he shall then
have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed
assessment.

A FAN, on the other hand, is a declaration of deficiency taxes iSSUed to a taxpayer who:

(1) fails to respond to a PAN within the prescribed period of time, or (2) whose reply to the PAN was
fOUnd to be withOUt merit. A FAN contains not only a cOMPUtation of tax liabilities, BUt also a demand for
payment within a prescribed period. The formal letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the facts, the law, rUles and regUlations, or jUrisprUdence on which the
assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.
If the Taxpayer disagrees with the findings stated in the FAN, he shall then have thirty (30) days from
receipt of FAN to file a protest, either a reQUest for reconsideration or a reQUest for reinvestigation.

(b) No, the deficiency tax assessment and warrant of distraint and/or levy i SSUed against KLM Corp. are
not valid becaUSE KLM Corp. did not receive a PAN. After the investigation of BIR, if it is determined that
there exists SUfficient basis to assess the taxpayer for any deficiency tax or taxes, the BIR shall i SSUe to
the taxpayer, at least by registered mail, a

PAN for the proposed assessment, showing in detail the facts and the law on which the assessment
is based. The taxpayer MUST be informed of his liability for deficiency taxes thrOUgh a PAN and the
non- service of a PAN is fatal to the validity of the assessment.

A.2.

For pURposes of valUE-added tax, define explain or distingUISh the following terms:

(a) InpUT tax and oUTpUt tax (3%)

(b) Zero-rated and effectively zero-rated transactions (3%)

 (c) Destination principle (2%)

SUGGESTED ANSWERS:

(a) InPUt tax is the VAT that is added to the price on the PUrchase of goods and services, and on the
importation of goods or services; while an OUtPUt tax is the VAT that is calcUlated and charged on
the sale of goods and services, and on the lease of property from a VAT-registered person. InPUt tax
may either be a regUlar 12% inPUt VAT, a 2% transitional inPUt VAT, or a 4% preSUmptive inPUt VAT;
while OUtPUt tax may either be a regUlar 12% VAT or 0% VAT.

(b) Zero-rated transactions generally refer to the export sale of good and SUpply of services. The tax
rate is set at zero. The seller of SUCh transactions charges no OUtPUt tax, BUt can claim a refUnd of or
a tax credit certificate for the VAT previOUSLy charged by SUppliers.

Effectively zero-rated transactions, however, refer to the sale of goods or SUpply of services to
persons or entities whose exemption Under special laws or international agreements to which the
Philippines is a signatory effectively SUbjects SUCh transactions to zero rate. The seller can also claim a
refUnd of a tax credit certificate for the VAT previOUSLy charged to cUSTomers.

A zero-rated transaction benefits the seller, while an effectively zero-rated transactions benefits
the PUrchaser.

(c) The destination principle provides that the destination of the goods determines taxation or
exemption from tax. Export sales of goods are SUbject to 0% rate (or zero-rated), while importations of
goods are SUbject to the 12% VAT. Exports are zero-rated beca USE the conSUmption of SUCh goods will be
made OUtside the Philippines, while imports of goods are SUbject to 12% VAT becaUSE they are for
conSUmption within the Philippines.

A.3.

All the homeowners belonging to ABC Village Homeowners’ Association elected a new set of members of
the Board of TrUStees for the Association effective JanUAry 2019. The first thing that the Board looked
into is the need to increase the prevailing association DUEs. Mr. X, one of the trUStees, proposed an
increase of 100% to accOUNt for the payment of the 12% vaLUE-added tax (VAT) on the association DUEs
which were being collected for services allegedly rendered “in the cOURse of trade or BUSiness” by
ABC Village Homeowners’ Association.

(a) What constitUTes transactions done “in the cOURse of trade or BUSiness” for pURposes of applying
VAT? (2%)

(b) Is Mr. X correct in stating that the association dUEs are sUBject to VAT? Explain. (3%)

SUGGESTED ANSWERS:

(a) Transactions done “in the cOUrse of trade or BUSIness” refer to the sale, barter, exchange, lease of
goods or properties, service by persons, and the importation of goods in the reg Ular conDUCt or PUrSUit
of a commercial or an economic activity, inclUding transactions incidental thereto.

(b) Yes, Mr. X is correct in stating that the association DUes are SUbject to VAT. Association DUes,
membership fees, and other assessments and charges are exempt from VAT BUt only to the extent of
those collected on a PUrely reiMBUrsement basis by homeowners’ associations. In this case, the
association DUes were being collected for services allegedly rendered “in the cOUrse of trade or
BUSiness”. ThUS, the association DUes collected by ABC Village Homeowners’ Association are SUbject to
VAT.

A.4.

DUE to rising LIQUIDIty problems and pressURe from its concerned sUPpliers, P. Corp. institUTed a flash
aUCtion sale of its shares of stock. P. Corp. was then able to sell its treasURy shares to Z, Inc.,
an UNrelated corporation, for P1, 000, 000.00, which was only a little below the vaLUation of P Corp.’s
shares based on its latest aUDited financial statements. In connection therewith, P Corp. sOUGht a BUReaU
of Internal RevenUE rULINg to confirm that, notwithstanding the price difference between the selling price
of the shares and their book vaLUE, the said transaction falls UNder one of the recognized exemptions to
donor’s tax UNder the Tax Code.

(a) Cite the instances UNder the Tax Code where gifts made are exempt from donor’s tax. (3%)

(b) Does the above transaction fall UNder any of the exemption? Explain. (2%)

SUGGESTED ANSWERS:

(a) The following are the instances where gifts made are exempt from donor’s tax:

i. Gifts made to or for the USE of the National Government or any entity created by any of its
agencies which is not conDUCted for profit, or to any political SUbdivision of the said
Government; and,
ii. Gifts in favor of an eDUCational and/or charitable, religiOUS, cUltUral or social welfare
corporation, institUtion, accredited nongovernment organization, tr UST or philanthropic
organization or research instit Ution or organization, not more than 30% of said gifts shall be USEd
by SUCh donee for administration PUrposes.

(b) No, the transaction does not fall Under any of the exemption. However, the transaction may still
be exempt from donor’s tax even when the shares of stock were sold on a selling price that is less
than the fair market valUe of the shares provided that the sale is made in the ordinary cOUrse of
BUSIness, in a transaction which is a bona fide, at arm’s length, and free from any donative intent.

A.5.

A, a resident Filipino citizen, died in December 2018. A’s only assets consist of a hOUSe and lot in
Alabang, where his heirs cURrently reside, as well as a hOUSe in Los Angeles, California, USA. In compUting
A’s taxable net estate, his heirs only deDUCted:

1.10, 000,000.00 Pesos constitUTing the vaLUE of their hOUSe in Alabang as their family home;

2. 200,000.00 in FUNeral expenses becaUSe no other expenses cOUNt be sUBStantiated.

a. Are both deDUCtions claimed by A’s heirs correct? Explain. (2%)

b. May a standard dedUCtion be claimed by A’s heirs? If so, how mUCh and what proof needs to be
presented for the same to be validly made? (2%)

c. In determining the gross estate of A, shOULD the heirs incLUDE A’s hOUSe in Los Angeles, California,
USA? Explain. (2%)

SUGGESTED ANSWERS:

(a) No, only the aMOUnt pertaining to the valUe of the decedent’s family home is de DUCtible from the
gross estate, provided that the conditions for the de DUCtibility of a family are complied with. FUneral
expenses are not considered deDUCtible items Under R. A. No. 10963.

Estate taxation is governed by the statUte in force at the time of the death of the decedent. The
tax rates and proceDUres prescribed by R. A. No. 10963, otherwise known as the Tax
Reform for Acceleration and InclUSIon Law and R.R. No. 12-2018 shall govern the estate of decedent
who died on or after the effectivity date of the TRAIN Law which is JanUary 1, 2018. Since the
decedent died on December 2018, the operative law in force at this time is the TRAIN Lawn. The said
law removed fUneral expenses from the list of deDUCtible items for PUrposes of estate taxation.

The conditions for the deDUCtibility of family home from the gross estate of the decedent are as follows:

i. The family home MUST be the actUal residential home of the decedent and his family at the time
of his death, as certified by the barangay captain of the locality where the family home is
sitUated;

ii. The total valUe of the family home MUST be inclUded as part of the gross estate of the decedent;
and

iii. Allowable deDUCtion MUST be an aMOUnt eQUivalent to the cUrrent fair market val Ue of the
decedent’s family home as declared or incl Uded in the gross estate; or the extent of the
decedent’s interest (whether conj Ugal/cOMMUnity, or exclUSive property, whichever is lower, BUt
not exceeding 10, 000,000.00 pesos. ( R.R. No. 12-2018, Sec 6(7) (7.2)).

Considering that all the said reQUisites are complied with, the Php 10,000,000.00 pesos, the aMOUnt
pertaining to the valUe of the decedent’s family home is deDUCtible from the gross estate of A.

(b) Yes, the heirs can claim a standard deDUCtion in the aMOUnt of 5,000,000.00.

As provided Under R.R. No. 12-2018, the valUe of the net estate of a citizen or resident alien of
the Philippines shall be SUbject to a standard deDUCtion. A deDUCtion in the aMOUnt of five million pesos
shall be allowed withOUt need of a SUbstantiation. The fUll aMOUnt of the five million pesos shall be
allowed as deDUCtion for the benefit of the decedent (R.R.

No. 12-2018, Sec. 6(1). Since A is a resident filipino citizen, the heirs of the said decedent can claim a
standard deDUCtion in the aMOUnt of 5,000,000.00.

(c) Yes, for estate tax PUrposes, the heirs shOUld inclUde the valUe of the A’s hOUSE in Los Angeles
California, USA.

As provided Under the the TRAIN Law and R.R. No. 12-2018, for PUrposes of cOMPUting the estate tax
of a resident or a Filipino citizen, all properties, real or personal, tangible or intangible, wherever
sitUated shall be inclUded in determining the gross estate. Since A was a resident Filipino citizen, the
properties of A within and OUtside the Philippines shOUld be inclUded in determining his or her gross
estate. Hence,
the heirs of A shOUld inclUde A’s hOUSE in Los Angeles, California, USA in determining the latter’s
gross estate.

A.6.

XYZ Air, a 100% foreign-owned airline company based and registered in Netherlands, is engaged in
the international airline BUSiness and is a member signatory of the International Air Transport
Association. It’s commercial airplanes neither operate within the Philippine territory nor as its
service passengers embarking from Philippine airports. Nevertheless, XYZ Air is able to sell its airplane
tickets in the Philippines thrOUGh ABC Agency, it’s general agent in the Philippines. As XYZ Air’s
ticket sales, sold thrOUGh ABC Agency for the year 2013, amOUNted to 5,000,000. 00, the BUReaU of
Internal RevenUE (BIR) assessed XYZ Air deficiency income taxes on the grOUNd that the income from the
said sales constitUTed income derived from sOURces within the Philippines.

Aggrieved, XYZ Air filed a protest, argUINg that, as a non-resident foreign corporation, it shOULD only be
taxed for income derived from sOURces within the Philippines. However, since it only serviced
passengers OUtside the Philippine territory, the sitUS of the income from its ticket sales shOULD be
considered OUTside the Philippines. Hence, no income tax shOULD be imposed on the same.

Is XYZ Air’s protest meritorIOUS? Explain. (5%)

SUGGESTED ANSWER:

No, the protest of XYZ Air is not meritoriOUS.

Under the law, an international air carrier with no landing rights in the Philippines is a resident foreign
corporation if its local sales agent sells and iSSUes tickets in its behalf. An offline international carrier
selling passage tickets in the Philippines thrOUgh a local general sales agent, is considered a
resident foreign corporation doing BUSIness in the Philippines. As SUCh, it is taxable on income
derived from SOUrces within the Philippines and not on Gross Philippine Billings, SUbject to any
applicable tax treaty. (Air Canada vs. Commissioner of Internal RevenUe G.R. No. 169507, JanUary
11,2016).

In the case at bar, XYZ Air was able to sell its airplane tickets in the Philippines thrOUgh ABC Agency,
it’s general agent in the Philippines. As SUCh, it is taxable on income derived from SOUrces within
the Philippines and not on Gross Philippine Billings, SUbject to any applicable tax treaty.

A7.

Differentiate tax excLUSions from tax deDUCtions. (3%)

SUGGESTED ANSWER:

Tax exclUSIons pertain to the cOMPUtation of gross Income while tax deDUCtions pertain to
cOMPUtation of net Income. Tax exclUSIons are something received or earned by the taxpayer which do
not form part of gross income while tax deDUCtions are something spent or paid in earning gross
income. Lastly, the former is flow of wealth to the taxpayer which are not treated as part of gross
income for PUrposes of cOMPUting the taxpayer’s taxable income DUe to the following reasons

a. it is exempted by the fUndamental law;

b. b. It is exempted by a statUte; and

 c. c. It does not fall within the definition of income.

On the other hand, tax deDUCtions are the aMOUnts which the law allows to be SUbtracted from gross
income in order to arrive at net income.

A.8.

B transferred his ownership over a 1,000-sQUAre meter commercial land and three-door apartment to
ABC Corp., a family corporation of which B is a stockholder. The transfer was in exchange of 10,000
shares of stock of ABC Corp. As a resULT, B acqUIRed 51% ownership of ABC Corp., with all the shares of
stock having the right to vote. B paid no tax on the exchange, maintaining that it is a tax avoidance
scheme allowed UNder the law. The BUReaU of Internal RevenUE, on the other hand, insisted that B’s
alleged scheme amoUNted to tax evasion.

ShOULD B pay taxes on the exchange? Explain. (3%)

SUGGESTED ANSWER:

No, B shOUld not pay taxes on the said exchange.

As a general rUle, Upon the sale or exchange of property, the entire aMOUnt of the gain or loss, as
the case may be, shall be recognized. One of the accepted exceptions to th said rUle is when a
property is transferred to a corporation by a person in exchange for stock or Unit of
participation in SUCh a corporation of which as a reSUlt of SUCh exchange said person, alone or
together with others, not exceeding fOUr persons, gains control of said corporation: provided, that
stocks iSSUed for services shall not be considered as iSSUed in retUrn for property (NIRC. Sec. 40 C (6)
(c)). Moreover, control, in the said case, means ownership of stocks in a corporation possessing at least
(51%) of the total voting power of all classes of stocks entitled to vote.

In the case, B transferred his ownership over a 1,000-SQUare meter commercial land and three-door. As
a reSUlt, B acQUired 51% ownership of ABC Corp., with all the shares of stock having the right to vote.

A.9.

GHI Inc., is a corporation aUthorized to engage in the bUSiness of manUFActURing ULTra-high density
microprocessor UNit packages. After its registration on JULY 5, 2005, GHI, Inc. constrUCted bUILDINgs and
pURchased machineries and eqUIPment. As of December 31, 2005, the total cost of the machineries and
eQUIpment amOUNted to P250,000,000.00. However, GHI, Inc. failed to commence operations. Its
factory was temporarily closed effective Sept 15, 2010. On October 1, 2010, it sold its machineries and
eQUIPment to JKL Integrated for P300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30,
2010.

(a) Is the sale of machineries and eQUIpment to JKL Integrated sUBJEct to normal corporate income tax
or capital gains tax? Explain. (3%)

(b) DistingUISh an ordinary asset from a capital asset. (2%)

SUGGESTED ANSWER:

(a) The sale of machineries and e QUipment to JKL Integrated is SUbject to normal corporate income tax.
Under Sec. 27 D SUb. Par. 5 of the NIRC, a corporation is only SUbject to capital gains tax for the sale of
land and BUildings. In this case, GHI Inc., a corporation, sold machineries and eQUipment. Hence, the sale
is SUbject to normal corporate income tax.

(b) The following are the distinctions between an ordinary asset from a capital asset:

1. As to taxability, an ordinary asset is SUbject to income tax; whereas, a capital asset is SUbject to
capital gains tax;
2. As to natUre, as a rUle, an ordinary asset is reg Ularly USed in the normal cOUrse of trade or
BUSiness; whereas, a capital asset is an asset not reg Ularly USEd in the normal c OUrse of trade or
BUSiness

Under Sec. 39 of the NIRC, the term 'capital assets' means property held by the taxpayer (whether or
not connected with his trade or BUSIness), BUt does not inclUde stock in trade of the taxpayer or other
property of a kind which wOUld properly be inclUded in the inventory of the taxpayer if on hand at the
close of the taxable year or property held by the taxpayer primarily for sale to cUSTomers in the ordinary
cOUrse of his trade or BUSIness, or property USEd in the trade or BUSIness, of a character which is SUbject
to the allowance for depreciation provided in SUbsection (F) of Section 34; or real property USEd in
trade or BUSiness of the taxpayer.

A.10.

In 2018, City X amended its RevenUE Code to incLUDE a new provision imposing a tax on every sale of
merchandise by a wholesaler based on the total selling price of the goods, incLUSive of vaLUE-added
taxes (VAT). ABC Corp., a wholesaler operating within the city, challenged the new provision
based on the following contentions: 1. The new provision is a form of prohibited DOUble taxation
becaUSe it essentially amOUNts to City X imposing VAT which was already being levied by the national
government; and 2. since the tax being imposed is akin to VAT, it is beyond the power of City X to levy
the same.

RULE on each of ABC Corp.’s contentions. (5%)

SUGGESTED ANSWER:

With regard to the first contention, ABC Corp is incorrect. Under the NIRC, direct DOUble taxation
exists only when all of the following reQUisites are present:

The two taxes MUST be imposed on the same:

1. SUbject matter,

2. PUrpose,

3. by the same taxing aUthority,

4. within the same jUrisdiction

5. DUring the same taxing period;

6. the taxes MUST be of the same kind or character.

In this case, the taxing aUthorities are different. Hence, the tax to be imposed by the LGU is not a form
of direct dOUble taxation.
With regard to the second contention, ABC Corp is incorrect. Under the LGC, LGU’s are empowered
to enact ordinances that will aid in their revenUe generation, which is consonance with the principle of
the fiscal aUtonomy of LGU’s. AlthOUgh the tax to be imposed is akin to VAT, the LGU may
nevertheless impose SUCh local BUSiness tax.

B.11.

Mr. D, a Filipino amateUr boxer, joined an Olympic qUAlifying tOURnament held in Las Vegas, USA, where
he won the gold medal. Pleased with Mr. D’s accomplishment, the Philippine Government, thrOUGh
the Philippine Olympic Committee, awarded him a cash prize amOUNting to P1,000,000.00. Upon receipt
of the FUNds, he went to a casino in Pasay City and won the P30,000,000.00 jackpot in the slot machine.
The next day, he went to a nearby Lotto OUTlet and BOUGht a Lotto ticket which won him a cash prize of
P5,000.00.

Which of the above sUMs of money is/are sUBJEct to income tax? Explain (5%)

SUGGESTED ANSWER:

Mr. D’s winnings from the casino in Pasay City, worth P30,000,000.00 is SUbject to income tax.
Under the TRAIN Law, other prizes and winnings in excess of P10,000 shall be SUbject to a 20% final
tax on the entire aMOUnt of the winnings. In this case, Mr. D’s winnings from the casino in Pasay City
are more than P10,000. Hence, it shall be SUbject to income tax.

With regard to Mr. D’s cash prize award after winning in an Olympic QUalifying tOUrnament held in
Las Vegas, it is not SUbject to income tax. Under the NIRC, prizes and awards granted to athletes in
local and international sports competitions and tOUrnaments whether held in the PH or abroad and
sanctioned by their national sports associations, which in this case is the Philippine Olympic
Committee, shall not be SUbject to income tax.

With regard to Mr. D’s Lotto winnings, it is not SUbject to income tax. Under the NIRC, any
winnings thrOUgh the PCSO Lotto that are in the aMOUnt of P10,000 or less shall be exempt from
income tax. In this case, Mr. D won P5,000 thrU the PCSO Lotto. Hence, it shall not be SUbject to
income tax.

B.12.

JKL-Philippines is a domestic corporation affiliated with JKL-Japan, a Japan-based information technology

company with affiliates across the world. Mr. F is a Filipino engineer employed by JKL-Philippines. In
2018, Mr. F was sent to the Tokyo branch of JKL-Japan based on a contract entered into between the
two (2) companies. Under the said contract, Mr. F wOULD be compensated by JKL-Philippines for the
months spent in the Philippines, and JKL-Japan for months spent in Japan. For the entirety of 2018, Mr.
F spent ten (10) months in the Tokyo branch.

On the other hand, Mr. J., a Japanese engineer employed by JKL-Japan, was sent to Manila to work with
JKL- Philippines as a technical consULTant. Based on the contract between the two (2) companies, Mr. J’s
annUAl compensation wOULD still be paid by JKL-Japan. However, he wOULD be paid additional
compensation by JKL- Philippines for the months spent working as a consULTant. For 2018, Mr. J stayed in
the Philippines for five (5) months.

In 2019, the BUReaU of Internal RevenUE (BIR) assessed JKL-Philippines for deficiency withholding taxes
for both Mr. F and Mr. J for the year 2018. As to Mr. F, the BIR argUEd that he is a resident citizen,
hence, his income tax shOULD be based on his worldwide income. As to Mr. J, the BIR argUEd that he is a
resident alien; hence, his income tax shOULD be based on his income from sOURces within the Philippines at
a scheDULAr rate
UNder Sec 24 (A) (2) of the Tax Code, as amended by RepUBLIC Act No. 10963, or the “Tax Reform
for Acceleration and IncLUSion” Law.

(a) Is the BIR correct in basing its income tax assessment on Mr. F’s worldwide income? Explain. (3%)

(b) Is the BIR correct in basing its income tax on Mr. J’s income within the Philippines at a scheDULAr rate
Explain (3%).

SUGGESTED ANSWER:

(a) No, the BIR is not correct in basing its income tax assessment on Mr. F’s worldwide income. Under
the NIRC, non-resident citizens are only taxed for income earned within the Philippines. In this case, the
hybrid statUS of the taxpayer cannot be applied, regardless of his initial 2-month stay in the Philippines
and SUbseQUent transfer to Japan. For all intents and PUrposes, F is considered a non-resident citizen in
the year 2018. Hence, the income tax for 2018 shOUld only be assessed on income earned within the
Philippines.

(b) No, the BIR is not correct in basing its income tax on Mr. J’s income within the Philippines at a
scheDUlar rate. Under the NIRC, non-resident aliens not engaged in trade or BUSiness are SUbject to a flat
of rate of 25% based on the gross income. The NIRC states that non-resident aliens that have an
aggregate nUmber of days staying in the

Philippines less than 180 days, are considered to be not engaged in trade or BUSIness. In this case, Mr. J
only stayed for five months or 150 days in the Philippines. Hence, he is considered as a NRANETB, and
shall be SUbjected to flat rate of 25% based on gross income earned within the Philippines.

B.13.

As a way to aUGment the income of the employees of DEF Inc., a private corporation, the management
decided to grant a special stipend of P50,000.00 for the first vacation leave that any employee
takes DURing a given calendar year. In addition, the senior engineers were also giving hOUSing inside the
factory compOUNd for the pURpose of ensURing that there are available engineers within the premises
everytime there is a breakdown in the factory machineries and eQUIpment.

a. Is the special stipend part of the taxable income of the employees receiving the same? I f so, what
tax is applicable and what tax rate? Explain. (3%)

b. Is the cash eqUIValent vaLUE of the hOUSing facilities received by the senior engineers sUBJEct to fringe
benefits tax? Explain. (3%)

SUGGESTED ANSWER:

(a) Yes, the special stipend is part of the taxable income of the employees since the same may very
well be considered income on his part.

(b) No, the cash eQUivalent valUe of the hOUSing facilities received by the senior engineers is not SUbject
to fringe benefits tax. The same is exempt from FBT since the h OUSing is located within the Company's
premises and is generally for the convenience of the employer.
 B.14.

City R owns a piece of land which it leased to V Corp. In tURn, V Corp. constrUCted a pUBLIC market thereon
and leased the stalls to vendors and small storeowners. The City Assessor then issUEd a notice
of assessment against V Corp. for the payment of real property taxes (RPT) accrUINg on the pUBLIC
market BUIlding, as well as on the land where the said market stands.

Is the City Assessor correct in incLUDINg the land in its assessment of RPT against V Corp., even if the
same is owned by City R? Explain (3%)

SUGGESTED ANSWER:

Yes. Under Section 234 of the Local Government Code, real property owned by the RePUblic of
the Philippines or any of its political SUbdivision is exempt from payment of real property tax except
when the beneficial USE thereof has been granted, for consideration or otherwise, to a taxable person or
entity.

B.15.

Mr. C is employed as a Chief ExecUTive Officer of MNO Company, receiving an annUAl compensation
of P10,000,000.00 while Mr. S is a secUrity gUArd in the same company earning an annUAl
compensation of P200,000.00. Both of them sOURce their income only from their employment with MNO
Company.

a. At the end of the year, is Mr. C personally reQUIRed to file an annUAl income tax retURn? Explain.
(2.5%)

b. How aBOUT Mr. S? Is he personally reQUIRed to file an annUAl income tax retURn? Explain. (2.5%)

SUGGESTED ANSWER:

(a) No, indiviDUals receiving PUrely compensation income from a single employer, which has been
correctly withheld are no longer reQUired to file their annUal ITR.

(b) No, indiviDUals receiving PUrely compensation income from a single employer, which has been
correctly withheld are no longer reQUired to file their annUal ITR.

B.16.

a. Differentiate between a calendar year and a fiscal year. (2.5%)

b. When is the deadline for the filing of a corporation’s final aDJUStment retURn for a calendar year?
How abOUT for a fiscal year? (2.5%)

SUGGESTED ANSWER:

(a) Calendar year means an acc OUnting period of twelve months ending on the last day of December. On
the other hand, fiscal year means an acc OUnting period of twelve months ending on the last day of any
month other than the month of December.

(b) For a calendar year, the final retUrn shOUld be filed on or before the 15th day of April following the
close of the taxable year. For a fiscal year, the final retUrn is filed on or before the 15th day of the 4th
month following the close of the taxable year.
 B.17.

XYZ Corp. is listed as a top 20,000 Philippine corporation by the BUReaU of Internal RevenUE. It secURed a
loan from ABC Bank with a 6% per annUM interest. All interest payments made by XYZ Corp. to ABC
Bank is sUBJEct to a 2% creditable withholding tax. At the same time, XYZ Corp. has a trUSt deposit with
ABC Bank in the amOUNt of Php100,000,000.00, which earns a 2% interest per annUM, BUT is sUBJEct to
a 20% final withholding tax on the interest income received by XYZ Corp.

(a) Who are the withholding agents in the case of: 1. The 20% final withholding tax; and 2. The 2%
creditable withholding tax? Explain. (2.5%)

(b) When is the deadline for filing a JUDicial claim for reFUNd for any excess or erroneOUS taxes paid in
the case of: 1. The 20% final withholding tax; and 2. The 2% creditable withholding tax? (2.5%)

SUGGESTED ANSWER:

(a) For the 20% final withholding tax, the withholding agent is ABC Bank being in control of the payment
SUbject to withholding tax. (R.R. 2-98, Sec. 2.57.3). On the other hand, XYZ Corporation is the
withholding agent for the 2% creditable withholding tax being the party paying for the interest
payments on the loan sec Ured, and being listed as a top 20,000 Philippine Corporation by the BIR. (RR
No. 6-2009).

(b) The deadline for filing a jUdicial claim for refUnd for any excess or erroneOUS taxes paid for both the
(1) 20% final withholding tax and (2) the 2% creditable withholding tax is two (2) years from the date of
payment of the tax. (Section 229, NIRC).

B.18.

After a BUReaU of Internal RevenUE (BIR) aUDIt, T. Corp., a domestic corporation engaged in BUYINg
and selling of scrap metals, was fOUNd to have deficiency income tax of Php 25,000,000.00, incLUDINg
interests and penalties, for the year 2012. For 2012, T Corp. filed its income retURn (ITR) on April 15, 2013
becaUSe it USed the calendar year for its accOUNting. The BIR sent the Preliminary Assessment
Notice (PAN) on December 23, 2015, and eventUAlly, the Final Assessment Notice (FAN) on April
11, 2016, which were received by T Corp. on the same dates that they were sent. Upon receipt of the
FAN, T Corp. filed it protest letter on JUNe 25, 2016.

Thereafter, and withOUT action from the Commissioner of Internal RevenUE (CIR), T. Corp. filed a petition
for review before the COURt of Tax Appeals, alleging that the assessment has prescribed. For its part, the
CIR moved to dismiss the case, pointing OUT that the assessment had already become final becaUSe the
protest was filed beyond the allowable period.

(a) Is T Corp.’s contention regarding the prescription of the assessment meritorIOUS? Explain. (2.5%)

(b) ShOULD the CIR’s motion to dismiss be granted? Explain (2.5%)

SUGGESTED ANSWER:

(a) No, T Corp.’s contention regarding prescription of the assessment is not meritoriOUS.

Under Section 203 of the National Internal RevenUe Code, as a general rUle, internal revenUe taxes
shall be assessed within three (3) years after the last day prescribed by law for the filing of the
retUrn. The
deadline for filing the annUal income tax retUrn (ITR) of corporations is the 15th day of the 4th month
following the close of the fiscal year.

Here, the 15 day of the 4th month following the close of the fiscal year 2012 of T Corp. is April 15, 2013,
which is also the date the ITR of T Corp. was filed. The BIR has Until April 15, 2016 to assess for proper
taxes. The FAN was sent to and received by T Corp. on April 11, 2016, which is within the
prescriptive period.

(b) Yes, the CIR’s motion to dismiss shOUld be granted.

The taxpayer or aUthorized representative or agent has thirty (30) days from date of receipt of the
FAN to protest the same. If the taxpayer fails to file a valid protest against the FAN within 30
days, the assessment shall become final execUtory and demandable. (RR18-13).

Here, T Corp. received the FAN on April 11, 2016. T. Corp has Until May 11, 2016 to protest the
same. However, T Corp. only filed the protest letter on JUne 25, 2016.

ThUS, the motion to dismiss shOUld be granted.

B.19.

On May 10, 2011, the final withholding tax for certain income payments to W Corp. was withheld
and remitted to the BUReaU of Internal RevenUE (BIR), and the corresponding retURn therefor was
concomitantly filed on the same date. Upon discovering that the amOUNt

withheld was excessive, W Corp. filed with the BIR a claim for reFUNd for erroneOUSly withheld and
collected final withholding income tax on May 3, 2013. A week after, and withOUT waiting for any
decision from the Commissioner of Internal RevenUE (CIR), W Cor. Filed a petition for review before the
COURt of Tax Appeals (CTA) to make sURe that the petition was filed within the two (2)-year period for
claiming reFUNds.

In resisting the claim, the BIR contended that the claim mUSt be dismissed by the CTA on the grOUNd of
non- exhaUStion of administrative remedies becaUSe it did not give the CIR the opportUNity to act on the
claim of reFUNd.

(a) Is the BIR’s contention meritorIOUS? Explain (2.5%)

(b) AssUming that the claim for re FUNd filed by W Corp. is for excess and/or UNUTilized inpUT VAT for the
second QUArter of 2011, and for which the retURn was timely filed on JULY 25, 2011, wOULD YOUR answer
be the same? Explain. (2.5%)

SUGGESTED ANSWER:

(a) No, the BIR’s contention is not meritoriOUS.

Sections 204 and 229 of the NIRC pertain to the refUnd of erroneOUSly or illegally collected
taxes. Section 204 applies to administrative claims for refUnd, while Section 229 to jUdicial claims for
refUnd. In both instances, the taxpayer’s claim MUST be filed within two (2) years from the date of
payment of the tax or penalty. However, Section 229 of the NIRC fUrther states the condition that a
jUdicial claim for refUnd may not be maintained Until a claim for refUnd or credit has been
DUly filed with the Commissioner. However, Section 229 does not imply that the Collector of
Internal RevenUe (CIR) first act Upon the taxpayer’s claim, and that the taxpayer shall not go to
cOUrt before he is notified of the Collector’s action.
The claim with the CIR was intended primarily as a notice of warning that Unless the tax or
penalty alleged to have been collected erroneOUSLy or illegally is refUnded, cOUrt action will follow, BUt
the period of two years provided in the last claUSE shall not be deemed interrUpted pending
consideration of the claim. (CBK Power Company vs CIR, G.R. No. 193383-84, JanUary 14, 2014).

(b) No, the answer will not be the same.

For valUe-added tax (VAT) refUnds, Section 112 of the Tax Code provides that the taxpayer, whose
sales are zero-rated or effectively zero-rated, has two years after the close of the taxable QUarter
when the sales were made, to apply for an administrative claim for refUnd. Thereafter, the
Commissioner of Internal RevenUe (CIR) has 120 days from the SUbmission of complete SUpporting
docUments to act Upon the claim for refUnd. In case of fUll or partial denial of the claim or failUre
of the CIR to act on the application within 120 days, the taxpayer may appeal with the COUrt of Tax
Appeals (CTA) within 30 days from receipt of the decision or Upon expiration of the 120-day period.

In the case of CIR vs. Aichi (GR No. 184823 dated October 6, 2010), the SUpreme COUrt (SC) held that
the observance of the 120-day period is a mandatory and jUrisdictional reQUisite to the filing of a jUdicial
claim for refUnd before the CTA. As SUCh, its non-observance wOUld warrant the dismissal of the jUdicial
claim for lack of jUrisdiction.

B.20.

ABC, Inc. owns a 950-sQUAre meter commercial lot in QUEzon City. It received a notice of assessment
from the City Assessor, sUBJEcting the property to real property taxes (RPT). Believing that the
assessment was erroneOUS, ABC, Inc. filed a protest with the City TreasURer. However, for faiLURe to pay
the RPT, the City TreasURer dismissed the protest.

(a) Was the City TreasURer correct in dismissing ABC, Inc.’s protest. Explain. (2.5%)

(b) AssUMing that ABC, Inc. decides to appeal the dismissal, where shOULD the appeal be filed. (2.5%)

SUGGESTED ANSWER:

(a) Yes, the City TreaSUrer was correct in dismissing ABC Inc.’s protest

Under Section 252 of the Local Government Code, no protest shall be entertained Unless the
taxpayer first pays the tax, in which the words “paid Under protest” shall be annotated on the tax
receipts.

Here, ABC Inc. failed to first pay the real property tax assessed by the QUezon City when it filed a
protest before the City TreaSUrer.

(b) ASSUming that ABC, Inc. decides to appeal the dismissal, the appeal shOUld be filed with the
Local Board of Assessment Appeals (LBAA).

If the local treaSUrer denies the protest or fails to act Upon it within the 60-day period provided for
in Section 252, the taxpayer/real property owner may then appeal or directly file a verified petition
with the LBAA within sixty days from denial of the protest or receipt of the notice of assessment, as
provided in Section 226 of R.A. No. 7160
 2018 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED

ANSWERS I

KM Corporation, doing BUSiness in the City of Kalookan, has been a distrIBUTor and retailer of clothing and
hOUSehold materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax
on Wholesalers, DistrIBUTors or Dealers) and 17 (Tax on Retailers) of the RevenUE Code of Kalookan City
(Code). SUBSeQUEntly, the SanggUNiang PanLUNgsod enacted an ordinance amending the Code by inserting
Section 21 which imposes a tax on "BUSinesses SUBJEct to Excise, VaLUE-Added and Percentage Taxes
UNder the National Internal RevenUE Code (NIRC)," at the rate of 50% of 1 % per annUM on the
gross sales and receipts on persons "who sell goods and services in the cOURse of trade or BUSiness." KM
Corporation paid the taxes DUE UNder Section 21 UNder protest, claiming that (a) local government UNits
cOULD not impose a tax on BUSinesses already taxed UNder the NIRC and (b) this wOULD amOUNt to
doUBLE taxation, since its BUSiness was already taxed UNder Sections 15 and 17 of the Code.

(a) May local government UNits impose a tax on BUSinesses already sUBJEcted to tax UNder the NIRC?
(2.5%)

(b) Does this amOUNt to dOUBLE taxation? (2.5%)

SUGGESTED ANSWER:

(a) Yes. “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 accr Ue exclUSIvely
to the local governments.” (Article 10, Section 5 of the 1987 ConstitUtion).

Sec 133 of the LGC – Common limitations on the taxing power of LGC

Relate with Sec 143 (h) of the LGC – “Tax on BUSInesses: (h) On any BUSiness, not otherwise specified

in the preceding paragraphs, which the sanggUnian concerned may deem proper to tax: Provided, That
on any BUSIness SUbject to the excise, valUe-added or percentage tax Under the National Internal
RevenUe Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or
receipts of the preceding calendar year. The sanggUnian concerned may prescribe a scheDUle of
graDUated tax rates BUt in no case to exceed the rates prescribed herein.”

(b) Yes, it will aMOUnt to indirect DOUble taxation. Under the law, direct dOUble taxation exists if the
following reQUisites exist:
i. Both taxes are imposed on the same property or SUbject matter;
ii. For the same PUrpose;
iii. Imposed by the same taxing aUthority;  Within the same jUrisdiction;
iv. DUring the same taxing period;
v. Covering the same kind or character of tax.

If there is an element lacking, only indirect dOUble taxation exists. The ConstitUtion only prohibits
direct DOUble taxation.

II

Kronge KonsULT, Inc. (KKI) is a Philippine corporation engaged in architectURal design, engineering,
and constrUCtion work. Its principal office is located in Makati City, bUT it has varIOUS infrastrUCtURe
projects in the cOUNtry and abroad. ThUS, KKI employs both local and foreign workers. The company
has adopted a
policy that the employees' salaries are paid in the cURrency of the cOUNtry where they are assigned
or detailed.

Below are some of the employees of KKI. Determine whether the compensation they received from KKI
in 2017 is taxable UNder Philippine laws and whether they are reQUIRed to file tax retURns with the BUReaU
of Internal RevenUE (BIR). (2% each)

(a) Kris Konejero, a Filipino accOUNtant in KKl's Tax Department in the Makati office, and married to a
Filipino engineer also working in KKI;

(b) KlaUS Kloner, a German national who heads KKl's Design Department in its Makati office;

(c) Krisanto Konde, a Filipino engineer in KKl's Design Department who was hired to work at the
principal office last JanUAry 2017. In April 2017, he was assigned and detailed in the company's
project in Jakarta, Indonesia, which project is expected to be completed in April 2019;

(d) Kamilo Konde, Krisanto's brother, also an engineer assigned to KKl's project in Taipei, Taiwan. Since KKI
provides for hOUSing and other basic needs, Kamila reQUEsted that all his salaries, paid in Taiwanese
dollars, be paid to his wife in Manila in its Philippine Peso eQUIvalent; and

(e) Karen Karenina, a Filipino architect in KKl's Design Department who reported back to KKl's Makati
office in JUNe 2017 after KKl's project in KUAla LUMpUR, Malaysia was completed.

SUGGESTED ANSWER:

The Tax Code provides that only resident citizen who is a citizen of Philippines residing therein is taxable
on all income derived from SOUrces within and withOUt the Philippines.

SUbstitUted filing reQUisites:

 Employee receives PUrely compensation income (regardless of aMOUnt) DUring the taxable year;
 Employee receives income from a single employer in the Philippines DUring the taxable year;
 The aMOUnt of tax DUe from the employee at the end of the year eQUals the aMOUnt of tax
withheld by the employer;
 If married, the employee’s SPOUSe also complies with all three aforementioned conditions, or
otherwise receives no income;
 The employer files BIR Form 1604CF; and
 Employee has BIR Form 2316 or Certificate of Final Tax Withheld At SOUrce (BIR Form 2306)
iSSUed by his employer.

(a) (Resident citizens) Taxable; Not reQUired (if compliant with the SUbstitUted filing)

(b) (Resident alien) Taxable; Not reQUired (if compliant with the SUbstitUted filing)

(c) (Non-resident citizen) Taxable only on the Philippine SOUrced income; Not reQUired (if compliant with
the SUbstitUted filing)
◦ Sec 22 (E)(3): “Most of the time” – At least 183 days abroad
◦ A citizen of the Philippines who works and derives income from abroad and whose employment
◦ thereat reQUires him to be physically present abroad most of the time DUring the taxable year.

(d) (Non-resident citizen) No Philippine SOUrced income; Not reQUired

◦ Sec 22 (E)(2): Reside abroad for employment on a permanent basis
◦ A citizen of the Philippines who leaves the Philippines DUring the taxable year to reside abroad,
◦ either as an immigrant or for employment on a permanent basis.
(e) (Non-resident citizen) Taxable only on the Philippine SOUrced income; Not reQUired (if compliant with
the SUbstitUted filing)
◦ Sec 22 (E)(4): PreviOUSly a non-resident citizen who arrives in the Philippines
◦ A citizen who has been previ OUSLy considered as nonresident citizen and who arrives in the
Philippines at any time DUring the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in which he arrives in
the Philippines with respect to his income derived from SOUrces abroad Until the date of his
arrival in the Philippines.

III

Kim, a Filipino national, worked with K-SQUAre, Inc. (KSI), and was seconded to varIOUS KSl-
affiliated corporations:

1.from 1999 to 2004 as Vice President of K-Gold Inc.,

2. from 2004 to 2007 as Vice President of KPB Bank;

3. from 2007 to 2011 as CEO of K-Com Inc.;

4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years UNtil his
retirement last December 12, 2017 UPon reaching the compULSory retirement age of 60 years.

All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-
QUalified mULTiemployer-employee retirement plan (MEE RP), UNder which the employees may be
moved aroUNd within the controlled grOUp (i.e., from one KSI sUBSidiary or affiliate to another)
withOUT loss of seniority rights or break in the tenURe. Kim was well-loved by his employer and
colleagUEs, so UPon retirement, and on his last day in office, KSI gave him a Mercedes Benz car worth
PhP 5 million as a sURprise, with a streamer that reads: "YOU'Ll be missed. Good LUCk, Sir Kim."

(a) Are the retirement benefits paid to Kim pURsUAnt to the MEERP taxable? (2.5%)

(b) Which internal revenUE tax, if any, will apply to the grant of the car to Kim by the company? (2.5%)

SUGGESTED ANSWER:

(a) Exempt. Sec 32 (B)(6)(a): Retirement benefits received Under RA No. 7641 (Retirement Pay Law, Art.
287 of the Labor Code); or those received by officials and employees of private firms, whether indivi DUal
or corporate, Under a reasonable private benefit plan maintained by the employer, provided the
following reQUisites are present:
 The retiree has been in the service of the same employer for at least 10 years;
 The retiree is not less than 50 years of age;
 Exemption is availed of only once.

Considered as within 10 years DUe to the fact that “employees may be moved arOUnd within the
controlled grOUp withOUt loss of seniority rights or break in the tenUre”.

(b) Donor’s tax. Not in consideration of services rendered BUt by reason of gratUity.
 IV

Years ago, Krisanto BOUGht a parcel of land in MUNtinLUPa for only PhP65,000. He donated the land to
his son, Kornelio, in 1980 when the property had a fair market vaLUE of PhP75,000, and paid the
corresponding donor's tax.

Kornelio, in tURn, sold the property in 2000 to Katrina for PhP 6.5 million and paid the capital gains
tax, docUmentary stamp tax, local transfer tax, and other fees and charges. Katrina, in tURn, donated the
land to Klaret School last AUGUSt 30, 2017 to be USed as the site for additional classrooms. No donor's tax
was paid, becaUSe Katrina claimed that the donation was exempt from taxation. At the time of the
donation to Klaret School, the land had a fair market vaLUE of PhP 65 million.

(a) Is Katrina liable for donor's tax? (2.5%)

(b) How mUCh in deDUCtion from gross income may Katrina claim on accOUNt of the said donation?
(2.5%)

SUGGESTED ANSWER:

(a) Yes. Sec 101 (a) (3) – Exempt from donor’s tax: Gifts in favor of an e DUCational and/or charitable,
religiOUS, cUltUral or social welfare corporation, instit Ution, accredited nongovernment organization,
trUST or philanthropic organization or research instit Ution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be USEd by SUCh donee for administration PUrposes.

For the PUrpose of the exemption, a 'non-profit eDUCational and/or charitable corporation,
institUtion, accredited nongovernment organization, trUST or philanthropic organization and/or
research institUtion or organization' is a school, college or University and/or charitable
corporation, accredited nongovernment organization, trUST or philanthropic organization and/or
research institUtion or organization, incorporated as a nonstock entity, paying no dividends,
governed by trUSTees who receive no compensation, and devoting all its income, whether stUdents'
fees or gifts, donation, SUbsidies or other forms of philanthropy, to the accomplishment and
promotion of the PUrposes enUmerated in its Articles of Incorporation.

(b) None. Sec 34 (H)(1)- Contri BUtions or gifts actUally paid or made within the taxable year to, or for the
USE of the Government of the Philippines or any of its agencies or any political SUbdivision thereof
exclUSIvely for PUblic PUrposes, or to accredited domestic corporation or associations organized and
operated exclUSively for religiOUS, charitable, scientific, yOUth and sports development, c UltUral or
eDUCational PUrposes or for the rehabilitation of veterans, or to social welfare instit Utions, or to non -
government organizations, in accordance with r Ules and regUlations prOMUlgated by the Secretary of
finance, Upon recommendation of the Commissioner, no part of the net income of which in Ures to the
benefit of any private stockholder or indivi DUal in an aMOUnt not in excess of ten percent (10%) in the
case of an indiviDUal, and five percent (%) in the case of a corporation, of the taxpayer's taxable income
derived from trade, BUSiness or profession as c OMPUted withOUt the benefit of this and the following
SUbparagraphs. Here, the donee is not QUalified and thUS, no deDUCtion from gross income is allowed.

SpOUSes Konstantino and Karina are Filipino citizens and are principal shareholders of a restaURant
chain, Karina's, Inc. The restaURant's principal office is in Makati City, Philippines.

Korina's became so popULAr as a Filipino restaURant that the owners decided to expand its
operations overseas. DURing the period 2010-2015 alone, it opened ten (10) stores throUGhOUT North
America and five
(5) stores in varIOUS parts of EURope where there were large Filipino commUNities. Each store abroad was
in the name of a corporation organized UNder the laws of the state or cOUNtry in which the store was
located. All stores had identical capital strUCtURes: 60% of the OUTstanding capital stock was owned by
Karina's, Inc., while the remaining 40% was owned directly by the spOUSes Konstantino and Korina.

Beginning 2017, in light of the immigration policy enUNciated by US President Donald TrUMp, many
Filipinos have since retURned to the Philippines and the nUMber of Filipino immigrants in the US dropped
significantly. On accOUNt of these developments, Konstantino and Karina decided to sell their shares of
stock in the five
(5) US corporations that were doing poorly in gross sales. The spOUSes' lawyer-friend advised them
that they will be taxed 5% on the first PhP100,000 net capital gain, and 10% on the net capital gain in
excess of PhP100,000.

Is the lawyer correct? If not, how shOULD the spOUSes Konstantino and Karina be taxed on the sale of
their shares? (5%)

SUGGESTED ANSWER:

No. Foreign shares are not within the PUrview of Sec 24(C) or CGT.

Sec 24(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.

BUt the shares are considered capital assets, as defined Under Sec 39(A) - "capital assets"
means property held by the taxpayer (whether or not connected with his trade or BUSIness), BUt
does not inclUde stock in trade of the taxpayer or other property of a kind which wOUld properly be
inclUded in the inventory of the taxpayer if on hand at the close of the taxable year, or property held
by the taxpayer primarily for sale to cUSTomers in the ordinary cOUrse of his trade or BUSIness, or
property USEd in the trade or BUSIness, of a character which is SUbject to the allowance for
depreciation provided in SUbsection (F) of Section 34; or real property USEd in trade or BUSIness of the
taxpayer.

ThUS, MUST be taxed based on the holding period as provided in Sec 39(B) - Percentage Taken
Into AccOUnt. • In the case of a taxpayer, other than a corporation, only the following percentages of the
gain or loss recognized Upon the sale or exchange of a capital asset shall be taken into accOUnt in
cOMPUting net capital gain, net capital loss, and net income: (1) One hUndred percent (100%) if the
capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the
capital asset has been held for more than twelve (12) months.

VI

Kria, Inc., a Korean corporation engaged in the BUSiness of manUFActURing electric vehicles, established a
branch office in the Philippines in 2010. The Philippine branch constrUCted a manUFActURing plant
in KaBUYAo, LagUNa, and the constrUCtion lasted three (3) years. Commercial operations in the LagUNa
plant began in 2014.

In JUSt two (2) years of operation, the Philippine branch had remittable profits in an amOUNt exceeding
175% of its capital. However, the head office in Korea instrUCted the branch not to remit the profits to the
Korean head office UNtil instrUCted otherwise. The branch chief finance officer is concerned that the BIR
might hold the Philippine branch liable for the 10% improperly accUMULAted earnings tax (IAET) for
permitting its profits to accUMULate beyond reasonable BUSiness needs.
(a) Is the Philippine branch of Kria sUBJEct to the 10% IAET UNder the circUmstances stated above?
(2.5%)

(b) Is it sUBJEct to 15% branch profit remittance tax (BPRT)? (2.5%)

SUGGESTED ANSWER:

(a) No. Sec 29 (A) – IAET covers only domestic corporations. Branch is considered a resident foreign
corporation, thUS, not SUbject to IAET

(b) No. Sec 28 (A)(5) – BPRT is imposed only on actUal remittance. Here, no remittance was made.
ThUS, not SUbject to BPRT.

VII

Karissa is the registered owner of a beachfront property in Kawayan, QUEzon which she acQUIRed in
2015. Unknown to many, Karissa was only holding the property in trUSt for a rich politician who happened
to be her lover. It was the politician who paid for the FUll pURchase price of the Kawayan property. No
deed of trUSt or any other docUment showing that Karissa was only holding the property in trUSt
for the politician was execUTed between him and Karissa.

Karissa died single on May 1, 2017 DUE to a freak sURfing accident. She left behind a nUMber of personal
properties as well as real properties, incLUDINg the Kawayan property. Karissa's sister, Karen, took charge
of registering Karissa's estate as a taxpayer and reporting, for income tax and VAT pURposes, the rental
income received by the estate from real properties. However, it was only on October 1, 2017 when Karen
managed to file an estate tax retURn for her sister's estate. The following were claimed as deDUCtions in
the estate tax retURn:

1.FUNeral expenses amOUNting to PhP250,000;

2. Medical expenses amOUNting to PhP100,000, incURred when Karissa was hospitalized for
pneUMonia a month before her death; and

3. Loss vaLUEd at PhP6 million arising from the destrUCtion of Karissa's condominIUM UNit DUE to fire
which occURred on September 15, 2017.

(a) ShOULD the beachfront property be incLUDEd in Karissa's gross estate? (2.5%)

(b) Are the claimed deDUCtions proper? (2.5%)

SUGGESTED ANSWER:

(a) Yes. Sec 90 (A) of the Tax Code provides that the gross val Ue of the estate exceeds Two hUndred
thOUSAnd pesos (P200,000), or regardless of the gross val Ue of the estate, where the said estate
consists of registered or registrable property. Hence, the beachfront property shOUld be inclUded in
the gross estate.

(b) For the fUneral expenses, it is limited Up to Php 200,000 only; For the medical expenses, the
actUal aMOUnt can be claimed (Php 100,000); and for the loss, the total aMOUnt of SUCh loss.
 VIII

Upon the death of their beloved parents in 2009, Karla, Karla, and Karlie inherited a hUge tract of farm
land in Kanlaon City. The siblings had no plans to USe the property. ThUS, they decided to donate the
land, BUt were not sURe to whom the donation shOULD be made. They consULT YOU, a well-known tax law
expert, on the tax implications of the possible donations they plan to make, by giving YOU a list of the
possible donees:

1.The Kanlaon City High School ALUMni Association (KCHS AA), since the siblings are all aLUMni of
the same school and are active members of the organization. KCHS AA is an organization intended to
promote and strengthen ties between the school and its aLUmni;

2. The Kanlaon City Water District which intends to USe the land for its offices; or

3. Their second cOUSin on the maternal side, Kikay, who serves as the caretaker of the property.

Advise the siblings which donation wOULD expose them to the least tax liability. (5%)

SUGGESTED ANSWER:

I will advise the siblings that the donation to the Kanlaon City Water District wOUld expose them to
the least tax liability. Sec 101 (A)(2) of the Tax Code provides that gifts made to or for the USE of the
National Government or any entity created by any of its agencies which is not conDUCted for
profit, or to any political SUbdivision of the said Government are considered exempt gifts.

While the other donations will be SUbject to 30% Donors tax based on the net gifts since they
are considered donations to strangers Under Sec 99(B) of the Tax Code. A stranger as defined is a
person who is not a: (1) Brother, sister (whether by whole or half-blood), SPOUSE, ancestor and lineal
descendant; or (2) Relative by consangUinity in the collateral line within the fOUrth degree of
relationship.

IX

Karlito, a Filipino BUSinessman, is engaged in the bUSiness of metal fabrication and repair of LPG
cylinder tanks. He conDUCts BUSiness UNder the name and style of "Karlito's Enterprises," a single
proprietorship. Started only five (5) years ago, the BUSiness has grown so enormOUSly that Karlito decided
to incorporate it by transferring all the assets of the BUSiness, particULArly the inventory of goods on hand,
machineries and eQUIpment, sUpplies, parts, raw materials, office FURnitURe and FURnishings, delivery trUCks
and other vehicles, BUIldings, and tools to the new corporation, Karlito's Enterprises, Inc., in exchange for
100% of the capital stock of the new corporation, the stock sUBScription to which shall be deemed FULLY
paid in the form of the assets transferred to the corporation by Karlito.

As a resULT, Karlito's Enterprises, the sole proprietorship, ceased to do BUSiness and applied for
cancellation of its BIR Certificate of Registration. The BIR, however, assessed Karlito VAT on accOUNt of
the cessation of BUSiness based on the cURrent market price of the assets transferred to Karlito's
Enterprises, Inc.

(a) Is the transfer sUBJEct to VAT? (2.5%)

(b) Is the transfer sUBject to income tax? (2.5%)

SUGGESTED ANSWER:

(a) Not SUbject to VAT. Sec 106 (C) - Changes in or Cessation of Stat US of a VAT-registered Person. -
The tax imposed in S Ubsection (A) of this Section shall also apply to goods disposed of or existing as
of a
certain date if Under circUmstances to be prescribed in rUles and regUlations to be proMUlgated by the
Secretary of Finance, Upon recommendation of the Commissioner, the statUS of a person as a
VAT- registered person changes or is terminated.

However, Sec 40(C)(2) transactions are covered by the exceptions laid down in RR 2-98.

(b) No, not SUbject to income tax. Sec 40 (C)(2) - No gain or loss shall be recognized if in PUrSUance of a
plan of merger or consolidation: (a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or
consolidation, solely for the stock of another corporation also a party to the merger or consolidation;
or (c) A secUrity holder of a corporation, which is a party to the merger or consolidation, exchanges his
secUrities in SUCh corporation, solely for stock or secUrities in SUCh corporation, a party to the merger or
consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in

exchange for stock or Unit of participation in SUCh a corporation of which as a reSUlt of SUCh
exchange said person, alone or together with others, not exceeding fOUr (4) persons, gains
control of said corporation: Provided, That stocks iSSUed for services shall not be considered as
iSSUed in retUrn for property.

KlaUS, Inc., a domestic, VAT-registered corporation engaged in the land transportation BUSiness, owns
a hOUSe and lot along KatipUNan St., QUEzon City. This property is being USed by KlaUS, lnc.'s president
and single largest shareholder, Atty. Krimson, as his residence. No BUSiness activity transpires there
except for the company's Christmas party which is held there every December. Atty. Krimson recently
grew tired of the long commUTe from KatipUNan to his office in Makati City and caUSed the company to
sell the hOUSe and lot. The sale was recorded in the books of KlaUS, Inc. as investment in real property.

(a) Is the sale of the said property sUBJEct to VAT? (2.5%)

(b) Is the sale sUBJEct to 6% capital gains tax or regULAr corporate income tax of 30%? (2.5%)

SUGGESTED ANSWER:

(a) Yes. Incidental sale SUbject to VAT

In the SUpreme COUrt (SC) case of Commissioner of Internal RevenUe vs. Magsaysay Lines (G.R.
No. 146984. JUly 28, 2006), the SUpreme COUrt Upheld a 1992 CTA decision which rUled that the
sale of shipping vessels, made by a corporation engaged in the sale of services, wOUld not be SUbject to
VAT. The COUrt fUrther rUled that the VAT is imposed on transactions which occUr in the cOUrse
of trade or BUSiness. AlthOUgh there are incidental transactions which invariably contriBUte to the
prODUCtion chain, these shOUld not be SUbjected to VAT becaUSE since they do not occUr within
the cOUrse of trade or BUSiness, “the providers of SUCh goods or services wOUld hardly, if at all,
have the opportUnity to appropriately credit any VAT liability as against their own accUMUlated
VAT collections since the accUMUlation of OUtPUt VAT arises in the first place only thrOUgh the
ordinary cOUrse of trade or BUSiness.” Applying this SC decision to the facts provided in RMC 15-
2011, the sale of the vehicles shOUld not be SUbjected to VAT becaUSE, althOUgh the company
wOUld profit from the sale, it was not made in the cOUrse of trade or BUSIness or incidental thereto.
(b) SUbject to RCIT becaUSE it became a property which wOUld properly be inclUded in the inventory of a
taxpayer. The corporate income tax rate both for domestic and resident foreign corporations is 30%
based on net taxable income.

XI

Koko's primary sOURce of income is his employment with the government. He earns extra from the land
he inherited from his parents, and which land he has been leasing to a private, non-stock, non-profit
school since 2005.

Last JanUAry, the school offered to BUY the land from Koko for an amOUNt eQUIValent to its zonal valUE
pLUS 15% of sUCh zonal vaLUE. Koko agreed bUT reQUIRed the school to pay, in addition to the pURchase
price, the 12% VAT. The school refUSed Koko's proposal to pass on the VAT contending that it was an
entity exempt from sUCh tax. Moreover, it said that Koko was not regULArly engaged in the real
estate BUSiness and, therefore, was not sUBject to VAT. ConseQUEntly, Koko shOULD not charge any VAT
to the school.

(a) Is the contention of the school correct? (2.5%)

(b) Will YOUR answer be the same if Koko signed UP as a VAT-registered person only in 2017? (2.5%)

SUGGESTED ANSWER:

(a) No. sale of real properties held primarily for sale to cUStomers or held for lease in the ordinary c OUrse
of trade or BUSIness of the seller shall be SUbject to VAT

(b) No. If VAT-registered, no need to QUalify. SUbject to VAT regardless of the gross annUal revenUe.

XII

The BIR Commissioner, in his relentless enforcement of the RUN After Tax Evaders (RATE) program,
filed with the Department of JUStice (DOJ) charges against a movie and television celebrity. The
Commissioner alleged that the celebrity earned arOUNd PhP 50 million in fees from prODUCt
endorsements in 2016 which she failed to report in her income tax and VAT retURns for said year. The
celebrity qUEstioned the proceeding before the DOJ on the grOUNd that she was denied DUE process since
the BIR never issUEd any Preliminary Assessment Notice (PAN) or a Final Assessment Notice (FAN),
both of which are reqUIRed UNder Section 228 of the NIRC whenever the Commissioner finds that proper
taxes shOULD be assessed.

Is the celebrity's contention tenable? (2.5%)

SUGGESTED ANSWER:

No. No need for PAN and FAN may be iSSUed aUtomatically.

Sec. 222 (A) of the Tax Code provides that in the case of a false or fraUDUlent retUrn with intent to
evade tax or of failUre to file a retUrn, the tax may be assessed, or a proceeding in cOUrt for the
collection of SUCh tax may be filed withOUt assessment, at any time within ten (10) years after the
discovery of the falsity, fraUd or omission: Provided, That in a fraUd assessment which has become
final and execUtory, the fact of fraUd shall be jUdicially taken cognizance of in the civil or criminal
action for the collection thereof.
 XIII

The Collector at the Port of Koronadal seized 100 second-hand right-hand drive BUSes imported
from Japan. He issUEd warrants of distraint and scheDULEd the vehicles for aUCtion sale. Kamila, the
importer of the second-hand BUSes, filed a replevin sUIT with the Regional Trial CoURt (RTC). The
RTC granted the replevin UPon filing of a bond.

Did the RTC err in granting the replevin? (2.5%)

SUGGESTED ANSWER:

Yes. RTC has no jUrisdiction. Sec 202 (j) - Exercise of exclUSIve original jUrisdiction over forfeitUre cases
Under “CUSToms Modernization and Tariff Act (GMTA)”. RA10863.

XIV

The City of Kabankalan issUEd a notice of assessment against KKK, Inc. for deficiency real property
taxes for the taxable years 2013 to 2017 in the amOUNt of PhP 20 million. KKK paid the taxes UNder
protest and institUTed a complaint entitled "Recovery of Illegally and/or ErroneOUSly-Collected Local
BUSiness Tax, Prohibition with Prayer to IssUE TRO and Writ of Preliminary InJUNction" with the RTC of
Negros Occidental.

The RTC denied the application for TRO. Its motion for reconsideration having been denied as well,
KKK filed a petition for certiorari with the COURt of Appeals (CA) assailing the denial of the TRO.

Will the petition prosper? (5%)

SUGGESTED ANSWER:

No. The jUrisdiction is with the CTA and not with the CA. RA 9282 provided that CTA ExclUSIve appellate
jUrisdiction in tax collection cases:

"a. Over appeals from the jUdgments, resolUtions or orders of the Regional Trial COUrts in tax collection
cases originally decided by them, in their respective territorial jUrisdiction.

XV

In 2015, Kerwin BOUGht a three-story hOUSe and lot in Kidapawan, North Cotabato. The property has a
floor area of 600 sq.m. and is located inside a gated sUBDIVision. Kerwin initially declared the
property as residential for real property tax pURposes.

In 2016, Kerwin started USing the property in his BUSiness of manUFActURing garments for export. The
entire grOUNd floor is now occUPied by state-of-the-art sewing machines and other eQUipment, while the
second floor is USed as offices. The third floor is retained by Kerwin as his family's residence. Kerwin's
neighbors became sUSpicIOUS of the activities going on inside the hOUSe, and they decided to
report it to the Kidapawan City Hall. Upon inspection, the local government discovered that the property
was being UTilized for commercial USe. Immediately, the Kidapawan Assessor reclassified the property as
commercial with an assessment level of 50% effective JanUAry 2017, and assessed Kerwin back taxes
and interest. Kerwin claims that only 2/3 of the BUILDINg was USed for commercial pURposes since the
third floor remained as family residence. He argUEs that the property shOULD have been classified as
partly commercial and partly residential.

(a) Is the Kidapawan assessor correct in assessing back taxes and interest? (2.5%)
(b) Is Kerwin correct that only 2/3 of the property shOULD be considered commercial? (2.5%)

(c) If Kerwin wants to file an administrative protest against the assessment, is he re QUIRed to pay the
assessment taxes first? With whom shall the protest be filed and within what period? (2.5%)

SUGGESTED ANSWER:

(a) Sec 222 of the LGC - Assessment of Property S Ubject to Back Taxes. - Real property declared for the
first time shall be assessed for taxes for the period DUring which it wOUld have been liable BUt in no case
for more than ten (10) years prior to the date of initial assessment: Provided, however, That SUCh taxes
shall be comPUted on the basis of the applicable sche DUle of valUes in force DUring the corresponding
period. If SUCh taxes are paid on or before the end of the QUarter following the date the notice of
assessment was received by the owner or his representative, no interest for delin QUency shall be
imposed thereon; otherwise, SUCh taxes shall be SUbject to an interest at the rate of two percent (2%)
per month or a fraction thereof from the date of the receipt of the assessment Until SUCh taxes are fUlly
paid.

(b) No. Sec 198(B) of the LGC - Real property shall be classified, val Ued and assessed on the basis of
actUal USE regardless of where located, whoever owns it, and whoever USEs it.

(c) No. Protest – within 60 days from receipt of assessment (sec. 195, LGC). Payment Under protest
is not necessary.

When the local treaSUrer or his DUly aUthorized representative finds that correct taxes, fees, or
charges have not been paid, he shall iSSUe a notice of assessment stating the natUre of the tax, fee or
charge, the aMOUnt of deficiency, the SUrcharges, interests and penalties. Within sixty (60) days from
the receipt of the notice of assessment, the taxpayer may file a written protest with the local treaSUrer
contesting the assessment; otherwise, the assessment shall become final and execUtory. The local
treaSUrer shall decide the protest within sixty (60) days from the time of its filing. If the local treaSUrer
finds the protest to be wholly or partly meritoriOUS, he shall iSSUe a notice canceling wholly or
partially the assessment. However, if the local treaSUrer finds the assessment to be wholly or
partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. The taxpayer
shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty
(60) day period prescribed herein within which to appeal with the cOUrt of competent jUrisdiction
otherwise the assessment becomes conclUSIve and Unappealable.cralaw

Remedy against the Assessment/Appeal, within 60 days from notice of assessment of provincial, city
or MUnicipal assessor to Local Board of Assessment Appeals (Sec. 226, LGC)

Local Board of Assessment Appeals. - Any owner or person having legal interest in the property who is
not satisfied with the action of the provincial, city or MUnicipal assessor in the assessment of his
property may, within sixty (60) days from the date of receipt of the written notice of assessment,
appeal to the Board of Assessment appeals of the province or city by filing a petition Under oath in
the form prescribed for the PUrpose, together with copies of the tax declarations and SUCh
affidavits or docUments SUbmitted in SUpport of the appeal.

XVI

In an action for ejectment filed by KURt, the lessor-owner, against Kaka, the lessee, the trial cOURt rULEd
in favor of KURt. However, the trial cOURt first reQUIRed KURt to pay the realty taxes DUE on the property for
2016 before he may recover possession thereof.
KURt objected, argUINg that the delinQUEnt realty taxes were never raised as an issUE in the ejectment
case. At any rate, KURt claimed that it shOULD be Kaka who shOULD be made liable for the realty taxes since
it was Kaka who possessed the property thrOUGhOUT 2016.

Is KURt correct in resisting the trial cOURt's reQUIRement to pay the taxes first? (2.5%)

SUGGESTED ANSWER:

LGC Sec 268. Payment of DelinQUent Taxes on Property SUbject of Controversy. - In any action
involving the ownership or possession of, or SUCCession to, real property, the cOUrt may, motU
propio or Upon representation of the provincial, city, or MUnicipal treaSUrer or his dePUty, award
SUCh ownership, possession, or SUCCession to any party to the action Upon payment to the cOUrt of the
taxes with interest DUe on the property and all other costs that may have accrUed, SUbject to the final
OUtcome of the action

XVII

KILUSang KrUS, Inc. (KKI) is a non-stock, non-profit religIOUS organization which owns a vast tract of land in
Kalinga.

KKI has devoted 1 /2 of the land for varIOUS USes: a chURch with a cemetery excLUSive for deceased
priests and nUns, a school providing K to 12 eDUCation, and a hospital which admits both paying and
charity patients. The remaining 1/2 portion has remained idle.

The KKI Board of TrUStees decided to lease the remaining 1 /2 portion to a real estate developer
which constrUCted a commUNity mall over the property.

Since the rental income from the lease of the property was sUBStantial, the KKI decided to USe the
amOUNt to finance (1) the medical expenses of the charity patients in the KKI Hospital and (2) the
pURchase of books and other eDUCational materials for the stUDEnts of KKI School.

(a) Is KKI liable for real property taxes on the land? (2.5%)

(b) Is KKl's income from the rental fees sUBJEct to income tax? (2.5%)

SUGGESTED ANSWER:

Test is the USE of the property. (LUng Center Case)

(a) Yes. The COUrt held that the petitioner is a charitable institUtion within the context of the 1973
and 1987 ConstitUtions.

The test whether an enterprise is charitable or not is whether it exists to carry OUt a PUrpose
reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage.
Hence, the LUng Center was organized for the welfare and benefit of the Filipino people.

As a general principle, a charitable institUtion does not lose its character as SUCh and its exemption
from taxes simply becaUSE it derives income from paying patients, so long as the money received is
devoted to charitable objects and no money inUres to the private benefit of the persons managing or
operating the institUtion. As well as the reason of donation in the form of SUbsidies granted by the
government.
(b) No. Those portions of its real property that are leased to private entities are not exempt from
real property taxes as these are not actUally, directly and exclUSIvely USEd for charitable PUrposes.

The petitioner failed to prove that the entirety of its real property is actUally, directly and
exclUSively USEd for charitable PUrposes. While portions of the hospital are USEd for the treatment of
patients and the dispensation of medical services to them, whether paying or non-paying, other
portions thereof are being leased to private indiviDUals for their clinics and a canteen.

Hence, the portions of the land leased to private entities as well as those parts of the hospital leased to
private indiviDUals are not exempt from SUCh taxes. On the other hand, the portions of the land
occUpied by the hospital and portions of the hospital USed for its patients, whether paying or
non-paying, are exempt from real property taxes.

ADE = exempt from income tax (De lasalle)

The reQUisites for availing the tax exemption Under Article XIV, Section 4 (3), namely: (1) the
taxpayer falls Under the classification non-stock, non-profit eDUCational institUtion ; and (2) the income
it seeks to be exempted from taxation is USEd actUally, directly and exclUSIvely for eDUCational
PUrposes. The records of the case showed that the fOUndation’s operation is not for profit, BUt in
PUrSUit of its primary PUrpose which is “to establish a school xxx the primary intention being to form
the whole man thrOUgh the integration of a liberal Christian eDUCation with professional competence
for participation in Philippine development.”

XVIII

Kathang Isip, Inc. (Kii) is a domestic corporation engaged in the BUSiness of manUFActURing,
importing, exporting, and distrIBUting toys both locally and abroad. Its principal office is located in
Kalookan City, Philippines. It has 50 branches in different cities and mUNicipalities in the cOUNtry.
When Kii applied for renewal of its mayor's permit and licenses in its principal office in JanUAry
this year, Kalookan City demanded payment of the local BUSiness tax on the basis of the gross sales
reported by the corporation in its aUDITed financial statements for the preceding year. Kil protested,
contending that Kalookan City may tax only the sales consUMmated by its principal office BUT not the
sales consUMmated by its branch offices located oUTside Kalookan City.

When Kalookan City denied the protest, Kil engaged the services of Atty. Kristeta KaBUYAo to
file the necessary jUDICial proceedings to appeal the decision of Kalookan City. Atty. KaBUYAo is a legal
expert, BUT resides in Kalibo, Aklan where her hUSband operates a resort. She, however, practices in
Metro Manila, incLUDINg Kalookan City. The cOUNsel representing the city, in the case filed in
Kalookan City by KII, QUEstioned the USe of Atty. KaBUYAo's Professional Tax Receipt (PTR) issUEd in
Aklan for a case filed in Kalookan City.

(a) Is Kll's contention that Kalookan City can only collect local BUSiness taxes based on sales consUMmated
in the principal office meritorIOUS? (2.5%)'

(b) Is the Kalookan City cOUNsel correct in saying that Atty. KaBUYAo's PTR issUEd in Aklan cannot be
USed in Kalookan? (2.5%)

SUGGESTED ANSWER:

(a) Sec 150 of the LGC – For PUrposes of collection of the taxes Under Section 143 (tax on BUSIness),
BUSinesses maintaining or operating branch or sales OUtlet elsewhere shall record the sale in the branch
or sales OUtlet making the sale or transaction, and the tax thereon shall accrUe and shall be paid to the
MUnicipality where SUCh branch or sales OUtlet is located.

(b) Sec 139(B) of the LGC – Professional Tax

(B) Every person legally aUthorized to practice his profession shall pay the professional tax to the
province where he practices his profession or where he maintains his principal office in case he practices
his profession in several places: Provided, however, That SUCh person who has paid the corresponding
professional tax shall be entitled to practice his profession in any part of the Philippines with OUt being
SUbjected to any other national or local tax, license, or fee for the practice of SUCh profession.

XIX

The BIR assessed Kosco, Inc., an importer of food prODUCts, deficiency income and valUE-added taxes,
pLUS 50% sURcharge after determining that Kosco, Inc. had UNder-declared its sales by an amOUNt
exceeding 30% of that declared in its income tax and VAT retURns. Kosco, Inc. denied the alleged UNder-
declaration, protested the deficiency assessment for income and vaLUE-added taxes and challenged the
imposition of the 50% sURcharge on the grOUNd that the sURcharge may only be imposed if Kosco, Inc.
fails to pay the deficiency taxes within the time prescribed for their payment in the notice of assessment.

(a) Is the imposition of the 50% sURcharge proper? (2.5%)

(b) If YOUR answer to {a) is yes, may Kosco, Inc. enter into a compromise with the BIR for reDUCtion of
the amOUNt of sURcharge to be paid? (2.5%)

SUGGESTED ANSWER:

(a) Yes. Penalty: 50% of the tax or of the deficiency tax, in case any payment has been made on the
basis of a retUrn before the discovery of the falsity or fraUd.

•In case of: [ FiFa ]

a) WillfUl neglect to File the retUrn within the period prescribed; or
b) False or fraUDUlent retUrn is willfUlly made, in case any payment has been made on the basis of SUCh
retUrn before the discovery of the falsity or fraUd.

Prima facie evidence of a false or fraUDUlent retUrn as determined by the Commissioner PUrSUant to the
rUles and regUlations prOMUlgated by the Sec. of Finance:
a.) SUbstantial Under declaration of taxable sales, receipts or income - failUre to report sales, receipts or
income in an aMOUnt exceeding 30% of that declared per retUrn
b.) SUbstantial overstatement of deDUCtions - claim of deDUCtions in an aMOUnt exceeding 30% of actUal
deDUCtions

(b) Yes. Compromise based on 2 grOUnds: a) financial capacity; and b) assessment is of DOUbtfUl
validity.

XX

Krisp Kleen, Inc. (KKI) is a corporation engaged in the manUFActURing and processing of steel and its by-
prODUCts. It is both registered with the Board of Investments with a pioneer statUS, and with the BIR as a
VAT entity. On October 10, 2010, it filed a claim for reFUNd/credit of inpUt VAT for the period JanUAry 1
to March 31, 2009 before the Commissioner of Internal RevenUE (CIR). On FebrUAry 1, 2011, as the CIR
had not
yet made any rULINg on its claim for reFUNd/credit, KKI, fearFUL that its period to appeal to the cOURts might
prescribe, filed an appeal with the COURt of Tax Appeals (CTA).

(a) Can the CTA act on KKl's appeal? (2.5%)

(b) Will YOUR answer be the same if KKI filed its appeal on March 20, 2011 and CIR had not yet acted on
its claim? (2.5%)

SUGGESTED ANSWER:

Aichi case

120+30 days is mandatory and jUrisdictional

(a) The prescriptive period of 2 year . Sec. 204 (c) and 229 are applied only in instances of errone OUS
payment and illegal collection. Sec. 112 (A) of NIRC applies here. Sec. 31 Chapter VIII Book I of the
Administrative Code of 1987 being the more recent law governing legal period applies making 1 year =
12 months. The principle of Lex Posterioni Derogati Priori applies. Th US, since it is filed on exactly Sept.
30, 2004 filing is timely.

(b) Filing an administrative claim is a condition precedent to a jUdicial claim for refUnd . Sec. 112 (D) of
the NIRC clearly provides that the CIR has 120 days from date of the SUbmission of the complete
docUments in SUpport of the application within which to grant or deny the claim. In case of fUll or partial
denial by the CIR, the recOUrse is to appeal before the CTA within 30 days from receipt of the decision of
the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refUnd, the
remedy is to appeal the inaction of the CIR to the CTA within 30 days.
 2017 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED

ANSWERS I.

SMZ, Inc. is a VAT-registered enterprise engaged in the general constrUCtion BUSiness. HP

International contracts the services of SMZ Inc, to constrUCt HP International’s factory BUilding located
in the LagUNa TechnoPark, a special economic zone HP International is registered with the Philippine
Economic Zone AUThority (PEZA) as an ecozone export enterprise, and, as sUCh, enjoys income tax
holiday pURsUAnt to the Special Economic Zone Act of 1995.

SMZ, Inc., files an application with the BUReaU of Internal RevenUE (BIR) for the VAT zero-rating of its sale
of services to HP International. However, the BIR denies SMZ, Inc.’s application on the grOUNd
that HP International already enjoys income tax holiday: Is the BIR correct in denying SMZ, Inc.’s
application? Explain YOUR answer: (6%)

SUGGESTED ANSWER

No. All sales of goods, properties, and services made by a VAT-registered SUpplier from the
CUSToms Territory to an ecozone enterprise shall be SUbject to VAT, at zero percent (0%) rate,
regardless of the latter’s type or class of PEZA registration (Coral Bay Nickel Corporation v. CIR, G.R.
No. 190506, JUne 13, 2016, citing Commissioner of Internal RevenUe v. Toshiba Information
EQUipment (Phils.), Inc., G.R. No. 150154, AUgUST 9, 2005).

Moreover, Under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons
or entities whose exemption Under special laws effectively SUbjects the SUpply of SUCh services to
zero percent (0%) rate are considered zero-rated. Considering the law doés not provide for any
additional QUalification or diSQUalification, the BIR cannot deny the application on the grOUnd that HP
International already enjoys income tax holiday.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to
the reQUirements provided by law. To do so constitUtes lawmaking, which is generally reserved for
Congress (Soriano v. Secretary of Finance, et al, G.R. Nos. 184450, 184508, 184538, 185234, JanUary
24, 2017).

ALTERNATIVE ANSWER

The BIR is wrong. Under Sec 108(B)(3) of the NIRC, the sale is effectively zero-rated and there is no
need to file an application for zero-rating with the BIR The BIR in pointing OUt that HP International
enjoys income tax holiday is of no moment, becaUSE a sale of services to an ecozone enterprise by a
SUpplier from the cUSToms territory is considered as an effectively zero-rated sale of service in
view of the exemption enjoyed by the Peza enterprise from indirect taxes.

II.

Wreck Corporation is a domestic corporation engaged in the BUSiness of importing, refining and selling
petroleUm prODUCts. DURing the period from September 1, 2014 to December 31, 2014, Wreck Corporation
imported 225 million liters of Jet A-1 aviation FUEl and paid the excise taxes thereon. Seventy-five
percent (75%) of the total vOLUMe of aviation FUEl imported were actUAlly sold to international carriers of
Philippine and foreign registries for their USe or consUMption OUTside of the Philippines in the period from
November 1, 2014, to December 31, 2014. Wreck Corporation did not pass on to the international
carriers the excise taxes it paid on the importation of petroleUM prODUCts.
On JUNe 25, 2015, Wreck Corporation filed an administrative claim for reFUNd or issUAnce of tax
credit certificate amOUNting to the excise taxes it had paid on the importation of 225 million liters
of Jet A-l aviation FUEl.

If YOU Were the Commissioner of Internal RevenUE, will YOU grant Wreck Corporation’s administrative
claim for reFUNd or issUAnce of tax credit certificate? Explain YOUR answer. (6%)

SUGGESTED ANSWER:

Yes, BUt only the excise tax which corresponds to the 75% of the total volUme of aviation fUel
imported that were actUally sold to the inter national carriers. Wreck Corporation, as the statUtory
taxpayer who is directly liable to pay the excise tax on its petroleUm prODUCts, is entitled to a refUnd
or credit of the excise taxes it paid for petroleUm prODUCts sold to international carriers, the latter
having been granted exemption from the payment of said excise tax Under Sec. 135 (a) of the
NIRC(CIR v. Pilipinas. Shell PetroleUm Corporation, G.R. No. 188497, FebrUary 19, 2014).

III

VanderFUL, Inc.’s income tax retURn for taxable year 2015 showed an overpayment DUE to excess
creditable withholding taxes in the amOUNt of P750,000. The company. opted to carry over the excess
income tax credits: as tax credit against its QUArterly income tax liabilities for the next sUCCeeding years.
For taxable year 2016, the company’s income tax retURn showed an overpayment DUE to excess
creditable withholding taxes in the amOUNt of PI,100,000, which incLUDEd the carry-over from year
2015 in the amoUNt of P750,000 becaUSe its operations resULTed in a net loss hence, there was no
application for any tax liability. This time, the company opted and marked the box “To be reFUNded” in
respect of the total amOUNt of P1,100,000.

VanderFUL, Inc. now files in the BIR a claim for reFUNd of UNUTilized overpayments of P1,100,000, Is the
claim meritorIOUS? (4%).

SUGGESTED ANSWER:

No, BUt only to the extent of the aMOUnt of P750,000.00 which was carried over from year
2015. Section 76 of the NIRC of 1997 clearly states: 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. Section 76
expressly states that the option shall be considered irrevocable for that taxable period referring to the
period comprising the SUCCeeding taxable years. Section 76 fUrther states that no application for cash
refUnd or iSSUance of a tax credit certificate shall be allowed therefore referring to that taxable
period..” comprising the SUCCeeding taxable years (Asiaworld Properties Philippine Corporation v. CIR,
G.R. No. 171766, JUly 29, 2010).

IV.

On the basis of a warrant of seizURe and detention issUEd by the Collector of CUStoms for the pURpose of
enforcing the Tariff and CUStoms Code, assorted brands of liQUOR and cigarettes said to have been
illegally imported into the Philippines were seized from a store operating in a Freeport zone. The store
owner moved for the QUAsáhal of the warrant on the grOUNd that the col-… lector of CUStoms had no
JURisdiction to enforce it within the Freeport zone..
ShOULD the motion to QUAsh be granted (3%)

SUGGESTED ANSWERS

No. The treatment of the Freeport zone as a separate cUSToms territory cannot completely divest
the Government of its right to intervene in the operations and management of SUCh Freeport,
especially when patent violations of the cUStoms and tax laws are discovered. After all, Section 602
of the Tariff and CUStoms Code vests exclUSIve original jUrisdiction in the BUreaU of CUSToms
over seiZUre and forfeitUre cases in the enforcement of the tariff and cUSToms laws (Agrier Co.,
Ltd. v. Hon. FitUS B. VillanUeva, et al., G.R. No. 158150, September 10, 2014).

V.

On March 30, 2016, XL Co. filed an administrative claim for reFUNd of UNUTilized InpUt VAT for taxable
year 2014, together with sUPporting docUMents, XL Co. claimed that its sale of generated power and
delivery of electric capacity was VAT zero-rated. DUE to the inaction of the Commissioner of Internal
RevenUE (CIR), XL Co. filed with the CoURt of Tax Appeals (CTA) the following JUDICial claims for reFUNd.

Period Covered Date Filed

1st QUArter of 2014 March 31, 2016

2nd QUArter of 2014 JUNe 30, 2016

3rd and 4th QUArter of 2014 AUGUSt 12, 2016

Is XL Co.’s claim for VAT reFUNd timely filed? Explain YOUR answer. (5%)

SUGGESTED ANSWER:

As regards the claims for VAT refUnd which are administrative in natUre, all have been timely filed.
The law reQUires that the administrative claim shOUld be filed within two years from the end of the
QUarter when the sale was made (Sec. 112(A), NIRC); hence, the filing of the administrative claim for
refUnd on March 30, 2016 covering the fOUr QUarters of 2014, complies with the period prescribed by
law.

The same is not trUe, however, as to the jUdicial claims. Only the jUdicial claim filed on AUgUST 12, 2016
is timely filed. As provided by Section 112(C), 1997 NIRC, as amended, one of the conditions for a
jUdicial claim of refUnd or credit Under the VAT System is compliance with the 120+30 day
mandatory and jUrisdictional periods. Strict compliance with the 120+30 day periods is, thUS,
necessary for SUCh claim to prosper (CIR V. San ROQUe Power Corporation, G.R. Nos. 187485,
196113 and 197156, October 8, 2013).

The Commissioner has been granted by law 120 days within which to decide the taxpayer’s claim. Then,
if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may
appeal to the CTA within 30 days from the expiration of the 120-day. period. Applying this to the
present case, the 120+ day from the filing of the administrative claim fell on JUly 28, 2016. XL Co.
may ile the jUdicial claim from JUly 29, 2016 to AUgUST 27, 2016; thUS, only the jUdicial claim filed
on AUgUST 12. 2016 has been timely filed.
 VI.

Heeding the pronOUNcement of the President that the worsening traffic condition in the metropolis was a
sign of economic progress, the Congress enacted RepUBLIC Act No. 10701, also known as An Act
Imposing, a Transport Tax on the PURchase of Private Vehicles. Under RA 10701, BUYErs of private
vehicles are reQUIRed to pay a transport tax eqUIValent to 5% of the total pURchase price per
vehicle pURchased. RA 10701 provides that the Land Transportation Office (LTO) shall not accept
for registration any new vehicles withOUT proof of payment of the 5% transport tax. RA 10701 FURther
provide that existing owners of private vehicles shall be reQUIRed to pay a tax eQUIvalent to 5% of the
cURrent fair market : vaLUE of every vehicle registered with the LTO. However, RA 10701 exempts owners
of pUBLIC UTility vehicles and the Government from the coverage of the 5% transport tax.

A grOUP of private vehicle owners sUE on the grOUNd that the law is UNconstitUtional for contravening
the EqUAl Protection ClaUSe of the ConstitUTion.

RULE on the constitUTionality and validity of RA 10701. (5%).

SUGGESTED ANSWER

RA 10701 is valid and constitUtional. A levy of tax is not UnconstitUtional becaUSE it is not intrinsically
eQUal and Uniform in its operation. The Uniformity, rUle does not prohibit classification for PUrposes of
taxation (British American Tobacco v. Jose Isidro N. Camacho, G.R. No. 163583, AUgUST 20, 2008,
562 SCRA 511).

Uniformity of taxation, like the kindred concept of eQUal protection, merely reQUires that all SUbjects
or objects of taxation, similarly sitUated are to be treated alike both in privileges and liabilities. Unifor-.
mity does not forfend classification as long as: (1) the standards that are USEd therefore are
SUbstantial and not arbitrary, (2) the categorization is germane to achieve the legislative PUrpose, (3)
the law applies, all things being eQUal, to both present and fUtUre conditions, and (4) the classification
applies eQUally well to all those belonging to the same class (RUfino R. Tan v. Ramon R. Del Rosario, Jr.,
G.R. Nos. 109289 and 109446, October 13, 1994, 237 SCRA 324, 331). All of the foregoing
reQUirements of a valid classification having been net and those which are singled OUt are
a.class. in themselves, there is no violation of the “EQUal Protection ClaUSE” of the ConstitUtion.

VII.

Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty Corporation
(SPRC). He invited the Regional Director of the HOUSing and Land Use RegULAtory Board (HLURB) to
LUNch at the SULO Hotel in QUEzon City to discUSS the approval of SPRC’s application for a
development permit in connection with its sUBDIvision development project in Pasig City, At breakfast
the following day, Calvin met a prospective client interested to enter into a joint ventURe with SPRC. for
the constrUCtion of a residential condominIUm UNit in Cainta, Rizal.

Calvin incURred expenses for the lUNch and breakfast meetings he had with the Regional Director of
HLURB and the prospective client, respectively. The expenses were DULY sUPported by official receipts
issUEd in his name. At month’s end, he reQUEsted the reimBURsement of his expenses, and SPRC granted
his reQUEst.

(a) Can SPRC claim an allowable dedUCtion for the expenses incURred by Calvin? Explain YOUR answer.
(2.5%)

SUGGESTED ANSWER
(a) SPRC cannot claim as a de DUCtion, the aMOUnt spent for lUnch in the meeting with the Regional
Director of HLURB: While the expense is BUSiness connected, the same is not allowed as de DUCtion
becaUSE it was incUrred as an indirect payment to a government official which, not only aMOUnts to
a violation of the Anti Graft and CorrUpt Practices Act BUt also constitUtes bribes, kickbacks and
similar payments (See Şec: 34 (a) (C) NIRC).

With respect, however, to the aMOUnt spent for breakfast with a prospective client, the same
is deDUCtible from gross income of SPRC. The expense complies with the reQUirements for
deDUCtibility, namely: (a) the expense MUST be ordinary and necessary (b) it MUST have been paid or
incUrred DUring the taxable year; (c) it MUST have been paid or incUrred in carrying on the trade or
BUSIness of the taxpayer, and (d) it MUST be SUpported by receipts, records or other pertinent papers
(CIR v. General Foods (Phils.), Inc, GR No: 143672, April 4, 2003, 401 SCRA 545, 553).

Section 34 (A )(b) of the 1997 NIRC, as amended, does not reQUire that the SUbstantiation be in the form
of official receipts or invoices iSSUed in the name of the taxpayer claiming the expense. It MUST only be
proven that there is a direct connection or relation of the expense being deDUCted to the
development, management, operation and/or conDUCt of the trade BUSiness or profession of the
taxpayer”.

(b) is the reimBURsement received by Calvin from SPRC sUBJEct to tax? Explain yOUR answer. (2.5%)

SUGGESTED ANSWER:

(b) No. Any aMOUnt paid as reiMBUrsements for representation incUrred by the employee in the
performance of his DUties is not compensation SUbject to withholding, if the following conditions
are satisfied: (1) It is for ordinary and necessary representation expense paid or incUrred by the
employee in the PUrSUit of the trade, BUSiness or profession, and (ii) The employee is reQUired to
accOUnt/liQUidate (for SUCh expense in accordance with the specific reQUirements of SUbstantiation
PUrSUant to Seç, 34 of the 1997 NIRC, as amended. The aMOUnts are actUally spent by the
employee for the benefit of his employer, so no income is considered to have flowed to the employee.

VIII

On April 30, 2015 Daryl resigned as the prodUCtion manager of 52nd AvenUE, a television stUDIo owned
by SSS Entertainment Corporation. 52nd AvenUE issUEd to her a Certificate of Withholding Tax
ori Compensation (BIR Form No. 2316), which showed that the tax withheld from her compensation was
eQUAl to her income tax DUE for the period from JanUAry 2015 to April 30, 2015.

A month after her resignation, Daryl pUT Up her own stUDIO and started proDUCing short films. She was
able to earn a meager income from her short films BUt did not keep a record of her prodUCtion expenses.

Is Daryl QUAlified for sUBStitUTed filing for taxable year 2015? Explain YOUR answer. (3%)

SUGGESTED ANSWER :

No. Following the relevant revenUe iSSUance, only an indiviDUal receiving PUrely compensation
income, regardless of aMOUnt; from only one employer in the Philippines for the calendar year, the
income tax of which has been withheld correctly by the said employer, shall QUalify for SUbstitUted
filing of income tax retUrn (RevenUe RegUlations No:3-2002). Daryl, within the same calendar year,
derived income from proDUCing short films; thUS, she did not receive PUrely compensation income
for calendar year 2015. Accordingly, the aMOUnt withheld from her compensation income is not eQUal
to the income tax DUe on his aggregate taxable income DUring the taxable year.
 IX.

Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing assistant to
a time deposit with AAB Bank. The bank regULArly deDUCted 20% final withholding tax on the interest
income from the time deposit.

Alfredo contends that the 20% final tax on the interest income.con stitUTed DOUBLE taxation becaUSe
his salary had been already sUBJEcted to withholding tax.

Is Alfredo’s contention correct? Explain YOUR answer. (3%)

SUGGESTED ANSWER:

No DOUble taxation means taxing for the same tax period the same thing or activity twice; when
it shOUld be taxed BUt once, for the same PUrpose and with the same kind of character of tax
(CIR v. CitytrUST Investment Phils., G.R. Nos. 139786, 140857, September 27, 2006). The 20%
final tax is imposed on the interest income, while the tax earlier withheld is on the salary or
compensation income. ThUS, thOUgh both pertain to income tax, they do not pertain to the same
thing or activity and conseQUently, no DOUble taxation exists.

X.

On JanUAry 27, 2017, Ramon, the comptroller of Vantage Point, Inc., execUTed a docUment entitled
“Waiver of the StatUTe of Limitations” in connection with the BIR’s investigation of the tax liabilities of the
company for the year 2012. However, the Board of Directors of Vantage Point, Inc., did not adopt a board
resOLUtion aUthorizing Ramon to execUte the waiver.

On October 14, 2017, Vantage Point, Inc. received a preliminary assessment notice from the BIR
indicating its deficiency withholding taxes. for the year 2012. Vantage Point, Inc., filed its protest. On
October 30, 2017, the BIR issUEd a formal letter of demand and final assessment notice. Vantage
Point, Inc., again filed a protest. The Commissioner of Internal RevenUE denied the protests and
directed the collection of the assessed deficiency taxes,

Accordingly, Vantage Point, Inc., filed a petition for review in the CTA to seek the cancellation
and withdrawal of the assessment on the grOUNd of prescription.

(a) What.constitUTes a valid waiver of the statUTe of limitations for the assessment and collection of
taxes? Explain YOUR answer.(3%)

SUGGESTED ANSWER

(a) Generally, a valid waiver of the stat Ute of limitations for the assessment and collection of taxes MUST
be execUted by the taxpayer and accepted by the BIR prior to the expiration of the period which it seeks
to extend. The same MUST also be execUted by the taxpayer.or.. his DUly aUthorized representative, or in
the case of a corporation, it MUST be signed by any of its responsible officers (CIR V. KUdos Metal
Corporation, G.R. No. 178087, May 5, 2010, 620 SCRA 232, 243, 244). S UCh reQUirements MUST be met
considering that a waiver of the statUte of limitations Under the NIRC, to a certain extent, is a
derogation of the taxpayer’s right to secUrity against prolonged and UnscrUPUlOUS investigations and
MUST therefore be carefUlly and strictly constr Ued (Philippine j OUrnalists, Inc. x. CIR, G.R. No. 162852,
December 16, 2004).
(b) Has the right of the Government to assess and collect deficiency taxes from Vantage Point, Inc. for
the year 2012 prescribed? Explain yOUR answer. (4%)

SUGGESTED ANSWER.

(b) Yes, the final assessment was iSSUed beyond the three year prescriptive period to make
an assessment (Section 203, 1997 NIRC, as amended). The Waiver did not extend the
three-year prescriptive period, since it was execUted after the expiration of SUCh period.

XI.

The Board of Directors of SUMo Corporation, a company primarily engaged in the BUSiness of marketing
and distrIBUTing pest control prODUCts, approved the partial cessation of its commercial operations,
resULTing in the separation of 32 regULAr employees. Only half of the affected employees were notified
of the board resOLUtion.

RULE on the taxability of the separation pay and indemnity that will be received by the affected
employees as the resULT of their separation from service. Explain YOUR answer. (3%)

SUGGESTED ANSWER

It shall be tax-exempt. Section 30(B)(6)(b) of the 1997 NIRC, as amended, provides that 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 shall
be exempt from taxation.

XII.

On September 17, 2015, Data Realty, Inc., a real-estate corporation dULY organized and existing
UNder Philippine law, sold to Jenny Vera a condominIUM UNit at Freedom Residences in Malabon City with
an area of 32.31 sQUAre meters for a contract price of P4,213,000. The condominIUM UNit had a
zonal vaLUE amOUNting to P2,877,000 and fair market valUE amOUNting to P550,000.

(a) is the transaction sUBJEct to vaLUE-added tax and docUmentary stamp tax? Explain YOUR answer. (3%)

SUGGESTED ANSWER

(a) Yes. As to the VAT liability, sale of real properties held primarily for sale to cUSTomer or held for lease
in the ordinary c OUrse of trade or BUSiness is SUbject to VAT (Section 106 (A) 1)(a), 1997 NIRC, as
amended); fUrther, the contract price, which is the highest compared to the zonal valUe and the fair
market valUe, is beyond the transactional . threshold a MOUnt for residential dwellings thereby making
the sale transaction VATable. As to the DST. liability, all deeds of sale and conveyances of real property
are likewise SUbject to DST (Section 196, 1997 NIRC, as amended).

(b) WOULD YOUR answer be the same if the property was sold by a bank in a foreclosURe sale? Explain
YOUR answer. (3%)

SUGGESTED ANSWER
(b) No, the sale made by the bank is exempt from VAT. Banks are exempt from VAT becaUSE they
are SUbject to percentage tax Under Title V of the NIRC (Section 109 in relation to Section 121 of 1997
NIRC, as amended). The sale, however, will still be SUbject to DST becaUSE conveyances of real
property are generally SUbject to DST (Section 196, NIRC).

XIII

BATAS Law is a general professional partnership operating in the City of ValenzUEla. It regULArly pays
valUE- added tax on its services. All its lawyers have indivIDUAlly paid the reQUIRed professional tax for
the year 2017. However, as a condition for the renewal of its BUSiness permit for the year 2017, the City
TreasURer of ValenzUEla assessed BATAS Law for the payment of percentage bUSiness tax on its gross
receipts for the year 2016 in accordance with the RevenUE Tax Code of ValenzUEla.

Is BATAS Law liable to pay the assessed percentage BUSiness tax? Explain YOUR answer. (3%)

SUGGESTED ANSWER

No Section 133 (i) of the Local Government Code provides that the exercise of the taxing powers of
local government Units SUCh as the City of ValenZUela shall not extend to the levy of percentage
or valUe- added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services
except as otherwise provided in the LGC; therefore, BATAS Law may not be assessed with and
reQUired to pay percentage BUSIness tax.

XIV.

Globesmart Services, Inc, received a final assessment notice with formal letter of demand from the BIR
for deficiency income tax, vaLUE-added tax and withholding tax for the taxable year 2016 amOUNting to
P48 million. Globesmart Services, Inc., filed a protest against the assessment, bUT the Commissioner of
Internal RevenUE denied the protest. Hence, Globesmart Services, Inc. filed a petition for review in the
CTA with an URgent motion to sUSpend the collection of tax.

After hearing, the CTA Division issUEd a resOLUTion granting the mo tion to sUSpend BUt reQUIRed
Globesmart Services, Inc., to post a sURety bond eQUIvalent to the deficiency assessment within 15 days
from notice of the resOLUTion. Globesmart Services, Inc, moved for the partial reconsideration of the
resOLUTion and for the reDUCtion of the bond to an amoUNt it cOULD obtain.

The CTA division issUEd another resOLUtion reDUCing the amOUNt of the sURety bond to P24 million. The
latter amOUNt was still more than the net worth of Globesmart Services, Inc., as reported in its aUDITed
financial statements.

(a) May the collection of taxes be sUSpended? Explain YOUR answer. (3%)

SUGGESTED ANSWER

(a) Yes. As provided by RA No. 1125, as amended by RA No. 9282, that when in the opinion of the C OUrt
the collection by the aforementioned government agencies may jeopardize the interest of the
Government and/or the taxpayer, the COUrt at any stage of the proceeding may SUSPEnd the collection
and reQUire the taxpayer either to deposit the a MOUnt claimed or to file a SUrety bond for not more than
DOUble the aMOUnt with the COUrt.
(b) Is the CTA Division JUStified in reQUIRing Globesmart Services, Inc., to post a sURety bond as a
condition for the sUSpension of the deficiency tax collection? Explain YOUR answer. (3%)

SUGGESTED ANSWER

(b). No. The SUpreme COUrt in the Tridharma Case cited the case of PacQUiao v. COUrt of Tax
Appeals (G.R. No. 213394, April 6, 2016) where it rUled that the CTA shOUld first conDUCt a
preliminary hearing for the proper determination of the necessity of a SUrety bond or the reDUCtion
thereof. In the conDUCt of its preliminary hearing, the CTA MUST balance the scale between the
inherent power of the State to tax and its right to prosecUte perceived transgressors of the law, on
one side, and the constitUtional rights of petitioners to DUe process of law and the eQUal protection of
the laws, on the other. In this case, the CTA failed to consider that the aMOUnt of the SUrety bond that
it is asking Globesmart Services, Inc. to pay is more than its net worth. It is, thUS, necessary for the
CTA to first conDUCt a preliminary hearing to give the taxpayer an opportUnity to prove its inability to
come Up with SUCh aMOUnt.

XV.

Casimira died on JUNe 19, 2017, after three weeks of confinement

DUE to an UNsUCCessFUL liver transplant. For her confinement, she had incURred sUBStantial medical
expenses that she financed thrOUGh personal loans secURed by mortgages on her real properties. Her
heirs are still in the process of making an inventory of her assets that can be USed to pay the estate
taxes, if any, which are DUE on December 19, 2017.

(a) Are the medical expenses, personal loans and mortgages incURred by Casimira deDUCtible from her
gross estate? Explain YOUR answer.

SUGGESTED ANSWER

(a) Yes, SUbject to certain conditions set by the NIRC. As for the medical expenses, they MUST be
incUrred within one year from death, whether paid or Unpaid, and the aMOUnt MUST not exceed
P500,000. As for the personal loans, it is reQUired that the loan docUment MUST be notarized and if
incUrred within three years from the date of death, the execUtor or administrator shall SUbmit a
statement showing the disposition of the proceeds of the loan. As to the mortgages, it is reQUired
that the fair. market valUe of Casimira’s interest in said property, Undiminished by SUCh mortgage or
indebtedness, is inclUded in the valUe of the gross estate. The claims for personal loans and mortgages
MUST have been contracted bona fide and for an adeQUate consideration in money or money’s worth
(Section 86, 1997 NIRC, as amended).

(b). May the heirs of Casimira file the estate tax retURn and pay the corresponding estate tax
beyond December 19, 2017, withOUT incURring interest and sURcharge? Explain yOUR answer. (3%)

SUGGESTED ANSWER

(b). The heirs may file the estate tax retUrn beyond December 19, 2017, as long as they filed a reQUest
for a reasonable extension, not exceeding 30 days. Once the reQUest for extension has been granted
and the retUrn filed within the extended period following the “pay-as-yOU file” proceDUre, only the
interest on extended payment may be imposed BUt not the SUrcharge. Interest and SUrcharge,
however, may be imposed Upon failUre of the heirs to file and pay the estate tax within the extended
period granted by the CIR (Sections 248(A) and 249 (D), 1997 NIRC, as amended).

Section 91, on the other hand, allows for the extension of time to pay the estate tax DUe, for a period
not exceeding five (5) years in case the estate is settled thrOUgh the cOUrts, or two (2) years in
case the
estate is settled extrajUdicially, If an extension is granted, the interest on extended payment may
be imposed. The Commissioner may reQUire the execUtor,. or administrator, or beneficiary, as the case
may be, to fUrnish a bond in an aMOUnt not exceeding dOUble the aMOUnt of the tax and with SUCh
SUreties as the Commissioner deems necessary, conditioned Upon the pay. ment of the said tax in
accordance with the terms of the extension.

XVI.

The BIR assessed the BaBUYan Water District (BWD) with deficiency income taxes amOUNting to
P8.5 million, incLUSive of interest and sURcharge. The BWD dispUTed the assessment, and argUEd that it
was a wholly-owned government entity performing essential government FUNctions. However, the BR
denied the protest.

The BWD filed a petition for arbitration in the Office of the Secretary of JUStice pURsUAnt to Sections 66
to 71, Chapter 14, Book IV of the Administrative Code of 1987 to assail the denial of its protest, and to
seek the proper interpretation of Section 32(B)(7)(b) of the Tax Code that excLUDEd from gross income
the income derived by the Government or its political sUBDIvisions. The Secretary of JUStice
rendered a decision declaring the BWD exempt from the payment of income tax.

The Commissioner of Internal RevenUE appealed to the CTA on the sole grOUNd that the
Secretary of JUStice had no jURisdiction to review the assessment of the BIR.

Is the appeal meritorIOUS? Explain YOUR answer. (4%)

SUGGESTED ANSWER

No. Section 7(a) of RA No. 1125, as amended by RA 9282 enU merates the CTA‘s exclUSIve
appellate jUrisdiction to review by appeal certain decisions or inaction BUt not that of a Secretary of
JUSTice.

Moreover, despite the iSSUe involves the CIR’s assessment, however, Section 7(a)(1) of the same
law, specifically the phrase “other matters arising Under the National Internal RevenUe or other
laws administered by the BUreaU of Internal RevenUe” MUST be read together with words
preceding it, i.e., “decisions of the Commissioner of Internal RevenUe in cases involving diSPUted
assessments, following the statUtory constrUCtion principle of ejUSDem generis (CIR V. CTA
(Second Division) and Petron Corporation, GR No. 207843, JUly 15, 2015).

ALTERNATIVE ANSWER

Yes. GOCCs are taxable entities and they are not exempt from BIR assessment and collection,
Unless their charter or the law creating them provides otherwise. Hence, in case of tax diSPUte between
a GOCC and the BIR, the controversy is cognizable and appealable to the CTA. The iSSUe cannot be
resolved by the DOJ.

PD 242 is a general law that deals with administrative settlement or adjUdication of diSPUtes, claims,
and controversies between or among government offices, agencies and instrUmentalities, inclUding
GOCCs; whereas, RA 1125 (the law creating CTA) is a special law. A special law. prevails over a
general law. The fact that PD 242 is the more recent law is of no significance, CTA has
jUrisdiction when a GOCC is assessed taxes. DiSPUtes, claims, and controversies falling Under RA
1125, even thOUgh solely among government offices, agencies, and instrUmentalities, inclUding
GOCCs, remain solely in the exclUSIve jUrisdiction of the CTA.
[Note: (On recent jUrisprUdence not covered by the 2017 Bar SyllaBUS) The SUpreme COUrt held
in Commissioner of Internal RevenUe v. Secretary of JU tice and PAGCOR (G.R. No. 177387,
November 9, 2016) that the Secretary of JUSTice does not have any jUrisdiction to review any diSPUted
assessments arising Under the Tax Code. The Secretary of JUSTice shOUld have desisted from dealing
with the petition and referred the matter to the COUrt of Tax Appeals that has jUrisdiction over appeals
on the decisions of the BIR in tax assessment cases).

XVII

San JUAn University is a non-stock, non-profit, eDUCational institUTion, It owns a piece of land in Caloocan
City on which its three.2-storey school. BUIldings stood. Two of the BUILdings are devoted to
classrooms, laboratories, à canteen, a bookstore, and administrative offices. The third BUILDINg is reserved
as dormitory for stUDEnt athletes who are granted scholarships for a given academic year.

In 2017, San JUAn University earned income from tUItion fees and from leasing a portion of its premises
to varIOUS Concessionaires of food, books, and school sUPplies.

(a) Can the City TreasURer of Caloocan City collect real property taxes on the land and BUILDINg of San
JUAn University? Explain YOUR answer. (5%)

SUGGESTED ANSWER

(a) Yes, BUt only on the leased portion. Article XIV, Section 4(3) of the 1987 Constit Ution provides that
the assets of a non-stock, non-profit e DUCational institUtion shall be exempt from taxes and DUties only if
the same are USEd actUally, directly, and exclUSIvely for eDUCational PUrposes. The test of exemption
from taxation is the USE of the property for PUrposes mentioned in the Constit Ution. The leased portion
of the BUilding may be SUbject to real property tax since SUCh lease is for commercial PUrposes, thereby,
it removes the asset from the property tax exemption granted Under the ConstitUtion (CİR v. De La Salle
University, Inc., G.R. Nos. 196596, 198841; 198941, November 9, 2016).

(b) is the income earned by San JUAn University for the year 2017 sUBJEct to income tax? Explain
YOUR answer. (5%)

SUGGESTED ANSWER

(b) No, provided that the revenUes are USEd actUally, directly, and exclUSIvely for eDUCational PUrposes
as provided Under Article XIV, Section 4(3) of the 1987 ConstitUtion. The reQUisites for availing
the tax exemption Under Article XIV, Section 4 (3) are as follows: (1) the taxpayer falls Under the
classification non-stock, non-profit eDUCational institUtion, and (2) the income it seeks to be exempted
from taxation is USEd actUally, directly and exclUSively for eDUCational PUrposes; thUS, so long as the
reQUisites are met, the revenUes may be exempt from tax (CIR v. De La Salle University, Inc., G.R.
Nos. 196596, 198841, 198941, November 9, 2016).

XVIII.

DistingUISh OUTright smUGgling from technical smUGgling. (3%)

SUGGESTED ANSWER

(a) In OUtright SMUggling (or UnlawfUl importation), goods and articles of commerce are br OUght into the
cOUntry withOUt the reQUired importation docUments, or are disposed of in the local market WithOUt
having been cleared by the BOC or other aUthorized government agencies, to evade the payment
of correct taxes, DUties and other charges. (BUreaU of CUSToms v. The Honorable Agnes VST
Devanadera, er al, G.R.. No. 193253, September 8, 2015)

Sec, 102. (FI) CMTA: OUtright SMUggling refers to an act of importing goods into the cOUntry
withOUt complete cUSToms prescribed importation docUments, or withOUt being cleared by
cUStoms or other regUlatory government agencies, for the PUrpose of evading payment of
prescribed taxes, DUties and other government charges.

On the other hand, in technical SMUggling, the goods and articles are brOUght into the cOUntry
thrOUgh fraUDUlent, falsified or erroneOUS declarations, to SUbstantially reDUCe, if not totally avoid, the
payment of correct taxes, DUties and other charges. SUCh goods and articles pass thrOUgh the
BOC, BUt the processing and clearing proceDUres are attended by fraUDUlent acts in order to evade
the payment of correct taxes, DU ties, and other charges (BUreaU of CUStoms v. The Honorable Agnes
VST Devanadera, et al, G.R. No. 193253, September 8, 2015).

Sec. 102. (pp) CMTA: Technical SMUggling refers to the act of importing goods into the cOUntry
by means of fraUDUlent, falsified or erroneOUS declaration of the goods to its natUre, kind, QUality,
QUantity or weight, for the PUrpose of reDUCing or avoiding payment of prescribed taxes, DUties,
and other charges.

(b) DistingUISh compromise from abatement of taxes (3%)

SUGGESTED ANSWER:

(b) A compromise of tax is a remedy which is available when there is a reasonable DOUbt as to the
validity of the claim against the taxpayer exists, or when the financial position of the taxpayer
demonstrates a clear inability to pay the assessed tax.

Abatement of tax, on the other hand, is available as a remedy when the tax or any portion
thereof appears to be UnjUSTly or excessively assessed, or when the administration and collection costs
involved do not jUSTify the collection of the aMOUnt DUe (Section 204, NIRC).

XIX.

CMI School, Inc., a non-stock, non-profit corporation, donated its three parcels of idle land sitUAted in the
MUNicipality of CUYApo, NUEva Ecija to SLC University, another non-stock, non-profit corporation,
in recognition of the latter’s contrIBUTion to and participation in the spiritUAl and eDUCational development
of the former.

(a) Is CMI School, Inc., liable for the payment of donor’s tax? Explain YOUR answer. (2.5%)

SUGGESTED ANSWER

(a) No. Gifts made by a resident in favor of an eDUCational corporation or institUtion shall be exempt
from donor’s tax (Section 101(A)(3), 1997 NIRC, as amended). Considering that SLC University is a non-
stock, non-profit corporation, and the property donated was made by a resident, then, SUCh exemption
Under the law applies to the present cases.

(b) If SLC. University later sells the three parcels of idle land to PURegold SUPermarket, Inc., a stock
corporation, will SLC University be liable for capital gains tax? Explain YOUR answer. (3%)
SUGGESTED ANSWER

(b) Yes. The gain preSUmed to have been realized on the sale, exchange or disposition of lands and/or
BUildings which are not act Ually USEd in the BUSiness of a corporation and are treated as capital assets
shall be SUbject to capital gains tax (Section 27(D)(5), 1997 NIRC, as amended). Likewise, Section 30 of
the NIRC SUbjects to income tax (capital gains tax) all income from properties, real or personal, or from
any activity conDUCted for profit, irrespective of the disposition of the income, by all tax exempt
corporations.

(c) If SLC University donates the three parcels of idle land in favor of the MUNicipality of CUYApo,
NUEva Ecija, will SLC University be ii able for donor’s tax? Explain YOUR answer. (2.5%)

SUGGESTED ANSWER

(C) No. Gifts made by a resident to any political SUbdivision of the National Government shall be exempt
from donor’s tax (Section 101(A)2), 1997 NIRC, as amended).
 2016 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

Briefly explain the following doctrines: lifeblood doctrine; necessity the benefits received principle;
and, doctrine of symbiotic relationship (5%)

SUGGESTED ANSWER

The following doctrines, explained:

✓ Lifeblood doctrine – WithOUt revenUe raised from taxation, the government will not SUrvive,
reSUlting in detriment to society. WithOUt taxes, the government wOUld be paralyzed for lack of
motive power to activate and operate it (CIR v. AlgUe, Inc., G.R. No. L-28896, FebrUary 17, 1988, 158
SCRA 9).

✓ Necessity theory – The exercise of the power to tax emanates from necessity, becaUSE withOUt
taxes, government cannot fUlfill its mandate of promoting the general welfare and well being of the
people (CIR
v. Bank of Philippine Islands, G.R. No. 134062, April 17, 2007, 521 SCRA 373).

✓ Benefits received principle – Taxpayers receive benefits from taxes thrOUgh the protection the
State affords to them. For the protection they get arises their obligation to SUpport the government
thrOUgh the payment of taxes (CIR V. AlgUe, Inc., G.R. No. L-28896, FebrUary 17, 1988, 158 SCRA 9).

reciprocal relation of protection a taxpayers. The state gives protection an protection, it MUST
be SUpported by (CIR v. AlgUe, Inc., G.R. No. L-28896, FebrUar

✓ Doctrine of symbiotic relationship – Taxation arises becaUSE of the reciprocal relation of protection
and SUpport between the state and taxpayers. The state gives protection and for it to continUe giving
protection, it MUST be SUpported by the taxpayers in the form of taxes. (CIR v. AlgUe, Inc., GR. No. L-
28896, FebrUary 17, 1988, 158 SCRA 9).

II

State at least five (5) cases UNder the excLUSive appellate JURisdiction of the COURt of Tax Appeals (CTA).

(5%) SUGGESTED ANSWER

The following cases are UNder the excLUSive appellate jURisdiction of the CoURt of Tax Appeals.
 ExcLUSive appellate JURisdiction to review by appeal:
 Decisions of the Commissioner of Internal Reven UE in cases involving disp UTed assessments,
reFUNds of internal revenUE taxes, fees or other charges, penalties in relation thereto, or other
matters arising UNder the NIRC or other laws administered by the BIR;
 Inaction of the Commissioner of Internal RevenUE in cases involving dispUTed assessments,
reFUNds of internal revenUE taxes, fees or other charges, penalties in relation thereto, or other
matters arising UNder the NIRC or other laws administered by the BIR, where the NIRC
provides a specific period of action, in which case the inaction shall be deemed a denial;
 Decisions, orders or resOLUTions of the RTC in local tax cases originally decided or resolved by
them in the exercise of their original or appellate jURisdiction;
 Decisions of the Commissioner of C UStoms in cases involving liability of c UStoms DUties, fees or
other money charges, seizURe, detention or release of property affected, fines, forfeitURes or other
 penalties in relation thereto, or other matters arising UNder the CUStoms Law or other
laws administered by the BUReaU of CUStoms; and
 Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jURisdiction over cases involving the assessment and taxation of real property originally
decided by the provincial or city board of assessment appeals.
 Decisions of the Secretary of Finance on cUStoms cases elevated to him aUTomatically for
review from decisions of the Commissioner of CUStoms adverse to the Government UNder Sec.
2315 of the Tariff and CUStoms Code; and
 Decisions of the Secretary of Trade and InDUStry, in the case of nonagricULTURal prODUCt,
commodity or article, and the Secretary of AgricULTURe, in the case of agricULTURal prODUCt,
commodity or article, involving DUmping and cOUNtervailing dUTies UNder Sec. 301 and 302.
respectively, of the Tariff and CUStoms Code, and safegUArd measURes UNder R.A. No. 8800,
where either party may appeal the decision to impose or not impose said DUTies.
 ExcLUSive appellate JURisdiction in criminal offenses:
◦ Over appeals from the JUDGments, resOLUTions or orders of the Regional Trial COURts in tax
cases originally decided by them, in their respective territorial jURisdiction; and
◦ Over petitions for review of the JUDGments, resOLUTions or orders of the Regional Trial
COURts in the exercise of their appellate jURisdiction over tax cases originally decided by
the Metropolitan Trial COURts, MUNicipal Trial COURts and MUNicipal CircUIt Trial COURts in
their respective JURisdiction.

NOTE: It is recommended that any five (5) of the above-enUMerated cases be given credit].

III.

Rakham operates the lending company that made a loan to Alfonso in the amOUNt of P120,000.00
sUBJEct of a promissory note which is dUE within one (1) year from the note’s issUAnce. Three years after
the loan became DUE and Upon information that Alfonso is nowhere to be fOUNd, Rakham asks yoU for
advice on how to treat the obligation as “bad debt.” DiscUSS the reQUISites for deDUCtibility of a “bad
debt?” (5%)

SUGGESTED ANSWER

I will advise Rakham that the obligation of Alfonso may now be considered as bad debts for having met
the yardstick of a debt which had become worthless. In order to be considered worthless, the taxpayer
shOUld establish that DUring the year from which a deDUCtion is SOUght, a sitUation developed as a reSUlt
of which it became evident in the exercise of SOUnd, objective BUSIness jUdgment that there remained
no practical, BUt only vagUely theoretical, prospect that the debt wOUld ever be paid (Collector of
Internal RevenUe v. Goodrich International RUbber Co., G.R. No. L-22265, December 22, 1967, 21 SCRA
1336). A bad debt is deDUCtible if it complies with the following reQUisites:

(a) There MUST be a valid and SUbsisting debt.

(b) The obligation is connected with the taxpayer’s trade or BUSiness

and is not between related parties.

(C) There is an actUal ascertainment that the debt is worthless.

(d) The debt is charged-off DUring the taxable year. A partial write-off is not allowed.(PRC v. CA, G.R. No.
118794, May 8, 1996, 256 SCRA 667).
 IV.

The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of real property located
within the city at a rate of fifty percent (50%) of one percent (1%) of the total consideration of
the transaction, Jose sold a parcel of land in the city, which he inherited from his deceased parents, and
reFUSed to pay the aforesaid tax. He instead filed a case asking that the ordinance be declared nULL and
void since the tax it imposed can only be collected by the national government, as in fact he has paid the
BUReaU of Internal RevenUE (BIR) the reQUIRed capital gains tax. If yOU Were the City Legal Officer of
Maharlika, what defenses wOULD yOU raise to sUStain the validity of the ordinance? (5%)

SUGGESTED ANSWER

I wOUld argUe that the City is allowed to levy a tax on transfer of real property ownership (Sec. 135,
LGC). The capital gains tax which is an income tax collected by the national government is entirely
different from the tax on sale or transfer imposed by the ordinance. The tax imposed by the ordinance
not being in the natUre of an income tax, the imposition of the income tax by the national government
will not pre- empt the tax SOUght to be imposed by the ordinance. I wOUld fUrther argUe that the
imposition by the national government of a tax will pre-empt Local Government Units (LGU) only
if there is no specific provision Under the Local Government Code giving said power (BUlacan v.
CA, G.R. No. 126232, November 1998, 299 SCRA 442),

V.

SURe Arrival Airways (SAA) is a foreign corporation, organized UNder the laws of the RepUBLIC of Nigeria.
Its commercial airplanes do not operate within Philippine territory, or service passengers
embarking from Philippine airports. The firm is represented in the Philippines by its general agent,
Narotel. SAA sells airplane tickets throUGh Narotel, and these tickets are serviced by SAA airplanes
oUTside the Philippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012
amOUNted to PIO,000,000.00 The Commissioner of Internal RevenUE (CIR) assessed SAA deficiency
income taxes at the rate of 30% on its taxable income, finding that SAA’s airline ticket sales constitUTed
income derived from sOURces within the Philippines. SAA filed a protest on the grOUNd that the
alleged deficiency income taxes shOULD be considered as income derived excLUSively from sOURces
OUTside the Philippines since SAA only serviced passengers oUTside Philippine territory. It, thUS, asserted
that the imposition of sUCh income taxes violated the principle of territoriality in taxation. Is the theory of
SAA tenable? Explain. (5%)

SUGGESTED ANSWER

No. The activity which gives rise to the income is the sale of ticket in the Philippines, hence, the income
from sale of tickets is an income derived from Philippine sOUrces which is SUbject to the
Philippine income tax. Accordingly, there is no violation of the principle of territoriality in taxation
(Air Canada v. CIR, G.R. No. 169507, JanUary 11, 2016, 778 SCRA 131).

[Note: As the case which is the basis of the answer was decided before the cUt-off date for the 2016 Bar
Examinations, it is recommended that this QUestion be considered a bonUS QUestion, with any answer to
be given fUll credit.]

VI

Mapagbigay Corporation grants all its employees (rank and file, sUPervisors, and managers) 5% discOUNt
of the pURchase price of its prODUCts. DURing an aUDIt investigation, the BIR assessed the
company the corresponding tax on the amOUNt eQUIValent to the cOURtesy discOUNt received by all
the employees,
contending that the cOURtesy discOUNt is considered as additional compensation for the rank and
file employees and additional fringe benefit for the sUPervisors and managers. In its defense, the
company argUEs that the discOUNt given to the rank and file employees is a de minimis benefit and not
sUBJEct to tax. As to its managerial employees, it contends that the discOUNt is nothing more than
a privilege and its availment is restricted.

Is the BIR assessment correct? Explain. (5%)

SUGGESTED ANSWER

No. The cOUrtesy discOUnts given to rank and file employees are considered “de minimis benefits”
falling Under the category of other facilities and privileges fUrnished or offered by an employer
to his employees which are of relatively small valUe intended to promote the health, goodwill,
contentment or efficiency of the employee. These benefits are not considered as compensation
SUbject to income tax
and conseQUently to the withholding tax (Sec.2.78.1′ of RR No. 10-2008). If these “de minimis benefits”
are fUrnished to SUpervisors and managers, the same are also exempt from the fringe benefits tax
(RR
No. 3-98; Sec. 33,

NIRC). ALTERNATIVE

ANSWER

Yes, the BIR assessment is correct. De minimis benefits are benefits of relatively small valUes
provided by the employers to the employee on top of the basic compensation intended for the general
welfare of the employees. It is considered exempt from income tax on compensation as well as from
fringe benefit tax, provided it does not exceed P10,000 per employee pertaxable year.

PUrSUant to RR No. 1-2015, which amended RR No. 2-98, 3-98, 5-2008, 5-2011 and 8-2012, the
following are considered de minimis benefits:

a) Monetized UnUSed vacation leave credits of private employees notexceeding 10 days DUring
the year;
b) Monetized valUe of vacation and sick leave credits paid to government officials and employees
c) Medical cash allowance to dependents of employees, not exceeding Php750 per employee per
semester or Php125 per month.
d) Rice SUbsidy of Php1,500
e) Uniform and clothing allowance not exceeding Php5,000 per annUm
f) ActUal medical assistance not exceeding Php10,000 per annUm
g) LaUndry allowance not exceeding Php300 per month
h) Employees’ achievement awards, e.g. for length of service or safety achievement, which MUST be
in the form of tangible personal property other than cash or gift certificate, with an ann Ual
monetary valUe not exceeding Php10,000 received by the employee Under an established
written plan which does not discriminate in favor of highly paid employees.
i) Gifts made DUring Christmas and major anniversary celebrations not exceeding Php5,000 per
employee per annUm
j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five
percent (25%) of the basic miniMUm wage on a per region basis
k) Benefits received by an employee by virt Ue of a collective bargaining agreement and
proDUCtivity incentive schemes provided that the total monetary valUe received from both
CBA and prODUCtive incentive schemes combined do not exceed Php10,000 per employee
per taxable year.

This list is exclUSIve and anything that is given which is not on the list, shall not be considered de
minimis. The 5% discOUnt of PUrchase price of its proDUCts, not being in this enUmeration, is SUbject to
tax as well as to withholding tax on compensation.
 VIII

In 2011, Solar CompUTer Corporation (Solar) pURchased a proprietarU membership share covered by
Membership Certificate No. 8 from the MaBUHay Golf CLUB, Inc.. for P500,000.00. On December 27, 2012,
it transferred the same to David, its American consULTant, to enable him to avail of the facilities of the
CLUB. David execUTed a Deed of Declaration of TrUSt and Assignment of Shares wherein he
acknowledged the absolUTe ownership of Solar over the share; that the assignment was withOUT any
consideration; and that the share was placed in his name becaUSe the CLUB reQUIRed it to be done. In
2013, the vaLUE of the share increased to P800,000.00

Is the said assignment a “gift” and, therefore, sUBJEct to gift tax? Explain. (5%)

SUGGESTED ANSWER

No. The transfer is not a taxable donation becaUSE there is no divestment of ownership by the
transferor. The PUrpose of the transfer is simply to allow David to avail of the facilities of the ClUb. The
execUtion of a “Deed of Declaration of TrUST and Assignment of Shares” where the absolUte ownership
by Solar of the share is acknowledged wOUld show that there is no relinQUishment of ownership by
Solar. The transfer being merely a transfer in form BUt not in SUbstance, the same is not SUbject to gift
tax.

IX

(A) Explain the proceDURe for claiming reFUNds or tax credits of inpUt VaLUE Added Tax (VAT) for zero-
rated or effectively zero-rated sale. UNder Sec. 112 of the National Internal RevenUE Code (NIRC)
from the filing of an application with the CIR Up to the CTA. (2.5%)

(B) Explain the proceDURe for claiming refUNds of tax erroneOUSly or illegally collected UNder Sec. 229
of the NIRC from the filing of the claim for reFUNds with the CIR UP to the CTA. (2.5%)

SUGGESTED ANSWER

(A) In order to be entitled to a ref Und/tax credit of excess inPUt VAT attriBUtable to zero-rated or
effectively zero-rated sales, the following reQUisites MUST be complied with:

a) The claim for refUnd MUST be filed with the Commissioner within 2 years cOUnted from the
last day of the QUarter when the zero. rated sale was made (Sec. 112, NIRC);
b) The claim for refUnd MUST be accompanied by a statement Under oath that all doc Uments to
SUpport the claim has been SUbmitted at the time of filing of the claim for refUnd (RMC 54-14);
c) The Commissioner MUST decide on the claim within 120 days from date of filing and the
adverse decision is appealable to the CTA within 30 days from receipt (Sec. 112, NIRC; CIR v.
Aichi Forging of Asia, Inc., G.R. No. 184823, October 6, 2010, 632 SCRA 422);
d) If no decision is made within the 120-day period, there is a deemed denial or adverse decision
which is appealable to the CTA within 30 days from the lapse of the 120-day period (Sec. 112,
NIRC; Sec. 7(a)(1) of RA 1125, as amended by RA 9282).

Congress issUEd a law allowing a 20% discOUNt on the pURchases of senior citizens from, among others,
recreation centers. This 20% discOUNt can then be USed by the sellers as a “tax credit.” At the initiative of
BIR, however, RepUBlic Act No. (RA) 9257 was enacted amending the treatment of 20% discOUNt as a
“tax deDUCtion.” EQUIty Cinema filed a petition the RTC claiming that RA 9257 is UNconstitUTional as it
forcibly deprives sellers a part of the price withOUT jUSt compensation.

(A) What is the effect of converting the 20% discOUNt from a “tax credere to a “tax dedUCtion”? (2.5%)

(B) If YOU are the JUDGe, how will YOU decide the case? Briefly explain yoUR answer. (2.5%)

SUGGESTED ANSWER

(A) The effect of converting the 20% disc OUnt from a “tax credit” to a “tax deDUCtion” is that the tax
benefit enjoyed by sellers of goods and services to senior citizens is effectively reDUCed. A tax credit
reDUCes the tax liability while a tax deDUCtion merely reDUCes the tax base. Under the tax credit
scheme, the establishments are paid back 100% of the discOUnt they give to senior citizens while
Under the tax deDUCtion scheme, they are only paid back aBOUt 32% of the 20% discOUnt granted to
senior citizens.

(B) I will decide in favor of the ConstitUtionality of the law. The 20% discOUnt as well as the tax
deDUCtion scheme is a valid exercise of the police power of the State (Manila Memorial Park Inc. v.
Department on Social Welfare and Development, G.R. No. 175356, December 3, 2013, 711 SCRA 302)

XI

Soaring Eagle paid its excise tax liabilities with Tax Credit Certificates (TCCs) which it pURchased
thrOUGh the One Stop Shop Inter-Agency Tax Credit Center (Center) of the Department of Finance. The
Center is a composite body of the DOF, BIR, BOC and the BOI. The TCCs were accepted by the BIR as
payments. A year after, the BIR demanded the payment of alleged deficiency excise taxes on the grOUNd
that Soaring Eagle is not a QUAlified transferee of the TCCs it pURchased from other BOl-registered
companies. The BIR argUEd that the TCCs are sUBJEct to post-aUDIT as a sUSpensive condition. On
the other hand, Soaring Eagle cOUNtered that it is a BUYEr in good faith and for vaLUE who merely relied
on the Center’s representation of the genUINeness and validity of the TCCs. If it is ordered to pay the
deficiency, Soaring Eagle claims the same is confiscatory and a violation of DUE process. Is the
assessment against Soaring Eagle valid? Explain. (5%)

SUGGESTED ANSWER

No. The assessment is invalid becaUSE the TCC’s USed by Soaring Eagle are valid and effective. A TCC
is an Undertaking by the government thrOUgh the BIR or DOF, acknowledging that a taxpayer is entitled
to a certain aMOUnt of tax credit from either an overpayment of income taxes, a direct benefit granted
by law or other SOUrces and instances granted by law SUCh as on specific UnUSEd inPUt taxes and
excise taxes on certain goods. As SUCh, tax credit is transferable in accordance with pertinent laws,
rUles, and regUlations (Pilipinas Shell PetroleUm Corp. v. Commissioner of Internal RevenUe, G.R.
No. 172598, December 21, 2007, 541 SCRA 316).

XII

The Philippine-British Association, Inc. (Association) is a non-stock non-profit organization which owns
the St. Michael’s Hospital (Hospital) Sec. 216 in relation to Sec. 215 of the LGC classifies all lands,
BUILDINgs and other improvements thereon actUAlly, directly, and excLUSively USed for hospitals as
“special.” A special classification prescribes a lower assessment than a commercial classification.
Within the premises of the Hospital, the Association constrUCted the St. Michael’s Medical Arts
Center (Center) which will hOUSe medical practitioners who will lease the spaces therein for their
clinics at prescribed rental rates. The doctors who treat the patients confined in the Hospital are
accredited by the Association. The City Assessor classified the Center as “commercial” instead of
“special” on the grOUNd that the Hospital owner gets income from the lease of its spaces to doctors who
also entertain OUt-patients. Is the City Assessor correct in classifying the Center as “commercial?”
Explain. (5%)

SUGGESTED ANSWER

No. The Medical Arts Center is an integral part of the Hospital and shOUld be classified for assessment
PUrposes as “special”. The fact alone that the doctors holding clinics in the Center are those DUly
accredited by the Association who owns the Hospital, and these doctors are the ones who can treat the
Hospital’s patients confined in it, takes away the said Medical Arts Center from being categorized
as “commercial” since a tertiary hospital is reQUired by law to have a pool of physicians who comprise
the reQUired medical departments in variOUS medical fields (City Assessora CeBU City v.
Association of Benevola de CeBU, Inc., G.R. No. 152904, JUne 2007, 524 SCRA 128).

XIII

PURsUAnt to Sec. 11 of the “Host Agreement between the United Nations and the Philippine government,
it was provided that the World Health Organization (WHO), “its assets, income and other properties shall
be: a) exempt from all direct and indirect taxes.” Precision ConstrUCtion Corporation (PCC) was hired to
constrUCt the WHO Medical Center in Manila. Upon completion of the BUILDing, the BIR assessed a 12%
VAT on the gross receipts of PCC derived from the constrUCtion of the WHO BUILDINg. The BIR contends
that the 12% VAT is not a direct nor an indirect tax on the WHO BUt a tax that is primarily DUE from the
contractor and is therefore not covered by the Host Agreement. The WHO argUEs that the VAT is
deemed an indirect tax as PCC can shift the tax BURden to it. Is the BIR correct? Explain. (5%)

SUGGESTED ANSWER

No. Since World Health Organization (WHO), the contractee, is exempt from direct and indirect
taxes PUrSUant to an international agreement where the Philippines is a signatory, the exemption from
indirect taxes shOUld mean that the entity or person exempt is the contactor itself becaUSE the
manifest intention of the agreement is to exempt the contractor so that no tax may be shifted to the
contractee (CIR v. John Gotamco & Sons, Inc., G.R. No. L-31092, FebrUary 24, 1987, 148 SCRA 36). The
iMMUnity of WHO from indirect taxes extends to the contractor by treating the sale of service as
effectively zero- rated when the law provided that, “services rendered to persons or entities
whose exemption Under special laws or international agreements to which the Philippines is a
signatory effectively SUbjects the SUpply of SUCh service to zero percent (0%) rate” (Section 108(B) 3,
NIRC). Accordingly, the BIR is wrong in assessing the 12% VAT from the contractor, Precision
ConstrUCtion Corporation.

XIV

LUCky V Corporation (LUCky) owns a 10-storey bUILDINg on a 2,000 SOUS meter lot in the City of Makati. It
sold the lot and BUILDing to Rainiere P80million. One month after, Rainier sold the lot and BUILDing to
Health Smoke Company (HSC) for P200 million. LUCky filed its annUAl tax retURn and declared its gain
from the sale of the lot and bUILDINg in the amOUNt of P750,000.00

An investigation conDUCted by the BIR revealed that two months prior to the sale of the properties to
Rainier, LUCky received P40 million from HSC and not from Rainier. Said amOUNt of P40 million was
debited by HSC and reflected in its trial balance as “other inv. — LUCky Bldg.” The month after, another
P40million
was reflected in HSC’s trial balance as “other inv. — LUCky Bldg.” The BIR concLUDEd that there is tax
evasion since the real BUYEr of the properties of LUCky is HSC and not Rainier. It issUEd an assessment
for deficiency income tax in the amOUNt of P79 million against LUCky. LUCky argUEs that it resorted to tax
avoidance or a tax saving device, which is allowed by the NIRC and BIR rULEs since it paid the correct
taxes based on its sale to Rainier. On the other hand, Rainier and HSC also paid the prescribed taxes
arising from the sale by Rainier to HSC. Is the BIR correct in assessing taxes on LUCky? Explain. (5%)

SUGGESTED ANSWER

Yes. The sale of the property by LUCky V Corporation (LUCky) to Rainer and conseQUently the sale
by Rainer to HSC being prompted more on the mitigation of tax liabilities than for legitimate
BUSiness PUrposes, therefore, constitUtes tax evasion. The real BUyer from LUCky is HBC as
evidenced by the direct receipt of payments by the former from the latter where the latter recorded
“other investments – LUCky BUilding”. The scheme of resorting to a two-step transaction in selling
the property to the Ultimate BUyer in order to escape paying higher taxes is considered as OUtside
of those lawfUl means allowed in mitigating tax liabilities which makes LUCky, criminally and civilly
liable. Hence, the BIR is correct in assessing taxes on LUCky (CIR v. Estate of Benigno P. Toda, Jr., G.R.
No. 147188, September 14, 2004, 438 SCRA 290).

XV

Peter is the Vice President for Sales of Golden Dragon Realty Conglomerate Inc. (Golden Dragon). A
grOUP of five (5) foreign investors visited the cOUNtry for possible investment in the condominIUM
UNits and sUBDIvision lots of Golden Dragon. After a tOUR of the properties for sale, the investors were
wined and dined by Peter at the posh Conrad’s Hotel at the cost of P150,000.00. Afterward, the
investors were brOUGht to a party in a videoke cLUb which cost the company P200,000.00 for food
and drinks, and the amOUNt of P80,000,00 as tips for BUSiness promotion officers. Expenses at
Conrad’s Hotel and the videoke cLUB were receipted and sUBMitted to sUPport the deDUCtion for
representation and entertainment expenses. Decide if all the representation and entertainment
expenses claimed by Golden Dragon are deDUCtible. Explain. (5%)

SUGGESTED ANSWER

Reasonable allowance for entertainment, aMUSEment, and recreation expenses DUring the taxable year
that are directly connected or related to the operation or conDUCt of the trade, BUSIness or profession,
or that are directly related to or in fUrtherance of the conDUCt of his/its trade, BUSIness, or exercise
of a profession not to exceed SUCh ceilings prescribed by rUles and regUlations, are allowed as
deDUCtion from gross income. In this case, the expenses incUrred were to entertain the investors of
Golden Dragon; thUS, the aMOUnt deDUCtible for entertainment, aMUSEment and recreation
expenses is limited to the actUal aMOUnt paid or incUrred BUt in no case shall the deDUCtion
exceed 0.50% of net sales for taxpayers engaged in the sale of goods or properties (Sec. 34(A)(1)(a)
(iv), NIRC as implemented by RR No. 10-2002).

[Note: Reasonableness and liberality are recommended in considering an examinee’s answer to

this QUestion.]

XVI

Amor Powers, Inc. (API) is a domestic corporation registered with the BIR as a vaLUE-added taxpayer. API
incURred excess inpUT VAT in the amoUNt of P500,000,000.00 on AUGUSt 3, 2008. Hence, it filed with
the BIR an administrative claim for the reFUNd or credit of these inpUT taxes on AUGUSt 15,2010. WithOUT
waiting
for the CIR to act on its claim, API filed a Petition for Review with the CTA on September 15, 2010 before
the lapse of two years after the close of the taxable QUArter concerned.

In its Comment on the Petition, the CIR argUEs that API’s Petition shOULD be dismissed as it was filed
before the lapse of the 120-day period given to the CIR by Sec. 112(D) of the NIRC, which became
effective on JanUAry 1, 1998. For the CIR, the 120-day period is mandatory and JURisdictional so that any
sUIT filed before its expiration is prematURe and, therefore, dismissible, API, on the other hand, invokes
BIR RUling No. DA- 489-03 issUEd by the CIR on December 10, 2003 in answer to a QUEry posed by the
Department of Finance regarding the propriety of the actions taken by Lazi Bay ResOURces
Development, Inc., which filed an administrative claim for reFUNd with the CIR and, before the lapse of
the 120-day period from its filing, filed a JUDicial claim with the CTA. BIR RULing No. DA-489-03 stated
that the taxpayer-claimant need not wait for the lapse of the 120-day period before It cOULD seek JUDICial
relief with the CTA.

Will API’s Petition for Review prosper? Decide with reasons. (5%)

SUGGESTED ANSWER

Yes. The petition for review filed by API falls within the exemption from the mandatory 120 + 30-
day reQUirement in PUrSUing a jUdicial remedy for a claim of refUnd of inPUt taxes attriBUtable to zero-
rated sales. All claims for refUnd filed between October 6, 2003 when BIR RUling No. DA-489-03 was
iSSUed Until the prOMUlgation of the decision by the SUpreme COUrt rUling on the period by which a
taxpayer may PUrSUe a jUdicial remedy for a claim for refUnd, MUST follow the period prescribed in the
BIR RUling (CIR v. Aichi Forging of Asia, Inc., G.R. No. 184823, October 6, 2010, 632 SCRA 422).

XVII

The reQUISites for a valid waiver of the three-year (3-year) prescriptive period for the BIR to assess
taxes DUE in the taxable year are prescribed by RevenUE MemoranDUm Order (RMO) No. 20-90:

1. The waiver mUSt be in the proper form prescribed by RMO 20-90.

2. The waiver mUSt be signed by the taxpayer himself or his DULY aUThorized representative. In
the case of a corporation, the waiver mUSt be signed by any of its responsible officials. In case
the aUThority is delegated by the taxpayer to a representative, s UCh delegation shOULD be in
writing and DULY notarized.
3. The waiver shOULD be DULY notarized.
4. The CIR or the revenUE official aUthorized by him mUSt sign the waiver indicating that the BIR
has accepted and agreed to the waiver. The date of sUCh acceptance by the BIR shOULD be
indicated. However, before signing the waiver, the CIR or the revenUE official aUthorized by him
mUSt make sURe that the waiver is in the prescribed form, DULY notarized, and execUTed by the
taxpayer or his DULY aUthorized representative.
5. Both the date of execUTion by the taxpayer and date of acceptance by the BUReaU ShOULD be
before the expiration of the period of prescription or before the lapse of the period agreed UPon
in case a sUBSeQUEnt agreement is execUTed.
6. The waiver mUSt be execUTed in three copies, the original copy to be attached to the docket of
the case, the second copy for the taxpayer and the third copy for the Office accepting the
waiver. The fact of receipt by the taxpayer of his/her file copy mUSt be indicated in the original
copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of
the agreement.

After being assessed by the BIR with alleged deficiency income taxes, VVV Corporation (VVV) thrOUGh
EnrIQUE, its President, execUTed a waiver of the prescriptive period. The waiver was signed by
RevenUE District Officer (RDO) Alfredo. However, the waiver did not state the date of execUtion by the
taxpayer and date of acceptance by the BIR. EnrIQUE was also not FURnished a copy of the waiver by the
BIR.
VVV claims that the waiver ‘is void DUE to non-compliance with RMO 20-90. Hence, the period
for assessment had already prescribed. Moreover, since the assessment involves P2million, the waiver
shOULD have been signed by the CIR and instead of a mere RDO. On the other hand, the BIR contends
that the reQUIRements of RMO No. 20-90 are merely directory; that the execUTion of the waiver
by VVV was a enUNciation of its right to invoke prescription and that the government cannot be
estopped by the mistakes committed by its revenUE officers. Is VVV liable? Explain. (5%)

SUGGESTED ANSWER

No. The waiver was execUted after VVV Corporation (VVV) was assessed for deficiency income
taxes obviOUSLy to jUSTify the assessment made after prescription had set in. This is the reason why
WWV is invoking prescription DUe to the alleged invalidity of the waiver for failUre to comply with the
reQUisites set forth Under RMO 20-90. A waiver execUted beyond the prescriptive period is ineffective
(CIR v. The Stanley Works Sales (Phils), Inc., G.R. No. 187589, December 3, 2014, 743 SCRA 642).

XX

Patrick is a sUCCessFUL bUSinessman in the United States and he is a sole proprietor of a sUpermarket
which has a gross sales of $10 million and an annUAl income of $3million. He went to the Philippines on a
visit and, in a party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: if
he (Patrick) decides to reacQUIRe his Philippine citizenship UNder RA 9225, establish residence in this
cOUNtry, and open a sUpermarket in Makati City, will the BIR tax him on the income he earns from his U.S.
BUSiness? If YOU Were Atty. Agaton, what advice will YOU give Patrick? (5%)

SUGGESTED ANSWER

I will advise Patrick that once he re-acQUires his Philippine citizenship and establishes his residence in
this cOUntry, his income tax classification wOUld then be a ‘resident citizen’. A resident citizen is taxable
on all his income, whether derived within or withOUt the Philippines; accordingly, the income he
earns from his BUSIness abroad will now be SUbject to the Philippine income tax (Sec. 23, NIRC).

ALTERNATIVE ANSWER

If Patrick becomes a DUal citizen Under RA 9225 in OUr cOUntry, he shall be allowed to acQUire
real properties and engage himself in BUSIness here jUST like an ordinary Filipino withOUt
renOUncing his foreign citizenship. In addition, his income abroad will not be taxed here. These are
among the Incentives we have extended to former Filipinos Under the DUal Citizenship Law so that
they will be encOUraged to come home and invest their money in OUr cOUntry.

XVIII

Henry, a U.S. natURalized citizen, went home to the Philippines to reacQUIRe Philippine citizenship UNder
RA 9225. His mother left him a lot and BUILDINg in Makati City and he wants to make USe of it in his
trading BUSiness. Considering that he needs money for the BUSiness, he wants to sell his lot and BUILDINg
and make USe of the consideration. However, the lot has sentimental valUE and he wants to reacQUIRe it in
the FUTURe. A friend of Henry told him of the “sale-leaseback transaction” commonly USed in the U.S.,
which is also USed for tax reDUCtion. Under said transaction, the lot owner sells his property to a BUYEr on
the condition that he leases it back from the bUYEr. At the same time, the property owner is granted an
option to repURchase the lot on or before an agreed date. Henry approaches YOU as a tax lawyer for
advice.
Explain what tax benefits, if any, can be obtained by Henry and the BUYEr from the sale-
leaseback transaction? (5%)

SUGGESTED ANSWER

Henry will be entitled to claim rental expense as a deDUCtion from his gross income in the
trading BUSiness. His lease payments plUS interest wOUld be SUbstantially higher than the depreciation
expense he may claim in cOMPUting his taxable income; hence, the lease wOUld reSUlt in the additional
benefit of increasing his additional tax deDUCtions. The BUyer will be deriving rental income from the
property and be able to claim BUSiness deDUCtions SUCh as real property taxes, repairs and
maintenance, depreciation and other expenses necessary for the renting OUt of the property.

XIX

Jennifer is the only daUGhter of Janina who was a resident in Los Angeles California, U.S.A. Janina died in
the
U.S. leaving to Jennifer one million shares of SUN Life (Philippines), Inc., a corporation organized and
existing UNder the laws of the RepUBLIC of the Philippines. Said shares were held in trUSt for Janina by the
Corporate Secretary of SUN Life and the latter can vote the shares and receive dividends for Janina.
The Internal RevenUE Service (IRS) of the U.S. taxed the shares on the grOUNd that Janina was domiciled
in the U.S. at the time of her death.

(A) Can the CIR of the Philippines also tax the same shares? Explain. (2.5%)

(B) Explain the concept of dOUBLE taxation. (2.5%)

SUGGESTED ANSWER

(A) Yes. The property being a property located in the Philippines, it is SUbject to the Philippine
estate tax irrespective of the citizenship or residence of the decedent (Sec. 85, NIRC). However, if
Janina is a non- resident alien at the time of her death, the transmission of the shares of stock can
only be taxed applying the principle of reciprocity (Sec. 104, NIRC).

(B) DOUble taxation occUrs when the same SUbject or object of taxation is taxed twice when it shOUld be
taxed BUt once. DOUble taxation is prohibited. when it is an imposition of taxes on the same SUbject
matter, for the same PUrpose, by the same taxing aUthority, within the same jUrisdiction, DUring the
same taxing period, with the same kind or character of a tax (84 C.J.S. 131-132). It is permissible if taxes
are of different nat Ure or character, or the two taxes are imposed by different taxing a Uthorities
(VillanUeva v. City of Iloilo, G.R. No. L-26521, December 28, 1968, 26 SCRA 578).

XX

Patrick is a sUCCessFUL bUSinessman in the United States and he is a sole proprietor of a sUpermarket
which has a gross sales of $10 million and an annUAl income of $3million. He went to the Philippines on a
visit and, in a party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: if
he (Patrick) decides to reacQUIRe his Philippine citizenship UNder RA 9225, establish residence in this
cOUNtry, and open a sUpermarket in Makati City, will the BIR tax him on the income he earns from his U.S.
BUSiness? If YOU Were Atty. Agaton, what advice will YOU give Patrick? (5%)

SUGGESTED ANSWER
I will advise Patrick that once he re-acQUires his Philippine citizenship and establishes his residence in
this cOUntry, his income tax classification wOUld then be a ‘resident citizen’. A resident citizen is taxable
on all his income, whether derived within or withOUt the Philippines; accordingly, the income he
earns from his BUSIness abroad will now be SUbject to the Philippine income tax (Sec. 23, NIRC).

ALTERNATIVE ANSWER

If Patrick becomes a DUal citizen Under RA 9225 in OUr cOUntry, he shall be allowed to acQUire
real properties and engage himself in BUSIness here jUST like an ordinary Filipino withOUt
renOUncing his foreign citizenship. In addition, his income abroad will not be taxed here. These are
among the Incentives we have extended to former Filipinos Under the DUal Citizenship Law so that
they will be encOUraged to come home and invest their money in OUr cOUntry.
 2015 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

I.

Explain the principles of a sOUNd tax system. (3%)

SUGGESTED ANSWER

The principles of a SOUnd tax system and their respective explanations, are as follows:

a) Fiscal adeQUacy which means that the sOUrces of revenUe shOUld be SUfficient to meet the
demands of PUblic expenditUres (Chavez v. Ongpin, G.R. No. 76778, JUne 6, 1990);

b) EQUality or theoretical jUSTice which means that the tax BUrden shOUld be proportionate to the
taxpayer’s ability to pay (Sec. 28(1), Art. VI, 1987 ConstitUtion); and

c) Administrative feasibility which means that the tax law sh OUld be capable of convenient, j UST and
effective administration, as well as, easy compliance by taxpayer.

II

Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing match held
in 2013, he won prize money in United States (US) dollars eqUIValent to P300,000,000.

(A) Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? Why? (2%)

(B) May Mr. A’s prize money QUAlify as an excLUSion from his gross income? Why? (2%)

(C) The US already imposed and withheld income taxes from Mr. A’s prize money. How may Mr. A USe or
apply the income taxes he paid on his prize money to the US when he comp UTes his income tax liability in
the Philippines for 2013? (4%)

SUGGESTED ANSWER

(A) Yes. Under the Tax Code, the income within and withOUt of a resident citizen is taxable. Since Mr. A is
a resident Filipino citizen, his income worldwide is taxable in the Philippines (Sec. 23 A, NIRC).

(B) No. Under the law, all prizes and awards granted to athletes in local and international sports
competitions and tOUrnaments whether held in the Philippines or abroad and sanctioned by their
national sports associations are exclUded from gross income. The exclUSion find application only to
amateUr athletes where the prize was given in an event sanctioned by the appropriate national sports
association affiliated with the Philippine Olympic Committee and not to professional athletes like Mr. A.
Therefore, the prize money wOUld not QUalify as an exclUSion from Mr. A’s gross income (Sec. 32 B [7]
[d], NIRC).

(C) The income taxes withheld and paid to the U.S. government maybe claimed by Mr. A, either as a
deDUCtion from his gross income or as a tax credit from the income tax DUe, when he cOMPUtes his
Philippine income tax liability for taxable year 2013 (Sec. 34(C)(1)(b), NIRC).

ALTERNATIVE ANSWER
(A) Yes, the income of Ms. B from the sale of ready-to-wear goods to C is taxable. A nonresident citizen
is taxable only on incorne derived from SOUrces within the Philippines (Sec. 23(B), NIRC). In line with the
SOUrce rUle of income taxation, since the goods are pr ODUCed and sold within the Philippines, Ms. B’s
Philippine-SOUrced income is taxable in the Philippines.

(B) Yes, BUt only a proportionate part of the income. Gains, profits and income from the sale of personal
property prODUCed by the taxpayer withOUt and sold within the Philippines, shall be treated as derived
partly from SOUrces within and partly from SOUrces withOUt the Philippines (Sec. 42E, NIRC).

Note: The problem does not indicate where the sale took place. The SUggested answers in a and b
above aSSUme that the sale took place in the Philippines. A non-resident alien is to be taxed by the
Philippine government only on her income derived from an activity conDUCted in the Philippines SUCh as
the sale of goods irrespective where proDUCed.

III.

Ms. C, a resident citizen, BOUGht ready-to-wear goods from Ms. B, a non-resident citizen.

(A) If the goods were prODUCed from Ms. B’s factory in the Philippines, is Ms. B’s income from the sale to
Ms. C taxable in the Philippines? Explain. (2%)

(B) If Ms. B is an alien indivIDUAl and the goods were prODUCed in her factory in China, is Ms. B’s income
from the sale of the goods to Ms. C taxable in the Philippines? Explain. (2%)

SUGGESTED ANSWER

(A) Yes, the income of Ms. B from the sale of ready-to-wear goods to C is taxable. A nonresident citizen
is taxable only on income derived from SOUrces within the Philippines (Sec. 23(B), NIRC). In line with the
SOUrce rUle of income taxation, since the goods are pr ODUCed and sold within the Philippines, Ms. B’s
Philippine-SOUrced income is taxable in the Philippines.

(B) Yes, BUt only a proportionate part of the income. Gains, profits and income from the sale of personal
property prODUCed by the taxpayer withOUt and sold within the Philippines, shall be treated as derived
partly from SOUrces within and partly from SOUrces withOUt the Philippines (Sec. 42E, NIRC).

Note: The problem does not indicate where the sale took place. The SUggested answers in a and b
above aSSUme that the sale took place in the Philippines. A non-resident alien is to be taxed by the
Philippine government only on her income derived from an activity conDUCted in the Philippines SUCh as
the sale of goods irrespective where proDUCed.

IV.

Mr. E and Ms. Fare both employees of AAA Corp. They got married on FebrUAry 14, 2011. On December
29, 2011, the cOUPle gave birth to triplets. On JUNe 25, 2013, they had twins. What were the
personal exemptions or deDUCtions which Mr. E and Ms. F cOULD claim in the following taxable years:

(A) For 2010 (2%)

(B) For 2011 (3%)

(C) For 2013 (2%)

SUGGESTED ANSWER

(A) For 2010, Mr. E and Ms. Fare each entitled to personal exemptions of P50,000.00 (Sec. 35A, NIRC).

(B) For 2011, Mr. E and Ms. Fare each entitled to basic personal exemption of P50,000.00. In addition to
his basic personal exemption, Mr. E cOUld claim additional personal exemptions for three (3) QUalified
dependent children in the aMOUnt of P25,000.00 for each child (Sec. 35B, NIRC).

(C) For 2013, Mr. E and Ms. Fare each entitled basic personal exemptions of P50,000.00. Mr. E cOUld
claim additional personal exemptions for fOUr (4) QUalified dependent children in the aMOUnt of
P25,000.00 for each child (Sec. 35B, NIRC).

V.

BBB, Inc., a domestic corporation, enjoyed a particULarly profitable year in 2014. In JUNe 2015, its Board of
Directors approved the distrIBUTion or cash dividends to its stockholders. BBB, Inc. has indivIDUAl
and corporate stockholders. What is the tax treatment of the cash dividends received from BBB, Inc.
by the following stockholders:

(A) A resident citizen (1%)

(B) Non-resident alien engaged in trade or BUSiness (1%)

(C) Non-resident alien not engaged in trade or bUSiness (1%)

(D) Domestic corporation (1%)

(E) Non-resident foreign corporation (1%)

SUGGESTED ANSWER

(A) A final withholding tax for ten percent (10%) shall be imposed Upon the cash dividends actUally
or constrUCtively received by a resident citizen from BBB, Inc. (Sec. 24 (b)(2), NIRC).

(B) A final withholding tax of twenty percent (20%) shall be imposed Upon the cash dividends
actUally or constrUCtively received by a non-resident alien engaged in trade or BUSIness from BBB,
Inc. (Sec. 25(a) (2), NIRC).

(C) A final withholding tax e QUal to twenty-five percent (25%) of the entire income received from all
SOUrces within the Philippines, inclUding the cash dividends received from BBB, Inc. (Sec. 25(b),
NIRC).

(D) Dividends received by a domestic corporation from another domestic corporation, SUCh as BBB, Inc.,
shall not be SUbject to tax (Sec. 27(d) (4), NIRC).

(E) Dividends received by a non-resident foreign corporation from a domestic corporation are generally
SUbject to an income tax of 30% to be withheld at SOUrce (Sec. 28(b)(1), NIRC). However, a final
withholding tax of fifteen percent (15%) is imposed on the a MOUnt of cash dividends received from a
domestic corporation like BBB, Inc. if the tax sparing r Ule applies (Sec. 28(B) (5)(b), NIRC). P UrSUant to
this rUle, the lower rate of tax wOUld apply if the cOUntry in which the non-resident foreign corporation
is
domiciled wOUld allow as tax credit against the tax DUe from it, taxes deemed paid in the Philippines of
15% representing the difference between the regUlar income tax rate and the preferential rate.

VI.

Differentiate between dOUBLE taxation in the strict sense and in a bro sense and give an example of
each. (4%)

SUGGESTED ANSWER

DOUble taxation in the strict sense pertains to the direct DOUble taxation. This means that the taxpayer
is taxed twice by the same taxing aUthority, within the same taxing jUrisdiction, for the same property
and same PUrpose., Example: Imposition of final withholding tax on cash dividend and reQUiring
the taxpayer to declare this tax-paid income in his income tax retUrns..

On the other hand, DOUble taxation in the broad sense pertains to indirect DOUble taxation. This
extends to all cases in which there is a BUrden of two or more impositions. It is the DOUble taxation
other than those covered by direct DOUble taxation (CIR v. Solidbank Corp., G.R. No. 148191,
November 25, 2003, 436 SCRA 416). Example: SUbjecting the interest income of banks on their
deposits with other banks to the 5% Gross Receipts Tax (GRT) despite of the same income having
been SUbjected to 20% Final Withholding Tax (FWT), is only a case of indirect dOUble taxation. The
GRT is a tax on the privilege of engaging in BUSiness, while the FWT is a tax on the privilege of
earning income (CIR v. Bank of Commerce, G.R. NO. 149636, JUne 8, 2005, 459 SCRA 638).

VII.

On May 15, 2013, CCC, Inc., received the Final Decision on DispUTed Assessment issUEd by the
Commissioner of Internal RevenUE (CIR) dismissing the protest of CCC, Inc. and affirming the assessment
against said corporation. On JUNe 10, 2013, CCC, Inc., filed a Petition for Review with the COURt of
Tax Appeals (CTA) division. On JUly 31, 2015, CCC, Inc. received a copy of the Decision dated JUly 22,
2015 of the CTA division dismissing its Petition. CCC, Inc. immediately filed a Petition for Review with the
CTA en banc on AUGUSt 6, 2015. Is the immediate appeal by CCC, Inc. to the CTA en banc of the adverse
Decision of the CTA division the proper remedy? (3%)

SUGGESTED ANSWER

No, CCC, Inc. shOUld first file a motion for reconsideration or motion for new trial with the CTA
Division. Before the CTA en banc cOUld take cognizance of the petition for review concerning a case
falling Under its exclUSive appellate jUrisdiction, the litigant MUST SUfficiently show that it
SOUght prior reconsideration or moved for a new trial with the concerned CTA Division
(Commissioner of CUSToms v. Marina Sale, G.R. No. 183868, November 22, 2010, 635 SCRA 606; RUle
8, Sec. 1 of the Revised RUles of COUrt of Tax Appeals).

VIII

In JUNe 2013, DDD Corp., a domestic corporation engaged in the bUSiness of leasing real properties in the
Philippines, entered into a lease agreement of a residential hOUSe and lot with EEE, Inc., a non-
resident foreign corporation. The residential hOUSe and lot will be USed by officials of EEE, Inc. dURing the
visit to the Philippines. The lease agreement was signed by representatives from DDD Corp. and EEE, Inc.
in Singapore.
DDD Corp. did not sUBJEct the said lease to VAT believing that it was not a domestic service contract.
Was DDD Corp. correct? Explain. (3%)

SUGGESTED ANSWER

DDD Corp. is not correct. Lease of properties shall be SUbject to VAT irrespective of the place where
the contract of lease was execUted if the property is leased or USEd in the Philippines (Sec. 108(A),
NIRC)

IX

For calendar year 2011, FFF, Inc., a VAT-registered corporation, reported UNUTilized excess inpUT VAT in
the amOUNt of P1,000,000.00 attrIBUtable to its zero-rated sales. Hoping to impress his boss, Mr.
G, the accOUNtant of FFF, Inc., filed with the BUReaU of Internal RevenUE (BIR) on JanUAry 31, 2013 a claim
for tax reFUNd/credit of the P1,000,000.00 UNUTilized excess inpUT VAT of FFF, Inc. for 2011. Not having
received any commUNication from the BIR, Mr. G. filed a Petition for Review with the CTA on March 15,
2013, praying for the tax reFUNd/credit of the P1,000,000.00 UNUTilized excess inpUT VAT of FFF, Inc. for
2011. –

(A) Did the CTA acQUIRe JURisdiction over the Petition of FFF, Inc.? (2%)

(B) DiscUSS the proper proceDURe and applicable time periods for administrative and JUDICial claims
for reFUNd/credit of UNUTilized excess inpUt VAT. (4%)

SUGGESTED ANSWER

(A) The CTA has not acQUired jUrisdiction over the Petition of FFF, Inc. becaUSE the jUdicial claim has been
prematUrely filed on March 15, 2013. The S Upreme COUrt rUled that the 30-day period after the
expiration of the 120-day period fixed by law for the Commissioner of Internal Reven Ue to act on the
claim for refUnd is jUrisdictional and failUre to comply wOUld bar the appeal and deprive the COUrt of Tax
Appeals of its jUrisdiction to entertain the appeal (CIR v. Aichi Forging Company of Asia Inc.. G.R. No.
183421, October 22, 2014, 632 SCRA 422). in this case, Mr. G filed the administrative claim on Jan Uary
31, 2013. The petition for relief shOUld have been filed on J Une 30, 2013. Filing the indicial claim on
March 15, 2013 is prematUre, thUS the CTA did not acQUire jUrisdiction.

(B) The administrative claim MUST be filed with the Commissioner of Internal Reven Ue (CIR) within two
years from the close of the taxable QUarter when the zero-rated sales were made. The CIR has 120 days
from the date of SUbmission of complete docUments in SUpport of the claim to decide. If the CIR decides
within the 120-day period or the 120-day period expires withOUt the CIR rendering a decision, the
taxpayer has 30 days to file a petition for review with the CTA reckoned from the receipt of adverse
decision or from the lapse of the 120-day period.

As a general rUle, the 30-day period to appeal is both mandatory and jUrisdictional. As an exception
to the general rUle, prematUre filing is allowed only if filed between December 10, 2003 and
October 5, 2010, when BIR RUling No. DA-489-03 was still in force prior to the reversal of the
aforesaid rUling by the CTA in the Aichi case on October 6, 2010 (Mindanao Il Geothermal
Partnership v. CIR, G.R. No. 204745, December 8, 2014, 713 SCRA 645).

X.

Indicate whether each of the following indivIDUAls is reQUIRed or not reQUIRed to file an income tax retURn;

(A) Filipino citizen residing OUTside the Philippines on his income from sOURces OUtside the Philippines.
(1%)
(B) Resident alien on income derived from sOURces within the Philippines. (1%)

(C) Resident citizen earning pURely compensation income from two employers within the Philippines,
whose income taxes have been correctly withheld. (1%)

(D) Resident citizen who falls UNder the classification of minimUM wage earners. (1%)

(E) An individUAl whose sole income has been sUBJEcted to final with holding tax. (1%)

SUGGESTED ANSWER

(A) Not reQUired. The income of a non-resident Filipino citizen are taxable only on income SOUrced
within the Philippines. Accordingly, his income from SOUrces OUtside the Philippines is exempt from
income tax (Sec. 51A (1)(b), NIRC).

(B) ReQUired. A resident alien is taxable only for income derived from SOUrces within the Philippines
(Sec. 51A (1)(c), NIRC).

(C) ReQUired. A resident citizen who is earning PUrely compensation income from two employers sh OUld
file income tax ret Urn. If the compensation income is received conc Urrently from two employers DUring
the taxable year, the employee is not QUalified for SUbstitUted filing (Sec. 51A (2)(b), NIRC).

(D) Not reQUired. Under the law, all miniMUm wage earners in the private and PUblic sector shall be
exempt from payment of income tax (Sec. 51A (2)(d), NIRC in relation to RePUblic Act No. 9504).

(E) Not reQUired. Under the law, an indiviDUal whose sole income has been SUbjected of final
withholding tax PUrSUant to Sec. 57(A), NIRC, need not file a ret Urn. What he received is a tax-paid
income (Sec. 51A (2)(c) NIRC).

XI.

What are de minimis benefits and how are these taxed? Give three (3) examples of de minimis
benefits. (4%)

SUGGESTED ANSWER

De minimis benefits are facilities and privileges FURnished or offered by an employer to his employees,
which are not considered as compensation sUBJEct to income tax and conseQUEntly to withholding tax,
if sUCh facilities or privileges are of relatively small valUE and are offered or FURnished by the employer
merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. If
received by rank- and-file employees, they are exempt from income tax on wages; if received by
sUpervisory or managerial employees, they are exempt from the fringe benefits tax (RR No. 2-98, as
amended by RR No. 8-2000). The following shall be considered as de minimis benefits: (Note: The
examinee may choose any three)
 Monetized UNUSed vacation leave credits of private employees not exceeding 10 days
dURing the year;
 Monetized vaLUE of vacation and sick leave credits paid to government officials and
employees;
 Medical cash allowance to dependents of employees, not exceeding P750 per employee per
semester or P125 per month;
 Rice sUBSidy of P1,500 or 1 sack of 50 kg rice per month amOUNting to not more than P1,500;
 Uniform and clothing allowance not exceeding P5,000 per annUM;
 ActUAl medical assistance not exceeding P10,000 per annUM;
  LaUNdry allowance not exceeding P300 per month;
 Employees achievement awards, e.g., for length of service or safety achievement, which
mUSt be in the form of a tangible personal property other than cash or gift certificate, with an
annUAl monetary vaLUE not exceeding P10,000 received by the employee UNder an
established written plan which does not discriminate in favor of highly paid employees;
 Gifts given dURing Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annUM;
 Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the
basic minimUM wage on a per region basis;
 Benefits received by an employee by virt UE of a collective bargaining agreement (CBA) and
prODUCtivity incentive schemes, provided that the total ann UAl monetary vaLUE received from both
CBA and prODUCtivity incentive schemes combined do not exceed P10,000 per employee per
taxable year (Rev. Regs. 2-98, as amended).

XII.

Mr. H decided to sell the hOUSe and lot wherein he and his family have lived for the past 10 years, hoping
to BUY and move to a new hOUSe and lot closer to his children’s school. Concerned aBOUT the capital gains
tax that will be DUE on the sale of their hOUSe, Mr. H approaches YOU as a friend for advice, if it is possible
for the sale of their hOUSe to be exempted from capital gains tax and the conditions they mUSt comply
with to avail themselves of said exemption. How will YOU respond?(4%)

SUGGESTED ANSWER

I wOUld advise Mr. H, that he may be exempted from the payment of the capital gains tax on the sale
or disposition of the hOUSE and lot where his family lives becaUSE the sale of principal residence by a
natUral person is exempt, provided the following conditions are complied with, viz: 1. The proceeds of
the sale is fUlly Utilized in acQUiring or constrUCting new principal residence within 18 calendar
months from the date of sale or disposition; 2. The historical cost or adjUSTed basis of the real
property sold or disposed will be carried over to the new principal residence BUilt or acQUired; 3. The
Commissioner has been DUly notified, thrOUgh a prescribed retUrn, within 30 days from the date of sale
or disposition of the person’s intention to avail of the tax exemption; and The exemption was availed
only once every 10 years (Sec. 24(d)(2), NIRC).

XIII

GGG, Inc. offered to sell thrOUGh competitive bidding its shares in HAH Corp., eQUIvalent to 40% of the
total OUtstanding capital stock of the latter. JJJ, Inc. acQUIRed the said shares in HHH Corp. as the highest
bidder. Before it cOULD secURe a certificate aUthorizing registration/tax clearance for the transfer of the
shares of stock to JIJ, Inc., GGG, Inc. had to reQUEst a rULINg from the BIR confirming that its sale of the
said shares was at fair market vaLUE and was thUS not sUBJEct to donor’s tax. In BIR RULINg No. 012-14, the
CIR held that the selling price for the shares of stock of HHH Corp, was lower than their book vaLUE, so
the difference between the selling price and the book vaLUE of said shares was a taxable donation. GGG,
Inc. reQUEsted the Secretary of Finance to review BIR RULINg No. 012-14, BUt the Secretary affirmed said
rULINg. GGG, Inc. filed with the COURt of Appeals a Petition for Review UNder RUle 43 of the Revised RULEs
of COURt. The COURt of Appeals, however, dismissed the Petition for lack of JURisdiction declaring
that it is the CTA which has JURisdiction over the issUEs raised. Before which COURt shOULD GGG, Inc.
seek recOURse from the adverse rULINg of the Secretary of Finance in the exercise of the latter’s power of
review? (3%)
SUGGESTED ANSWER

GGG, Inc., shOUld seek recOUrse with the COUrt of Tax Appeals (CTA) which has jUrisdiction. There is
no provision in law that expressly provides where exactly the adverse rUling of the Secretary of
Finance Under Section 4 of the NIRC is appealable. However, RA No. 1125, as amended, addresses the
seeming gap in the law as it vests Upon the CTA, albeit impliedly, with jUrisdiction over the case as
“other matters” arising Under the NIRC or other laws administered by the BIR. FUrthermore, the
SUpreme COUrt held that the jUrisdiction to review the rUlings of the Secretary of Finance on the iSSUes
raised against a rUling of the Commissioner of Internal RevenUe, pertains to the COUrt of Tax
Appeals in the exercise of its appellate jUrisdiction (Philamlife v. The Sec. of Finance and CIR, G.R. No.
210987, November 24, 2014).

XIV

KKK Corp. secURed its Certificate of Incorporation from the SecURities and Exchange Commission on JUNe
3, 2013. It commenced BUSiness operations on AUGUSt 12, 2013. In April 2014, Ms. J, an employee of KKK
Corp. in charge of preparing the annUAl income tax retURn of the corporation for 2013, got conFUSed on
whether she shOULD prepare payment for the regULar corporate income tax or the minimUm corporate
income tax.

(A) Ás Ms. J’s sUPervisor, what will be YOUR advice? (2%),

(B) What are the distinctions between regULAr corporate income tax and minimUm corporate income
tax? (3%)

SUGGESTED ANSWER

(A) As Ms. J’s SUpervisor, I will advise that KKK Corp. sh OUld prepare payment for the regUlar corporate
income tax and not the miniMUm corporate income tax. Under the Tax Code, miniMUm corporate
income tax is only applicable beginning on the f OUrth taxable year following the commencement of
BUSIness operation (Sec. 27(e)(1), NIRC).

(B) The distinctions between regUlar corporate income tax and the miniMUm corporate income tax
are the following:
 As to taxpayer: RegUlar corporate income tax applies to all corporate taxpayers; while
miniMUm corporate income tax applies to domestic corporations and resident foreign
corporations.
 As to tax rate: RegUlar corporate income tax is 30%; while miniMUm corporate income tax
is 2%.
 As to tax base: RegUlar corporate income tax is based on the net taxable income; while
miniMUm corporate income tax is based on gross income.
 As to period of applicability: RegUlar corporate income tax is applicable once the corporation
commenced its BUSIness operation, while miniMUm corporate income tax is applicable
beginning on the fOUrth taxable year following the commencement of BUSIness operation.
 As to imposition: The miniMUm corporate income tax is imposed whenever it is greater than
the regUlar corporate income tax of the corporation (Sec. 27(A) and (E), NIRC; RR No. 9-98).

XV.

In 2012, Dr. K decided to retURn to his hometown to start his own practice. At the end of 2012, Dr. K
fOUNd that he earned gross professional income in the amOUNt P1,000,000.00, while he incUrred
expenses amOUNting to P560,000.00 constitUTing mostly of his office space rent, Utilities, and
miscellaneOUS expenses related to his medical practice. However, to Dr. K’s dismay, only P320,000.00
of his expenses
were DULY covered by receipts. What are the options available for Dr. K, so he cOULD maximize the
deDUCtions from his gross income? (3%)

SUGGESTED ANSWER

In order to maximize his deDUCtions, Dr. K may avail of the optional standard deDUCtion (OSD) which is
an aMOUnt not exceeding forty percent (40%) of his gross sales or gross receipts. The OSD can be
claimed withOUt being reQUired to present proof or evidence of expenses paid or incUrred by him
(Sec. 34(L), NIRC; Rev. Regs. 16-08, as amended).

XVI

LLL is a government instrUMentality created by ExecUtive Order to be primarily responsible for

integrating and directing all reclamation projects for the National Government. It was not organized as a
stock or a non- stock corporation, nor was it intended to operate commercially and compete in the
private market. By virtUE of its mandate, LLL reclaimed several portions of the foreshore and offshore
areas of the Manila Bay, some of which were within the territorial JURisdiction of Q City. Certificates of title
to the reclaimed properties in Q City were issUEd in the name of LLL in 2008. In 2014, Q City issUEd
Warrants of Levy on said reclaimed properties of LLL based on the assessment for delinQUEnt property
taxes for the years 2010 to 2013.

(A) Are the reclaimed properties registered in the name of LLL sUBJEct to real property tax? (4%)

(B) Will YOUR answer be the same in (A) if from 2010 to the present time, LLL is leasing portions of the
reclaimed properties for the establishment and USe of popULAr fastfood restaURants J BURgers, G Pizza,
and K Chicken? (2%)

SUGGESTED ANSWER

(A) The reclaimed properties are not SUbject to real property tax becaUSE LLL is a
government instrUmentality. Under the law, real property owned by the RePUblic of the Philippines is
exempt from real property tax Unless the beneficial USE thereof has been granted to a taxable person
(Sec. 234, Local Government Code). When the title of the real property is transferred to LLL, the
RePUblic remains the owner of the real property. ThUS, SUCh arrangement does not reSUlt in the
loss of the tax exemption (RePUblic of the Philippines, represented by The Philippine Reclamation
AUthority (PRA) v. City of ParanaQUe, G.R. No. 191109, JUly 8, 2012, 677 SCRA 246):

ALTERNATIVE ANSWER

(A) No. LLL is an instrUmentality of the national government which cannot be taxed by local
government Units. LLL is not a government-owned or controlled corporation taxable for real
property taxes (City of LaPULaPU V. PEZA, G.R. No. 184203, November 26, 2014).

(B) No. As a rUle, properties owned by the RePUblic of the Philippines are exempt from real property
tax except when the beneficial USE thereof has been granted, for consideration or otherwise, to
a taxable person. When LLL leased OUt portions of the reclaimed properties to taxable entities,
SUCh as the POPUlar fast food restaUrants, the reclaimed properties are SUbject to real property
tax (Sec. 234(a), Local Government Code; GSIS v. City TreaSUrer and City Assessor of the City of
Manila, G.R. No. 186242, December 23, 2009).
 XVII

Mr. L owned several parcels of land and he donated a parcel each to his two children. Mr. LacQUIRed
both parcels of land in 1975 for P200,000.00. At the time of donation, the fair market vaLUE of the two
parcels of land, as determined by the CIR, was P2,300,000.00; while the fair market valUE of the same
properties as shown in the scheDULE of vaLUEs prepared by the City Assessors was P2,500,000.00. What
is the proper vaLUAtion of Mr. L’s gifts to his children for the pURpose of compUTing donor’s tax? (3%)

SUGGESTED ANSWER

The valUation of Mr. L’s gift to his children is the fair market valUe (FMV) the property at the
time of donation. The FMV is the higher of the EMV as determined by the Commissioner, or the FMV as
shown in the scheDUle of valUes fixed by the provincial and city assessors. In this case, for the
PUrpose of cOMPUting donor’s tax, the proper valUation is the valUe prepared by the City Assessors
aMOUnting to P2,500,000.00, becaUSE it is higher than the FMV determined by the CIR (Sec. 102 in
relation to Sec. 88(B), NIRC).

XVIII

Under the Tariff and CUStoms Code, as amended:

(A) When does importation begin and when is it deemed terminated? (2%)

(B) In what case/s is the decision of the Collector aUTomatically reviewed by the Commissioner of
CUStoms? In what instance/s is the decision of the Commissioner aUTomatically appealed to the
Secretary of Finance? (4%)

SUGGESTED ANSWER

(A) Importation begins when the carrying vessel or aircraft enters the j Urisdiction of the Philippines with
intention to Unlade therein. Importation is deemed terminated Upon payment of the DUties, taxes, and
other charges DUe Upon the articles, or sec Ured to be paid, at a port of entry and the legal permit for
withdrawal shall have been granted, or in case said articles are free of DUties, taxes and other charges,
Until they have legally left the jUrisdiction of CUSToms (Sec. 1202 of the Tariff and CUStoms Code).

(B) Whenever the decision of the Collector of C USToms in any seiZUre proceedings is adverse to the
government, the said decision is aUtomatically elevated to the Commissioner of CUStoms for review,
and if SUCh decision is affirmed by the Commissioner of CUSToms, the same shall be aUtomatically
elevated to and be finally reviewed by the Secretary of Finance (Sec. 2315 of the Tariff and CUStoms
Code):

XIX

In 2014, M City approved an ordinance levying cUStoms DUties and fees on goods coming into the
territorial JURisdiction of the city. Said city ordinance was DULY pUBLIShed on FebrUAry 15, 2014 with
effectivity date on March 1, 2014.

(A) Is there a grOUNd for opposing said ordinance? (2%)

(B) What is the proper proceDURal remedy and applicable time periods for challenging the ordinance? (4%)
SUGGESTED ANSWER

(A) Yes, on the grOUnd that the ordinance is Ultra vires. The taxing powers of local government Units,
SUCh as M City, cannot extend to the levy of taxes, fees and charges already imposed by the national
government, and this inclUdes, among others, the levy of cUStoms DUties Under the Tariff and CUSToms
Code (Sec. 133(e), Local Government Code).

(B) Any QUestion on the constitUtionality or legality of tax ordinances may be raised on appeal within 30
days from the effectivity to the Secretary of J USTice. The Secretary of JUSTice shall render a decision
within 60 days from the date of receipt of the appeal. Thereafter. within 20 days after receipt of the
decision or the lapse of the sixty-day period with OUt the Secretary of JUSTice acting Upon the appeal, the
aggrieved party may file the appropriate proceedings with the Red C OUrt (Sec. 187, Local Government
Code).

XX

After filing an Information for violation of Section 254 of the National Internal RevenUE Code (Attempt
to Evade or Defeat Tax) with the CTA, the PUBLIC ProsecUTor manifested that the People is reserving the
right to file the corresponding civil action for the recovery of the civil liability for taxes. As
cOUNsel for the accUSed, comment on the People’s manifestation. (3%)

SUGGESTED ANSWER

The manifestation is not proper. The criminal action and the corresponding civil action for the
recovery of the civil liability for taxes and penalties shall at all times be siMUltaneOUSLy institUted with,
and jointly determined in the same proceeding before the COUrt of Tax Appeal (CTA). The filing of
the criminal action is deemed to necessarily carry with it the filing of the civil action, and no right to
reserve the filing of SUCh civil action separately from the criminal action shall be recognized (Sec. 7(b)
(1) of RePUblic Act. No. 9282: JUdy Anne Santos v. People, G.R. No. 173176, AUgUST 26, 2008, 563
SCRA 341).

XXI

MMM, Inc., a domestic telecommUNications company, handles incoming telecommUNications services for
non-resident foreign companies by relaying international calls within the Philippines. To broaden
the coverage of its telecommUNications services throUGhOUT the cOUNtry, MMM, Inc. entered into
varIOUS interconnection agreements with local carriers. The non-resident foreign corporations pay MMM,
Inc. in US dollars inwardly remitted thrOUGh Philippine banks, in accordance with the rULEs and
regULAtions of the Bangko Sentral ng Pilipinas. MMM, Inc. filed its QUArterly VAT RetURns for 2000.
SUBSeQUEntly, MMM, Inc. timely filed with the BIR an administrative claim for the reFUNd of the
amOUNt of P6,321,486.50, representing excess inpUt VAT attrIBUTable to its effectively zero-rated sales
in 2000. The BIR rULEd to deny the claim for reFUNd of MMM, Inc. becaUSe the VAT official receipts
sUBmitted by MMM, Inc. to sUBStantiate said claim did not bear the words “zero-rated” as reQUIRed UNder
Section 4.108-1 of RevenUE RegULAtions (RR) No. 7-95. On appeal, the CTA division and the CTA en banc
affirmed the BIR rULINg. MMM, Inc. appealed to the SUPreme COURt argUINg that the NIRC itself did not
provide for sUCh a reQUIRement. RR No. 7-95 shOULD not prevail over a taxpayer’s sUBStantive right to
claim tax reFUNd or credit.

(A) RULE on the appeal of MMM, Inc. (3%)

(B) Will YOUR answer in (A) be any different if MMM, Inc. was claiming reFUNd of excess inpUT VAT
attrIBUTable to its effectively zero-rated sales in 2012? (2%) ;
SUGGESTED ANSWER

(A) The appeal of MMM, Inc. MUST be denied. MMM, Inc.’s position that the reQUirements Under RR
No. 7- 95 shOUld not prevail over a taxpayer’s SUbstantive right to claim tax refUnd or credit is
UnmeritoriOUS. The Secretary of Finance has the a Uthority to prOMUlgate the necessary rUles and
regUlations for the effective enforcement of the provisions of the National Internal RevenUe Code
(NIRC). SUCh rUles and regUlations are given weight and respect by the c OUrts in view of the rUle-
making aUthority given to those who forMUlate them and their specific expertise in their respective
fields. An applicant for a claim for tax refUnd or tax credit MUST not only prove entitlement to the
claim, BUt also compliance with all the docUmentary and evidentiary reQUirements. ConseQUently,
the COUrt of Tax Appeal (CTA), and the CTA en banc correctly rUled that the failUre to indicate the
words “zero-rated” on the invoices and receipts iSSUed by a taxpayer, wOUld reSUlt in the denial of
the claim for refUnd or tax credit (Eastern Telec OMMUnications Philippines, Inc. v. CIR, G.R. No.
183531, March 25, 2015).

(B) No, my answer will not be different if the claim for ref Und is for effectively zero-rated sales in 2012.
The reQUirement to print the word “zero-rated” is no longer by mere reg Ulations, BUt is now clearly
provided by law as follows — “If the sale is SUbject to žero percent (0%) valUe-added tax, the term
“zero- rated sale” shall be written or printed prominently on the invoice or receipt. FailUre to comply
with this invoicing re QUirement is fatal to a claim for ref Und of inPUt taxes attriBUtable to the zero-rated
sale (Sec. 113(B)(2)(c), NIRC). Moreover, as recently rUled by the SUpreme COUrt, the SUbseQUent
incorporation of Sec. 4.108-1 of RR 7-95 in Sec. 113 of the NIRC as intr ODUCed in R.A. No. 9337, actUally
confirmed the validity of the imprinting re QUirement on VAT invoices or official receipts-a case falling
Under the principle of legislative approval of administrative interpretation by reenactment (Northern
Mindanao Power Corp. v. CIR, G.R. No. 185115, FebrUary 18, 2015).

XXII

State the conditions for allowing allowing the following as deDUCtions from the gross estate of a citizen or
resident alien for the pURpose of imposing estate tax:

(A) Claims against the estate (2%) (B) Medical expenses (2%)

SUGGESTED ANSWER

(A) In order that claims against the estate may be allowed as de DUCtions from the gross estate of a
citizen or resident alien for PUrposes of imposing the estate tax, the law re QUires that at the time the
indebtedness was incUrred, the debt instrUment was DUly notarized. In addition, if the loan was
contracted within three (3) years before the death of the decedent, the execUtor or administrator shall
SUbmit a statement showing the disposition of the proceeds of the loan (Sec. 86(a)(1)(c), NIRC).

(B) The conditions for the allowance of medical expenses as de DUCtions from the gross estate of a
citizen or resident alien are: (1) the medical expenses MUST have been incUrred within one (1) year
before the death of the decedent; (2) that the medical expenses are DUly SUbstantiated with
receipts; and (3) the total aMOUnt thereof, whether paid or Unpaid, does not exceed P500,000.00
(Sec. 86A(6), NIRC).
 2014 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

I.

On March 27, 2012, the BUReaU of Internal RevenUE (BIR) issUEd a notice of assessment against BLUE
Water InDUStries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency
corporate income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the
BIR contesting said assessment and demanding that the same be cancelled or set aside

However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the
BIR informed BWI that the latter’s letter protest was denied on the grOUNd that the assessment had
already become final, execUTory and demandable. The BIR reasoned that its faILURe to decide the case
within 180 days from filing of the letter protest shOULD have prompted BWI to seek recOURse before the
COURt of Tax Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the
180-day period as mandated by the provisions of the last paragraph of Section 228 of the National
Internal RevenUE Code (NIRC). Accordingly, BWI’s faILURe to file a petition for review before the CTA
rendered the assessment final, execUTory and demandable.

Is the contention of the BIR correct? Explain. (5%)

SUGGESTED ANSWER:

No, the contention of BIR is not correct. The right of BWI to consider the inaction of the Commissioner
on the protest within 180 days as an appealable decision is only optional and will not make the
assessment final, execUtory and demandable (Section 228, NIRC; Lascona Land Co., Inc. V, CIR, G.R.
No. 171251, March 5, 2012, 667 SCRA 455).

II.

Mr. De Sarapen is a candidate in the UPcoming Senatorial elections. Mr. De Almacen, believing in
the sincerity and ability of Mr. De Sarapen to intrODUCe mUCh needed reforms in the cOUNtry,
contrIBUTed P500,000.00 in cash to the campaign chest of Mr. De Sarapen. In addition, Mr. De
Almacen pURchased tarpaULINs, t-shirts, UMbrellas; caps and other campaign materials that he also
donated to Mr. De Sarapen for USe in his campaign,”

Is the contrIBUTion of cash and campaign materials sUBJEct to donor’s tax? (4%)

SUGGESTED ANSWER:

The Tax Code provides that any contriBUtion in cash or in kind to any candidate, political party
or coalition of parties for campaign PUrposes shall be governed by the Election Code (Section 99(C),
NIRC). On the other hand, the OmniBUS Election provides, that any provision of the law to the
contrary notwithstanding, any contriBUtion in cash or in kind to any candidate or political party or
coalition of parties for campaign PUrposes, DUly reported to the Commission shall not i be SUbject to
axy payment of gift tax (Section 13, R.A. 7166). Hence, the contriBUtions will be exempt from donor’s
tax if they are DUly reported to the Commission. Otherwise, the contriBUtions will be SUbject to donor’s
tax.
 III.

Dr. Taimtim is an alUMnUS’ of the College of Medicine of Universal University (UU), a privately-owned
center for learning which grants yearly dividends to its stockholders, UU has a famOUS Chapel located
within the campUS Where the old folks USed to say that anyone who wanted to pass. the medical board
examinations shOULD offer a dozen roses on all the SUNdays of October. This was what Dr.Taimtim did
when he was still reviewing for the board examinations. In his case, the folk saying proved to be trUE
becaUSe he is now a sUCCessFUL cardiologist. Wanting to give back to the chapel and help defray the
costs of its maintenance, Dr.Taimtim donated P50,000.00 to the caretakers of the chapel
which was evidenced by an acknowledgment receipt.

In compUTing his net taxable income, can Dr. Taimtim USe his donation to the chapel:as an
allowable deDUCtion from his gross income UNder the National Internal RevenUE Code (NIRC)? (4%)

SUGGESTED ANSWER:

No, the donation is not deDUCtible. The chapel is owned by privately-owned University hence the
donation for the maintenance of the chapel is a donation to the University. The donation to be
deDUCtible MUST comply with the reQUirement that the net income of the donee MUST not inUre to the
benefit of any private stockholder or indiviDUal. In the instant case, the University is granting yearly
dividends to its stockholders which is a clear violation of the law appertaining to the so-called
“private inUrement doctrine” thereby making the donation non-deDUCtible (Section 34(H)(1), NIRC).

IV

Gangwain Corporation. (GC) filed its QUarterly tax retURns for the calendar year 2012 as follows:

First QUArter – April 25, 2012

Second QUArter – JULY 23, 2012

Third QUArter – October 25, 2012

FOURth QUarter – JanUAry 27, 2013

On December 22, 2013, GC filed with the BUReaU of Internal RevenUE (BIR) an administrative claim
for reFUNd of its UNUTilized inpUT VaLUE-Added Tax (VAT) for the calendar year 2012. After several
months of inaction by the BIR on. its claim for reFUNd, GC decided to elevate its claim directly to the
COURt of Tax Appeals (CTA) on April 22, 2014. In dUE time, the CTA denied the tax reFUNd relative to the
inpUt VAT of GC for the first qUArter of 2012, reasoning that the claim was filed beyond the two-year
period prescribed UNder Section 112(A) of the National Internal RevenUE Code (NIRC).

(A) Is the CTA correct? (3%)

(B] AssUMing that GC filed its claim before the CTA on

FebrUAry 22, 2014, wOULd YOUR answer be the same?

(3%) SUGGESTED ANSWER:

(A) No. CTA is not correct. The two-year period to file à claim for refUnd refers to the administrative claim
: and does not refer to period within which to elevate the claim to the CTA. The filing of the
administrative claim for refUnd was timely done becaUSE it is: made within two years from the end of
the QUarter, when the zero-rated transaction took place (Section 112(A); NIRC). When GC decided to
elevate its claim to the CTA on April 22, 2014, it was after the lapse of 120 days from the filing of the
claim for refUnd with the BIR, hence, the appeal is seasonably filed. The rUle on VAT refUnds is two
years to file the claim with the BIR, plUS 120 days for the Commissioner to act and inaction after 120
days is a deemed adverse decision on the claim, appealable to the CTA within 30 days from the
lapse of the 120-day period (CIR 3:0. Aichi Forging Company of Asia, Inc., G.R. No: 1. 184823,
October 6, 2010; CIR v. San ROQUe, G.R. No. 187485, FebrUary 12, 2013)

(B) Yes. The two-year prescriptive period to file a claim for refUnd refers to the administrative claim
with: the BIR and not to the period to elevate the claim to the CTA. Hence, the CTA cannot deny the
refUnd for reasons that the first QUarter claim was filed beyond the two-year period prescribed by law.
However, when the claim is made before the CTA on FebrUary 24, there is definitely no appealable
decision as yet beca USE the 120-day period for the Commissioner to act on the claim for refUnd has not
yet lapsed. Hence, the act of the taxpayer in elevating the claim to the CTA is prematUre and the CTA has
no jUrisdiction to rUle thereon (CIR V.. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6,
2010; CIR ..v. San ROQUe, G.R. No. 187485, FebrUary 12, 2013).

V.

The City of Liwliwa assessed local BUSiness taxes. against Talin Company, Claiming that there is
DOUBle taxation, Talin Company filed a complaint for ReFUNd or Recovery of Illegally and/or ErroneOUSly-
collected Local “BUSiness Tax Prohibition with Prayer to IssUE Temporary Restraining Order and Writ of
Preliminary InJUNction with the Regional Trial COURt (RTCİ: The RTC denied the application for a Writ
of Preliminary InJUNction. Since its motion for reconsideration was denied, Talin Company filed a special
civil action for certiorári with the COURt of Appeals (CA): The government lawyer representing the City of
Liwliwa prayed for the dismissal of the petition on the grOUNd that the same shOULD have been filed with
the COURt of Tax Appeals (CTA) Talin Company, thrOUGh its lawyer, Atty. Frank, cOUNtered that the CTA
cannot entertain a petition for certiorari since it is not one of its powers and :. aUThorities UNder existing
laws and rULEs.

Decide. (5%)

SUGGESTED ANSWER:

The government lawyer is correct that it is the COUrt of Tax Appeals that is vested with
proper jUrisdiction.

The law is clear when it said that The COUrt of Tax Appeals shall have exclUSive appellate jUrisdiction
to review by appeal decisions, orders or resolUtions of : the Regional Trial COUrts in local tax
cases originally decided or resolved by them in the exercise of their original or appellate jUrisdiction
(Section 7(3), RA 9282). In a recent case decided by the SUpreme COUrt, it was beld that the CTA has
certiorari powers over the iSSUe of grave aBUSE of discretion on the part of the RTC in iSSUing an
interlocUtory order in cases falling within the exclUSIve appellate jUrisdiction of the tax cOUrt, as this is
inherent to its exercise of appellate jUrisdiction (City of Manila v. Hon. Caridad H. Grecia-CUerdo,
G.R. No. 175723, FebrUary 4, 2014).

VI.

Choose the correct answer. SmUGgling (1%)

(A) does not extend to the entry of imported or exported articles by means of any false or fra UDUlent
invoice; statement or practices; the entry of goods at less than the tr Ue weight or meaSUre; or the filing
of any false ..or fraUDUlent entry for the payment of drawback or refUnd of DUties.

(B) is limited to the import of contraband or highly DUtiable cargo beyond the reach of c USToms
aUthorities

(C) is committed by any person who shall fra UDUlently import or bring into the Philippines, or assist in so
doing, any article, contrary to law, or shall receive, conceal, BUy; sell or any manner facilitate the
transportation, concealment or sale of SUCh article after .,importation, knowing the same to have been
imported contrary to law

(D) is PUnishable by administrative penalty

only SUGGESTED ANSWER:

(C) is committed by any person who shall fraUDUlently import or bring into the Philippines, or assist in so
doing, any article, contrary to law, or shall receive, conceal, BUy, sell or any manner facilitate
the transportation, concealment or sale of SUCh article’. after importation, knowing the same to have
been imported contrary to law (Section 3601, Tariff and CUStoms Code).

VII

In accordance with the Local Government Code (LGC), the SanggUNiang PangLUNgsod (SP) of BagUIO
City enacted : Tax Ordinance No.19, Series of 2014, imposing a P50.00 tax on all the tOURists and
travellers going to BagUIO City. In imposing the local tax, the SP reasoned that the tax collected will be
USed to maintain the cleanliness of BagUIO City and for the beaUTification of its tOURist attractions.
Claiming the tax to be UNJUSt, BagUIo Travellers Association (BTA); an association of travel agencies in
BagUIO City; filed a petition for declaratory relief before the Regional Trial COURt (RTC becaUSe. BTA was
apprehensive that tOURists: might cancel their bookings with BTA’s member agencies. BTA also
prayed for the issUAnce of a Temporary Restraining Order (TRO) to enjoin BagUIO City from enforcing
the local tax on their cUStomers and on all tOURists: going to BagUIO City. The RTC issUEd a TRO
enjoining BagUIO City from imposing the local tax Aggrieved, BagUIO City filed a petition for certiorari
before the SUpreme CoURt (SC) seeking to set aside the TRO issUEd by the RTC on the grOUNd that
collection of taxes cannot be enjoined.

Will the petition prosper? (5%)

SUGGESTED ANSWER:

Yes. The petition for certiorari will prosper. The RTC has no jUrisdiction to entertain any
action concerning the validity of a Tax Ordinance and to enjoin the imposition of taxes levied by
it. Any QUestion. on the legality of the tax ordinance can only be raised on appeal with the Secretary of
JUSTice and the appeal shall not have the effect of SUSPEnding the effectivity of the ordinance and the
accrUal and the payment of the tax levied therein (Section 187, LGC).

VIII

Masarap KUmain, Inc. (MKI) is a VaLUE Added Tax (VAT)-registered company which has been engaged in
the catering bUSiness for the past 10 years. It has invested a sUBStantial portion of its capital on flat
wares, table linens, plates, chairs, catering eQUIPment, and delivery vans. MKI sold its first delivery van,
already 10 years
old and idle,to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the BUSiness of bUYINg
and selling gravel and sand. The selling price of the delivery van was way below: its acQUISition cost.

Is the sale of the delivery van by MKI to MGSC sUBJEct: to VAT? (4%)

SUGGESTED ANSWER:

Yes, the sale of the delivery van is SUbject to VAT being a transaction incidental to the catering BUSIness

which is a VAT-registered activity of MKI. Transactions that are Undertaken incidental to the PUrSUit of
a commercial or economic activity are considered as entered into in the cOUrse of trade or
BUSiness (Section 105, NIRC). A sale of a fUlly depreciated vehicle that has been USed in BUSIness is
SUbject to VAT as an incidental transaction, althOUgh SUCh sale may be considered *. isolated
(Mindanao II Geothermal Partnership V. CIR, G.R. Nos. 193301, 194637, March 11, 2013).

IX

Mr. Gipit borrowed from Mr. MaUNawain P100,000,00, payable in five (5) eQUAl monthly installments.
Before the first installment became DUE, Mr. Gipit rendered general cleaning services in the entire office
BUILDINg of Mr. MaUNawain, and as compensation therefor, Mr. MaUNawain cancelled the indebtedness of
Mr. Gipit UP to the amOUNt of P75,000.00. Mr. Gipit claims that the cancellation of his indebtedness
cannot be considered as gain on his part which mUSt be sUBJEct to income tax, becaUSe according to
him, he did not actUAlly receive payment from Mr. MaUNawain for the general cleaning services.

Is Mr: Gipit correct? Explain. (4%)

SUGGESTED ANSWER:

No. The cancellation of the indebtedness of Up to P75,000 is intended as a compensation for the
general cleaning services rendered by Mr. Gipit. Compensation for services in whatever form paid is
part of gross income (Section 32(A), NIRC).

X.

Which of the following is an excLUSion from gross income? (1%)

(A) salaries and wages

(B) cash dividends

(C) LIQUIDating dividends after dissOLUTion

of a corporation

(D) de minimis benefits

(E) embezzled money

SUGGESTED ANSWER:

(D) de minimis benefits (Section 33(C)(4); RR NO. 3-98).

 XI

Triple Star, à domestic corporation, entered into a Management Service Contract with Single Star, a
non resident foreign corporation with no property in the Philippines. Under the contract, Single Star
shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be
performed in Hong Kong.

Is the compensation for the services of Single Star taxable as income from sOURces within the
Philippines? Explain. (4%)

SUGGESTED ANSWER:

No. The compensation for services rendered by Single Star is an income derived from SOUrces
withOUt the Philippines. To be considered as income from within, the labor or service MUST be
performed within the Philippines (Section 42(A)(3) and Section 42(C)(3) NIRC). Since all the
services reQUired to be performed by Single Star, a non- resident foreign corporation, is to be
performed in Hongkong, the entire income is from sOUrces withOUt.

XII.

Which of the following shOULD not be claimed as deDUCtions from gross income? (1%)

(A) discOUNts given to senior citizens on certain goods and :: services

(B) advertising expense to maintain some form of goodwill for the taxpayer’s BUSiness

(C) salaries and bonUSes paid to employees

(D) interest payment on loans for the pURchase of machinery and eQUIPment USed in BUSiness

SUGGESTED ANSWER:

(B) advertising expense to maintain some form of . goodwill for the taxpayer’s BUSiness (General Foods
Corporation v. CIR, G.R. No. 143672, April 24, 2003)

XIII

HopeFUL Corporation obtained a loan fron GenerOUS. Bank and execUTed a mortgage on its real property to
secURe the loan. When HopeFUL Corporation failed to pay the loan, GenerOUS Bank extraJUdicially
foreclosed the mortgage on the property and acQUIRed the same as the highest bidder. A month after the
foreclosURe, HopeFUL Corporation exercised its right of redemption and was able to redeem the property.

Is GenerOUS Bank liable to pay capital gains tax as a resULT of the foreclosURe sale? Explain. (4%)

SUGGESTED ANSWER:

No. In a foreclOSUre of a real estate mortgage, the capital gains tax accrUes only after the lapse of
the redemption period becaUSE it is only then that there exists a transfer of property. ThUS, if the
right to redeem the foreclosed property was exercised by the mortgagor before expiration of the
redemption
period, as in this case, the foreclOSUre is not a taxable event (See RR No. 4-99, SUpreme Transliner, Inc.
v. BPI Family Şavings Bank, Inc., G.R. No. 165617, FebrUary 25, 2011).

XIV

Mr. X, a Filipino residing in Alabama, U.S.A., died on JanUAry 2, 2013 after UNdergoing a major heart

sURgery. He left behind to his wife and two (2) kids several properties, to wit: (4%)

(1)family home in Makati City

(2) condominIUM UNit in Las Piñas City

(3) proceeds of health insURance from Take Care, a health maintenance organization in the Philippines;
and
(4) land in Alabama, U.S.A.

The following expenses were paid:

(1) FUNeral expenses

(2) medical expenses, and

(3) jUDICial expenses in the testate proceedings.

(A) What are the items that mUSt be considered as part of the gross estate income of Mr. X?

(B) What are the items that may be considered as deDUCtions from the gross estate?

SUGGESTED ANSWER:

(A) All the items of properties en Umerated in the problem shall form part of the gross estate of Mr. X.
The composition of the gross estate of a decedent who is a Filipino citizen shall incl Ude all of his
properties, real or personal, tangible or intangible, wherever sitUated (Section 85, NIRC).

NOTE: It is SUggested that if the examinee answered NONÉ, the same shOUld be given fUll credit
becaUSE there is no gross estate INCOME in the problem. Likewise, it is SUggested that any answer
shOUld be given fUll credit becaUSE of the QUestion is worded in a confUSIng manner.

(B) All the items of expenses in the problem are deDUCtible from bis gross estate. However, the
allowable aMOUnt of fUneral expenses shall be 5% of the gross estate or act Ual, whichever is lower, BUt
in no case shall the a MOUnt deDUCtible go beyond P200,000.. Likewise, the de DUCtible medical expenses
MUST be limited to those inc Urred within one year prior his death BUt not to exceed P500,000. In addition
to the items of expenses mentioned in the problem, the standard de DUCtion aMOUnting to Pl million is
also allowed as a deDUCtion from the gross estate (Section 86, NIRC).

XV.

When is a pre-assessment notice reQUIRed UNder the following cases? (1%).

(A) when the finding for any deficiency tax is the resULT of mathematical error in the compUTation of
the tax as appearing on the face of the retURn
(B) when a discrepancy has been determined between the tax withheld and the amOUNt actUAlly
remitted by the withholding agent

(C) when the excise tax DUE on excisable articles has been paid.

(D) 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.

SUGGESTED ANSWER::.

(C) when the excise tax DUe on excisable articles has been paid (Section 228, NIRC)

XVI

Mr. Tiaga has been a law-abiding citizen diligently paying his income taxes. On May 5, 2014, he
was sURprised to receive an assessment notice from the BUReaU of Internal RevenUE (BIR) informirig
him of a deficiency tax assess ment as a resULT of a mathematical error in the compU tation of his
income tax, as appearing on the face of his income tax retURn for the year 2011, which he filed on April 15,
2012. Mr. Tiaga believes that there was no sUCh error in the compUTation of his income tax for the year
2011.

Based on the assessment received by Mr. Tiaga; may he: already file a protest thereon? (4%)

SUGGESTED ANSWER:

Yes. Mr. Tiaga may consider the assessment notice : as a final assessment notice and his right to
protest within 30 days from receipt may now be exercised by him. When the finding of a deficiency
tax is the reSUlt of mathematical error in the cOMPUtation of the tax appearing on the face of the
retUrn, a pre- assessment notice shall not be reQUired hence, the assessment notice is a final
assessment notice (Section 228, NIRC; RR NO: 18-2013).

XVII

In a civil case for AnnULMent of Contract of Sale, plain iff Ma: Reklamo presented in evidence the Contract
of Sale: which she sOUGht to be annULLEd. No docUMentary stamp:. tax on the Contract of Sale
was paid becaUSe according to plaintiff Ma. Reklamo, there was no need to pay the same since the
sale was not registered with the Register of Deeds. Plaintiff Ma. Reklamo is now offering the Contract
of Sale as her evidence.

Is the Contract of Sale admissible? (4%)

SUGGESTED ANSWER

No. The Contract of Sale cannot be admitted in evidence. The docUment is clearly taxable becaUSE the
law imposes a docUmentary stamp tax (DST) on Sales and Agreements to Sell, and Memoranda of Sale:
(Section 175, NIRC). Since the (DST) thereon is not paid the effect is that the instrUment, docUment or
paper which is reQUired by law to be stamped and which has been signed, iSSUed, accepted and
transferred withOUt being DUly stamped shall not be recorded, nor shall it be USed in evidence in
any cOUrt Until the reQUisite stamp or stamps shall have been affixed thereto and cancelled
(Section 201,
NIRC). In the case at bar, no docUmentary stamp tax was paid on the Contract of Sale, hence, it. cannot
be USEd as hex evidence in cOUrt.

NOTE: This MUST be considered as a bonUS QUestion becaUSE it is OUtside the coverage of the bar
examination.

XVIII.

Madam X owns real property in Caloocan City. On JULY 15, 2014, she received a notice of assessment
from the City Assessor, informing her of a deficiency tax on her property. She wants to contest the
assessment. (4%)

(A) What are the administrative remedies available to Madam X in order to contest the assessment and
their respective prescriptive periods?

(BJ May Madam X reFUSe to pay the deficiency tax assessment dURing the pendency of her appeal?

SUGGESTED ANSWER:

(A) The administrative remedies available to Madam X to contest the assessment and their respective
prescriptive periods are as follows:

1. Pay the deficiency real property tax Under

protest (Section 252, LGC);

2. File the protest with local trea SUrer – The protest in writing MUST be filed within thirty (30) days from
payment of the tax to the provincial city treaSUrer or MUnicipal treaSUrer, in the case of a MUnicipality
within Metropolitan Manila Area, who shall decide : the protest within sixty (60) days from receipt
(Section 252, LGC);

3. Appeal to the LBAA – If protest is denied or Upon the lapse of the 60-day period for the treaSUrer
to decide, the taxpayer may appeal to the LBAA within 60 days and the case decided within 120
days (Section 226 & 229, LGC):

4. Appeal to the CBAA – If not satisfied with the decision of the LBAA, appeal to the CBAA within 30
days from receipt of a copy of the decision (Section 229(c), LGC).

(B) No. The payment of the deficiency tax is a condition before she can protest the deficiency
assessment. It is the decision on the protest or inaction thereon that gives her the right to appeal.
This means that she cannot refUSE to pay the deficiency tax assessment DUring the pendency of the
appeal beca USE it is the payment itself which gives rise to the remedy. The law provides that no
protest (which is the beginning of the di SPUtation process) shall be entertained Unless the taxpayer
first pays the tax. (Section 252, LGC).

XIX

The BUReaU of Internal RevenUE (BIR) issUEd RevenUE MemoranDUM CircULAr (RMC) No. 65-2012
imposing VaLUE Added Tax (VAT) on association DUEs and membership fees collected by condominIUm
corporations from its member condominIUM-UNit owners. The RMC’s validity is challenged before the
SUpreme COURt (SC) by the condominIUM corporations. The Solicitor General, cOUNsel for BIR, claims that
association DUEs,
membership fees, and other assessment/charges collected by a condominIUM corporation are sUBJEct to
VAT since they constitUTe income payments or compensation for the beneficial services it provides to
its members and tenants.

On the other hand, the lawyer of the condominIUM corporations argUEs that sUCh DUEs and fees are
merely held in trUSt by the condominIUM corporations excLUSively for their members and USed
solely for administrative expenses in implementing the condominIUM corporations pURposes.
Accordingly, the condominIUm corporations do not actUAlly render services for a fee sUBJEct to VAT.

Whose argUMent is correct? Decide. (5%)

SUGGESTED ANSWERS: (either answer shOUld be given credit):

SUGGESTED ANSWER 1:

The lawyer of the condominiUm corporations is correct. The association DUes, membership fees,
and other assessments/charges do not constitUte incoine payments becaUSE they were collected
for the benefit ‘ “of the Unit owners and the condominiUm corporation is not created as a BUSIness
entity. The collection is the money of the Unit owners pooled together and will be .. spent exclUSIvely for
the PUrpose of maintaining and preserving the BUilding and its premises which they themselves
own and possess (First e-Bank Tower CondominiUm Corp., V. BIR, Special Civil Action No. 12-1236,
RTC Br. 146, Makati City).

SUGGESTED ANSWER 2:

In the case of office Metro Philippines, Inc. (formerly RegUS Centres, Inc.) v. Commissioner of Internal
RevenUe, CTA Case No. 8382, the COUrt only dealt with the EWT iSSUe as the VAT Section 105
shows that transactions in the cOUrse of a trade or BUSiness (sells, barters, exchanges, leases
goods or properties, renders services, imports goods) are those SUbject to VAT, In the case of a
condominiUm corporation, the fUnction of the entity is merely for administrative PUrposes and not a
trade or BUSIness. ThUS, payments in the form of association DUes shOUld not be SUbjected to VAT.

XX

DURing his lifetime, Mr. Sakitin obtained a loan amOUNting to ten million pesos from Bangko Uno for
the pURchase of a parcel of land located in Makati City, USing sUCh pro perty as collateral for the loan. The
loan was evidenced by a DULY notarized promissory note, SUBSeQUEntly, Mr. Sakitin died. At the time of his
death, the UNpaid balance of the loan amOUNted to P2 million, The heirs of Mr. Sakitin deDUCted the
amOUNt of P2 million from the gross estate, as part of the “Claims against the Estate.” SUCh deDUCtion
was disallowed by the BUReaU of Internal RevenUE (BIR) Examiner, claiming that the mortgaged property
was not incLUDEd in the compUtation of the gross estate. Do YOU agree with the BIR? Explain. (4%).

SUGGESTED ANSWER:

Yes. Unpaid mortgages Upon, or any indebtedness with respect to property are deDUCtible from
the gross estate only if the valUe of the decedent’s interest in said property, Undiminished by SUCh
mortgage or indebtedness, is inclUded in the gross.estate (Section 86(AX1)(e)) In the instant case, the
interest of the decedent in the property PUrchased from the loan where the said pro perty was
USEd as the collateral, was not inclUded in the gross estate. Accordingly, the Unpaid balance of the
loan : at the time of Mr. Sakitin’s death is not deDUCtible as “Claims against the Estate”.
 XXI

On AUGUSt 31, 2014, Haelton Corporation (HC), thrU its aUThorized representative Mş Pares, sold a 16-
storey. commercial BUILDing known as Haeltown BUILDINg to Mr. Belly for P100 million: Mr. Belly, in tURn,
sold the same property on the same day to Bell Gates, Inc (BGI) for P200 million. These two (2)
transactions were evidenced by two. separate Deeds of AbsOLUTe Sale notarized on the same day by the
same notary pUBlic: Investigations by the BUReaU of Internal RevenUE (BIR) showed that:

(1) the Deed of AbsOLUTe Sale between Mr. Belly and BGI was notarized ahead of the sale between HC
and Mr. Belly;

(2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly;

(3) the said payment of P40 million was recorded … by BGI in its books as of JUNe 30, 2014 as investment
in Haeltown BUILDINg; and (4) the sUBStantial portion of P40 million was withdrawn by Ms. Pares thro UGh
the declaration of cash: dividends to all its stockholders.

Based on the foregoing, the BIR sent Haeltown Corpo tation, a Notice of Assessment for deficiency
income tax arising from an alleged simULAted sale of the aforesaid commercial BUILding to escape
the higher corporate income tax rate of thirty percent (30%).

What is the liability of Haeltown Corporation, if any?

SUGGESTED ANSWER:

Haelton Corporation is liable for the deficiency income tax as a reSUlt of tax evasion. The
PUrpose of selling first the property to Mr. Belly is to create a tax shelter. He never controlled the
property and did not enjoy the normal benefits and BUrdens of ownership. The sale to him was merely
a tax ploy, a shan, and withOUt BUSIness PUrpose and economic SUbstance. The intermediary
transaction, which was prompted more on the mitigation of tax liabilities than for legitimate BUSI ness
PUrpose constitUtes one of tax evasion. However, being a corporation, Haelton can only be liable
for civil fraUd which is a civil liability rather than a criminal fraUd which can only be committed
by natUral persons (CIR 1.-Benigno Toda, Jr.G.R. No. 147188, September 14, 2004, 438 SCRA 290).

XXII

Choose the correct answer DOUBLE Taxation (1%)

(A) is one of direct DUPlicate taxations wherein two (2) taxes mUSt be imposed on the same sUBJEct
matter, by the same taxing aUthority, within the same JURisdiction, I DURing the same period, with the
same kind or character of tax, even if the pURposes of imposing the same are different

(B) is forbidden by. law; and therefore, it is a valid defense against the validity of a tax measURe

(C) means taxing the same property twice when it shOULD be taxed only once; it is tantamOUNt to
taxing the same person twice by the same JURisdiction for the same thing

(D) exists when a corporation is assessed with local BUSiness tax as a manUFActURer, and at the same
time, vaLUE-added tax as a person selling goods in the cOURse of trade or BUSiness.

SUGGESTED ANSWER:
(C) means taxing the same property twice when it shOUld

be taxed only once; it is tantaMOUnt to taxing the same person twice by the same jUrisdiction for
the same thing (Victorias Milling Co. Vi MUnicipality of Victorias, Negros Occidental, G.R. No. L-
21183, September 27, 1968).

XXIII

Choose the correct answer. Tax Avoidance (1%).

(A) 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.

(B) is a tax saving device within the means sanctioned by law

(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax
liabilities. than for legitimate BUSiness pURpose.

(D) is any form of tax deDUCtion scheme, regardless if the same is legal or not.

SUGGESTED ANSWER:

(B) is a tax saving device within the means sanctioned by law (Philip ManUfactUring Corp. v. CIR, G.R. No.
L-19737, AUgUST 26, 1968).

XXIV.

A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their
profession as awyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among
which are as follows: (6%)

Earnings

(1)professional/legal fees from varIOUS Clients

(2) cash prize received from a religIOUS Society in recognition of the exemplary service of ABC Law Firm

(3) gains derived from sale of excess compUTers

and Payments:

(1)salaries of office staff

(2) rentals for office space

(3) representation expenses incURred in meetings with clients

(A) What are the items in the abovementioned earnings which shOULD be incLUDEd in the compUTation
of ABC Law Firm’s gross income? Explain.
(B) What are the items in the abovementioned payments which may be considered as deDUCtions from
the gross income of ABC Law Firm? Explain.

(C). If ABC Law Firm earns net income in 2012, what, if any, : is the tax conseQUEnce on the part of ABC
Law Firm insofar as the payment of income tax is concerned?

What, if any, is the tax conseQUEnce on the part of A, B, and C as indiviDUAl partners, insofar as the
payment of income tax is concerned?

SUGGESTED ANSWER:

(A) The three (3) items of earnings shOUld be inclUded in

the cOMPUtation of ABC Law Firm’s gross income. The professional/legal fees from: variOUS Clients
is inclUded as part of gross income being in the natUre of compensation for services (Section
32(A) (I), NIRC). The cash prize from a religiOUS SOCiety … in recognition of its exemplary services
is also :** inclUded there being no law providing for its exclUSIon. This is not a prize in recognition
of any of the achievements enUmerated Under the law hence, shOUld form part of gross income
(Section 32(B)(7):

(c), NIRC). The gains from sale of excess cOMPUters . and laptops shOUld also be inclUded as part of the :
firm’s gross income becaUSE the term gross income specifically inclUdes gains derived from dealings in
property (Section 32(A)(3), NIRC).

(B) The law firm being formed as a general professional partnership is entitled to the same deDUCtions
as allowed to corporations (Section 26, NIRC). Hence, the three (3) items of de DUCtions mentioned in the
problem are all deDUCtible, they being in the nat Ure i of ordinary and necessary expenses inc Urred in the
practice of profession (Section 34(A), NIRC).

ALTERNATIVE ANSWER:

The law firm being formed as a general professional partnership is entitled to the same deDUCtions as
allowed to corporations (Section 26, NIRC). Hence, the three (3) items of deDUCtions mentioned in the
problem are all deDUCtible, they being in the natUre of ordinary and necessary expenses incUrred in the
practice of profession (Section 34(A), NIRC). However, the aMOUnt deDUCtible for
representation expenses incUrred by a taxpayer engaged in sale of services, inclUding a law firm, is
SUbject to a ceiling of 1% of net revenUe (RR No. 10-2002)

(C) The net income having been earned by the law firm, which is formed and QUalifies as a general
Professional partnership, is not SUbject to income tax becaUSE the earner is devoid of any income
tax personality. Each partner shall report as gross income his distriBUtive share, actUally or
constrUCtively received, in the net income of the partnership. The partnership is merely treated for
income tax PUrposes as a pass-thrOUgh entity so that its net income is not taxable at the level of the
partnership BUt said net income shOUld be attriBUted to the partners, whether or not distriBUted to
them, and they are liable to pay the income tax based on their respective taxable income as
indiviDUal taxpayers (Section 26, NIRC).

XXV

Which of the following transactions is sUBJEct to VaLUE Added Tax (VAT)? (1%)
(A) sale of shares of stock-listed and traded thrOUGh the local stock (B) importation of personal
and hOUSehold effects belonging to residents of the Philippines retURning from abroad sUBJEct to cUStom:
DUTies UNder the Tariff and CUStoms Code.

(C) services rendered by indivIDUAls pURsUAnt to an employer-employee relationship.

(D). gross receipts from lending activities by credit or mULti-pURpose cooperatives DULY registered with
the Cooperative Development AUThority.

SUGGESTED ANSWER:

(B) importation of personal and hOUSehold effects belonging to residents of the Philippines
retUrning from abroad SUbject to cUSTom DUties Under the Tarifi and CUStoms Code (exempt from
VAT only if exempt from cUSToms DUties, Section 109(1)(C), NIRC).

XXVI.

Freezy Corporation, a domestic corporation engaged in the manUFActURe and sale of ice cream,
made payments: to an officer of Frosty Corporation, a competitor in the ice cream BUSiness, in exchange
for said officer’s revelation of Frosty Corporation’s trade secrets.

May Freezy Corporation claim the påyment to the Officer as deDUCtion from its gross income? Explain.
(4%)

SUGGESTED ANSWERS

No, The payments made in exchange for the revelation of a competitor’s trade secrets is considered
as an expense which is against law, morals, good cUSToms or PUblic policy, which is not
deDUCtible (3M Philippines, · Inc. V. CIR, GR No. 82833, September 26, 1988). Also, the law will not
allow the deDUCtion of bribes, kickbacks and other similar payments. Applying the principle of
ejUSDEm generis, payment made by Freezy Corporation wOUld fall Under “other similar payments
which are not allowed as deDUCtion from gross income (Section 34(A)(1)(C), NIRC).

XVII

In JanUAry 2013; YOUR friend got his first job as an office clerk. He is Upon him for financial sUPport. His
parents have long retired from their work, and his two (2) siblings are still minors and stUDYINg in grade
school. In FebrUAry 2014, he consULTed YOU as he wanted to comply”: with all the rULEs pertaining to
the preparation and filing of his income tax retURn. He now asks YOU the following:

{A} Is he entitled to personal exemptions? If so, how mUCh? (1%). (B) Is he entitled to additional
exemptions? If so, how mUCh? (1%) (C) What is the effect of the taxes withheld from his salaries on his
taxable income? (2%)

SUGGESTED ANSWER:

(A) Yes. The law allows a basic personal exemption of P50,000 for each indiviDUal taxpayer (Section
35(A), NIRC).

(B) No. While his parents and minor siblings are living with and dependent Upon him for financial
SUpport, they are not QUalified dependents for PUrposes of. additional exemptions. The term
“dependent” for
PUrposes of the additional personal exemption wOUld inclUde only legitimate, illegitimate or legally
adopted child (Section 35(B), NIRC).

(C) The taxes withheld from his salaries will not affect his taxable income beca USE they are not allowed
as tax deDUCtions BUt as tax credits. Tax deDUCtions: reDUCe the taxable income while tax credits re DUCe
the tax liability (CIR v. Central LUZON DrUg Corpo ration, G.R. No. 159647, April 15, 2005).

XXVIII.

Choose the correct answer. Tax laws – (1%)

(A) may be enacted for the promotion of private enterprise or BUSiness for as long as it gives incidental
advantage to the pUBLIC or the State

(B) are inherently legislative; therefore, may not be delegated

(C) are territorial in natURe; hence, they do not recognize the generally-accepted tenets of international
law

(D) adhere to UNiformity and eQUAlity when all taxable articles or kinds of property of the same class
are taxable at the same rate.

SUGGESTED ANSWER:

(D) adhere to Uniformity and eQUality when all taxable articles or kinds of property of the same class are
taxable at the same rate (City of BagUio v. de Leon, G.R. No. L-24756, October 31, 1968, 25 SCRA 938).

XIX.

Doña Evelina, a rich widow engaged in the bUSiness of cURrency exchange; was assessed a
considerable amOUNt of local BUSiness taxes by the City Government of Bagnet by virtUE of Tax
Ordinance No. 24. Despite her objections thereto, Doña Evelina paid the taxes. Nevertheless,
UNsatisfied with said Tax Ordinance; Doña Evelina, thrOUGh her cOUNsel Atty. ELP, filed a written
claim for recovery of said :local BUSiness. taxes and contested the assessment. Her claim was denied,
and so Atty. ELP elevated her case to the Regional Trial COURt (RTC).

The RTC declared. Tax Ordinance No. 24 nULL and void and withOUT legal effect for having been enacted
in violation of the pUBLICation reQUIRement of tax ordinances: and revenUE measURes UNder the
Local Government Code (LGC) and on the grOUNd of DOUble taxation. On appeal, the COURt of Tax
Appeals (CTA) affirmed the decision of the RTC. No:motion for reconsideration was filed and the decision
became final and execUTory: (4%)

(A) If yOU are Atty. ELP, what advice will yOU give Doña Evelina so that she can recover the sUBJEct local
BUSiness taxes? ;

(B) If Doña Evelina eventUAlly recovers the local BUSiness taxes, mUSt the same be considered as
income taxable. by the national government?

SUGGESTED ANSWER::

(A] The remedy availed of by Doña Evelina to QUestion the validity of the assessment was to file a
written claim for recovery which was denied by the city treaSUrer. It appears that after the denial,
the jUdicial
remedies were properly PUrSUed. Since the decision by the CTA had already become final and
execUtory, the cOUnsel shOUld advice Doña Evelina to press for the execUtion of the jUdgment.
ShOUld the city treaSUrer refUSE to refUnd the local taxes :paid, they shOUld PUSH for the iSSUance of a
writ of execUtion by the CTA to force the local treaSUrer to make the refUnd.

(B) Yes, SUbject to the tax benefit rUle. The local BUSiness tax paid is a BUSiness connected tax hence,
deDUCtible from gross income. If at the time of its deDUCtion it reSUlted to a tax benefit to Doña
Evelina, then the recovery will form part of gross income to the extent of the tax benefit on the
previOUS deDUCtion (Section 34(C)(1), NIRC).