Basic Taxation Questions & Answers

Taxation 1 Preliminary Exam Pointers:
Question # 1
Give the three fundamental principles of a sound tax system. (Explain each)
Answer:
Basic Principles of a Sound Tax System [FAT]- (Came out in first quiz)
1. Fiscal Adequacy – the sources of tax revenue should coincide with, and approximate the
needs of government expenditure. Neither an excess nor a deficiency of revenue visa‐ vis the
needs of government would be in keeping with the principle.
2. Administrative Feasibility – tax laws should be capable of convenient, just and effective
administration. (CJE)
3. Theoretical Justice – the tax burden should be in proportion to the taxpayer’s ability to pay
(ability to pay principle). The 1987 Constitution requires taxation to be equitable and uniform.
Question # 2
Is there double taxation when a property was subjected for VAT and Income tax by BIR and real
property tax and community tax by the City Government?
Answer:
Yes. The various impositions constitute double taxation because the property is taxed twice.
However, this type of taxation is not prohibited by the Constitution because it is not direct
duplicate taxation violative of equal protection and uniformity in taxation. The taxes here are
imposed for different purposes and by different taxing authorities.
Question # 3:
As to the issue on whether the legally mandate 20% senior citizen discount is an exercise of
police power or an exercise of the power of eminent domain, discuss the seemingly opposing
views of the Supreme Court in the Cases of Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation and Carlos Superdrug Corporation vs. DSWD.
Prepared by: JC Malero

What was the ruling of the Supreme Court regarding the above-mentioned issue in the recent
case of Manila Memorial Park vs. Secretary of DSWD.
Answer:
(Commissioner of Internal Revenue vs. Central Luzon Drug Corporation)

Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it
stressed that the privilege enjoyed by senior citizens does not come directly from the State, but
rather from the private establishments concerned. Accordingly, the tax credit benefit granted to
these establishments can be deemed as their just compensation for private property taken by
the State for public use. In the exercise of the State’s power of eminent domain, the tax credit
scheme would allow peso for peso reimbursement and has the effect of directly reducing the tax
liability.
(Carlos Superdrug Corporation vs. DSWD )

The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. However, the 20 % discount is treated as tax deduction under
the police power of the state and the deduction has the effect only of reducing the taxable
income.
(Manila Memorial Park vs. Secretary of DSWD.)

In this case the court ruled that the 20% senior citizen discount is an exercise of police power
using the tax deduction scheme.
Question # 4
In Gomez vs. Palomar Case, discuss the ruling of the Supreme Court on the following
contentions of the petitioner: 1. Violation of the equal protection clause, 2. Tax in not valid
because it is not levied for public purpose, 3. Violates the uniformity in taxation and 3. The
revenue is spent for the benefit of the Philippine Tuberculosis Society, a private organization
without appropriation by law.
Answer:
It is said that the statute is violative of the equal protection clause of the Constitution.
The classification is likewise based on considerations of administrative convenience. For it is now
a settled principle of law that "consideration of practical administrative convenience and cost in
the administration of tax laws afford adequate ground for imposing a tax on a well recognized
and defined class.
The petitioner further argues that the tax in question is invalid, first, because it is not levied for a
public purpose as no special benefits accrue to mail users as taxpayers, and second, because it
violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner
means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that
the only benefit to which the taxpayer is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized society, established and safeguarded by the
devotion of taxes to public purposes.
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate
rather than a graduated tax. A tax need not be measured by the weight of the mail or the extent
of the service rendered. We have said that considerations of administrative convenience and
cost afford an adequate ground for classification. The same considerations may induce the
legislature to impose a flat tax which in effect is a charge for the transaction, operating equally
on all persons within the class regardless of the amount involved.
The money raised from the sales of the anti-TB stamps is spent for the benefit of the Philippine
Tuberculosis Society, a private organization, without appropriation by law.
the Society is not really the beneficiary but only the agency through which the State acts in
carrying out what is essentially a public function. The money is treated as a special fund and as
such need not be appropriated by law.
Question # 5
Under the 1987 Constitution, aside from revenue bills, what are the other types of bills that
must originate exclusively from the House of Representatives?
Answer:
All appropriation, revenue or tariff bills, bill authorizing increase of the public debt, bills of
local application, and private bills-(ART-BBP)
Question # 6

Give the three bills that can be subjected to the Veto Power of the President either by item
veto or pocket veto.
Answer:
The President shall have the power to veto (item or pocket veto) any particular item or items in
an Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which
he does not object. (ART)
Question # 7
Primary and Sumptuary purposes of taxation.
Answer:
Purposes and Objectives of Taxation

1. Revenue – to provide funds or property with which the State promotes the general welfare
and protection of its citizens.
2. NonRevenue or Sumptuary
[PR2EP]
a. Promotion of General Welfare – Taxation may be used as an implement of police power in
order to promote the general welfare of the people. [see Lutz vs Araneta (98 Phil 148) and
Osmeňa vs Orbos (G.R. No. 99886, Mar. 31, 1993)]
b. Regulation – As in the case of taxes levied on excises and privileges like those imposed in
tobacco or alcoholic products or amusement places like night clubs, cabarets,cockpits, etc.
In the case of Caltex Phils. Inc. vs COA (G.R. No. 92585, May 8, 1992), it was held that taxes may
also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization
of a threatened industry which is affected with public industry like the oil industry.
c. Reduction of Social Inequality – this is made possible through the progressive system of
taxation where the objective is to prevent the under‐concentration of wealth in the hands of
few individuals.
d. Encourage Economic Growth – in the realm of tax exemptions and tax reliefs, for instance,
the purpose is to grant incentives or exemptions in order to encourage investments and
thereby promote the country’s economic growth.
e. Protectionism – in some important sectors of the economy, as in the case of foreign
importations, taxes sometimes provide protection to local industries like protective tariffs and
customs.- (Came out in first quiz)
Question # 8
In the Leading case of Tolentino vs. Secretary of Finance, one of the petitioners claimed that
the value-added tax (VAT) is regressive, and that the VAT Law contravenes the mandate of
Congress to provide for a progressive system of taxation because the law imposes a flat rate of
10 % and thus place the tax burden on all taxpayers without regard to their ability to pay. What
was the ruling of the Supreme Court on this particular issue?
Answer:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." It does not prohibit regressive system of taxation. The constitutional provision has
been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized." The Court added that we cannot avoid regressive
taxation, only that we can minimized the effect.
Question # 9
Reconcile the following statements: “The power to tax includes the power to destroy” and
“The power to tax does not include the power to destroy while this court sits.”
Answer:
According to Chief Justice Marshall of the U.S. Supreme Court, “the power to tax involves the
power to destroy.”
On the other hand, according to Justice Holmes of the U.S. Supreme Court, “the power to tax is
not the power to destroy while this court sits.”
Reconciliation of the two (2) views: Justice Marshall’s view refers to a valid tax while Justice
Holmes’ view refers to an invalid tax. Hence, the imposition of a valid tax could not be
judicially restrained merely because it would prejudice the taxpayer’s property. On the other
hand, an illegal tax could be judicially declared invalid and should not work to prejudice a
taxpayer’s property.
Question # 10
What is Substantive Charity Test.

Answer:
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.
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, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.
Question # 11
Is the enactment of RA No. 7716 (Expanded Value-Added Tax Law) valid when it did not
“originate exclusively” in the House of Representatives as required by Art. VI (24) of the
Constitution? (Tolentino vs. Secretary of Finance)
Answer:
The Court holding that such consolidation was consistent with the power of the Senate to
propose or concur with amendments to the version originated in the HoR. What the Constitution
simply means, according to the 9 justices, is that the initiative must come from the HoR.
The Court says that it is not the law but the bill that must originate exclusively from the House of
Representatives. Thus, RA 7716 is valid even if there is a different version.
Question # 12
Is a VAT imposed on tollway operators a tax on tax? Or it is a user’s tax? (Diaz vs. Secretary of
Finance)
Answer:
Not a TAX ON TAX

VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an
indirect tax. In indirect taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it

paid on goods, properties or services to the buyer. In such a case, what is transferred is not the
sellers liability but merely the burden of the VAT.
Not a USER’S TAX

The person liable is the toll way operator. It is an operator’s tax just shifted to the user. Even if
the same is shifted to the user, it is no longer a tax but a cost.
Question # 13
What is Tax Amnesty?
Answer:
A tax amnesty is a general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax.
Question # 14
What is the doctrine of Mobilia Sequuntur Personam?
Answer:
The maxim of Mobilia Sequuntur Personam and Situs of Taxation According to this maxim,
which means”movable follow the person,” the situs of personal property for the purpose of
taxation is the domicile of the owner.
Exception:
1. When the law provides for the situs of taxation. (Sec. 104, RA 8424)
2. When the personal property has already acquired situs in another jurisdiction. E.g. shares of
stock. The situs for taxation purposes is the state where it is permanently kept or the place
of the incorporation of the corporation which issued the shares.
Question # 15
Wendell has tax delinquency in his property, but the same taxing authority utilized his other
property for public use. He now refused payment of his tax delinquency arguing that the City
has obligation to pay him of the property he owned but now used by the city government for
public use. Can setting off take effect between a citizen and the government? (Francia vs. IAC)

Answer:
General Rule: Taxes are not subject to set‐off or legal compensation. The government and the
taxpayer are not creditors and debtors or each other. Obligations in the nature of debts are due
to the government in its corporate capacity, while taxes are due to the government in its
sovereign capacity (Philex Mining Corp. vs CIR, 294 SCRA 687; Republic vs Mambulao Lumber
Co., 6 SCRA 622)
Exception: Where both the claims of the government and the taxpayer against each other have
already become due and demandable as well as fully liquated. (see Domingo vs Garlitos,
L18904, June 29, 1963)
In Domingo v. Garlitos, the claim of the estate against the Government has been recognized
and an amount has already been appropriated for the purpose by a corresponding law. Under
the above circumstances, both the claim of the Government for inheritance taxes and the claim
of the intestate for services rendered have already become overdue and demandable is well as
fully liquidated.
Set-Off – A mode of extinguishing an obligation when two persons, in their own right, are
creditors and debtors of each other.
Question # 16
What is International Judicial Double Taxation.
Answer:
The imposition of comparable taxes in two or more states on the same taxpayer in respect of
the same subject matter and for identical grounds.
Double taxation usually takes place when a person is a resident of a contracting state and
derives income from or owns capital in, the other contracting state and both states impose tax
on that income or capital. (CIR vs. SC Johnson and Son, Inc. et al)
This is an indirect double taxation and therefore allowed.
Question # 17
Coca-Cola was subjected to two (2) types of taxes. Was it allowed? (City of Manila vs. Coca-
Cola)

Answer:
the Court finds that there is indeed double taxation if respondent is subjected to the taxes under
both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
same subject matter the privilege of doing business in the City of Manila; (2) for the same
purpose to make persons conducting business within the City of Manila contribute to city
revenues; (3) by the same taxing authority petitioner City of Manila; (4) within the same taxing
jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods
per calendar year; and (6) of the same kind or character a local business tax imposed on gross
sales or receipts of the business.
Question # 18
Can someone be imprisoned for non-payment of tax? How about non-payment of poll tax?
Answer:
Non-imprisonment for non-payment of poll tax

a. Basis: Sec. 20 Art. III. “No person shall be imprisoned for debt or non‐payment of poll tax.”
b. Important Points to Consider:
1. The only penalty for delinquency in payment is the payment of surcharge in the form of
interest at the rate of 24% per annum which shall be added to the unpaid amount from due
date until it is paid. (Sec. 161, LGC)
2. The prohibition is against “imprisonment” for “non‐payment of poll tax”.
Thus, a person is subject to imprisonment for violation of the community tax law other than for
non‐payment of the tax and for non‐payment of other taxes as prescribed by law.
N.B GENERAL RULE-A person shall be imprisoned for non-payment of tax, EXCEPT poll tax.
Question # 19
Is there a substantial distinction between purely compensation earner and a business and
professional income earner to warrant different tax rates? (Sison vs. Ancheta)
Answer:

Yes. The substantial distinction lies when the purely compensation earner cannot deduct their
operating expenses while the business and professional income earner can deduct their
overhead expenses from their income.
The Supreme Court ruled that the schedular income tax which imposes graduated taxes of 0%
to 35% without deductions on compensation income of individuals and a rate scheme of 5% to
60% on business and other income with deductions does not violate the rule on equal
protection since there is no infirmity if classifications are based on substantial distinctions.
Question # 20
EPIRA Law. Test of Valid Delegation. Taxation or Police Power? (Gerochi vs. Department of
Energy)
Answer:
If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally
raised does not make the imposition a tax. From the Declaration pf Policy of EPIRA (Section 2),
it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise
of the State's police power. Public welfare is surely promoted.
Question # 21
CIR vs. SC Johnsons Case. (Tax Treaty)
Answer:
MOST FAVORED NATION(from wiki) -The term means the country which is the recipient of this
treatment must nominally receive equal trade advantages as the "most favoured nation" by the
country granting such treatment. (Trade advantages include low tariffs or high import quotas.)
In effect, a country that has been accorded MFN status may not be treated less advantageously
than any other country with MFN status by the promising country. There is a debate in legal
circles whether MFN clauses in bilateral investment treaties include only substantive rules or
also procedural protections.
PURPOSE-(from the case)The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has been or may be granted to
the most favored among other countries. The most favored nation clause is intended to
establish the principle of equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded by either party to those
of the most favored nation.
NOTE: si SC Johnson ni reclamo kay ang RP-Germany treaty mas naa advantage than RP-US
treaty. Ana siya nga violation na sa MOST FAVORED NATION mas gipaboran ang Germany.(Note
rani para makasabot.)
RULING OF THE COURT: We accordingly agree with petitioner that since the RP-US Tax Treaty
does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there
is no payment of taxes on royalties under similar circumstances.
Note: in short niana ang court nga sayup si SC Johnson, ang Germany naghatag man ug credit
nga 20 percent, niya ang US wala man gahatag ana bi so dili ka pwede muclaim ug 10 percent,
25 imuha kay wala man kay credit. Alkansi ang negosyo.
Question # 22
What is Enrolled Bill Doctrine.
Answer:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the
Senate President and the certification of the Secretaries of both Houses of Congress that it was
passed are conclusive of its due enactment.
Question # 23
Whether or not the classification freeze provision is valid?
Answer:
Is valid as the Classification freeze provision uniformly applies to all newly introduced brands in
the market, whether imported or locally manufactured.

Question # 24
What is moot and academic rule or the mootness doctrine?
Answer:
A moot case is “one that ceases to present a justiciable controversy by virtue of supervening
events, so that a declaration thereon would be of no practical use or value.” “[A]n action is
considered ‘moot’ when it no longer presents a justiciable controversy because the issues
involved have become academic or dead[,] or when the matter in dispute has already been
resolved and hence, one is not entitled to judicial intervention unless the issue is likely to be
raised again between the parties x x x. Simply stated, there is nothing for the x x x court to
resolve as [its] determination x x x has been overtaken by subsequent events.”
Exceptions to the Mootness Doctrine
(1) the “capable of repetition yet evading review exception"; and

(2) the “collateral consequences
exception
Question # 25
Kailangan baa ang TTRA (Tax Treaty Relief Application) to avail lower tax rates granted by tax
treatise?
Answer:
Dili na kailangan ang prior approval of BIR and TTRA. You will just have to be assessed. Apply
here pacta sunt servanda principle in international law. 1
Question # 26
Mode of tax exemption:
Answer:
1. Execution of Tax Agreement with a foreign States
1
Deutsche Bank of AG Manila Branch vs. CIR
Taxation 1 Midterm Exam Pointers:
Question # 27
In Osmena vs. Orbos, the controversy was about the Oil Petroleum Special Fund (OPSF)
Answer:
OPSF – a Special Fund created to assist the stabilization of oil prices. Kung nay mahitabo,
gamiton. Apan kung di mahurot unsaon man?
Mao nit ang gi-question ni Osmena. What will happen to the excess?
Re-classify as trust liability account. Not to be returned to the General Fund . Art. 6 Sec. 29
provides that money for special fund, excess should be returned to the General Fund.
Main issue: naa bay violation?
Based on the E.O. instead of returning it to the General Fund it will be invested in the securities.
Court says: No Violation. OPSF although in the form of taxation, actually it was an exercise of
police power, that is to assist the stabilization of oil prices.
Issue on the undue delegation of power to tax?
Provision conferring authority to Energy Regulatory Board(ERB)
No undue delegation being an exercise of police power. The law is complete in itself and there
is sufficiency of standard.
Question # 28
What is Tax Amnesty ?
Answer:
A Tax Amnesty is a general pardon to taxpayers or intentional overlooking by the State of it

authority to impose penalties on persons otherwise guilty of evasion or violation of revenue or
tax law.

Note: Only Congress could grant tax amnesties.
How about the President? Under the 1987 Constitution, there could be no tax amnesty
granted by the President of the Philippines because the same is in the nature of a tax
exemption which could be granted only by a concurrence of a majority of all the members of
Congress.
The purpose of tax amnesty is to give tax evaders who wish to relent and are willing to reform a
chance to do so and thereby start with a clean slate.
Tax amnesty is strictly interpreted against taxpayer and liberally in favor of the taxing authority.
Question # 29
What is Tax Exemption?
Answer:
is the act of the State in divesting itself of its prerogative to collect taxes upon certain subject
and object of taxation.
Question # 30
Tax Amnesty vs. Tax Exemption?
Answer:
Tax Amnesty is immunity from all criminal, civil and administrative liabilities arising from
nonpayment of taxes.
Tax Exemption is an immunity from civil liability only.
Tax Amnesty applies only to past tax periods, hence of retroactive application.
Tax Exemption has prospective application.
Question # 31
Doctrine of Equitable Recoupment?
Answer:
Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred
by prescription, a tax presently being assessed against a taxpayer may be recouped or set-off
against the tax whose refund is now barred by prescription.
Doctrine of equitable recoupment not followed in the Philippines.
Question # 32
What is Tax Avoidance?
Answer:
Also Tax Minimization or Tax Planning. Is a tax saving device within the means sanctioned by
law.
Example: Donating portion of property to a non-stock, non-profit educational institution whose

income and assets are actually, directly and exclusively used for educational purposes.
(Qualified for Tax Exemption under
1. Article XIV , Sec. 4(3) of the Constitution

2. Sec 30(h) of the Tax Code.
Question # 33
What is Tax Evasion?
Answer:
Also Tax Dodging. Connotes fraud through the use of pretenses and forbidden devices to lessen
or defeat taxes.
Example in Toda case. Toda sold a Corporate Property to a natural person Altonaga (100M)
then on the same day sold the same property to another corporation Royal Match (200M). The
sale from Altonaga to Royal Match would subject the income only to 6% (5% at that time)
individual capital gains tax, and not on the 35% (now 30%) corporate income tax.
Question # 34
What are Impositions under the Police Power and not under the power of Taxation:
Answer:
1. Regulation of non-useful occupations- License Fees. (Cu-Unjieng v. Palstone)

2. The Sugar Adjustment Act. (Lutz vs. Araneta)
3. The Philsugin fund, an imposition on sugar, to raise funds to conduct research and
improvement.
4. Margin Fees paid on the branch profit remittances.
5. Establisment of Oil Price Stabilization Fund (OPSF)
6. The imposition under Section 40(g) of Public Service Act
Question # 35
What are License Fees?
Answer:
Fees collected as impositions for the regulation, administration and control of non-useful
occupations.
Compared to Tax, Licence Fees are imposition under the Police Power of the State and is
limited in amount.
Compared to Assessment Fees – Only those owners of properties who benefited on the
improvement of the property will be subjected to the special assessments.
Compared to Debt – Debt is based on contract.
Question # 36
As a General Rule, Tax exemption should be construed strictly against the taxpayer.
Answer:
Exception:
When the law expressly provide the exemption to NAPOCOR, thus there is no need for
NAPOCOR to prove its exemption contrary to the rule.
Rule on Strictissimi Juris will not apply.
Question # 37
Characteristics of Taxing Power?
Answer:
Comprehensive – Unlimited – Plenary – Supreme (CUPS)
Question # 38
Would a violation of the principles of a sound tax system invalidate a tax law.
Answer:
As a General Rule, No. Violation of the principles of a sound tax system will not invalidate a tax
law. The principles of a sound tax system are just mere guidelines.
The exception, however, is when there is violation of the principle on theoretical justice. Such
will invalidate the tax law as there will be a violation on the principle on progressivity. 2
Question # 39
Is double taxation prohibited under the 1987 Constitution?
Answer:
No. Double taxation is not specially prohibited in the Philippine Constitution.
However, where there is direct duplicate taxation, then there may be violation of the
constitutional precepts of equal protection and uniformity in taxation.
Question # 40
When there will be double taxation in a strict sense?
Answer:
Double taxation in a strict sense is a direct double taxation which has the following elements:
1. The same
a) Object or property is taxed twice;
b) By the same taxing authority;
c) For the same taxing purpose;
d) During the same period;
2. Taxing all the object or property within the same territory for the first time without
taxing all of them for the second time.
Direct Double Taxation (Not Allowed)
2
from the discussion of Atty. Yu
A defense against the imposition of taxes.
Indirect Double Taxation or Double Taxation in its broad sense. (Allowed)
Not a defense against the imposition of taxes.
Question # 41
Whether or not a person has a locus standi in a taxpayer suit even if he is not a party to the
contract in a government’s feeding program. (Direct Injury Test- Planter Products, Inc. vs.
Fertiphil)
Answer:
As a General Rule, a party has no locus standi if he is not a party to the contract.
Exceptions:
1. Taxpayer suit (using Direct injury test
2. Case of Transcendental importance
3. Class Suit
Direct injury test to determine locus standi was held that a person who impugns the validity of
a statute must have a personal and substantial interest in the case such that he has sustained,
or will sustain direct injury as a result. A person has locus standi when it suffered direct injury.
Question # 42
Grounds when a taxpayer’s suit was given due course by the court.
Answer:
REQUISITES FOR A TAXPAYERS PETITION –TAXPAYER SUIT (MPP)
1) That money is being extracted and spent in violation of specific constitutional protections.
2) That public money is being deflected to any improper purpose.
3) That the petitioner seeks to restrain respondents from wasting public funds through the
enforcement of an invalid or unconstitutional law.
Question: Is it necessary for a person to attach a proof of being a tax payer in a tax payer suit?
Answer: No. It is not necessary. Even a tax evader can file a tax payer suit as long as he can
show illegal disbursement of public funds.
Question # 43
Are Sections 4,5 and 6 of R.A. 9337, amending Sections 106, 107 and 108, respectively, of NIRC
giving the President the stand-bye authority to raise the VAT rate from 10% to 12% when
certain condition is met, constitute undue delegation of the legislative power to tax? (ABAKADA
GURO Case)
Answer:
No. The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. In this case, it is not a delegation of legislative power BUT
a delegation of ascertainment of facts upon which enforcement and administration of the
increased rate under the law is contingent.
The Supreme Court sustained the constitutionality of RA 9337 authorizing the President to
increase the VAT rate from 10% to 12% effective January 1, 2006 upon recommendation of the
Secretary of Finance on the existence of either of the two conditions.
It ruled that the law leaves the entire operation or non operation of the 12% rate upon factual
matters outside of the control of the executive. No discretion would be exercised by the
President.
In making his recommendation to the President on the existence of either or the two
conditions, the Secretary of Finance is not acting as the alter ego of the President or even her
subordinate. In such instance, he is not subject to the power of control and direction of the
President. He is acting as the agent of the legislative department, to determine and declare the
event upon which its expressed will is take effect.
Question # 44

Distinguish the duty of a public officer owing to the public collectively from the duty owing to
particular individuals. 3
Answer:
It is a fundamental principle in the law of public officers that a duty owing to the public in
general cannot give rise to a liability in favor of particular individuals.[1] The failure to perform
a public duty can constitute an individual wrong only when a person can show that, in the
public duty, a duty to himself as an individual is also involved, and that he has suffered a special
and peculiar injury by reason of its improper performance or non-performance.
In the instant case, what is involved is a public officers duty owing to the public in general. The
petitioner, as the then Commissioner of the Bureau of Internal Revenue, is being taken to task
for Revenue Memorandum Circular (RMC) No. 37-93 which she issued without the requisite
notice, hearing and publication, and which, in Commissioner of Internal Revenue v. Court of
Appeals,[24] we declared as having fallen short of a valid and effective administrative issuance.
[25] A public officer, such as the petitioner, vested with quasi-legislative or rule-making power,
owes a duty to the public to promulgate rules which are compliant with the requirements of
valid administrative regulations. But it is a duty owed not to the respondent alone, but to the
entire body politic who would be affected, directly or indirectly, by the administrative rule.
Note: Chato was not held liable because there was no bad faith.
Question # 45
Was the tax impose on the manufacture of sugar by sugar centrals and another tax on owners
of land planted with sugar case constitutionally valid? How about if the same tax be imposed in
the present condition? (Lutz vs. Araneta – Sugar Adjustment Act)
Answer:
Yes. The tax was for public purpose, that is for the rehabilitation of the sugar industry which
was down at that time. Taxation may be made the implement of the state’s police power.
No. The case of the Sugar Adjustment Act is an exceptional case, which might not be decided in
the same manner today.
3
Vinzons-Chato vs. Fortune Tobacco Corp
Question # 46
What is the Substantive Charity Test.
Answer: (high probability)
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.
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, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.4
Question # 47
Real property tax exemptions Rules.
Answer: (high probability)
Basis: Sec. 28(3) Art. VI. “Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non‐profit cemeteries, and all lands, building, and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.”
Question # 48
Instances where the Commissioner of Internal Revenue is authorized to inquire into or examine
the bank deposit accounts of taxpayers.
Answer:
General Rule. No. under the Bank Secrecy Law.
Exception: Commissioners power to inquire bank deposits under Sec. 6 (F)
(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. – Notwithstanding
any contrary provision of Republic Act No. 1405 and other general or special laws, the
Commissioner is hereby authorized to inquire into the bank deposits of:
4
Lung Center of the Philippines vs. Quezon City, G.R. No. 144104, June 29, 2004.
(1) a decedent to determine his gross estate; and
(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204
(A) (2) of this Code by reason of financial incapacity to pay his tax liability.
(3) In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under
Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute
the authority of the Commissioner to inquire into the bank deposits of the taxpayer.
(4) (RA 10021) Exchange of information on tax matters upon the request of foreign taxing
authority provided that it is pursuant to a treaty by which the Philippines ratified the same.
The term 'foreign tax authority', as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of."
Note: In case of compromise:
1. Financial incapacity to pay;
need to waive bank secrecy law.
Case: BIR examiner conduct an examination on a taxpayer. Conducted surveillance. Then came
into a conclusion that there is a chance that a taxpayer is committing tax evasion. Then he
requested to the Commissioner to conduct inquiry to obtain information saying that it will help
the government. The reason is mere suspicion.
Question: Puede ba?
Answer: Dili. Bank Secrecy Law. Not under the exceptions.
Case: Taxpayer declared only 100K income monthly but in fact receive daily income of 50 K.
Question: Puede ba i-surveillance?
Answer: Yes. Commissioner’s power to obtain information information for the purpose of
ascertaining the correctness of return or the making of one to determine the tax liability of a
person.. (Sec. 5 of NIRC).
Question # 49

Can a tax law be applied retroactively if favorable to a taxpayer?
Answer:
No. Tax laws do not have any retroactive application even if favorable to the taxpayer because
tax laws are not considered as part of criminal law.
Revenue laws are substantive laws and their application must not be equated with remedial
laws.
Tax laws do not have retroactive application. To give retroactive application would violate the
due process rights of the taxpayer who should know his obligations to be able to comply with
them. Furthermore, the public purpose principle concept is likewise infringed. The public need
must exist at the time of the enactment of the tax measure.
Thus, the previously assessed and demanded tax may still be collected because the repeal is to
be construed as an exemption that must be strictly construed. After all, tax laws do not have
any retroactive application even if favorable to the taxpayer because tax laws are not
considered as part of criminal law.
Question # 50 (past midterm)

What is income?
Answer:
Broad sense – All wealth which flows into the hands of the taxpayer other than as a mere
return of capital. 5
Income is the revenue a business earns from selling its goods and services or the money an
individual receives in compensation for his or her labor.
Give the requisites that must be present before an income to be taxable.
Answer:
1. There is income, gain or profit (P-I-G)

2. The income, gain or profit is received or realized6 during the taxable year
5
Conwi vs. CTA, 213 SCRA 83 (1992)
6
Realization test to determine income – Income must arise from close end transaction. Temporary gain without sale is a mere unrealized income.
(Realized)
3. The income, gain or profit has been received either actually or constructively and
such income gain or profit is not exempt from income tax. (Recognized)
Question # 52
“A” has a property in Mandaue worth 2M. After 2 years, it was appraised into 5M. It
was later sold to 10M.
What is the income and is the capital?
Answer:
The income is 8M and the capital is 2M not 5M because the latter is a mere temporary
gain, thus without the sale is just an unrealized income.
Question # 53
Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in Makati
City in 1970 at a consideration of P1 Million. In 2011, the land, which remained
undeveloped and idle had a fair market value of P20 Million. Mr. Antonio Ayala, another
Filipino citizen, is very much interested in the property and he offered to buy the same
for P20 Million. The Assessor of Makati City re-assessed in 2011 the property at P10
Million. (B) Is Mr. Castillo liable for income tax in 2011 based on the offer to buy by Mr.
Ayala?
Explain your answer.
Answer:
No. Mr. Castillo is not liable for income tax in 2011 because no income is realized by him
during that year. Tax liability for income tax attaches only if there is a gain realized
resulting from a closed and complete transaction 7.
Question # 54(past midterm)
7
Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918
Sources of Tax under Sec. 23 of the 1997 NIRC.
Answer:
NIRC SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise
provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.
Non-resident aliens not engaged in trade or business and non-resident foreign corporations are
taxable in their gross income while the resident and non-resident citizens, resident alien, non-
resident alien engaged in trade or business, domestic and resident foreign corporations are
taxable on their net income.
Mr. Tanaka is a non-resident alien engaged in business in the Philippines being a general
manager of Yamashin Philippines a subsidiary of Yamashin Japan. He received compensation
income from Yamashin Japan in yen and also received compensation income from Yamashin
Philippines. He received both investment income and passive income. How would his tax
liability be computed?
Answer:

For a non-resident alien engage in business in the Philippines like Mr. Tanaka, he shall be
subject to an income tax in the same manner as an individual citizen and a resident alien
individual, on a taxable income received from all sources within the Philippines, which is based
on his net income. Situs of Tax on service income is situs of service. Passive income is subject
to a final withholding tax at the rate of 20% on the total amount.
Note:
NON-RESIDENT ALIENS: Subject to tax on taxable income received from all sources within the Philippines.
a. NRAETB: A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days during any calendar year. Tax is based on net income. 8
b. NRANETB: A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of not more than one hundred eighty (180) days during any calendar year. Tax is based on Gross income
with 25% tax rate.
Income tax applies only when the income, profit or gain is realized or received 9. Are there
instances when a property is tax even if the profit or gain is not yet realized or received?
Answer:
Yes. The General Rule provides that income tax applies only when the income, profit or gain is
realized or received. 10 There are two instances, however, when the rule provides and
exemption:
One: When real property classified as a capital asset is sold by a taxpayer, in which case, the
law presumes that there is a capital gain realized from the sale, and the basis for computing the
6% capital gains tax is the gross selling price or fair market value as determined by the
Commissioner, whichever is higher11. (Presumptive Capital Gains Principle)
Two: When listed shares of stocks of a domestic corporation are traded in a local stock
exchange, the law imposes the ½ of 1% stock transaction tax, which is based on the gross selling
price without deducting cost.

8
Under TRAIN, Interest income from depository bank of RC and RA is increased from 7.5 % to 15 % . Except NRA. Which retains the
20 % under Sec. 25 (2)
9
(Sec. 39(B), NIRC).
10
Id.
11
Sec. 24(D)(1), NIRC
Melissa inherited from her father a 300-square-meter lot. At the time of her father's death on
March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the
cost of the medical expenses of her sick son, she sold the lot for P600,000.00, on cash basis. The
prevailing market value of the property at the time of the sale was P3,000.00 per square meter.
Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not,
why not?
Answer:
Yes.
The capital gains tax is 6% of the fair market value of the real property amounting to P
900,000.00. The Tax due is the 6 % of the value between the selling price (P600,000.00) and
fair market value of the real property (P900,000.00), whichever is higher. In this case, the fair
market value is higher than the selling price, therefore the tax base is P 900,000.00. The tax
amount is P54,000.00.
The capital gains tax is due on the sale if a real property classified as a capital asset (Sec 24(d)
(1), NIRC)
Can the sale of property be exempt from Capital Gains Tax on the ground that the value of the
property drop from its original fair market value and thus, instead of gain the seller incurred a
loss in the sale of the property ?
Answer:
No. the sale of the property is subject to capital gains tax despite the drop in the value of the
property. Under the Presumptive Gain Principle, Capital Gain Tax is determined from the
selling price, fair market value or zonal value, whichever is higher regardless whether the
disposition earned an income or incurred a loss. 12
Question # 59-1:
XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal

Revenue (BIR) ruling in June 2005 that exempts from tax the importation of some of its raw
materials. The ruling is of first impression, which means the interpretations made by the
12
Atty. Yu discussion.
Commissioner of Internal Revenue is one without established precedents. Subsequently,
however, the BIR issued another ruling which in effect would subject to tax such kind of
importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which
means that all the importations done before the issuance of the second ruling could be subject
to tax.
Can the importations before the issuance of the new BIR Ruling subject to tax?
Answer:
No. BIR Ruling cannot be given retroactive effect if its retroactive application is prejudicial to
the taxpayer who acted in good faith such as in this partcular case.
What are a BIR rulings?
Answer:
BIR Rulings are interpretation of tax laws and regulations issued by the BIR. They are usually
rendered upon the request of taxpayers to clarify or interpret certain provision of tax law or
revenue regulations or other issuances of the BIR.
What are the types of BIR Rulings?
Answer:
1. BIR Ruling of First Impression: These refer to the rulings, opinions and interpretations of the
BIR Commissioner with respect to the provisions of the Tax Code and other tax laws without
established precedent, and which are issued in response to a specific request for a ruling or an
opinion filed by a taxpayer with the BIR.
It cannot be delegated
The Commissioner cannot delegate to any of his subordinate officials the power to issue rulings
of first impression or to revoke, reverse or modify any existing ruling of the BIR
2. BIR Ruling with Established Precedents: These refer to mere reiteration of previous rulings,
opinions and interpretations of the Commissioner, as delegated to duly authorized internal

revenue officers that are issued in response to a specific request for ruling filed by a taxpayer
with the BIR.
Can a BIR ruling be applied retroactively, considering that tax exemptions should be interpreted
strictly against the tax payer?
Answer:
No. A BIR ruling cannot be given retroactive effect if its retroactive application is prejudicial to
the taxpayer and the taxpayer acted in good faith. 13
However, any revocation, modification or reversal of any of the rules or any of the BIR rulings or
circulars may apply (1) where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal Revenue; (2) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith. 14
Question # 62
What are the power of the BIR commissioner that cannot be delegated?
Answer:
1. The power to recommend the promulgation of rules and regulations by the Secretary of
Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing
ruling of the Bureau.
3. The power to compromise or abate tax liability.
4. The power to assign or reassign internal revenue officers to establishments where articles
to excise tax are produced.
Mr. Tan, a resident alien, has sold his shares of stock in a domestic corporation, not traded in
the stock exchange. The purchase price was P300,000.00 and the selling price is P700,000.00.
Compute his net capital gains and what is the tax rate applicable for the net capital gains
realized during the taxable year?
Answer:
13
Section 246, NIRC
14
CIR vs. Philhealth Care Providers, G.R. No. 168129, April 24, 2007
The net capital gains is the difference between the selling price of P700,000.00 and the cost of
P300,000.00, which is P400,000.00. The applicable tax rate will be 5% tax for the first
P100,000.00 and the balance of P300,000.00 will be subject to the tax rate of 10%. 15 Under
the present TRAIN Law, the net capital gain of P400,000.00 is subject to the flat rate of 15%.
Question # 64
Mr. Tansan, a non-resident alien not engaged in trade or business in the Philippines has sold
shares of stocks in a domestic corporation and also sold real property in the Philippines. What
are the applicable tax rates?
Answer:
Capital gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall
be subject to the income tax prescribed under subsections (c) and (d) of Section 24, NIRC.
Section 24 (C), provides for the tax rates 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, 5% for the first 100,00 and 10% on any amount in excess of P100,000.00.
Sec. 24(D) provides for the 6% capital gains tax based on the selling price or current fair market
value, whichever is higher imposed upon the capital gains presumed to have been realized in
the sale, exchange, or disposition of real property located in the Philippines. Under the TRAIN
Law, the net capital gains from the sales of share of stock of a domestic corporation is now
subject to a flat rate of 15%.
What are the conditions in order that the capital gains presumed to have been realized from a
sale of real property may not be subject to capital gains tax?
Answer:
1. The gain have been realized from the sale or disposition of the principal residence by
natural person
2. The proceeds of which is fully utilized in acquiring or constructing a new principal residence
within 18 calendar months from the date of sale or disposition.
3. The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired.
15
Sec. 24(C), NIRC
4. The Commissioner shall have been duly notified by the taxpayer within 30 days from the
date of sale or disposition through a prescribed return of his intention to avail of the tax
exemption mentioned.
5. The said tax exemption can only be availed of once every 10 years.
6. If no full utilization of the proceeds of sale or disposition, the portion of the gain presumed
to have been realized from the sale or disposition shall be subject to capital gains tax.
Question # 66
Enumerate four (4) powers of the Commissioner of Internal Revenue pursuant to Sections 4, 5,
and 6 of the National Internal Revenue Code of 1997.
Answer:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Quasi-
Legislative Power) –
Important note: reviews of the Secretary of Finance pursuant to Sec. 4 of the NIRC are
appealable to the Court of Tax Appeals. (Philamlife vs. Secretary of Finance, G.R. No. 210987,
November 24, 2014)
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
(Quasi-Judicial Power)
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take
Testimony of Persons. – (Party did not file tax return. If the party is not cooperative, report,
subpoena the 3rd persons, patients for doctors and hospitals)
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. – (e.g BIR requires notarized lease of
tenants)
In a sale of shares of stock of a domestic corporation, is the status of a taxpayer considered?

What will be the tax base and the tax rate?

Answer:
As a General Rule, in computing for the tax of an individual, the status of the tax payer shall be
considered first. The exception, however, when he kind of taxpayer in the transaction is not
important to be ascertained
1. Where the transaction involves the sale of shares of stocks of a domestic corporation,16
whether listed and traded in a local stock exchange, or unlisted or listed but not traded17 in a
local stock exchange. In this case, it does not matter who the seller of the shares is because
either the transaction is subject to the 1% of stock transaction tax or 5%/10% capital gains tax
on net capital gain, whether the seller is an individual, citizen or alien, or a corporation,
domestic or foreign; and
2. Where the real property sold is a capital asset located in the Philippines, that is subject to the
6% capital gains tax.
Note:
 In the sale of shares of stock, tax is based on the net gain. Zero net gain, no tax base.
Exception: When listed shares of stock of a domestic corporation are traded in a local
stock exchange, the law imposes the 1/2 of 1% stock transaction tax, which is based on
the gross selling price without deducting cost.
 In the sale of real property, tax is based on the price (SP, FM), whichever is higher. Cost
is immaterial. Loss or negative, immaterial because tax is based on the price. 18
Illustration # 1
Sales of shares of stock of a domestic corporation:
Selling Price – P 700,000.00 Net Capital Gains: Before TRAIN Law Under TRAIN
Cost - P 300,000.00 700,000.00 less First 100,000.00 x 5% 15% x
FMV/ZV - P500,000.00 300,000.00 bal. 300,000.00 x 10% Net Capital Gain
400,000.00
Illustration # 2
Sale of real property in the Philippines:
16
Reason: Because in the sale of shares of stock , it is an exemption to the doctrine of Mobilia Sequuntur Personam, when the
property has already acquired situs in another jurisdiction. Thus, the situs of taxation of the sale of shares of stock for purposes of
taxation is the state where it is permanently kept or the place of the incorporation which issued the shares.
17
Listed share may also be sold outside the stock exchange subject to capital gains tax.
18
Presumptive Gain Principle.
Selling Price – 5M FMV (BIR) of 5.5 M is higher
Cost 7M Tax based is 5.5 M and Tax rate is 6 %
FMV (BIR)19 - 5.5M Cost is immaterial
FMV (Assessor) 5M
What are the conditions in order that the capital gains presumed to have been realized from a
sale of a principal residence may not be subject to capital gains tax?
Answer:
1. The gain have been realized from the sale or disposition of the principal residence by
natural person
2. The proceeds of which is fully utilized in acquiring or constructing a new principal

residence within 18 calendar months from the date of sale or disposition.
3. The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired.
4. The Commissioner shall have been duly notified by the taxpayer within 30 days from the
date of sale or disposition through a prescribed return of his intention to avail of the tax
exemption mentioned.
5. The said tax exemption can only be availed of once every 10 years.
6. Proportionate tax if the proceeds of the sale or disposition is not fully utilized.
Question # 69 (For exam)
When can be a non-profit, non-stock educational institution be exempt from tax on its
canteen, bookstore or dormitory? (De La Salle Case)
Answer:
Aside from the exemptions provide under the Constitution stating that "All revenues and assets
of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties, DOF 137-87 provides that:
19
Zonal Value
Revenues derived from and assets used in the operation of cafeterias/canteens, dormitories,
bookstores are exempt from taxation provided
1. They are operated by the educational institution as ancillary activities; and
2. The same are located within the school premises.
Additional note:
Non-stock, non-profit educational institution shall, however, be subject to internal revenue

taxes on income from trade, business or other activity the conduct of which is not related to the
exercise of performance by such educational institution of its educational purpose or function.
Revenue Memorandum Cicular No. 76-2003
Non-stock, non-profit corporations, however, are subject to the corresponding internal revenue
taxes imposed under the Tax Code of 1997 on their income derived from any of their
properties, real or personal, or any activity conducted for profit regardless of the disposition
thereof (i.e. rental payment from their building/premises), which income should be returned
for taxation.
What are the four requisites that must be complied before the income or profit acquired from
unrelated transaction of non-stock and non- profit charitable institution corporation shall be
exempt from tax?
Answer:
Section 30(E)20 of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
20
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income
taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section
30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the institution "actually, directly and exclusively" use the property for a
charitable purpose.
Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other constitutive documents. 21
Question # 71
A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to

provide medical services to the poor. The hospital also accepted paying patients although none
of its income accrued to any private individual; all income were plowed back for the hospital's
use and not more than 30% of its funds were used for administrative purposes. Is the hospital
subject to tax on its income? If it is, at what rate?
Answer:
Yes. Although a non-stock non-profit hospital organized for charitable purposes, is generally
exempt from income tax, it becomes taxable on income derived from activities conducted for
profit. Services rendered to paying patients are considered activities conducted for profit which
are subject to income tax, regardless of the disposition of said income. The hospital is subject to
income tax of 10% of its net. 22 income derived from the paying patients considering that the
income earned appears to be derived solely from hospital-related activities
Section 30(E)23 of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person. (Ibalik sa operations dili ihatag sa officers)
Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other constitutive documents.
21
CIR vs. St. Luke’s Medical Center, G.R. No. 195909, September 26, 2012
22
CIR v. St. Luke’s Medical Center, Inc., G.R. Nos. 195909 & 195960, Sept 26, 2012.
23
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income
taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section
30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the institution "actually, directly and exclusively" use the property for a
charitable purpose.
In this case, St. Luke did not comply with the requirement # 3 on “Operated exclusively for
charitable purposes” because it received from paying patients. The tax rate is based on Section
27 (B) of NIRC for hospital which are nonprofit that is 10 % on their taxable income.
Discussion:
It be noted, however, that in St. Luke’s case, the 10 % is not permanent, since the court says
that based on Section 27 (B), if the gross income form unrelated trade , business or other
activity exceeds 50% of the total gross income, the tax will be 30 % on the entire taxable
income.
SC, however, allowed the 10 % because 47% of the income comes from paying patients, and if it
exceeds its under related trade, thus the 10 % still applies.
Question # 72 (high probability)
Compare Section 27(B) and Section (30) last paragraph of the NIRC.
Answer:
Under Section 27 (B) of the NIRC, The entire income from proprietary educational institutions
and hospital which are nonprofit may be subject to tax of regular rate 30% instead of 10 % if
gross income from unrelated activity exceeds 50 % of the gross income.
Under Section 30 last paragraph of the NIRC, only the income from activities conducted for
profit is subject to tax of 30 %.
State the Constitutional provisions granting exemptions.
Answer:
a) Art. VI, Sec. 28(3), 1987 Constitution provides:

"Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings and improvements actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation."
b) Art. XIV, Sec. 4(3), 1987 Constitution provides: All revenues and assets of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purposes
shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by law.
Note:
1. For the revenues and assets of non-stock, non-profit educational institutions, look at the
use.
Exemption is granted only if used actually, directly and exclusively for educational purposes.
2. If proprietary, automatic use of Sec. 30 of NIRC last Paragraph:
“Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this code.
Sec. 30 of NIR last Paragraph is not applicable for non-stock, non-profit because the
Constitution does not qualify, thus SC says it is unconstitutional on this part.
But Constitutional for application in proprietary educational institution.
Question # 74
What are the requisites for valid BIR rules and regulations?
Answer:
They are as follows:
1. Consistent and in harmony with law;

2. Reasonable;
3. Useful and necessary; and
4. Published in the Official Gazette, or a newspaper of
general circulation.
Question # 75
True or False. Explain your answer in not more than two (2) sentences. A law imposing a tax on
income of religious institutions derived from the sale of religious articles is valid.
Answer:
False. Congress can pass a law taxing income of religious institutions from its property or
activities used for profit but not for their income from exercise of religious activities. The
imposition of a tax on income of a religious institution from sale of religious articles is an
infringement of religious freedom which is not allowed under the fundamental law. 24
Question # 76
In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the property as
his and his family's principal residence. It is now year 2013 and he is thinking of selling the
property to buy a new one. He seeks your advice on how much income tax he would pay if he
sells the property. The total zonal value of the property isP5,000,000 and the fair market value
per the tax declaration is P2,500,000. He intends to sell it for P6,000,000. What material
considerations will you take into account in computing the income tax? Please explain the legal
relevance of each of these considerations.
Answer:
Since the planned sale involves a real property classified as a capital asset, the material
considerations to take into account to compute the income tax are:
1. The current fair market value of the property to be sold. The current fair market value is
the higher between the zonal value and the fair market value per tax declaration.
2. The gross selling price of the property. 3. Determination of the tax base which is the
higher between the gross selling price and the current fair market of the property. The
income tax is computed as 6% of the tax base which is in the nature of a final capital
gains tax. (Sec 24 (D)(1), NIRC). However, since the property to be sold is a principal
residence and the purpose is to buy a new one, I will advise Mr. Belen that the sale can
be exempt from 6% capital gains tax if he is willing to comply with the following
conditions:
a. He must utilize the proceeds of sale acquiring a new principal residence within 18
months from the date of disposition;
24
American Bible Society v. City of Manila, 101 Phil. 385 (1957)
b. He should notify the Commissioner of his intention to avail of the exemption within 30
days from date of sale;
c. He should open an escrow account with a bank and deposit the 6% capital gains tax due
on the sale. If he complies with the utilization requirement he will be entitled to get
back his deposit; otherwise, the deposit will be applied against the capital gains tax due.
(Sec 24 (D)(2), NIRC) Exchange of Real Property by an Individual and Domestic
Corporation
Question # 77
In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100,000.
This property has a current fair market value of P10 million in view of the construction of a
concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in
Laguna for a one-half hectare residential property located in Batangas, with a fair market value
of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase
and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. (B) Is
Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base
and rate? Explain
Answer:
Yes. Juan must pay final income tax of 6% of the gross selling price or the fair market value,
whichever is higher. 25
Question # 78
ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The property has
been classified as residential and with a zonal valuation of P1,000 per square meter. The capital
gains tax was paid based on the zonal value. The Revenue District Officer (RDO), however,
refused to issue the Certificate Authorizing Registration for the reason that based on his ocular
inspection the property should have a higher zonal valuation determined by the Commissioner
of Internal Revenue because the area is already a commercial area. Accordingly, the RDO
wanted to make a recomputation of the taxes due by using the fair market value appearing in a
nearby bank'‟s valuation list which is practically double the existing zonal value. The RDO also
wanted to assess a donor's tax on the difference between the selling price based on the zonal
value and the fair market value appearing in a nearby bank's valuation list.
(A) Does the RDO have the authority or discretion to unilaterally use the fair market value as
the basis for determining the capital gains tax and not the zonal value as determined by the
Commissioner of Internal Revenue? Reason briefly.
Answer:
25
Sec. 24[D1], NIRC; and RR No. 13-99
No. The RDO has no authority to use a fair market value other than that prescribed in the Tax
Code. The fair market value prescribed for the computation of any internal revenue tax shall be,
whichever is the higher of: (1) The fair market value as determined by the Commissioner
(referred to as zonal value); or (2) the fair market value as shown in the schedule of values of
the provincial and city assessors (FMV per tax declaration). (Section 6(E), NIRC). The use of the
fair market value appearing in a nearby bank’s valuation list, therefore, is not allowed for
purposes of computing internal revenue taxes.
(B) Should the difference in the supposed taxable value be legally subject to donor's tax?
Reason briefly.
No. The difference in the supposed taxable value cannot be legally subject to the don or’s tax,
because the use of a fair market value other than that prescribed by the Tax Code is not
allowed for computing any internal revenue tax. (Section 6(E), NIRC).
Question # 79
What are the features of the Philippine income tax law?
Answer:
The features of the Philippine income tax law are the following:
1. DIRECT TAX- Income tax is a direct tax because the tax burden is borne by the income
recipient upon whom the tax is imposed. It is a tax demanded from the very person
who, it is intended or desired, should pay it, while indirect tax is a tax demanded in the
first instance from one person in the expectation and intention that he can shift the
burden to someone else.
2. PROGRESSIVE TAX-Income tax is a progressive tax, since the tax base increases as the
tax rate increases. It is founded on the ability to pay principle13 and is consistent with
the Constitutional provision that "Congress shall evolve a progressive system of
taxation.
3. PRINCIPLES OF CITIZENSHIP, RESIDENCE and SOURCE-The Philippines has adopted the
most comprehensive system of imposing income tax by adopting the citizenship
principle, the residence principle, and the source principle.
4. SEMI-SCHEDULAR, SEMI-GLOBAL-The Philippines follows the semi-
schedular or semi-global system of income taxation.

5. AMERICAN ORIGIN- The Philippine income tax law is a law of American origin. Thus,
the authoritative decisions of the U.S. courts and officials charged with enforcing the
U.S. Internal Revenue Code have peculiar force and persuasive effect for the Philippines.
6. CIVIL- The Tax Code is classified as civil in nature and not a political law; hence, it is
enforced even during the enemy occupation (Hilado vs. Collector, 100 Phil. 288).
Although penalties are provided for violations of the Tax Code, it is not a penal law
(Lorenzo vs. Posadas, 64 Phil. 353).
Question # 80
State the general definition of gross income.
Answer:
Gross Income means all income derived from whatever source, including (but not limited to)
the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional
partnership.
Question # 81
Distinguish global system of taxation from scheduler system of taxation.
Answer:
A global system of taxation is one where the taxpayer is required to report all income earned
during a taxable period in one income tax return, which income shall be taxed under the same
rule of income taxation; whereas, schedular system of taxation requires a separate return for

each type of income and the tax is computed on a per return or per schedule basis. Schedular
system provides for different tax treatment of different types of income.
Question # 82
Is the interest on the promissory notes to be treated income from the Philippines considering
that all the elements of the main transactions, i.e., payments, execution of the contracts,
construction of vessels, were all done in Japan?
Answer:
The interest is considered income from the Philippines. Section 42 of R.A. 8424 provides that
the following items of gross income shall be treated as gross income from sources within the
Philippines.
1) Interest — interest derived from sources within the Philippines, and interest on bonds, notes,
or other interest bearing obligations of residents, corporate or otherwise; x x x The law does
not speak of the "activity" which gave rise to the obligation, but solely the residence of the
obligor.
Question # 83
What are the rules on the taxability of the capital gains from sale of real property?
Answer:
A) Individual taxpayers and estates and trusts.
A.1) IN GENERAL. A final tax of six percent (6%) based on the gross selling price or current fair
market value (zonal value) as determined in accordance with Section 6(e) of the Code,
whichever is HIGHER is hereby imposed on capital gains presumed to have been realized from
the sale, exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by individuals
including estates and trusts: Provided, that the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political subdivisions or agencies or
to government-owned or controlled corporations shall be determined either under Section
24(A) (5%-34%) or under this Subsection, at the option of the taxpayer. (Sec. 24[D])
Requisites before Capital Gains Tax (CGT) will apply:

1. Disposition (Sale, Exchange, Pacto de retro sale, conditional sales)
2. Real Asset – Real property
3. Capital Assets (If the case says, sale of real property used in trade or business “Ordinary
Assets”, automatically CGT will not apply)
4. Located in the Philippines ( If the case says, sale of real property in Japan by a resident
citizen, automatically CGT will not apply)
A.2) EXCEPTION. The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of which is fully utilized in acquiring
or constructing a new principal residence within eighteen (18) calendar months from the date of
sale or disposition,
shall be exempt from the capital gains tax imposed under this
Subsection:
Provided, that the historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired:
Provided further, that the Commissioner shall have been duly notified by the taxpayer within
thirty (30) days from the date of sale or disposition through a prescribed return of his intention
to avail of the tax exemption herein mentioned:
Provided, still further, that the said tax exemption can only be availed of once every ten (10)
years:
Provided finally, that if there is no full utilization of the proceeds of sale or disposition, the
portion of the gain presumed to have been realized from the sale or disposition, subject to
capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the
gross selling price in order to determine the taxable portion and the tax prescribed under
paragraph (1) of this Subsection shall be imposed thereon.
Define capital asset.

Answer:
Capital asset means property held by the taxpayer (whether or not connected with his trade or
business), but does not include:
a) stock in trade of the taxpayer or other property of a kind which would properly be included
in the inventory of the taxpayer;
b) property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business;
c) property used in the trade or business and subject to the allowance for depreciation; and
d) real property used in trade or business of the taxpayer.
Ms. X was offered in a mall to purchase a condominium unit located in Cebu in its pre-selling
stage. Ms. X then purchased the condominium unit from the developer and when it was
completed, had it rented by Mr. Y. Later Ms. X later sold the property.
1. Is the sale from the Developer to Ms. X subject to the 6 % Capital Gains Tax?
2. Is the sale by Ms. X subject to 6% Capital Gains Tax?
Answer:
1. No. The Condo unit is not a capital asset but an ordinary asset26being a property primarily
held for sale, thus, not subject to Capital Gains Tax. It is subject, however, to 6 % tax under
other tax provision but not under Capital Gains Tax.
2. No. The Condo unit is not a capital asset but an ordinary asset being a property used in
lease business, thus not subject to Capital Gains Tax. It is subject, however, to 6 % tax under
other tax provision but not under Capital Gains Tax.
Question # 85
ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-
resident foreign corporation based in the U.S. Under the agreement which the parties forged in
the U.S., XYZ granted ABC the right to use a computer system program and to avail of technical
know-how relative to such program. In consideration for such rights, ABC agreed to pay 5% of
the revenues it receives from customers who will use and apply the program in the Philippines.
Discuss the tax implication of the transaction.
Answer:
26
Ordinary Assets:
1. Stock in Trade/ Inventoriable assets - tock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer;
2. Ordinary property primarily held for sale - property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business;
3. Property used in business/ Depreciable - property used in the trade or business and subject to the allowance for
depreciation; and
4. Real Property Used in business - real property used in trade or business of the taxpayer.
The amount payable under the agreement is in the nature of royalty. The term royalty is broad
enough to include compensation for the use of an intellectual property and supply of technical
know-how as a means of enabling application or enjoyment of any such property or right (Sec
42(4), NIRC). The royalties paid to the non-resident U.S. corporation, equivalent to 5% of the
revenues derived by ABC for the use of the program in the Philippines, is subject to a 30% final
withholding tax, unless a lower tax rate is prescribed under an existing tax treaty. (Sec 28(B)(1),
NIRC). Foreign Corporate Tax;
Local Agent for a Foreign Airline.
Question # 86
Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It
is not licensed to do business in the Philippines. 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, Philippine Airlines (PAL), a Philippine
corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA
airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in
1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA
deficiency income taxes at the rate of 35% on its taxable income, finding that KIA's airline ticket
sales constituted income derived from sources within the Philippines. KIA filed a protest on the
ground that the P2,968,156.00 should be considered as income derived exclusively from
sources outside the Philippines since KIA only serviced passengers outside Philippine territory.
Is the position of KIA tenable? Reasons.
Answer:
No, KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in
the Philippines, through its agent PAL, is considered as income from within the Philippines,
subject to 35% tax based on its taxable income pursuant to Sec 25(a)(1) of the Tax Code of
1997. The transacting of business in the Philippines through its local sales agent, makes KIA a
resident foreign corporation despite the absence of landing rights, thus, it is taxable on income
derived within. The source of an income is the property, activity or service that produced the
income. In the instant case, it is the sale of tickets in the Philippines which is the activity that
produced the income. KIA’s income being derived from within is subject to Philippine income
tax.27
Note:The taxable year involved in the problem is 1997, hence, the suggested answer above
follows the applicable provision of the old Tax Code (National Internal Revenue Code of 1997)
then in effect and the prevailing jurisprudence on the matter. However, with the adoption of
the National Internal Revenue Code of 1997 (RA 8424) which took effect on January 1, 1998, it
is expected that the bar candidates have lost track of the change in the tax law which transpired
27
CIR v. British Overseas Airways Corporation, 149 SCRA 395, (1987)
more than a decade ago. For this reason, it is respectfully requested that an answer based on
the provisions of the New tax Code shall be given full credit. Accordingly, an answer framed in
his wise should also be considered as a correct answer, viz:
ALTERNATIVE ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on
income from within. The income of KIA as an international air carrier is derived from the sale of
transportation services. Compensation for services is an income from within if the sources are
performed in the Philippines (Sec 42(A)(3), NIRC). The origination of the flight is determinative
of the sources of income of the international carrier. If the flight originated from the Philippines
to a foreign destination, the income is an income from within; if it originated in a foreign
country to any destination, the income is from without. In the case at bar, no flight will
originate from the Philippines because KIA is not licensed to do business here. Hence, the
income is not taxable in the Philippines (Sec 28(A)(3), NIRC). Foreign Corporate Tax.
Question # 87
Manny Mayweather, a non-resident citizen, be liable to pay income tax on the P45,000 monthly
rental income? Reason briefly.
Answer:
Yes. The rental income from property located in the Philippines is considered as income derived
from within. Manny Mayweather, a non-resident citizen is taxable on income derived from
sources within the Philippines. (Section 42 in relation to Section 23, NIRC).
Question # 88
The petitioner Secretary of Finance argues that the CA committed a reversible error when it
held that the assessment of the Customs Collector of the Port of Manila had become final and
conclusive on all parties pursuant to Sections 1407 and 1603 of the TCCP. According to the
petitioner Secretary of Finance, these provisions cannot limit the authority of the Secretary of
Finance or the Commissioner of Customs to assess or collect deficiency duties; in the exercise of
their supervisory powers, the Commissioner and the Secretary may at any time direct the re-
assessment of dutiable articles and order the collection of deficiency duties. Even assuming that
Sections 1407 and 1603 of the TCCP apply to the present case, the petitioner posits that the
one-year limitation set forth in these provisions presupposes that the return and all entries, as
passed upon and approved by the Collector, reflect the accurate description and value of the
imported article. Where the article was misdeclared or undervalued, the statute of limitations
does not begin to run until a deficiency assessment has been issued and settled in full. Lastly,
the petitioner claims that the respondent, being a direct and actual party to the importation,
should have ensured that the imported article was properly declared and assessed the correct
duties.

The respondent Oro Maura Shipping Lines, on the other hand, claims that the appraisal of the
Collector can only be altered or modified within a year from payment of duties, per Sections
1407 and 1603 of the TCCP; it is only when there is fraud or protest or when the import entry
was merely tentative that settlement of duties will not attain finality. The petitioners allegation
that there was misdeclaration or undervaluation of the vessel is not supported by the evidence
and is contrary to the findings of the District Collector of the Port of Cebu, which the petitioner
himself affirmed in his 4th Indorsement dated January 8, 1999. Moreover, the records show
that the value of the vessel was properly declared by the respondent at P1,100,000.00,
pursuant to the appraisal of the MARINA.
Can the Secretary of Finance order a re-assessment of the vessel M/V HARUNA?
Answer:
Yes. Settled is the rule that the government is not bound by the errors committed by its agents.
Estoppel does not also lie against the government or any of its agencies arising from
unauthorized or illegal acts of public officers. This is particularly true in the collection of
legitimate taxes due where the collection has to be made whether or not there is error,
complicity, or plain neglect on the part of the collecting agents.
Assuming further that MARINA merely committed a mistake in approving the vessels proposed
acquisition cost at P1,100,000.00, and that the Collector of the Port of Manila similarly erred,
estoppel generally finds no application against the State when it acts to rectify mistakes,
errors, irregularities, or illegal acts, of its officials and agents, irrespective of rank.
This ensures efficient conduct of the affairs of the State without any hindrance on the part of
the government from implementing laws and regulations, despite prior mistakes or even illegal
acts of its agents shackling government operations and allowing others, some by malice, to
profit from official error or misbehavior. The rule holds true even if the rectification prejudices
parties who had meanwhile received benefits.28
Taxation 1 Prefinal Exam Pointers:

Question # 89
On February 2, 2001, after requesting the cancellation of its PEZA registration and amending its
articles of incorporation to shorten its corporate term, SMI-Ed Philippines filed an
administrative claim for the refund of ₱44,677,500.00 with the Bureau of Internal Revenue
28
Secretary of Finance vs. Oro Maura Shipping Lines, G.R. No. 156946, July 15, 2009

(BIR). SMIEd Philippines alleged that the amount was erroneously paid. It also indicated the
refundable amount in its final income tax return filed on March 1, 2001. It also alleged that it
incurred a net loss of ₱2,233,464,538.00.
The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for
review before the Court of Tax Appeals on September 9, 2002.
SMI-Ed Philippines filed a petition for review before the Court of Tax Appeals En Banc. It argued
that the Court of Tax Appeals Second Division erroneously assessed the 6% capital gains tax on
the sale of SMI-Ed Philippines’ equipment, machineries, and buildings. It also argued that the
Court of Tax Appeals Second Division cannot make an assessment at the first instance. Even if
the Court of Tax Appeals Second Division has such power, the period to make an assessment
had already prescribed.
Can the elevation of the refund claim with the Court of Tax Appeals stopped the BIR from
making the correct assessment?
Answer
No. Nothing stopped the BIR from making the correct assessment. The elevation of the refund
claim with the Court of Tax Appeals was not a bar against the BIR’s exercise of its assessment
powers.
The BIR had three years from the filing of petitioner’s final tax return in 2000 to assess
petitioner’s taxes.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the
quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled
to the refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner
was indeed not liable for the 5% final tax and, instead, liable for taxes other than the 5% final
tax.
The Court of Tax Appeals should not be expected to perform the BIR's duties of assessing and
collecting taxes whenever the BIR, through neglect or oversight, fails to do so within the
prescriptive period allowed by law.29
29
SMI-ED Philippine Technology, Inc. vs. CIR, G.R No. 175410, November 12, 2014
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of manufacturing ultra high-density microprocessor unit
package." After its registration SMI-Ed Philippines constructed buildings and purchased machineries and equipment.The total cost of the
properties amounted to ₱3,150,925,917.00.8SMI-Ed Philippines "failed to commence operations." Its factory was temporarily closed,. On August 1,
2000, it sold its buildings and some of its installed machineries and equipment to Ibiden Philippines, Inc., another PEZA-registered enterprise, SMI-
Ed Philippines was dissolved on November 30, 2000.
In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales of its properties to 5% final tax on PEZA
registered corporations. SMI-Ed Philippines paid taxes amounting to ₱44,677,500.00. On February 2, 2001, after requesting the cancellation of its
PEZA registration and amending its articles of incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative claim for the
Question # 90
Petitioner Republic of the Philippines filed a Motion for Reconsideration maintaining that
pursuant to Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect
on July 1, 2013, the interest rate imposed by the RTC on just compensation should be lowered
to 6% for the instant case falls under a loan or forbearance of money. In its Order dated March
10, 2014, the RTC reduced the interest rate to 6% per annum not on the basis of the
aforementioned Circular, but on Article 2209 of the Civil Code. Further, petitioner claims that
contrary to the RTC’s instruction, transfer taxes, in the nature of Capital Gains Tax and
Documentary Stamp Tax, necessary for the transfer of the subject property from the name of
the respondent Soriano to that of the petitioner are liabilities of respondent and not petitioner.
Are the petitioner’s contentions correct?
Answer:
As to the applicable interest rate, the Court recognized that the just compensation due to the
landowners for their expropriated property amounted to an effective forbearance on the part
of the State. Applying the Eastern Shipping Lines ruling, the Court fixed the applicable interest
rate at 12% per annum, computed from the time the property was taken until the full amount
of just compensation was paid, in order to eliminate the issue of the constant fluctuation and
inflation of the value of the currency over time.
This allowance of interest on the amount found to be the value of the property as of the time of
the taking computed, being an effective forbearance, at 12% per annum should help eliminate
the issue of the constant fluctuation and inflation of the value of the currency over time.
As to who will shoulder the capital gains tax, it has been held that since capital gains is a tax on
passive income, it is the seller, not the buyer, who generally would shoulder the tax.
Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated December 18, 2013, constituted the
DPWH as a withholding agent to withhold the six percent (6%) final withholding tax in the
expropriation of real property for infrastructure projects. As far as the government is
concerned, therefore, the capital gains tax remains a liability of the seller since it is a tax on the
seller's gain from the sale of the real estate.
refund of ₱44,677,500.00 with the Bureau of Internal Revenue (BIR). SMIEd Philippines alleged that the amount was erroneously paid. It also
indicated the refundable amount in its final income tax return filed on March 1, 2001. It also alleged that it incurred a net loss of
₱2,233,464,538.00. The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for review before the Court of Tax
Appeals on September 9, 2002. The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for refund in the decision dated
December 29, 2004.
As to documentary stamp tax due, as a general rule, therefore, any of the parties to a
transaction shall be liable for the full amount of the documentary stamp tax due, unless they
agree among themselves on who shall be liable for the same.
In this case, there is no agreement as to the party liable for the documentary stamp tax due on
the sale of the land to be expropriated. But while petitioner rejects any liability for the same,
this Court must take note of petitioner’s Citizen’s Charter, which functions as a guide for the
procedure to be taken by the DPWH in acquiring real property through expropriation under RA
8974. The Citizen’s Charter, issued by petitioner DPWH itself on December 4,2013, explicitly
provides that the documentary stamp tax, transfer tax, and registration fee due on the transfer
of the title of land in the name of the Republic shall be shouldered by the implementing agency
of the DPWH, while the capital gains tax shall be paid by the affected property owner. 30
Question # 91
For non-payment of the loan, the mortgage was extrajudicially foreclosed and the property was
sold to the bank as the highest bidder in the public auction conducted by the Office of the
30
Republic of the Philippines vs. Arlene Soriano, G.R. No. 21666, February 25, 2015.
On October 20, 2010, petitioner Republic of the Philippines, represented by the Department of Public Works and Highways (DPWH), filed a
Complaint for expropriation against respondent Arlene R. Soriano, the registered owner of a parcel of land consisting of an area of 200 square
meters, situated at Gen. T De Leon, Valenzuela City, and covered by Transfer Certificate of Title (TCT) No. V-13790.4 In its Complaint, petitioner
averred that pursuant to Republic Act (RA) No. 8974, otherwise known as "An Act to Facilitate the Acquisition of Right-Of-Way, Site or Location for
National Government Infrastructure Projects and for other Purposes," the property sought to be expropriated shall be used in implementing the
construction of the North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur Highway, Valenzuela City.
Petitioner duly deposited to the Acting Branch Clerk of Court the amount of ₱420,000.00 representing 100% of the zonal value of the subject
property. Consequently, in an Order dated May 27, 2011, the RTC ordered the issuance of a Writ of Possession and a Writ of Expropriation for
failure of respondent, or any of her representatives, to appear despite notice during the hearing called for the purpose.
Accordingly, the RTC considered respondent to have waived her right to adduce evidence and to object to the evidence submitted by petitioner for
her continued absence despite being given several notices to do so.
On November 15, 2013, the RTC rendered its Decision, the dispositive portion of which reads: WHEREFORE, with the foregoing determination of
just compensation, judgment is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of and title to 200 square meters of defendant Arlene R. Soriano’s parcel of
land covered by TCT V-13790 necessary for the construction of the NLEX – Harbor Link Project(Segment 9) from NLEX to MacArthur
Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the above-described parcel of land including improvements thereon, if there be
any, free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per square meter or the sum of Four Hundred Twenty Thousand
Pesos (Php420,000.00) for the 200 square meters as fair, equitable, and just compensation with legal interest at 12% per annum from the taking of
the possession of the property, subject to the payment of all unpaid real property taxes and other relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential damages which shall include the value of the transfer tax necessary for the
transfer of the subject property from the name of the defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila is directed to annotate this Decision in Transfer Certificate of Title No.
V-13790 registered under the name of Arlene R. Soriano.
Provincial Sheriff of Lucena City. A Certificate of Sale was issued in favor of the bank and the
same was registered.
Before the expiration of the one-year redemption period, the mortgagors Supreme Transliner
Inc. and Alvarez notified the bank of their intention to redeem the property.
The mortgagors redeemed the property. A Certificate of Redemption was issued by the bank.
The petitioners-mortgagors raise the single issue of whether the foreclosing mortgagee should
pay capital gains tax upon execution of the certificate of sale, and if paid by the mortgagee,
whether the same should be shouldered by the redemptioner. They specifically prayed for the
return of all asset-acquired expenses consisting of documentary stamps tax, capital gains tax,
foreclosure fee, registration and filing fee, and additional registration and filing fee totaling
P906,142.79, with 6% interest thereon from May 21, 1997.
What is the ruling of the Supreme Court?
Answer:
The court ruled that in foreclosure sale, there is no actual transfer of the mortgaged real
property until after the expiration of the one-year redemption period as provided in Act No.
3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption.
In the interim, the mortgagor is given the option whether or not to redeem the real property.
The issuance of the Certificate of Sale does not by itself transfer ownership.
Considering that herein petitioners-mortgagors exercised their right of redemption before the
expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains
tax due on the extrajudicial foreclosure sale. There was no actual transfer of title from the
owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the total
redemption price was unwarranted and the corresponding amount paid by the petitioners-
mortgagors should be returned to them.31
Question # 92
31
Supreme Transliner, Inc. vs. BPI Family Saving Bank, G.R. No. 165617, February 25, 2015
This case involves the question of the correct redemption price payable to a mortgagee bank as purchaser of the property in a
foreclosure sale.
On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez, obtained
a loan in the amount of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of
Title No. T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111
(2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the
20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau
of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their
payment at maturity on October 18, 2011.32
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding
tax under the 1997 National Internal Revenue Code. Related to this question is the
interpretation of the phrase "borrowing from twenty (20) or more individual or corporate
lenders at any one time" under Section 22(Y) of the 1997 National Internal Revenue Code,
particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the
Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the
Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of
rulings?
Answer:
Tax treatment of deposit substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a
final withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements.
32
The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion worth of 10-year zero-
coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty Eradication and
Alleviation Certificates or the PEA Ce Bonds by the Caucus of Development NGO Networks
The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the
public(the term 'public' means borrowing from twenty (20) or more individual or corporate
lenders at any one time) other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower’s own account, for the purpose of relending
or purchasing of receivables and other obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include, but need not be limited to, bankers’
acceptances, promissory notes, repurchase agreements, including reverse repurchase
agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments with
recourse: Provided, however, That debt instruments issued for interbank call loans with
maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments.
The collection of tax is not barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue
Code to assess and collect internal revenue taxes is extended to 10 years in cases of (1)
fraudulent returns; (2) false returns with intent to evade tax; and (3) failureto file a return, to
be computed from the time of discovery of the falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section
222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period: Provided, That in a
case where a return is filed beyond the period prescribed by law, the three (3)-year period shall
be counted from the day the return was filed. For purposes of this Section, a return filed before
the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
33
Question # 93
Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative duly

registered with and regulated by the Cooperative Development Authority (CDA).It was
established on February 17, 1985 with the following objectives and purposes: (1) to increase
the income and purchasing power of the members; (2) to pool the resources of the members by
encouraging savings and promoting thrift to mobilize capital formation for development
activities; and (3) to extend loans to members for provident and productive purposes. It has the
power (1) to draw, make, accept, endorse, guarantee, execute, and issue promissory notes,
mortgages, bills of exchange, drafts, warrants, certificates and all kinds of obligations and
33
Banco de Oro et. al vs. Republlic of the Philippines, G.R. No. 198756, January 13, 2015
instruments in connection with and in furtherance of its business operations; and (2) to issue
bonds, debentures, and other obligations; to contract indebtedness; and to secure the same
with a mortgage or deed of trust, or pledge or lien on any or all of its real and personal
properties.
On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group Deputy
Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223, authorizing BIR
Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12, Bacolod City, to
examine petitioner’s books of accounts and other accounting records for all internal revenue
taxes for the taxable years 1999 and 2000.
Proceedings before the BIR Regional Office
On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency withholding
taxes for taxable years 1999 and 2000 which were protested by petitioner on July 23, 2002.
Thereafter, on October 16, 2002, petitioner received two other Pre-Assessment Notices for
deficiency withholding taxes also for taxable years 1999 and 2000. The deficiency withholding
taxes cover the payments of the honorarium of the Board of Directors, security and janitorial
services, legal and professional fees, and interest on savings and time deposits of its members.
Is petitioner liable to pay the deficiency withholding taxes on interest from savings and time
deposits of its members for the taxable years 1999 and 2000, as well as the delinquency
interest of 20% per annum?
Answer:
No. Petitioner is not liable to pay the assessed deficiency withholding taxes on interest from the
savings and time deposits of its members, as well as the delinquency interest of 20% per
annum.
The amendment in Article 61 of RA 9520, specifically providing that members of cooperatives

are not subject to final taxes on their deposits, affirms the interpretation of the BIR that Section
24(B)(1) of the NIRC does not apply to cooperatives and confirms that such ruling carries out
the legislative intent. Under the principle of legislative approval of administrative
interpretation by reenactment, the reenactment of a statute substantially unchanged is
persuasive indication of the adoption by Congress of a prior executive construction.
Moreover, no less than our Constitution guarantees the protection of cooperatives. Section 15,
Article XII of the Constitution considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II of the Constitution declares
that it is a policy of the State to promote social justice in all phases of national development. In
relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social
justice shall include the commitment to create economic opportunities based on freedom of
initiative and self-reliance. Bearing in mind the foregoing provisions, we find that an
interpretation exempting the members of cooperatives from the imposition of the final tax
under Section 24(B)(1) of the NIRC is more in keeping with the letter and spirit of our
Constitution.34
Question # 94
34
Dumaguete Cathedral vs. CIR, G.R. No. 182722, January 22, 2010.

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Basic Taxation Questions & Answers

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What were the three fundamental principles of a sound tax system discussed?

What were the three fundamental principles of a sound tax system discussed?

What was the ruling of the Supreme Court regarding the senior citizen discount issue in the Manila Memorial Park case?

What was the ruling of the Supreme Court regarding the senior citizen discount issue in the Manila Memorial Park case?

Taxation 1 Preliminary Exam Pointers:

Prepared by: JC Malero

(Commissioner of Internal Revenue vs. Central Luzon Drug Corporation)

(Carlos Superdrug Corporation vs. DSWD )

(Manila Memorial Park vs. Secretary of DSWD.)

Prepared by: JC Malero

Primary and Sumptuary purposes of taxation.

Purposes and Objectives of Taxation

What is Substantive Charity Test.

Not a TAX ON TAX

Prepared by: JC Malero

Not a USER’S TAX

What is the doctrine of Mobilia Sequuntur Personam?

Prepared by: JC Malero

What is International Judicial Double Taxation.

This is an indirect double taxation and therefore allowed.

Prepared by: JC Malero

Non-imprisonment for non-payment of poll tax

Prepared by: JC Malero

Whether or not the classification freeze provision is valid?

Prepared by: JC Malero

What is moot and academic rule or the mootness doctrine?

Exceptions to the Mootness Doctrine

(1) the “capable of repetition yet evading review exception"; and

Mode of tax exemption:

1. Execution of Tax Agreement with a foreign States

Main issue: naa bay violation?

Issue on the undue delegation of power to tax?

Provision conferring authority to Energy Regulatory Board(ERB)

What is Tax Amnesty ?

A Tax Amnesty is a general pardon to taxpayers or intentional overlooking by the State of it

Prepared by: JC Malero

What is Tax Exemption?

Tax Amnesty vs. Tax Exemption?

Tax Exemption is an immunity from civil liability only.

Tax Exemption has prospective application.

Doctrine of Equitable Recoupment?

What is Tax Avoidance?

Example: Donating portion of property to a non-stock, non-profit educational institution whose

1. Article XIV , Sec. 4(3) of the Constitution

What is Tax Evasion?

1. Regulation of non-useful occupations- License Fees. (Cu-Unjieng v. Palstone)

What are License Fees?

Compared to Debt – Debt is based on contract.

Rule on Strictissimi Juris will not apply.

Characteristics of Taxing Power?

Comprehensive – Unlimited – Plenary – Supreme (CUPS)

Is double taxation prohibited under the 1987 Constitution?

No. Double taxation is not specially prohibited in the Philippine Constitution.

When there will be double taxation in a strict sense?

a) Object or property is taxed twice;

b) By the same taxing authority;

c) For the same taxing purpose;

d) During the same period;