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BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

GENERAL PRINCIPLES

Question No. 1: (1991)

1) The police power, the power to tax and the power of eminent domain are
inherent powers of government. May a tax be validly imposed in the exercise of
the police power and not of the power to tax? If your answer is in the affirmative,
give an example.

Answer:

The police power may be exercised for the purpose of requiring licenses for
which license fees may have to be paid. The amount of the license fees for the
regulation of useful occupations should only be sufficient to pay for the cost of the
license and the necessary expense of police surveilance and regulation. For non-
useful occupations, the license fee may be sufficiently high to discourage the
particular activity sought to be regulated. It is clear from the foregoing that police
power may not be exercised by itself alone for the purpose of raising taxes.
However, police power may be exercised jointly with the power of taxation for the
purpose of raising revenues. (Lutz vs. Araneta, 98 Phil. 148)

Alternative Answer:

Taxation involves the power to raise revenue not only in order to support the
existence of government but likewise to carry out legitimate objects of
government. Among such legitimate objects are those that police power itself can
cover. As early as the case of Lutz vs. Araneta (98 Phil. 148)., the Supreme Court
has ruled that taxation may be used to implement an object of police power. An
illustration of such exercise would be an imposition of taxes on gambling, the rates
of which are made somewhat onerous in order to discourage gambling instead of
an outright prohibition thereof by an exercise of a police power measure such as by
present provisions of the Revised Penal Code.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

2) Discuss the meaning and the implications of the following statement:

“Taxes are the lifeblood of government and their prompt and certain
availability is an imperious need.”

Answer:

The phrase, “taxes are the lifeblood of government, etc.” Expresses the
underlying basis of taxation which is governmental necessity, for indeed, without
taxation, a government can neither exists nor endure. Taxation is the indispensable
and inevitable price for civilized society; without taxes, the government would be
paralyzed. This phrase has been used, for instance, to justify the validity of the
laws providing for summary remedies in the collection of taxes. As a consequence
of the above rule, an injunction against the assessment and collection of taxes is
generally withheld be the laws imposing such taxes. Even when it is not so, under
procedural laws such an injunction may not be obtained as held in the case of
Valley Trading Co. vs. CFI (G.R. No. 49529, 31 March 1989), where the Supreme
Court ruled that the damages that may be caused to the taxpayer by being made to
pay the taxes cannot be said to be as irreparable as it would be against the
government’s inability to collect taxes.

Question No. 2: (1991)

To provide means for rehabilitation and stabilization of the sugar industry so


as to prepare it for the eventuality of the loss of the quota allocated to the
Philippines resulting from the lifting of U.S. sanctions against an African country ,
Congress passes a law increasing the existing tax on the manufacture of sugar on a
graduated basis. All collections made under the law are to accrue to a special fund
to be spent only for the purposes enumerated therein, among which are to place
the sugar industry in a position to maintain itself and ultimately to insure its
continued existence despite the loss of that quota, and to afford laborers employed
in the industry a living wage and to improve their working conditions. X, a sugar
planter , files a suit questioning the constitutionality of the law alleging that the
tax is not for a public purpose as the same is being levied exclusively for the aid
and support of the sugar industry.

Decide the case.


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Answer:

The suit filed by the sugar planter questioning the constitutionality of the
sugar industry stabilization measure is untenable. Taxation is no longer merely
for raising revenue to support the existence of government but the power may also
be exercised to carry out legitimate objects of the government. It is a legitimate
object of government to protect its local industries on which the national eceonomy
largely depends. Where the aim o f the tax measure is to achieve such a
governmental objective, the tax imposition can be said to be for a public purpose
(Gaston vs. Republic Bank, 158 SCRA 626).

Question No. 10: (1992)

Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock
of San Miguel Corporation. For failure to file a donor’s return on the donation
within the statutory period, the taxpayer was assessed the sum of P102,000.00, as
donor’s tax plus 25% surcharge or P25,500.00 and 20% interest or P20,400.00
which he paid on June 24, 1985.

On April 10, 1986, he filed his income tax return for 1985 claiming among others,
a deduction for interest amounting to P9,500.00 and reported a taxable income of
P96,000.00.

On November 10, 1986, the taxpayer filed an amended income tax return for the
same calendar year 1985, claiming therein additional deduction in the amount of
P20,400.00 representing interest paid on the donor’s gift tax.

A claim for refund of alleged overpaid income tax for 1985 was filed with the
Commissioner which was subsequently denied.

Upon appeal with the Court of Tax Appeals, the Commissioner took issue with the
Court of Tax Appeals determination that the amount paid by the taxpayer for
interest on his delinquent taxes is deductible form the gross income for the same
year pursuant to Sec. 29 (b) (1) of the National Internal Revenue Code.

The Commissioner of Internal Revenue pointed out that a tax is not indebtedness.
He argued that there is a fundamental distinction between a “tax” and a “debt”
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

according to the Commissioner, the deductibility of “interest on indebtedness form


a person’s income tax cannot extend to interest on taxes.

1) What is your opinion on the argument of the Commissioner that a tax is not
indebtedness so that deductibility on the interest on taxes should not be
allowed?

Answer:

The Commissioner’s argument is misplaced because the interest on the donor’s


tax is not one that can be considered as having been incurred in connection with
the taxpayer’s trade business or exercise profession.

Alternative Answer:

a) While a tax may be considered a debt for purposes of deduction from gross
income, the interest on taxes cannot be considered, as such interest is in the
nature of a penalty, the imposition of which is designed to discourage
delinquent payment of taxes. To allow the deductibility of such interest
would be to diminish the punitive and deterrent effects of the imposition,
and thus to diminish the importance of the prompt payment of taxes.

b) The argument of the Commissioner is wrong. Because while a tax as general


rule is not a debt,, interest of a non-payment of a tax has been considered
like interest on indebtedness by the Supreme Court. (Note: whether or not
the interest is deductible under the present law is not apparently in question).

2) Distinguish between the legal concept of “taxes” and “depts.”

Answer:

A tax may be considered a debt in the Civil Code sense for the following
purposes:

a) Collection being enforced by court action;


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

b) Statute of limitations; and


c) Deduction from gross income.

Strictly speaking, however, a tax is not debt in that there can be no set-off between
the taxpayer and the Government.

3) Pursuant to the National Internal Revenue Code, for interest to be


deductible, what are the requirements to be met? Explain.

Answer:

For interest to be deductible, the following requirements must be met:

a) That there must be an indebtedness;


b) That there is an interest on such indebtedness;
c) Such interest was paid or accrued within the taxable year;
d) Interest was paid on a debt related to one’s profession, trade or business.

Question No. 3: (1994)

1. Distinguish a direct from an indirect tax.

2. Distinguish “scheduler treatment” from “global treatment” as used in


income taxation.

Answer:

1. A direct tax is one in which the taxpayer who pays the tax is directly
liable therefor, that is, the burden of paying the tax person paying the tax.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No.16: (1994)

The secretary of finance, upon recommendation of the commissioner of Internal


Revenue, issued a revenue regulation using gross income as the tax base for
corporations a doing business in the Philippines.

Is the revenue regulation valid?

Answer:

The regulation establishing gross income as the tax base for corporations doing
business in the Philippines (domestic as well as resident foreign is not valid. This is
no longer implementation of the law but actually it constitutes legislation because
among the powers that are exclusively within the legislative authority to tax is the
power to determine the amount of the tax. (Sec. 1 Cooley 176-184). Certainly, if
the tax is limited to gross income without deductions of these corporations, this is
changing the amount of the tax as said amount ultimately depends on the taxable
base.

An indirect tax is one paid by a person who is not directly liable therefor,
and who may therefore shift or pass on the tax to another person or entity, which
ultimately assumes the tax burden. (Maceda v. Macaraig, 197 SCRA 771)

2. Distinction between “scheduler treatment’ and “global treatment” as used


in income taxation:

Under a scheduler system, the various types/items of income (i.e,


Compensation; business/professional income are classified accordingly and are
accorded different tax treatments, in accordance with schedules characterized by
graduated tax rates. Since these types of income are treated separately, the
allowable deductions shall likewise vary for each type of income.

Under the global system, all income received by the taxpayer are grouped
together, without any distinction as to the type or nature of the income, and after
deducting therefrom expenses and other allowable deductions, are subjected to tax
at a fixed rate.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No. 7: (1995)

Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all
lawyers, formed a partnership which they named Marquez and Peneyra Law
Offices. The Commissioner of Internal Revenue thereafter Issued Revenue
Regulation No. 2-93 implementing R.A. 7496 known as the Simplified Net Income
Taxation Scheme (SNITS). Revenue Regulation No. 2-93 provides in part:

Sec. 6. General Porfessional Partnership. –The general professional


partnership and the partners are covered R.A. 7496. Thus, in determining profit of
the partnership, only the direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by partners in their
individual capacities in the practice of their profession which are not reimbursed or
paid by the partnership but are not considered as direct costs are not deductible
from his gross income.

1) Marquez and Peneyra Law Offices filed a taxpayer’s suit alleging that
Revenue Regulation No. 2-93 violates the principle uniformity in taxation
because general professional partnerships are now subject to payment of
income tax and that there is a difference in the tax treatment between
individuals engaged in the practice of their respective professions and
partners in general professional partnerships.
Is this contention correct? Explain.

2) Is Revenue Regulation No. 2-93 now considered as having adopted a gross


income method instead of retaining the net income taxation scheme?
Explain.
Answer:

1) The contention is not correct. General professional partnerships remain to be


a non-taxable entity. What is taxable are the partners comprising the same
and they are obligated to report as income their share in the income of the
general professional partnership during the taxable year whether distributed
or not. The SNITS treats professionals as one class of tax payers so that they
shall be treated alike irrespective of whether they practice their profession
alone or in association with other professionals under a general professional
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

partnership. What are taxed differently are individuals and corporations. All
individuals similarly situated are taxed alike under the regulations, therefore,
the principle of uniformity in taxation is not violated. On the contrary, all the
requirements of a valid classification have been complied with (Tan vs. del
Rosario et. al. G.R. No. 109289, October 3, 1994).

2) No. Revenue Regulation No. 2-93 implementing RA No. 7496 have indeed
significantly reduced the items of deduction by limiting it to direct costs and
expenses or the 40% of gross receipts maximum deduction in cases where
the direct costs are difficult to determine. The allowance of limited
deductions however, is still on consonance with the net income taxation
scheme rather than the gross income method. While it is true that not all the
expenses of earning the income might be allowed, this can well be justified
by the fact that deductions are not matters of right but are matters of
legislative grace.

Question No. 1: (1996)

1. What are the basic features of the present income tax system?

Answer:

Our present income tax system can be said to have the following basic features:

a. It has adopted a comprehensive tax situs by using the nationality, residence


and source rules. This makes citizens and resident aliens taxable on their income
derived from all sources while non-resident aliens are taxed only on their income
derived from within the Philippines. Domestic corporations are also taxed on
universal income while foreign corporations are taxed only on income from within.

b. The individual income tax system is mainly progressive in nature in that it


provides graduated rates of income tax. Corporations in general are taxed at a flat
rate of thirty five percent (35%) of net income.

c. It has retained more scheduler than global features with respect to individual
taxpayers but has maintained a more global treatment on corporations.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Note: The following might also be cited by the bar candidates as features of the
income tax system:

a. Individual compensation income earners are taxed on modified gross income


(Gross compensation income less personal exemptions). Self-employed and
professionals are taxed on net income with deductions limited to seven items or in
lieu thereof the forty percent (40%) maximum deduction plus the personal
exemptions. Corporations are generally taxed on net income except for non-
resident foreign corporation which are taxed on gross income.

b. the income tax is generally imposed via self-assessment system or pay-as-


you-file concept of imposing the tax although certain incomes, including income of
non-residents, are taxed on the pay-as-you-earn concept of the so called
withholding tax.

c. The corporate income tax is a one-layer tax in that distribution of profits to


stockholders (except to non-residents) is not subject to income tax.

2. What is the nature of the power of taxation?

Answer:

The power to tax is an attribute of sovereignty and is inherent in the State. It


is a power emanating from necessity because it imposes a necessary burden to
preserve the State’s sovereignty (Phil. Guarantee Co. vs. Commissioner, L22074,
April 30, 1965), It is inherently legislative in nature and character in that the power
of taxation can only be exercised through the enactment of law.

Alternative Answer:

The nature of the power of taxation refers to its own limitations such as the
requirement that it should be for a public purpose, that it be legislative, that it is
territorial an dthat it should be subject to international comity.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No. 2 (1996)

1. X, a lessor of a property, pays real estate tax on the premises, a real estate
dealers tax based on rental receipts and income tax on the rentals. X claims that
this is double taxation.

Decide.

Answer:

There is no double taxation. Double taxation means taxing for the same tax
period the same thing or activity twice, when it should be taxed but once, by the
same taxing authority for the same purpose and with the same kind or character of
tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on
the privilege to engage in business; while the income tax is a tax on the privilege to
earn an income. These taxes are imposed by different taxing authorities and are
essentially of different kind and character (Villanueva vs. City of Iloilo, 26 SCRA
578).

2. Is protest at the time of payment of taxes/duties a requirement to preserve


the taxpayers right to claim a refund? Explain.

Answer:

For taxes imposed under the NIRC, protes at the time of payment is not
required to preserve the taxpayers’ right to claim refund. This is clear under
Section 230 of the NIRC which provides that a suit or proceeding maybe
maintained for the recovery of national internal revenue tax or penalty alleged to
have been erroneously assessed or collated, whether such tax or penalty has been
paid under protest or not.

For duties imposed under the Tariff and Customs Code. A protest at the time
of payment is required to preserve the taxpayers’ claim for refund. The procedure
under the TCC is to the effect that when a ruling or decision of the Collector of
Customs is made whereby liability for duties is determined, the party adversely
affected may protest such ruling or decision by presenting to the collector, at the
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

time when payment is made, or within fifteen days thereafter, a written protest
setting forth his objections to the ruling or decisions in question (Sec. 2308, TCC).

Question No. 3: (1996)

1. Distinguish tax evasion from tax avoidance.

Answer:

a. Tax evasion is a scheme used outside of those lawful means to escape tax
liability and, when availed of it usually subjects the taxpayer to further or
additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax
saving device within the means sanctioned by law, hence legal.

b. X is the owner of a residential lot situated at Quirino Avenue, Pasay City.


The lot has an area of 300 square meters. On June 1, 1994. \100 square meters of
said lot owned by X was expropriated by the government to be used in the
widening of Quirino Avenue, for P300,000.00 representing the estimated assessed
value of said portion. From 1991 to 1995 X, who is a businessman, has not been
paying his income taxes, X is now being assessed for the unpaid income taxes in
the total amount of P150,000.00. X claims his income tax liability has already been
compensated by the amount of P300,000.00 which the government owes him for
the expropriated of his property.

Decide.

Answer:

The income tax liability of X cannot be compensated with the amount


owned by the Government as compensation for his property expropriated. Taxes
are of distinct kind, essence and nature than ordinary obligations. Taxes and debts
cannot be the subject of compensation because the Government and X are not
mutually creditors and debtors of each other and a claim for taxes is not a debt,
demand, contract, or judgment as is allowable to be set off. (Francia vs. IAC, G.R
76749, June 28, 1988)
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No. 4: (1996)

1. Why are tax exemptions strictly construed against the taxpayer?

Answer:

Tax exemptions are strictly construed against the tax-payer because such
provisions are highly disfavoured and may almost be said to be odious to the law
(Manila Electric Company vs. Vera 67 SCRA 351). The exception contained in the
tax statues must be strictly construed against the one claiming the exemption
because the law does not look with favour on tax exemptions them being contrary
to the life-blood theory which is the underlying basis for taxes.

2. When may a taxpayer’s suit be allowed?

Answer:

A taxpayer’s suit may only allowed when an act complained of, which may
include a legislative enactment, directly involves the illegal disbursement of public
funds derived from taxation (Pascual vs. Secretary of Public Works, 110 Phil.
331).

Question No. 7: (1996)

1. Distinguished a false return from a fraudulent return.

Answer:

The distinction between a false return and a fraudulent return is that the first
merely implies a deviation from the truth or fact whether international or not,
whether the second is intentional and deceitful with the sole aim of evading the
correct tax due (Aznar vs. Commissioner, L-20569, August 23, 1974).

Alternative Answer:

A false return contains deviations from the truth which may be due to
mistakes, carelessness or ignorance of the person preparing the return. A fraudulent
return contains an intentional wrongdoing with the sole object of avoiding the tax
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

and it may consist in the intentional under declaration of income, intentional over
declaration of deductions or the recurrence of both. A false return is not
necessarily tainted with fraud because the fraud because the fraud contemplated by
law is actual and not constructive. Any deviation from the truth on the other hand,
whether intentional or not, constitutes falsity. (Asnar vs. Commissioner L-20569,
August 23, 1974)

2. Explain the extent of the authority of the Commissioner of Internal


Revenue to compromise and abate taxes?

Answer:

The authority of the Commissioner to compromise encompasses both civil


and criminal liabilities of the taxpayer. The civil compromise is allowed only in
cases (a) where the tax assessment is of doubtful validity, or (b) when the financial
position of the taxpayer demonstrates a clear inability to pay the tax, The
compromise for the tax liability is possible at any stage of litigation and the
amount of compromise is left to the discretion for the Commissioner except with
respect to final assessments issued against large taxpayers wherein the
Commissioners cannot compromise for less than fifty percent (5-%_. Any
compromise involving large taxpayers lower than fifty percent (50%) shall be
subject to the approval of the Secretary of Finance.

All criminal violations except those involving fraud, can be compromised by


the Commissioner by not prior to the filing of the information with the Court.

The Commissioner may also abate or cancel a tax liability when (a) the tax
or any portion thereof appears to have been unjustly or excessively assessed; or (b)
the administrative and collection s costs involved do not justify collection of the
amount due. (Sec. 204, NIRC)
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No. 8 (1996)

The Constitution exempts from taxation charitable institutions, churches,


parsonages or convents apartment thereto, mosques and non-profit cemeteries and
lands buildings and improvements actually, directly and exclusively used for
religious, charitable and educational purposes.

Mercy Hospital is a 100-bed hospital organized for charity patients.

Can said hospital claim exemption from taxation under the above-quoted
constitutional provision? Explain.

Answer:

Yes, Mercy Hospital can claim exemption from taxaton under the provision
of the Constitution, but only with respect to real property taxes provided that such
rela properties are used actually, directly and exclusively for charitable purposes.

Question No. 1: (1997)

(a) Is double taxation a valid defense against the legality of a tax measure?
(b) When an item of income is taxed in the Philippines and the same income
is taxed in another country, is there a case of double taxation?
(c) What are the usual methods of avoiding the occurrence of double
taxation:
Answer:
(a) No, double taxation standing alone and not being forbidden by our
fundamental law is not a valid defense against the legality of a tax measure (Pepsi
Cola v. Tanawan, 69 SCRA 460). However, if double taxation amounts to a direct
duplicate taxation, in that the same subject is taxed twice when it should be taxed
but once, in a fashion that both taxes are imposed for the same purpose by the same
taxing authority, within the same jurisdiction or taxing district, for the same
taxable period and for the same kind or character of a tax, then it becomes legally
objectionable for being oppressive and inequitable.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

(b) Yes, but it is only a case of indirect duplicate taxation which is not
legally prohibited because the taxes are imposed by different taxing authorities.
(c) The usual methods of avoiding the occurence of double taxation are:
1. Allowing reciprocal exemption either by law or by treaty;
2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deduction for foreign taxes paid; and
4. Reduction of the Philippine tax rate.
Note: Any three of the methods shall be given full credit.

Question No. 2 (1997)


The House of Representative introduced HB 7000 which envisioned to levy
a tax on various transactions. After the bill was approved by the House, the bill
was sent to the Senate as so required by the Constitution. In the upper house,
instead of a deliberation of the House Bill, the Senate introduced SB 8000 which
was its own version of the same tax. The Senate deliberated on this Senate Bill
were then consolidated in the Bicameral Committee. Eventually, the consolidated
bill was approved and sent to the President who signed the same. The private
sectors affected by the new law questioned the validity of the enactment on the
ground that the constitutional provision requiring that all revenue bills should
originate from the House of Representatives had been violated.
Resolve the issue.
Answer:
There is no violation of the constitutional requirement that all revenue bills
should originate from the House of Representatives. What is prohibited is for the
Senate to enact revenue measures on its own without a bill originating from the
House. But once the revenue bill was passed by the House and sent to the Senate,
the latter can pass its own version on the same subject matter consonant with the
latter’s power to propose or concur with amendments. This follows from the co-
equality of the two chambers of Congress (Tolentino v. Secretary of Finance, GR
No. 115455, Oct. 30, 1995).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No. 3: (1997)


“X” Corporation was the recipient in 1990 of two tax exemptions both from
Congress, one law exempting the company’s bond issues from taxes and the other
exempting the company from taxes in the operation of its public utilities. The two
laws extending the tax exemptions were revoked by Congress before their expiry
dates.
Were the revocations constitutional?
Answer:
Yes. The exempting statutes are both granted unilaterally by Congress in the
exercise of taxing powers. Since taxation is the rule and tax exemption, the
exception, any tax exemption unilaterally granted can be withdrawn at the pleasure
of the taxing authority without violating the Constitution (Mactan Cebu
International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996).
Neither of these were issued by the taxing authority in a contract lawfully
entered by it so that their revocation would not constitute an impairment of the
obligations of contracts.
Alternative Answer:
No. The withdrawal of the tax exemption amounts to a deprivation of
property without due process of law, hence unconstitutional.

Question No. 4: (1997)


Taxes were generally imprescriptible; statutes, however, may provide
otherwise. State the rules that have been adopted on this score by –
(a) The National Internal Revenue Code;
(b) The Tariff and Customs Code; and
(c) The Local Government Code
Answer:
The rules that have been adopted on prescription are as follows:
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

(a) National Internal Revenue Code – The statute of limitation for


assessment of tax if a return is filed is within three (3) years from the last day
prescribed by law for the filing of the return or if filed after the last day, within
three years from date of actual filing. If no return is filed or the return filed is false
or fraudulent , the period to assess is within ten years from discovery of the
omission, fraud or falsity.
The period to collect the tax is within three years from date of assessment. In
the case, however, of omission to file or if the return filed is false or fraudulent, the
period to collect is withinh ten years from discovery without need of an
assessment.
(b) Tariff and Customs Code – It does not express any general statute of
limitation; it provided, however, that “when articles have entered and passed free
of duty or final adjustment of duties made, with subsequent delivery, such entry
and passage free of duty or settlement of duties will, after the expiration of one (1)
year, from the date of the final payment of duties, in the absence of fraud or
protest, be final and conclusive upon all parties, unless the liquidation of import
entry was merely tentative” (Sec. 1603, TCC).
(c) Local Government Code – Local taxes, fees, or charges shall be assessed
within five (5) years from the date they became due. In case of fraud or intent to
evade the payment of taxes, fees or charges the same may be assessed within ten
years from discovery of the fraud or intent to evade payment. They shall also be
collected either by administrative or judicial action within five (5) years from date
of assessment (Sec. 194. LGC).

Question No. 5: (1997)

(a) Discuss the meaning of the Global and Schedular systems of taxation.

(b) To which system would you say that the method of taxation under the
National Internal Revenue Code belongs?

Answer:
(a) A global system of taxation is one where the taxpayer is required to lump
up all items of income earned during taxable period and pay under a single set of
income tax rules on these different items of income.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

A schedular system of taxation provides for a different tax treatment of


different types of income so that a separate tax return is required to be filed for
each type of income and the tax is computed on a per return or per schedule basis.
(b) The method of taxation under the NIRC belongs to a system which is
partly schedular and partly global.

I. (1998)

Explain the requirement of uniformity as a limitation in the imposition and/or


collection of taxes. (5%)

Suggested Answer:

Uniformity in the imposition and/or collection of taxes means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The
requirement of uniformity is complied with when the tax operates with the same
force and effect in every place where the subject of it is found (Churchill & Tait v.
Conception, 34 Phil. 969). It does not mean that lands, chattels, securities, income,
occupations, franchises, privileges, necessities and luxuries shall be assessed at the
same rate. Different articles may be taxed at different amounts provided that the
rate is uniform on the same class everywhere with all people at all times.
Accordingly, singling out one particular class for taxation purposes does not
infringe the requirement of uniformity.

First Alternative Answer:

The criteria is met when the tax laws operate equally and uniformly on all
persons under similar circumstances. All persons are treated in the same manner,
the conditions not being different, both in privileges conferred and liabilities
imposed. Uniformity in taxation also refers to geographical uniformity. Favoritism
and preference is not allowed.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Second Alternative Answer:

A tax is deemed to have satisfied the uniformity rule when it operates with the
same force and effect in every place where the subject maybe found. (Phil. Trust &
Co. v. Yatco, 69 Phil. 420)

II. (1998)

From what sources of income are the following persons/corporations taxable


by the Philippine government?

1. Citizen of the Philippines residing therein; [ 1% ]


2. Non-resident citizen; [ 1% ]
3. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker. [ 1% ]
4. An alien individual, whether a resident or not of the Philippines; [ 1% ]
5. A domestic corporation; [ 1% ]

Suggested Answer

(Section 23, NIRC of 1997)

1. A citizen of the Philippines residing therein is taxable on all income derived


from sources within and without the Philippines.
2. A nonresident citizen is taxable only on income derived from sources within
the Philippines.
3. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income from
sources within the Philippines.
4. An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within
and without the Philippines.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

VII. (1998)

Can the Commissioner of Internal Revenue inquire into the bank deposits of
a taxpayer? If so, does this power of the Commissioner conflict with R.A 1405
(Secretary of Bank Deposits Law) [5%]

Suggested Answer:

The Commissioner of Internal Revenue is authorized to inquire into the bank


deposits of:

(1) a decedent to determine his gross estate;


(2) any taxpayer who has filed an application for compromise of his tax
liability by means of financial incapacity to pay his tax liability by means
of financial incapacity to pay his tax liability (Sec. 6(F), NIRC).

The limited power of the Commissioner does not conflict with R.A.
No. 1405 because the provisions of the Tax Code granting this power
is an exception to the Secrecy of Bank Deposits Law as embodied in a
later legislation.

Furthermore, in case a taxpayer applies for an application to compromise the


payment of his tax liabilities on his claim that his financial position demonstrates a
clear inability to pay the tax assessed, his application shall not be considered unless
and until he waives in writing his privilege under R.A. No. 1405, and such waiver
shall constitute the authority of the Commissioner to inquire into the bank deposits
of the taxpayer.

I. (2000)

Justice Holmes once said: “The power to tax is not the power to destroy while this
Court (the Supreme Court) sits.” Describe the power to tax and its limitations.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

The power to tax is an inherent power of the sovereign which is exercised through
the legislature. To impose burdens upon subjects and objects within its jurisdiction
for the purpose of raising revenues to carry out the legitimate objects of
government. The underlying basis for its exercise is governmental necessity for
without it no government can exist nor endure. Accordingly, it has the broadest
scope of all the powers of government because in the absence of limitations, it is
considered as unlimited, plenary, comprehensive and supreme. The two limitations
on the power of taxation are the inherent and constitutional limitations which are
intended to prevent abuse on the exercise of the otherwise plenary and unlimited
power. It is the Court’s role to see to it that the exercise of the power does not
transgress these limitations.

II. (2000)

a) Mr. Pascal’s income from leasing his property reaches the maximum rate of
tax under the law. He donated one-half of his said property to a non-stock,
non-profit educational institution whose income and assets are actually,
directly and exclusively used for educational purposes, and therefore
qualified for tax exemption under article XIV. Section 4(3) of the
Constitution and Section 30(h) of the tax code. Having thus transferred a
portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the
rental income derived from his property. Is their tax avoidance or tax
evasion? Explain. (2%)

Suggested Answer:

There is tax avoidance. Mr. Pascual has exploited a legally permissive alternative
method to reduce his income tax by transferring part of his rental income to a tax
exempt entity through a donation of one-half of the income producing property.
The donation is likewise exempt from donor’s tax. The donation is the legal means
employed to transfer the incidence of the rental income.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

b) An Executive Order was issued pursuant to law. Granting tax and duty
incentives only to businesses and residents within the “secured area” of the
Subic Economic Special Zone, and denying said incentives to those who live
within the Zone but outside such “secured area”. Is the constitutional right to
equal protection of the law violated by the Executive Order? Explain. (3%)

Suggested Answer:

No. Equal protection of the law clause is subject to reasonable. Classification, to be


be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of
the law, (3) not be limited to existing conditions only, (4) apply equally to all
members ofthe same class.

There are substantial differences between big investors being enticed to the
“secured area” and the business operators outside that are in accord with the equal
protection clause that does not require territorial uniformity of laws. The
classification appplies equally to all the resident individuals and businesses within
the “secured area”. The residents, being in like circumstance to contributing
directly to the achievement of the end purpose of the law, are not categorized
further. Instead, they are similarly treated, both in privileges granted and
obligations required. (Tiu, et al., v. Court of Appeals, et al., GR No. 127410,
January 20, 1999).

III. (2000)

Article VI, Section 28(3) of the 1987 Philippine Constitution provides that
charitable institutions, churches and personages or covenants appurtenant thereto,
mosques, non-profit cemeteries and all lands, buildings and improvements
actually, directly dand exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.

a) To what kind of tax does this exemption apply? (2%)


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

This exemption applies only to property taxes. What is exempted is not the
institution itself but the lands, buildings dand mprovements actually, directly and
exclusively used for religious, charitable and educational purposes. (Commissioner
of Internal Revenue v. Court of Appeals, et al., GR No. 124043, October 14,
1998).

b) Is proof of actual use necessary for tax exemption purposes under the
Constitution? (3%)

Suggested Answer:

Yes, because tax exemptions are strictly construed against the taxpayer. There
must be evidence to show that the taxpayer has complied with the requirements for
exemption. Furthermore, real property taxation is based on use and not on
ownership, hence the same rule must also be applied for real property tax
exemptions.

II. (2001)

a) Distinguish a tax amnesty from a tax exemption. (3%)


b) Distinguish direct taxes from indirect taxes, and give an example for each
one. (2%)

Suggested Answer:

a) Tax amnesty is an immunity from all criminal, civil and administrative


liabilities arising from non-payment of taxes. It is a general pardon given to
all taxpayers. It applies only to past tax periods, hence of retroactive
duplication. (People v. Castaneda, GR No. L-46881, 1988).

Tax exemption is an immunity from the civil liability only. It is an immunity


from the civil liability only. It is an immunity or privilege, a freedom from a
charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind.
28, 36 NE 365). It is generally prospective in application.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

b) Direct taxes are taxes wherein both the incidence (or liability for the
payment of the tax) as well as the impact or burden of the tax falls on the
same person. An example of this tax is income tax where the person subject
to tax cannot shift the burden of the tax to another person.
Indirect taxes, on the other hand, are taxes wherein the incidence of or the
liability for the payment of the tax falls on one person but the burden thereof
can be shifted or passed on to another person. Example of this tax is the
value-added tax. (Aban, Law of Basic Taxation, p. 20).

Alternative Answer:

A direct tax is a tax which is demanded from the person who also shoulders the
burden of the tax. Example: corporate and individual income tax. An indirect tax is
a tax which is demanded from one person in the expectation and intention that he
shall indemnify himself at the expense of another, and the burden finally resting on
the ultimate purchaser or consumer. Example: value added tax.

I. (2003)

4%

Why is the power to tax considered inherent in a sovereign State?

Suggested Answer:

It is considered inherent in a sovereign State because it is a necessary attribute of


sovereignty. Without this power no sovereign State can exist or endure. The
power to tax proceeds upon the theory that the existence of a government is a
necessity and this power is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent state or government. No
sovereign state can continue to exist without the means to pay its expenses; and
that for those means, it has the right to compel all citizens and property within its
limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur.,
Taxation 40).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

VIII. (2003)

4%

(a) What is meant by the “tax benefit rule”?


(b) Give an illustration of the application of the tax benefit rule.

Suggested Answer:

(a) Tax benefit rule states that the taxpayer is obliged to declare as taxable
income subsequent recovery of bad debts in the year they were collected
to the extent of the tax benefit enjoyed by the taxpayer when the bad
debts were written-off and claimed as a deduction from income. It also
applies to take previously deducted from gross income but which were
subsequently refunded or credited. The taxpayer is also required to
report as taxable income the subsequent tax refund or tax credit granted
to the extent of the tax benefit the taxpayer enjoyed when such taxes
were previously claimed as deduction from income.
(b) X Company has a business connected receivable amounting to
P100,000.00 from Y who was declared bankrupt by a competent court.
Despite earnest efforts to collect the same, Y was not able to pay,
prompting X Company to write-off the entire liability. During the year
of write-off, the entire amount was claimed as a deduction for income
tax purposes reducing the taxable net income of X Company to only
P1,000,000.00. Three years later, Y voluntarily paid his obligation
previously written-off to X Company. In the year of recovery, the entire
amount constitutes part of gross income of X Company because it was
able to get full tax benefit three years earlier.

I. (2004)

Taxes are assessed for the purposed of generating revenue to be used for public
needs. Taxation itself is the power by which the State raises revenue to defray the
expenses of govenment. A jurist said that the a tax is what we pay for civilization.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

A. In our jurisdiction, which of the following statements may be erroneous:


1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and contributions.
3. Taxes are imposed on persons and property within the territorial
jurisdiction of a State.
4. Taxes are levied by the executive branch of the government.
5. Taxes are assessed according to a reasonable rule of apportionment.

Justify your answer or choice briefly. (5%)

Suggested Answer:

A. 4. Taxes are levied by the executive branch of government.

This statement is erroneous because levy refers to the act of imposition by


the legislature which is done through the enactment of a tax law. Levy is an
exercise of the power to tax which is exclusively legislative in nature and
character. Clearly, taxes are not levied by the executive branch of
government. (NPC v. Albay, 186 SCRA 198 [1990]).

B. Which of the following propositions may now be untenable:


1. The court should construe a law granting tax exemption strictly against
the taxpayer.
2. The court should construe a law granting a municipal corporation the
power to tax most strictly.
3. The Court of Tax Appeals has jurisdiction over decisions of the Customs
Commissioner in cases involving liability for customs duties.
4. The Court of Appeals has jurisdiction to review decisions of the Court of
Tax Appeals.
5. The Supreme Court has jurisdiction to review decisions of the Court of
Appeals.

Justify your answer or choice briefly. (5%)


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

B. 2. The court should construe a law granting tax exemption strictly against
the taxpayer.

This proposition is now untenable. The basic rationale for the grant of tax
power to local government units is to safeguard their viability and self-
sufficiency by directly granting them general and broad tax powers (Manila
Electric Company v. Province of Laguna et al., 306 SCRA 750 [1999]).
Considering that inasmuch as the power to tax may be exercised by local
legislative bodies, no longer by valid congressional delegation but by direct
authority conferred by the Constitution, in interpreting statutory provisions
on municipal fiscal powers, doubts will, therefore, have to be resolved in
favor of municipal corporations (City Government of San Pablo, Laguna v.
Reyes, 305 SCRA 353 [1999]). This means that the court must adopt a liberal
construction of a law granting a municipal corporation the power to tax.

Note: If the examinee chose proposition no. 4 as his answer, it should be


given full credit considering that the present CTA Act (RA No. 9282) has
made the CTA a co-equal judicial body of the Court of Appeals. The
question “Which of the following propositions may now be untenable” may
lead the examinee to choose a proposition which is untenable on the basis of
the new law despite the cut-off date adopted by the Bar Examination
Committee. RA No. 9282 was passed on March 30, 2004.

VII. (2004)

A. For failure to comply with certain corporate requirements, the stockholders


of ABC Corp. were notified by the Securities and Exchange Commission
that the corporation would be subject to involuntary dissolution. The
stockholders did not do anything to comply with the requirements, and
corporation was dissolved. Can the stockholders be held personally liable for
the unpaid taxes of the dissolved corporation? Explain briefly. (5%)
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

A. No. As a general rule, stockholders cannot be held personally liable for the
unpaid taxes of a dissolved corporation. The rule prevailing under our
jurisdiction is that a corporation is vested by law with a personality that is
separate and distinct from those of the persons composing it (Sunio v. NLRC,
127 SCRA 390 [1984]).

Note: Additional point should be given to the examinee if he answers in the


following that:

However, stockholders may be held liable for the unpaid taxes of a dissolved
corporation if it appears that the corporate assets have passed into their
hands (Tan Tiong Bio v. CIR, 4 SCRA 986 [1962]). Likewise, when
stockholders have unpaid subscriptions to the capital of the corporation they
can be made liable for unpaid taxes of the corporation to the extent of their
unpaid subscriptions.

B. After the tax assessment had become final and unappealable, the
Commissioner of Internal Revenue initiated the filing of a civil action to
collect the tax due from NX. After several years, a decision was rendered by
the court ordering NX to pay the tax due plus penalties and surcharges. The
judgment became final and executory, but attempts to execute the judgment
award were futile.

Subsequently, NX offered the Commissioner a compromise settlement of


50% of the judgment award, representing that this amount is all he could
really afford. Does the Commissioner have the power to accept the
compromise offer? Is it legal and ethical? Explain briefly. (5%)

Suggested Answer:

B. Yes. The Commissioner has the power to accept the offer of compromise of
the financial position of the taxpayer clearly demonstrates a clear inability to
pay the tax (Section 204, NIRC).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

As represented by NX in his offer, only 50% of the judgment award is all he


could really afford. This is an offer for compromise based on financial
incapacity which the Commissioner shall not accept unless accompanied by
a waiver of the secrecy of bank deposits (Section 6[F], NIRC). The waiver
will enable the Commissioner to ascertain the financial position of the
taxpayer, although the inquiry need not be limited only to the bank deposits
of the taxpayer but also as to his financial position as reflected in his
financial statements or other records upon which his property holdings can
be ascertained.

If indeed, the financial position of NX as determined by the Commissioner


demonstrates a clear inability to pay the tax, the acceptance of the offer is
legal and ethical because the ground upon which the compromise was
anchored is within the context of the law and the rate of compromise is well
within and far exceeds the minimum prescribed by law which is only 10% of
the basic tax assessed.

I. (2005)

a) Describe the power of taxation. May a legislative body enact laws to rise
revenues in the absence of a constitutional provision granting said body the
power of tax? Explain.

b) May taxes be the subject if set-off or compensation? Explain

c) Can an assessment for a local tax be the subject of set-off or compensation


against a final judgment for a sum of money obtained by the taxpayer
against the local government that made the assessment? Explain.

d) Is a deficiency tax assessment a bar to a claim for tax refund or tax credit?
Explain.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

e) Is the approval of the court, sitting as probate or estate settlement court,


required in the enforcement and collection of estate tax? Explain. (10%)

Suggested Answer:

a) The power of taxation is inherent in the State being an attribute of


sovereignty. As an incident of sovereignty, the power to tax has been
described as unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency
who are to pay it. (Mactan Cebu International Airport Authority v. Marcos,
261 SCRA 667, (1996))

Being an inherent power, the legislature can enact laws to raise revenues
even without the grant of said power in the Constitution. It must be noted
that Constitutional provisions relating to the power of taxation do not
operate as grants of the power of taxation to the Government, but instead
merely constitute limitations upon a power which would otherwise be
practically without limit. (Cooley, Constitutional Limitations, 1927 8th Ed.,
p. 787)

b) No. Taxes cannot be the subject of set-off or compensation for the following
reasons: (1) taxes are off distinct kind , essence and nature, and these
impositions cannot be classed in merely the same category as ordinary
obligations; (2) the applicable laws and principles governing each are
peculiar, not necessarily common, to each; and (3) public policy is better sub
served if the integrity and independence of taxes are maintained (Republic v.
Mambulao Lumber Company, 4 SCRA 622 (1962)),

However, if the obligation to pay taxes and the taxpayer’s claim against the
government are both overdue, demandable, as well as fully liquidated,
compensation taxes place by operation of law and both obligations are
extinguished to their concurrent amounts. (Domingo v. Garlitos, 8 SCRA 443
(1963).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

c) No. Taxes and debts are of different nature and character; hence, no set-off
or compensation between these two different classes of obligations is
allowed. The taxes assessed are the obligations of the taxpayer arising from
law, while the money judgment against the government is an obligation
arising from contract, whether express or implied. In as much that taxes are
not debts, it follows that the two obligations are not susceptible to set-off or
legal compensation. (Francia v. Intermediate Appellate Court, 162 SCRA
753 (1988)).

It is only when the local tax assessment and the final judgment are both
overdue, demandable, as well fully liquidated may set-off or compensation
be allowed. (Domingo v. Garlitos, 8 SCRA 443, (1963)

d) No. As a general rule, a deficiency tax assessment is not a bar to claim for
tax refund or tax credit. It is logically appropriate; however, that if the
deficiency tax assessment is already final, the Commissioner should not
grant the claim unless the taxpayer pays the deficiency. Likewise, no tax
refund or tax credit will be granted as long as there is pending a deficiency
tax assessment for the same taxable period. To award a tax refund or tax
credit will be granted as long as there is pending a deficiency tax assessment
for the same taxable period. To award a tax refund or tax credit despite the
existence of deficiency assessment for the same taxable period is an
absurdity and a polarity in conceptual effects. A taxpayer cannot be entitled
to a refund and at the same time be liable for a tax deficiency assessment. In
order to avoid multiplicity of suits, it is logically necessary and legally
appropriate that the issue of deficiency tax assessment be resolved jointly
with the taxpayer’s claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or refundable. (CIR
v. CA. Citytrust Banking Corp. and CTA.234 SCRA 348 (1994))

e) No. The approval of the court, sitting in probate, is not a mandatory


requirement in the collection of estate tax. On the contrary, under Section 94
of the NIRC, it is the probate or settlement court which is forbidden to
authorize the executor or judicial administrator of the decedent’s estate, to
deliver any distributive share to any party interested in the estate, unless a
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

certification from the Commissioner of Internal Revenue that the estate tax
has been paid is shown. (Marcos II v. Court of Appeals, 273 SCRA 47 (1997)

I. (2006)

1) Enumerate the 3 stages or aspects of taxation. Explain each. 5%


2) Distinguish “Direct taxes” from “Indirect taxes”. Give examples. 5%

Suggested Answer:

1) The three stages or aspects of taxation are:


a. Levy. This refers to the enactment of a law by congress authorizing the
imposition of a tax.
b. Assessment and collection. This is the act of administration and
implementation of the tax law by the executive through its administrative
agencies.
c. Payment. This is the act of compliance by the taxpayer, including such
options schemes or remedies as may be legally available to him.

2) Direct taxes are demanded form the very person who, as intended, should
pay the tax which he cannot shift to another; while an indirect tax is
demanded in the first instance from one person with the expectation that he
can shift the burden to someone else, not as a tax, but as Part of the purchase
price (Maceda v. Macaraig, Jr., 223 SCRA 217 [1993]). Examples of direct
taxes are income tax, estate tax and donor’s tax. Examples of direct taxes are
value-added tax, percentage tax and excise tax on excisable articles.

II. (2006)

What is tax pyramiding? What is its basis in law? 5%

Suggested Answer:

Tax pyramiding refers to the imposition of a tax upon a tax. This occurs when the
tax is added as part of the tax base. It has no basis in law (People v.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Sandiganbayan, 467 SCRA 137 [2005]); CIR v. American Rubber Co., 18 SCRA
842 [1966]).

Another Suggested Answer:

Tax pyramiding refers to situation where some or all of the stages of distribution of
goods or services are taxed, with the accumulation borne by the financial
consumer. There is tax pyramiding when sales taxes are applied to both inputs and
outputs, thus shifting the tax burden to the ultimate consumer. It has no basis in
law because it violates the principle of uniformity and neutrality in taxation (R.G
Holcombe, taxing services, 30 Fla. St. U.L. Rev 467 [1996]).

Note: It is respectfully requested that nay answer be given full credit as the term
tax pyramiding “was first used only in people v. Sandiganbayan & Commissioner
Tan decided on Aug. 16, 2005, which date is beyond the cut-off date for cases.

III. (2007)

(5%)

What kind of taxes, fees and charges are considered as National Internal Revenue
Taxes under the National Internal Revenue Code (NIRC)?

Suggested Answer:

The following taxes, fees and charges are considered to be National Internal
Revenue Taxes under the National Internal Revenue Code:

a) Income tax;
b) Estate and donor’s taxes;
c) Value-added tax;
d) Other percentage taxes;
e) Excise taxes;
f) Documentary stamp taxes; and

Such other taxes as are or hereafter may be imposed and collected by the Bureau of
Internal Revenue. (Section 21, NIRC).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

IV. (2007)

(10%)

XYZ Corporation, an export oriented company, was able to secure a Bureau of


Internal Revenue (BIR) ruling in June 2005 that exempts from tax the importation
of some of its raw materials. The ruling is of first impression, which means the
interpretations made by the Commissioner of Internal Revenue is one without
established precedents. Subsequently, however, the BIR issued another ruling
which in effect would subject to tax such kind of importation. XYZ Corporation is
concerned that said ruling may have a retroactive effect, which means that all their
importations done before the issuance of the second ruling could be subject to tax.

a) What are BIR rulings?

Suggested Answer:

BIR rulings are administrative opinions issued by the Commissioner of Internal


Revenue interpretative of a provision of a tax law.

Alternative Answer:

They are the best guess of the moment and incidentally often contain such well-
considered and sound law, but the courts have held that they do not prevent an
entire change of front at any time and are merely advisory sort of an information
service to the taxpayer. (Aban, Law of Basic Taxation in the Philippines, p. 149
citing Quiazon and Lukban).

b) What is required to make a BIR ruling of first impression a valid one?

Suggested Answer:

A BIR ruling of first impression to be valid must not be against the law and it must
be issued only by the Commissioner of Internal Revenue. (Philippine Bank of
Communications v. CIR, 302 SCRA 241 [1999]; Section 7, NIRC).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

c) Does a BIR ruling have a retroactive effect, considering the principle that tax
exemptions should be interpreted strictly against the taxpayer?

Suggested Answer:

No. A BIR ruling cannot be given retroactive effect if its retroactive application is
prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court of Appeals et.al. 267
SCRA 557 [1997]).

Alternative Answer:

The general rule is that a BIR ruling does not have a retroactive effect if giving it a
retroactive application is prejudicial to the taxpayer. However, if the first ruling is
tainted with either of the following: (1) misstatement or omission of material facts,
(2) the facts gathered by the BIR are materially different from the facts upon which
the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can
have a retroactive application. (ABS-CBN Broadcasting Co. v. CTA & CIR, 08
SCRA 142 [1981]; Sec. 246, NIRC).

IX. (2007)

(10%)

Weber Realty Company which owns a three-hectare land in Antipolo entered into a
Joint Venture Agreement (JVA) with Prime Development Company for the
development of said parcel of land. Weber Realty as owner of the land contributed
the land to the Joint Venture and Prime Development agreed to develop the same
into a residential subdivision and construct residential houses thereon. They agreed
that they would divide the lots between them.

a) Does the JVA entered into by and between Weber and Prime create a
separate taxable entity? Explain briefly.

Suggested Answer:

The JVA entered into between Weber and Prime does not create a separate taxable
entity. The joint venture is formed for the purpose of undertaking construction
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

projects; hence, is not considered as a corporation for income tax purposes.


(Section 22(B), NIRC).

b) Are the allocation and distribution of the saleable lots to Weber and Prime
subject to income tax and to expanded withholding tax? Explain briefly.

Suggested Answer:

No. The allocation and distribution of the saleable lots to Weber and Prime is a
mere return of their capital contribution. The income tax and the expanded
withholding tax is not due on a capital transaction because no income is realized
from it. (BIR Ruling No. DA-192-2001, October 17, 2001).

c) Is the sale by Weber or Prime of their respective shares in the saleable lots to
third parties subject to income tax and to expanded withholding tax? Explain
briefly.

Suggested Answer:

Yes. The sale by Weber and Prime of their respective shares to third parties is a
closed and completed transaction resulting in the realization of income, subject to
income tax and to the expanded withholding tax. (BIR Ruling DA 228-2006).

V. (2008)

Maria Suerte, a Filipino Citizen, purchased a lot in Makati City in 1980 at the price
of P1-million. Said property has been leased to MAS Corporation, a domestic
corporation engaged in manufacturing paper products, owned 99% by Maria
Suerte, In October 2007, EIP Corporation, a real estate developer, expressed its
desire to buy the Makati Property at its fair market value of P300 million, payable
as follows;(a) P60 million down payment; and (b) balance payable equally in
twenty four (24) monthly consecutive installments. Upon the advice of a tax
lawyer, Maria Suerte exchanges her Makati property for shares of stock of MAS
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Corporation. A BIR ruling, confirming the tax-free exchange of property for shares
of stock, was secured from the BIR National Office and a Certificate Authorizing
Registration was issued by the Revenue District Officer (RDO) where the property
was located. Subsequently, she sold her entire stockholdings in MAS Corporation
to EIP Corporation for P300million. In view of the tax advice, Maria Suerte paid
only the capital gains tax of P29,895,000 (P100,000x5%plus P298,900,000x10%),
instead of the corporate income tax of P104,650,000 (35% on P299 million gain
from sale of real property). After evaluating the capital gains tax payment, the
RDO wrote a letter to Maria Suerte, stating that she committed tax evasion.

Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte
had resorted to? Explain. (6%)

Suggested Answer:

The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance
and tax evasion . Tax avoidance is the use of legal means to reduce tax liability and
it is the legal right of a tax payer to decrease the amount of what otherwise would
be his taxes by means which the law permits. (Heng Tong Textiles Co., Inc. v
Commissioner, 24 SCRA 767 [1968]. There is nothing illegal about transferring
first the property to a corporation in a tax free exchange at a lower tax than what
could have been imposed if the property was sold directly.

Another Suggested Answer:

The contention is devoid of basis. To constitute tax evasion there must be an


integration of the three factors, namely: 1) the end to be achieved, i.e payment of
an amount of tax less than what is known by the taxpayer to be legally due;2) an
accompanying state of mind which is described as being evil, in bad faith, willful
or deliberate and not merely accidental; and 3) a course of action or failure of
action which is unlawful. The second and third factors are not present in the instant
case; hence there is no tax evasion that was committed. The means employed to
reduce taxes being allowed by law, it was a case of tax avoidance that was resorted
to. (Commissioner v. Toda, 438 SCRA 290[2004].
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

I. (2009)

TRUE or FALSE. Answer TRUE if the statement is true or FALSE if the


statement Is False. Explain your answer in not more than two (2) sentences. (5%)

a) A law that allows taxes to be paid either in cash or in kind is valid.

Suggested Answer:

True. There is no law which requires the payment of taxes in cash only. However,
in a law allowing payment of taxes in kind, although valid, may pose problems of
valuation, hence will violate the principle of administrative feasibility.

b) When the financial position of the taxpayer demonstrates a clear inability to


pay the tax, the Commissioner of Internal Revenue may validly compromise
the tax liability.

Suggested Answer:

True. Financial incapacity is a ground allowed by the law in order that the
Commissioner of Internal Revenue may compromise a tax liability (Section 204,
NIRC).

c) The doctrine of equitable recoupment allows taxpayers whose claim for


refund has prescribed to offset tax liabilities with his claim of overpayment.

Suggested Answer:

True. The doctrine arose from common law allowing offsetting of a prescribed
claim for refund against a tax liability arising from the same transaction on which
an overpayment is made ans underpayment is due. The doctrine finds no
application to cases where the taxes involved are totally unrelated, and although it
seems equitable, it is not allowed in our jurisdiction (CIR v. UST, 104 Phil. 1062
[1958]).

d) A law imposing a tax on income of religious institutions derived for the sale
of religious articles is valid.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

False. Congress can pass a law taking income of religious institutions form its
property or activities used for profit but not on their income from exercise of
religious activities. The imposition of a tax on income of a religious institute from
sale of religious articles is an Infringement of religious freedom which is not
allowed under the fundamental law (American Bible Society v. City of Manila, 101
Phil. 386[1957]).

e) A false return and a fraudulent return are one the same.

Suggested Answer:

False. There is a difference between a false return and a fraudulent return. The first
merely implies a deviation for the truth or fact whether intentional or not, whereas
the second is intentional or not, whereas the second is intentional and deceitful
with the aim of evading the correct tax due (Aznar v. Commissioner, GR No. L-
20569, August 23, 1974, 58 SCRA 519 [1974]).

II. (2009)

Enumerate the four (4) inherent limitations on taxation. Explain each item briefly.
(4%)

Suggested Answer:

The inherent limitations on the power to tax are:

1. Taxation is for a public purpose – The proceeds of the tax must be used (A)
for the support of the state or (b) for some recognized objective of the
government or to directly promote the welfare of the community.
2. Taxation is inherently legislative – Only the legislature has full discretion as
to the person’s property, occupation or business to be taxed provided these
are all within the State’s territorial jurisdiction. It can also finally determine
the amount or rate of tax, the kind of tax to be imposed and the method of
collection (1 Cooley 176-184).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

3. Taxation is territorial – taxation may be exercised only within territorial


jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial
jurisdiction, the taxing authority may determine the “place of taxation” or
“tax situs”.
4. Taxation is subject to international comity - This is a limitation which is
founded on reciprocity designed to maintain a harmonious and productive
relationships among the various states. Under international comity, a state
must recognize the generally-accepted tenets of international law, among
which are the principles of sovereign equality among states and of their
freedom form suit without their consent, that limit the authority of a
government to effectively impose taxes on a sovereign state and its
instrumentalities, as well as on its property held, and activities undertaken in
that capacity.

Question No. 1 (2012)

Bank A deposited money with Bank B which earns interest that is subjected to the
20% final withholding tax. At the same time, Bank A is subjected to the 5% gross
receipts tax on its interest income on loan transactions to customers. Which
statement below incorrectly describes the transaction?

a) There is double taxation because two taxes – income tax and gross receipts
tax are imposed on the interest incomes described above, and double
taxation is prohibited under the 1987 Constitution;
b) There is no double taxation because the first tax is income tax, while the
second tax is business tax;
c) There is no double taxation because the income tax is on the interest income
of Bank A on its deposits with Bank B (passive income), while the gross
receipts taxis on the interest income received by Bank A from loans to its
debtor-customers (active income);
d) Income tax don interest income of deposits of Bank A is a direct tax, while
GRT on interest income on loan transaction is an indirect tax.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

a) There is no double taxation if the law imposes two different taxes on the
same income, business or property. First, the taxes herein are imposed on
two different subject matters. The subject matter of the FWT (Final
Withholding Tax) is the passive income generated in the form of interest on
deposits and yield on deposit substitutes, while the subject matter of the
GRT (Gross Receipts Tax) is the privilege of engaging in the business of
banking. Second, although both taxes are national in scope because they are
imposed by the same taxing authority – the national government under the
Tax Code – and operate within the same Philippine jurisdiction for the same
purpose of raising revenues, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid
after every calendar quarter in which it is earned. On the other hand, the
GRT is neither deducted nor withheld, but is paid only after every taxable
quarter in which it is earned. (Commissioner of Internal Revenue v. BPI, GR
No. 147375, June 26, 2006)

Question No. 2 (2012)

Which of the following statements is not correct?

a) In case of doubt, statutes levying taxes are construed strictly against the
government;
b) The construction of a statute made by his predecessors is not binding upon
the successor, if thereafter he becomes satisfied that a different construction
should be given;
c) The reversal of a ruling shall not generally be given retroactive application,
if said reversal will be prejudicial to the taxpayer;
d) A memorandum circular promulgated by the CIR that imposes penalty for
violations of certain rules need not be published in a newspaper of general
circulation or official gazette because it has the force and effect of law.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

d) A revenue memorandum circular shall not begin to be operative until after


due notice thereof maybe fairly presumed (Commissioner of Internal
Revenue vs. Philippine Airlines, GR No. 180066, July 8, 2009).

Question No. 3 (2012)

Which statement below expresses the lifeblood theory?

a) The assessed taxes must be enforced by the government;


b) The underlying basis of taxation is government necessity, for without
taxation, a government can neither exist nor endure;
c) Taxation is an arbitrary method of exaction by those who are in the seat of
power;
d) The power of taxation is an inherent power of the sovereign to impose
burdens upon subjects and objects “within its jurisdiction for the purpose of
raising revenues.”

Suggested Answer:

b) Taxes are the lifeblood of the government, for without taxes, the government
can neither exist nor endure. A principal attribute of sovereignty, the
exercise of taxing power derives its source from the very existence of the
state whose social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of the power to
tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.
(National Power Corporation vs. City of Cabanatuan, GR No. 149110, April
9, 2003).

Question No. 4 (2012)

Which statement is wrong?


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

a) The power of taxation may be exercised by the government, its political


subdivisions, and public utilities;
b) Generally, there is no limit on the amount of tax that may be imposed;
c) The money contributed as tax becomes part of the public funds;
d) The power of tax is subject to certain constitutional limitations.

Suggested Answer:

a) Inherent Powers of the State.

Question No. 5

The Philippines adopted the semi-global tax system, which means that:

a) All taxable incomes, regardless of the nature of income, dare added together
to arrive at gross income, and all allowable deductions are deducted from the
gross income to arrive at the taxable income;
b) All incomes subject to final withholding taxes are liable to income tax under
the scheduler tax system, while all ordinary income as well as income not
subject to final withholding taxes are liable to income tax under the global
tax system;
c) All taxable incomes are subject to final withholding taxes under the
scheduler tax system;
d) All taxable incomes from sources within and without the Philippines are
liable to income tax.

Suggested Answer:

b) General Principles of Taxation.

Question No. 61 (2012)

Which statement is correct?


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

a) Legislative acts passed by the municipal council in the exercise of its


lawmaking authority are denominated as resolutions and ordinances;
b) Legislative acts passed by the municipal council in the exercise of its
lawmaking authority are denominated as resolutions;
c) Legislative acts passed by the municipal council in the exercise of its
lawmaking authority are denominated as ordinances;
d) Both ordinances and resolutions are solemn and formal acts.

Suggested Answer:

c) Section 2227, Revised Administrative Code of 1917.

Multiple Choice No. III (2013)

Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross
sales to the BIR and the municipal license tax based on the same gross sales to the
City of Makati. He comes to you for advice because he thinks he is being subjected
to double taxation.

What advice will you gave him? (1%)

a) Yes, there is double taxation and it is oppressive;


b) The City of Makati does not have this power;
c) Yes, there is double taxation and this is illegal in the Philippines;
d) Double taxation is allowed where one tax is imposed by the national
government and the other by the local government.

Suggested Answer:

d) Double taxation is allowed where one tax is imposed by the national


Government and the other by the local government (CIR v. Solid bank Corp.,
G.R. No.148191, November 25, 2003).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Multiple Choice No. IV (2013)

Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%.
The law was thought to be sufficient to drive many cigarette companies that would
go out of business because it would not be able to pay the increased tax.

The cigarette company is ______ (1%)

a) Wrong because taxes are the lifeblood of the government;


b) Wrong because the law recognizes that the power to tax is the power to
destroy.
c) Correct because no government can deprive a person of his livelihood.
d) Correct because Congress, in this case, exceeded its power to tax.

Suggested Answer:

b) Wrong because the law recognizes that the power to tax is the power to
destroy (McCulloch v. Maryland, 17 U.S. 4 Wheat. 316 (1819).

Multiple Choice VIII (2013)

XYZ Corporation manufactures glass panels and is almost at the point of


insolvency. It has no more cash and all has are unsold glass panels. It received an
assessment from the BIR for deficiency income taxes. It wants to pay but due to
lack of cash, it seeks permission to pay in kind with glass panels.

Should the BIR grant the requested permission? (1%)

a) It should grant permission to make payment convenient to taxpayers;


b) It should not grant permission because a tax is generally a pecuniary burden;
c) It should grant permission; otherwise, XYZ Corporation would not be able
to pay;
d) It should not grant permission because the government does not have the
storage facilities for glass panels.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

b) It should not grant permission because a tax is generally a pecuniary burden


(Characteristics of Taxes).

XXII. (2014)

Choose the correct answer. Double Taxation (1%)

a) is one of direct duplicate taxations wherein two (2) taxes must be imposed
on the same subject matter, by the same taxing authority, within the same
jurisdiction, during the same period, with the same kind or character of tax,
even if the purposes of imposing the same are different.
b) is forbidden by law; and therefore, it is a valid defense against the validity of
a tax measure.
c) means taxing the same property twice when it should be taxed only once; it
is tantamount to taxing the same person twice by the same jurisdiction for
the same thing.
d) exists when a corporation is assessed with local business tax as a
manufacturer, and at the same time, value-added tax as a person selling
goods in the course of trade or business.

Suggested Answer:

c) means taxing the same property twice when it should be taxed only once; it
is tantamount to taxing the same person twice by the same jurisdiction for
the same thing (Victorias Milling Co. v. Municipality of Victorias, Negros
Occidental, G.R. No. L-21183, September 27, 1968)

XXIII. (2014)

Choose the correct answer. Tax Avoidance (1%)


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

a) is a scheme used outside of those lawful means and, when availed of, it
usually subjects the taxpayer to further or additional civil or criminal
liabilities.
b) is a tax saving device wihin the means sanctioned by law.
c) is employed by a corporation, the organization of which is prompted more
on the mitigation of tax liabilities than for legitimate business purpose.
d) is any form of tax deduction scheme, regardless if the same is legal or not.

Suggested Answer:

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


Manufacturing Corp. V. CIR, G.R. No. L-19737, August 26, 1968).

XXVIII. (2014)

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

a) may be enacted for the promotion of private enterprise or business for as


long as it gives incidental advantage to the public or the State
b) are inherently legislative; therefore, may not be delegated
c) are territorial in nature; hence, they do not recognize the generally accepted
tenets of international law
d) adhere to uniformity and equality when all taxable articles of kinds of
property of the same class are taxable at the same rate

Suggested Answer:

d) adhere to uniformity and equality when all taxable articles or kinds of


property of the same class are taxable at the same rate (City of Baguio v. De
Leon, G.R. No. L-24756, October 31, 1968, 25 SCRA 938).

Question No. 1 (2015)

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


BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

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

a) Fiscal adequacy which means that the sources of revenue should be


sufficient to meet the demands of public expenditures (Chavez v. Ongpin,
G.R No. 76778, June 6, 1990)
b) Equality of theoretical justice which means that the tax burden should be
capable of convenient, just and effective administration, as well as easy
compliance by taxpayer

Question No. 6 (2015)

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

Suggested Answer:

Double Taxation in the strict sense pertains to the direct double taxation. This
means that the taxpayer is taxed twice by the same taxing authority, within the
same taxing jurisdiction, for the same property and same purpose. Example:
Imposition of final withholding tax on cash dividend and requiring the taxpayer to
declare this tax-paid income in his income tax returns

On the other hand, double taxation in the broad sense pertains to indirect double
taxation. This extends to all cases in which there is a burden of two or more
impositions. It is the double taxation other than those covered by direct double
taxation. (CIR v. Solidbank Corp., G.R. No. 148191, November 25, 2003, 436
SCRA 416). Example: Subjecting the interest income of banks on their deposits
with other banks to the 5% Gross Receipt Tax (GRT) despite of the same income
having been subjected to 20% Final Withholding Tax (FWT), is only a case of
indirect double taxation. The GRT is a tax on the privilege of engaging in business,
while the FWT is a tax on the privilege or earning income (CIR v. Bank of
Commerce, G.R. No. 149636, June 8, 2005, 459 SCRA 638).
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Question No. 1 (2016)

Briefly explain the following doctrines: necessity theory; benefits received


principle; and doctrine of symbiotic relationship. (5%)

Suggested Answer:

The following doctrines explained:

 Lifeblood doctrine – Without revenue raise from taxation, the government


will not survive, resulting in detriment to society. Without taxes, the
government would be paralyzed for lack of motive power to activate and
operate it (CIR v. Algue, Inc. 158 SCRA 9(1988).
 Necessity theory – The exercise of the power to tax emanates from
necessity, because without taxes, government cannot fulfill its mandate of
promoting the general welfare and well-being of the people (CIR v. Bank of
Philippine Islands, 521 SCRA 373 [2007]
 Benefits received principle – Taxpayers receive benefits from taxes through
the protection the State affords to them. For the protection they get arises
their obligation to support the government through payment of taxes (CIR v.
Algue, Inc. 158 SCRA 9 [1988]
 Doctrine of symbiotic relationship – Taxation arises because of the
reciprocal relation of protection and support between the state and taxpayers.
The state gives protection and for it to continue giving protection, it must be
supported by the taxpayers in the form of the taxes (CIR v. Algue, Inc. 158
SCRA 9[1988].

VI. (2017)

Heeding the pronouncement of the President that the worsening traffic condition in
the metropolis was a sign of economic progress, the Congress enacted Republic
Act No. 10701, also known as An Act Imposing a Transport Tax on the Purchase
of Private Vehicles.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Under RA 10701, buyers of private vehicles are required to pay a transport tax
equivalent to 5% of the total purchase price per vehicle purchased. RA 10701
provides that the Land Transportation Office (LTO) shall not accept for
registration any new vehicles without proof of payment of the 5% transport tax.
RA 10701 further provide that existing owners of private vehicles shall be required
to pay a tax equivalent to 5% of the current fair market valeue of every vehicle
registered with the LTO. However, RA 10701 exempts owners of public utility
vehicles and the Government from the coverage of the 5% transport tax.

A group of private vehicle owners sue on the ground that the law is
unconstitutional for contravening the Equal Protection Clause of the Constitution.

Rule on the constitutionality and validity of RA 10701. (5%)

Suggested Answer:

RA 10701 is valid and constitutional. A levy of tax is not unconstitutional because


it is not intrinsically equal and uniform in its operation. The uniformity rule does
not prohibit classification for purposes of taxation (British American Tobacco v.
Jose Isidro N. Camacho, GR No. 163583, August 20, 2008, 562 SCRA 511).

Uniformity of taxation, like the kindred concept of equal protection, merely


requires that all subjects or objects of taxation, similarly situated, are to be treated
alike both in privileges and liabilities. Uniformity does not forfend classification as
long as: (1) the standards that are used therefor are substantial and not arbitrary, (2)
the categorization is germane to achieve the legislative purpose, (3) the law
applies, all things being equal, to both present and future conditions, and (4) the
classification applies equally well to all those belonging to the same class (Rufino
R. Tan v. Ramon R. Del Rosario, Jr., GR No. 109289 and 109446, October 13,
1994, 237 SCRA 324, 331). All of the foregoing requirements of a valid
classification having been met and those which are singled out are a class in
themselves, there is no violation of the “Equal Protection Clause” of the
Constitution.
BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

IX. (2017)

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

Alfredo contends that the 20% final tax onthe interest income constituted double
taxation because his salary had been already subjected to withholding tax.

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

Suggested Answer:

No. Double taxation means taxing for the same tax period the same thing or
activity twice, when it should be taxed but once, for the same purpose and with the
same kind of character of tax (CIR v. Citytrust Investment Phils., GR Nos. 139786,
140857, September 27, 2006). The 20% final tax is imposed on the interest income,
while the tax earlier withheld is on the salary or compensation income. Thus,
though both pertain to income tax, they do not pertain to the same thing or activity
and consequently, no double taxation exists.