TAXATION LAW

2018 BAR EXAMINATIONS

MARVIN PATRICIO CAÑERO

Attorney-at-Law
Certified Public Accountant
Law Professor and Bar Reviewer in Taxation
Former Revenue Attorney – Bureau of Internal Revenue
GENERAL PRINCIPLES OF TAXATION
 DOUBLE TAXATION:

1. DIRECT DUPLICATE TAXATION (objectionable or prohibited)

a. same property or subject-matter
b. for the same purpose,
c. by the same taxing authority
d. within the same jurisdiction
e. during the same taxing period
f. same kind or character of tax

2. INDIRECT DUPLICATE TAXATION (broad sense and is permissible) -

one or more of the requisites of direct duplicate taxation is/are not
present.
Constitutionality of Double Taxation:

There is no constitutional prohibition against double taxation in

the Philippines. It is something not favored, but is permissible,
provided that some other constitutional requirement is not thereby
violated, such as the requirement that taxes must be uniform. (Pepsi
Cola Bottling Co. v. City of Butuan, GR L-22814, 28 August 1968)
QUESTION: ABC Banking Corporation seasonably filed its Quarterly
Percentage Tax Returns reflecting gross receipts in the total amount
of Php1.5 Billion and paid the corresponding 5% Gross Receipt Tax of Php
75 Million pursuant to Section 221 of the Tax Code. ABC Banking
Corporation claimed double taxation because the total gross receipts in
the amount of Php1.5 Billion included the sum of Php350 Million
representing gross receipts from passive income which was already
subjected to 20% final withholding tax under Section 27(D)(1) of the
same Code. (A) Explain the concept of double taxation. (B) Is the claim of
ABC Banking Corporation tenable?
Appropriations, Revenue and Tariff Bills Shall Originate
Exclusively From the House of Representatives

it is not the law — but the revenue bill — which is required to
"originate exclusively" in the HOR.

the initiative for filing revenue, tariff, or tax bills, bills authorizing an
increase of the public debt, private bills and bills of local application
must come from the HOR (Tolentino vs. Secretary of Finance)
Prohibition Against Taxation of Religious, Charitable Entities, and
Educational Entities (Art. VI, Sec. 28(3)7, PC)

 To be entitled to the exemption, it must be proven by clear and

unequivocal proof, that the entity (a) is a charitable religious or
educational entity; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable,
religious or eductational purposes (Lung Center of the Philippines
vs. QC., 2004).

 The exemption extends to facilities which are incidental to and

reasonably necessary for the accomplishment of the main
purposes (Abra Valley College Inc. vs. Aquino, 1988).
Prohibition against taxation of non-stock, non-profit institutions
[Art. XIV, Sec. 4(3) and (4), PC]

 To be granted the exemption, it must be proven with substantial

evidence that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted
from taxation is used actually, directly, and exclusively for educational
purposes. (CIR vs. CA,YMCA ,1998)
 Thus, when a non-stock, non-profit educational institution proves that
it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT. On the
other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.
(CIR VS. DLSU, 2016)
The last paragraph of Section 30 of the Tax Code is without force and
effect with respect to non-stock, non-profit educational
institutions, provided, that the non-stock, non-profit educational
institutions prove that its assets and revenues are used actually, directly
and exclusively for educational purposes. The tax-exemption
constitutionally-granted to non-stock, non profit educational
institutions, is not subject to limitations imposed by law. (CIR VS. DLSU).
QUESTION: VLC University, a non-stock, non-profit educational entity,
operates a canteen for its students and a bookstore inside the university
building, leases a portion of the ground floor of the said building to 7/11
Convenient Store, and operates two dormitories for its students. Is the
University liable to pay: (A) real property tax for the university building
and two dormitories; and (B) income tax on the income from the
operations of the canteen, bookstore, and two dormitories and the lease
of a portion of the ground floor of the university building to 7/11
Convenient Store?
OFFSETTING OF TAX REFUND WITH TAX DEFICIENCY:

With respect to the offsetting of tax refund with tax deficiency, the
same is unavailing under Art. 1279 of the Civil Code. (South African
Airways vs. CIR, 2010).

Offsetting of taxes is allowed if the determination of the taxpayer's

liability is intertwined with the resolution of the claim for tax refund of
erroneously or illegally collected taxes under Section 229 of the NIRC.
(CIR v. CTA, 1994)
The SC allowed the offsetting and did not grant the prayer for a refund
because the correctness of the return filed by petitioner is put in doubt
due to the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1) of the
NIRC. (South African Airways vs. CIR )

The matter of set-off or compensation is not an issue because what is

involved is not the off-set of tax liabilities against any alleged claim the
taxpayer may have against the government; rather, the case is a denial
of a taxpayer’s refund claim on account of the finding of liability for
another tax in lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid (AIR CANADA vs. CIR, 2016)
SMI-ED Philippines Technology, Inc. v. CIR, 2014

Offsetting was allowed because there was a need for the court to
determine if a taxpayer claiming refund of erroneously paid taxes is
more properly liable for taxes other than that paid.

The determination of the proper category of tax that should have been
paid is not an assessment but is an incidental issue that must be
resolved in order to determine whether there should be a refund.
QUESTION: Tapaya Power Corporation (TPC) is engaged in the business
of power generation and sale of electricity to the NPC and Alas Fertilizer
Corporation (AFC). TPC filed with the BIR an administrative claim for
refund or credit of its unutilized input VAT on sale of electricity. Due to
the inaction of the CIR, TPC filed with the CTA a Petition for Review. The
CTA ruled that: (a) the sale to NPC is zero-rated sale of electricity
pursuant to Section 108 (B) (3) of the NIRC, as amended, in relation to
Section 13 of the Revised Charter of the NPC, as amended;
(b) the sale of electricity to AFC is invalid zero-rated because TPC failed
to present a Certificate of Compliance from the Energy Regulatory
Commission; and (c) TPC is thus entitled only to the refund of input VAT
on sales attributable to NPC and not to AFC. Accordingly, the CIR
claimed that TPC should be held liable for deficiency VAT on sales
attributable to AFC and that the refund and deficiency VAT should be
subject to set-off or compensation. Is the claim of the CIR correct?
 TAX AMNESTY

absolute waiver by a sovereign of its right to collect taxes and power to

impose penalties on persons or entities guilty of violating a tax law. Tax
amnesty aims to grant a general reprieve to tax evaders who wish to
come clean by giving them an opportunity to straighten out their records
(CS GARMENT, INC., vs. CIR, March 12, 2014)
 TAX EXEMPTION VS. TAX AMNESTY

There is immunity from tax; Connotes condonation from payment of an

existing liability.
The grantee does not pay anything; the grantee pays a portion.
Can be availed of by any qualified taxpayer; not always available.
It is prospective in application; it is retroactive in application.
Tax liability does not attach to one enjoying a privilege of tax exemption;
Tax liability attaches to a taxpayer who wants to avail of tax amnesty.
Requires no payment of tax; requires the payment of certain percentage
of unpaid taxes.
Immunity from civil liability; Immunity from civil, criminal and
administrative liability.
Taxpayer’s Suit

 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. (Remulla vs Maliksi)
INCOME TAX
Requisites for Taxability of Income:

1. There is an income, gain or profit;

2. The income, gain or profit is received (actually or constructively)

or realized during the taxable year;

3. The income, gain or profit is not exempt from income tax. (CIR VS.
CA, GR NO. 108576, JANUARY 20, 1999 )
General Principles of Income Taxation (Sec. 23, NIRC)

Resident Citizens and Domestic Corporations are taxable on their

income derived from sources within and without the Philippines.

All other kinds of taxpayers are taxable only on their income derived
from sources within the Philippines.
Source Rules (Sec. 42, NIRC):

• Interests – residence of the debtor

• Dividends– residence of the corporation paying dividends, subject to
the 50% source rule
• Services - place of performance of the service
• Rentals and royalties – location of the property or interest in such
property
• Sale of Real Property – location of the real property
• Sale of Personal Property
• partly within and partly without (produce)
• place of sale (purchase)
Sale of Tickets in the Philippines by an Offline International Carrier:

The source of an income is the property, activity or service that

produced the income; thus, the sale of tickets is the activity that
produces the income.

[CIR vs. British Overseas Airways Corp., et al., (1987); CIR vs. Air India,
et al., (1988)]
NDC vs. CIR, 151 SCRA 472

The residence of the obligor who pays the interest rather than the
physical location of the securities, bonds or notes or the place of
payment is the determining factor of the source of interest income.
BAR: Pacific, Inc. is engaged in overseas shipping. It time chartered
one of its ships to a Japanese company on a five- year term. The
charter was consummated through the efforts of Kamino Moto, a
Tokyo based broker. The negotiation took place in Tokyo. The
agreement calls for Pacific, Inc. to pay Kamino Moto $50,000.00.
Your opinion is sought whether Pacific, Inc. should withhold the tax
before sending the compensation of Kamino Moto.
BAR: Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a
nonresident citizen.

a) If the goods were produced from Ms. B's factory in the

Philippines, is Ms. B's income from the sale to Ms. C taxable in the
Philippines? Explain.
b) If Ms. B is an alien individual and the goods were produced in her
factory in China, is Ms. B's income from the sale of the goods to
Ms. C taxable in the Philippines? Explain.
Employer’s Convenience Rule:

 “board and lodging furnished employees in addition to their cash

compensation is held to be supplied for the convenience of the
employer and the value thereof is not required to be reported in
such employees' income tax returns.” (Henderzon vs. Collector, 1
SCRA 649L-12954, February 28, 1961)
BAR: PRT Corp. purchased a residential house and lot with a swimming
pool in an upscale subdivision and required the company president to stay
there without paying rent; it reasoned out that the company president
must maintain a certain image and be able to entertain guests at the house
to promote the company's business. The company president declared that
because they are childless, he and his wife could very well live in a smaller
house.
Special Treatment of Fringe Benefits:

good, service, or other benefit furnished or granted by an employer, in

cash or in kind, in addition to basic salaries, to an individual employee
(except rank and file employees) such as, but not limited to the
enumeration under Sec. 33 (B) of the NIRC.

Fringe Benefit shall be subject to FRINGE BENEFIT TAX which shall be

treated as final income tax on the employee that shall be withheld and
paid by the employer
Exceptions:

a. FB authorized and exempted under special laws;

b. Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
c. FB given to Rank and File Employees
d. De minimis benefits
Taxation of De Minimis Benefits:

a. The enumeration under regulations is exclusive.

b. De minimis ceilings are independent and separate from the
82,000 “other benefits”.
c. Any amount in excess of the limit is taxable subject to the
82,000 ceiling.
d. De minimis benefits shall constitute as deductible expense of
employer (RR 10-2008).
Soriano, et al vs. SOF and CIR, ( 2017)

RA 9504 is explicit as to the coverage of exemption: the wages

that are not in excess of the SMW, including the corresponding
holiday, overtime, night differential and hazard pays. In other
words, what the legislature is exempting is the MWE’s minimum
wage and other forms of statutory compensation like holiday,
overtime, night differential and hazard pays. These are not
bonuses or other benefits; these are wages.
Gains Derived from Dealings in Properties:

Negative Definition of Capital Asset:

1. Stock in trade or other properties included in the inventory of

the taxpayer;
2. Property held primarily for sale to customers in the ordinary
course of business;
3. Property used in trade or business and subject to depreciation;
4. Real property used in trade or business [Sec. 39(A)(1), NIRC].
BAR : In January 1970, Juan Gonzales bought one hectare of
agricultural land in Laguna for P100,000. This property has a current
fair market value of P10 million in view of the construction of a
concrete road traversing the property. Juan Gonzales agreed to
exchange his agricultural lot in Laguna for a one-half hectare
residential property located in Batangas, with a fair market value of
P10 million, owned by Alpha Corporation, a domestic corporation
engaged in the purchase and sale of real property. Alpha Corporation
acquired the property in 2007 for P9 million.
Ordinary Gains & Losses

 Ordinary income - any gain from the sale or exchange of property

which is not a capital asset

 Ordinary loss - any loss from the sale or exchange of property

which is not a capital asset [Sec.22 (Z), NIRC]

 The general rules of income taxation apply to both gain and loss.
• Individual – graduated rates
• Corporation – 30% RCIT
Capital Gains Tax ( CGT)

1. Shares of Stock
Listed and Traded: final tax of ½ of 1% GSP
Not listed and traded: final tax of 5% - 10% Net Capital Gain

2. Real Property
6% CGT on the presumed gain (SP or FMV)
Exception: sale or disposition of principal residence

3. Other Capital Asset

Subject to ordinary income tax
CGT on Shares of Stocks:

equity investment is a capital, not ordinary, asset of the investor the

sale or exchange of which results in either a capital gain or a capital
loss. Shares of stock, like the other securities defined in Section
22(T) of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an active
trader (for his own account) in securities (China Bank vs. CA, GR No.
125508, 19 July 2000)
CGT on Real Property

For corporation, the final tax is imposed on the gain presumed

to have been realized on the sale, exchange or disposition of
lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets.
[Section 27(D)(5), NIRC; SMI-ED vs. CIR]

includes pacto de retro sales and other forms of conditional

sales like extra-judicial foreclosure sale, execution sale,
expropriation;
In case the right of redemption is exercised before the expiration of
the statutory period in a foreclosure sale, no capital gains tax shall
be imposed as there was no actual transfer of title from the owner-
mortgagor to the foreclosing mortgagee.

 However, if no redemption was made within the redemption

period, the title over the property is transferred from owner-
mortgagor to the mortgagee; accordingly, the latter is liable to pay
capital gains tax on the foreclosure sale. (Supreme Transliner, Inc. vs.
BPI family Savings Bank, 25 February 2011).
Sale or Disposition of Principal Residence

1. proceeds fully utilized within 18 mos. from sale;

2. historical cost or adjusted basis shall be carried over to the new
principal residence;
3. CIR has been duly notified within 30 days from sale or
disposition;
4. can only be availed of once every 10 years;
5. if there is no full utilization, only the portion of the gain presumed
to have been realized from the sale or disposition shall be subject
to CGT.
Other Capital Assets:

1. Individual taxpayer
Holding period
Capital losses are allowed only to extent of the capital gains
Net Capital Loss Carry-Over is ALLOWED.

2. Corporate taxpayer
No holding period
Same
Net Capital Loss Carry-Over NOT ALLOWED
BAR: In March 2009, Tonette, who is fond of jewelries, bought a
diamond ring for P750,000.00, a bracelet for P250,000.00, a necklace
for P500,000.00, and a brooch for P500,000.00. Tonette derives
income from the exercise of her profession as a licensed CPA. In
October 2009, Tonette sold her diamond ring, bracelet, and necklace
for only P1.25 million incurring a loss of P250,000.00. She used the
P1.25 million to buy a solo diamond ring in November 2009 which
she sold for P1.5 million in September 2010. Tonette had no other
transaction in jewelry in 2010.
Income From Whatever Source:

Gains arising from expropriation of property

Income derived from illegal sources
increase in the net worth if unreported and not explained by the
taxpayer
The condonation of indebtedness for a consideration
Recovered damages representing recoveries of lost profits
Exclusions from Gross Income

they represent return of capital or are not income;

 subject to another kind of internal revenue tax;

expressly exempt form income tax under the law.

Benefits Received on Account of Involuntary Separation

because of death, sickness or other physical disability or for any cause

beyond the control of the said official or employee. [Sec. 32(B)(6)(b),
NIRC].

separation of the employee must not be asked for, initiated by him, or

of his own making or choice
BAR: X worked for a manufacturing firm. Due to business reverses the
firm offered voluntary redundancy program in order to reduce overhead
expenses. Under the program an employee who offered to resign would
be given separation pay equivalent to his three month’s basic salary for
every year of service. X accepted the offer and received P400.000.00 as
separation pay under the program. After all the employees who accepted
the offer were paid, the firm found its overhead still excessive. Hence it
adopted another redundancy program. Various unprofitable departments
were closed. As a result, Y was separated from the service. He also
received P400.000.00 as separation pay.
REQUISITES FOR DEDUCTIBLITY OF BUSINESS EXPENSE

a. ordinary and necessary;

b. paid or incurred during the taxable year;
c. paid or incurred in carrying on the trade or business of the
taxpayer;
d. supported by receipts;
e. if subject to withholding tax, proof of payment to the BIR must be
shown [Sec. 34(K)].
BAR: MFC incurred substantial advertising expenses in order to protect
its brand franchise for one of its line products. In its income tax return,
MFC included the advertising expense as deduction from gross income,
claiming it as an ordinary business expense. Is MFC correct?
BAR: Gold and Silver Corporation gave extra 14th month bonus to all its
official and employees in the total amount of P75 Million. When it filed
its corporate income tax return the following year, the corporation
declared a net operating loss. When the income tax return of the
corporation was reviewed by the BIR the following year, it disallowed as
item of deduction the P75 Million bonus the corporation gave its officials
and employees on the ground of unreasonableness. The corporation
claimed that the bonus is an ordinarily and necessary expense that
should be allowed. If you were the BIR Commissioner, how will you
resolve the issue?
 To be considered ordinary, expense must be reasonable in
amount.[CIR vs. General Foods (Phils.), Inc.; C. M. Hoskins & Co., Inc. vs.
CIR]

 A capital outlay is not deductible but depreciable, except, if the TP is a

non-profit proprietary educational institution [Sec. 34(A), NIRC].
 expenses relating to recapitalization and reorganization of
corporation, cost of obtaining stock subscription, promotion
expenses, and commission or fees paid for the sale of stock
reorganization are capital expenditures;

 litigation expenses incurred in defense or protection of title are capital

in nature and not deductible.

(Atlas Consolidated Mining &Devt. Corp. vs. CIR)

BAR: YYY Corporation engaged the services of the Manananggol Law
Firm in 2006 to defend the corporation's title over a property used in
the business. For the legal services rendered in 2007, the law firm
billed the corporation only in 2008 and the same was paid.YYY
Corporation claimed this expense as a deduction from gross income
in its 2008 return, because the exact amount of the expense was
determined only in 2008.
All Events Test:

A test applied in the realization of income and expense by an accrual-

basis taxpayer. The test requires:

a. the fixing of a right to the income or liability to pay; and,

b. the availability of reasonably accurate determination of such

income or liability (CIR v. Isabela Cultural Corporation, 2007)
QUESTION: On 8 May 1999, X loaned 10 Million Pesos to Y. After more
than fifteen (15) years, X has not heard anything from Y and the 10
Million Pesos remains unpaid. X claimed the 10 Million Pesos as bad
debt and deducted it from his gross income for taxable year 2015. On
March 5, 2017, Y suddenly appeared and paid the 10 Million Pesos
indebtedness.
Tax Benefit Rule:

The recovery of bad debts previously allowed as deductions in the

preceding years shall be included as part of the gross income in the
year of recovery to the extent of the income tax benefit of said
deduction [Sec 34 (E), NIRC].
Taxes allowed as deductions, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of
the income tax benefit of said deduction [34(C)(1), NIRC]
There is no income tax benefit where the disallowance of the bad
debts written off would not affect the taxpayer’s non-liability or the
amount of his liability for income tax.
Net Operating Loss Carry-Over (NOLCO)

 Excess of deductions over gross income of the business for any

taxable year,
 Additional deductible item from gross income similar to other
allowable deductions.
 Can be carried over next 3 consecutive years immediately
following the year of such loss (5 years for mines, other that oil
and gas well)
Optional Standard Deduction:

BAR 2009: Ernesto, a Filipino citizen and a practicing lawyer, filed his
income tax return for 2007 claiming optional standard deductions.
Realizing that he has enough documents to substantiate his profession-
connected expenses, he now plans to file an amended income tax return
for 2007, in order to claim itemized deductions, since no audit has been
commenced by the BIR on the return he previously filed. Will Ernesto be
allowed to amend his return? Why or why not?
INCOME TAX ON INDIVIDUAL TAXPAYERS:

BAR: Pierre de Savigny, a Frenchman, arrived in the Philippines on

January 1, 2010 and continued to live and engage in business in the
Philippines. He went on a tour of Southeast Asia from August 1 to
November 5, 2010. He returned to the Philippines on November 6, 2010
and stayed until April 15, 2011 when he returned to France. He earned
during his stay in the Philippines a gross income of P3 million from his
investments in the country.
BAR: A Co., a Phil. corporation, has an executive (P) who is a Filipino
citizen. A Co. has a subsidiary in HK (HK Co.) and will assign P for an
indefinite period to work full time for HK Co. P will bring his family to
reside in HK and will lease out his residence in the Phil.. The salary of P
will be shouldered 50% by A Co. while the other 50% plus housing, cost
of living and educational allowances of P's dependents will be shouldered
by HK Co. A Co. will credit the 50% of P's salary to P's Philippine bank
account. P will sign the contract of employment in the Phil. P will also be
receiving rental income for the lease of his Phil. residence.
Income Tax on Corporation:

Corporation includes:
 Partnerships, no matter how created or organized; joint-stock
companies; joint accounts (cuentas en participacion); associations;
insurance companies

It excludes:
 General professional partnerships
 JVA or consortium - construction projects or petroleum, coal,
geothermal and other energy operations
BAR: XXX Company which owns a three-hectare land in Antipolo entered
into a JVA with YYY Company for the development of said parcel of land.
XXX Company as owner of the land contributed the land to the Joint
Venture and YYY Company agreed to develop the same into a residential
subdivision and construct residential houses thereon. They agreed that
they would divide the lots between them.
JVA for Construction Projects:

a. should involve joining or pooling of resources by licensed local

contracts; that is, licensed as general contractor by the PCAB and
DTI
b. these local contractors are engaged in construction business;
and
c. the JVA itself must likewise be duly licensed as such PCAB and
DTI ( Sec. 3. RR No. 10-2012)
QUESTION: Singapore Air, a foreign corporation organized and existing
under the laws of Singapore, was granted an authority to operate as an
offline carrier by the Civil Aeronautics Board of the Philippines. It does
not have flights originating from or coming to the Philippines and does
not operate any airplane in the Philippines. It engaged the services of
ABC Corporation as its general sales agent in the Philippines which sells
passage documents in the Philippines.
A. For income tax purposes, is Singapore Air a resident or a non-resident
foreign corporation ?

Singapore Air is a resident foreign corporation because it is

a corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines.
Here, ABC CORPORATION performs acts or works or exercises
functions that are incidental and beneficial to the purpose of
Singapore AIR’S business. The activities of ABC CORPORATION bring
direct receipts or profits to petitioner. Singapore Air is, therefore, a
resident foreign corporation.
B. Is Singapore Air liable to the tax on Gross Philippine Billings under
Section 28(A)(3) of the 1997 National Internal Revenue Code?

NO. The GPB tax under the law attaches only when the carriage of
persons, excess baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold. Thus, not having flights to
and from the Philippines, Singapore Air is clearly not liable for the
Gross Philippine Billings tax.
C. Is the sale of Singapore Air’s airline tickets through ABC Corporation
subject to Philippine Income tax?

Yes. As a resident foreign corporation, SINGAPORE Air is taxable on

its income derived from sources within the Philippines. Here,
SINGAPORE Air’s income from sale of airline tickets, through ABC
CORPORATION, is income realized from the pursuit of its business
activities in the Philippines. Thus, SINGAPORE Air is subject to the
regular corporate income tax rate under Section 28(A)(1) of the
NIRC, subject to any applicable tax treaty to which the Philippines is
a signatory.
Exempt Corporations ( Sec. 30, NIRC):

BAR: A group of philanthropists organized a non-stock, non-profit

hospital for charitable purposes to provide medical services to the poor.
The hospital also accepted paying patients although none of its income
accrued to any private individual; all income were plowed back for the
hospital's use and not more than 30% of its funds were used
for administrative purposes. Is the hospital subject to tax on its income?
If it is, at what rate?
Thus, even if the charitable institution must be "organized and
operated exclusively" for charitable purposes, it is nevertheless allowed
to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities.

The only consequence is that the "income of whatever kind and

character" of a charitable institution "from any of its activities
conducted for profit, regardless of the disposition made of such income,
shall be subject to tax ( SLMC VS. CIR, 2012).
PAGCOR v. BIR, 10 December 2014

PAGCOR's tax privilege of paying five percent (5%) franchise tax in

lieu of all other taxes with respect to its income from gaming
operations is not repealed or amended by Section l(c) of R.A. No.
9337;
PAGCOR's income from gaming operations is subject to the 5%
franchise tax only; and
PAGCOR's income from other related services is subject to corporate
income tax only.
Bloombery Resort vs. BIR,10 Aug 2016

all contractees and licensees of PAGCOR, upon payment of the 5%

franchise tax, shall likewise be exempted from all other taxes,
including corporate income tax realized from the operation of
casinos.

Considering that PAGCOR is subject to corporate income tax for

"other related services", we find it logical that its contractees and
licensees shall likewise pay corporate income tax for income derived
from such "related services."
Preferential Rates for Proprietary Educational Institutions and Hospitals
– Sec. 27(B), NIRC

• “Proprietary” which are “non-profit”

“Proprietary” means private;
“Non-profit” means no net income or asset accrues to or benefits
any member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities
conducted not for profit.

• 10% of TI except Passive Income; subject to the predominance rule

Improperly Accumulated Earnings Tax:

10% tax on profits of a corporation that are permitted to accumulate

instead of being distributed by a corporation to its shareholders for the
purpose of avoiding the income tax with respect to its shareholders or
the shareholders of another corporation ( Sec. 29, NIRC)

 to discourage tax avoidance through corporate surplus accumulation;

to compel corporations to distribute earnings to shareholders so that
could be taxed (Cyanamid Phils. Vs. CIR, 2000)
Evidence of purpose to avoid income tax:

a. The fact that any corporation is a mere holding company or

investment company;

b. The fact that the earnings or profits of a corporation are permitted

to accumulate beyond the reasonable needs of the business.
BAR: In 2009, Spratz, Inc.’s net profit before tax was P35 million while its
operating expenses was P31 million. In 2010, its net profit before tax was
P40 million and its operating expenses was P38 million. It did not declare
dividends for 2009 and 2010. And it has no proposed capital
expenditures for 2011 and the immediate future. May Spratz be subject
to the improperly accumulated tax on its retained profits for 2009 and
2010?
• “Immediacy Test” - the immediate needs of the business

• Taxpayer’s intention at the time of accumulation is controlling (Manila

Wine Merchants, Inc., 1984)

• Prior accumulations should be included in the computation (Basilan

Estates, Inc. vs CIR)
Income Tax on Partnerships

(1) General Partnerships

Taxable as corporation [Sec 27(A) in relation to Sec. 22(B), NIRC]

Final Tax on share of the partners in the distributable net income of

a partnership [Sec 24(B)]

Unregistered partnerships are included in the concept of

“corporations”
BAR: A and B, co-owners, bought 3 parcels of land in one transaction
and bought 2 more parcels of land in another. They decided to sell the 3
parcels to C and the 2 parcels to D. They realized a net profit gain and
paid CGT. CIR assessed them for deficiency corporate income tax.
BAR: A group of insurance companies in the Philippines decided to
form a pool and entered into a reinsurance treaty with a non-
resident reinsurance company. Is such a pool subject to corporate axes
and withholding taxes on dividends paid to the non-resident
reinsurance company?
BAR: A and B inherited properties. They did not partition the same
and instead invested them to a common fund and divide the profits
therefrom. Should they be classified as an unregistered partnership
subject to corporate income tax?
(2) General Professional Partnerships

not subject to income tax

Partners shall be liable for income tax in their separate and
individual capacities
each partner shall report as gross income his distributive share
the net income of the GPP shall be computed in the same manner as
a corporation to compute the distributive share of the partners
Income Tax on Estates:

(1) Estate Under Judicial Settlement:

a) During the Pendency of the Settlement

As a rule, taxable in the same manner as individuals.

Distribution of income to the heirs
No such distribution
Income Tax on Estates:

(1) Estate Under Judicial Settlement:

b) Termination of the judicial settlement

 Unregistered partnership
Co-ownership
(2) Estate not under judicial settlement

no tax personality;

pending the extrajudicial settlement:

a. Unregistered partnership
b. Co-ownership
Income Tax on Trusts:

1. Trust itself, through the trustee or fiduciary, is liable for the income
tax;
2. The amount of income to be distributed to the beneficiary is a
deduction from the gross income of the trust but must be reported as
income of the beneficiary (Sec.61(A),NIRC)
3. Income of the trust
distributed to the beneficiaries –beneficiaries
accumulated or held for future distribution –trustee or fiduciary. (
Regs. No. 2)
• GR: Trust itself, through the trustee or fiduciary, is liable for the income
tax

• Exceptions:
Revocable trust -trustor
For the benefit of the grantor - trustor
Trust administered in foreign country – trustee

• Exemption of Employees Trust [Sec. 60(B), NIRC]

BAR: Johnny transferred a valuable 10-door commercial apartment to a
designated trustee, Miriam, naming in the trust instrument Santino,
Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed
to distribute the yearly rentals amounting to P720,000.00. The trustee
consults you if she has to pay the annual income tax on the rentals
received from the commercial apartment.
BAR: In the year 2000, X worked part time as a waitress in a restaurant in
Mega Mall from 8:00 a.m. to 4:00 p.m. and then as a cashier in a 24-hour
convenience store in her neighborhood. The total income of X for the year
from the two employers does not exceed her total personal and
additional exemptions for the year 2000. Was she required to file an
income tax return last April? Explain your answer.
INDIVIDUALS EXEMPT FROM FILING INCOME TAX RETURN

1. Individual whose gross income does not exceed total personal and
additional exemptions, except citizens and aliens engaged in
business/practice of profession;
2. Individual entitled to substituted filing;
3. Individual whose sole income has been subjected to final withholding
income tax;
4. Individual who is exempt from income tax.
5. Minimum wage earner

SUBSTITUTED FILING
1. The employee receives purely compensation income during the taxable
year.
2. The employee receives the income only from one employer during the
taxable year.
3. The amount of tax due from the employee at the end of the year equals
the amount of tax withheld by the employer.
4. The employee's spouse also complies with all three (3) conditions
stated above.
5. The employer files the annual information return.
6. The employer issues BIR Form 2316
VALUE-ADDED TAX
Constitutional Issues:

To begin with, it is not the law — but the revenue bill — which is
required by the Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. XXX as a result of
the Senate action, a distinct bill may be produced. (Tolentino vs. SOF)
VAT is a regressive tax because "VAT payment by low-income
households will be a higher proportion of their incomes (and
expenditures) than payments by higher-income households.

In the case of the VAT, the law minimizes the regressive effects of this
imposition by providing for zero rating of certain transactions (R.A. No.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to
other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC) [
Tolentino vs. SOF]
The Constitution does not prohibit the imposition of indirect taxes, like
the VAT. What it simply provides is that Congress shall "evolve a
progressive system of taxation." Resort to indirect taxes should be
minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. ( Tolentino vs. SOF)
There is no undue delegation of legislative power when the President
was given the stand-by authority to raise the VAT rate from 10% to 12%
when a certain condition is met. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of
the increase rate under the law is contingent. (Abakada Guro vs. Ermita)
Cross Border Doctrine/Destination Principle

No VAT shall be imposed to form part of the cost of goods destined for
consumption outside the territorial border of the Philippine taxing
authority.

Conversely, those goods destined for use or consumption and services

to be rendered within the Philippines shall be subject to the 12% VAT
pursuant to the “Destination Principle” (CIR vs. Toshiba Information
Equipment [Phils.], Inc., 2005)
Persons Liable to VAT

Any person who, in the course of his trade or business, sells, barters,
exchanges or leases goods or properties, or renders services, and any
person who imports goods,

In case of importation, the importer is liable, whether or not made in

the course of his trade or business; if the imported goods are
subsequent sold/transfers to non-exempt persons, the latter shall be
considered the importers
“In the Ordinary Course of Trade or Business”

the regular conduct or pursuit of a commercial or economic activity,

including transactions incidental thereto, by any person regardless of
whether or not the person engaged therein is a non-stock, non-profit
private organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their guests), or
government entity. (Section 105, NIRC)
CIR Vs. Magsaysay Lines, 2006

The subject sale is not vatable because sale of the vessels was not in
the ordinary course of trade or business of NDC. The phrase "course
of business" or "doing business" connotes regularity of activity. In
the instant case, the sale was an isolated transaction. The sale which
was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried
on with regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property”.
Sale of a fully depreciated company vehicle:

It is subject to VAT. It does not follow that an isolated transaction

cannot be an incidental transaction for purposes of VAT liability.
Indeed, a reading of Section 105 of the Tax Code would show that a
transaction “in the course of trade or business” includes
“transactions incidental thereto” ( Mindanao II Geothermal vs. CIR,
2013)
Zero-Rated Transactions:

A zero-rated sale of goods or properties/sale of service (by a VAT-

registered person) is a taxable transaction for VAT purposes, but shall
not result in any output tax. However, the input tax on purchases of
goods, properties or services, related to such zero-rated sale, shall be
available as tax credit or refund.
VAT Exempt Transactions:

sale of goods or properties and/or services and the use or lease of

properties that is not subject to VAT (output tax)

the seller is not allowed any tax credit of VAT (input tax) on purchases

 the person making the exempt sale of goods, properties or services

shall not bill any output tax to his customers because the said
transaction is not subject to VAT
Exempt Transactions vs. Zero-Rated
1. Zero-rated transactions are taxable transactions for VAT purposes,
but shall not result in any output tax; exempt transactions are
transactions that are not subject to VAT;
2. Under exempt transactions, the seller is not allowed any tax credit
of VAT (input tax) on purchases; in zero-rated transactions, input
tax on purchases of goods, properties or services, related to such
zero-rated transaction, shall be available as tax credit or refund;
3. Under zero-rating, all VAT is removed from the zero-rated goods,
activity or firm. In contrast, exemption only removes the VAT at the
exempt stage and it will actually increase, rather reduce the total
taxes paid by the exempt firm’s business or non-retail customer.
CIR vs. UNITED CADIZ SUGAR FARMERS ASSOCIATION MULTI-PURPOSE
COOPERATIVE, 2016

sale of raw cane sugar is exempt from VAT because it is considered

to be in its original state;

sale of refined sugar is generally subject to VAT because it can no

longer be considered to be in its original state; however, such
transaction may nevertheless qualify as a VAT-exempt transaction if
the sale is made by a CDA-registered cooperative which sells: (1)
exclusively to its members; or (2) to both members and non-
members, its produce, whether in its original state or processed
form.
Sale of Real Properties Exempt from VAT:

1. real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business;
2. real properties utilized for low-cost housing as defined by RA No.
7279 and other related laws, such as RA No. 7835 and RA No. 8763;
3. real properties utilized for socialized housing as defined under RA No.
7279, and other related laws, such as RA No. 7835 and RA No. 8763;
4. residential lot valued at P1, 919,500.00 and below, or house & lot and
other residential dwellings valued at P3,199,200.00 and below.
Lease of Residential Units Not Subject to VAT:

1. Monthly Threshold: with a monthly rental per unit not exceeding

P12,800.00 regardless of the amount of aggregate rentals received by
the lessor during the year;

2. Annual Threshold: lease of residential units where the monthly rental

per unit exceeds P12,800.00 but the aggregate of such rentals of the
lessor during the year do not exceed P1, 919,500.00;
Waiver of Exemption:

A VAT-registered person may elect that the exemptions under Section

109 (1) of the NIRC not apply to its sale of goods or properties or
services: Provided, that an election made under this subsection shall be
irrevocable for a period of three (3) years from the quarter the election
was made. [Section 109(2), NIRC]
(A) Sales of chicken by a restaurant owner who did not register as a VAT
person and whose gross annual sales is P1.2 Million

 VAT exempt. The transaction is VAT exempt because the gross annual
sales does not exceed the annual threshold of P1,919,500.00.
(B) Lessor leases commercial stalls located in the Greenhills Commercial
Center to VAT-registered sellers of cell phones; lessor’s gross rental
during the year amounted to P12 Million.

 VAT taxable. The transaction is a lease of property with gross annual

receipts of more than the annual threshold of P1,919,500.00
(C) Lessor leases residential apartment units to individual tenants for
P10,000.00 per month per unit; his gross rental income during the year
amounted to P2 Million

 VAT exempt. Lease of residential units with a monthly rental per unit not
exceeding P12,800.00, regardless of the amount of aggregate rentals
received by the lessor during the year is an exempt transaction.
(D) Lessor leases commercial stalls at P10,000.00 per stall per month and
residential units at P15,000.00 per unit per month; his gross rental
income during the year amounted to P3 Million

 VAT taxable. Lease of residential units where the monthly rental per unit
exceeds P12,800.00 and the aggregate of such rentals of the lessor during
the year exceed P1, 919,500.00 shall be subject to VAT. The lease of
commercial stalls is not a VAT exempt transaction under Sec. 109 of the
NIRC.
(E) Lessor leases two (2) residential houses and lots at P50,000.00 per
month per unit, but he registered as a VAT person.

 VAT taxable. Lease of residential units where the monthly rental per unit
exceeds P12,800.00 but the aggregate of such rentals of the lessor during
the year do not exceed P1, 919,500.00 shall be exempt from VAT;
however, a VAT-registered person may elect that the exemption shall not
apply to his sales of goods or properties or services.
FORT BONIFACIO DEVELOPMENT CORP. vs. CIR, 2012

1. Is prior payment of taxes required for a taxpayer to avail of the 8%

(now 2%) transitional input tax credit?

 There is nothing in Sec. 105 (now sec. 111) of the Tax Code to
indicate that prior payment of taxes is necessary for the availment
of the 8% transitional input tax credit. Obviously, all that is required
is for the taxpayer to file a beginning inventory with the BIR.
 Moreover, prior payment of taxes is not required to avail of the
transitional input tax credit because it is not a tax refund per se but
a tax credit; thus, unlike a tax refund, prior payment of taxes is not a
prerequisite to avail of a tax credit.
2. Should the transitional input tax credit be limited only to the value of
the improvements on the real property?

 RR 7-95, insofar as it restricts the definition of "goods" as basis of

transitional input tax credit under Section 105 is a nullity.
Accordingly, the 8% transitional input tax credit should not be
limited to the value of the improvements on the real properties but
should include the value of the real properties as well
Tax Refund of Unutilized Input VAT– Sec 112(A)

1. Two-Year Prescriptive Period

a. It is only the administrative claim that must be filed within the

2-year period.
b. The proper reckoning date for the 2-year period is the close of
the taxable quarter when the relevant sales were made.
c. The only other rule is the Atlas ruling (from filing of return and
payment), which applied only from 8 June 2007 to 12
September 2008.
2. The 120+30 Day Period:

a. The taxpayer can file an appeal in one of two ways:

i. file the judicial claim within 30 days after the CIR denies the
claim within the 120-day period, or

ii. file the judicial claim within 30 days from the expiration of the
120-day period if the CIR does not act within the 120-day
period.
b. The 30-day period always applies, whether there is a denial or
inaction on the part of the CIR.
c. As a general rule, the 30-day period to appeal is both mandatory and
jurisdictional. (Aichi and San Roque)
d. As an exception to the general rule, premature filing is allowed only if
filed between 10 December 2003 and 5 October 2010, when BIR
Ruling No. DA-489-03 was still in force. (San Roque)
e. Late filing is absolutely prohibited, even during the time when BIR
Ruling No. DA-489-03 was in force. [CIR vs. Mindanao II Geothermal
Partnership, (2014)]
JUDICIAL REMEDIES
Jurisdiction of the CTA

The CTA can review the decision of the CIR on the protest against an
assessment but not the assessment itself. ( CIR vs. Villa)

The words used, specifically the words final decision and appeal,
taken together led petitioner to believe that the FLD/AN was in fact
the final decision of the CIR on the letter-protest and that the
available remedy was to appeal the same to the CTA (Allied Banking)
CIR vs. CTA AND PETRON CORPORATION, July 15, 2015)

What is appealable to the CTA is the decision of the COC over a

customs collector's adverse ruling on a taxpayer's protest and not
decisions of the customs collector. It is only after the COC shall
have made an adverse ruling on the matter under protest may the
aggrieved party file an appeal to the CTA.
COC vs. Oilink International Corp. (2014)

The principle of non-exhaustion of administrative remedies is not

an iron-clad rule.

Here, the COC already decided to deny the protest by Oilink and
stressed then that the demand to pay was final. Thus, the
exhaustion of administrative remedies would have been an exercise
in futility because it was already the COC demanding the payment
of the deficiency taxes and duties.
CTA Jurisdiction on “Other Matters”

The appellate jurisdiction of the CTA is not limited to cases which

involve decisions of the CIR on matters relating to assessments or
refunds. The second part of the provision covers other cases that arise
out of the NIRC or related laws administered by the BIR. (CIR vs.
Hambrecht & Quist Philippines, Inc., GR No. 169225, 17 November 2011)
CTA Jurisdiction on “Other Matters”

Prescription (Hambretch & Quist, 2011)

CIR decision to enter into a compromise agreement (PNOC vs.

Savellano, 2005)

CIR’s refusal to enter into abatement agreements (Qatar

Airways,CTA Case)
The adverse ruling of the SOF in its exercise of its power of review
under Sec. 4 is appealable to the CTA, as “other matters” arising under
the NIRC or other laws administered by the BIR. (Philam Life vs. SOF
&CIR , 2014)

a. BIR rulings issued by the CIR are subject to review by the SOF;
b. Revenue Memorandum Circulars are considered rulings or
opinions of the CIR;
c. Revenue regulations on which the assessment is based
d. A RMO is in reality a ruling of the or an opinion issued by the CIR
(Bar 2006; CIR vs. Leal, 2002)
Does the CTA have jurisdiction to resolve cases where the
constitutionality of a law or rule is challenged?

The CTA has undoubted jurisdiction to pass upon the

constitutionality or validity of a tax law or regulation when raised
by the taxpayer as a defense in disputing or contesting an
assessment or claiming a refund. It is only in the lawful exercise of
its power to pass upon all matters brought before it, as sanctioned
by Section 7 of Republic Act No. 1125, as amended.

The CTA may likewise take cognizance of cases directly challenging

the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum
circulars, rulings).
•
Section 7 of Republic Act No. 1125, as amended, is explicit that, except
for local taxes, appeals from the decisions of quasi-judicial
agencies (Commissioner of Internal Revenue, Commissioner of
Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be
brought exclusively to the CTA.

In other words, within the judicial system, the law intends the CTA to
have exclusive jurisdiction to resolve all tax problems. Petitions for
writs of certiorari against the acts and omissions of the said quasi-
judicial agencies should, thus, be filed before the Court of Tax Appeals.
•
Republic Act No. 9282, a special and later law than Batas Pambansa
Blg. 129 provides an exception to the original jurisdiction of the
Regional Trial Courts over actions questioning the constitutionality or
validity of tax laws or regulations. Except for local tax cases, actions
directly challenging the constitutionality or validity of a tax law or
regulation or administrative issuance may be filed directly before the
Court of Tax Appeals.
•
With respect to administrative issuances (revenue orders, revenue
memorandum circulars, or rulings), these are issued by the
Commissioner under its power to make rulings or opinions in
connection with the implementation of the provisions of internal
revenue laws. Tax rulings, on the other hand, are official positions of
the Bureau on inquiries of taxpayers who request clarification on
certain provisions of the NIRC, other tax laws, or their implementing
regulations. Hence, the determination of the validity of these issuances
clearly falls within the exclusive appellate jurisdiction of the CTA under
Section 7(1) of RA 1125, as amended, subject to prior review by the
Secretary of Finance, as required under the NIRC. (BDO VS. CIR, 2015;
Steel Corporation vs. BOC and VIR, 2018)

Does the CTA have jurisdiction to review the decision of the RTC which
concerns a petition for declaratory relief involving real property taxes?

The CTA has jurisdiction to review by appeal the decisions, rulings

and resolutions of the RTC over local tax cases, which includes real
property taxes. The general meaning of "local taxes" should be
adopted in relation to Paragraph (a) (3) of Section 7 of R.A. 9282,
which necessarily includes real property taxes (NAPOCOR vs.
Municipal Government of Navotas, et al., 24 November, 2014).
Does the the CTA En Banc have jurisdiction to take cognizance of Petition
for Annulment of Judgment of decision of the CTA Division?

The Revised Rules of the CTA and even the Rules of Court which
apply suppletorily thereto provide for no instance in which the en
banc may reverse, annul or void a final decision of a division. The
silence of the Rules may be attributed to the principles that there
can be no hierarchy within a collegial court between its divisions
and the en banc, and that a court's judgment, once final, is
immutable.
A direct petition for annulment of a judgment of the CTA to the
Supreme Court, meanwhile, is likewise unavailing, for the same reason
that there is no identical remedy with the High Court to annul a final
and executory judgment of the Court of Appeals. RA No. 9282, Section l
puts the CTA on the same level as the Court of Appeals, so that if the
latter's final judgments may not be annulled before the Supreme Court,
then the CTA's own decisions similarly may not be so annulled.

Instead, what remained as a remedy for the petitioner was to file a

petition for certiorari under Rule 65, which could have been filed as an
original action before the Supreme Court and not before the CTA En
Banc.
SMI-ED vs. CIR,2014

 In an action for the refund of taxes allegedly erroneously paid, the

CTA may determine whether there are taxes that should have been
paid in lieu of the taxes paid. Determining the proper category of
tax that should have been paid is not an assessment. It is incidental
to determining whether there should be a refund.
THE NO-INJUNCTION RULE:

No court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge imposed by
the Tax Code (Sec. 218, NIRC).

the prohibition applies only to national internal revenue taxes and not
to local taxes (Angeles City vs. Angeles City Electric Cooperative, 2010).
The CTA may suspend the collection of taxes subject to the following
conditions:

1. The collection may jeopardize the interest of the government

and/or the taxpayer;
2. The CTA requires the taxpayer either to deposit the amount
claimed or file a surety bond for not more than double the amount
with the Court; and
3. The case is pending appeal with the CTA;
Can the CTA dispense the posting of the required bond under Sec. 11 of RA
1125, as amended?

Whenever it is determined by the courts that the method employed

by the CIR in the collection of tax is not sanctioned by law, the bond
requirement under Section 11 of RA No. 1125 should be dispensed
with (SPOUSES PACQUIAO VS. CIR, 2016).
TRIDHARMA MARKETING COR VS. CTA & CIR, 2016

It behoved the CTA to consider other factors recognized by the law
itself towards suspending the collection of the assessment, like
whether or not the assessment would jeopardize the interest of the
taxpayer, or whether the means adopted by the CIR in determining
the liability of the taxpayer was legal and valid.

CTA gravely abused its discretion because it fixed the amount of the
bond at nearly five times the net worth of the petitioner without
conducting a preliminary hearing to ascertain whether there were
grounds to suspend the collection of the deficiency assessment on
the ground that such collection would jeopardize the interests of the
taxpayer.
THANK YOU!
JESUS NEVER SAID IT WOULD BE EASY,
BUT HE SAID IT WOULD BE WORTH IT!

(Matthew 7:13-14)