TAXATION LAW

ADDENDUM TO THE
LAST-MINUTE TIPS FOR THE 2016 BAR
PIERRE MARTIN D. REYES

Q. Distinguish ‘tax evasion’ from ‘tax net income or asset accrues to or benefits any
avoidance.’ member or specific person and all the activities of
the hospital are non-profit. On the other hand,
A. The difference is as follows: Section 30(E) and (G), while providing for an
exemption is qualified by the last paragraph
which, in turn, provides that activities conducted
Tax Avoidance Tax Evasion for profit shall be taxable. Section 30(E) and (G)
requires that an institution be operated
It is the tax saving It is a scheme used exclusively for charitable purposes to be
device within the outside of those completely exempt from income tax. In this case,
means sanctioned by lawful means and however, St. Lukes is not operated exclusively for
law. when availed of, it charitable purposes insofar as its revenues from
usually subjects the paying patients are concerned. Such revenue is
taxpayer to further subject to income tax at 10% under Section 27(B).2
or additional civil or
criminal liabilities Q. What is the rule on the deductibility of
representation or entertainment,
Q. What are the elements of direct double amusement and recreation expenses?
taxation?
A. Such expenses must:
A. There is direct double taxation if the two taxes
are imposed: 1. Must be paid or incurred during the
taxable year
1. On the same subject matter; 2. be directly related to or in furtherance of
2. For the same purpose; the conduct of the trade, business or
3. By the same taxing authority; exercise of the profession
4. Within the same jurisdiction; 3. not be contrary to law, morals, public
5. During the same taxing period; policy or public order
6. The taxes must be of the same kind or 4. does not constitute a bribe, kickback or
character.1 other similar payment
5. must be duly substantiated by adequate
Q. St. Lukes Medical Center is a hospital proof
organized as a non-stock and non-profit 6. The appropriate amount of withholding
corporation. It admits both paying and non- tax if applicable should have been withheld
paying patients. The CIR claimed that St. therefrom and paid to the BIR
Lukes was liable for income tax at 10% as 7. not exceed such ceilings prescribed by the
provided under Section 27(B) of the NIRC. Secretary of Finance.
St. Lukes argues that it is a non-stock, non-
profit institution for charitable and social Q. Is there a ceiling on entertainment,
welfare purposes exempt from income tax amusement and recreational expenses?
under Section 30(E) and (G) of the NIRC.
Decide. A. Yes. The ceiling are as follows:

A. St. Lukes cannot claim full tax exemption 1. Sellers of goods or properties– 0.5% of
under Section 30 because it has paying patients their net sales as representation expenses
and this is notwithstanding the fact that it is a
non-profit hospital. For Section 27(B) to apply, the
hospital must be non-profit which means that no

1Pepsi-Cola Bottling Company v. Mun. of Tanauan, G.R. No. L- 2CIR v. St. Lukes Medical Center, G.R. No. 195909 and 195960,
31156 February 27, 1976. September 26, 2012

Page 1 of 6
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.
 TAXATION LAW PM REYES
ADDENDUM TO THE LAST-MINUTE
TIPS FOR THE 2016 BAR

2. Sellers of services– 1% of their net

revenues as representation expenses.3 A. The obligation of the payor/employer to deduct
and withhold the related withholding tax arises at
Q. What are the conditions for bad debts to the time the income was paid or accrued or
be deductible? recorded as expense in the payor’s/employer’s
books, whichever comes first.7
A. The requisites for deductibility of bad debts
are: Q. What is the taxability of campaign
contributions for donor’s tax purposes?
1. There must be an existing indebtedness
due to the taxpayer which must be valid A. The tax treatment of campaign contributions
and legally demandable for donor’s tax purposes are as follows:
2. The same must be connected with the
taxpayer’s trade, business or practice of
profession Campaign Period Before or after the
3. The same must not be sustained in a set by COMELEC campaign period
transaction entered into between related set by COMELEC
parties
4. The same must actually be charged-off
within the taxable year The donations/ The donations/
5. The same must be actually ascertained to contributions that contributions that
be worthless and uncollectible as of the end have been utilized have been utilized
of the taxable year. and spent during the and spent before or
6. The debts are uncollectible despite diligent campaign period as after the campaign
efforts exerted by the taxpayer.4 set by the period are subject to
COMELEC are donor’s tax.
Q: Is the 20% Senior Citizens’ discount a tax exempt from donor’s
credit or a tax deduction? tax.

A. The 20% Senior Citizen Discount is a tax

deduction. The 20% sales discount shall be treated
as a tax deduction and no longer as a tax credit.5
Note: This reversed the ruling in CIR v. Central Luzon
Drug Corporation,6 where the Court held that the 20%
discount required by the law to be given to senior
citizens was a tax credit and not merely a tax deduction
from the gross income or gross sale of the
establishment concerned. This ruling, however, was
based on Section 4 of Republic Act No. 7432, which
provides establishments may claim the discount as a
tax credit. Note that Republic Act No. 9257, which
amended Republic Act No. 7432, now provides that
establishments may claim the discounts as a tax
deduction. Republic Act No. 9994 retains this
treatment of the 20% senior citizen’s discount as a tax
deduction.
Q. When is the payor/employer obliged to
deduct and withhold the related
withholding taxes on accrued bonuses?
Donations made by corporations in violation of the
Section 36(9) of the Corporation Code are subject
to donor’s tax. (RMC No. 30-2016 dated March
14, 2016)
Note: Section 36(9) of the Corporation Code prohibits
corporations, domestic or foreign, from giving
donations in aid of any political party or candidate or
for purposes of partisan political activity
Q. What is the 20-lender rule?
A. Under the 20-lender rule, when funds are
simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public
borrowing and the debt instrument at that point
in time is deemed a deposit substitute.
Consequently, the seller is required to withhold
the 20% final withholding tax on the imputed
interest income from the said debt instrument.8

3 RR 10-2002 dated JULY 10, 2002. 6 G.R. No. 159647, April 15, 2005.
4 RR 5-99 dated March 10, 1999. 7 ING Bank v. Commissioner of Internal Revenue, G.R. No. 167679,
5 Carlos Superdrug Corp v. Department of Social Welfare and July 22, 2015.
Development, G.R. No. 166494, June 29, 2007; M.E. Holding 8 Banco de Oro v. Republic, G.R. No. G.R. No. 198756, August 16,

Corporation v. Court of Appeals, G.R. No. 160193, March 3, 2008, 2016.

Page 2 of 6
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.
 TAXATION LAW
ADDENDUM TO THE LAST-MINUTE
TIPS FOR THE 2016 BAR
Q. There were claims against the estate of
the deceased which allegedly exceed the
gross estate which resulted in the
administrator reporting no 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. The claims
existing at the time of death are significant to, and
should be made the basis of, the determination of
allowable deductions. Post-death developments
are not material in determining the amount of
deduction, especially for the claims against the
estate deduction. There is no law, nor any
legislative intent in our tax laws, which
disregards the date-of-death valuation principle
which is the US rule on deductions. The amount
deductible is the debt which could have been
enforced against the deceased in his lifetime,
nothing more and nothing less. In this
jurisdiction, we follow the date-of-death valuation
rule. 9
Q. What is the rule of reciprocity
applicable to intangible personal property
of a decedent who is a non-resident alien?
A. With respect to intangible personal
property of a non-resident alien, no estate tax
shall be collected if reciprocity is present. There is
reciprocity in the following cases:
(a) If the decedent at the time of his death was
a citizen or resident of a foreign country
which at the time of his death did not
impose an estate tax, in respect of
intangible personal property of citizens of
the Philippines not residing in that foreign
country; or
9 Dizon v. Court of Tax Appeals, GR No. 140944, April 30, 2008, citing
Ithaca v. US, 279 bUS 151, 49 S.Ct. 291, 73 L.Ed. 647 (1929).
10 NIRC, §4
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.
PM REYES
(b) If the laws of the foreign country of which
the decedent was a citizen and resident at
the time of his death allows a similar
exemption from estate tax, in respect of
intangible personal property owned by
citizens of the Philippines not residing in
that foreign country.10
Q. ABC is the operator of XYZ Inn Hotel. It
leases part of its premises to PAGCOR and
caters food and beverages to its patrons.
ABC contends that the sale of food and
beverages to PAGCOR is zero-rated and thus
entitling them to claim a tax refund/credit.
Is ABC correct?
A. Yes. The services rendered to persons or
entities whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively subjects the
supply of such services to zero (0%) rate shall be
subject to 0%. Since the law clearly provides for
PAGCOR’s exemption, the sale of services of
Acesite to PAGCOR is effectively zero-rated.
Hence, ABC may refund the VAT it paid on its
sale of food and beverages to PAGCOR.11
Note: In the same case, the Supreme Court said that
the Government is not exempt from the application of
solutio indebiti. In the field of taxation where the State
exacts strict compliance upon its citizens, the State
must likewise deal with taxpayers with fairness and
honesty. Hence, under the principle of solutio
indebiti, the Government has to restore to the taxpayer
the sums representing erroneous payments of taxes.12
Q. ABC filed a claim for refund of unutilized
input taxes for the 4th quarter of 1993. The
CTA found that ABC failed to present proof
that it has not applied the alleged excess
input taxes to any of its subsequent
quarter's output tax liability. The taxpayer
merely presented in evidence documents to
show that it has not applied the amount
subject of the claim to its 1994 first quarter
output tax liability but did not present the
1994 1st quarter VAT return at all. Will ABC’s
claim prosper?
A. No. When claiming tax refund/credit, the VAT-
registered taxpayer must be able to establish that
11 Commissioner of Internal Revenue v. Acesite Philippines, G.R. No.
147295, February 16, 2007.
12 Id.
Page 3 of 6
 TAXATION LAW
ADDENDUM TO THE LAST-MINUTE
TIPS FOR THE 2016 BAR
it does have refundable or creditable input VAT,
and the same has not been applied against its
output VAT liabilities information which are
supposed to be reflected in the taxpayers VAT
returns. Thus, an application for tax refund/credit
must be accompanied by copies of the taxpayers
VAT return/s for the taxable quarter/s
concerned.13
Q. In VAT refunds, is there a difference
between an invoice and official receipt for
purposes of substantiation of the claim?
A. Yes. A VAT invoice is necessary for every sale,
barter or exchange of goods or properties while a
VAT official receipt properly pertains to ever;
lease of goods or properties, and every sale, barter
or exchange of services. In other words, the VAT
invoice is the seller's best proof of the sale of the
goods or services to the buyer while the VAT
receipt is the buyer's best evidence of the payment
of goods or services received from the seller.14
Q. Will the failure of the taxpayer to
appeal the inaction result in the finality of
the Formal Letter of Demand and Final
Assessment Notice?
A. No. Section 228 of the NIRC did not limit the
remedy to appeal the inaction of the CIR to the
filing of an appeal after the lapse of the 180-day
period. When the taxpayer protested the
assessment, he naturally expects the
Commissioner to either decide positively or
negatively. The taxpayer cannot be prejudiced if
he chooses to wait for the final decision of the CIR
on the protested assessment.15
Q. Define “willful blindness.”
A. Willful blindness is the "deliberate avoidance
of knowledge of a crime, esp. by failing to make a
reasonable inquiry about suspected wrongdoing
despite being aware that it is highly probable."16
Q. In what type of internal revenue taxes
may deficiency interest be imposed?
13 Atlas Consolidated Mining Corporation v. Commissioner of
Internal Revenue, G.R. 159471, January 26, 2011.
14 Nippon Express (Philippines) Corporation v. CIR, G.R. No. 185666,
February 4, 2015; Northern Mindanao Power Corporation v. CIR,
G.R. No. 185115, February 18, 2015.
15 Lascona Land v Commissioner of Internal Revenue, G.R. No.
171251, March 5, 2012.
16 People v Benjamin G. Kintanar, CTA Crim. Case No. 0-030,
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.
PM REYES
A. Based on Section 249(B) of the Tax Code, the
"Deficiency Interest" shall be imposed on “[a]ny
deficiency in the tax due, as term is defined in this
Code", i.e., as the term "deficiency" is defined in
the NIRC of 1997. There are only three (3)
instances where it defines the term "deficiency",
and this relates only and respectively to three (3)
types of internal revenue taxes, namely, income
tax, estate tax, and donor's tax, pursuant to
Sections 56(8), 93 and 104. Thus, the deficiency
interest under Section 249(8) should be applied
only whenever there is a deficiency income tax, a
deficiency estate tax, and a deficiency donor's
tax.17
Note: In the same case, the CTA 1st Division also ruled
that deficiency interest extends only up to the time
when the taxpayer is required to pay the assessed after
being informed thereof while delinquency interest shall
commence from the time when the concerned taxpayer
failed to pay the assessed tax within the time allowed
as stated in the formal letter of demand. In other
words, the deficiency interest would not accrue at the
same that the delinquency interest begins to accrue
and therefore avoiding a 40% interest rate per annum.
Note that the Tax Code specifically states that
deficiency interest shall apply from the date prescribed
for its payment until the full payment thereof. In any
case, the Liquigaz case is merely a CTA decision and
as such should not be considered as binding precedent.
At most, it is persuasive. Further, in recent CTA cases
(albeit with dissents), the 20% deficiency interest has
been imposed on all types of taxes.
Q. The National Power Corporation
(NPC) received a notice of franchise tax
delinquency from the Provincial
Government of Bataan. The assessment is
based on NPC’s sale of electricity that it
generated from two power plants in Bataan.
The province once again sent notices of tax
due. NPC replied that it had ceased to be
liable after the enactment of Electric Power
Industry Act (EPIRA), which relieved NPC
of its functions of generating and supplying
electricity. The province proceeded to levy
on the properties that NPC used to own. Is
NPC liable for the franchise tax?
August 11, 2010; Rogelio A. Tan v. People, CTA EB Crim No. 022
(CTA Crim Case Nos. O-064 and O-065) and People v. Rogelio A. Tan,
CTA EB Crim No. 023 (CTA Crim. Case Nos. O-064 and O-65), Nov.
18, 2014.
17 Liquigaz Philippines Corporation v. Commissioner of Internal
Revenue, CTA EB No. 1117 & CTA EB No. 1119, September 21, 2015;
Ace/Saatchi & Saatchi Advertising, Inc. v. Commissioner of Internal
Revenue, CTA Case No. 8439, December 9, 2015.
Page 4 of 6
 TAXATION LAW
ADDENDUM TO THE LAST-MINUTE
TIPS FOR THE 2016 BAR
A. No. The EPIRA transferred to the National
Transmission Corporation (TRANSCO) the NPC’s
electric transmission function. Thus, the NPC ceased
to operate said business in Bataan. Since the local
franchise tax is imposed on the privilege of operating
a franchise, such tax is not the liability of NPC, but
instead of TRANSCO. The province cannot likewise
levy on the transmission facilities to satisfy the
assessment against NPC because the same is now
owned by TRANSCO.
The EPIRA also created the Power Sector Assets and
Liabilities Management Corporation (PSALM) and
transferred to it all of the NPC’s generation assets,
which includes the plants in Bataan. Clearly, NPC
had ceased running said business. Further, the
EPIRA transferred all existing liabilities of NPC to
PSALM, which would include its unpaid liabilities
for local franchise tax. Consequently, such tax is
collectible from PSALM.18
Q. Is the payment under protest
requirement for real property assessment
cases complied with by posting a surety
bond before appealing to the Local Board of
Assessment Appeals?
A. Yes. Section 252 of the Local Government Code
mandates that "[n]o protest shall be entertained
unless the taxpayer first pays the tax." It is settled
that the requirement of "payment under protest"
is a condition sine qua non before an appeal may
be entertained. By posting a surety bond before
filing its appeal of the assessment with the LBAA,
the taxpayer may be considered to have
substantially complied with the requirement of
payment under protest in Section 252 of the Local
Government Code for the said bond already
guarantees the payment to the Office of the City
Treasurer of the total amount of real property
taxes and penalties due.19
Q. Is the Mactan Cebu International
Airport Authority (MCIAA) a GOCC which
will now be considered liable for real
property taxes under the Local Government
Code?
18 National Power Corporation v. Provincial Government of Bataan,
G.R. No. 180654, April 21, 2014.
19 Meralco v. City Assessor and City Treasurer of Lucena City, G.R.
No. 166102, August 5, 2015.
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.
PM REYES
A. No. The MCIAA is an instrumentality of the
government, thus, its properties actually, solely
and exclusively used for public purposes,
consisting of the airport terminal building,
airfield, runway, taxiway and the lots on which
they are situated, are not subject to real property
tax.20
Q. Is the Philippine Economic Zone
Authority (PEZA) exempt from the payment
of real property taxes?
A. Yes. The PEZA is exempt from the payment of
real property taxes. The general rule is that real
properties are subject to real property taxes.
Exceptions to the rule are however also provided
in the Local Government Code. Under Section
133(o), local government units have no power to
levy taxes of any kind on the national government,
its agencies and instrumentalities and local
government units. Specifically on real property
taxes, Section 234 enumerates the persons and
real property exempt from real property taxes,
which includes “real property owned by the
Republic of the Philippines or any of its political
subdivisions except when the beneficial use
thereof has been granted, for consideration or
otherwise, to a taxable person.” The PEZA is an
instrumentality of the national government.
Being an instrumentality of the national
government, the PEZA cannot be taxed by local
government units. Further, the real properties
under the PEZA’s title are owned by the Republic
of the Philippines. Properties of public dominion,
even if titled in the name of an instrumentality as
in this case, remain owned by the Republic of the
Philippines.21
Note: Even the PEZA’s lands and buildings whose
beneficial use have been granted to other persons may
not be taxed with real property taxes. The PEZA may
only lease its lands and buildings to PEZA-registered
economic zone enterprises and entities. These PEZA-
registered enterprises and entities, which operate
within economic zones, are not subject to real property
taxes. Under Section 24 of the Special Economic Zone
Act of 1995, no taxes, whether local or national, shall
be imposed on all business establishments operating
within the economic zones.
20 Mactan-Cebu International Airport Authority (MCIAA) v. City of
Lapu-Lapu, G.R. No. 181756, June 15, 2015.
21 City of Lapu-Lapu v. PEZA, G.R. No. 184203 & 187583, November
26, 2014.
Page 5 of 6
 TAXATION LAW PM REYES
ADDENDUM TO THE LAST-MINUTE
TIPS FOR THE 2016 BAR

Q. ABC Company owned two parcels of land at the BOC, and are other charges. Often
in Pasig City. Portions of the properties are not declared through committed by means
leased to different business establishments. submission of import of misclassification
Being part of the ill-gotten wealth of the documents, such as of the nature, quality
Marcoses, the owner of ABC voluntarily the import entry and or value of goods and
surrendered ABC Company to the Republic internal revenue articles,
through the PCGG. Now, Pasig City seeks to declaration. undervaluation in
impose real property taxes on the properties terms of their price,
of ABC. Are the properties of ABC liable for quality or weight,
real property taxes? and misdeclaration
of their kind.23
A. It depends. The portions of the properties not
leased to taxable entities are exempt from RPT
while the portions leased to taxable entities are Q. Does the CTA En Banc have jurisdiction
subject to RPT.22 to take cognizance of a petition for
annulment of judgment to annul a decision
Q. Distinguish “unlawful importation” of one of its divisions?
under Section 3601 of the TCCP from
“various fraudulent practices against A . N o . The Revised Rules of the CTA and even
customs revenue” under Section 3602 of the the Rules of Court which apply suppletorily
TCCP? thereto provide for no instance in which the en
bane may reverse, apnul or void a final decision of
a division. Verily, the Revised Rules of the CTA
Unlawful Fraudulent provide for no instance of an annulment of
Importation Practices judgment at all. Further, the Rules of Court are
(Outright (Technical silent as to whether a collegial court sitting en
smuggling) smuggling) bane may annul a final judgment of its own
division.24

Goods and articles of Goods and articles Q. Does the CTA in Division have
commerce are are brought into the jurisdiction to review the decision of the
brought into the country through RTC which concerns a petition for
country without the fraudulent, falsified declaratory relief involving real property
required importation or erroneous taxes?
documents, or are declarations, to
disposed of in the substantially reduce, A . Y e s . The CTA, sitting as Division, has
local market without if not totally avoid, jurisdiction to review by appeal the decisions,
having been cleared the payment of rulings and resolutions of the RTC over local tax
by the BOC or other correct taxes, duties cases, which includes real property taxes. This is
authorized and other charges. evident from a perusal of the Local Government
government Such goods and Code (LGC) which includes the matter of Real
agencies, to evade articles pass through Property Taxation under one of its main chapters.
the payment of the BOC, but the Indubitably, the power to impose real property tax
correct taxes, duties processing and is in line with the power vested in the local
and other charges. clearing procedures governments to create their own revenue sources,
Such goods and are attended by within the limitations set forth by law. As such,
articles do not fraudulent acts in the collection of real property taxes is conferred
undergo the order to evade the with the local treasurer rather than the Bureau of
processing and payment of correct Internal Revenue.25
clearing procedures taxes, duties, and

22Pasig City v. Republic, G.R. No. 185023, August 24, 2011. 24 Commissioner of Internal Revenue v. Kepco Ilijan Corporation,
23Bureau of Customs v. Hon. Devanadera, G.R. No. 193253, G.R. No. 199422, June 21, 2016.
September 8, 2015. 25 National Power Corporation v. Municipality of Navotas, G.R. No.

192300, November 24, 2014.

Page 6 of 6
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.