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A. GENERAL PRINCIPLES Q: What are the aspects of taxation ? A: The aspects of taxation are as follows:

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

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

Q: What is the lifeblood theory of taxation? A: The lifeblood theory states that the assessment of a tax is enforceable despite its being contested because of the urgency to collect taxes, this being the government’s primary source of revenue. Otherwise, if the payment of taxes could be postponed by questioning their validity, government would be paralyzed. [CIR v. Cebu Portland]. Q: Where is the application of the lifeblood theory illustrated? A: It is illustrated in the prohibition against set-off of taxes and in the rule that prohibits the issuance of an injunction to restrain the collection of taxes. However, the latter admits of an exception which is provided both under the new (RA 9282) and the old (RA 1125) CTA laws wherein it is provided that “when in the opinion of the Court the collection may jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court”. For the prohibition against set-off of taxes, note that the payment of taxes with Tax Credit Certificates is valid as this is expressly provided for in Section 204 (C) of the Tax Code. Another illustration is in the principle of the presumption of correctness of assessments. Q: What are the non-revenue or SUMPTUARY objectives of taxation? A:

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

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

c.) Taxes on imports may be increased to protect local industries against foreign competition or decreased to encourage foreign trade.

d.) Taxes on imported goods may also be used as a bargaining tool by a country by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country to enhance its bargaining power.

e.) Taxes can discourage certain businesses such as in the case of the high taxes imposed on alcohol and tobacco products.

f.) Taxes can also minimize inequity. Q: How do you distinguish between tax from tolls, penalties, special assessments and license?

TAX TOLL TAX LICENSE A demand of sovereignty

A demand of proprietorship

Enforced contribution assessed

Legal compensation or

Paid for the support of the government

Paid for the use of another’s property

by sovereign authority to defray public expenses

Reward of an officer for specific services

Generally no limit on the

Amount of toll depends upon

Levied for revenue Imposed for regulation

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Amount of tax that may be

the cost of construction or Exercise of taxing power

Exercise of police power

Imposed maintenance of the public improvement used

Imposed on persons, property, exercise of right or privilege

Imposed on the right to exercise a privilege only

May be imposed only by the government

May be imposed by the government or private individuals or entities

Generally no limit on the amount of tax that may be imposed

Amount should be limited to the necessary expenses of inspection and regulation

Failure to pay does not necessarily make an act or business illegal

Failure to pay makes the act of business illegal

TAX SPECIAL ASSESSMENT TAX PENALTY Levied on persons, property, privileges, acts, etc

Levied only on land Intended to raise revenue

Designated to regulate conduct

Personal liability Not a personal liability of the person involved, his liability is limited only to the land involved

May be imposed only by the government

May be imposed by the government or private individuals or entities

Based on necessity and benefits

Based wholly on benefits

Has general application

Exceptional both as to the time and place

Q: Is the Universal Charge (‘UC”) imposed on electricity end-users by distributors a tax or a fee? A: The UC is a regulatory fee as it is levied to ensure viability of the country’s electric power industry. The declaration of policy in the EPIRA law definitely focuses on the public welfare by ENSURING THE VIABILITY OF THE COUNTRY’S ELECTRIC POWER INDUSTRY. The SC also added that it has ruled time and again that taxing power may be used as an implement of police power. Given that it is a regulatory measure, the objection on it being levied not by Congress has no basis. In addition, the SC ruled that the Energy Regulatory Commission is guided by sufficient standards provided within the EPIRA law itself to calculate how much to impose as UC and, as such, there is no undue delegation. Finally, it was stated that the imposition redounds to the benefit of the power industry and not the public at large and that the rate is uniformly levied on electricity end-users unlike a tax which is imposed based on a taxpayer’s ability to pay. [Gerochi vs. DOE, July 17, 2007] Q: Was the Motor Vehicle Registration FEE (“MVRF”) imposed against Philippine Airlines considered a tax or a regulatory fee? A: The MVRF was considered tax notwithstanding its designation as a fee. The SC upheld the previous decision in the Calalang case and based its ruling on the fact that (1) the legislative intent clearly showed that the imposition was primarily levied as a tax and (2) more importantly, only 1/5 of the amount levied was reserved for the operating expenses of the collecting agency which is a clear indication that the main purpose of MVRF was for revenue. Q: How were direct taxes and indirect taxes distinguished in the recent case of CIR vs. PLDT ? A: Direct taxes were defined as “those that are extracted from the very person who, it is intended or desired, should pay them” while indirect taxes are defined as “those that are demanded, in the first instance one person in expectation and intention that he can shift the burden to someone else”.

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Q: How are taxes classified? A:

As to subject matter a.) Personal – Tax of a fixed amount, imposed on persons within a specified territory, whether

citizens or not, without regard to their property or the occupation or business in which they are engaged

b.) Property – Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable methods of apportionment

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

As to who bears the burden a.) Direct – Demanded from the person who also shoulders the burden of the tax; the taxpayer is

directly or primarily liable, and he cannot shift the burden to another. Incidence and burden of tax are on the same person. (Example: income tax)

b.) Indirect – Demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer. Incidence is on one person but the burden is shifted to another. (Example: VAT)

As to scope a.) National – Tax imposed by the national government b.) Local – Tax imposed by municipal corporations or local government units

As to rate

a.) Progressive – The rate increases as the tax base of bracket increases b.) Regressive – The rate decreases as the tax base or bracket increases

Q: Is a margin fee considered as tax? A: NO. A fee imposed to curb excessive demands on international reserve, such as the margin fee, is not a tax but a form of exchange control. As such, it may not be considered a deductible expense if it is being claimed as a “tax” under (now) Section 34 (C). [Esso Standard v. CIR] Q: What is the effect of this distinction? A: The margin fee will not be considered as a deductible expense as a tax paid since it is not even considered as a tax. Neither is it deductible as a business expense because the expense merely pertained to the ability to remit profits and not the running of the business itself. [Esso Standard v. CIR] Q: How do we distinguish a fee from a tax? A: On the one hand, a fee is imposed for purposes of regulation and the amount imposed is related to cost of regulation. It is also an exercise of police power. On the other hand, a tax is imposed for revenue generation purposes and there is no relation of the amount imposed to the cost. Q: What are the basic principles of a sound tax system? A:

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

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

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

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

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Q: What principle related to “taxes being levied for a public purpose” was laid down in the case of Planters Products, Inc. vs. Fertiphil Corporation (March 14, 2008)? A: President Marcos issued an LOI which provided the imposition of a capital recovery component (CRC) on the domestic sales of all fertilizer grades. The same LOI provided that the CRC “shall be collected until adequate capital is raised to make Petitioner PPI (a private company) viable”. When Marcos left, Fertiphil sought a refund of the amounts it paid under the LOI. The SC ruled that:

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

(2) Given its nature as a tax imposition, the fact that the ultimate beneficiary is PPI, a private company, makes the levy invalid for not serving a public purpose.

Q: Can the power of taxation be delegated? If so, what is the legal basis for this? A: The power of taxation can be delegated to the local government units, which power to delegate is granted under Art. X, Sec. 5 of the Constitution. The delegation is consistent with the recognition of the LGUs power to create its own sources of revenue. BUT the power is not inherent in the local government unlike in the national government.

Q: What is the doctrine enunciated in the case of John Hay Peoples Alternative ? A: In the John Hay case, it was stated that the exemption granted under RA 7227 only refers to Subic entities, hence inapplicable to John Hay. The fact that an Administrative Order was passed by President Ramos stating that the tax incentives available under RA 7227 should also apply to John Hay locators is a violation of the requirement that tax exemptions must be strictly and expressly provided for and that the power to grant tax exemption is only within powers of Congress. This same rule applied to the Clark locators in the case of Coconut Oil Refiners Association, Inc. vs. BCDA. Note that R.A. 9400 was passed in March 2007 granting incentives to locators in Clark, John Hay, Poro Point and Morong economic zones. Q: Are the land and buildings owned by Manila International Airport Authority subject to real property tax and leviable ? A: No. The recent case of MIAA vs. PARANAQUE (July 20, 2006) ruled that since MIAA is not a GOCC but a “government instrumentality vested with corporate powers” or a GOVERNMENT CORPORATE ENTITY (like Philippine Ports Authority, University of the Philippines, Philippine Fisheries Development Authority (2007 case) and Bangko Sentral ng Pilipinas), it is exempt from real property tax. Likewise, since the properties are owned by the government, they are outside the commerce of man and can’t be auctioned. However, the portion of the property leased to private entities (such as the hangars) are subject to real property tax. Q: Is the Expanded Value Added Tax Law unconstitutional for embodying a regressive system of taxation? A: Even if the VAT is regressive because it is an indirect tax, it is not prohibited since the Constitution does not prohibit regressive taxes. What it simply provides is that “Congress shall evolve a progressive system of taxation”, which means that direct taxes are to be preferred and indirect taxes minimized. [Tolentino v. Secretary of Finance] Q: What were the points discussed in the VAT case of ABAKADA GURO PARTY LIST VS. ERMITA? A: The following points were discussed in this case

(1) There is no undue delegation of legislative power on the provision allowing increase of the VAT rate to 12% since what is delegated is simply “the ascertainment of facts upon which the

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administration and enforcement of the increase rate under the law is contingent”. Also, the fact that no discretion is exercised by the President is evident in the use of the term “shall”. (2) Petitioners contention that the 12% VAT rate is an “unfair and unnecessary additional tax burden” is beyond the scope of review of the Court as it is a “question of wisdom of legislation” (3) The law is equitable as it imposes safeguards/limits in the form of VAT exemption granted to

gross sales below P1.5 million. Q: Was the “classification freeze” provision provided under RA 9334 and discussed in the case of British American Tobacco vs. Camacho (August 20, 2008) constitutional? A: Yes. The SC ruled that the provision passes the ‘rational basis’ test and addresses (i) concerns on the delegation of too much power to the DOF and BIR; (ii) simplification of tax administration of sin products; (iii) elimination of potential areas for abuse and corruption in tax collection; (iv) buoyant and stable revenue generation; and (v) ease of projection of revenues. It added that even if creates undue advantage to its competitors, it is not enough to declare the law unconstitutional since it does not show that Congress had this in mind but instead was moved by an earnest desire to improve tax administration. Finally, it was ruled that RA 9334 does not violate GATT as it does not discriminate on just imported products.

Q: Is the Attrition Law (RA 9335) constitutional? A: Yes. In the case of Abakada Guro Party List vs. Purisima (August 14, 2008), the SC ruled that the law giving incentives to BIR/BOC employees if the exceeded their collections was valid as there are enough safeguard and penalties to ensure that the collectors do not become ‘bounty hunters’. It was also ruled that there was no unequal protection since BIR/BOC are the only revenue collectors and are thus differentiated from other government agencies. Likewise, it was found that sufficient standards existed for the President to determine revenue targets as basis for rewards/penalties and thus did not create any issue on undue delegation. Finally, the SC said that the provision empowering the Congressional Committee to review the law’s implementing rules is an invalid provision since this is a function of the Executive (and review is by the Judiciary and not Legislature) and is thus a violation of separation of powers. Q: The YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. It leased part of its premises to small canteen owners and charged parking fees on the lots besides its building. The CIR wanted to tax YMCA for such income; however the latter claimed that it is exempt from such. Which side is correct? A: The CIR is correct that YMCA is liable to pay income tax. The assessment here was for deficiency INCOME tax on income derived from rental of real property and NOT PROPERTY tax. Section 27 of the NIRC provides that even if non-profitable clubs are exempted, the last paragraph expressly states that profits realized from real property from whatever source and wherever used is taxable (It is also taxable on income from profitable activities). On the other hand, the Constitutional exemption under Art. 6 Sec. 28 (3) of Constitution (“charitable institutions, churches, non-profit cemeteries, etc.) refers to property taxes only. The Constitutional exemption under Art. 14 Sec. 4 (3) which states that non-stock educational institution whose assets are used actually, directly and exclusively for educational purpose is exempt from tax applies to income tax BUT THIS DID NOT APPLY SINCE YMCA WAS UNABLE TO PROVE THAT IT IS AN EDUCATIONAL INSTITUTION. Q: What is the decision of the Supreme Court in the recent case of Lung Center Hospital vs. Quezon City (June 29, 2004) A: The Court ruled that even if the hospital leases out portions for commercial purposes and admits both paying and non-paying patients, it does not lose its character as a charitable institution as long as the proceeds are used to further charitable purposes. However, even so, petitioner was deemed as not exempt from real property tax on the portions of its property not actually, directly and exclusively used for charitable purposes. Thus, portions leased out for commercial purposes are subject to real property tax while those used by hospital even if used for paying patients are still exempt from the same tax. Q: What is the effect of multiplicity of situs of taxation?

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A: Due to the variance in the concept of “domicile” for tax purposes, and considering the multiple distinct relationships that may arise with respect to intangible personality and the use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner thereto, the same income or intangible property may be subject to taxation in several taxing jurisdictions. A simple example is an American decedent who died while residing in Japan and who has properties in the Philippines. Q: How do we address multiplicity of situs? A: The taxing jurisdiction may:

1) Provide for exemptions or allowance of deduction or tax credit for foreign taxes and; 2) Enter into treaties with other states. Q: What are the elements of double taxation in its strict sense (direct duplicate taxation)? A:

a.) taxing twice, b.) by the same taxing authority, c.) within the same jurisdiction or taxing district, d.) for the same purpose, e.) in the same year (or taxing period), f.) some of the property in the territory.

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

(1) income of corporation which is both subject to income tax and then to withholding tax when declared as dividends to individual shareholders

(2) tax levied by two different states Q: If a tax imposed is imposed on a taxpayer’s storage of copra (by the local government) and another tax is imposed on the sale of taxpayer’s products such as soap, oil, margarine, etc. (by the national government), is there a case of double taxation ? A: No. The activities being taxed and the taxing authority are different. [Procter & Gamble case] Q: What happened in the case of CIR vs. TODA (September 14, 2004) as to justify the Court’s finding that the taxpayers were guilty of tax evasion ? A: CIC Corp. sold Cibeles building to Mr. Altonaga for 100 million who, on the same day, sold the same building to Royal Match Inc. for 200 million. The assessment was based on the taxable gain not reported by virtue of the scheme adopted by the parties. The Court ruled that the three factors in tax evasion are all present in this case, viz: (1) end to be achieved (payment of less tax) (2) evil or deliberate state of mind (not merely accidental) (3) course of action which is unlawful. The Court added that the two transfers were tainted with fraud since the intermediary transfer (from CIC to Altonaga) was prompted only by the desire to mitigate tax liabilities and not for any business purpose. Q: What is the SUBSTANCE OVER FORM doctrine? A: Taxability is determined by the reality of the transaction rather than the appearance which may be contrived. Q: Private respondents are locators within Subic Economic Zone and have been granted tax- and duty-free incentives under R.A. 7227. Subsequently, R.A. 9334 was passed in 2005 which stated that notwithstanding any special contrary, “importation of cigarettes, spirits, liquors into the Philippines even if destined for tax and duty free shops, shall be subject to all applicable taxes” and specific reference was made to goods destined for the Subic Economic Zone. Will the Subic locators continue enjoying tax incentives even after R.A. 9334? A: No. The revocation of the tax- and duty-free exemption of importation of cigarettes is valid because

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(1) There is no vested right in tax exemption and may thus be modified or withdrawn at will by the granting authority.

(2) Tax exemptions are strictly construed against claiming party. (3) While tax exemption may have been part of the inducement to carry on business within the

zone, this exemption is not contractual and, as such, the non-impairment clause of the Constitution can not be rightly invoked.

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

Q: What is the LEGISLATIVE GRACE concept and how does it relate to the case of National Development Company? A: The concept provides that “any tax relief provided is the result of specific acts of Congress that may be applied and interpreted strictly”. In the NDC case it was ruled that the fact the Secretary of Finance guaranteed the loans of NDC, the payments of NDC to the Japanese creditors can not be exempt from withholding since the fact that the loan was is not tantamount to waiver of collection of taxes which must must be express. Q: What are the requisites of a taxpayer’s suit? A: The two minimum requisites for taxpayer suit are that (1) public funds are disbursed and (2) the law violated affects the petitioner. This is why in the case of Lozada vs. BP, petitioner’s action mandamus to call election to fill up BP vacancies was not considered a taxpayer’s suit because the failure to call elections does not involve public expenditure and in fact seeks government to spend funds.

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B. INCOME TAX Q: What are the features of the Philippine tax system A: the Philippine tax system is (1) direct; (2) progressive; and (3) semi-schedular (varying taxes imposed on passive income), semi-global (one rate for all types of gross income) Q: What are the elements of a taxable income? A: 1) gain or profit (as opposed to mere reimbursements or return on capital; note also that

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

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

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

EXAMPLE: Mr. X figured in an accident and got paid for (a) hospital cost (b) lost income (c) moral damages (compensatory only) and (d) FMV of car wrecked

Only (b) is taxable SINCE THE REST ARE MERE RETURN ON CAPITAL Q: How does income differ from capital? A: Income is any wealth that flows into the taxpayer other than a return of capital while capital constitutes the investment which is the source of income. Therefore, capital is fund while income is the flow. Capital is wealth while income is the service of wealth. Capital is the tree while income is the fruit. Q: How do you classify taxpayers? A: Abbreviated

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

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

Q: How is the residency of an alien determined? A: An alien is considered a nonresident if he/she stays here for a DEFINITE SHORT PERIOD of time. An alien will be considered a resident if the stay here is either (a) DEFINITE AND EXTENDED or (b) INDEFINITE. Once determined to be a nonresident alien, the test to determine whether the alien is a nonresident alien ENGAGED in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days. Nonresident aliens not engaged in business are subject to tax of 25% on gross income earned from all sources EXCEPT (1) interest from FCDU/OBU deposits (exempt) and (2) CGT on sale of shares (5%/10%) and real property (6%) classified as capital asset. They are also not entitled to Optional Standard Deduction. Q: What is the consequence of an income item being subjected to FINAL tax?

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A: Such income is no longer “RETURNABLE”, i.e.; it will no longer be declared as income in the Income Tax Return, hence will no longer be subject to the schedular rates on income tax (for individuals) or to 30% (for corporations).

Q: What income items are considered as passive income subject to final tax in the hands of an individual resident citizen? A: These are (i) interest from bank deposits; (ii) royalties; (iii) prizes exceeding P10,000; and (iv) dividends. Q: How are prizes taxed under the Tax Code? A: The tax imposable will depend on the amount of the prize. If the prize is: MORE THAN 10,000 = 20% FINAL TAX 10,000 OR LESS = forms part of gross income which is subject to the SCHEDULAR rate However, winnings from the PCSO and LOTTO are EXEMPT from tax. Q: What is the taxability of dividends received by individuals? A: It depends. If the dividends are from a DOMESTIC COPRORATION, the recipients will be taxed as follows: Citizens and resident aliens = 10% Nonresident aliens engaged in trade or business in the Philippines = 20% Nonresident aliens engaged NOT in trade or business in the Philippines = 25%

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

Q: What is the taxability of dividends received by corporations from a domestic corporation? A: It depends. If the dividends are from a DOMESTIC CORPORATION, the recipients will be taxed as follows: Domestic or Resident Foreign corporation = 0% (as inter-corporate dividends) Nonresident foreign corporation = Tax treaty rate, if any 15% if no tax treaty but satisfies tax-sparing provision 30% if no tax treaty and does not comply with tax-sparing provision

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

Q: May parents and siblings be claimed as ADDITIONAL exemption? A: NO. Parents and siblings are considered dependents ONLY FOR PURPOSES OF QUALIFYING an individual to become a “head of a family” but they CANNOT be claimed as additional exemptions. Q: Are illegitimate children considered as additional exemption? A: YES. Q: Are SENIOR CITIZENS supported and living with a taxpayer included for purposes of claiming additional exemptions? A: According to a BIR Ruling, senior citizens do not qualify for purposes of claiming additional exemptions because such does not have basis in law. Q: What is the rule on senior citizen discounts granted by commercial establishments? A: In Carlos Superdrug Corp. vs. DSWS (June 29, 2007) and M.E. Holdings Corporation vs. CIR & CTA, the Supreme Court ruled that the rule will be -- (i) prior to March 21, 2004, the discounts are treated as tax credit; (ii) after March 21, 2004 the same is treated as deductions.

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The Court distinguished tax credit vs. tax deduction by stating that a credit is a “peso-for-peso deduction from the taxpayer’s tax liability” or a “full recovery” while a tax deduction only benefits the taxpayer to the extent of 35% of the amount granted as discount. However, the Court ruled that “the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program”. The Court recognized that the law is a legitimate exercise of police power. (Note that the 20% discount also applies to movie admission fees, transport fares, hotel services, restaurant bills, etc.) Q: What is the effect of a change in status of the taxpayer or the CHANGE-IN-STATUS rule? A: The rule of thumb is THAT WHICH WILL BE BENEFICIAL TO TAXPAYER (e.g., if taxpayer marries, thereby qualifying him for a bigger personal exemption of 32,000 instead of P25,000, then the law will treat him as if he married at the beginning of the year; but if a married person’s spouse dies, thereby making him either a head of the family or single, in either case he will be entitled to lower personal exemption, then the law will treat him as if he was widowed at the end of the year and still get his 32,000 personal exemption.) Q: Is a nonresident alien entitled to personal and additional exemption? A: It depends. If engaged in trade or business and country of residence allows exemptions to Filipinos = allow the lower of two amounts (i.e., Philippines or foreign country). If NOT engaged, he will NOT be allowed the exemption. Q: Are employees of ROHQs, OBUs and FCDUs entitled to personal and additional exemptions: A: No, these employees are subject to tax on gross income without the benefit of deduction/exemptions. Q: What are the changes introduced by REPUBLIC ACT NO. 9504 (TAX EXEMPTION OF MINIMUM WAGE EARNES AND INCREASING PERSONAL/ADDITIONAL EXEMPTIONS / CHANGE IN OSD) (June 17, 2008)? A: • “Minimum wage earners” shall be exempt from the payment of income tax on their taxable income.

Moreover, the holiday pay, overtime, night shift differential pay, and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. The term “statutory minimum wage” refers to the rate fixed by the Regional Tripartite Wage and Productivity Board.

• Increases the amount of personal exemption for all individuals to a fixed amount of P50,000.00, from the previous varying amounts of P20,000.00, P25,000.00 and P32,000.00. Also increases the additional exemption from P8,000.00 toP25,000.00 for each dependent, not exceeding four (4).

• Amends Section 34(L) to --- (1) Increase to 40% of gross sales or receipts the 10% Operational Standard Deduction (OSD)

previously allowed to individuals (except nonresident aliens) engaged in business or earning income in the exercise of their profession; and

(2) Now allow corporations (except nonresident foreign corporations) to claim OSD, instead of itemized deductions, in an amount not exceeding 40% of their gross income.

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

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

(1) A compensation earner whose income does not exceed the allowable exemptions; (2) A compensation earner whose withholding taxes were correct EXCEPT if 2 employers OR

exceeds 60T; (3) Those whose only income is subject to Final Withholding Tax; (4) Individuals exempt from income tax; (5) Those whose total compensation is below 60T.

However, an individual who is engaged in business is ALWAYS required to file an ITR regardless of the amount of income generated Q: How do you differentiate between Capital Gains Tax on sale of shares of stock not traded in

the local stock exchange and Capital GainsTax on sale of real property considered as capital asset?

A: The sale of shares of stock not traded in the local stock exchange is subject to CGT at the rate of 5% for the first P100,000 and 10% on the amount in excess of P100,000. The tax base shall be only the GAIN on the sale. Such sale will always be subject to CGT without any possibility of exemption. As for the sale of real property considered as capital asset, the rate is 6% and the tax base is the ENTIRE SELLING PRICE, because under the law this is a PRESUMED GAIN from the sale. However, there is a possibility of exemption as when the proceeds of the sale will be utilized by the taxpayer to buy his principal residence, such purchase to be made within 18 months from the sale. The money in this case shall be put in escrow. The sale of real property classified as capital asset to the government may be subject to either the 6% CGT or form part of gross income of the taxpayer (in the latter case, only the gain forms part of the gross income), subject to the taxpayer’s choice.

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

TAX ON CORPORATIONS Q: What were the factors in the case of AFISCO that led the Court to consider the reinsurance pool as a taxable entity separate and distinct from the individual insurance companies that made up the pool? A: The factors were:

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

them to get their premiums What was crucial in this case was the fact that there was continuity of dealings. Q: Are professional fees paid to general professional partnerships subject to withholding tax? A: No, since the GPPs are exempt from tax, payments to them are also not subject to withholding tax. However, payments made BY them (or any other tax exempt entity) are subject to withholding tax if the payee/income recipient is not similarly exempt from income tax. Q: What is a JOINT VENTURE and what is its taxability? A: In a JV, there is:

(1) contribution of capital, skill (2) shared profits (3) mutual control

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(4) single business transaction undertaken for the purpose A joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government is exempt from income tax.

Q: In the cases of Obilos and Gatchalian, what were considered as the elements to establish that a taxable unregistered partnership existed? A: The elements that were deemed necessary for a taxable unregistered partnership were (1) mutual contribution of funds and (2) joint interest in properties and gains. In the Obilos case the fact that a father bought land which he then transferred to his children who then resold them without actually introducing improvements or subdividing was considered as NOT giving rise to a taxable unregistered partnership as opposed to the Gatchalian case where they agreed to contribute funds to buy lotto tickets and then showed clear intent to divide profits. Q: How are the rules on the taxability of schools under Tax Code summarized? A: (1) EXEMPT --- Nonstock and no part of the income inures to the benefit of an individual. This is however subject to the last paragraph of Sec. 30 which states that income from properties, real or personal, and activities conducted for profit are taxable. ES (2) SUBJECT TO 10% --- private school registered w/ DECS (proprietary) whose unrelated income does not exceed 50% (3) SUBJECT TO 30% = same requisite as that subject to 10% BUT unrelated income exceeds 50% (examples of unrelated income are dividends, rentals, interest on loans, gains on sale) Q: What is the taxability of non-stock non profit associations and schools under RMC 76-03? A: Associations are subject to:

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

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

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

Exempt also from 20% FWT on interest on bank deposits, royalties; 7.5% FWT on FCDU deposits provided there are

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

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

A: It will be subject to EITHER the regular income tax OR 6% CGT, at the option of the TAXPAYER Q: Does the exemption on “gains from the sale of bonds, debentures and other certificates of indebtedness with a maturity of more than 5 years” include exemption of interest income? A: NO, it does NOT include interest income for the following reasons:

1) “gains derived from dealings in property” and “interest” are separately indicated in Section 32 defining gross income

2) the provisions of the Tax Code applicable to individuals (except nonresident alien not engaged in business) specifically exempt interest from long-term deposits/investments (thus, if a corporation was meant to be exempt as well, the Tax Code would have expressly provided so)

3) U.S. rules clearly distinguish interest and gain from sale Q: Are there exemptions from the MCIT? A: Yes. The following are exempt from the MCIT:

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1. domestic corporations operating as proprietary educational institutions subject to tax at 10% on their taxable income

2. domestic corporations engaged in hospital operations which are non-profit subject to tax at 10% on their taxable income

3. domestic corporations engaged in business as depositary banks under the expanded foreign currency deposit system

4. firms that are under a special income tax regime (e.g., PEZA, BCDA) Q: When is the MCIT imposable on a domestic corporation? A: It is imposable on the fourth year following the year of operation Q: Up to what period may the MCIT be carried over? A: It may be carried over up to the three (3) immediately succeeding taxable years. Q: How is the MCIT imposed? A: It is imposed if the computed 2% tax on gross (excludes passive income subject to final tax from gross income and with only direct costs as deductions) is higher than the regular income tax (computed based on gross income less the deductions allowed under the Tax Code) Q: Can the imposition of the MCIT be suspended? A: Yes, in cases of force majeure, labor strike or legitimate business reverses BUT note that only the Department of Finance can grant the suspension. Q: How is a company considered as a resident foreign corporation? A: The Tax Code defines such an entity as being engaged in trade or business or who, as defined in jurisprudence, “undertakes continuous business transaction”. A BRANCH corporation is a RESIDENT FOREIGN CORPORATION while a SUBSIDIARY is a DOMESTIC CORPORATION. Q: Are offline carriers (i.e., no landing rights in the Philippines) which have general sales agent subject to Philippine tax? A: Yes, they may not be subject to the 2.5% gross Philippine billings but they are subject to tax on their ticket sales as nonresident foreign corporations (the CTA cases of South African Airways has upheld the BOAC ruling) Q: How is the BPRT computed? A: The BPRT is computed based on the profits earmarked for remittance and NOT on the actual remittance. Q: Are there corporations exempt from the BPRT? A: YES. PEZA companies are not subject to BPRT. Q: What is the difference between a Regional/Area Headquarters and a Regional Operating Headquarters? A: An R/AHQ can only perform supervisory, communication, coordination functions while an ROHQ can do planning, logistics, R&D, financial advisory, etc. For income tax purposes, an R/AHQ is exempt from income tax primarily because it is not expected to generate any income while the ROHQ is subject to the preferential tax rate of 10%. For VAT purposes, services by an R/AHQ are VAT exempt while those of the ROHQ may be VAT-taxable or VAT zero rated if, in the latter case, the services are performed for nonresidents and paid for in foreign currency. Q: Will the 15% preferential rate for Filipinos occupying managerial and technical position in an ROHQ apply even if the position is not concurrently held by expatriate ? A: Yes.

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

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

Q: How do you trace the ownership for purposes of determining whether corporation is closely-held for purposes of determining exemption from the IAET ? A: You trace it all the way up to the ultimate parent. An example would be if Company A improperly accumulates earnings and the company is owned 100% by Company B who is in turn owned by Company C who is in turn owned by Company D. Even if only Company D is a public company, the same still inures to Company A’s benefit thus exempting it from IAET. Q: Are there entities exempt from Improperly Accumulated Earnings Tax? A: YES.

1. banks and other non-bank financial intermediaries 2. insurance companies 3. publicly-held corporations 4. taxable partnerships 5. general professional partnerships 6. non-taxable joint ventures 7. enterprises duly registered with the PEZA, BCDA, and those under special income tax regimes

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

1. accumulation up to 100% of the paid-up capital 2. for definite corporate expansion projects or programs 3. for buildings, plants or equipment acquisitions 4. for compliance with a loan covenant or pre-existing obligation under a legitimate business

agreement 5. when there is a legal prohibition for its distribution 6. in the case of Phil. subsidiaries of foreign corporations, undistributed earnings intended or

reserved for investments within the Philippines Q: When improperly accumulated earnings are subjected to the IAET, will it still be subject to the tax on dividends when eventually declared as dividends? A: YES. Q: In justifying the required corporate liquidity to justify exemption from IAET, is the Bardahl formula applicable to all corporations? A: NO. The Bardahl formula may apply only to companies with shorter operating cycles. An operating cycle of 288.35 days does not justify a high liquidity as opposed to companies with operating cycle of 3.33 months [CYANAMID (JANUARY 20, 2000)]. Q: What is the tax benefit rule? A: This rule states that the recovery of an amount previously written-off but which was subsequently collected is a taxable event TO THE EXTENT THAT IT BENEFITED THE TAXPAYER, i.e., to the extent that the said deduction resulted in a lower taxable INCOME, hence a lower tax due. Thus, if the taxpayer was already in a taxable loss position before deducting the bad debts, then subsequent recovery of the bad debt will not be taxable since the bad debt did not benefit him with a reduced tax due. Q: What is the rule on the taxability of STOCK dividends? A: Generally, STOCK dividends are not taxable EXCEPT when

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1. it changes the proportionate interest of a shareholder after its receipt 2. the stock dividends are subsequently sold

Disguised dividends = excessive payments by a corporation to shareholders which may be interpreted as ways to avoid tax on dividends (example: interest and loan payments) Liquidating dividend = dividends declared by a dissolving company. The tax implication to the shareholder is as if he/she sold his/her shares to the liquidating company (i.e., actual gain computed as liquidating dividend less cost basis in the share subscription). The liquidating company is NOT subject to any tax. Q: Define transfer pricing. A: It is the power of the Commissioner to distribute, apportion, allocation and shift income and expenses between related taxpayers to reflect their true taxable income or to prevent evasion of taxes. Q: What is the tax implication of a forgiveness of debt? A: If the forgiveness of debt is made:

for services rendered, it shall be taxed as compensation income on the part of the recipient for no consideration, it is subject to donor’s tax by a corporation in favor or a debtor who is likewise a stockholder of the creditor-corporation, it

will be treated as a dividend by a stockholder in favor of a corporation-debtor, it will be treated as additional capital of the

stockholder-lender on the corporation-debtor [SEC. 50 OF RR 2] Q: Are the income of property donated likewise excluded from gross income if the donor’s tax is paid ? A: No. Only the property donated will be excluded but not the income (ex. Dividends on shares donated) Q: What are considered as exclusions from gross income: A: 1) life insurance paid to heirs of deceased 2) retirement pay if (i) at least 50 and 10 and (ii) plan registered w/ BIR and (iii) benefit availed only once --- Ruling in SANTOS VS. SERVIER PHILS. (11/28/08 – NACHURA) 3) benefits received under SSS/GSIS 4) gifts (bec. subject to donor’s tax already) BUT income of property (ex. Dividends of shares) is TAXABLE 5) 13th month pay AND other benefits 6) income by foreign gov’t. from loans, bonds, stocks, deposits by foreign gov’t., financing institution owned, controlled or refinanced by gov’t., or international regional financial institution set-up by foreign gov’t. 7) income derived by the government or its political subdivisions from any public utility or from the exercise of any essential governmental function 8) prizes and awards to recognize religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if (i) the recipient was selected without any action on his part to enter the contest or proceeding; and (ii) the recipient is not required to render substantial future services as a condition to receiving the prize or award. 9) all prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. Q: What are the de minimis benefits exempted from income tax? A:

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

in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000

(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; (i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on

account of illness, marriage, birth of a baby, etc., and (j) DAILYmeal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage." Q: What is the taxability of the refund of taxes? A: If the tax was previously claimed as deduction then subsequently refunded, it will form part of gross income at the year of refund. However, if said tax was not claimed as deduction in the first place as they are non-deductible types of taxes(such as income tax, estate tax, etc.), it will not constitute taxable income [RMC 13-80]. Q: What is the taxability of terminal pay? A: Terminal leave pay is NOT subject to income tax because

(1) It is receive at the time when the taxpayer is ALREADY RESIGNED and thus it is not considered as salary, and

(2) Separation pay received for causes beyond the control of the employee is exempt from income tax and compulsory retirement is deemed a “cause beyond the control” of the employee [RE REQUEST OF ZIALCITA].

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

1. Benefits granted to rank and file employees 2. Benefits required by the business or for the convenience of the employer 3. De minimis benefits 4. Benefits exempted by law

Q: When are loans granted to employees subject to Fringe Benefit Tax? A: When the interest on said loans are lower than the legal rate of 12%. In which case, the between 12% and the stipulated interest rate shall be subject to FBT. Q: When is educational assistance exempt from FBT? A: When the following conditions concur:

(1) the education is related to employer’s business and (2) Such assistance is coupled with a service contract.

If granted to relatives of the employee = it is subject FBT except if there is a competitive scholarship scheme Q: Are transportation allowances taxable? A: If they are part of the salary and are given as a fixed amount, it is taxable as compensation. If it is required by the nature of the work and the employee is required to liquidate, it is not taxable.

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Q: Can housing benefit be not subject to FBT? A: Yes. If the housing is (i) less than 50 meters away from the workplace or (ii) the stay of the employee is less than 3 months. Q: Once an item is subjected to FBT will the same still form part of the taxable income of the recipient-employee? A: No. The FBT is a final tax. Q: Who can avail of the deductions provided under the law? A: All types of taxpayers EXCEPT:

1. nonresident aliens not engaged in business and 2. nonresident foreign corporations

Q: What are examples of capital expenditures which are considered as non-deductible are instead spread out over the life of the asset? A: Some examples would be litigation expenses to protect the title of a property and advertising expense (see below). The test to characterize a payment as a capital expense is if the benefit/s extends beyond the taxable year when payment was made. Q: What is the taxability of advertising expense? A: It depends. If the advertising expense was incurred to stimulate current sales (tactical), it is deductible in full. If however it is incurred to stimulate future sale (thematic), it will be treated as a capital expenditure and the cost thereof will be amortized over the years benefited, with each year able to claim only the amount amortized in such year. [GENERAL FOODS (APRIL 14, 2003)] (note also that in this case, the SC held that the amount was not considered ORDINARY, thereby failing one of the requisites for deductibility of business expenses, since the P9 million cost of advertising was inordinately large as it constituted ½ of the company’s total marketing expense)

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

A:

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

Q: Is money spent for bribery deductible? A: NO! Q: What is the ceiling imposed on representation expense for purposes of deduction from gross income? A: for sale of goods: 0.50% of net sales Sale of service: 1% of net revenue However, when supporting documents reflect a lower amount, then such lower amount shall be used. Note that the treatment of representation expense will apply if the taxpayer is able to show that it was in fact NOT a fringe benefit granted. An example would be the club memberships which, if used to entertain clients, would be part of representation expenses but if only used by the employee-officer, will be subject to FBT. Q: What is interest arbitrage? A: It results in the reduction of the interest expense by a percentage of the interest income subject to final tax. It is also defined as a circumstance which is presumed to exist because by putting excess funds in deposits/securities subject to 20% withholding, taxpayers are able to avoid the 32% tax which will happen

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if same funds are invested in revenue-generating activities (thus, margin is 12%). Another illustration of this is when a taxpayer borrows money from the bank (interest payments on which can then be claimed as expense and thus a 32% benefit) then deposits it in a bank (and subsequently suffers only a 20% final withholding tax), thus benefiting by 12% representing the difference between the 32% deduction and the 20% withholding tax. It does not matter if taxpayer actually intended to save on taxes. Q: Will interest payments between a parent company and its subsidiary be disallowed in view of Section 34 (B)(2)(b) in relation to Section 36 (B) of the Tax Code? A: No. The prohibition on non-deductibility of interest expense refers to a case where the creditor and debtor are commonly owned by at least 50%. The case of a parent and subsidiary loan does not refer to a case of commonly-owned entities but one where one entity owns the other. Q: What is the treatment of interest paid to acquire property used for business? A: Interest incurred to acquire property used for business may either be claimed as a deduction or treated as capital expenditure Q: Who may avail of tax credits for income tax purposes? A: Only those subject to tax on worldwide income (resident citizen and domestic corporation) because they pay taxes for foreign sourced income twice (in the Philippines and abroad), and the tax credit is meant to lessen the impact of double taxation. Q: What are the non-deductible taxes? A: (1) Income tax (2) estate and donor's taxes; and (3) taxes assessed against local benefits of a kind tending to increase the value of the property assessed (RPT) Q: When is there a net operating loss carry-over (NOLCO)? A: When the allowable deductions exceed gross income. Q: For how long may the NOLCO be carried over? A: It may be carried-over for 3 succeeding years. Any NOLCO remaining beyond said period is forfeited. Q: Are there instances when a net operating loss may not be carried over? A: YES. When the net operating loss is incurred at the time when company not taxable (e.g., registered under the BOI), such net operating loss may NOT be carried-over. Q: A Corp. owns B Corp. which is the entity with the NOLCO. A Corp. then exchanges its shares in B Corp. for all of the shares in C Corp. so that after the exchange A Corp. owns C Corp. which in turn owns B Corp. Will B’s NOLCO still be available for deduction after the exchange? A: Yes. NOLCO carry-over is allowed if there is no substantial change in ownership (at least 75% of company still owned by same persons) which was the case here since A Corp.’s mode of ownership over B Corp. only changed from direct to indirect. Q: Can the depreciation expense exceed the amount of acquisition cost of the asset if the property is reappraised and it is shown that the reappraised value is higher than the acquisition cost? A; No. Q: What properties are subject to depreciation? A: Tangible and intangible assets which are limited in diration such as copyright, patent, franchise. Property not subject to depreciation would be inventories, LAND, properties not used for business and intangibles with unlimited use.

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Q: Using the straight-line method, what is the annual depreciation of an equipment which was acquired for 5M and an estimated useful life of 5 years and a salvage value of zero? A: The annual depreciation will be 1M pesos computed as follows: (5,000,000 less 0) divided by 5 years. Q: When are forex losses and re-appraisal adjustments deductible? A: The same are deductible only when there is already a close and completed transaction because it is only at such point when the loss is realized. An example is when a $100 loan incurred when the exchange rate was P50:$1 is subsequently paid when the exchange rate is already at P60:$1, the same will result in a deductible forex loss of P1000 which represents the additional amount of peso the borrower has to come up to pay the same amount of dollar loan (100). Before actual payment, there is as yet no closed and completed transaction which may be claimed as a deductible expense. Q: When are bad debts deductible? A: When they are ascertained to be worthless and after having gone through the process of ascertainment such as by sending demand letters, etc. Note that in the cases of banks claiming the expense, the BSP must approve. On the other hand, if the bad debt being written off is from an insurance company, the insurance company must be proven as being insolvent Q: Philex entered into an agreement with Baguio Gold entitled “Power of Attorney” whereby Philex was made to manage and operate Baguio Gold’s mining claim in Sto. Nino, Benguet province. In return, Philex was to receive as compensation 50% of the net profit of the Sto. Nino project. In the course of the project, Philex made advances of cash and property until the mine stopped operating due to losses. Subsequently, Philex wrote off the indebtedness to Baguio Gold. The BIR disallowed the write-off as the same was considered as investment in a partnership rather than as a loan. Is Philex entitled to the write-off of bad debts? A: No. The amount advanced by Philex was meant to be investments (NOT loan) since (i) 50% share is too big to be interest (ii) no requirement to repay for Baguio Gold (iii) no collateral (iv) sharing of profit and creation of common fund are indicators of joint venture. PHILEX MINING CORPORATION vs. CIR (April 16, 2008). As such they are not bad debts that could be written off. Q: When are donations deductible in full? A: When the same are made to: (1) Government for PRIORITY ACTIVITIES in education, health, youth & sports, human settlements,

science, economic development (2) Foreign institutions and int’l. Orgs. (3) accredited NGOs, provided the following conditions are met:

a. it utilizes the same w/in the 15th day after the 3rd month from close of the year, b. the administrative expenses of such NGO does not exceed 30%, c. upon dissolution, the assets of such NGO are required to be transferred to another NGO,

and d. its board members receive no compensation

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

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

The limitations are:

10% of net income for individual taxpayers 5% of net income for corporate taxpayers

Q: Are interest and penalties paid on a deficiency tax assessment deductible for tax purposes ?

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A: Only interest is deductible, the penalties paid are not.

Q: What items are non deductible for income tax purposes? A:

(1) Personal expenses (2) Amounts to improve buildings (because the amounts spent thereon are capitalized, but which will

subsequently be deductible in the form of depreciation expense) (3) Restoration expenses for property subject to depreciation (because capitalized) (4) Premiums for life insurance on employee where taxpayer is beneficiary of insurance (5) Losses from sale or exchange between related parties

Q: What are capital assets? A: Capital assets are those property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE

1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or

2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or

3. property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or

4. Real property used in trade or business of the taxpayer. These four items are considered as ORDINARY ASSETS. Q: Mr. A owns a ten-door apartment with a monthly rental of P5,000 each unti. He sells the entire complex to Mr. B. Is the sale subject to capital gains tax? A: No. The apartment complex is definitely real property used in business and the gains derived from the sale is considered ordinary income. Q: When is the holding period material for purposes of imposing the capital gains tax? A: Only when the shares are sold by an individual such that if the same has been held for more than 12 months, only 50% of the gain or loss is taken into account. This does not apply to corporations. Q: A bought X Co. shares today and sold it after 3 months and suffered losses but after 15 days also bought X Co. shares. Is the loss suffered in the previous sale allowed? A: No. This is an example of a wash sale where the losses from sale of stocks or securities is disallowed if taxpayer acquired 30 days before and after stocks or securities substantially identical EXCEPT if the taxpayer involved is a dealer in securities. Q: Are equity investments considered as capital assets? A: YES. Equity investments are considered capital assets and not ordinary asset. The only instance when shares of stock are considered as ordinary assets is when the same is in the hands of a dealer in securities. Thus, loss in investments which become worthless is capital loss (deductible only from capital gains, if any) and NOT deductible as a bad debt [CHINA BANKING CORP. VS. CIR (JULY 19, 2000)]. Q: Describe a simple tax-free transfer under Section 40 (C)(2) of the Tax Code. A: X Corp. transfers a parcel of land to Y Corp. in exchange for Y Corp. shares as a result of which transfer X Corp. gains control of Y Corp. (i.e., shares transferred makes X Corp. owner of at least 51% of Y Corp.). Subsequent to the exchange, the cost basis of the assets transferred will be as follows: (1) land in the hands of Y Corp. – same cost basis as in the hands of X Corp. / Y Corp. shares – same cost basis as the land exchanged by X Corp. Q: What is the purpose for the exemption/deferral accorded under Section 40? A: To encourage corporations in pooling, combination or expanding resources to spur economy Q: What is the situs of dividends? A: It is considered as sourced within the Philippines if the dividends are declared by:

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1. A domestic corporation 2. A foreign corporation, at least 50% of whose gross income for the three-year period ending with

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

If the income derived from sources within the Philippines is less than 50% of the total gross income, the entire amount of income generated is NOT considered as Philippine-sourced.

Q: What is the situs of services? A: It is considered as sourced within the Philippines when performed in the Philippines Q: What is the situs of sale of personal property? A: It situs is the place of sale EXCEPT:

(1) if what is sold are shares of a domestic corporation which is always considered as Philippine sourced income

(2) if such personal property is manufactured abroad and sold here or manufactured here and sold abroad – in which case the amount shall be allocated

Q: What is the situs of rentals, royalties, and other intangibles? A: It is considered as sourced within the Philippines when the same is used in the Philippines Q: What is the situs of insurance contracts? A: The situs of which is the place of activity (meaning the location of risk) and NOT the place of business (which reinsurers do not have in the Philippines) [PHIL. GUARANTY]. Q: X Corp., a Philippine company, engaged Y Corp., a nonresident US company, to perform services abroad. Will X Corp.’s payments be subject to withholding tax? A: No. Since Y Corp.’s income is not subject to Philippine tax as it is earned by a nonresident foreign corporation and is considered as non-Philippine source income, the same is not subject to income tax and to the Philippine withholding taxes. Q: What is meant by MOBILIA SEQUUNTUR PERSONAM as it relates to situs rules? A: Taxation follows the property or person who shall be subject to tax. SALE ON INSTALLMENTS - BANAS VS. C.A. (FEBRUARY 10, 2000) Petitioner sold lots to Ayala and was paid less than 25%, the balance was covered by 4 checks. On the same day, the checks were discounted (meaning exchanged for cash at an amount lower than the face value) also to Ayala. Petitioner reported as income for the year of sale only the cash amount received from sale and excluded the amounts received from the discounted checks. The balance was reported as income by the petitioner only in the next 4 years. Petitioner claims it was correct because initial payment excludes evidences of indebtedness including Promissory Notes. SC = The transaction remains to be an installment (not cash) sale as the law expressly excludes “evidence of indebtedness” in the determination of how much was paid for the year. However, even if the proceeds of discounted note is not considered as part of initial payment, the income realized from the discounting itself is still a separate taxable income in the year it was converted into cash because it was at this year that there was actual gain on the discounted notes. Q: When a taxpayer indicates in his ITR that the excess income tax paid shall be carried over to the succeeding taxable years, may he subsequently apply for a tax credit or refund for the same amount?

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A: NO. The option to carry-over, once exercised, is irrevocable [Section 76 of the Tax Code]. The same rule will apply even if the taxpayer did not tick the “carry-over” box in the year when the excess payment occurred but did indicate in the succeeding year that the excess amount was being treated as “prior year’s excess credits”. (Philam Asset Management vs. CIR – December 14, 2005) Q: What are the elements required to successfully file a claim for excess CWT payments? A: The elements required are: a.) filing a claim within 2 years b.) the income upon which the taxes were withheld were included in the return of the claimant c.) the fact of withholding is established by certificate/s issued by the payor to the payee-claimant

[Filinvest Development Corp. vs. CIR (August 9, 2007) – Nachura] Q: May a withholding agent file a claim for a refund on its overpayments made on withholding tax for payments to nonresident foreign corporations ? A: YES. Considering that it will be the withholding agent who shall be liable for deficiency assessment and penalties in case of failure to withhold, it should likewise be given the authority to file the claim for refund. Q: Who are required by law to withhold on income payments?

A: agents, employees of withholding agents persons having control of the payment and claiming the expense (ex. Utility bills paid to SM by

concessionaires) payor having control of the payment where payment is made thru brokers (ex. Travel agents)

Q: When does the obligation to withhold arise? A: Either when:

1. it is paid 2. it becomes payable (i.e., it is legally due, demandable or enforceable) or 3. it is accrued as an asset or expense

Q: Distinguish creditable withholding tax (CWT) from final withholding tax (FWT). A: Payments under the CWT merely approximate the tax due on the payee while those under the FWT constitute dull payment of the tax due. Under the CWT system, the income recipient is still required to report the income from which taxes were withheld although it may claim the CWT as credit. Under the FWT, the payments subjected to the same are no longer reported as taxable income.

Q: X Corp. pays Y Corp. regularly. The payments are generally subject to withholding tax but X Corp. has refused to withhold on the basis that it (X Corp.) is exempt from tax. Is X Corp. correct? A: No. The exemption has to pertain to the payee, in this case Y Corp., so that the withholding taxes would not be due.

Q: When is a short period return due after a merger? A: Within 30 days from the effectivity of the merger based on the SEC approval

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C. ESTATE AND DONOR’S TAXES Q: When is the property transferred? A: Civil Code says property is transferred at time of death WITHOUT interruption. Thus, the governing law is that which was existing at the time of death. Q: In case of a conditional transfer (as when the will provides that the property may not be sold within 10 years from the death of the testator), when does the estate tax accrue? A: The tax thereon accrues at the time of death notwithstanding the condition. [Lorenzo v. Posadas]. Q: In the same situation, which value is considered for purposes of computing the estate tax? A: Since death is generating source from which the power of state to impose tax, tax should be measured by value at time of death regardless of (i) postponement of actual possession or (ii) subsequent appreciation or depreciation. [Lorenzo v. Posadas]. Q: What law shall govern in such a situation? A: It will be governed by the law in force at the tine of death [Lorenzo v. Posadas]. Q: What are the two general classifications of properties that are covered by the estate tax? A:

1. Those directly included: a. For citizens and residents – property located WORLDWIDE, whether

i. realty, ii. personal property (tangible or intangible)

b. For nonresident alien – property located in RP i. realty, ii. personal property (tangible or intangible)

However, INTANGIBLE PERSONAL property (such as shares of a foreign company 85% of whose business is located in the Philippines) of nonresident aliens where there is reciprocity, meaning the country of residence of the decedent

(a) did not impose transfer tax or (b) allowed similar exemption from transfer tax of property owned by Filipino citizens

NOT residing in that foreign country 2. Those indirectly included:

a. Transfers in contemplation b. Revocable transfers c. Property under general power of appointment d. Transfers with retention of certain rights over income or enjoyment e. Transfers for insufficient consideration

These are considered “substitutes for testamentary dispositions” – although inter vivos in form, they are mortis causa in substance.

Q: When is a transfer considered as one made in contemplation of death? A: When the motivating factor for such transfer is the thought of death, or if given near the time of death – ex. old age, failing health, length of time between donation & death, concurrence with will-making. Note: the 3 year presumption under PD. 1705 (which provides that transfers made within 3 years of death are presumed to have been done in contemplation of death) NO longer applies. Q: Are there instances which DISPROVE that the transfer was made in contemplation of death? A: YES. When it is shown that the reason for the transfer was the decedent’s desire:

1. to see his children enjoy the property 2. to save income taxes 3. to settle family disputes

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4. to relieve donor from administrative burden 5. to reward services rendered

Q: In determining whether a transfer is a donations inter vivos or a donation mortis causa, is a determination of the type of heir relevant? A: YES. Where there is a donation inter vivos to a person who is NOT a forced heir, the presumption is that such transfer was inter vivos. But is the recipient of the donated property is a forced heir, the transfer is presumed to be made merely to accelerate the inheritance, hence mortis causa. However, the presumption may be rebutted by evidence to the contrary [VDA. DE ROCES v. POSADAS] Q: What deductions are not available to nonresident estates? A: Nonresident estates can not deduct the 1 million standard deduction, medical expenses and family home. Q: What are the indications of a donation inter vivos? A: When:

1. Property was donated “out of love and affection” 2. When a reservation on the donation is made only with respect to the right of usufruct which

denotes that naked ownership was already transferred (ratio: why reserve such right if one remains to be the owner thereof?)

3. When the transferors retained sufficient property only for the purpose of maintaining their status in life, thereby implying that it was alright to part with the property even during the transferor’s lifetime

4. Donee accepted donation since in a donation mortis causa acceptance is not required [Gestopa v. CA, October 5, 2000]

Q: Illustrate transfers for insufficient consideration. A:

Case A Case B Case C FMV, transfer 1,000 1,000 1,000 FMV, death 2,000 2,000 2,000 Consideration received at the time of transfer

700

1,000

0

Amount included in estate 1,300

0

2,000

In determining whether there was sufficient consideration, compare the FMV of the property at the time of transfer with the amount of consideration received at the time of transfer. However, the amount to be included in the estate is computed by taking the difference between the FMV of the property at the time of death and the amount of consideration received at the time of transfer. Q: What is the reason behind allowing as deduction for estate tax purposes property which was previously taxed (vanishing deduction)? A: To mitigate the harshness of previous taxation. Q: What are the conditions for the deductibility of property previously taxed or VANISHING DEDUCTION? A:

1. Present decedent must have acquired the property by inheritance or donation within 5 years prior to his death

2. Property acquired formed part of gross estate of the prior decedent, or was a taxable gift of the donor

3. Estate tax or donor’s tax due thereon must have been paid 4. The property must be identified as the one received from the prior decedent or from the donor 5. The estate of the prior decedent has not previously availed of the vanishing deduction

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

1) determine the FMV of the PPT at the time of the prior decedent’s death and the FMV at the time of the present decedent’s death then get the lower of these two amounts

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

3) subtract 2 from 1 4) Apply rate of vanishing deduction to 3 above (20% to 100%)

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

= (500T) – (500T/2M x 400T) = 400T

! 400T x 60% = 240T

Q: There were claims against the estate of the deceased which allegedly exceeded the gross estate which resulted in the administrator reporting a NIL estate tax liability. The BIR contested the amounts of the claims against the estate deductions stating that lower amounts were paid as compromise payments during the settlement of the estate and these amounts should be what will be considered in arriving at the net estate. Will the compromise amounts be the amounts considered as deductions to the gross estate? A: NO, the deduction allowable is that amount determined at the time of death. Post-death developments are not material in determining the amount of deduction, specially for the claims against the estate deduction. Thus, the Court applied the “date-of-death valuation rule” which is the US rule on deductions and which is applicable also in the Philippines given no apparent reason to disregard the same. The amount deductible is the debt which could have been enforced against the deceased in his lifetime, nothing more and nothing less. [DIZON in his capacity as Administrator of deceased Fernandez vs. CIR (April 30, 2008) – Nachura] Q: Are amounts in excess of the P500,000 medical expenses deductible still as claims against the estate? A: No. Q: Are notarial fees and attorney’s fees on guardianship proceedings deductible from gross estate? A: It depends. If the attorney’s fees pertain to the collection of assets, payment of debts, or distribution of the property to the heirs then they are deductible. Q: When will the same be disallowed as deductions form gross estate? A: When the same pertains to:

payments are made to the trustee who was charged with the administration of the decedent’s assets for the benefit of an just an heir and

the bond filed by the administrator since it is in the nature of a qualification for the office and not necessary for the settlement of the assets of the estate [CIR VS. PAJONAR (MARCH 22, 2000)]

Q: Should the BIR discover unpaid taxes due from the decedent already after the property has been distributed to the heirs, how can the BIR recover such unpaid tax liabilities? A: The BIR can recover in two ways:

(1) it may recover said liability from all the heirs who shall share proportionately OR (2) it may go against the property held by an heir if the same is sufficient to cover the whole tax

liability (in which case, the heir who paid can seek reimbursement from his/her co-heirs)

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BUT in both instances, the respective heirs may not be held accountable for more that the share he/she inherited

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

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

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

2. the transfer is for less than adequate consideration 3. the transfer is inter vivos

Q: Mr. A sold his lot not used for business to his brother Mr. B for 500,000 when at that time the lot was valued in the market at P1M. Mr. A bought it for P100,000. In addition, A sold some of the shares of his company, X Corp., to his senior executives. He sold the X Corp. shares for P300,000 when the market value was at P500,000. His original cost in the shares is P100,000. Are the sales subject to donor’s tax? A: The sale of the lot is not subject to donor’s tax as it is a real property classified as a capital asset and as such is subject to the 6% capital gains tax. The sale of the shares are, however, subject to the donor’s tax of 30% based on the difference between the selling price and the market value. Q: Are there deductions from the gross gift?

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

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

2. gifts to the national gov’t. or to other created entities not made for profit 3. gifts to religious, charitable, etc. provided that not more than 30% of the value of the gifts are

used for admin. purposes 4. encumbrance on the property if assumed by the donee 5. those specifically provided as diminution on property donated

Q: Are non-resident aliens entitled to all these deductions? A: NO. Only 2 to 5 are allowable Q: Which is a more tax efficient mode of transferring property – via donation mortis causa or inter vivos ? A: While the rates for donor’s tax are lower (2% to 15%) compared to those imposed for estate tax (5% to 20%), payment of donor’s tax are necessarily earlier than estate tax.

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D. REMEDIES Q: Who is the current Commissioner of Internal Revenue? A: Sixto S. Esquivias IV Q: What is the basic composition of the Bureau of Internal Revenue? A: The BIR is headed by the Commissioner and 4 deputy commissioners. There are Assistant Commissioners and division chiefs reporting to the respective departments. Q: What are the powers of the Commissioner of Internal Revenue? A: The CIR has the power:

1. to interpret tax laws and decide tax cases a. interpretation of laws

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

b. decide tax cases • exclusive appellate jurisdiction of the CTA

2. to obtain information, to summon, examine and take testimony of persons " but these powers do not empower the CIR to inquire into bank deposits except as

provided under Section 6(F) of the NIRC

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

compromise of his tax liability under Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability. This requires a signed Waiver of the Secrecy of Bank Deposits.

3. to make assessments and prescribe additional requirements for tax administration and

enforcement a. examination of returns and determination of tax due

• once filed, the taxpayer may no longer withdraw it; but he may amend it, subject to the following requirements:

1. it is made within 3 years from filing, and 2. no notice for audit or investigation has been actually served to him

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

c. authority to conduct inventory-taking, surveillance, and to prescribe presumptive gross sales and receipts

d. authority to terminate taxable period when the taxpayer is i. retiring from business ii. intending to leave the country iii. removing his property iv. obstructing tax collection

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

(1) a decedent to determine his gross estate; and (2) any taxpayer who has filed an application for compromise of his tax liability under

Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability

g. authority to accredit and register tax agents

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h. authority to prescribe additional procedural or documentary requirements Q: Are all the powers of the Commissioner delegable? A: No. The following may not be delegated: (1) Promulgation of rules & regulations (2) Issuance of first impression rulings (3) Compromise or abate if the amount is over P500,000 (4) Assign officers in charge of excisable articles Q: May the CIR be compelled to make an assessment? A: NO. Mandamus lies only to perform ministerial functions; assessment is discretionary on the CIR. Absent showing of grave abuse, CIR’s right to interpret tax laws and enforce them is discretionary [MERALCO SECURITIES CORP.] Q: When is the civil penalty of 25% imposable? A: It is imposable in case of:

1. failure to file return and pay tax due thereon 2. filing with unauthorized revenue officer 3. failure to pay within time prescribed in assessment notice 4. failure to pay part of the amount shown in ITR

Note: All the above simultaneously attract the 20% interest except number 2. Q: If a taxpayer who files a return subsequently realizes that the return filed was insufficient, will his amended return be subject to the 25% surcharge? A: As long as the taxpayer files the amended return before the lapse of any demand by the BIR to pay his/her deficiency assessment, the taxpayer is not liable for any surcharge. Q: Taxpayer A filed and paid taxes on April 15, 2009 worth 5M. On May 15, 2009, he realized he should have paid P6M and thus pays the additional P1M. Is he subject to the 25% surcharge? A: No. None of the violations mentioned was committed by the taxpayer. Q: Taxpayer B filed and paid taxes on April 15, 2009 worth 5M. On May 15, 2009, the BIR issued an assessment and required that Taxpayer pay an additional P1M on or before June 15, 2009. If he pays before June 15, 2009 is he subject to the 25% surcharge? A: No. None of the violations mentioned was committed by the taxpayer. Q: Taxpayer C did not file any return nor pay any taxes on April 15, 2009. On May 15, 2009, he realized he should have paid P6M and thus pays the whole 6M. Is he subject to the 25% surcharge? A: Yes. Taxpayer C failed to file return and pay tax due thereon which is the first type of act which requires a 25% surcharge imposition. Q: Taxpayer D filed and paid taxes on April 15, 2009 worth 10M. On May 15, 2009, the BIR issued an assessment and required that Taxpayer pay an additional P5M on or before June 15, 2009. If he pays after June 15, 2009 is he subject to any surcharge? A: Yes. Taxpayer D will be subject to the 50% surcharge since (a) he failed to pay within the time prescribed in the notice of assessment and (b) the underdeclaration is 50% or in excess of the 30% threshold which raises the prima facie presumption of a false or fraudulent return. As such allegation is only prima facie, it may be rebutted. Q: Can the compromise offer of a taxpayer be lower the prescribed rates (10% for financial incapacity and 40% for doubtful validity) in the Tax Code? A: Yes, but the approval by the Evaluation Board which is composed of the CIR plus 4 Deputy Commissioners is required

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Q: When may the interest on deficiency tax be waived? A: When the assessment is highly controversial as in the case of CAGAYAN ELECTRIC POWER & LIGHT where there was a withdrawal of its exemption from income tax and a subsequent reinstatement of such exemption. Thus, non-payment during the short time when the taxpayer was exempt was not subjected to interest payment. Q: What remedies are available for the collection of taxes? A:

1. tax lien (Sec. 219) 2. compromise (Sec. 204) 3. distraint of goods (shares, debts, ect.) 4. levy of real property 5. civil or criminal action 6. forfeiture 7. suspension of business operations 8. enforcement of admin. fines

The remedies may be resorted to all at the same time but 3 and 4 not available if less than 100 pesos. Q: May an assessment for deficiency estate tax attain finality when there is a pending case in the probate court? A: YES, when such assessment was not protested by the taxpayer administratively [MARCOS II v. CA] Q: Will service of an assessment notice made to the agent of the decedent after the decedent’s death be effective? A: NO. Service of assessment notice on the trust officer/agent of the decedent made after the death is invalid since at that time the legal relationship between the principal and his agent had been automatically severed by the death of the principal even if the agent continued to act as such by filing the decedent’s ITR. The fact of failure to file a notice of death will not alter this effect but will only expose the estate to penalties and will not continue the relationship with the agent [ESTATE OF LATE JULIAN DIEZ VS. CIR (JANUARY 27, 2004)] Q: What is the significance of the taxpayer’s indicating in the previous year’s ITR its new address? A: Any service of assessment notice on the old address subsequent to such previous year invalidates the assessment. [CIR VS. BPI AS LIQUIDATOR OF PARAMOUNT ACCEPTANCE CORP. (SEPTEMBER 23, 2003)] Q: Does the dismissal of a civil action carry with it the dismissal of the civil aspect of tax collection? A: No, proceedings in tax cases are different since the tax liability not deemed included in criminal cases filed. Q: Should the filing of a criminal complaint be preceded by assessment ? A: NO. In case of a false or fraudulent return, proceedings in court may be commenced without an assessment since under the Tax Code, civil and criminal aspects may be pursued simultaneously Q: When does the government’s right to assess prescribe? A: The general rule is that the government’s right to assess prescribes in 3 yrs. from the date of the last day of filing. However:

1. If the return is filed after such date, the 3-yr. period is reckoned from the date of actual filing 2. If return filed before last day, then considered as filed on the last day.

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

a) If --- a. A false or fraudulent return is filed with intent to evade tax b. There is a failure to file return Then --- a. tax may be assessed OR b. proceeding in court for collection may be filed without assessment --- at any time within 10 years from discovery of falsity, fraud or omission (b) Waiver of PERIOD TO ASSESS is allowed before the end of period (Note: waivers must be consented to by the BIR and is not a unilateral act)

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

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

2. taxpayer requests reinvestigation which is granted by CIR 3. taxpayer cannot be located in address 4. a warrant of distraint or levy is served (not only issued) and no property could be found 5. taxpayer is out of the Philippines

Regular ITR No ITR, or false or fraudulent ITR Collection w/ prior assessment Collection w/ prior assessment • Assess within 3 yrs. from actual filing or last

day to file (if the filing was done prior to said last day)

• Collection within 5 yrs. from date of assessment by summary OR judicial

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

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

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

Collection within 10 yrs. from date of discovery of falsity, fraud, omission by judicial proceedings only and not by summary proceedings (this limitation on mode of enforcing collection is the distinction if the government proceeds to collection without assessment)

Q: Is there a need to prove that the taxpayer actually received the assessment notice within the prescriptive period? A: No. As a general rule, the assessment is deemed made once the notice is mailed. However, if the receipt is disputed and for this presumption of receipt of mail to apply, CIR must prove that (1) letter was properly addressed and (2) that it was mailed; otherwise, presumption of receipt cant apply. Q: When may the collection of taxes be made? A: It may be made within 5 years from assessment or within the period agreed in the waiver. However, if the waiver refers to both assessment and collection and interpreting it as such will in effect shorten the collection period, then it is deemed to refer to assessment only and not to collection [RP v. LIM DE YU] Q: What is the effect of a reinvestigation on the period to collect ?

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A: The period utilized for reinvestigation is deducted from the period within which to collect. Thus, if the assessment was made on 1/1/2000 and the collection was made on 1/1/2006 but it was shown that from 1/1/2001 to 1/1/2003, or a period of 2 years, the assessment was being reinvestigated, the action to collect has not yet prescribed since deducting the 2 year period when reinvestigation was made will only amount to 4 years (6 years total minus 2 years of reinvestigation) and is thus still within the 5 year period to collect. Q: What is the difference between a request for reinvestigation and a request for reconsideration for purposes of tolling the running of the prescriptive period to collect? A: A request for reconsideration is a reevaluation on the basis of existing records while a reinvestigation is a reevaluation on the basis of newly-discovered or additional evidence. It is a request for reinvestigation acted upon which suspends the prescriptive period to collect. (BANK OF THE PHIL. ISLANDS VS. CIR (OCTOBER 17, 2005) Q: What are the requirements of a valid waiver? A: (a) specified period (b) signed by proper authority (for 1M or above = CIR must sign) and (c) taxpayer must be furnished a copy of the waiver in order to perfect agreement since waiver is not a mere unilateral act (Philippine Journalists Inc. vs. CIR (December 16, 2004) Q: An informer filed a case with the CTA against the taxpayer and the BIR. The informer was seeking to (1) declare the taxpayer as having an assessment and (2) as a consequence of (1), to collect his informer’s reward. This case was filed by the informer within 3 years from the time that the taxpayer filed its return. However, apart from this action initiated by the informer, no other action was filed by the government seeking to collect against the taxpayer. Has the right to collect already prescribed? A: No, this is a unique case but the BIR is deemed to be compliant with the requirement “collection within 5 years from time of assessment” since if the Petitioner-informant won, the CTA would have ordered the erring parties to pay the tax. At the very least, the filing by the informer of the case would have suspended the running of the period because the BIR is prohibited from making collection because there was a pending case. [PNOC vs. CA, April 26, 2005] Q: Is there a difference between a false return and a fraudulent return? A: YES. A false return merely implies deviation from truth, whether intentional or not, while a fraudulent return refers to an intentional evasion of tax [AZNAR v. CTA] Q: Where there is an assessment, when does the right to collect prescribe? A: Where there is an assessment, the right to collect prescribes in 5 years. The 10 year period to collect from discovery of falsity, fraud, etc. is NOT APPLICABLE [RP. v. RET]. Note that in this case the Court ruled that the pendency of a criminal case against the taxpayer did not prevent the CIR from proceeding to collect so any action that was lodged after 5 years from the assessment can no longer be valid as being barred by prescription. Q: When does the period of prescription with respect to the government’s right to file a criminal action begin to run? A: Prescription begins to run from the date of commission, or if not known, from discovery AND actual filing of judicial proceeding [SEC. 281 Tax Code]. Q: When is the prescriptive period interrupted? A: It is interrupted when;

1. proceedings are instituted and 2. when the taxpayer is out of the country [SEC. 281 Tax Code]

Q: When quarterly tax returns are required to be filed, from where is the 3-year prescriptive period reckoned? A: It is reckoned from the date of filing of the final ANNUAL return even for percentage taxes. [PROTECTOR’S SERVICES INC. v. CA (APRIL 12, 2000)]

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Note that quarterly VAT returns are final returns so the 2-year period to file the claim for refund is reckoned from their filing. For income taxes, the reckoning of the 2 year period is the filing of the final adjustment return and not the quarterly income tax returns. Q: What is the nature of the requirement that the assessment must “state the facts and the law on which the assessment is based”? A: Such is not merely a procedural requirement but a substantive requirement which determines taxpayer’s ability to protest. Thus, the same must be complied with otherwise the assessment is void. Thus, assessment notices which only have computations are invalid. This is the reason why the new Tax Code provides that the taxpayer be “informed” and not merely “notified”. Given that this new rule benefits the taxpayer, the same may be applied retroactively. (CIR vs. Azucena Reyes, January 27, 2006 upheld in CIR vs. Enron Subic Power Corporation – January 19, 2009)

Q: Is the RMC stating that the 2-year period to file a claim for refund is extended to make it 10 years correct? A: NO. The RMC cannot go beyond what is provided by law; and the State cannot be put in estoppel. [PBCOM v. CIR ]

Q: For refund case, may the taxpayer elevate its claim with the CTA even before a decision is made by the BIR? A: YES, similar to assessments, taxpayers may appeal the inaction of the BIR to the CTA even for refund cases. However, the period is different since the BIR is given 120 days to act on a refund; otherwise, the taxpayer may already appeal the inaction. However, if the 2-year period is about to lapse and no decision has as yet been given, the taxpayer may already appeal to the CTA even if the 120 day period to decide has not expired. Q: In what instance is the Preliminary Assessment Notice not required? A: 1) assessment is purely mathematical error 2) discrepancy between tax withheld and remitted 3) section 76 – claim for refund is filed when it was previously carried-over 4) excise tax on excisable article not paid 5) goods imported by tax-exempt is sold not taxable entity Q: May interest on the tax refund be awarded? A: NO. Interest on the tax refund cannot be awarded unless

(1) authorized by law or (2) the collection of the tax was attended by arbitrariness (inexcusable or obstinate disregard of legal

provisions). But there is no arbitrariness when there is room for two opinions [PHILEX MINING CORP. VS. CIR (APRIL 21, 1999)]

Q: Will the filing of the Supplemental Petition be sufficient to toll the prescriptive period for the claim for refund? A: NO, the claim for refund has been barred by prescription since the Supplemental Petition was not admitted. While retirement funds/employee trusts are still absolutely exempt from income tax regardless of the nature of tax, Petitioner’s claim was barred by prescription since the filing of Supplemental Petition (and not an original action) was not granted and therefore “it did not have any judicial effect” to toll the running of the 2-year period. It was only when a subsequent Petition for Review was filed did the prescriptive period toll. Also, this is not a case where 2-year period can be considered non-jurisdictional since there are no “exceptional circumstances” to speak of such as that prevailing in the Panay Electric Co. case (1958) where the taxpayer and CIR agreed to await the result of another analogous case prior to having the taxpayer file an action for refund. FAR EAST BANK AND TRUST COMPANY vs. CIR (May 2, 2006) - TINGA

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EXTENSION OF 2-YEAR PERIOD ? – PNB VS. CIR (OCTOBER 14, 2003 – C.A. CASE) TWO YEAR PERIOD TO FILE JUDICIAL CLAIM FOR REFUND “IS NOT JURISDICTIONAL AND MAY BE SUSPENDED OR REASONS OF EQUITY AND OTHER SPECIAL CIRCUMSTANCES” SUCH AS 1) WHEN TAXPAYER MADE ADVANCE INCOME TAX PAYMENT (HEEDING PRES. AQUINO’S CALL) AND WAS MADE TO BELIEVE THAT ITS REQUEST FOR TAX CREDIT WILL BE ACTED UPON FAVORABLY CONSIDERING THAT ITS CARRY-OVER WAS UNUTILIZED SINCE THE COMPANY SUFFERED LOSSES FOR THE NEXT 4 YEARS (PNB CASE) 2) WHEN THE TAXPAYER AND THE CIR AGREED TO WAIT FOR THE RESULT IN ANOTHER CASE HAVING THE SAME ISSUE (PANAY ELECTRIC CO. CASE)

3) WHEN THE CIR INITIALLY AGREED TO GRANT THE REFUND AND LATER DENIED THE SAME (NAGUIAT CASE) Q: Petitioner, an online international air carrier, filed with the BIR a claim for refund of excise taxes it paid on its purchases of jet fuel from Petron Corporation. The CTA denied the claim and ruled that since the excise tax was imposed on Petron as the manufacturer of petroleum products, any claim for refund should be filed by Petron. It added that when the burden of the tax was shifted to the purchaser, the amount passed-on to the latter is no longer a tax but an added cost of the goods purchaser as decided in the Philippine Acetylene case. Petitioner could not be considered a taxpayer because it merely shouldered the burden of the excise tax (which is an indirect tax) and not the excise tax itself as Petron, being the manufacturer, still remains primarily liable. Petitioner said that to have Petron be the claimant is to make their right to recovery dependent solely on Petron’s acts over which it has no control. Is Silkair the proper party to claim a tax credit for the excise taxes it paid on its purchases of jet fuel from Petron Corporation? A: NO, the proper party to seek a refund of an indirect tax is the statutory taxpayer, who is the person on whom the tax is imposed by law and who paid the same, even if that person shifted the tax to another. Thus, Petron Corporation being the statutory taxpayer (excise taxes being levied on manufacturers and producers) is the entity that may claim a refund. When Petron passed on the burden of the tax to petitioner, the additional amount can no longer be considered a tax but as part of the purchase price which Petitioner had to pay as purchaser. Petitioner’s argument that it is entitled to the refund since it is exempt from paying indirect taxes by virtue of the Air Transport Agreement between the Philippines and Singapore is unavailing considering that, unlike the situation of NPC in the Maceda case, there is in this case an absence of clear legislative intent of an exemption from indirect taxes based on Section 135(b) of the Tax Code and Article 4(2) of the Air Transport Agreement. [SILKAIR (SINGAPORE) PTE, LTD. vs. COMMISSIONER OF INTERNAL REVENUE (February 6, 2008 & November 14, 2008)] Q: Is a final demand letter issued by the BIR reiterating the demand for immediate payment considered as a final decision appealable to the CTA? A: YES. The letter is deemed as the CIR’s final act since failure to comply therewith exposes property to distraint and levy [CIR VS. ISABELA CULTURAL CORP. (JULY 11, 2001)]. More importantly, section 228 allows direct appeal to the CTA if protest is not acted upon within 180 days. Q: When is a decision appealable to CTA ? A: So long as the tenor of the decision is that the dispute of Petitioner is denied, it is appealable. To let the Petitioner defer the period is to unduly put in his hand the collection of taxes. The CIR should always indicate in clear language the decision of the BIR [SURIGAO ELECTRIC v. CTA] Q: Is the denial by the BIR of the protest on the PAN (not the FAN) appealable to the CTA ? A: No. The denial of the CIR must be on a protest of the FAN. Q: PSPC acquired some TCCs through the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (composed of DOF, BIR, BOC and BOI) from other BOI-registered entities. PSPC then utilized the said TCCs for its excise taxes and were then issued TDMs by the Center and ATAPs issued by the BIR. However, the BIR assessed PSPC for delinquency excise taxes alleging that PSPC is not a qualified transferee of the TCCs. CA ruled that PSPC was not entitled to the benefit of the TCCs and thus upheld the assessment. Were the use of PSPC of the TCCs valid?

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A: Yes. There is no suspensive condition for the validity of TCCs as they are effective immediately and only computational errors are allowed as basis to invalidate TCCs. Also, even if the source is defective, it does not affect PSPC’s right as it acted in good faith and the agencies approved of the use of TCCs [PILIPINAS SHELL PETROLEUM CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE (December 21, 2007)] PLEASE REMEMBER THE PERIODS IN AN ASSESSMENT PROCEEDINGS

• 30 DAYS TO PROTEST FROM RECEIPT OF FAN • 60 DAYS TO SUBMIT COMPLETE SET OF DOCUMENTS • 180 DAYS FOR THE CIR TO ACT FROM THE SUBMISSION OF COMPLETE

DOCUMENTS • 30 DAYS TO APPEAL TO THE CTA FROM DENIAL OR INACTION

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E. CTA R.A. 9282

• ELEVATES CTA TO CA LEVEL • TWO DIVISIONS AND EN BANC • VOTES OF 2 IF DIVISION AND 4 IF EN BANC • EX-JUSTICES CANT APPEAR BEFORE COURT WITHIN 1 YEAR

JURISDICTION --- A. EXCLUSIVE APPELLATE JURISDICTION 1. DECISIONS OF CIR 2. INACTION OF CIR 3. DECISIONS OF RTC ON LOCAL TAX CASES 4. DECISIONS OF COC 5. DECISIONS OF CBAA (ON EXERCISE OF APPEAL OVER RPT TAX CASES

DECIDED BY LBAA) 6. DECISIONS OF DOF ON CUSTOMS CASES ELEVATED TO HIM ON AUTOMATIC REVIEW DUE TO ADVERSE DECISION VS. GOVERNMENT 7. DECISIONS OF DTI (ON NON-AGRI. PRODUCTS) AND DA (ON AGRI. PRODUCTS) INVOLVING DUMPING AND COUNTERVAILING DUTIES

B. OVER CRIMINAL OFFENSES

1. ORIGINAL - FOR CRIMINAL ACTS UNDER NIRC AND CUSTOMS CODE 1M OR ABOVE 2. APPELLATE – LESS THAN 1M OR NO SPECIFIED AMOUNT (REGULAR COURTS, IF FROM RTC = APPEAL TO CTA / IF FROM MTC THEN RTC = PETITION FOR REVIEW TO CTA)

C. OVER TAX COLLECTION CASES

1. ORIGINAL – 1M OR ABOVE 2. APPELLATE – LESS THAN 1M (REGULAR COURTS, IF FROM RTC = APPEAL TO CTA / IF FROM MTC THEN RTC = PETITION FOR REVIEW TO CTA)

PERIOD – 30 DAYS FROM RECEIPT OR INACTION

MODE --- A. PETITION FOR REVIEW = RULE 42 (HEARD BY DIVISION) B. IF FROM CBAA OR RTC (IN APPELLATE JURISDICTION) = RULE 43 (HEARD EN BANC)

MAY FILE MR OR NEW TRIAL WITHIN 15 DAYS FROM RECEIPT OF DENIAL FROM DIVISION TO EN BANC – PETITION FOR REVIEW FROM EN BANC TO SC – PETITION FOR REVIEW ON CERTIORARI (RULE 45)

“when in the opinion of the Court the collection may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court”. (Section 11 in old, Section 9 in new)

Q: In 2005, the Commissioner of Internal Revenue referred to the Department of Justice (DOJ) Secretary, for preliminary investigation and filing of an Information in court, the case against Petitioner for alleged violation of the Tax Code. The CIR alleged that Petitioner substantially underdeclared her income for the year 2002. The DOJ filed an Information against Petitioner who then filed with the CTA division a Motion to Quash the Information filed against her on the grounds of (a) lack of authority of the prosecuting attorney to file the Information, and (b) violation of Petitioner’s constitutional rights to due process and equal protection of the laws, when similar charges against Regina Encarnacion Velasquez were dismissed by the DOJ on the ground that Velasquez’s tax liability was not yet fully determined when the charges were filed against her. The

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CTA denied the Motion to Quash and scheduled arraignment. Petitioner filed with the CTA en banc a Motion for Extension of Time to File a Petition for Review to appeal the denial of her Motion to Quash. Petitioner subsequently filed the Petition for Review with the CTA en banc. Is the resolution of the CTA First Division denying Petitioner’s Motion to Quash a proper subject of an appeal to the CTA en banc? A: NO, the denial of a Motion to Quash is an interlocutory order which is not the proper subject of an appeal or a petition for certiorari. The Revised Rules of Court provide that only final judgments or orders shall be subject to appeal to avoid multiplicity of suits. The test to determine whether an order or judgment is interlocutory or final is whether the order or judgment leaves something to be done in the trial court with respect to the merits of the case. If it does, it is interlocutory; if it does not, it is final. The remedy of the accused from the denial of her Motion to Quash is to proceed with the trial of the case in court, and if final judgment is rendered against her, she could then appeal, and upon such appeal, present the questions which she sought to be decided by the appellate court in a petition for certiorari. Certiorari is an appropriate remedy to assail an interlocutory order only when: (a) the tribunal issued such order without or in excess of jurisdiction or with grave abuse of discretion; and (b) the assailed interlocutory order is patently erroneous, and the remedy of appeal would not afford adequate and expeditious relief. The Court ruled that none of these circumstances were present in the case. The Court also upheld the CTA’s findings on the two points raised by the Petitioner, viz: (1) the filing of the Information was approved by the Commissioner (which is the only requirement as the law does not prescribe the form of approval) as indicated in his letter to the DOJ Secretary and (2) the more appropriate recourse Petitioner should have taken, given the dismissal of similar charges against Velasquez, was to appeal to the DOJ Secretary the Resolution of the Office of the State Prosecutor recommending the filing of an Information against her. Petitioner cannot claim denial of due process because she was given the opportunity to file her affidavits and other pleadings and submit evidence before the DOJ during the preliminary investigation of her case and before the Information was filed against her. [JUDY ANNE L. SANTOS vs. PEOPLE OF THE PHILIPPINES and BUREAU OF INTERNAL REVENUE (August 26, 2008)] Q: Are the remedies of (1) filing an appeal on the BIR’s inaction and (2) filing an appeal on the CIR’s decision exclusive or alternative remedies? A: the options are mutually exclusive and resort to one bars the other. In the case of RCBC vs. CIR (APRIL 24, 2007), CIR failed to act on the disputed assessment within 180 days from date of submission of documents. Thus, petitioner opted to file a Petition for Review before the Court of Tax Appeals BUT FILED THE SAME MORE THAN 30 DAYS AFTER LAPSE OF 180-DAY PERIOD. After availing the first option, i.e., filing a Petition for Review which was however filed out of time, Petitioner can not successfully resort to the second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the Court of Tax Appeals, on the pretext that there is yet no final decision on the disputed assessment because of the Commissioner’s inaction.

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F. VAT

Q: What is the current VAT rate? A: 12% Q: What is the nature of the VAT and what are the elements of a VAT-taxable sale? A: VAT is an indirect tax that may be shifted. The elements of a VAT-taxable sale are as follows: 1) Sale of goods and services, lease of property including “deemed sale” transaction such as (1) transfer of

goods not in the course of business (2) property dividends (3) consignment and without the sale being made within 60 days

2) In the course of trade or business (except if importation) and including INCIDENTAL transactions (as opposed to isolated transactions except if service by nonresident)

3) The transaction is not a VAT zero-rated or a VAT exempt transaction

Q: What are considered as “goods or properties” for VAT purposes? A: All tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; (b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process,

goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. Q: Is a profit element required for VAT to be imposed? A: No. The case of COMASERCO held that even if the arrangement is just a reimbursement of cost, the payments are still subject to VAT Q: National Development Corporation (NDC), in pursuance of the government-mandated plan of privatization, sold to Respondent 5 of its ships. Is the sale of the ships subject to VAT? A: NO, the sale is exempt for being an isolated transaction. The requirement of the sale being “in the course of trade or business” of the seller is indispensable and the seller must be treated as having done so “not just from time to time but all the time”. The Court added that if the VAT is imposed on isolated transactions, there would be less chance of being able to recover the VAT on its sale since no input VAT may have been passed-on to the seller given the nature of the transaction as not “doing business”. Likewise, the Court clarified that the enumeration of what are “deemed sale” does not modify the requirement of the sale being in the “ordinary course of trade or business” and is thus irrelevant. [CIR vs. MAGSAYSAY LINES, INC. (July 28, 2006)] Q: What is “technical importation” as it relates to VAT? A: It is the subsequent sale, transfer or exchange of imported goods by VAT-exempt persons to non-exempt persons or entities. In these cases, the latter shall be considered the importers thereof and shall be liable for VAT due on such importation. Q: Distinguish VAT zero-rated and VAT exempt transactions. A: They both do not yield any output VAT. However, the input VAT treatment is different such that (i) for a zero-rated transaction, the attributable input VAT may be credited and/or refunded and (ii) for an exempt transaction, the input VAT can not be credited/refunded. In addition, a VAT zero-rated taxpayer is required to VAT register while an exempt taxpayer should not VAT-register. Q: What are the notable VAT-exempt transactions? A:

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(1) Sale of agricultural food products in their original state (such as freezing, drying, broiling, roasting, etc.)

(2) Services provided by an R/AHQ but note that services by ROHQ are not VAT exempt but may be zero rated if the services are performed for a nonresident and paid for in foreign currency

(3) Medical services (by hospitals, etc.) except that services rendered by professionals (individuals) are already VAT-taxable

(4) Services from an employer-employee relationship (5) Export sales of non-VAT registered taxpayers (Note: if they were VAT-registered these would be

zero-rated) (6) Real property not held for sale to customers OR sales within the low-cost cap of below P1.5M for a lot

and P2.5M for a house and lot, and P10T per month for leases (7) Banks and non-bank financial intermediaries (8) Services subject to percentage tax (9) Services by TESDA-accredited entities (10) Sales NOT enumerated in 109 (A) to (V) and NOT exceeding 1.5M annually (Note: if the

services/sales are covered under (A) to (V), the amount is irrelevant) Remember that the enumeration under the Tax Code is exclusive.

Q: What are notable VAT-taxable transactions under the new law? A: Sale of electricity / Sale of non-food agricultural products / Services by doctors and lawyers

Q: What are notable zero-rated transactions already? A: Sale of goods & services to international shipping companies / Sale of power thru renewable sources (biomass, solar, wind, etc.) / Transport of passengers and cargo by air and sea from the Philippines to a foreign country Q: How is input VAT treated if the same related to purchase of assets subject to depreciation (or ordinary assets)? A: If the cost (excluding VAT) is more than 1M, the input VAT is also spread over life of the asset if the life of the asset is less than 5 years, or over 5 years if the life of the asset is more than 5 years Q: What are the only bases currently existing to refund unutilized input VAT? A: Only the input VAT relating to zero-rated transactions, those erroneously paid and those which remain unutilized at the close of the business may be refunded.

Q: Mirant generates power which it sells to the National Power Corporation (NPC) in which connection it secured the services of Mitsubishi Corporation of Japan (Mitsubishi). In the belief that its sale of power generation services to NPC is VAT zero-rated because of NPC’s tax exempt status, Mirant filed an Application for Effective Zero-Rating. The BIR issued a ruling stating that the supply of electricity by Respondent to NPC shall be subject to 0% VAT. On April 14, 1998, Mirant paid Mitsubishi the VAT component billed by the latter for services rendered. Mirant filed its quarterly VAT return for the second quarter of 1998, where it reflected the input VAT paid to Mitsubishi for progress billings of the latter for the period April 1993 to September 1996. Subsequently, on December 20, 1999, Mirant filed an administrative claim for refund of unutilized input VAT arising from (a) its purchase of capital goods from Mitsubishi, and (b) its domestic purchases of goods and services attributable to its zero-rated sales of power generation services to the NPC. Has Mirant’s claim for input VAT refund prescribed? A: Yes, it has prescribed. Claims for VAT refund must be filed within 2 years from the time sales were made even if payment for the VAT was made some quarters after that. The fact that there was a pending request for zero-rating was not recognized as basis for late filing of return and payment of taxes (i.e., two years after sales were made). Also, the Court ruled that the provision on erroneous payment can not be applied as it is not the case here. [COMMISSIONER OF INTERNAL REVENUE vs. MIRANT PAGBILAO CORPORATION (September 12, 2008)]

Q: Being a PEZA exporter, can a taxpayer claim its unutilized input VAT?

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A: YES, Sekisui is entitled to tax refund. PEZA entities can avail of two alternative or subsequent incentives of ITH and 5% GIE. It is only in the latter where the VAT is not imposed on the PEZA entity on its sales. Being under ITH, it will be subject to VAT and should VAT-register. However, (1) sales to the PEZA entity, regardless of incentive availed, is zero-rated on the part of the seller since PEZA is considered “foreign soil” and thus sales to them are considered as “export sales” and (2) if the PEZA entity is an exporter, its input VAT are subject to refund not by virtue of its PEZA status (and thus regardless of whether it’s at 5% GIE or ITH) but due to the nature of its transactions (i.e., export sales).[CIR vs. SEKISUI JUSHI PHILIPPINES, INC. (July 21, 2006)] Note that services rendered outside PEZA zone are not accorded the same VAT zero-rated treatment even if performed for PEZA companies, as the principle that they are rendered in ‘foreign soil’ does not apply. The most common examples would be the hotel accommodations (outside PEZA zone) of PEZA employees. Q: Benguet treated its sale of gold to BSP as zero-rated on the basis of the then Tax Code which gave zero-rated status to export sales. Benguet got a ruling confirming that sale of gold to BSP are export sales. BIR then disallowed refund of input VAT stating that a subsequent ruling was issued revoking the zero-rated status and that this could retroact since no prejudice would result to Benguet since (1) Benguet can offset it against its output or (2) it can claim the same as cost. Is the BIR correct? A: No. (1) Benguet didn’t have enough output to offset the input VAT it accumulated (precisely because believing it was zero-rated it did not pass-on OUTPUT VAT) (2) Assuming that the right to refund overpaid income tax (which would be the result if additional cost is taken up), it does not solve Benguet’s other disadvantageous situations. Also, only 32% of the amount is recovered. Thus, retroactive application of ruling was denied [CIR vs. BENGUET CORPORATION (July 8, 2005)] Q: Are PhilHealth’s services considered “medical services” to entitle it to VAT exemption? A: NO, but PhilHealth may exempt from VAT due only to a previously issued ruling. (1) The VAT-exempt transaction involved is “medical, dental, hospital and veterinary services except those rendered by professionals”. Given that Petitioner is not the entity providing medical services and only (i) acts as a conduit; (ii) arranges for the provision of health care; (iii) contracts services of doctors, etc.; and (iv) contracts and negotiates with hospitals, its services are not VAT-exempt. (2) However, the Court ruled that the revocation of the 1988 ruling can not be applied retroactively since it will prejudice the taxpayer who has not committed any of the acts (i.e., bad faith, omission of facts, etc.) to merit retroactivity of rulings. The fact that the term “health maintenance organization” only took on a technical definition in 1995 upon the passage of the National Health Insurance Act supports PhilHealth’s good faith contention. [CIR vs. PHILIPPINE HEALTH CARE PROVIDERS, INC. (April 24, 2007)] Q: A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC. The foreign entity then subcontracted the actual O&M to the Burmeister. NPC paid the foreign consortium a mixture of currencies while the consortium, in turn, paid Burmeister foreign currency inwardly remitted into the Philippines. BIR did not want to grant refund since the services are “not destined for consumption abroad” (or the destination principle). Are the receipts of Burmeister entitled to VAT zero-rated status? A: Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior to the filing of CIR’s Answer in the CTA. The substantial basis of the petition has no merit since the consortium, which was the recipient of services rendered by Burmeister, was deemed doing business within the Philippines since its 15-year O&M with NPC can not be interpreted as an isolated transaction. In addition, the Court interpreted Sections (1) (referring to ‘processing, manufacturing, repacking’) and (2) (‘services other than those in (1)’) of Sec. 102 (b) as both requiring (i) payment in foreign currency; (ii) inward remittance; (iii) accounted for by the BSP; AND (iv) that the service recipient is doing business outside the Philippines. The Court ruled that if this is not the case, taxpayers can circumvent just by stipulating payment in foreign currency. The refund was allowed since Respondent secured a ruling from the BIR allowing zero-rating of its sales to foreign consortium. However, the ruling is only valid until the time that CIR filed its Answer in the CTA which is deemed revocation of the previously-issued ruling. The Court said the revocation can not retroact

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since none of the instances in Section 246 (bad faith, omission of facts, etc.) are present. [CIR vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. (January 22, 2007)]

Q: How is the VAT imposed on real property transactions? A: VAT is imposed on real properties held for sale or lease as follows: a.) If cash or deferred payment (i.e., payment is more than 25%), then the VAT on the whole amount is

already imposed b.) If installment (less than 25% for year), then the VAT is imposed on each payment c.) There is no VAT imposed on Section 40 (C)(2) exchanges (tax-free) Q: Assuming a VAT-taxable transaction, is the advance payment in a real estate transaction subject to VAT? A: Of the amounts typically covering an advance payment, only pre-paid rent is subject to VAT. Other forms of advance payment such as option money, security deposit, etc., are not subject to VAT. Q: X Corporation had the following sales during the month: Sale to private entities subject to 12% P100,000.00 Sale to private entities subject to 0% 100,000.00 Sale of exempt goods 100,000.00 Sale to gov't. subjected to 5% final VAT Withholding 100,000.00 Total sales for the month P400,000.00 The following input taxes were passed on by its VAT suppliers: Input tax on taxable goods (12%) P5,000.00 Input tax on zero-rated sales 3,000.00 Input tax on sale of exempt goods 2,000.00 Input tax on sale to government 4,000.00 Input tax on depreciable capital good not attributable to any specific activity P20,000.00 (monthly amortization for 60 months) How much creditable input VAT is available for each of the respective type of transactions entered into by X Corp.? A: 1) For sales subject to 12% VAT --- (i) actual input VAT of P5,000 and (ii) ratable portion of P5,000 2) For sales subject to 0% VAT --- (i) actual input VAT of P3,000 and (ii) ratable portion of P5,000 3) For sale of exempt goods --- no input VAT is creditable as the transactions are VAT exempt 4) For sales to government --- no input VAT is creditable as the law imposes a 5% final withholding

VAT obligation on the government agency-payor

Q: In the above problem, how was the ratable portion of creditable input VAT (for VAT-taxable and zero-rated sales) computed? A: (1) for input VAT creditable on VAT-taxable sales Taxable sales ____________ x Amount of input tax not directly attributable Total Sales 100,000 _______ x 20,000 = 5,000

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400,000 (2) for input VAT creditable on VAT zero-rated sales Zero-rated sales ____________ x Amount of input tax not directly attributable Total Sales 100,000 _______ x 20,000 = 5,000 400,000 Q: When does the withholding VAT apply? A: The withholding VAT applies in cases where (1) payments are made to a nonresident whose services are considered as VAT-taxable (ex. royalties) in which case the 12% VAT will be withheld by the payor or (2) payments by government agencies, in which case the government entity will withhold 5% on its payments. These are all considered as final VAT payments. Q: Is a party dealing with a government entity deprived of its entitlement to the input VAT it accumulated considering the VAT withholding tax mechanism? A: The 7% difference (12%-5%) is the presumed input VAT cost of the entity dealing with the government agency. If the actual input VAT is below 7%, then the taxpayer will realize additional income. However if the if the actual input VAT is above 7%, then the difference between the actual input VAT and 7% is considered as additional cost. Q: What are the effects of the failure to register for VAT if such registration is required? A: The taxpayer will be (1) required to pay VAT even if it did not register; (2) prohibited from availing of input VAT on its purchases and (3) will be imposed administrative penalties of 50% surcharge. Q: What are the effects of issuing VAT receipts is the taxpayer is a VAT-exempt seller? A: The taxpayer will be (1) subject to other business taxes (ex. percentage) plus the VAT; (2) prohibited from availing of input VAT on its purchases and (3) will be imposed administrative penalties of 50% surcharge. Note that the buyer can avail of the input VAT in the transaction.

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G. LOCAL TAXATION Q: What is the basis of the Local Government’s TAXING POWER? (SECTION 129) A: It is only granted by the Constitution (Sec. 5 Art. X, Constitution) and is not inherent in the Local Government

Q: Who exercises the power of taxation for LGUs? A: It is exercised by the Sanggunian through the passage of local ordinances Q: What are the limitations on the taxing power of LGUs? A: LGUs can not impose: 1) income tax (except on banks and financial entities) 2) DST 3) Estate and donor’s taxes 4) Customs duties 5) Taxes on goods passing through the LGU 6) Taxes on BOI-registered enterprises 7) Excise taxes on articles under the Tax Code 8) Percentage tax and VAT 9) Taxes on gross receipts of transportation contractors 10) Motor vehicle taxes and fees 11) Taxes and fees on the National government, its agencies and instrumentalities Q: Is a municipal ordinance imposing fees on goods (corn) that pass through a municipality’s

territory valid? A: No, it is void. While the LGU can tax the vehicles using the roads it can not tax the goods even in the guise of “police surveillance” fees. [PALMA DEVELOPMENT CORP. VS. ZAMBOANGA DEL SUR (OCTOBER 16, 2003)] Q: Petron maintains a depot or bulk plant at the Navotas Fishport Complex where it engages in the selling of diesel fuels to vessels used in commercial fishing. Navotas City thereafter levied business taxes on its sale of petroleum products. Can LGUs levy local taxes on sale of petroleum? A: No, LGUs can not impose any type of local tax on petroleum products. The LGC provision provides two possible bases for exemption when it states the LGCs can not impose --- (i) “excise taxes on articles enumerated under the Tax Code” and (ii) “taxes, fees or charges on petroleum products”.

(1) The reference to excise taxes in the LGC is not for “the performance, carrying on or exercise of an activity”. Rather it refers to those subjected to specific or ad valorem taxes under the Tax Code.

(2) The 2nd basis for exemption refers not only to direct or excise taxes to be levied by LGUs on petroleum products but on all types of taxes on petroleum products including business taxes. The Court said that this could not refer again to the non-imposition of excise taxes on petroleum products because otherwise it would be a redundancy. [PETRON CORPORATION vs. TIANGCO (April 16, 2008)]

Q: Bulacan passed an ordinance imposing tax on minerals extracted from public lands BUT went on to collect tax on minerals extracted from private lands. Since the LGC only provides for tax on public lands, is the action of Bulacan valid? A: Generally, LGC can impose even if not in LGC since Sec. 186 is sweeping. However, Bulacan can’t levy on minerals from private lands because it is an excise tax on an article already covered by the Tax Code. This applies the PREEMPTION OR EXCLUSIONARY RULE wherein national government elects to tax a particular area, impliedly withholding from LGU the delegated power to tax the same field [PROVINCE OF BULACAN v. C.A.]

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Q: Who is covered by the Local Business Tax? A: (1) manufacturers, assemblers, processors (2) wholesalers, dealers, distributors (3) exporters, manufacturers of essential commodities (4) retailers (if both wholesale and retail, then pay both taxes) (5) contractors (6) banks and other Financial Institutions (income subject to LBT are enumerated in the section) (7) peddlers (8) other business not specified --- THOSE ALREADY SUBJECT TO TAX UNDER (1) TO (7) CAN NO LONGER BE SUBJECT TO TAX UNDER (8) otherwise it will be deemed as double taxation Q: Can an LGU tax a condominium corporation? A: In YAMANE VS. BA LEPANTO CONDO. CORP. (OCTOBER 25, 2005), it was ruled that condominium corporations are not “businesses” as the same is defined under the LGC w/c is a “commercial activity regularly engaged with a view to profit”. Even if a condominium corporation can levy fees, these are used merely to finance expenses of the condominium and nothing more. Q: On what is the local business tax imposed? A: Gross receipts Q: Ericsson was assessed for deficiency LBT but countered that the assessment was erroneous for having been based on its gross revenues (which, on top of gross receipts, includes uncollected earnings) rather than just its gross receipts. Can LGCs validly impose the LBT on the gross revenues rather than the gross receipts? A: NO, the LBT should be assessed based only on gross receipts. The LGC clearly provides that the LBT is based on gross receipts which include money or its equivalent actually or constructively received, the latter being defined to include deposit in banks, issuance of notice to offset any debt/obligation, etc. In contrast, gross revenue includes receivables which are “payments yet to be received” but are just “expected to be received”. Since Ericsson employs the accrual method of accounting, it does book its receivables as part of gross revenue which exposes it to potential double taxation on these amounts since a taxpayers’ gross revenue will definitely include its gross receipts to be reported in a subsequent year (i.e., when it is already paid actually or constructively) and for which LBT will be paid again. [ERICSSON TELECOMMUNICATIONS, INC. vs. CITY OF PASIG (November 22, 2007)]

Q: Give the rule on SITUS as stated in SECTION 150 of the LGC A: The rule applies if a company has several offices (head office, branch, sales office, warehouse) and is summarized as follows:

(A) Sec. 150 (a) W/ branch/sales office? recorded at allocation Yes branch/sales office none No principal none (B) Sec. 150 (b) Plantation & factory allocation to allocation to factory, etc. In same location ? principal Yes 30% 70% No 30% factory – 60%

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Plantation – 40% (if 2 or more factories, etc. = 70% is prorated Remember that Section 150 (b) [or (B) above] is only resorted to if there is no branch or sales office

Q: How are the sales of route trucks and vans taxed? A: If the sale is made in a place with a branch office, the sale is reported in the LGU where the branch office is located. However, if the sale is made in a place without a branch office, the sale is reported in the LGU where the goods are withdrawn. Q: When does the tax accrue? A: January 1 except new taxes which will accrue on 1st day of quarter next following effectivity of ordinance Q: What penalties are imposable on failure to pay local business taxes? A: The penalty of 25% and 2% interest per month not to exceed 36 months (or a maximum of 72%) may be imposed. Q: Are the local business tax payments paid for privilege of carrying on business in the year paid or for having engaged in business the previous year? A: It is paid for privilege of carrying on business in the year paid. For example, a corporation whose gross sales was 10M in 2008 and 20M in 2009, the LBT payable in January 2009 is based on P10M (gross receipts for 2008) but the same is payment for the right to do business in 2009. Thus, on the year of retirement, the company will only be liable if the actual LBT on the basis of current year sales is more than LBT paid based on previous year’s sales. To continue the example, if the sales of the company are also P10M as of the date of retirement in 2010, this means that the payment made in January 2010 based on the 2009 gross receipts is sufficient to cover the LBT due upon retirement. [Mobil Phils. Inc. vs. Treasurer of Makati (July 14, 2005)] Q: What are the remedies available to the local government? A: Civil remedies are distraint and levy AND collection and the same may be proceeded simultaneously. Certain personal properties, however, are exempt from distraint or levy (sec. 185) – ex. one horse, tools, clothing, libraries, etc. Q: Give the process on how an appeal involving questions on ordinance is made? A: Questions on ordinance are appealed to the Secretary of Justice within 30 days from effectivity which must be decided within 60 days BUT an appeal does not suspend effectivity of the ordinance. Within 30 days from the Sec. of Justice’s decision or after 60 day inaction, an appeal may be filed with the RTC.

Q: In relation to the rule on appeals on ordinance, what is the doctrine in DRILON v. LIM? A: The Secretary can declare an ordinance void for not having followed requirements (procedural and substantive) but he cannot replace it with his own law or he cannot say that it is unwise. Q: Can an ordinance which has been declared void for failure to publish for 3 weeks be “remedied” by passing another ordinance which purports to amend the ordinance that has been declared void? A: No, the new ordinance is still void since it can not cure something which had never existed in the first place as the same was void ab initio. [COCA-COLA VS. MANILA (JUNE 27, 2006)] Q: Give the requirements for the Sanggunian (not the mayor) to grant exemptions from local business tax? A: (1) natural calamities, civil disturbance, failure of crops

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(2) through an ordinance (3) shall similarly apply to all businesses similarly situated (4) shall only take effect for the next calendar year and not to exceed 12 months Q: Is the 6-year exemption from LBT for BOI-registered enterprises reckoned from date of BOI registration or from start of commercial operations? A: As the law is clear on the matter, the exemption starts from registration with the BOI even if the actual operations started some time after due to force majeure [BATANGAS POWER CORP. VS. NPC (APRIL 28, 2004)] Q: ABS-CBN was granted a franchise which provides that it “shall pay a 3% franchise tax and the said percentage tax shall be “in lieu of all taxes on this franchise or earnings thereof”. It thus filed a complaint against the imposition of local franchise tax. Petitioner argued that the “in lieu of all taxes” provision in Respondent’s franchise could not have been intended to prevail over the constitutional mandate which ensures the viability and self-sufficiency of local government units. Does the “in lieu of all taxes” provision in ABS-CBN’s franchise exempt it from payment of the local franchise tax? A: No, the right to exemption from local franchise tax must be clearly established beyond reasonable doubt and cannot be made out of inference or implications. The uncertainty over whether the “in lieu of all taxes” provision pertains to exemption from local or national taxes, or both, should be construed against Respondent. Respondent has the burden to prove that it is in fact covered by the exemption claimed, but it failed to discharge this burden. Furthermore, the “in lieu of all taxes” clause in Respondent’s franchise has become ineffective with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding P10 million as they are now subject to the VAT. [QUEZON CITY vs. ABS-CBN BROADCASTING CORPORATION (October 6, 2008)]

Q: Petitioner was granted a legislative franchise under RA No. 7294 and on that basis filed a case stating that it was not liable for the franchise tax of 75% of 1% of gross annual receipts since its franchise states that it is only subject to franchise tax under the Tax Code (now, the VAT), income tax and real property tax. The same franchise referred to provides that Petitioner “shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of this franchise x x x “ Is Petitioner liable to pay the franchise tax to Davao City? A: Yes, R.A. 7294 does not expressly provide what taxes Petitioner is exempt from and whether its exemption covers national or local taxes, or both. The uncertainty of the “in lieu of all taxes” clause must be construed strictly against Petitioner as it is in the form of a tax exemption. In which case, Smart’s exemption is interpreted to refer only to national and not local taxes. The Court noted that the “in lieu of all taxes” provision has become functus officio with the abolition of franchise tax on telecommunication companies and its replacement with the VAT. It also discarded Smart’s argument that what it enjoys is tax exclusion (as it pays other taxes) and not tax exemption and stated that either situation requires a strict interpretation against the taxpayer claiming the same. The findings of the Bureau of Local Government Finance (BLGF) which Petitioner relies upon to support its exemption from local franchise taxes are not conclusive on the courts. The BLGF is an administrative agency whose findings on questions of fact are given weight and deference in the courts. The question raised in this case is a legal issue, which is not within the jurisdiction of the BLGF to decide. Finally, Petitioner’s interpretation of the Public Telecommunications Policy Act provision “that any advantage, favor, privilege, exemption, or immunity granted to Globe Telecommunications should likewise apply to Petitioner” is misplaced as the Court ruled that these advantages, etc. necessarily refer to exemption from certain regulations and requirements since to sustain Petitioner’s theory would leave the Government with the burden of having to keep track of all granted telecommunications franchises, lest some companies be treated unequally. [SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO (September 16, 2008)] (Note: The same decision was reached in the February 27, 2009 case of Iloilo City vs. Smart Communications.)

Q: What are the rules on assessments? A: a) Assessment must be made within 5 years from the date they become due

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b) If there is fraud or intent to evade payment of tax, assessment may be made within 10 years from discovery of fraud or intent to evade

Q: How does the taxpayer contest a local business tax assessment? A: After the treasurer issues assessment, the taxpayer has 60 days to protest (NO PROTEST UNDER PAYMENT REQUIRED). The taxpayer has 60 days to decide. An appeal to the RTC is then available upon denial or 60-day inaction by the treasurer. RTC’s decision is then appealable to the CTA.

Q: What is the rule on collection? A: Collection must be within 5 yrs. from assessment.

Q: May the running of prescriptive period be suspended? A: Yes, in the following instances:

1. Treasurer is legally prevented from assessing/collecting 2. Taxpayer requests for reinvestigation and executes waiver 3. Taxpayer is out of the country or can not be located

Q: What is the rule on refunds? A: Must file written claim within 2 yrs. from the date of payment of tax OR from the date when the taxpayer is entitled to refund. Thus, the SUPERVENING CAUSE doctrine applies.

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H. REAL PROPERTY TAXATION Q: Do all type of LGUs have the power to impose RPT ? A: No. Municipalities outside Metro Manila and baranggays can not impose RPT Q: What types of machinery are subject to RPT? A: Local Finance Circular 1-2002 defines that machinery is subject to RPT “if it is an essential and principal element of an industry without which the business could not function”. Q: What types of real property are subject to idle land tax? A: The 5% tax on idle land is imposed on agricultural lands which are at least one (1) hectare or bigger or, (2) if non-agricultural and at least 1,000sqm. --- in both cases where at least 50% of the land is unutilized Q: What real properties are exempt from RPT A: Those enumerated under Section 234 of the LGC.

(a) realty owned by government or political subdivision (excludes GOCC except if 3. below) except if beneficial use is granted to a taxable person even if w/o consideration

(b) charitable, church, etc. and all lands and buildings actually directly exclusively used for religious, charitable or educational purposes

(c) all machineries actually directly exclusively used by local water districts and GOCC engaged in supply of water and electricity (THUS, ONLY MACHINERIES ARE EXEMPT, IF THEY ARE LANDS OR BUILDINGS – IT WILL BE DEEMED AS “SPECIAL CLASS”) – it has to be a GOCC such as NPC, etc.

(d) realty owned by registered cooperatives (e) machinery for pollution control and environment protection The local sanggunian can not add to the list of exempt properties but may allow condonation in cases of general failure of crops or decrease in agricultural products.

Q: First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) Agreement with Petitioner National Power Corporation (NPC) for the construction of a power plant. Under the agreement, Bauang Private Power Corporation (BPPC) was created to own, manage and operate the power plant and assume and perform FPPC’s obligations under the contract. BPPC will convert NPC’s supplied diesel fuel into electricity for a fee and deliver the power to NPC. After an agreed period of time, the power station shall be transferred by BPCC to NPC without payment of any compensation. The BOT Agreement also provides that NPC shall be responsible for the payment of all real property taxes (RPT) in respect of the power plant, buildings and improvements thereon. After BPPC was assessed for RPT, NPC filed a petition with the Local Board of Assessment Appeals (LBAA) to declare the machineries as exempt from RPT under Section 234(c) of the Local Government Code (LGC), which provides for the RPT exemption of, among others, “all machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or –controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.” The LBAA denied the Petition for Exemption and ruled that the exemption provided by the LGC applies only when a government-owned or –controlled corporation (GOCC) such as Petitioner owns and/or actually uses the machineries and equipment for the generation and transmission of electric power. NPC appealed to the Central Board of Assessment Appeals (CBAA). The CBAA affirmed the decision of the LBAA and ruled further that the lower 10% assessment level for the valuation of the subject properties available to GOCCs for RPT purposes, cannot be availed of by BPPC since it is not a GOCC. Is Petitioner NPC exempt from RPT on the machineries and equipment?

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A: No, because it does not actually, directly and exclusively use the machineries and equipment in the generation and transmission of electric power. NPC’s basis for its claimed exemption, Section 234(c) of the LGC, clearly provides that the RPT exemption shall apply to: (a) all machineries and equipment; (b) that are actually, directly, and exclusively used by; (c) local water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power. The machineries and equipment are owned by BPPC, subject only to the transfer of these properties to NPC after the lapse of the 15-year period agreed upon. Moreover, BPPC’s use of the machineries and equipment are actual, direct and immediate, while NPC’s is contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. In the same manner, the application of the lower 10% assessment level for the properties cannot be used by BPPC, since it is not a GOCC engaged in the generation and transmission of electric power, but a private entity. [NATIONAL POWER CORPORATION vs. CENTRAL BOARD OF ASSESSMENT APPEALS, ET.AL. (January 30, 2009)] Q: Petitioner was granted a 25-year franchise to install, operate and maintain telecommunications systems throughout the Philippines under a law which states that “The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise x x x.” As they were not being issued a Mayor’s permit, Petitioner paid the RPT under protest. Petitioner argued that the phrase “exclusive of this franchise” means that only the real properties not used in furtherance of its franchise are subject to RPT while those real properties which are used in its telecommunications business are exempt from RPT. Are Petitioner’s real properties used in its telecommunications business exempt from RPT? A: No, Petitioner’s real properties, whether or not used in its telecommunications business, are subject to RPT. Section 5 of RA No. 7678 categorically states that Petitioner is liable to pay the same taxes on its real estate, buildings, and personal property “exclusive of this franchise” as other persons or corporations. The phrase “exclusive of this franchise” qualifies the term “personal property.” This means that Petitioner’s legislative franchise, which is an intangible personal property, shall not be subject to taxes. This is to put franchise grantees in parity with non-franchisees as the latter obviously do not have franchises which may potentially be subject to realty tax. There is nothing in the first sentence of Section 5 which expressly or even impliedly exempts Petitioner from RPT. Finally, Petitioner’s reliance on the BLGF’s opinion stating that real properties owned by telecommunications companies are exempt from RPT is without basis as the BLGF has no authority to rule on claims for exemption from RPT. [DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC. vs. CITY GOVERNMENT OF BATANGAS (December 11, 2008)] Q: FELS entered into a lease contract with NAPOCOR over two engine power barges at Balayan Bay, Batangas. The lease contract stipulated that NAPOCOR shall be responsible for all taxes (including RPT on the barges), fees and charges that FELS may be liable to except (i) income tax of FELS and its employees; and (ii) construction permit and environmental fees. FELS was assessed for RPT and the LBAA upheld the assessment by stating that while the barges “may be classified as movable/personal property, they are considered as real property for tax purposes because they are installed at a specific location with a character of permanency”. Are the power barges considered as realty for RPT purposes? A: Yes, the barges are real property subject to RPT.

(1) The remedy from the decision of the Provincial Assessor is an appeal to the LBAA and not a Motion for Reconsideration. Failure to file the appeal to the LBAA within the 60-day period provided by law makes the assessment final and unappealable.

(2) Further basis to consider power barges as real property is Article 415(9) of the Civil Code which provides that “docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast”. As such they are categorized as immovable property by destination.

(3) Neither can FELS claim exemption under Section 234 of the LGC given that the requirement is that to be exempt the machineries and equipment must be actually, directly and exclusively used by GOCCs engaged in the generation of power. Since the agreement between FELS and NAPOCOR is that FELS will own and operate the barges and not NAPOCOR, the condition is not met. The mere undertaking to pay real estate taxes does not

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infect the transaction with NAPOCOR’s tax exemption since, at best, it will be considered only as an arrangement between the parties not binding 3rd parties. [FELS ENERGY, INC. vs. PROVINCE OF BATANGAS (February 16, 2007)]

Q: Are equipment/machineries in cement or wooden platform and which “were never used as industrial equipments to produce finished products for sale nor to repair machineries offered to the general public for business or commercial purposes” considered as realty subject to RPT? A: No. For equipment to be real property, they must be ESSENTIAL AND PRINCIPAL ELEMENTS (ex. machineries for production of soft drinks in breweries). In addition, the machinery should be essential to carry on business in a building or piece of land and this was not the case since it was proven that the equipment was not essential because it is used only for repairs which could actually be done elsewhere. [MINDANAO BUS COMPANY v. CITY ASSESSOR OF CAGAYAN DE ORO] Q: Are tanks, pumps, etc. installed by Caltex in gas stations on leased land considered as realty subject to RPT even if the lessor does not become the owner of the said assets? A: Yes, because they are essential to the business of the taxpayer. The issue of whether the property was installed by owner (Davao Sawmill case) does NOT apply since there the issue was on execution of judgment against the lessee. [RPT - CALTEX PHILS. vs. CBAA of PASAY]

Q: How is a RPT tax assessment disputed? A: 1. Owner pays tax 2. Annotation of “paid under protest” in receipt 3. Protest filed with the treasurer of the LGU within 30 days from payment 4. Treasurer to decide within 60 days 5. Treasurer decision or inaction within 60 days appealable to LBAA within 60 days 6. LBAA to decided within 120 days 7. LBAA decision appealable to CBAA within 30 days 8. CBAA appealable to CTA NOW UNDER RA 9282 (EVEN IF THE LAW STATES THAT IT IS FINAL AND EXECUTORY) Q: What are the rules on assessments? A: a) Assessment must be made within 5 years from the date they become due b) If there is fraud or intent to evade payment of tax, assessment may be made within 10 years from discovery of fraud or intent to evade Q: What is the rule on collection? A: Collection must be within 5 yrs. from assessment.

Q: May the running of prescriptive period be suspended? A: Yes, in the following instances: 1. Treasurer is legally prevented from assessing/collecting 2. Taxpayer requests for reinvestigation and executes waiver 3. Taxpayer is out of the country or can not be located Q: What is the rule on refunds? A: Must file written claim within 2 yrs. from the date of payment of tax OR from the date when the taxpayer is entitled to reduction or adjustment. Thus, the SUPERVENING CAUSE doctrine also applies. Q: What were the procedural issues addressed in the case of Lopez vs. City of Manila (February 19, 1999) A:

1) Remedies on legality of tax ordinance ---

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1. Sec. 187 – constitutionality or legality of ordinance – 30 days from effecitvity – DOJ 2. Sec. 226 – assessment of realty – 60 days from notice of assessment – LBAA

2) Steps for revision of Real Property assessments --- 1. preparation of schedule of FMVs 2. enactment of ordinance which (a) levies RPT and SEF (b) fix assessment levels and

(c) adopts schedules of FMVs in 1. above 3) Procedural steps in computing RPT ---

1. ascertain assessment level 2. multiply Market Value with assessment level = assessed value 3. multiply tax rate with assessed value

Q: Can the petitioner file a case direct to the RTC if it claims that it was questioning the authority of the treasurer to assess and not only the amount of assessment? A: No, it was found that petitioner raised issues on prescription, double taxation, tax exemption. In which case, the correctness of the tax assessment has to be dealt with and the treasurer has initial jurisdiction and his decision is appealable to the LBAA. [Olivares vs. Joey Marquez (September 22, 2004)]

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I. CUSTOMS 1. Importation begins when goods enter RP jurisdiction with intention to unlade and terminates upon

payment of taxes or legal permit to withdraw has been granted. 2. All articles subject to duty even if previously exported from RP except if specifically exempted by law. 3. PROHIBITED IMPORTATIONS are those vs. policy, morals, law, etc. 4. CONDITIONALLY-FREE IMPORTATIONS

• If thereafter sold for purposes other than original intention = subject to forfeiture and importation shall constitute a fraudulent practice

• Examples o Articles for repair, re-conditioning to be re-exported w/in 6 mos. (requires bond) o Personal effects for balikbayans excluding cars, and must NOT be commercial quantity

and NOT exceed P2000 – can be brought in 90 days after arrival o Articles to be donated to relief organizations (certified by DSWD, DECS) o Samples not for commercial sales, including medicines (but should not be available in

RP) o Economical, technical, vocational, scientific, philosophical, historical, cultural

books/publications and bibles 5. IN DETERMINING DUTIES TO BE PAID, TWO ELEMENTS REQUIRED – (1) type of good to determine duty rate and (2) dutiable value 7. DUTIABLE VALUE

• 6 methods --- Transaction Value / Transaction Value of Identical Goods / Transaction Value of Similar Goods / Deductive Value / Computed Value (methods 4 and 5 may be reversed) / Fallback Value

• ONE – Transaction Value o Price actually PAID/PAYABLE when exported to RP adjusted by adding ---

! Commissions / cost of containers / packing cost / cost of tools, engineering, artwork if supplied free of charge / royalties

! Value of subsequent resale accruing to the seller ! Cost of transport & loading/unloading charges from port of exportation to port of

entry in RP (costs within RP already excluded) ! Insurance

o Method one is not to be used IF ! Buyer imposes restrictions on sale or use of goods except if imposed by law,

geographical limits, not affect value of goods ! Sale is subject to some condition/consideration which can not be valued ! Part of subsequent resale accrues to seller and amount indeterminable ! BUYER AND SELLER RELATED – business partners; holds 5% equity; common

control; relatives up to 4th degree

8. Special duties • Anti-dumping

o Duty imposed on foreign article imported into the Philippines at a price less than the fair value, the importation of which might injure the establishment of an industry producing like goods in the Philippines (ex. TILES, CEMENT)

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o Action initiated by filing complaint alleging a) dumping, b) injury, and c) causal link between the dumped imports and the alleged injury

• Countervailing o Duty imposed on articles, upon the production, manufacture or export of which

any bounty or subsidy is directly or indirectly granted in the country of origin, and the exportation into the Philippines will likely injure an industry in the Philippines. Bounty is the cash award paid to an exporter while subsidy refers to fiscal incentives, not in the form of cash award, to encourage manufacturers or exporters. The duty is equal to the ascertained or estimated amount of the bounty or subsidy.

o There is deemed to be subsidy if there’s grant, foregone revenue, provision of goods/services

• Marking o Duty imposed on imported articles or containers which have not been properly

marked in any official language of the Philippines as to indicate the name of the country or origin of the article. The purpose is to prevent the deception of consumers.

o Certain exceptions – if goods cant be market without injury, crude substance, importer necessarily knows origin

• Discriminatory o Duty imposed upon articles of a foreign country which discriminates against Philippine

commerce in such a manner as to place it at a disadvantage compared with the commerce of another foreign country. (WTO)

o Amount not to exceed 100% ad valorem

10. GOVERNMENT REMEDIES – enforcement of tax lien on unpaid duties AND seizure & forfeiture

Seizure rules

If vessel becomes subject to seizure, the pursuit may be continued even beyond RP seas Doctrine of primary jurisdiction – CoC has exclusive jurisdiction on seizure cases to the exclusion of regular courts Even vehicles used for transporting seizable articles may be seized except if owner has no knowledge of its use 11. PENALTIES (a) Negligence — When a deficiency results from an offenders failureto exercise

reasonable care and competence to ensure that a statement made is correct, it shall be determined to be negligent = fine equivalent to ½ to 2 times the revenue loss.

(b) Gross Negligence — When a deficiency results from an act or acts of omission or commission done with actual knowledge or wanton disregard for the relevant facts it shall be determined to be grossly negligent = fine of 2 ½ to 5 times revenue loss.

(c) Fraud — When the material false statement or act in connection with the transaction was committed or omitted knowingly, voluntarily and intentionally, as established by clear and convincing evidence, it shall be determined to be fraudulent = fine of 5 to 8 times revenue loss and imprisonment of 2 to 8 years.

12. TAXPAYER REMEDIES – collector (within 15 days) – Commissioner of Customs (within 15 days) – Secretary of Finance (if adverse to government) – CTA – SC Commissioner of Customs and Secretary of Finance have 30 day to rule on appeal to them Payment under protest is required