I
TRUE or FALSE. Answer TRUE if the statement is true, or
FALSE if the statement is false. Explain your answer in not more
than two (2) sentences. (5%)

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

[b] When the financial position of the taxpayer demonstrates
a clear inability to pay the tax, the Commissioner of Internal
Revenue may validly compromise the tax liability.

[c] The doctrine of equitable recoupment allows a taxpayer
whose claim for refund has prescribed to offset tax liabilities with
his claim of overpayment.

[d] A law imposing a tax on income of religious institutions
derived from the sale of religious articles is valid.

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

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

III
Melissa inherited from her father a 300-square-meter lot. At
the time of her father’s death on March 14, 1995, the property was
valued at P720,000.00. On February 28, 1996, to defray the cost
of the medical expenses of her sick son, she sold the lot for P600,000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3,000.00 per square meter.

[a] Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? (4%)

[b] Is Melissa liable to pay Value Added Tax (VAT) on the
sale of the property? If so, how much and why? If not, why not?
(4%)

IV
International Technologies, Inc. (ITI) filed a claim for refund
for unutilized input VAT with the Court of Tax Appeals (CTA). In
the course of the trial, ITI engaged the services of an independent
Certified Public Accountant (CPA) who examined the voluminous
invoices and receipts of ITI. ITI offered in evidence only the
summary prepared by the CPA, without the invoices and the
receipts, and then submitted the case for decision.

Can the CTA grant ITI’s claim for refund based only on the
CPA’s summary? Explain. (4%)

V
Jessie brought into the Philippines a foreign-made luxury car,
and paid less than the actual taxes and duties due. Due to the
discrepancy, the Bureau of Customs instituted seizure proceedings
and issued a warrant of seizure and detention. The car, then parked
inside a pay parking garage, was seized and brought by government agents to a government impounding facility. The Collector of Customs denied Jessie’s request for the withdrawal of the warrant.

Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of judicial functions on the ground that only a judge may issue a warrant of search and seizure.

[a] Resolve with reasons Jessie’s criminal complaint. (4%)

[b] Would your answer be the same if the luxury car was seized while parked inside the garage of Jessie’s residence? Why or why not? (4%)

VI
The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee of ten centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality’s jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the
copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest.

Is the ordinance valid? Explain your answer. (4%)

VII
Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. 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, Philippine Airlines (PAL), a Philippine corporation.

KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory.

Is the position of KIA tenable? Reasons. (4%)

VIII
The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest.

He goes to court to assail the validity of the ordinance for being
discriminatory. Decide with reasons. (3%)

IX
Republic Power Corporation (RPC) is a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power. In 2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC’s power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates that all real estate taxes and assessments, rates and other charges, in respect of the power barges, shall be for the account of RPC.

In 2007, JEC received an assessment of real property taxes
on the power barges from the Assessor of Batangas City. JEC
sought reconsideration of the assessment on the ground that the
power barges are exempt from real estate taxes under Section 234
[c] of R.A. 7160 as they are actually, directly and exclusively used
by RPC, a government-owned and controlled corporation.

Furthermore, even assuming that the power barges are subject to
real property tax, RPC should be held liable therefor, in accordance
with the terms of the lease agreement.

Is the contention of JEC correct? Explain your answer. (4%)

X
ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income — 30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR.

On May 15, 1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim.

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund.

[a] Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (3%)

[b] Is the contention of ABCD Corporation correct? Why or why not? (3%)

*** END OF PART I ***

PART II

XI
Raffy and Wena, husband and wife, are both employed by XXX Corporation. After office hours, they jointly manage a coffee shop at the ground floor of their house. The coffee shop is registered in the name of both spouses. Which of the following is the correct way to prepare their income tax return? Write the letter only. DO NOT EXPLAIN YOUR ANSWER. (2%)

[a] Raffy will declare as his income the salaries of both spouses, while Wena will declare the income from the coffee shop.

[b] Wena will declare the combined compensation income of the spouses, and Raffy will declare the income from the coffee shop.

[c] All the income will be declared by Raffy alone, because only one consolidated return is required to be filed by the spouses.

[d] Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Each spouse shall be taxed separately on their corresponding taxable income to be covered by one consolidated return for the spouses.

[e] Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Raffy will file one income tax return to cover all the
income of both spouses, and the tax is computed on the
aggregate taxable income of the spouses.

XII
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. The corporation duly 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. Is YYY’s claim of deduction proper? Reasons. (4%)

XIII
In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was P1-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death. Zandro died in 2007, and Wilma succeeded to the property.

[a] Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? Explain. (3%)

[b] Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to estate tax? Explain. (3%)

[c] May a vanishing deduction be allowed in either or both of the estates? Explain. (3%)

XIV
Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to P10,000.00. His gross rental income for one year is P1,650,000.00. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? (4%)

XV
Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property.

[a] Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)

[b] Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor’s tax? Why or why not? (3%)

XVI
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? (4%)

XVII
A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same.

[a] Is the CTA correct in dismissing the petition for review? Explain your answer. (4%)

[b] Assume that the CTA’s decision dismissing the petition for review has become final. May the Commissioner legally enforce collection of the delinquent tax? Explain. (4%)

XVIII
A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he filed a protest, in the form of a request for reinvestigation, against the assessment and submitted all relevant documents in support of the protest. On September 11, 2009, the taxpayer, apprehensive because he had not yet received notice of a decision by the Commissioner on his protest, sought your advice.

What remedy or remedies are available to the taxpayer? Explain. (4%)

XIX
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.

[a] What advice will you give the trustee? Explain. (3%)

[b] Will your advice be the same if the trustee is directed to
accumulate the rental income and distribute the same only when
the beneficiary reaches the age of majority? Why or why not?
(3%)

XX
Masarap Food Corporation (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? Explain. (3%)

*** END OF PART II ***

(Courtesy:http://sc.judiciary.gov.ph/bar/2009/TAXATION09.pdf)

Presently, the legislature had passed some tax measures providing for some incentives that may negatively affect reaching collection targets along with some other updates tending to slow collections. I am referring to RA 9593-Tourism Act of 2009, RA 9442 – amendment to the Magna Carta for Disabled Persons, RA 9648 – DST Tax Exemption, reduction on amusement taxes to 10%, the MCIT case resolutions of PAL, transitional input tax issue of FBDC, and the MIAA real property tax case resolution this 2009. In short, the BIR is finding some measures in which it can raise collections as the target had been set to be attained despite all that. Moreso, that as we read on the papers, the senate says NO to tax measures imposing and creating new taxes which means NO helpline to BIR.

One of its (BIR) move is the expansion of the Top Ten Thousand Corporation (TTC) for mandatory withholding to Top Twenty Thousand Corporations. Wider coverage would mean a wider advance collection of income and more encouragement to payees of income payments to declare income and pay related taxes. Another notable introduction is the Top Five Thousand Individuals (TFI) for those individuals engaged in trade or business and those in the practice of profession meeting certain criteria set for the purpose. For those newly appointed TTC or TFI, these new regulations may not be simple to comply as they add some administrative duties. However, we cannot put the blame on BIR on this. Should they not comply, then, penalties are at stake. Other moves are on improved BIR assessments, and computerized matching so taxpayers are being surprised by some yearly assessments and left and right tax verification notices. In effect they are extracting for the taxpayer’s last drop of tax liabilities.

The idea of what can the BIR do to improve collection had been lingering on my mind and it is only on this post that I took the courage to formalize and share with the rest what I have in mind. In the meantime, what about if the BIR applies the same principle of withholding tax on GAMBLING, like on cockfighting winning bets? For some this is simply a past time or a hobby, but we must admit many lives on it. I do not participate on cockfighting but my understanding is the admin gets commission every time the bet wins. yes, the winning is a taxable income, but who knows if this income is being declared and tax paid. In the same manner, losses from gambling is a capital loss that is not deducted from income tax purposes. This may seem weird and maybe hard to implement at first not because of its complexities, but maybe because of some influential personalities who has the love of it that may simply use power to go against it. However, looking at it and considering the volume of money flowing in and out of the cockfighting industry every Sunday, special holidays and scheduled derby, I am quite confident that tax collections from this may mean something. If they could waste money on this past time, why not share a portion of this for taxes?

You may have something in mind that may also help the BIR improve collection. We would be pleased and honored to hear it from you. Simply drop a line below and we will try to submit our collective ideas to the BIR.

Under RA No. 9442, disable persons shall be entitled to the following:

a. 20% discount on services in hotels and similar lodging establishments; restaurants and recreation centers;
b. 20% discount on admission fees charged by theaters, cinema houses, concert halls and other similar places;
c. 20% discount on purchase of medicines in all drugstores;
d. 20% discount on medical and dental services including diagnostic and laboratory fees, and professional fees attending doctors in all private hospitals and medical facilities;
e. 20% discount on fare for domestic air and sea travel;
f. 20% discount on public railways, skyways and bus fare for the exclusive use and enjoyment of persons with disability;
g. educational assistance upon qualification
h. Such other special discounts in special programs on purchases of basic commodities in accordance with established guidelines.

For tax purposes, persons with disability with valid identification (issued by the barangay captain of residence, passport, and transportation discount card issued by NCWPD or National Council for the Welfare of Disabled Persons) may be claimed as a qualified dependent for additional personal exemption of P25,000. Seller establishments are allowed to claim the 20% discount as an allowable deduction from their gross income for income tax purposes. Further, individuals or nongovernmental institutions establishing homes, residential communities or retirement villages solely to suit the needs and requirements of persons with disability shall be accorded the following:

a. Realty tax holiday for the first five years of operation; and
b. Priority in the building and/or maintenance of provincial or municipal roads leading to the aforesaid home residential community or retirement village.

Personally, the 20% discount is quite similar to that of the senior citizens discount. For the least, the law would encourage respect to persons with disability and make them feel how important they are in the community, despite, their disabilities. Let us gave them respect and help them at all times.

Suggested readings:
a. Revenue Regulations No. 1-2009;

Taxes are the lifeblood of the government, without which, it cannot subsist. This dictates that taxes owing to the government shall come in due time and in exact amounts so as not to cause any untoward delay and interruption in its performance of its duties and responsibilities to the citizenry. Impliedly, excuses in the delay of payment, no matter how reasonable, may not defeat the need for the government to exist. Thus, to be fair to the BIR and the government, it maybe a good start to know the rationale on the imposition of these penalties– 25%/50% surcharge, 20% interest, and compromise penalties.

Surcharge is a one-time imposition upon failure to pay the tax due in full in due time. The rate 25%, in general, except if fraudulent in character where 50% is used. It is intended to hasten tax payments or to punish evasion or neglect of duty in respect thereof.

On the other hand, the imposition of 20% interest annually from the time a basic tax due is bound to be paid until such time that it becomes fully paid, is but a just compensation to the State for the delay in paying the tax and for the concomitant use by the taxpayer of funds that rightfully should be in the government’s hands. The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory for the time value of money in the government’s hands.

Finally, compromise penalty is imposed in lieu of prosecution in court. Instead of taxpayer being sued in court for the particular violation, the taxpayer and the BIR will simply agree upon the payment of compromise in order to do away with the time, effort and money that the litigation process may take.

Suggested readings:

a. Jamora vs. Meer, 74 Phil. 22
b. Castro vs. Collector of Internal Revenue, G.R. L-12174. Dec. 28, 1962
c. Aguinaldo VS. CIR, G.R. No. L-29790. February 25, 1982

Compared to the normal tax rate of 5-32% bracket 5-32%, if a resident alien or non-resident alien engaged in trade or business, or 25%, if a non-resident alien not engaged in trade or business, the 15% rate is a good break because of a material rate gap on rates of income tax on compensation of approximately 17% (32%-15%), and 10% (25%-15%), respectively. Thus, the BIR saw the need to clarify the bounds of the term “Managerial and Technical Positions” to avoid abuse and misapplication of the above rule to minimize taxes, if not escape or evade.

Under the Labor Code, employment of non-resident aliens commonly referred to as “expatriate employees”, is limited to positions which are managerial, confidential, or highly technical in nature, or where there are no Filipinos who are competent, able and willing to perform the services for which aliens are desired. To be considered managerial employee, it must possess authority to act in the interest of its employer requiring the use of independent judgment and not merely routinary or clerical in nature. The case of Villuga vs. NLRC, 225 SCRA 537 provides the following elements to be considered managerial employee:

a. primary duty consist of performance o work directly related to management policies;
b. customarily and regularly exercise discretion and independent judgment;
c. regularly and directly assist in the management of the establishment;
d. does not devote 20% of his time to work other than those prescribed above.

The employees are not managerial employees if they only execute approved and established policies, leaving little or no discretion at all whether to implement said policies or not. On the other hand, RMC did not elaborate very well on “technical position” other than saying that it is limited to positions which are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which aliens are desired.

By implication, all other BIR rulings issued inconsistent with the RMC are revoked accordingly. As a matter of fact, BIR Ruling No. DA-061-04 is revoked by the RMC. Thus, it is suggested that a review of existing employee structure and job descriptions in relation to their tax treatments is hereby recommended to ensure that the same is in compliance with the RMC.

Related posts:
a.Withholding tax on compensation
b.Exempt compensation

Suggested readings:
a. Villuga vs. NLRC, 225 SCRA 537
b. Republic Act No. 8756, amending E.O. No. 226