TAX REVIEW – MIDTERM GUIDE QUESTIONS revenue loss loss since there there was no

was actually taxes actual taxes due

1. What are the three elements of taxation? due but collection as the person or
a. It is an enforced proportional contribution from persons was waived by the transaction is
and properties; government protected by tax
b. It is imposed by the State by virtue of its sovereignty; exemption
c. It is levied for the support of the government and for all
5. Differentiate tax evasion from tax avoidance.
public needs. (Republic vs Cojuangco, 2011)
TAX AVOIDANCE TAX EVASION
2. Enumerate the general constitutional limitations of
Validity Legal and not Illegal and subject
taxation.
subject to criminal to criminal penalty
a. Due Process Clause (Art III, Sec 1) penalty
b. Equal Protection Clause (Art III, Sec 1) Effect Minimization of Almost always
c. Freedom of the Press (Art III, Sec 4) taxes results in absence
d. Religious Freedom (Art III, Sec 5) of tax payment.
e. No taking of private property without just compensation
(Art III, Sec 9) 6. Differentiate the doctrine established in People vs
f. Non impairment clause (Art III, Sec 10) Kintanar and Judy Ann Santos vs People (wilful blindness in
g. Law-Making Process (Art VI, Sec 26) failure to file a return vs neglect in supplying information in
h. Presidential Power to grant reprieves, commutations and returns)
pardons and remit fines and forfeitures after conviction by
final judgment (Art VII, Sec 19) In People v. Gloria Kintanar (CTA EB Crim. No. 006, Dec. 3,
2010), Ms. Kintanar was charged with failure to make or file
3. Enumerate the inherent limitations of taxation. her income tax returns (ITR), violating Section 255 of the 1997
a. Public purpose – the revenues collected from taxation National Internal Revenue Code (NIRC), as amended. She
should be devoted to a public purpose.
claimed that she did not actively participate in the filing of
b. Inherently legislative or non-delegability of the taxing
her joint ITR with her husband since she entrusted such duty
power – Only the legislature can exercise the power of taxes
unless the same is delegated by the constitution or through a to the latter who, in turn, hired an accountant to perform
law which does not violate the constitution their tax responsibilities. She testified that she did not know
c. Territoriality or situs of taxation – the taxing power should how much her tax obligation was; nor did she bother to
be exercised only within the territorial jurisdiction of the inquire or determine the facts surrounding the filing of her
taxing authority ITRs. Despite several notices and subpoena received by the
d. International Comity – Comity is respect accorded by accused, only an unsupported protest letter made by her
nation to each other’s as co-equals. As taxation is an act of
husband was filed with the Bureau of Internal Revenue (BIR).
sovereignty, such power should be imposed upon equals out
of respect. The Court of Tax Appeals (CTA) En Banc found her neglect or
e. Tax exemption of the State omission tantamount to “deliberate ignorance” or “conscious
avoidance”. As an experienced businesswoman, her reliance
4. Differentiate tax amnesty from tax exemption. on her husband to file the required ITR without ensuring its
full compliance showed clear indication of deliberate lack of
TAX AMNESTY TAX EXEMPTION concern on her part to perform her tax obligations. This ruling
Scope of immunity Immunity from all Immunity from was sustained by the Supreme Court (SC) in 2012.
criminal, civil and civil liability only
administrative
obligations arising Based on the foregoing, the willful blindness doctrine was
from non- applied by the CTA, as sustained by SC on cases where there
payment of taxes is a natural presumption that the taxpayer knows his/her tax
Grantee General pardon A freedom from a obligations under the law considering the factual
given to all erring charge or burden circumstances of the case, such as being a businesswoman or
taxpayers to which others official of a company. This case set a precedent that mere
are subjected
reliance on a representative or agent (i.e., accountant or
How applied Applied Applied
retroactively prospectively husband) is not a valid ground to justify any noncompliance in
tax obligations. The taxpayer must inquire, check and validate
Presence of actual There is revenue None, because
whether or not his/her representative or agent has complied
with the taxpayer’s tax responsibilities.
However, in the recent case of People v. Judy Ann Santos
(CTA Crim. Case no. 012, Jan. 16, 2013), the CTA Division
seemed to have a change of heart and acquitted Ms. Santos
despite having almost the same circumstances as that of the
case of Ms. Kintanar. In this case, Ms. Santos was accused of
failure to supply correct and accurate information in her ITR.
She claimed that by virtue of trust, respect and confidence,
she has entrusted her professional, financial and tax
responsibilities to her manager since she was 12 years old.
She participated and maintained her intention to settle the
case, and thus provided all the documents needed as well as
payment of her taxes. The element of willfulness was not
established and the CTA found her to be merely negligent.
The CTA also noted the intention of Ms. Santos to settle the
case, which negates any motive to commit fraud. This was
affirmed by the SC in its resolution issued April 2013.
THE DIFFERENCES
“Willful blindness” is defined in Black’s Law Dictionary as
“deliberate avoidance of knowledge of a crime, especially by
failing to make a reasonable inquiry about suspected
wrongdoing, despite being aware that it is highly probable.” A
“willful act” is described as one done intentionally, knowingly
and purposely, without justifiable excuse.
“Willful” in tax crimes means voluntary, intentional violation
of a known legal duty, and bad faith or bad purpose need not
be shown. It is a state of mind that may be inferred from the
circumstances of the case; thus, proof of willfulness may be,
and usually is, shown by circumstantial evidence alone.
Therefore, to convict the accused for willful failure to file ITR
or submit accurate information, it must be shown that the
accused was (1) aware of his/her obligation to file annual ITR
or submit accurate information, but that (2) he/she, or
his/her supposed agent, nevertheless voluntarily, knowingly
and intentionally failed to file the required returns or submit
accurate information. Bad faith or intent to defraud need not
be shown.
As can be observed in the first case, the accused knew that
she had to timely file and supply correct and accurate
information of the joint ITR with the BIR in relation to the
profession or the position she holds. The knowledge was
presumed based on the fact that Ms. Kintanar is an
“experienced” businesswoman, having been an independent
distributor of a product for several years. However, despite
this knowledge, the CTA found that she voluntarily, knowingly
and intentionally failed to fulfill her tax responsibilities by not
participating in the filing of the ITR and ensuring that
everything was filed correctly and accurately. As compared
with the Santos case, which the SC affirmed, the element of
“voluntarily, knowingly and intentionally” was taken
differently by the CTA in consideration of the facts of the
case. Ms. Santos fully entrusted her tax obligations and
finances to her manager since she was a child. It can be said
that she is not an “experienced” manager of her finances and
taxes since she never handled such task, as compared with
the situation of Ms. Kintanar, who is considered an
experienced businesswoman who manages her business as
well as her financial and tax responsibilities -- which is
expected of somebody in her position (i.e., president and/or
businessperson).
The concept of willful blindness doctrine is new in Philippine
jurisprudence. The application of this doctrine by the CTA in
the said cases was guided by the appreciation of the facts and
the pieces of evidence produced by the prosecution and
accused to prove the non-existence of willfulness. However,
defined and clear standards in its application must be done as
guidance for future application. This is necessary to avoid
arbitrary application and to encourage proper use of the
doctrine by both parties in the case.
Sauce:
http://www.bworldonline.com/content.php?section=Economy
&title=willful-blindness-doctrine&id=73786
7. Is the failure to file a tax treaty relief application (TTRA)
negate the taxpayer’s entitlement to a preferential tax rate
under a tax treaty? (Deutsche Bank AG Manila vs CIR, 2013)
No. The constitution provides for the adherence to the
general principles of international law as part of the laws of
the land (Art II, Sec 2). Every treaty is binding upon the
parties, and obligations must be performed (Article 26,
Vienna Convention on the Law on Treaties). There is nothing
in RMO 1-2000 indicating a deprivation of entitlement to a
tax treaty for failure to comply with the fifteen-day period.
The denial of availment of tax relief for the failure to apply
within the prescribed period (under administrative issuance)
would impair the value of the tax treaty. Also, the obligation
to comply with the tax treaty must take precedence over the
objective of RMO 1-2000 because the non-compliance with
tax treaties would have negative implications on international
affairs and would discourage foreign investments.
8. X Company was assessed by the BIR of unpaid VAT and
excise taxes on its imports. In due time, X Company
protested.Pending the resolution of X Company’s protest,
Congress enacted RA 9399, specifically to grant tax amnesty
to certain business enterprises. X Company is one of these
enterprises so it availed itself of the tax amnesty. BIR
refused to grant the request. Is X company liable? (CIR vs
Puregold Dutyfree, Inc., 2015)
No. RA 9399 covers all applicable tax and duty liabilities,
inclusive of fines, penalties, interests and other additions
thereto. Consequently, the government, through the
enactment of RA9399, has expressed its intention to waive its
right to collect taxes, which in this case is the tax imposed
under Sec. 131 (A) of the 1997 NIRC, subject to the condition
that A Company has complied with the requirements
provided therein. (CIR v. Puregold Dutyfree, Inc., G.R. No.
202789, June 22, 2015)
9. What is a de minimis benefit? Enumerate the De Minimis
benefits.
As defined by RR 3-98 [MAY 21, 1998], de minimis benefits
are benefits of relatively small value offered or furnished by
the employer to his/her employees as a means of promoting
the health, goodwill, contentment, efficiency of his/her
employees. These benefits are exempt from the withholding
tax on compensation income, and consequently from income
tax, regardless of whether or not the recipients of the
benefits are managerial or rank-and-file employees.
The following are considered de minimis benefits of ALL types
of employees. These are exempt from tax (R.R. 5-2011)
a. Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the year;
b. Monetized value of vacation and sick leave credits paid to
government officials and employees;
c. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per
month;
d. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per
month amounting to not more than P1,500;
e. Uniform and clothing allowance not exceeding P5,000 per
annum;
f. Actual medical assistance, e.g. medical allowance to cover
medical and healthcare needs, annual medical check-up,
maternity assistance, and routine consultations, not
exceeding P10,000 per annum;
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards, e.g. for length of service
or safety achievement, with an annual monetary value not
exceeding P10,000;
i. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum;
j. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the basic
minimum wage per region basis.
k. Benefits received by an employee by virtue of a CBA and
productivity incentive shemes provided the total annual
monetary value from both CBA and productivity schemes
combined do not exceed P10,000.
10. Are motor vehicles provided to independent directors of
domestic corporations subject to fringe benefit tax?
Yes. R.R No. 8-2018, the new income tax regulations, define
“fringe benefits” to mean any good, service or other benefit
granted in cash or in kind, other than the basic compensation,
by an employer to an individual employee, such as, but not
limited to housing; expense accounts; vehicles; household
personnel (maid, driver); interest on loans at less than market
rate; club membership fees; expenses for foreign travel;
holiday and vacation expenses; education assistance; and life
or health insurance and other non-life insurance premiums.
As fringe benefits are helpful in increasing employees’
productivity, they are generally considered by employers as
ordinary and necessary trade, business or professional
expenses. For fringe benefit expenses to be allowed as a
deduction, it is necessary for employers to pay the fringe
benefit tax
11.Can Mr. X, purely a compensation income earner, claim a
depreciation expense deduction on his income tax return on
the use of his personal car for his employer’s sales calls?
No. Section 34 of the NIRC is clear that “no deduction shall be
allowed in computing taxable income to taxpayer earning
compensation income arriving from employer-employee
relationship. In the given problem, Mr. X is a purely
compensation income earner. In addition to that, his claim for
depreciation is with respect to the use of his personal car for
his employer’s sales calls which in no case is provided under
the Tax Code.
12. Dr. Z is a dentist who leases a condominium unit as a
residence and a commercial space which uses as a clinic. Are
Dr. Z’s rent expenses from the lease of the condominium
unit and commercial space deductible from his gross
income?
His rent expense for the commercial space may be deducted
from his gross income as an ordinary business expense. The
lease of the commercial space as his clinic is necessary for the
conduct of his business. However, his rent expense for the
lease of his condominium as residence is not deductible
because it is not necessary for the conduct of his business.
13. Are cash vouchers signed by independent contractors for
janitorial services sufficient proof to substantiate the
business expenses of a taxpayer who availed of the
services? (H. Tambunting Pawnshop, 2013)
No. In order that the cash vouchers may be given probative
value, these must be validated with official receipts.
Deductions for income tax purposes partake of the nature of
tax exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed. Tambunting did not
discharge its burden of substantiating its claim for deductions
due to the inadequacy of its documentary support of its
claim. Its reliance on withholding tax returns, cash vouchers,
lessor's certifications, and the contracts of lease was futile
because such documents had scant probative value. The law
required Tambunting to support its claim for deductions with
the corresponding official receipts issued by the service
providers concerned.
th
14. Up to what amount of the 13 month pay and other
benefits is allowed to be excluded from gross income?
Gross benefits received by officials and employees of public
and private entities may be excluded from gross income
provided that the total exclusion shall not exceed P90,000.
The excess would be considered as part of the compensation
income of the employee where it is subject on a schedular
rate.
15. What are the exclusions from gross income for resident
citizens?
a. Gifts, bequests and devises
b. Life insurance proceeds
c. Amount received by insured as return of premium
d. Retirement benefits, pensions, gratuities, etc.
e. Income exempt under treaty
f. Compensation for injuries or sickness
g. Miscellaneous items.
a. 13thmonth pay and other Benefits;
b. Prizes and awards
c. Prizes and awards in sports competitions
d. Income derived by foreign government
e. Income derived by the government or its political
subdivisions
f. GSIS, SSS, Medicare and other contributions
g. Gains from the sale of bonds, debentures or other
certificate of indebtedness
h. Gains from redemption of shares in mutual fund
(NIRC, Sec. 32 [B])
16. Differentiate Capital Assets from Ordinary Assets? What
is/are the tax implication/s?
“Capital assets” includes property held by the taxpayer
whether or not connected with his trade or business, but the
term does not include any of the following, which are
consequently considered “Ordinary assets”:
1. stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year;
2. property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
3. property used in the trade or business of a character which
is subject to the allowance for depreciation provided in Sec.
34 (F) of the NIRC; or
4. real property used in trade or business of the taxpayer.
Generally, income realized from the sale of capital assets are
not reported in the income tax return as they are already
subject to final taxes (capital gains tax on real property and
shares of stocks not traded in the stock exchange). What are
to be reported in the annual income tax return are the capital
gains derived from the disposition of capital assets other than
real property or shares of stocks in domestic corporations,
which are not subject to final tax. On the other hand,
Income realized from sale of ordinary assets is part of Gross
Income, included in the Income Tax Return
17. Summarize the rules on allowable deductions under
Sections 34 and 35 of the NIRC as to:
a. General Rules for Deduction
1. There must be a specific provision of law allowing
the deductions, since deductions do not exist by
implication
2. The requirements of deductibility must be met
3. There must be proof of entitlement to the
deductions
4. The deductions must not have been waived
5. The withholding and payment of the tax required
must be shown
b. Who may avail deductions?
all taxpayers except:
1. Nonresident aliens not engaged in trade or business; and
2. Nonresident foreign corporations or those foreign
corporations not engaged in trade or business in the
Philippines
However, with respect to itemized deductions, they cannot
be availed by citizens and resident aliens whose income is
purely compensation income.
c. Who cannot avail of deductions?
1. Nonresident aliens not engaged in trade or
business; and
2. Nonresident foreign corporations or those foreign
corporations not engaged in trade or business in the
Philippines
d. General requisites for business or professional expenses
The requisites are:
1. The expense must be ordinary and necessary
2. Paid or incurred during the taxable year
3. In carrying on the trade or business of the
taxpayer
4. It must be supported by adequate invoices and
receipts
5. Must not be against law, morals, public policy, or
public order
6. It must be reasonable
e. Interest Expense
The requisites are:
1. There must be indebtedness
2. There should be an interest expense paid or
incurred upon such indebtedness
 3. The indebtedness must be that of the taxpayer
4. The indebtedness must be connected with the
taxpayer’s trade, business or exercise of profession
5. The interest expense must have been paid or
incurred during the taxable year.
6. The interest must have been stipulated in writing
7. The interest must be legally due
8. the interest payment arrangement must not be
between related taxpayers
9. the interest must not be incurred to finance
petroleum operations
10. in case of interest incurred to acquire property
used in trade, business, or exercise of profession, the
same was not treated as a capital expenditure
f. Taxes
Requisites for deductibility:
1. The payments must be for taxes
2. It must be paid or incurred within the taxable year
3. It must be incurred in connection with trade,
business or profession
4. Tax must be imposed by law on and payable by
the taxpayer (indirect taxes not included)
5. Taxes are not specifically excluded by law from
being deducted from the taxpayer’s gross income
g. Casualty Loses
Casualty losses are the loss or physical damage suffered by
property used in trade, business, or the profession that
results from unforeseen, identifiable events that are sudden,
unexpected, and unusual in character.
h. Net Operating Loss Carry-Over (NOLCO)
Net Operating loss refers to the excess of allowable deduction
over gross income of a business for any taxable year.
The requisites for the deductibility of NOLCO from gross
income are as follows;
1. The net operating loss of the business or
enterprise
2. for any taxable year immediately preceding the
current taxable year
3. which had not been previously offset as deduction
from gross income
4. shall be carried over as a deduction from gross
income
5. for the next 3 consecutive taxable years
immediately following the year of such loss
6. Provided, any net loss incurred in a taxable year
during which the taxpayer was exempt from income
tax shall not be allowed as a deduction
7. Provided, further, a net operating loss carry-over
shall be allowed only if there has been no substantial
change in the ownership of the business or
enterprise.
i. Donations to Charitable institutions
The conditions for deductibility of charitable contributions-
The requisites are:
1. Actually paid or made to the Philippine
Government or any political subdivision thereof, or
any of the domestic corporation or association
specified in the Tax Code
2. Made within the taxable year
3. Not exceeding 10% (individuals) or 5%
(corporations) of the taxpayer’s taxable income
before charitable contributions
4. Evidenced by adequate receipts or records
i. Full
Contributions that are deductible in full
These are:
1. Donations to the Government of the Philippines,
or political subdivisions including fully-owned
government corporation to be used exclusively in
undertaking priority activities in:
a. Culture
b. Health
c. Economic Development
d. Education
e. Science
f. Human Settlement
g. Youth and Sports development
2. Donations to Foreign institutions and international
organizations in compliance with treaties and
agreements with the Government.
3. Donations to Accredited NGO’s
a. Exclusively for: [C2HES2Y-RC]
i. Cultural
ii. Charitable
iii. Health
iv. Educational
v. Scientific
vi. Social welfare
vii. Character building & Youth and Sports
Development
viii. Research
ix. Any Combination of the above
Donation must be utilized not later than the 15th
day of the 3rd month following the close of taxable
year;
c. Administrative expense must not exceed 30% of
the total expenses;
d. Upon dissolution, assets shall be transferred to
another non-profit domestic corporation or to the
State.
4. Donations of prizes and awards to Athletes (R.A.
7549, Sec. 1)
 establishments for the 20% sales discount granted to
senior citizens on the sale of goods and/or services
b. Additional deduction from gross income of private
ii. Partial establishments for compensation paid to senior
Donations that are subject to limitation citizens.
1. Donations that are not in accordance with the priority
plan With the effectivity of RA 9257 on 21 March 2004,
2. Donations whose conditions are not complied with there is now a new tax treatment for senior citizens'
3. Donations to the Government of the Philippines or
discount granted by all covered establishments. This
political subdivision exclusive for public purposes
discount should be considered as a deductible
4. Donations to domestic corporations organized
exclusively for: expense from gross income and no longer as tax
a. Scientific credit (CIR v. Central Luzon Drug Corp., G.R. No.
b. Educational 159610, 2008).
c. Cultural
d. Charitable iii. Magna Carta for Disabled Persons
e. Religious The law provides that sales discounts given to
f. Rehabilitation of veteran persons with disabilities shall be deductible from
g. Social Welfare
gross income subject to certain conditions.
k. Deductibility of contributions to pension trusts
18. What is OSD? Who may avail OSD? What are the
Requisites for deductibility
requisites for individuals and corporations to avail OSD?
1. The employer must have established a Pension or
OSD is a fixed percentage deduction which is allowed to
retirement plan to provide for the payment of
certain taxpayers without regard to any expenditure. This is in
reasonable pensions to his employees
lieu of the itemized deduction.
2. It must be Funded by the employer
The optional standard deduction is an amount not exceeding:
3. The pension plan is Reasonable and actuarially
1. 40% of the gross sales or gross receipts of a qualified
sound
individual taxpayer; or
4. The deduction is Apportioned in equal parts over a
2. 40% of the gross income of a qualified corporation (NIRC,
period of 10 consecutive years beginning with the
Sec. 34 [L])
year in which the transfer or payment is made
5. The payment has Not yet been allowed as a
Persons who may avail of the OSD under the NIRC
deduction
1. Individuals
6. The amount contributed must no longer be
a. Resident citizens (RC)
subject to the Control and disposition of the
b. Non-resident citizens (NRC)
employer
c. Resident aliens (RA)
l. Deductions under Special Laws
2. Corporations
a. Domestic (DC)
i. Free Legal Assistance Act
b. Resident foreign corporations (RFC)
A lawyer or professional partnerships rendering
actual free legal services, as defined by the SC, shall
3. Partnerships
be entitled to an allowable deduction from the gross
4. Estates and trusts
income.
Deduction would be the amount that could have
An individual who avails of the OSD is not required to submit
been collected for the actual free legal services
final statements provided that said individual shall keep such
rendered or up to 10% of the gross income derived
records pertaining to his gross sales or gross receipts.
from the actual performance of the legal profession,
A corporation is still required to submit its financial
whichever is lower.
statements when it files its annual income tax return and
It shall be deductible provided that the actual free
keep such records pertaining to its gross income.
legal services contemplated shall be exclusive of the
minimum 60-hour mandatory legal aid services
19. Distinguish MCIT from RCIT.
rendered to indigent litigants as required under the
The tax base of RCIT is taxable income while the tax base of
Rule on Mandatory Legal Aid Services for Practicing
MCIT is gross income.
Lawyers, under BAR Matter No. 2012, issued by the
SC.
20. What constitutes doing business in order to classify a
corporation as a resident foreign corporation?
ii. Expanded Senior Citizens Act
a. Deduction from gross income of private
The term “doing business” includes:
Sec 39(d) RA 7042
21. What is the basis of the computation of the 6% CGT on
the sale of real property located in the Philippines held as
Capital Asset?
The capital gains tax of 6% is based on whichever is higher
between (a) the gross selling price or (b) the fair market value
according to Sec 6(E) of the NIRC ([i] the fair market value as
determined by the Commissioner, or [ii] the fair market value
as shown in the schedule of values of the Provincial and City
Assessors) of the real property for sale.
22. Is the sale of an apartment leased to tenants subject to
6% CGT?
No. The apartment being leased that is subsequently sold to
another cannot be subject to 6% CGT because it is not a
capital asset as contemplated under Sec. 39 (A)(1) of NIRC but
rather an ordinary asset. To be an ordinary asset it must be:
1. stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year;
2. property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
3. property used in the trade or business of a character which
is subject to the allowance for depreciation provided in Sec.
34 (F) of the NIRC; or
4. real property used in trade or business of the taxpayer.
In the case at bar, it is clear that the apartment is a
property used in the trade or business of the taxpayer; that is
the lease of the same to tenants. Hence, it cannot be subject
to 6% CGT.
23. What is the irrevocability rule, when it comes to
choosing whether to request for an income tax refund?
Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of
the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit
certificate shall be allowed therefor (Sec 76, NIRC).
24. Differentiate Compromise from Abatement.
COMPROMISE ABATEMENT
Nature Involves a Involves the
reduction of the cancellation of the
taxpayer’s liability entire tax liability
through a mutual of a taxpayer.
agreement.
Authorized Officer CIR, REB, NEB CIR
Grounds 1. Reasonable 1. The tax or any
doubt as to the portion thereof
validity of appears to be
assessment; unjustly or
2. Financial excessively
incapacity of the assessed; or
taxpayer 2. The
administration
and collection
costs involved do
not justify the
collection of the
amount due.
25. ABC Corp is a GOCC engaged in selling electric power to
the residents of Cabanatuan City. Pursuant to Sec. 37 of
Ordinance No. 165-32, the City of Cabanatuan assessed ABC
Corp. a franchise tax amounting to Php808,606.41. ABC
Corp. whose capital stock was subscribed and paid wholly by
the Philippine Government, refused to pay the tax
assessment, arguing that the City government has no
authority to impose tax on government entities. Petitioner
submits that the Charter of ABC Corp. being a valid exercise
of police power, should prevail over the Local Government
Code. Is the contention correct? (NPC vs City of Cabanatuan,
2003)
No. One of the most significant provisions of the LGC is the
removal of the blanket exclusion of instrumentalities and
agencies of the national government from the coverage of
local taxation. Although as a general rule, LGUs cannot
impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC
authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities.
It is worth mentioning that section 192 of the LGC empowers
the LGUs, through ordinances duly approved, to grant tax
exemptions, initiatives or reliefs. But in enacting section 37 of
Ordinance No. 165-92 which imposes an annual franchise tax
"notwithstanding any exemption granted by law or other
special law," the respondent city government clearly did not
intend to exempt the petitioner from the coverage thereof.
Section 137 of the LGC clearly states that the LGUs can
impose franchise tax “notwithstanding any exemption
granted by any law or other special law.” This particular
provision of the LGC does not admit any exception
26. What is a taxpayer’s suit?
It is a case where the act complained of directly involves the
illegal disbursement of public funds collected through
taxation. A taxpayer is allowed to sue where there is a claim
that public funds are illegally disbursed, or that public money
is being deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of an
invalid or unconstitutional law (Land Bank of the Philippines v.
Cacayuran, 696 SCRA 861, G.R. No. 191667, April 17, 2013).
27. Discuss briefly the rule on compensation or set-off in
relation to taxation.
Rules governing compensation or set-off as applied in
taxation
General Rule: No set-off is admissible against the demands
for taxes levied for general or local governmental purposes.
NOTE: The prevalent rule in our jurisdiction disfavors set-off
or legal compensation of tax obligations for the following
reasons:
(1) taxes are of a distinct kind, essence and nature, and these
impositions cannot be so 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 subserved if the integrity and
independence of taxes be maintained (lifeblood doctrine).
The collection of a tax cannot await the results of a lawsuit
against the government (Republic v. Mambulao Lumber
Company, 4 SCRA 622, 1962; Francia v. IAC, G.R. No. L-67649,
June 28, 1988; Caltex Philippines, Inc. v. Commission on Audit,
et al., G.R. No. 92585, May 8, 1992).
Exception: Where both the claims of the government and the
taxpayer against each other have already become due,
demandable, and fully liquidated, compensation takes place
by operation of law and both obligations are extinguished to
their concurrent amounts. In the case of the taxpayer’s claim
against the government, the government must have
appropriated the amount thereto (Domingo v. Garlitos, G.R.
No. L-18994, June 29, 1963).
28. Distinguish double taxation in the strict sense and in a
broad sense.
Double taxation in the strict sense is direct double taxation. It
means that the same property or subject matter is taxed
twice, for the same purpose, by the same taxing authority,
within the same jurisdiction, during the same tax period, with
two taxes of the same kind of character. On the other hand,
double taxation in the broad sense is indirect double taxation.
It means there are two or more pecuniary impositions on a
subject matter. For example, a business is required to pay
income tax to the national government and local business tax
to the local government.
29.Lui owns a chain of retail stores in Legazpi City where she
sells her handcrafted shoes. She pays VAT to the BIR based
on her gross sales. She likewise pays business tax to the City
of Legazpi base on the same gross sales. She claims the
imposition of tax is unconstitutional because it constitutes
double taxation. Is her contention correct?
No, her contention is incorrect. Double taxation is defined as
taxing the same property twice when it should be taxed but
once. It has also been defined as taxing the same person
twice by the same jurisdiction over the same thing. In the
case at bar, there is no direct double taxation because the tax
is collected by different taxing authorities which is the
national government and the local government. Hence, it
does not constitute double taxation.
30. YMCA is a non-stock, non-profit institution, organized
exclusively for charitable purposes. It leases out a portion of
its premises to small shop owners, like restaurants and
canteen operators, and from the parking fees collected from
non-members. YMCA utilizes the receipts from the rentals
exclusively in furtherance of its charitable purposes. Are
these rentals exempt from tax? (CIR vs CA, G.R. No. 124043,
1998)
No. As a rule, non-stock non-profit corporations organized for
religious, charitable or social welfare purposes are exempt
from income tax on their income received by them as such.
However, if these religious, charitable or social welfare
corporations derive income from their properties or any of
their activities conducted for profit, the income tax shall be
imposed on said items of income irrespective of their
disposition. In the case at bar, YMCA derive income from
leasing its portion of premises and from taking parking fees.
Income tax shall be imposed on said items of income
irrespective of their disposition
31. Are liquidating dividends subject to income tax?
Yes. Where a corporation distributes all of its property or
assets in complete liquidation or dissolution, the gain realized
from the transaction by the stockholder, whether individual
or corporate, is taxable income or a deductible loss, as the
case may be. It is generally a return of capital, and hence, it is
not income. However, it is taxable income with respect to the
excess of amount received over cost of the shares
surrendered.
32. Juan and Pedro dela Cruz inherited 10 hectares of land
form deceased father. The National Housing Authority
convinced the brothers to sell 5 hectares of land to low
income groups. Having learned the sale, the BIR made an
assessment against the dela Cruz brothers on the income
derived therefrom. The BIR insisted that the brothers
formed a taxable partnership. Is the BIR correct?
No, for the following reasons:
a. The sharing of gross returns does not of itself
establish a partnership, whether or not the persons
sharing them have a joint or common right or
interest in any property from which the returns are
derived. There must be an unmistakable intention to
form a partnership or joint venture (Obillos, Jr. v. CIR,
139 SCRA 436).
b. There is no contribution or investment of
additional capital to increase or expand the inherited
properties, merely continuing the dedication of the
property to the use to which it had been put by their
forebears (Ibid.).
c. Persons who contribute property or funds to a
common enterprise and agree to share the gross
returns of that enterprise in proportion to their
contribution, but who severally retain the title to
their respective contribution, are not thereby
rendered partners. They have no common stock
capital, and no community of interest as principal
proprietors in the business itself from which the
proceeds were derived (Pascual v. CIR, 166 SCRA
560)