4C

Antonio, Regatta Marie Blasco, Leana Mae Cachapero, Oliver

Calingasan, Charlene Calvan, Myrtle

Cardino, Gian Carlo Casibang, Ruben Castillo, Beverly

Cayaban, Iva Freyritz Galvez, Jerico Angelo

Lambino, Kaye Coleen Madridijo, Marlon

Mutia, Nabil Panganiban, Victoria Payumo, Margielyn

Quilates, Donelle Quinto, Ramiila Revilla, Rodrigo

Rosalejos, Chyrs Anne Sampaga, Genelou

Sandoval, Camhella Santos, Hanzel

Sta. Ana, Micaela Sulit, Dioxenos

Taguba, Jezreel Caridad Tan, Ma. Theresa

Zulueta, Isabel

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able of Contentss

The Professor ..............................................................................................2 Dos ................................................................................................................3 Donts ............................................................................................................4 Tips................................................................................................................5 Samplex Collection of Taxation Law of Atty. Anthony Dy ..................9 Assumimg Youre Correct: The Recit Questions ..................................24 2011 Tax Case Doctrines ..........................................................................57

T

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he Professor

Atty. Anthony Dy

Atty. Dy always comes to class donning a huge smile and starts the meeting by

a roll call and shuffling of index cars. Come recit time, students find themselves

gripping their seats, waiting for their names to be called, for 30-40 minutes worth of

recitation. Merely memorizing the codal provisions and commentaries in Atty. Dys

class is not enough. One has to learn the law by heart because he asks very

unpredictable and out-of-this-world questions ranging from other law subjects to

anything under the sun. Students love his class because despite the surprise quizzes,

extended class hours, and his cardinal rule that only handwritten notes are allowed in

his class, Atty. Dys witty remarks and anecdotes make law subjects interesting and his

class, fun and lively. Atty. Dy teaches Property, Taxation I and II, and Taxation Law

Review. He ranked No. 16 in the 2002 Bar Examinations and is currently working at

SGV & Co.

T

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os

1.) Come to class early. Atty. Dy checks the class attendance on time.

2.) Try to achieve perfect attendance if you want an additional point on your

final grade.

3.) Memorize every single detail, from tax remedies, to requisites for

exemptions from income tax to tax rates. Youll never know what Atty. Dy will

ask you in your recit.

4.) Never take any topic for granted. Read religiously like theres no tomorrow.

5.) Know your laws. Atty. Dy loves to correlate.

6.) Pray. Really hard. But syempre, study harder

D

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onts

1.) Never come to class unprepared. Atty. Dy is fond of shuffling class cards.

2.) Do not ask for a class party especially when there are only a few meetings

left during the sem. Chances are, your request will not be granted. But if youre

persistent, you can still try and experience having your first recit with balloons

and videoke in the background.

3.) Do not justify your inability to answer a question with an excuse that you

were not present when that particular topic was discussed in class. Atty. Dy

will always remember you for that.

4.) If you do not know the answer to a question, dont attempt to invent one

unless youre willing to risk your former professors name.

5.) Do not attempt to bluff. You will only look like a fool in the end. Atty. Dy

knows who really studied and those who really didnt.

6.) Do not ever make the mistake of having a class boycott. Its going to be an

automatic 65 for you.

D

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ips

What you need?

1. Books

The books of Mamalateo, Domondon, and Dimaampao are highly recommended.

2. Notes

Notes of those who previously took the subjects are particularly helpful when it

comes to questions during recitations. The Dimaampao notes or more popularly

known as tapsi notes also give students a simple approach to tax.

Your own personal notes of important topics will also be a great help in easily

remembering ideas and concepts which appear to be challenging. Make this a

habit. They may even be helpful come bar time.

Take down notes during recitations. The questions will be a great help in

determining topics which the professor wanted to focus on. They might even be

questions which could be asked during examinations.

3. The green codal or the National Internal Revenue Code, and its amendments.

Atty. Dy told the class that the tax codal must be read as much as we read the

other codals like the Civil code and the Rules of Court. The best evidence of the

extent of the use of your tax codal depends on the cleanliness and condition of it

compared to other codals. As Atty. Dy puts it, just compare.

4. Supreme Court decisions in Taxation law, Revenue regulations and BIR

rulings.

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Recent Supreme Court decisions in Taxation law may be found in certain

websites like the Supreme Court of the Philippines, Chan Robles website, and

Arellano website also known as the lawphil site.

Visit the BIR website for recent rulings and Revenue Regulations. You might also

want to check websites of certain Accounting firms which publish on their sites

monthly Tax briefs . (e.g. Punongbayan & Araullo)

5. Preparation

Do not come to class unprepared. Preparation is key, both in recitations and

examinations. Taxation I and Taxation II are both 3-unit subjects. If you want a

definite number of hours study, 9 hours of quality study time before the class

should be a reasonable period (Period of study = No. of units x 3).

But of course, every one of us has his or her own style of studying so the period

of study time will always depend on you.

For a review class, more time is demanded despite the review being a mere 2

unit subject. The class might be lucky enough if Atty. Dy asks for volunteers and

asks the person reciting to choose a topic. But do not rely on this as Att. Dy, as a

general rule, calls students by shuffling the class cards.

Tax Tips

1. Expect the class to have on overtime every meeting. Atty. Dys class usually

dismisses the class 30 minutes later than the designated time.

2. The types of questions usually asked are classified as follows:

a. Enumeration. You know you are being asked to enumerate when Atty. Dy

says, There are three theories of a sound tax system, and they are?

b. Defintion. What do you understand by the term/concept of ?

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c. Situational questions. These questions are of practical use as Atty. Dy usually

begins by saying, A clients asks you on how to., what will you say to your

client? In these type of questions, Atty. Dy expects you to explain the concept

in the simplest way possible. Explain as if you are talking to a client.

As a follow up, Atty. Dy will subsequently ask, You are now the BIR or the

counsel for the defense, what would be your arguments? In this type of

question, you are being asked to counter the arguments you mentioned in the

first place.

d. Correlation questions. In these types of questions interrelated topics,

concepts, and provisions are usually asked. One must be able to define the

relation of, say, one provision to another provision; how a concept is different

from the other; or which fact or factor is common between two concepts.

e. Out of this world questions or General Information questions. It pays to

know a lot of different things when it comes to Atty. Dys class. He usually asks

questions which are not related to the topics but which nevertheless make the

class laugh. These questions are asked maybe to test ones knowledge or to

simply make learning fun. I do not know. But one will definitely enjoy this.

3. Exams. You should expect a long and difficult exam. The types of questions maybe in

the form of True or False, Enumeration, MCQs, and Essay. He gives bonus questions at

the end of an exam. He even asks questions for those who have not recited. A final

exam usually asks for a final grade you expect from the subject.

Answer briefly but completely. Do not enumerate more than what was asked for. Give

three if the question asks for three even if you know ten of them.

4. Have a complete attendance if you can. The benefit is an additional 1% on your final

grade. But there is really nothing wrong if you do not come to class because you are

unprepared. Weigh the consequences.

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5. In the words of Atty. Dy, Do not give reasons for me to fail you. Looking at the

brighter side of this, always give him reasons to pass the subject with flying colors. Or

give yourself a favor, learn the topics assigned not for the purpose of getting a good

grade but for your own benefit in the future (e.g. bar time and future career)

Disclaimer and this is a serious one. By the time you finished reading this, Atty. Dy could

already have changed his manner of asking questions, making exam questions, and his

style of teaching in general.

But hey, thats history for you.

You are most welcome.

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amplex Collection of Atty. Dy Tax Exams

I. TRUE OR FALSE (a) Any excess in allowable de minimis benefit granted by an employer shall form part of the taxable income of the employee.

TRUE. Generally, de minimis benefits granted by an employer to an employee are exempt from tax, except wherein there is a provided threshold amount, and such amount is exceeded. The excess will be subject to tax.

(b) Taxes paid by a taxpayer are deductible as expenses for purposes of income taxes.

FALSE. Taxes paid or incurred within the taxable year in connection with the taxpayers profession, trade or business, shall be allowed as deductions, except (a) the income tax provided for under the NIRC and (b) income taxes imposed by authority of any foreign country. (NIRC, Sec. 34, C)

(c) Charitable contributions made by a taxpayer are deductible in full. FALSE. Charitable contributions which are not actually paid or made to the

Philippine government or any political subdivision thereof exclusively for public purposes, or exceeds 10% in the case of an individual or 5% in the case of a corporation, of the taxpayers taxable income are not deductible in full. (Sec 34, H)

(d) Political contributions by a corporate taxpayer to the campaign of a Presidentiable are deductible for income tax purposes. FALSE. Contributions to partisan political activities are not deductible. II. OBJECTIVE (a) Distinguish a VAT Automatically zero-rated transaction from VAT Effectively zero-rated transaction.

An automatically zero-rated sale refers to a sale of goods, properties and services to a Freeport Zone-registered enterprise by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997. An effectively zero-rated sale,

On the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated.

(b) Give 3 areas of distinction between Donors tax and Value Added Tax.

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DONORS TAX tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of transfer; VALUR ADDED TAX is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties. DONORS TAX is a direct tax; VALUED ADDED TAX is an indirect tax, it can be passed to the buyer DONORS TAX is computed on the basis of the total net gifts made during the calendar year; VAT is equivalent to 10% of the gross selling price of or gross value in money of the goods or properties sold, bartered or exchanged paid by the seller or transferor.

(c) Explain the concept of de minimis benefits in relation to fringe benefits tax. Give 3 examples of de minimis benefits.

Fringe benefits are goods, services or any benefits furnished or granted in cash or in kind by an employer to an individual employee. Under the NIRC, there is a special treatment of fringe benefits, which shall be taxed at 32%, payable by the employer.

De minimis benefits are benefits of a small value granted to rank-and-file

employees and are ordinarily not taxed. Examples of this would be: 1) Monetized unused vacation leaves per year (maximum of 10 days); 2.) Medical cash allowance (maximum of P750/semester or Php125/month); and 3.) Rice subsidy (maximum Php1,500/month).

(d) Enumerate the requisites of bad debts deductions. 1. There must be an existing indebtedness due to the taxpayer, which must be valid and legally demandable; 2. Debt must be connected with the taxpayers trade, business or profession; 3. Must not be between related parties under Sec. 36B; and 4. Debt must be actually ascertained to be worthless and uncollectible or charged off the books of accounts of the taxpayer.

III. ESSAY ABC Corporation, a domestic corporation, is owned by DEF Corporation (owned by Mr. Sy), a foreign corporation, and GHI Corporation (owned by Mr. Tee), a domestic Corporation. ABC Corporation intended to expand its business and to restructure its company. Part of the plan is to buy the shares of stock of DEF Corporation (Mr. Sy) worth Php 100M. Instead of paying Mr. Sy cash, ABC Corporation decided to transfer its shareholdings in XYZ Corporation as substitute for cash. The said shareholdings worth Php 50M and its present value is P100M.

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Discuss tax implications in the said transaction, if any. If said transaction is taxable, what are the applicable tax rates?

The transaction is a tax-free exchange. Under Section 40 (c) of the NIRC, No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding 4 persons, gains control of said corporation, provided that stocks issued for services shall not be considered as issued in return for property.

Leah is a single mother with a 15 year old son. In 2009, her reported income

includes ff:

a. Determine the Gross Income to be reported by Lea. Explain how you arrived at

your answer.

b. What are the exceptions to be recognized by Lea in 2009.

Income reported Amount ITR/ (Final tax)

Explanation/Basis

1. FMV of the expropriation sale of land to NAPOCOR

P1M

Qualify if the land is a

capital (6% CGT-final tax) or an ordinary

asset (gross income-ITR).

In either case the

proceeds can form part of

gross income.

If the land is classified as a capital asset: Under Sec. 24 D(1), the taxpayer is given the option to treat the gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled as a capital gain on sale of real property classified as capital asset or as part of her gross income subject to the graduated tax rate 5-32%. If the land is an ordinary asset, then the income from the sale shall form part of gross income subject to the graduated tax rate. My instincts tell me this should be treated as 1) a capital asset in the absence of any other facts that tell it is an ordinary asset. 2) subject to

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CGT since only the FMV is given. Final verdict: Final Tax

2. Jueteng income P50,000

ITR

Under the NIRC, all earned income and profits, whether legal or illegal/regardless of the source are taxable.

3. Proceeds of life insurance policy undertaken by her mother, designated her as a revocable beneficiary

P100,000

Exclusion

Under section 32 B (1), the proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise. The proceeds under the life insurance policy are compensation for the loss or indemnity and not income.

4. Dividend from a local company

P20,000

Final Tax (10%)

Under Sec. 24 B (2) of the Tax Code, a final tax at the rate of 10% shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation.

5. Dividend from an Off-shore real estate company

P30,000

ITR

A resident citizen is liable to income tax on her worldwide income. The dividend received from the foreign corporation is subject to the graduated tax rate. However, the foreign income tax paid or withheld on such dividend may be credited against the Philippine income tax due.

Gross income to be reported: 50,000 Jueteng income + 30,000 dividend from an

offshore real estate company = Php 80,000

b) What are the exemptions to be recognized by Lea in 2009.

Pursuant to the amendments of RA 9504, Lea is entitled to:

1. Basic personal exemption of P50,000 given to each individual taxpayer,

regardless of status.

2. Additional Exemption for each qualified dependent amounting to P25,000.

(Maximum of 4)

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A "dependent" means a legitimate, illegitimate or legally adopted child

chiefly dependent upon and living with the taxpayer if such dependent

is not more than twenty-one (21) years of age, unmarried and not

gainfully employed or if such dependent, regardless of age, is incapable

of self-support because of mental or physical defect.

Matchbox Phils is engaged in the selling of cars. Due to slow demand and business slow

down, it sells all its properties to Micro-Phil Inc. amounting to Php 10M. It also

transfers the warranty liabilities of its customers amounting to Php 20,000.00

whereby in the event that warranty expense exceeds said amount, Matchbox Phils

agreed to pay the excess. However, in the event that warranty expense is less than that

amount, the balance will belong to Micro-Phil Inc.

Are the warranty liabilities subject to 12% VAT? Explain.

I think yes. Kindly verify this. Absent ata ako nung tinuro ito. Hehehe.

In a tax-free exchange pursuant to Sec. 40(C )(2) of the Tax Code, transfer of real

property between two real estate dealers in exchange for shares shall be VAT-exempt.

If the exchange is not solely in kind (for example, money plus property was exchanged

or shares of stock or vice-versa), then there is no tax-free exchange because the gain is

taxed but the loss is not allowed to be deductible.

Exchange of property

(1) General rule: Except as herein provided, upon the sale or exchange of property, the

entire amount of the gain or loss, as the case may be, shall be recognized.

(2) Exceptions: No gain or loss shall be reorganized if in pursuance of a plan of merger

or consolidation (a) a corporation which is a party to a merger or consolidation,

exchanges property solely for stock in a corporation which is a party to the merger or

consolidation, (b) a shareholder exchanges stock in a corporation which is a party to

the merger or consolidation solely for the stock of another corporation, also a party to

the merger or consolidation, or (c) a security holder of a corporation which is a party

to the merger or consolidation exchanges his securities in such corporation solely for

stock or securities in another corporation, a party to the merger or consolidation.

(3) Exchanges not solely in kind; (a) If, in connection with an exchange described in the

above exceptions, a shareholder or security holder receives not only stock or securities

permitted to be received without recognition of gain or loss, but also money and/or

other property, the gain, if any, but not the loss, shall be recognized but in an amount

not in excess of the sum of the money and the fair market value of such other property

received.

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Manny Billar employed Willy Quizon to do the architectural design of the

proposed Condominium unit projects to be undertaken by the former. The

agreed price amounted to Php1M. Due to business crisis, only half of the Condo

units were purchased by the public. As a result, Manny could not settle the

payment of his outstanding liability to Quizon. On account of their friendship,

Manny offered the two bedroom units to Quizon as a mode of settling his

obligations. In turn, Quizon transferred the same two bedroom units to Manny

Pacman as payment of the gambling debt owing to the latter.

a) Does the transfer of the two bedroom units by Manny Billar to Quizon subject

to 12% VAT? Why or why not.

b. Does the transfer of the two bedroom-units by QWuizon to Pacman subject to

12% VAT? Why or why not?

Answers: Caveat.

a. No. Under Section 109 (V) of the Tax Code, the transfer is a VAT-exempt

transaction. The said provision states that sale or lease of goods or properties

or the performance of services other than the transactions other than the

transactions mentioned in the preceding paragraphs, the gross annual sales

and/or receipts do not exceed the amount of P1.5M.

Pursuant to RR 3-2012, the threshold amount has been increased to P

1,919,500.00 beginning January 1, 2012.

b. No. Transfer of the property is not an exchange of property in the course of

trade or business. Under Section 105, the phrase "in the course of trade or

business" means the regular conduct or pursuit of a commercial or an

economic activity, including transactions incidental thereto. The transfer of the

bedroom units was only an isolated transaction.

ABC is a school owned by 3 wealthy monks. Their receipts include: a. Educational

tuition fees; b. School canteen and university bookstore profits; c. billboard

advertisement. The proceeds of the three shall go to the construction of a state-of-the-

art library. Are they taxable income?

Taxability/ Tax consequences Qualify if Non-profit, non-stock educational

institution Proprietary Educational Institution

Educational tuition fees

Not taxable Under the 1987 Constitution, All revenues and assets of non-stock, non-profit educational institutions used actually,

Taxable Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals which are non-profit shall pay a tax of

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directly, and exclusively for educational purposes shall be exempt from taxes and duties. Also, it is granted exemption from corporate income tax as embodied in Section 30 of the NIRC.

10% (preferential tax rate) on their taxable income except for passive incomes which are subject to different tax rates. (Proprietary schools are private educational institutions which are stock and non-profit; those which are organized as stock corporations.)

School canteen and university bookstore profits

Not Taxable Pursuant to Department of Finance Order 137-87, revenues derived from and assets used in the operation of cafeteria/canteens, dormitories, and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises.

Taxable Under Section 27(B), it is subject to pay 10% of its taxable income. The normal corporate income tax rate of 30% shall be imposed on the entire taxable income if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by it from all sources. The term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.

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billboard advertisement

Taxable/ Not Taxable Under the Department of Finance Order 145-85, it is subject to internal revenue tax on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institution of its educational purposes or functions. Also, under the last paragraph of Section 30 of the NIRC, its income of whatever kind and character from any of its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. There can be an alternative answer because of the inconsistency between the Constitution and the last paragraph of Sec.30 of the NIRC. The former does not distinguish the source of income. Hence so long as it is used actually, directly, and exclusively for educational purposes, the income is exempt. Atty. Dy believes that the constitution must be followed.

Taxable Same reason as above. (The only constitutionally mandated tax exemption that it may avail of is the exemption from property taxes of all its properties actually, directly and exclusively used for educational purposes.)

VIII.

A is very rich. He donated P10M to the government for youth sports program. Is

the donation subject to donors tax?

No. The donation is exempt from donors tax in accordance with Section

101(A)(2) of the Tax Code, which provides that gifts made to or for the use of the

National Government or any entity created by any of its agencies which is not

conducted for profit, or to any political subdivision shall be exempt from tax.

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The question is trying to elicit a wrong answer by mentioning for youth sports

program. This would have been relevant had the question been: Is the donation

deductible?

The question on which rate is applicable makes the question trickier because the

donation is really an exempt transaction. A is not liable for donors tax.

Concerning deductibility, the transaction is fully deductible because Youth and

Sports development is a priority activity. If the donation is for a non-priority activity, then

there is limited deductibility: not to exceed 10% (individual) or 5% (corporation) of

taxable income.

I. TRUE OR FALSE (20 pts) 1.Purely compensation Income earners are not allowed any deduction on their gross income.

FALSE. They are allowed deductions on premium payments on health and/or hospitalization insurance.

2.Sellers of Marine food products are subject to 12% VAT when their gross sales exceed the P1.5M threshold provided in Section 109(v) of the Tax Code.

FALSE. They are exempt from value added tax under Sec 109(a).

3.Fringe benefit tax paid by the employer is allowed to be claimed as expenses. FALSE. This applies only when the fringe benefit is given to managerial or supervisory employees.

4.Expenses to be allowed as deductions must be supported by official receipts or invoices.

TRUE. As a general rule. There are however exceptions. The lack of supporting vouchers, receipts and other documentary proof however may be excused under Sec. 235.

5. All individual taxpayers are required to file an income tax return. FALSE. The following are those not required to file an ITR:

a. An individual who is a minimum wage earner b. An individual whose gross income does not exceed his total personal and additional exemptions c. An individual whose compensation income derived from one employer does not exceed P 60,000 and the income tax on which has been correctly withheld d. An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and sub-contractors and offshore-banking units, non-resident aliens not engaged in trade or business)

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e. Those who are qualified under substituted filing.

II.

1. Differentiate between ordinary and necessary expenses 2 pts An expense is ordinary when it connotes a payment, which is normal in relation to the business of the taxpayer and the surrounding circumstances. An expense is necessary where the expenditure is appropriate or helpful in the development of the taxpayers business or that the same is proper for the purpose of realizing a profit or minimizing a loss. (General Electric v CTA, July 14, 1963)

2. Give 2 differences between resident foreign corporation and non-resident foreign corporation 4 pts

A Resident Foreign Corporation is engaged in trade or business within the Philippines, while a Non Resident Foreign Corporation is not engaged in trade or business within the Philippines. Resident Foreign Corporations are subject to preferential tax rate or normal corporate income tax rate or minimum corporate income tax rate, whichever is higher, while a NonResident Foreign corporation-As a general rule is subject to final corporate income tax, which must be withheld by the Philippines payor of the income.

3.Give 2 difference between NOLCO and MCIT 2 pts. 4. Give 2 instances where although there is an accumulation of retained earnings, the corporation would be exempt from paying the improperly accumulated tax. 4 pts 1.Banks and other non-bank financial intermediaries;

2.Insurance companies.

5. Explain the concept of Optional Standard Deduction. Is the concept available to all taxpayers? 4 pts

The OSD is a privilege that may be enjoyed by certain individual taxpayers in lieu of the itemized deductions. It is available to citizens or resident aliens; thus non-resident aliens are not entitled to claim the optional standard deduction.

III. a. Explain the procedure in filing income tax return of domestic corporation. 4 pts Every corporation subject to tax shall render in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of Title II. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer(Sec.52). As required by the BIR, it shall be filed with

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the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the City or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where the main books of accounts and other data from which the return is prepared are kept.(Sec 76-A). The corporate quarterly declaration shall be filed within 60 days following the close of each of the first three quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth day of April, or on or before the fifteenth day of the fourth month following the close of the fiscal year as the case may be (Sec 76-B). b.Is the same procedure applicable to a general professional partnership. 4 pts

No. There is a difference. The BIR requires in Sec. 55 that every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners.

IV. Leah obtained a loan from 5-6 Universal Bank with an interest rate of 12%. After one year the interest payable by Leah amounted to P1 M. Before she can claim the whole amount as deductions, it was found out that the loan was obtained by Leah was re-lent by the latter to Janice. Can Leah claim as deduction the full amount of P1 Million as interest expense? 5 pts Pursuant to the Sec 34(B) of the Tax Code, the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with his trade, business or exercise of profession shall be allowed as a deduction from his gross income, the said interest expense however, shall be reduced if the taxpayer has derived certain interest income which had been subject to final withholding tax. The said reduction shall be equal to the percentages of the interest income earned depending on the year when the interest income was earned. (BIR Ruling No. 006-2000)

V. Aga and Lucy got ,married on January 1, 2007. On her 9-month pregnancy she gave birth to triplets named Tito, Vic, and Joey. On October 7, 2007, 18 hours after his birth, Tito died. One month later Joey also died. How much additional exemptions can Aga claim at the end of the taxable year? 5 pts Personal Exemption P50,000.00 Additional Exemption 75,000.00 (P25,000 x 3 ) Total Personal and Additional Exemptions P125,000.00 a)Individual taxpayers regardless of status are entitled to P50,000 personal exemption.

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b)An individual, whether single or married, shall be allowed an additional exemption P25,000 for each qualified dependent child, provided that the total number of dependents for which additional exemptions may be claimed shall not exceed four dependents. If any of such dependents dies during the taxable year, the taxpayer may still claim the exemptions as if any of the dependendents dies at the close of such year.( RR 10-2008.)

VI. Dolphy was overwhelmed when Vandolph, his favourite son, was about to get married to Marsha. One day before the celebration of the marriage, Dolphy gave a gift check in the amount of P8,888.88 to Marsha. Is Dolphy liable to donors tax? 5 pts

Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first P10,000.00 of the value thereof such gift should have been given to a legitimate recognized natural or adopted child of the donor. (Sec 101-A)

VII.

Joanne the manager of SM Bank, while reading her favourite tabloid, The Buzz , found out in the obituary that Don Juan died. Don Juan had left a P1M account in the name of Don Juan and his wife Dona Juanita, in the the SM Bank. On the following day, Dona Juanita requested to withdraw P10,000 from said account. a. If you were the bank manager, would you allow the withdrawal request of Dona Juanita? b. What steps should be taken by Dona Juanita, including the periods to be observed, to withdraw the full amount? 5 pts 1. In all cases of transfers subject to tax, or where though exempt from tax, the gross value of the estate exceeds P20,000, the executor, administrator, or any of the legal heirs, as the case may be, within two (2) months after the decedents death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner. (Sec 90-A).

2. File the return within six (6) months from decedent's death. However, the Commissioner may, in meritorious cases, grant extension not exceeding thirty (30) days.

3. A certified copy of the schedule of partition and the order of the court

approving the same shall be furnished the Commissioner within 30 days after the promulgation of such order. (Sec. 90)

4. The Estate Tax imposed shall be paid at the time the return is filed by the

executor or administrator or the heirs. However, when the Commissioner finds that payment on the due date of the Estate Tax or of any part thereof would impose undue

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hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts or two (2) years in case the estate is settled extra-judicially.

VIII. Pedro, one of the billionaires in Metro Manila celebrated his birthday on February 29, 2008. As a tradition in celebrating his birthday, he donated a vacant lot to a non-governmental organization and said organization would use the lot in constructing a sports complex. The fair market value of the land at the time it was given was P10,000 but Pedro had bought the said Land for only 1 million.

a. Is Pedro exempted from paying the donors tax and if so what circumstances should the donee comply with? Yes. In order that donations shall be exempt from donors gift tax, it is required that not more than 30% of the said gifts shall be used by the done-institution for administration purposes. (Sec 101-A)

b. Can Pedro claim as a deduction the donation given and if so, what amount can he claim?

The amount of 1 Million. The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (Sec.34-H)

IX.

Romulo a wealthy businessman gave to his friend Jun a lot valued at 20M so that Jun can retire from his work and fulfill his dream of having a goat farm. a. If Romulo died, what deductions can his estate claim? 2 pts

1.Expenses,Losses, Indebtedness and Taxes 2.Property Previously Taxed 3.Transfers for Public Use 4.The Family Home 5.Standard Deduction 6.Medical Expenses 7.Amount Received by Heirs under R.A.4917

b.Between giving the lot to Jun during his lifetime or giving the lot as a devise to Jun in his last will and testament, which mode is more tax efficient from the point of view of the donor? 2 pts

Estate Tax. The donors gift tax is much higher considering the donation was given to a stranger. Romulo will pay 30% of the net gifts because Jun can be considered a stranger if he chooses to make the donation intervivos as compared to estate taxes

X.

Determine whether the following is, a) subject to 12%VAT; b)vat exempt or c) zero rated:

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a.) sale of miner of gold amounting to P10 M to a gold jewelry manufacturer . 3 pts

Subject to 12% VAT b.)importation of smoked salmon meat.3 pts

Vat Exempt. Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market such as freezing, drying salting, broiling, roasting, smoking or stripping.

1. Who Are Entitled To Duty And Tax Free Privileges?

Section 105 of the Tariff and Customs Code of the Philippines as amended by Executive Order No. 206 provides duty and tax free privileges to the following individuals, the extent of which depends on their particular status:

1. Returning Resident. A Returning Resident is a Filipino national who has gone abroad and is now returning. Only those Returning Residents who have an uninterrupted stay abroad for at least six (6) months prior to their return to the Philippines are entitled to duty and tax free privileges.

2. Overseas Filipino Worker (OFW) is a Filipino national who worked in a foreign country under an employment contract. Only OFWs who have an uninterrupted stay abroad for more than six (6) months are entitled to duty and tax free privileges.

3. Former Filipino. A Filipino national who has acquired foreign citizenship abroad and is now returning. Only former Filipinos who are coming to settle permanently in the Philippines and have stayed abroad for at least six months are entitled to the duty and tax exemption privileges.

Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? (5%) SUGGESTED ANSWER: Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. [Sec. 25 (A) (1), NIRC of 1997] Thus, he is

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allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions. (Sec. 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35 (D), A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in Hong Kong (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 Philippines. 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 Philippines. P will also be receiving rental income for the lease of his Philippine residence. Are these salaries, allowances and rentals subject to the Philippine income tax? (5%) SUGGESTED ANSWER: The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a nonresident citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the time during the taxable year. (Section 22(E), NIRC). A nonresident citizen is taxable only on income derived from Philippine sources. (Section 23, NIRC). The salaries and allowances received from being employed abroad are incomes from without because these are compensation for services rendered outside of the Philippines. (Section 42, NIRC). However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived from within, the leased property being located in the Philippines. (Section 42, NIRC). Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense.

1) Interest on loans used to acquire capital equipment or machinery. 2) Depreciation of goodwill.

SUGGESTED ANSWER: 1) Interest on loans used to acquire capital equipment or machinery is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of a profession. (Section 34(B) (3), NIRC). 2) Depreciation for goodwill is not allowed as deduction from gross income. While intangibles maybe allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration. (Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such is not the case with goodwill.

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Recitation Questions

ssuming Youre Correct

General Principles

Panganiban, Victoria

Q: What is taxation?

Taxation is an inherent power of the sovereign, exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for raising revenues to carry out the legitimate objects of the government. It is merely a way of apportioning the costs of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens.

Q: Is revenue the only purpose of taxation? What are the other purposes and objectives of taxation? No. The purposes and objectives of taxation are as follows:

1. Revenue 2. Regulation 3. Promotion of General Welfare 4. Reduction of Social Inequality 5. Encourage Economic Growth 6. Protectionism

Q: Distinguished tax from license fee

1. A tax is levied in the exercise of the taxing power; license fee emanates from the police power of the State.

2. The purpose of tax is to generate revenue; whereas a license fee is regulatory.

3. The amount of exaction or charge, if it is to be a license fee, must only be of sufficient amount to include expenses of (a) issuing the license; and (b) cost of necessary inspection or police surveillance.

Q: How is taxation distinguished from police power?

1. As to Purpose Taxation is levied for the purpose of raising revenue; police power is exercised to promote public welfare through regulations.

2. As to Amount of Exaction In taxation there is no limit; in police power, the exaction should only be such as to cover the cost of regulation, issuance of the license or surveillance.

3. As to Benefits Received In taxation, no special or direct benefit is received by the taxpayer other than the fact that the Government only

A

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secures to the citizen that general benefit resulting from the protection of his person and property and welfare of all. As to police power, however, while no direct benefits are received, a healthy economic standard of society known as damnum absque injuria is attained.

4. As to Non-Impairment of Contracts In taxation, the non-impairment of contracts rule subsists. A taxing act cannot impair the obligation of contracts. In the exercise of police power, however, this limitation does not apply.

5. As to Transfer of Property Rights In taxation, taxes paid become part of the public funds; in police power, no transfer, but only restraint on the exercise, of property rights exists.

Calvan, Myrtle Q: In what part of a proposed bill can you find the declaration of public purpose?

Whenever a bill is passed, public purpose is always presumed. No need to expressly state it in the bill itself.

Q: Requisites of Equal Protection

To start with, the equal protection clause does not require the universal application of the laws to all persons or things without distinction. What it simply requires is equality among equals as determined according to a valid classification. The test developed by jurisprudence here and yonder is that of reasonableness, which has four requisites: (1) The classification rests on substantial distinctions; (2) It is germane to the purposes of the law; (3) It is not limited to existing conditions only; and (4) It applies equally to all members of the same class.

Q: State the doctrine in British American Tobacco Case. Does the assailed law violate the equal protection clause? The assailed law does not violate the equal protection and uniformity of taxation clauses.

Petitioner argues that the classification freeze provision violates the equal protection and uniformity of taxation clauses because Annex D brands are taxed based on their 1996 net retail prices while new brands are taxed based on their present day net retail prices. Citing Ormoc Sugar Co. v. Treasurer of Ormoc City, petitioner asserts that the assailed provisions accord a special or privileged status to Annex D brands while at the same time discriminate against other brands.

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These contentions are without merit and a rehash of petitioners previous arguments before this Court. As held in the assailed Decision, the instant case neither involves a suspect classification nor impinges on a fundamental right. Consequently, the rational basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal protection challenge. It has been held that in the areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification. Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest. As the Court ruled in the assailed Decision, viz:

A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies equally to all those belonging to the same class. The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands under Annex D as of October 1, 1996, was thus the logical and practical choice. Further, with the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to Annex D brands but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced in the future. (However, as will be discussed later, the intent to apply the freezing mechanism to newer brands was already in place even prior to the amendments introduced by RA 9334 to RA 8240.) This does not explain, however, why the classification is frozen after its determination based on current net retail price and how this is germane to the purpose of the assailed law. An examination of the legislative history of RA 8240 provides interesting answers to this question.

x x x x

From the foregoing, it is quite evident that the classification freeze provision could hardly be considered arbitrary, or motivated by a hostile or oppressive attitude to unduly favor older brands over newer brands. Congress was unequivocal in its unwillingness to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF and the BIR. Congress doubted the constitutionality of such delegation of power, and likewise, considered the ethical implications

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thereof. Curiously, the classification freeze provision was put in place of the periodic adjustment and reclassification provision because of the belief that the latter would foster an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is being foisted by petitioner upon the classification freeze provision. To our mind, the classification freeze provision was in the main the result of Congresss earnest efforts to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with other State interests. In particular, the questioned provision addressed Congresss administrative concerns regarding delegating too much authority to the DOF and BIR as this will open the tax system to potential areas for abuse and corruption. Congress may have reasonably conceived that a tax system which would give the least amount of discretion to the tax implementers would address the problems of tax avoidance and tax evasion.

Cardino, Gian Carlo Q: What is tax evasion?

Answer: It is a term that connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. It is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

The requirements of tax evasion are the following: a. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that the tax is due.

b. An accompanying state of mind which is described as being evil, in bad faith, wilful, or deliberate and not coincidental

c. A course of action which is unlawful.

Q: Is there a test in determining tax evasion?

Answer: Yes. The proofs of tax evasion are as follows: a. Failure to declare for taxation purposes true and actual income derived from business for two consecutive years.

b. Substantial underdeclaration of income in the tax returns of the taxpayer for four consecutive years coupled with intentional overstatement of deductions. Substantial underdeclaration of taxable sales, receipts, or income or a substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent return. Substantial underdeclaration means failure to report sales, receipts, or income in an amount exceeding 30% of that declared

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per return. Substantial overstatement means claim of deductions in an amount exceeding 30 % of actual deductions.

Q: What are the differences between tax evasion and tax avoidance? Answer: Tax avoidance is legal and not subject to criminal penalty. Its effect is the minimization of taxes. Tax Evasion is illegal and subject to criminal penalty. It almost always results in the absence of tax payments.

Q: Angel Locsin failed to report some of her income in her income tax return. Is it a case of tax evasion?

Answer: Mere failure to report some income does not constitute tax evasion. There must be an accompanying state of mind which is described as being evil, in bad faith, wilful, or deliberate and not coincidental. The course of action must be unlawful. However, Substantial underdeclaration of taxable sales, receipts, or income or a substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent return. Substantial underdeclaration means failure to report sales, receipts, or income in an amount exceeding 30% of that declared per return. Substantial overstatement means claim of deductions in an amount exceeding 30 % of actual deductions.

Sandoval, Camhella Q: What is the basis of the theory of Taxation?

Answer: Necessity Theory- The existence of the government is a necessity. It cannot continue without a means to pay its expenses and therefore has a right to compel all citizens and property within its power to contribute; and Benefits- Protection/ Reciprocity Theory (Doctrine of Symbiotic Relationship) - Every person who is able must contribute his share in the burden of running the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values.

Q: If you are going to give another name for the Lifeblood theory, what will it be? Q: Give one inherent limitation of Taxation.

Answer: Non- Delegation of Taxing Power. General rule: A delegated power cannot be further delegated. Since the power of taxation is a power that is exercised by Congress as delegates of the people, then as a general rule, Congress could not re-delegate this delegated power. Exceptions:

a) Delegation of Tariff powers by Congress to the President under the flexible tariff clause.

b) Delegation of Emergency powers to the President. c) Delegation to the President to enter into Executive agreements and to ratify

treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President.

d) Delegation to the people at large. e) Delegation to administrative bodies (Power of Subordinate Legislation).

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Q: Give a Constitutional limitation of Taxation.

Answer: Origin of Revenue or Tariff Bills (Section 24, Article VI of the 1987 Constitution)

Q: What is the reason behind why the title of the Bill must contain only one subject? Answer: To inform the public and to prevent hodgepodge legislation or log-rolling legislation.

Q: What is a private law? Answer:

Antonio, Regatta Marie

Q: What is hodgepodge or log-rolling legislation?

Legislation which the one bill-one title principle seeks to prevent. It is including other topics not germane to the title of the bill to trick the legislators into enacting the whole bill.

Q: What is the bill-making process?

3 readings before it is signed by the legislators and brought to the President for signing.

Q: Are educational institutions exempt from real property tax?

Yes. Provided the property is used actually, directly and exclusively for educational purposes.

Q: Bookstore inside San Beda, exempt from tax?

Yes. Generally, if it is incidental to the conduct of business of the school in connection to education, exempt.

Q: Cafeteria, exempt?

Yes. For the sustenance of the students.

Q: Photocopying businesses in the library, exempt? Depends. If they belong to the school, exempt from taxes. If not, owner is liable to business taxes.

Q: What are poll taxes?

Poll taxes are taxes paid by an individual to the place where he resides as a personal tax.

Revilla, Rodrigo Q: What is the ratification requirement for treaties? 2. Is publication a requirement?

The power to ratify a treaty is vested in the President, but "no treaty or international agreement shall be valid and effective unless concurred in by at

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least 2/3 of all the members of the Senate." (Sec. 21, Art. VII, Philippine Constitution) Publication is not required. The treaty enters into force as soon as the consent of all the parties to be bound by the treaty is established. But note: Article 102 of the UN Charter requires that every treaty and international agreement entered into by any UN member as soon as possible with the Secretariat and published by it. Failure to register would not, however, affect the validity of the treaty; however, the unregistered instrument cannot be invoked by any party thereto before any organ of the UN.

Q: When a treaty grants a tax exemption, can the government by regulation prescribe additional requirements before a taxpayer can avail the tax exemption under the treaty? Q: If you were a taxpayer, what can you argue against such tax regulation? Q: If you were the government, what can you argue against the taxpayer?

Rules and regulations must not override, but must remain consistent and in harmony with the law or tax treaty that is sought to be applied and implemented. They are intended to carry out, neither to supplant nor to modify, the law. Thus a taxpayer who intends to avail of an exemption under a tax treaty can argue that a regulation is in the guise of legislation by not only imposing additional burden but depriving the taxpayer of a tax exemption, which, if without the regulation, will be available to him under the law or tax treaty. The government, may, however, argue that the issuance of the regulation is for mere administration and collection purposes, or that the government is expressly granted by the law or tax treaty to prescribe additional requirements by regulation.

Q: How are tax laws construed? 6. Are there exceptions? 7. Why are the exceptions construed that way?

Tax laws are construed most strongly against the Government, and liberally in favor of the citizen because burdens are not to be imposed beyond what the statute expressly and clearly import.

Tax exemptions, however, are highly disfavored in law and construed strictly against he who claims an exemption. So as not to defeat the purpose for which certain tax exemptions are granted, this rule of strict construction of tax exemptions does not apply: a) When the statute granting exemption provides for liberal construction thereof, b) In case of special taxes relating to special cases and affecting only special classes of persons, c) If the tax exemption refers to public property, and d) in cases of those granted to 1) organizations performing strictly religious, charitable and education functions and 2) government political subdivisions or instrumentality.

Zulueta, Isabel Q: Give the distinctions between a tax and a license fee

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1. A tax is levied in the exercise of the taxing power; license fee emanates from the police power of the State.

2. The purpose of tax is to generate revenue; whereas a license fee is regulatory

3. The amount of the exaction or charge, if it is to be a license fee, must only be of sufficient amount to include expenses of (1) issuing the license; and (2)costs of necessary inspection or police surveillance.

Q: Can an exaction be both a tax and a regulatory fee at the same time? Yes as in the case of license taxes. A law like PD 1987 which regulates the videogram industry may validly impose a tax of 30% on the gross receipts of videogram operators. In the case of Tio v. Videogram Regulatory Board, it was held that the provisions of Sec.26 of the Constitution which requires that every bill must contain only one subject which must be expressed in the title thereof is not violated.

Q: Why is it important to distinguish a tax between a license? Give two. To determine who are entitled to exemptions; and To determine the legality or illegality of non-payment. Because non-payment of a license fee for a business makes that business illegal. However, non-payment of a tax for a business does not necessarily make that business illegal although this might be a ground for criminal prosecution against the person or persons violating the law.

Q: With regard to the exemption I n the Constitution: Sec. 28(3), Art Vi, of the Constitution provides Charitable Institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation, to what kind of tax does this exemption apply?

This applies only to property or realty taxes assessed on such properties used directly, actually and exclusively for religious, charitable and educational purposes.

Q: Give examples of property taxes. Real property tax and additional levies on real property.

Q: What is Real Property Tax? It is a direct tax on the ownership of lands and buildings or other improvements thereon not specifically exempted and is payable regardless of whether the property is used or not, although the value may vary in accordance with such factor.

Q: Can the local government also impose other taxes on the same property aside from the basic real property tax?

Yes. The local taxing power extends not only to the imposition of the basic real property tax, which has already been discussed, but it also includes the

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imposition of the special levies. These are: (1) the 1% additional real estate tax to finance the Special Education Fund (SEF) which is levied on an ad valorem basis (Sec.235 LGC); (2) the 5% additional tax on idel lands likewise imposed on an ad valorem basis (Sec. 236,LGC); and (3) the special levy or special assessment which is not actually a tax (Sec.240, LGC).

Tax Administration and Enforcement

Calingasan, Charlene Mae

Q: Congressman Manny pacquiao will pass a bill imposing tax upon all residents of General Santos. Valid or not?

ANSWER: not valid, violative of the equal protection clause. No substantial difference between the residents of General Santos and other residents of other provinces or regions of the country.

Taguba, Jezreel Caridad

Q: What are the principles of a sound tax system? a. FISCAL ADEQUACY- sources of government revenue must be sufficient to meet

government expenditures and other public needs b. ADMINISTRATIVE FEASIBILITY- tax laws must be capable of being effectively

enforced with the least inconvenience to the taxpayer c. THEORETICAL JUSTICE- a sound tax system must be based on the taxpayers

ability to pay (Ability to Pay Theory) Q: Will a violation of these principles invalidate a tax law?

It depends. A validity of a tax law will not be affected even if it is not in consonance with the principles of Fiscal Adequacy and Administrative Feasibility because the Constitution does not expressly require so. These principles are only designed to make our tax system sound. However, if a tax law runs counter to the principle of Theoretical Justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation must be uniform and equitable.

Q: The City of Manila intends to impose local tax to the LRT, can they validly do so?

Section 5, Article 10, 1987 Constitution provides that Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.

However, in the case at bar, the City of Manila cannot impose local tax to the LRT by virtue of the Principle of Pre-emption where the National Government

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elects to tax a particular area, it impliedly withholds from the local government the delegated power to tax the same field. This doctrine principally rests on the intention of the Congress. LRT is being taxed by the National Government, hence, the City of Manila cannot impose its local tax upon it.

Q: How do you arrive at the net taxable estate of a decedent.

Gross estate Less: (1) Deductions

(2) Net Share of the Surviving Spouse in the CPP --------------------------------------------------------------------------- Net Taxable Estate Q: Procedure for the settlement of net estate tax.

A. Filing of Notice of death 1. When notice of death is filed:

a. When the transfer is subject to tax, or b. Although exempt, the gross value of the estate exceeds P20,000

2. Not all transfers mortis causa requires a written notice of death to be filed with the Commissioner. It is only when the transfer is subject to tax or when the gross estate exceeds P20,000

3. Period of filing is 2 months after the death of the decedent or within like period after qualifying as executor or administrator, the notice must be filed with the Commissioner.

B. Filing of Estate Tax Return

1. When the gross estate exceeds P200,000 or regardless of the value of the estate, where the estate consists of registered or registrable properties

-When the gross estate exceeds P2M, the estate tax return be supported by a statement duly certified by a Certified Public Accountant.

-There is an additional requirement of registering the estate and getting a separate TIN.

2. Period to file: As a general rule, 6 months from the decedents death. Except, in meritorious cases, the Commissioner may grant reasonable extension not exceeding 30 days.

C. Payment of Tax

1. General Rule: Pay-as-you-file

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2. Exception: The Commissioner may grant extension. The extension must be for a period not exceeding 5 years if the estate is settled judicially or 2 years if settled extrajudicially.

Rosalejos, Chyrs Anne

Q: What are the general powers of the BIR?

a. To assess and collect national internal taxes, fees and charges. b. To enforce all forfeitures, penalties and fines connected with the

assessment and collection of taxes, fees and charges. c. To execute judgment in all cases decided in its favor by the CTA and the

ordinary courts; and d. To effect and administer the supervisory and police power conferred upon

it by the Tax Code and other special laws. Q: What are the powers of the Commissioner of Internal Revenue?

a. Power to interpret tax laws. b. Power to decide tax cases. c. Power to obtain information and to summon, examine and take testimony

of persons; and d. Power to make assessments and prescribe additional requirements for tax

administration and enforcement.

Q: When is Presumptive Gross Sales or Receipts applicable?

a. When a person fails to issue receipts or invoice; or b. There is reason to believe that the book or accounts or other records do not

correctly reflect the declarations made or to be made in a return required to be filed under the provision of the Tax Code.

Q: What are those powers which cannot be delegated by the Commissioner?

a. Power to recommend the promulgation of rules or regulations by the

Secretary of Finance; b. Power to issue rulings of first impressions or the reverse, revoke or modify

any existing ruling of the Bureau. c. Power to compromise or abate any tax liabilty. Except assessments issued

by the regional offices involving basic deficiency taxes of Php. 500,000.00 or less, and minor criminal violations discovered by regional and district officials.

d. Power to assign or re-assign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

Q: What are the exceptions to the non-retroactivity of rulings?

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a. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR.

b. Where facts subsequently gathered by the BIR are materially different from the facts on which the ruling was based.

c. Where the taxpayer acted in bad faith.

Sampaga, Genelou

Q: What are the powers and duties of the Commissioner of Internal Revenue?

Q: Can the powers and duties of the Commissioner be delegated?

Q: What are the powers and duties of the Commissioner which cannot be delegated?

Q: From the decision of the Commissioner of Internal Revenue, what is the remedy of the

taxpayer? Under what rule in the Rules of Court?

Income Taxation

Cachapero, Oliver

Q: What is the effect if administrative agencies like the BIR make an interpretation of tax laws through a regulation?

ANSWER: Such interpretation must be given much weight and respect since even if it is not a law, it has the efficacy of a law applying the doctrine of subordinate legislation.

Q: In a taxicab business, how will you categorize the vehicle used in such business?

ANSWER: It cannot be considered as a capital asset because it is a property used in his trade or business. (Sec.39 of NIRC)

Q: Which is broader in concept, gross sale or gross income?

ANSWER: Gross sale because you have to deduct some allowable items from the gross sale to come up with the gross income.

Q: What is tax arbitrage?

ANSWER: It is an unsound taxation practice wherein back to back loan is used to take advantage of the lower rate of tax on interest (20%) and a higher rate of tax on interest expense deduction (33%).

Q: What are the rates that are needed to be considered in dealing with interests on individuals?

ANSWER:

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The imposable 20% final tax rate on interests and the 33% allowable interest deduction on interest expenses.

Casibang, Ruben

Q: What are the governing principles relating to income taxation that are embodied in Section 23 of the Tax Code?

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

from sources within and without the Philippines b. A nonresident citizen is taxable only on income derived from sources within

the Philippines c. An individual citizen of the Philippines who is working and deriving income

from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker

d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines

e. A domestic corporation is taxable on all income derived from sources within and without the Philippines

f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines

Q: What rules may be inferred from such principles?

a. Citizenship principle b. Residence principle c. Source principle

Q: What is the importance of knowing the tax treatment of individuals?

It is important to know the tax treatment of individuals and corporations because, each and every category has distinct characteristics in a sense that not all income earned by these individuals and corporations are taxable. Some are entitled to preferential rates, some are not. Some income are excluded in computing the gross income and some individuals are entitled to additional exemptions while other are not.

Q: Nora Aunor is a known actress. She went to the US and stayed there for several years and earned income. In the middle of the year, say June , she came back and accepted projects in the movie industry. how will her tax on income be treated?

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Under Sec 22 (e) (4) of the Tax Code, Nora aunor shall be considered as a nonresident citizen. It states that a citizen who has been previously considered as nonresident and who arrives in the Philippines at anytime during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. Thus, income she received while she was in the US shall be treated as income from sources without and is not taxable because was then a nonresident citizen. On the other hand upon arrival in the Philippines, income within shall be taxable.

Q: Pilots and stewardess of Philippine Airlines, how will their tax on income be treated? Are their tax treatment similar to seaman?

Employees of Philippine Airlines are residents of the Philippines, thus income from sources within and without are taxable. However, pilots, stewardesses and other crews of airlines plying international routes, who are holders of immigrant visas or foreign working visas and have left the Philippines, qualify as nonresident citizens. The fact that their salaries are paid locally does not remove them from this category.

Quinto, Ramiila

Q: what are the three classification of taxpayers? 1. individual 2. corporations 3. estate and trust Q: who are considered individual taxpayers? 1. resident citizen 2. non resident citizen 3. resident alien 4. non resident alien engaged in business and trade in the Philippines 5. non resident alien not engaged in business and trade in the Philippines

6. aliens employed in multinational companies, offshore banking and petroleum service contractors 7. OCW

Q: Gen Principles of Income Taxation

1. A citizen of the Philippines, residing therein in taxable on all income derived from sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within the Philippines.

3. An individual citizen of the Philippines who is working and deriving income from abroad as an Overseas Filipino Worker is taxable only on income from sources within the Philippines: Provided that a seaman who is a citizen of the Philippines and receives compensation abroad as a member of the complement

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of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker.

4. An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within and without the Philippines.

6. A foreign corporation whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines.

Q: what are the sources of income? Within the Philippines Outside the philippines Q: Suppose a Filipino branch manager is assigned in hongkong. He is receiving two salaries, one from the Philippines and the other from Hongkong. The work is being performed in Hongkong. Is he liable for both salaries?

No. with respect to compensation for labor or personal services performed, the place of performance is controlling. The services rendered in hongkong are income from sources without the philipinnes.

Lambino, Kaye Coleen

Q: Every corporation is subject to 30% regular coporate income tax except

Non resident foreign corporation, Why? They are subject to final tax on gross income without the benefit of any deductions.

30% on gross income received feom all sources within the Philippines Q: What else?

GSIS, SSS, PHIC, PCSO. Generally all government owned and controlled corporations have the same rules governing domestic corporations engaged in similar business industry, or activity applies.

Q: What else,

Special domestic corporations - proprietary educational institutions and non profit hospitals

Tax base 10 % on NET INCOME Requisites: a. Stock and non profit institution, b. Private educational institution c. Gross income from unrelated trade, business activity does not

exceed 50% of gross income from all sources

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d. For educational institutions, issued a permit to operate from decs, ched, tesda,.

Exceptions: 30 % if the the gross income from unrelated trade and business or other activity exceeds 50% of the total gross income derived from all sources Exempt if non stock non profit educational institutions

Q: What is unrelated trade, business, or other activity It is an undertaking that are not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function

Q: Determine whether or not unrelated:

a. Concessionaires, such as Jollibee for example, or fior, canteens etc - Food services by the school are related but for it to be exempt it must be

owned and operated by the school as ancilliary activities and is located inside.

- B. car stickers for parking related, they are for the students benefit - C . bookstore related.

Payumo, Margielyn

Q: Is there a difference between the taxability of dividends received by a resident

individual and by a domestic corporation from domestic corporation?

Answer: Yes. Dividends received from a domestic corporation by a resident citizen is subject to 10% final tax while those received by a domestic corporation is exempt.

Q: ABC Corp, a domestic corporation declared dividends in favor of X a non-resident alien not engage in trade or business,Y resident alien and EFG Corp a non-resident foreign corporation. Tax implication.

Answer:X, Non-resident alien not engage in trade or business in the Philippines - 25% final tax Y, resident alien - 10% final tax EFG non-resident foreign corporation General Rule: Subject to 15% final tax as long as the country in which the NRFC is domiciled allows a tax credit for taxes "deemed paid" in the Philippines equivalent to 15% or does not impose tax on dividends. The fact that the country in which the NRFC is domiciled does not impose any tax on.the dividends received by such corporation should be held as a full satisfaction ofthe condition for the availment of the 15% final tax.

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Exception: It is subject to final tax of 30% IF the country within which the NRFC is domiciled does NOT allow a tax credit.

Q: What is the rationale of the imposition of Minimum Corporate Income Tax?

Ans: It is intended to put a stop to the practice of corporations which while having large turn-overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses called tax shelters

Q: What are the conditions for its imposition?

Answer: It is applied when the taxable income is zero or negative such as when there is net loss or when the MCIT is greater than Normal corporate income tax due.

Q: When does MCIT commence?

MCIT is imposed beginning the fourth taxable year immediately following the year in which such corporation commenced its business operations, which is the year when the corporation registers with the BIR and NOT when the corporation started commercial operation.

Quilates, Donelle

1. What are capital assets? 2. In the impeachment proceeding, is the sale of Megaworld of the Bellagio unit to

the Chief Justice subject to the capital gains tax? 3. What is the tax base of the capital gains tax from the sale of real property located

in the Philippines? Why? 4. What do you mean by tax arbitrage? 5. Is the 33% tax arbitrage reduction an arbitrary amount?

ANSWERS:

1. Capital asset is defined in the NIRC in the negative. Meaning, if the asset is not included within the meaning of an ordinary asset, it is considered to be a capital asset. The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

2. No, the sale of Megaworld to the Chief Justice is not subject to the capital gains tax on sale of real property located in the Philippines. In order to subject the said transaction to the capital gains tax, it is necessary that the real property be

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treated as a capital asset. In the case at bar, since Megaworld is engaged in the trading and selling of real estate, the said Bellagio unit should not be considered as a capital asset. This is so because the said property is included in the inventory of the Megaworld.

3. The tax base of the capital gains tax from the sale of real property located in the Philippines is 6% of the higher between: (a) The gross selling price; and (b) prescribed zonal value of real properties as prescribed by the commissioner OR the fair market value based on schedule of values of the of the provincial or city assessors whichever is higher.

4. Tax arbitrage is the mandatory deduction of the interest income subject to final tax against the interest expense to be recognized under deductions of the gross income. The purpose is to discourage back to back loan to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest expense deduction.

5. No, the rate is not arbitrary. The 33% reduction is derived from the ratio of the difference between the 30% corporate income tax and 20% final tax on interest income over the 30% corporate income tax rate [(30% - 20%) / 30% = 33%]. In this way the 10% advantage in case of back to back loans will be avoided.

Antonio, Regatta

Q: What is an insurance contract?

An insurance contract is an agreement whereby one undertakes to indemnify another for any loss, damage or injury arising from a known or contingent event.

Q: Are insurance contracts excluded from Income taxes? Yes. Specifically excluded under the NIRC.

Q: If, for example, Iggy Arroyo, designated Grace Ibuna, his mistress as the beneficiary in an insurance contract, tax implication?

Grace Ibuna, as a mistress, may not be designated as a beneficiary to the insurance contract because she fall sunder the exceptions of void donations under Art. 329 of the NCC.

Q: What if Iggy designates Graces sister as beneficiary, can that be done? Yes. She is not among those excepted to receive donations from Iggy. The tax implication would be that Iggy would be liable for donors tax to a stranger.

Q: What are the basic principles of an insurance contract? Contract of adhesion, Aleatory contract, Contract of indemnity

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Q: What if I donated a painting to a church worth P1 million, and the church sells it for the renovation of the church building, what are the tax implications?

The first transaction your donation to the church not taxable. Donation to a religious organization. The second transaction the selling of the painting not taxable the fund will be used to rebuild the church.

Q: LSG selling of shirts and jackets, taxable?

No. LSG is not an entity which is taxable by the BIR. Its existence is connected with San Beda as an educational institution. All revenue of a non-profit, non-stock school is tax exempt under the Constitution.

Q: What if they put up a store outside San Beda and made a business of selling shirts and jackets?

Taxable, if the selling is done on a commercial level with an economic end, it will be subject to tax.

Q: Can you sell your