— BAR Q & A, TAXATION —

2016 Bar Exam Suggested Answers in

Taxation by the UP Law Complex
DECEMBER 31, 2018

Briefly explain the following doctrines: lifeblood doctrine; necessity the benefits received
principle; and, doctrine of symbiotic relationship (5%)

SUGGESTED ANSWER

The following doctrines, explained:

✓ Lifeblood doctrine – Without revenue raised 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., G.R. No.
L-28896, February 17, 1988, 158 SCRA 9).

✓ 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, G.R. No. 134062, April 17,
2007, 521 SCRA 373).

✓ 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 the payment of taxes (CIR V. Algue, Inc., G.R. No. L-
28896, February 17, 1988, 158 SCRA 9).

reciprocal relation of protection a taxpayers. The state gives protection an protection, it

must be supported by (CIR v. Algue, Inc., G.R. No. L-28896, Februar

✓ 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 taxes.
(CIR v. Algue, Inc., GR. No. L-28896, February 17, 1988, 158 SCRA 9).
 II

State at least five (5) cases under the exclusive appellate jurisdiction of the Court of Tax Appeals
(CTA). (5%)

SUGGESTED ANSWER

The following cases are under the exclusive appellate jurisdiction of the Court of Tax
Appeals.

1. Exclusive appellate jurisdiction to review by appeal:

2. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
NIRC or other laws administered by the BIR;
3. Inaction of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
NIRC or other laws administered by the BIR, where the NIRC provides
a specific period of action, in which case the inaction shall be deemed a
denial;
4. Decisions, orders or resolutions of the RTC in local tax cases originally
decided or resolved by them in the exercise of their original or appellate
jurisdiction;
5. Decisions of the Commissioner of Customs in cases involving liability of
customs duties, fees or other money charges, seizure, detention or
release of property affected, fines, forfeitures or other penalties in
relation thereto, or other matters arising under the Customs Law or
other laws administered by the Bureau of Customs; and
6. Decisions of the Central Board of Assessment Appeals in the exercise of
its appellate jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial or city
board of assessment appeals.
7. Decisions of the Secretary of Finance on customs cases elevated to him
automatically for review from decisions of the Commissioner of
Customs adverse to the Government under Sec. 2315 of the Tariff and
Customs Code; and
8. Decisions of the Secretary of Trade and Industry, in the case of
nonagricultural product, commodity or article, and the Secretary of
Agriculture, in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Sec. 301 and 302.
respectively, of the Tariff and Customs Code, and safeguard measures
 under R.A. No. 8800, where either party may appeal the decision to
impose or not impose said duties.
9. Exclusive appellate jurisdiction in criminal offenses:

 Over appeals from the judgments, resolutions or orders of the Regional

Trial Courts in tax cases originally decided by them, in their respective
territorial jurisdiction; and

2. Over petitions for review of the judgments, resolutions or orders of the

Regional Trial Courts in the exercise of their appellate jurisdiction over
tax cases originally decided by the Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial Courts in their respective
jurisdiction.

INOTE: It is recommended that any five (5) of the above-enumerated cases be given credit].

III.

Rakham operates the lending company that made a loan to Alfonso in the amount of
P120,000.00 subject of a promissory note which is due within one (1) year from the note’s
issuance. Three years after the loan became due and upon information that Alfonso is nowhere to
be found, Rakham asks you for advice on how to treat the obligation as “bad debt.” Discuss the
requisites for deductibility of a “bad debt?” (5%)

SUGGESTED ANSWER

I will advise Rakham that the obligation of Alfonso may now be considered as bad debts
for having met the yardstick of a debt which had become worthless. In order to be
considered worthless, the taxpayer should establish that during the year from which a
deduction is sought, a situation developed as a result of which it became evident in the
exercise of sound, objective business judgment that there remained no practical, but only
vaguely theoretical, prospect that the debt would ever be paid (Collector of Internal
Revenue v. Goodrich International Rubber Co., G.R. No. L-22265, December 22, 1967, 21
SCRA 1336). A bad debt is deductible if it complies with the following requisites:

(a) There must be a valid and subsisting debt.

(b) The obligation is connected with the taxpayer’s trade or business and is

not between related parties.

(C) There is an actual ascertainment that the debt is worthless.

(d) The debt is charged-off during the taxable year. A partial write-off is not allowed.(PRC
v. CA, G.R. No. 118794, May 8, 1996, 256 SCRA 667).

IV.

The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of real
property located within the city at a rate of fifty percent (50%) of one percent (1%) of the total
consideration of the transaction, Jose sold a parcel of land in the city, which he inherited from his
deceased parents, and refused to pay the aforesaid tax. He instead filed a case asking that the
ordinance be declared null and void since the tax it imposed can only be collected by the national
government, as in fact he has paid the Bureau of Internal Revenue (BIR) the required capital
gains tax. If you were the City Legal Officer of Maharlika, what defenses would you raise to
sustain the validity of the ordinance? (5%)

SUGGESTED ANSWER

I would argue that the City is allowed to levy a tax on transfer of real property ownership
(Sec. 135, LGC). The capital gains tax which is an income tax collected by the national
government is entirely different from the tax on sale or transfer imposed by the ordinance.
The tax imposed by the ordinance not being in the nature of an income tax, the imposition
of the income tax by the national government will not pre-empt the tax sought to be
imposed by the ordinance. I would further argue that the imposition by the national
government of a tax will pre-empt Local Government Units (LGU) only if there is no
specific provision under the Local Government Code giving said power (Bulacan v. CA,
G.R. No. 126232, November 1998, 299 SCRA 442),

V.

Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic
of Nigeria. Its commercial airplanes do not operate within Philippine territory, or service
passengers embarking from Philippine airports. The firm is represented in the Philippines by its
general agent, Narotel. SAA sells airplane tickets through Narotel, and these tickets are serviced
by SAA airplanes outside the Philippines. The total sales of airplane tickets transacted by Narotel
for SAA in 2012 amounted to PIO,000,000.00 The Commissioner of Internal Revenue (CIR)
assessed SAA deficiency income taxes at the rate of 30% on its taxable income, finding that
SAA’s airline ticket sales constituted income derived from sources within the Philippines. SAA
filed a protest on the ground that the alleged deficiency income taxes should be considered as
income derived exclusively from sources outside the Philippines since SAA only serviced
passengers outside Philippine territory. It, thus, asserted that the imposition of such income taxes
violated the principle of territoriality in taxation. Is the theory of SAA tenable? Explain. (5%)

SUGGESTED ANSWER

No. The activity which gives rise to the income is the sale of ticket in the Philippines, hence,
the income from sale of tickets is an income derived from Philippine sources which is
subject to the Philippine income tax. Accordingly, there is no violation of the principle of
territoriality in taxation (Air Canada v. CIR, G.R. No. 169507, January 11, 2016, 778
SCRA 131).

[Note: As the case which is the basis of the answer was decided before the cut-off date for the
2016 Bar Examinations, it is recommended that this question be considered a bonus question,
with any answer to be given full credit.]

VI

Mapagbigay Corporation grants all its employees (rank and file, supervisors, and managers) 5%
discount of the purchase price of its products. During an audit investigation, the BIR assessed the
company the corresponding tax on the amount equivalent to the courtesy discount received by all
the employees, contending that the courtesy discount is considered as additional compensation
for the rank and file employees and additional fringe benefit for the supervisors and managers. In
its defense, the company argues that the discount given to the rank and file employees is a de
minimis benefit and not subject to tax. As to its managerial employees, it contends that the
discount is nothing more than a privilege and its availment is restricted.

Is the BIR assessment correct? Explain. (5%)

SUGGESTED ANSWER

No. The courtesy discounts given to rank and file employees are considered “de minimis
benefits” falling under the category of other facilities and privileges furnished or offered by
an employer to his employees which are of relatively small value intended to promote the
health, goodwill, contentment or efficiency of the employee. These benefits are not
considered as compensation subject to income tax and consequently to the withholding tax
(Sec.2.78.1′ of RR No. 10-2008). If these “de minimis benefits” are furnished to supervisors
and managers, the same are also exempt from the fringe benefits tax (RR No. 3-98; Sec. 33,
NIRC).

ALTERNATIVE ANSWER

Yes, the BIR assessment is correct. De minimis benefits are benefits of relatively small values
provided by the employers to the employee on top of the basic compensation intended for the
general welfare of the employees. It is considered exempt from income tax on compensation as
well as from fringe benefit tax, provided it does not exceed P10,000 per employee pertaxable
year.

Pursuant to RR No. 1-2015, which amended RR No. 2-98, 3-98, 5-2008, 5-2011 and 8-2012, the
following are considered de minimis benefits:

1. a) Monetized unused vacation leave credits of private employees

notexceeding 10 days during the year;
2. 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
Php750 per employee per semester or Php125 per month.
d) Rice subsidy of Php1,500
3. e) Uniform and clothing allowance not exceeding Php5,000 per annum
4. f) Actual medical assistance not exceeding Php10,000 per annum
5. g) Laundry allowance not exceeding Php300 per month
6. h) Employees’ achievement awards, e.g. for length of service or safety
achievement, which must be in the form of tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding
Php10,000 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees.
7. i) Gifts made during Christmas and major anniversary celebrations not
exceeding Php5,000 per employee per annum
8. j) Daily meal allowance for overtime work and night/graveyard shift not
exceeding twenty-five percent (25%) of the basic minimum wage on a per
region basis
9. k) Benefits received by an employee by virtue of a collective bargaining
agreement and productivity incentive schemes provided that the total
monetary value received from both CBA and productive incentive schemes
combined do not exceed Php10,000 per employee per taxable year.
This list is exclusive and anything that is given which is not on the list, shall not be considered de
minimis. The 5% discount of purchase price of its products, not being in this enumeration, is
subject to tax as well as to withholding tax on compensation.

VIII

In 2011, Solar Computer Corporation (Solar) purchased a proprietaru membership share covered
by Membership Certificate No. 8 from the Mabuhay Golf Club, Inc.. for P500,000.00. On
December 27, 2012, it transferred the same to David, its American consultant, to enable him to
avail of the facilities of the Club. David executed a Deed of Declaration of Trust and Assignment
of Shares wherein he acknowledged the absolute ownership of Solar over the share; that the
assignment was without any consideration; and that the share was placed in his name because the
Club required it to be done. In 2013, the value of the share increased to P800,000.00

Is the said assignment a “gift” and, therefore, subject to gift tax? Explain. (5%)

SUGGESTED ANSWER

No. The transfer is not a taxable donation because there is no divestment of ownership by the
transferor. The purpose of the transfer is simply to allow David to avail of the facilities of the
Club. The execution of a “Deed of Declaration of Trust and Assignment of Shares” where the
absolute ownership by Solar of the share is acknowledged would show that there is no
relinquishment of ownership by Solar. The transfer being merely a transfer in form but not in
substance, the same is not subject to gift tax.

IX

(A) Explain the procedure for claiming refunds or tax credits of input Value Added Tax (VAT)
for zero-rated or effectively zero-rated sale. under Sec. 112 of the National Internal Revenue
Code (NIRC) from the filing of an application with the CIR up to the CTA. (2.5%)

(B) Explain the procedure for claiming refunds of tax erroneously or illegally collected under
Sec. 229 of the NIRC from the filing of the claim for refunds with the CIR up to the CTA.
(2.5%)

SUGGESTED ANSWER

(A) In order to be entitled to a refund/tax credit of excess input VAT attributable to zero-
rated or effectively zero-rated sales, the following requisites must be complied with:
 1. The claim for refund must be filed with the Commissioner within 2
years counted from the last day of the quarter when the zero. rated sale
was made (Sec. 112, NIRC);
2. The claim for refund must be accompanied by a statement under oath
that all documents to support the claim has been submitted at the time
of filing of the claim for refund (RMC 54-14);
3. The Commissioner must decide on the claim within 120 days from date
of filing and the adverse decision is appealable to the CTA within 30
days from receipt (Sec. 112, NIRC; CIR v. Aichi Forging of Asia, Inc.,
G.R. No. 184823, October 6, 2010, 632 SCRA 422);
4. If no decision is made within the 120-day period, there is a deemed
denial or adverse decision which is appealable to the CTA within 30
days from the lapse of the 120-day period (Sec. 112, NIRC; Sec. 7(a)(1)
of RA 1125, as amended by RA 9282).

Congress issued a law allowing a 20% discount on the purchases of senior citizens from, among
others, recreation centers. This 20% discount can then be used by the sellers as a “tax credit.” At
the initiative of BIR, however, Republic Act No. (RA) 9257 was enacted amending the treatment
of 20% discount as a “tax deduction.” Equity Cinema filed a petition the RTC claiming that RA
9257 is unconstitutional as it forcibly deprives sellers a part of the price without just
compensation.

(A) What is the effect of converting the 20% discount from a “tax credere to a “tax deduction”?
(2.5%)

(B) If you are the judge, how will you decide the case? Briefly explain your answer. (2.5%)

SUGGESTED ANSWER

(A) The effect of converting the 20% discount from a “tax credit” to a “tax deduction” is
that the tax benefit enjoyed by sellers of goods and services to senior citizens is effectively
reduced. A tax credit reduces the tax liability while a tax deduction merely reduces the tax
base. Under the tax credit scheme, the establishments are paid back 100% of the discount
they give to senior citizens while under the tax deduction scheme, they are only paid back
about 32% of the 20% discount granted to senior citizens.

(B) I will decide in favor of the Constitutionality of the law. The 20% discount as well as
the tax deduction scheme is a valid exercise of the police power of the State (Manila
Memorial Park Inc. v. Department on Social Welfare and Development, G.R. No. 175356,
December 3, 2013, 711 SCRA 302)
 XI

Soaring Eagle paid its excise tax liabilities with Tax Credit Certificates (TCCs) which it
purchased through the One Stop Shop Inter-Agency Tax Credit Center (Center) of the
Department of Finance. The Center is a composite body of the DOF, BIR, BOC and the BOI.
The TCCs were accepted by the BIR as payments. A year after, the BIR demanded the payment
of alleged deficiency excise taxes on the ground that Soaring Eagle is not a qualified transferee
of the TCCs it purchased from other BOl-registered companies. The BIR argued that the TCCs
are subject to post-audit as a suspensive condition. On the other hand, Soaring Eagle countered
that it is a buyer in good faith and for value who merely relied on the Center’s representation of
the genuineness and validity of the TCCs. If it is ordered to pay the deficiency, Soaring Eagle
claims the same is confiscatory and a violation of due process. Is the assessment against Soaring
Eagle valid? Explain. (5%)

SUGGESTED ANSWER

No. The assessment is invalid because the TCC’s used by Soaring Eagle are valid and
effective. A TCC is an undertaking by the government through the BIR or DOF,
acknowledging that a taxpayer is entitled to a certain amount of tax credit from either an
overpayment of income taxes, a direct benefit granted by law or other sources and
instances granted by law such as on specific unused input taxes and excise taxes on certain
goods. As such, tax credit is transferable in accordance with pertinent laws, rules, and
regulations (Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue, G.R.
No. 172598, December 21, 2007, 541 SCRA 316).

XII

The Philippine-British Association, Inc. (Association) is a non-stock non-profit organization

which owns the St. Michael’s Hospital (Hospital) Sec. 216 in relation to Sec. 215 of the LGC
classifies all lands, buildings and other improvements thereon actually, directly, and exclusively
used for hospitals as “special.” A special classification prescribes a lower assessment than a
commercial classification.

Within the premises of the Hospital, the Association constructed the St. Michael’s Medical Arts
Center (Center) which will house medical practitioners who will lease the spaces therein for their
clinics at prescribed rental rates. The doctors who treat the patients confined in the Hospital are
accredited by the Association. The City Assessor classified the Center as “commercial” instead
of “special” on the ground that the Hospital owner gets income from the lease of its spaces to
doctors who also entertain out-patients. Is the City Assessor correct in classifying the Center as
“commercial?” Explain. (5%)

SUGGESTED ANSWER

No. The Medical Arts Center is an integral part of the Hospital and should be classified for
assessment purposes as “special”. The fact alone that the doctors holding clinics in the
Center are those duly accredited by the Association who owns the Hospital, and these
doctors are the ones who can treat the Hospital’s patients confined in it, takes away the
said Medical Arts Center from being categorized as “commercial” since a tertiary hospital
is required by law to have a pool of physicians who comprise the required medical
departments in various medical fields (City Assessora Cebu City v. Association of Benevola
de Cebu, Inc., G.R. No. 152904, June 2007, 524 SCRA 128).

XIII

Pursuant to Sec. 11 of the “Host Agreement between the United Nations and the Philippine
government, it was provided that the World Health Organization (WHO), “its assets, income and
other properties shall be: a) exempt from all direct and indirect taxes.” Precision Construction
Corporation (PCC) was hired to construct the WHO Medical Center in Manila. Upon completion
of the building, the BIR assessed a 12% VAT on the gross receipts of PCC derived from the
construction of the WHO building. The BIR contends that the 12% VAT is not a direct nor an
indirect tax on the WHO but a tax that is primarily due from the contractor and is therefore not
covered by the Host Agreement. The WHO argues that the VAT is deemed an indirect tax as
PCC can shift the tax burden to it. Is the BIR correct? Explain. (5%)

SUGGESTED ANSWER

No. Since World Health Organization (WHO), the contractee, is exempt from direct and
indirect taxes pursuant to an international agreement where the Philippines is a signatory,
the exemption from indirect taxes should mean that the entity or person exempt is the
contactor itself because the manifest intention of the agreement is to exempt the contractor
so that no tax may be shifted to the contractee (CIR v. John Gotamco & Sons, Inc., G.R.
No. L-31092, February 24, 1987, 148 SCRA 36). The immunity of WHO from indirect taxes
extends to the contractor by treating the sale of service as effectively zero-rated when the
law provided that, “services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory effectively subjects
the supply of such service to zero percent (0%) rate” (Section 108(B) 3, NIRC).
Accordingly, the BIR is wrong in assessing the 12% VAT from the contractor, Precision
Construction Corporation.

XIV

Lucky V Corporation (Lucky) owns a 10-storey building on a 2,000 Sous meter lot in the City of
Makati. It sold the lot and building to Rainiere P80million. One month after, Rainier sold the lot
and building to Health Smoke Company (HSC) for P200 million. Lucky filed its annual tax
return and declared its gain from the sale of the lot and building in the amount of P750,000.00

An investigation conducted by the BIR revealed that two months prior to the sale of the
properties to Rainier, Lucky received P40 million from HSC and not from Rainier. Said amount
of P40 million was debited by HSC and reflected in its trial balance as “other inv. — Lucky
Bldg.” The month after, another P40million was reflected in HSC’s trial balance as “other inv.
— Lucky Bldg.” The BIR concluded that there is tax evasion since the real buyer of the
properties of Lucky is HSC and not Rainier. It issued an assessment for deficiency income tax in
the amount of P79 million against Lucky. Lucky argues that it resorted to tax avoidance or a tax
saving device, which is allowed by the NIRC and BIR rules since it paid the correct taxes based
on its sale to Rainier. On the other hand, Rainier and HSC also paid the prescribed taxes arising
from the sale by Rainier to HSC. Is the BIR correct in assessing taxes on Lucky? Explain. (5%)

SUGGESTED ANSWER

Yes. The sale of the property by Lucky V Corporation (Lucky) to Rainer and consequently
the sale by Rainer to HSC being prompted more on the mitigation of tax liabilities than for
legitimate business purposes, therefore, constitutes tax evasion. The real buyer from Lucky
is HBC as evidenced by the direct receipt of payments by the former from the latter where
the latter recorded “other investments – Lucky Building”. The scheme of resorting to a
two-step transaction in selling the property to the ultimate buyer in order to escape paying
higher taxes is considered as outside of those lawful means allowed in mitigating tax
liabilities which makes Lucky, criminally and civilly liable. Hence, the BIR is correct in
assessing taxes on Lucky (CIR v. Estate of Benigno P. Toda, Jr., G.R. No. 147188,
September 14, 2004, 438 SCRA 290).

XV

Peter is the Vice President for Sales of Golden Dragon Realty Conglomerate Inc. (Golden
Dragon). A group of five (5) foreign investors visited the country for possible investment in the
condominium units and subdivision lots of Golden Dragon. After a tour of the properties for sale,
the investors were wined and dined by Peter at the posh Conrad’s Hotel at the cost of
P150,000.00. Afterward, the investors were brought to a party in a videoke club which cost the
company P200,000.00 for food and drinks, and the amount of P80,000,00 as tips for business
promotion officers. Expenses at Conrad’s Hotel and the videoke club were receipted and
submitted to support the deduction for representation and entertainment expenses. Decide if all
the representation and entertainment expenses claimed by Golden Dragon are deductible.
Explain. (5%)

SUGGESTED ANSWER

Reasonable allowance for entertainment, amusement, and recreation expenses during the
taxable year that are directly connected or related to the operation or conduct of the trade,
business or profession, or that are directly related to or in furtherance of the conduct of
his/its trade, business, or exercise of a profession not to exceed such ceilings prescribed by
rules and regulations, are allowed as deduction from gross income. In this case, the
expenses incurred were to entertain the investors of Golden Dragon; thus, the amount
deductible for entertainment, amusement and recreation expenses is limited to the actual
amount paid or incurred but in no case shall the deduction exceed 0.50% of net sales for
taxpayers engaged in the sale of goods or properties (Sec. 34(A)(1)(a) (iv), NIRC as
implemented by RR No. 10-2002).

[Note: Reasonableness and liberality are recommended in considering an examinee’s answer

to this question.]

XVI

Amor Powers, Inc. (API) is a domestic corporation registered with the BIR as a value-added
taxpayer. API incurred excess input VAT in the amount of P500,000,000.00 on August 3, 2008.
Hence, it filed with the BIR an administrative claim for the refund or credit of these input taxes
on August 15,2010. Without waiting for the CIR to act on its claim, API filed a Petition for
Review with the CTA on September 15, 2010 before the lapse of two years after the close of the
taxable quarter concerned.

In its Comment on the Petition, the CIR argues that API’s Petition should be dismissed as it was
filed before the lapse of the 120-day period given to the CIR by Sec. 112(D) of the NIRC, which
became effective on January 1, 1998. For the CIR, the 120-day period is mandatory and
jurisdictional so that any suit filed before its expiration is premature and, therefore, dismissible,
API, on the other hand, invokes BIR Ruling No. DA-489-03 issued by the CIR on December 10,
2003 in answer to a query posed by the Department of Finance regarding the propriety of the
actions taken by Lazi Bay Resources Development, Inc., which filed an administrative claim for
refund with the CIR and, before the lapse of the 120-day period from its filing, filed a judicial
claim with the CTA. BIR Ruling No. DA-489-03 stated that the taxpayer-claimant need not wait
for the lapse of the 120-day period before It could seek judicial relief with the CTA.
Will API’s Petition for Review prosper? Decide with reasons. (5%)

SUGGESTED ANSWER

Yes. The petition for review filed by API falls within the exemption from the mandatory 120 +
30-day requirement in pursuing a judicial remedy for a claim of refund of input taxes attributable
to zero-rated sales. All claims for refund filed between October 6, 2003 when BIR Ruling No.
DA-489-03 was issued until the promulgation of the decision by the Supreme Court ruling on the
period by which a taxpayer may pursue a judicial remedy for a claim for refund, must follow the
period prescribed in the BIR Ruling (CIR v. Aichi Forging of Asia, Inc., G.R. No. 184823,
October 6, 2010, 632 SCRA 422).

XVII

The requisites for a valid waiver of the three-year (3-year) prescriptive period for the BIR to
assess taxes due in the taxable year are prescribed by Revenue Memorandum Order (RMO) No.
20-90:

1. The waiver must be in the proper form prescribed by RMO 20-90.

2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any
of its responsible officials. In case the authority is delegated by the taxpayer
to a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the waiver. The date of
such acceptance by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by him must make
sure that the waiver is in the prescribed form, duly notarized, and executed
by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the
Bureau should be before the expiration of the period of prescription or before
the lapse of the period agreed upon in case a subsequent agreement is
executed.
6. The waiver must be executed in three copies, the original copy to be attached
to the docket of the case, the second copy for the taxpayer and the third copy
for the Office accepting the waiver. The fact of receipt by the taxpayer of
his/her file copy must be indicated in the original copy to show that the
taxpayer was notified of the acceptance of the BIR and the perfection of the
agreement.
After being assessed by the BIR with alleged deficiency income taxes, VVV Corporation (VVV)
through Enrique, its President, executed a waiver of the prescriptive period. The waiver was
signed by Revenue District Officer (RDO) Alfredo. However, the waiver did not state the date of
execution by the taxpayer and date of acceptance by the BIR. Enrique was also not furnished a
copy of the waiver by the BIR.

VVV claims that the waiver ‘is void due to non-compliance with RMO 20-90. Hence, the period
for assessment had already prescribed. Moreover, since the assessment involves P2million, the
waiver should have been signed by the CIR and instead of a mere RDO. On the other hand, the
BIR contends that the requirements of RMO No. 20-90 are merely directory; that the execution
of the waiver by VVV was a enunciation of its right to invoke prescription and that the
government cannot be estopped by the mistakes committed by its revenue officers. Is VVV
liable? Explain. (5%)

SUGGESTED ANSWER

No. The waiver was executed after VVV Corporation (VVV) was assessed for deficiency
income taxes obviously to justify the assessment made after prescription had set in. This is
the reason why WWV is invoking prescription due to the alleged invalidity of the waiver
for failure to comply with the requisites set forth under RMO 20-90. A waiver executed
beyond the prescriptive period is ineffective (CIR v. The Stanley Works Sales (Phils), Inc.,
G.R. No. 187589, December 3, 2014, 743 SCRA 642).

XX

Patrick is a successful businessman in the United States and he is a sole proprietor of a

supermarket which has a gross sales of $10 million and an annual income of $3million. He went
to the Philippines on a visit and, in a party, he saw Atty. Agaton who boasts of being a tax
expert. Patrick asks Atty. Agaton: if he (Patrick) decides to reacquire his Philippine citizenship
under RA 9225, establish residence in this country, and open a supermarket in Makati City, will
the BIR tax him on the income he earns from his U.S. business? If you were Atty. Agaton, what
advice will you give Patrick? (5%)

SUGGESTED ANSWER

I will advise Patrick that once he re-acquires his Philippine citizenship and establishes his
residence in this country, his income tax classification would then be a ‘resident citizen’. A
resident citizen is taxable on all his income, whether derived within or without the
Philippines; accordingly, the income he earns from his business abroad will now be subject
to the Philippine income tax (Sec. 23, NIRC).

ALTERNATIVE ANSWER
If Patrick becomes a dual citizen under RA 9225 in our country, he shall be allowed to acquire
real properties and engage himself in business here just like an ordinary Filipino without
renouncing his foreign citizenship. In addition, his income abroad will not be taxed here. These
are among the Incentives we have extended to former Filipinos under the Dual Citizenship Law
so that they will be encouraged to come home and invest their money in our country.

XVIII

Henry, a U.S. naturalized citizen, went home to the Philippines to reacquire Philippine
citizenship under RA 9225. His mother left him a lot and building in Makati City and he wants to
make use of it in his trading business. Considering that he needs money for the business, he
wants to sell his lot and building and make use of the consideration. However, the lot has
sentimental value and he wants to reacquire it in the future. A friend of Henry told him of the
“sale-leaseback transaction” commonly used in the U.S., which is also used for tax reduction.
Under said transaction, the lot owner sells his property to a buyer on the condition that he leases
it back from the buyer. At the same time, the property owner is granted an option to repurchase
the lot on or before an agreed date. Henry approaches you as a tax lawyer for advice.

Explain what tax benefits, if any, can be obtained by Henry and the buyer from the sale-
leaseback transaction? (5%)

SUGGESTED ANSWER

Henry will be entitled to claim rental expense as a deduction from his gross income in the
trading business. His lease payments plus interest would be substantially higher than the
depreciation expense he may claim in computing his taxable income; hence, the lease would
result in the additional benefit of increasing his additional tax deductions. The buyer will
be deriving rental income from the property and be able to claim business deductions such
as real property taxes, repairs and maintenance, depreciation and other expenses necessary
for the renting out of the property.

XIX

Jennifer is the only daughter of Janina who was a resident in Los Angeles California, U.S.A.
Janina died in the U.S. leaving to Jennifer one million shares of Sun Life (Philippines), Inc., a
corporation organized and existing under the laws of the Republic of the Philippines. Said shares
were held in trust for Janina by the Corporate Secretary of Sun Life and the latter can vote the
shares and receive dividends for Janina. The Internal Revenue Service (IRS) of the U.S. taxed
the shares on the ground that Janina was domiciled in the U.S. at the time of her death.

(A) Can the CIR of the Philippines also tax the same shares? Explain. (2.5%)

(B) Explain the concept of double taxation. (2.5%)

SUGGESTED ANSWER

(A) Yes. The property being a property located in the Philippines, it is subject to the Philippine
estate tax irrespective of the citizenship or residence of the decedent (Sec. 85, NIRC). However,
if Janina is a non-resident alien at the time of her death, the transmission of the shares of stock
can only be taxed applying the principle of reciprocity (Sec. 104, NIRC).

(B) Double taxation occurs when the same subject or object of taxation is taxed twice when it
should be taxed but once. Double taxation is prohibited. when it is an imposition of taxes on the
same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period, with the same kind or character of a tax (84 C.J.S.
131-132). It is permissible if taxes are of different nature or character, or the two taxes are
imposed by different taxing authorities (Villanueva v. City of Iloilo, G.R. No. L-26521,
December 28, 1968, 26 SCRA 578).

XX

Patrick is a successful businessman in the United States and he is a sole proprietor of a

supermarket which has a gross sales of $10 million and an annual income of $3million. He went
to the Philippines on a visit and, in a party, he saw Atty. Agaton who boasts of being a tax
expert. Patrick asks Atty. Agaton: if he (Patrick) decides to reacquire his Philippine citizenship
under RA 9225, establish residence in this country, and open a supermarket in Makati City, will
the BIR tax him on the income he earns from his U.S. business? If you were Atty. Agaton, what
advice will you give Patrick? (5%)

SUGGESTED ANSWER

I will advise Patrick that once he re-acquires his Philippine citizenship and establishes his
residence in this country, his income tax classification would then be a ‘resident citizen’. A
resident citizen is taxable on all his income, whether derived within or without the
Philippines; accordingly, the income he earns from his business abroad will now be subject
to the Philippine income tax (Sec. 23, NIRC).
ALTERNATIVE ANSWER

If Patrick becomes a dual citizen under RA 9225 in our country, he shall be allowed to acquire
real properties and engage himself in business here just like an ordinary Filipino without
renouncing his foreign citizenship. In addition, his income abroad will not be taxed here. These
are among the Incentives we have extended to former Filipinos under the Dual Citizenship Law
so that they will be encouraged to come home and invest their money in our country.