TAXATION

POINTERS IN TAXATION
Reviewer on Taxation (2017)
By Atty. Roberto Belarmino M. Lock

1. Explain the nature or concept of: (a) Percentage Tax; (b) Documentary Stamp Tax; and, (c)
Excise Tax under the NIRC.

(a) Percentage Tax is a national tax measured by a certain percentage of the gross
selling price or gross value in money of goods sold, bartered or imported; or of the
gross receipts or earnings derived by any person engaged in the sale of services.
(CIR vs. Citytrust Investment Phils., Inc., GR No. 139786 dated September 27, 2006)

(b) Documentary Stamp Tax (“DST”) is a tax on documents, instruments, loan
agreements, and papers evidencing the acceptance, assignment, sale or transfer
of an obligation, right or property incident thereto. A DST is actually an excise tax
because it is imposed on the transaction rather than on the document. A DST is
also levied on the exercise by person of certain privileges conferred by law for the
creation, revision or termination of specific legal relationships through the
execution of specific instruments. Hence, in imposing the DST, the Supreme Court
considers not only the document but also the nature and character of the
transaction. (Philippine Banking Corporation vs. CIR, GR No. 170574 dated January
30, 2009)

(c) Excise Taxes under Section 129 of the NIRC, as amended, are imposed on two
kinds of goods, namely: (a) goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition; and (b) things
imported. Undoubtedly, the excise tax imposed under Section 129 of the NIRC is
a tax on property. (Chevron Philippines, Inc. vs. CIR, GR No. 210836 dated
September 1, 2015, J. Bersamin)

2. Is there a distinction between the traditional definition of excise tax and excise taxes under the
NIRC?

Yes, taxes are classified, according to subject matter or object, into three groups, to wit: (1)
personal, capitation or poll taxes; (2) property taxes; and (3) excise or license taxes. Personal,
capitation or poll taxes are fixed amounts imposed upon residents or persons of a certain class
without regard to their property or business, an example of which is the basic community tax.
Property taxes are assessed on property or things of a certain class, whether real or personal, in
proportion to their value or other reasonable method of apportionment, such as the real estate
tax. Excise or license taxes are imposed upon the performance of an act, the enjoyment of a
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privilege, or the engaging in an occupation, profession or business. (traditional definition) Income
tax, value-added tax, estate and donor’s tax fall under the third group.

Excise tax, as a classification of tax according to object (traditional definition), must not be
confused with the excise tax under Title VI of the NIRC. The term "excise tax" under Title VI of
the 1997 NIRC derives its definition from the 1986 NIRC, and relates to taxes applied to goods
manufactured or produced in the Philippines for domestic sale or consumption or for any other
disposition and to things imported. In contrast, an excise tax that is imposed directly on certain
specified goods – goods manufactured or produced in the Philippines, or things imported – is
undoubtedly a tax on property. (CIR vs. Pilipinas Shell Petroleum Corporation, GR No. 188497
dated February 19, 2014, Separate Opinion, J. Bersamin)

3. Chevron imported fuel and paid the corresponding excise taxes prior to its release from the
customs house. Subsequently, Chevron sold the imported fuel to Clark Development
Corporation (“CDC”), an entity exempt from direct and indirect taxes. Chevron did not pass on
the excise tax to CDC.

Claiming exemption under Sec. 135 (c) of the NIRC, Chevron filed a claim for refund for
erroneously paid excise tax in relation to its sale of fuel to CDC. Is Chevron entitled to a tax
refund for the excise taxes paid on the importation of petroleum products that it sold to CDC?

Yes, excise tax is a tax on property; hence, the exemption from the excise tax expressly granted
under Section 135 of the NIRC must be construed in favor of the petroleum products on which
the excise tax was initially imposed.

Under Section 129 of the NIRC, as amended, excise taxes are imposed on two kinds of goods,
namely: (a) goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition; and (b) things imported. Undoubtedly, the excise tax
imposed under Section 129 of the NIRC is a tax on property.

With respect to imported things, Section 131 of the NIRC declares that excise taxes on imported
things shall be paid by the owner or importer to the Customs officers, conformably with the
regulations of the Department of Finance and before the release of such articles from the
customs house, unless the imported things are exempt from excise taxes and the person found
to be in possession of the same is other than those legally entitled to such tax exemption. For
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this purpose, the statutory taxpayer is the importer of the things subject to excise tax. Chevron,
being the statutory taxpayer, paid the excise taxes on its importation of the petroleum products.

Section 135 (c) of the NIRC states:

SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities
or Agencies. – Petroleum products sold to the following are exempt from excise
tax:

(c) Entities which are by law exempt from direct and indirect taxes.

Pursuant to Section 135(c), petroleum products sold to entities that are by law exempt from
direct and indirect taxes are exempt from excise tax. The phrase which are by law exempt from
direct and indirect taxes describes the entities to whom the petroleum products must be sold in
order to render the exemption operative. Section 135(c) should thus be construed as an
exemption in favor of the petroleum products on which the excise tax was levied in the first place.
The exemption cannot be granted to the buyers – that is, the entities that are by law exempt
from direct and indirect taxes – because they are not under any legal duty to pay the excise tax.

Inasmuch as its liability for the payment of the excise taxes accrued immediately upon
importation and prior to the removal of the petroleum products from the customshouse,
Chevron was bound to pay, and actually paid such taxes. But the status of the petroleum products
as exempt from the excise taxes would be confirmed only upon their sale to CDC (or, for that
matter, to any of the other entities or agencies listed in Section 135 of the NIRC). Before then,
Chevron did not have any legal basis to claim the tax refund or the tax credit as to the petroleum
products.

Consequently, the payment of the excise taxes by Chevron upon its importation of petroleum
products was deemed illegal and erroneous upon the sale of the petroleum products to CDC.
(Chevron Philippines, Inc. vs. CIR, GR No. 210836 dated September 1, 2015, J. Bersamin)

4. The Municipality of Malvar, Batangas issued Ordinance No. 18, which is entitled "An Ordinance
Regulating the Establishment of Special Projects.” The purpose of the ordinance is to regulate
the "placing, stringing, attaching, installing, repair and construction of all gas mains, electric,
telegraph and telephone wires, conduits, meters and other apparatus, and provide for the
correction, condemnation or removal of the same when found to be dangerous, defective or
otherwise hazardous to the welfare of the inhabitant[s]."

Are the fees imposed under Ordinance No. 18 considered as taxes?
No, since the main purpose of Ordinance No. 18 is to regulate certain construction activities of
the identified special projects, which included "cell sites" or telecommunications towers, the fees
imposed in Ordinance No. 18 are primarily regulatory in nature, and not primarily revenue-
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raising. While the fees may contribute to the revenues of the Municipality, this effect is merely
incidental. Thus, the fees imposed in Ordinance No. 18 are not taxes.

In Progressive Development Corporation vs. Quezon City, the Supreme Court declared that "if the
generating of revenue is the primary purpose and regulation is merely incidental, the imposition
is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax.” (Smart vs. Municipality of Malvar, Batangas, GR No. 204429
dated February 18, 2014.)

5. Revenue Memorandum Order (“RMO”) No. 1-2000 requires that any availment of a tax treaty
relief (lower income tax rate) must be preceded by an application with the International Tax
Affairs Division of the Bureau of Internal Revenue at least 15 days before the transaction.

Should failure to strictly comply with RMO No. 1-2000 deprive persons or corporations of the
benefit of a tax treaty?

No, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.

Laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose additional requirements that would negate the
availment of the reliefs provided for under international agreements. More so, when the Tax
Treaty does not provide for any pre-requisite for the availment of the benefits under said
agreement.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No.
1-2000. Logically, noncompliance with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the consequences sought to be
prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied
through other system management processes, e.g., the imposition of a fine or penalty. But we
cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly
comply with an administrative issuance requiring prior application for tax treaty relief. (Deutsche
Bank AG Manila Branch vs. CIR, GR No. 188550 dated August 19, 2013; CBK Power Company
Limited vs. CIR, GR No. 193383-84 dated January 14, 2015)

6. What is the Doctrine of Operative Fact and how does it relate to the rules on taxation?

The general rule is that a void law or administrative act cannot be the source of legal rights or
duties. Article 7 of the Civil Code enunciates this general rule, as well as its exception: "Laws are
repealed only by subsequent ones, and their violation or non-observance shall not be excused by
disuse, or custom or practice to the contrary. When the courts declared a law to be inconsistent
with the Constitution, the former shall be void and the latter shall govern. Administrative or
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executive acts, orders and regulations shall be valid only when they are not contrary to the laws
or the Constitution."

The doctrine of operative fact is an exception to the general rule, such that a judicial declaration
of invalidity may not necessarily obliterate all the effects and consequences of a void act prior to
such declaration.

The doctrine of operative fact is in fact incorporated in Section 246 of the Tax Code, which
provides:

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal
of any of the rules and regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification or reversal will
be prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his
return or any document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.

Under Section 246, taxpayers may rely upon a rule or ruling issued by the Commissioner from the
time the rule or ruling is issued up to its reversal by the Commissioner or this Court. The reversal
is not given retroactive effect. This, in essence, is the doctrine of operative fact. (CIR vs. San
Roque, GR No. 187485 dated October 8, 2013)

7. San Roque Corporation argues that the ruling in CIR vs. San Roque (February 12, 2013) on the
mandatory observance of the 120+30 periods under Sec. 112 (c) of the Tax Code should only be
given a prospective application because "the manner by which the Bureau of Internal Revenue
(BIR) and the Court of Tax Appeals (CTA) actually treated the 120+30 day periods constitutes
an operative fact the effects and consequences of which cannot be erased or undone." Is this
argument correct?

No, the doctrine of operative fact applies only when there is a "legislative or executive
measure," meaning a law or executive issuance, that is invalidated by the court. From the
passage of such law or promulgation of such executive issuance until its invalidation by the court,
the effects of the law or executive issuance, when relied upon by the public in good faith, may
have to be recognized as valid.

To justify the application of the doctrine of operative fact as an exemption, San Roque asserts
that "the BIR and the CTA in actual practice did not observe and did not require refund seekers
to comply with the 120+30 day periods." This is glaring error because an administrative practice
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is neither a law nor an executive issuance. Moreover, in the present case, there is even no such
administrative practice by the BIR as claimed by San Roque.

There must, however, be a rule or ruling issued by the Commissioner that is relied upon by the
taxpayer in good faith. A mere administrative practice, not formalized into a rule or ruling, will
not suffice because such a mere administrative practice may not be uniformly and consistently
applied. An administrative practice, if not formalized as a rule or ruling, will not be known to the
general public and can be availed of only by those within formal contacts with the government
agency. (CIR vs. San Roque, GR No. 187485 dated October 8, 2013)

8. What is the non-retroactivity of rulings rule?

Any revocation, modification or reversal of any of the rules and regulations promulgated in
accordance with the preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation, modification or reversal
will be prejudicial to the taxpayers, except in the following cases:

a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;
b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
c) Where the taxpayer acted in bad faith. (Sec. 246 NIRC)

9. What is a Commissioner’s Ruling?

It is a ruling that must be signed by the Commissioner of Internal Revenue, otherwise, the said
ruling is null and void:

a) A ruling of first impression or a ruling without any established precedent; and,
b) A ruling which reverses, revokes or modifies an existing ruling of the BIR. (Sec. 7 NIRC)

10. The BIR issued a ruling addressed to XYZ Company stating that loans or advances are not
subject to Documentary Stamp Tax (“DST”). A year after, the BIR revoked this ruling by issuing
a new ruling stating that loans or advances are subject to DST. FDC Company was issued a
deficiency DST assessment in relation to the loans or advances it granted to its affiliates. FDC
Company argues that the assessment is not valid because the revocation of the ruling on the
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non-imposition of DST on advances should not be given retroactive effect. Is the argument of
FDC Company correct?

No, not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC
Company cannot invoke the principle on non-retroactivity of BIR rulings. (CIR vs. Filinvest
Development Corporation, GR No. 163563 dated July19, 2011)

11. The Secretary of Finance wrote the Commissioner of Internal Revenue (“CIR”), requesting for a
ruling on the proper tax treatment of the discount or interest income arising from treasury
bonds issued by the Bureau of Treasury. In reply, the CIR issued BIR Ruling No. 370-2011 stating
that the treasury bonds, being deposit substitutes, are subject to the 20% final withholding tax.

a) In contesting the validity of the said ruling, is it mandatory to file an appeal with
the Secretary of Finance under Sec. 4 of the Tax Code?

No, the subject BIR Ruling may be contested directly before the Court of Tax Appeals.

As a general rule, a taxpayer who is not satisfied with a ruling issued by the Commissioner of
Internal Revenue should file an appeal or request for review of the subject ruling with the
Secretary of Finance within thirty (30) days from receipt of the adverse ruling. This is in
accordance with Sec. 4 of the Tax Code which provides that “the power to interpret the provisions
of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance,” in relation to Department of
Finance Order No. 23-2001. Moreover, administrative remedies must first be availed of under
the doctrine of exhaustion of administrative remedies.

However, it is settled that the doctrine of exhaustion of administrative remedies does not apply
when the issue is purely legal, there are circumstances indicating the urgency of judicial
intervention and when the exhaustion will result in an exercise in futility, among others.

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be
a futile exercise because it was upon the request of the Secretary of Finance that the 2011 BIR
Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance
adopted the Commissioner of Internal Revenue’s opinions as his own.

b) Which court has jurisdiction to review the said ruling of the CIR?

It is the Court of Tax Appeals Division. The questioned BIR ruling No. 370-2011 was issued in
connection with the implementation of the Tax Code on the taxability of the interest income from
the treasury bonds issued by the government.

The statutory basis is Sec. 7(a)(1) of RA No. 9282 stating that the Court of Tax Appeals Division
has jurisdiction over: “Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in
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relation thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue.” Mode of appeal is Petition for Review under
Rule 42 to be filed within 30 days from receipt of the decision or ruling of the CIR. (BDO vs.
Republic of the Philippines, GR No. 198756 dated January 13, 2015)

12. Petron imports “Alkylate” which is a raw material or blending component for the manufacture
of ethanol-blended motor gasoline. The Collector of Customs upon instructions of the
Commissioner of Customs imposed excise tax on Petron’s importation of Alkylate. The
imposition of the excise tax was supposedly premised on Customs Memorandum Circular (CMC)
No. 164-2012 dated July 18, 2012, implementing the Letter dated June 29, 2012 issued by the
CIR, which states that: “Alkylate which is a product of distillation similar to that of naphta, is
subject to excise tax under Section 148(e) of the National Internal Revenue Code (NIRC) of
1997.”

In view of the CIR's assessment, Petron filed before the CTA a petition for review, raising the
issue of whether its importation of alkylate as a blending component is subject to excise tax as
contemplated under Section 148 (e) of the NIRC.

Does the CTA have jurisdiction over the petition filed by Petron?

No, Section 4 of the NIRC confers upon the CIR both: (a) the power to interpret tax laws in the
exercise of her quasi-legislative function; and (b) the power to decide tax cases in the exercise of
her quasi-judicial function. It also delineates the jurisdictional authority to review the validity of
the CIR's exercise of the said powers, thus:

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.
- The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphases and
underscoring supplied)

The CTA is a court of special jurisdiction, with power to review by appeal decisions involving tax
disputes rendered by either the CIR or the COC. Conversely, it has no jurisdiction to determine
the validity of a ruling issued by the CIR or the COC in the exercise of their quasi-legislative
powers to interpret tax laws.

In this case, Petron's tax liability was premised on the COC's issuance of CMC No. 164-2012, which
gave effect to the CIR's June 29, 2012 Letter interpreting Section 148 (e) of the NIRC as to include
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alkylate among the articles subject to customs duties, hence, Petron's petition before the CTA
ultimately challenging the legality and constitutionality of the CIR's aforesaid interpretation of a
tax provision. In line with the foregoing discussion, however, the CIR correctly argues that the
CTA had no jurisdiction to take cognizance of the petition as its resolution would necessarily
involve a declaration of the validity or constitutionality of the CIR's interpretation of Section 148
(e) of the NIRC, which is subject to the exclusive review by the Secretary of Finance and ultimately
by the regular courts.

Hence, as the CIR's interpretation of a tax provision involves an exercise of her quasi-legislative
functions, the proper recourse against the subject tax ruling expressed in CMC No. 164-2012 is a
review by the Secretary of Finance and ultimately the regular courts. (CIR vs. CTA and Petron
Corporation, GR No. 207843 dated July 15, 2015)

13. PAGCOR’s exemption from income tax was removed by RA No. 9337. PAGCOR argues that the
said law is unconstitutional for being violative of the equal protection clause and the non-
impairment clause under the constitution. Are these arguments correct?

No, PAGCOR cannot find support in the equal protection clause of the Constitution, as the
legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the
Committee on Ways and Means, show that PAGCOR’s exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code
of 1997, was not made pursuant to a valid classification based on substantial distinctions and the
other requirements of a reasonable classification by legislative bodies, so that the law may
operate only on some, and not all, without violating the equal protection clause. The legislative
records show that the basis of the grant of exemption to PAGCOR from corporate income tax was
PAGCOR’s own request to be exempted.

PAGCOR further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating
the non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is
read into, the contract even without the parties expressly saying so. Petitioner states that the
private parties/investors transacting with it considered the tax exemptions, which inure to their
benefit, as the main consideration and inducement for their decision to transact/invest with it.
Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A. No.
9337 has the effect of changing the main consideration and inducement for the transactions of
private parties with it; thus, the amendatory provision is violative of the non-impairment clause
of the Constitution.

PAGCOR’s contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which
provides that no law impairing the obligation of contracts shall be passed. The non-impairment
clause is limited in application to laws that derogate from prior acts or contracts by enlarging,
abridging or in any manner changing the intention of the parties. There is impairment if a
subsequent law changes the terms of a contract between the parties, imposes new conditions,
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dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of
the parties.

As regards franchises, Section 11, Article XII of the Constitution provides that no franchise or right
shall be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires.

In Manila Electric Company v. Province of Laguna, the Court held that a franchise partakes the
nature of a grant, which is beyond the purview of the non-impairment clause of the
Constitution. The pertinent portion of the case states:

While the Court has, not too infrequently, referred to tax exemptions contained
in special franchises as being in the nature of contracts and a part of the
inducement for carrying on the franchise, these exemptions, nevertheless, are far
from being strictly contractual in nature. Contractual tax exemptions, in the real
sense of the term and where the non-impairment clause of the Constitution can
rightly be invoked, are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity,
sheds its cloak of authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the obligations of
contracts. These contractual tax exemptions, however, are not to be confused
with tax exemptions granted under franchises. A franchise partakes the nature of
a grant which is beyond the purview of the non-impairment clause of the
Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment, alteration or repeal
by Congress as and when the common good so requires.
In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs
and other recreation or amusement places, sports, gaming pools, i.e., basketball, football,
lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the
Philippines. Under Section 11, Article XII of the Constitution, PAGCOR’s franchise is subject to
amendment, alteration or repeal by Congress such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No.
8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may affect
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any benefits to PAGCOR’s transactions with private parties, is not violative of the non-impairment
clause of the Constitution. (PAGCOR vs. BIR, GR No. 172087 dated March 15, 2011)

14. What are the tax implications of PAGCOR’s receipt of income from: (a) gaming operations; and,
(b) other related services?

(a) On Gaming Operations – subject to 5% franchise tax under PD 1869 and not subject to
regular corporate income tax; and,
(b) Other Related Services – subject to regular corporate income tax and not subject to 5%
franchise tax under PD 1869. (PAGCOR vs. The BIR, GR No. 215427 dated December 10,
2014)

15. The BIR issued a ruling which provides that all treasury bonds regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit substitutes. Is
the said ruling valid?

No, under Sec. 22(Y) of the NIRC, the term ‘deposit substitutes’ shall mean an alternative form of
obtaining funds from the public (the term “public” means borrowing from twenty (20) or more
individual or corporate lenders at any one time) xxx.

The said BIR Ruling is invalid because it completely disregarded the 20 or more lender rule added
by Congress in the NIRC. It also created a distinction for government debt instruments as against
those issued by private corporations when there was none in the law.

Moreover, its interpretation of "at any one time" to mean at the point of origination alone is
unduly restrictive. From the point of view of the financial market, the phrase “at any one time”
for purposes of determining the “20 or more lenders” would mean every transaction executed in
the primary or secondary market in connection with the purchase or sale of securities. (BDO vs.
Republic, GR No. 198756 dated January 13, 2015)

16. What is the tax treatment of the discount (considered as interest income) on zero-coupon bonds
or treasury bonds?

It would depend on whether the debt instrument is considered as a deposit substitute or not. If
there are 20 or more lenders and therefore a deposit substitute, it is generally subject to the 20%
Final Withholding Tax on interest income. On the other hand, if there are only 19 or less lenders,
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the interest income forms part of gross income and is subject to the regular income tax rates.
(BDO vs. Republic, GR No. 198756 dated January 13, 2015)

17. SEPTI Corporation sold its machinery and equipment located in the Philippines which are
considered as real properties and classified as capital assets for tax purposes. The Court of Tax
Appeals (“CTA”) held that the sale is subject to the 6% capital gains tax. Is the CTA correct?

No, capital gains of individuals and corporations from the sale of real properties are taxed
differently. Individuals are subject to the 6% capital gains from sale of all real properties located
in the Philippines and classified as capital assets under Sec. 24(D) of the Tax Code.

For corporations, the National Internal Revenue Code of 1997 treats the sale of land and
buildings, and the sale of machineries and equipment, differently. Domestic corporations are
imposed a 6% capital gains tax only on the presumed gain realized from the sale of lands and/or
buildings under Sec. 27(D). The National Internal Revenue Code of 1997 does not impose the 6%
capital gains tax on the gains realized from the sale of machineries and equipment.

Therefore, the income from the sale of SEPTI’s machineries and equipment is subject to the
provisions on normal corporate income tax. (SMI-ED Technology Corporation, Inc. vs. CIR, GR No.
175410 dated November 12, 2014)

18. In expropriation proceedings, may the government be compelled to pay the capital gains tax?

No. Thus, it has been held that since capital gains is a tax on passive income, it is the seller, not
the buyer, who generally would shoulder the tax. Accordingly, the BIR, in its BIR Ruling No. 476-
2013, dated December 18, 2013, constituted the DPWH as a withholding agent to withhold the
six percent (6%) final withholding tax in the expropriation of real property for infrastructure
projects. As far as the government is concerned, therefore, the capital gains tax remains a liability
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of the seller since it is a tax on the seller's gain from the sale of the real estate. (Republic vs.
Soriano, GR No. 21166 dated February 25, 2015)

19. HT Pawnshop filed its income tax return claiming the following deductions and the
corresponding supporting documents:

Item of Deduction Documentary Support
a) Loss on Auction Sale Rematado Book, Subasta Book and
Schedule of Losses on Auction Sale
b) Security and janitorial services, Certification and Cash Vouchers
management and professional fees,
and rental expenses
c) Loss on Fire and Theft Certification from the Bureau of Fire
Protection in Malolos; Certification from
the Police Station in Malolos; Accounting
entry for the losses; and List of properties
lost.

Should the above-mentioned items of deduction be allowed for income tax purposes?

a) Loss on Auction Sale

The “Loss on Auction Sale” should be disallowed as a deduction for income tax purposes.

To prove the loss on auction sale, petitioner submitted in evidence its "Rematado" and "Subasta"
books and the "Schedule of Losses on Auction Sale". The "Rematado" book contained a record of
items foreclosed by the pawnshop while the "Subasta" book contained a record of the auction
sale of pawned items foreclosed.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed in
strictissimi juris against the taxpayer is well settled. Corollary to this rule is the principle that
when a taxpayer claims a deduction, he must point to some specific provision of the statute in
which that deduction is authorized and must be able to prove that he is entitled to the deduction
which the law allows. An item of expenditure, therefore, must fall squarely within the language
of the law in order to be deductible. A mere averment that the taxpayer has incurred a loss does
not automatically warrant a deduction from its gross income.

HT Pawnshop did not properly prove that it had incurred losses. The subasta books it presented
were not the proper evidence of such losses from the auctions because they did not reflect the
true amounts of the proceeds of the auctions due to certain items having been left unsold after
the auctions. The rematado books did not also prove the amounts of capital because the figures
reflected therein were only the amounts given to the pawnees. It is interesting to note, too, that
 TAXATION
the amounts received by the pawnees were not the actual values of the pawned articles but were
only fractions of the real values.
b) Security and janitorial services, management and professional fees, and rental expenses

The said expenses should likewise be disallowed as deductions for income tax purposes.

The requisites for the deductibility of ordinary and necessary trade or business expenses, like
those paid for security and janitorial services, management and professional fees, and rental
expenses, are that: (a) the expenses must be ordinary and necessary; (b) they must have been
paid or incurred during the taxable year; (c) they must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) they must be supported by receipts, records or
other pertinent papers.

To reiterate, deductions for income tax purposes partake of the nature of tax exemptions and
are strictly construed against the taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed. HT Pawnshop did not discharge its burden of substantiating
its claim for deductions due to the inadequacy of its documentary support of its claim. Its reliance
on withholding tax returns, cash vouchers, lessor’s certifications, and the contracts of lease was
futile because such documents had scant probative value. The law required HT Pawnshop to
support its claim for deductions with the corresponding official receipts issued by the service
providers concerned.

c) Loss on Fire and Theft

The “Loss on Fire and Theft” should also be disallowed as a deduction for income tax purposes.

Under Revenue Regulations No. 12-1977, within forty-five (45) days after the date of the
occurrence of casualty or robbery, theft or embezzlement, a taxpayer who sustained loss
therefrom and who intends to claim the loss as a deduction for the taxable year in which the loss
was sustained shall file a sworn declaration of loss with the nearest Revenue District Officer.

In the context of the foregoing rules, the CTA En Banc aptly rejected HT Pawnshop's claim for
deductions due to losses from fire and theft. The documents it had submitted to support the
claim, namely: (a) the certification from the Bureau of Fire Protection in Malolos; (b) the
certification from the Police Station in Malolos; (c) the accounting entry for the losses; and (d)
the list of properties lost, were not enough. What were required were for HT Pawnshop to submit
the sworn declaration of loss mandated by Revenue Regulations 12-1977. Its failure to do so was
prejudicial to the claim because the sworn declaration of loss was necessary to forewarn the BIR
that it had suffered a loss whose extent it would be claiming as a deduction of its tax liability, and
thus enable the BIR to conduct its own investigation of the incident leading to the loss. Indeed,
the documents HT Pawnshop submitted to the BIR could not serve the purpose of their
 TAXATION
submission without the sworn declaration of loss. (H. Tambunting Pawnshop, Inc. vs. CIR, GR No.
173373 dated July 29, 2013, J. Bersamin)

20. St. Luke’s Medical Center (“St. Luke’s”) operates a non-stock non-profit hospital. St. Luke’s was
assessed by the BIR for deficiency 10% income tax on its taxable income in relation to Sec. 27
(B) of the Tax Code. St. Luke’s argues that it is exempt from income tax under Secs. 30 (E) and
(G) of the Tax Code being a charitable institution and an organization promoting social welfare.

a) What do Secs. 27 (B), 30 (E) and 30 (G) of the Tax Code provide?

SEC. 27. Rates of Income Tax on Domestic Corporations. —

xxx xxx xxx

(B) Proprietary Educational Institutions and Hospitals. — Proprietary educational institutions
and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income
except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by
such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income. For purposes of this Subsection, 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. A 'proprietary educational institution'
is any private school maintained and administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

SEC. 30. Exemptions from Tax on Corporations. — The following organizations shall not be
taxed under this Title in respect to income received by them as such:

xxx xxx xxx

(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part
 TAXATION
of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer
or any specific person;

xxx xxx xxx

(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

xxx xxx xxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.

b) The BIR argues that with the introduction of Sec. 27 (B), Congress intended to
remove the exemption that non-profit hospitals previously enjoyed under
Section 27 (E) of the NIRC of 1977, which is now substantially reproduced in
Section 30 (E) of the NIRC of 1997. Is the BIR correct?

No, Section 27 (B) of the NIRC does not remove the income tax exemption of proprietary non-
profit hospitals under Section 30 (E) and (G). Section 27 (B) on one hand, and Section 30 (E) and
(G) on the other hand, can be construed together without the removal of such tax exemption.
The effect of the introduction of Section 27 (B) is to subject the taxable income of two specific
institutions, namely, proprietary non-profit educational institutions and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential rate under
Section 27 (B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30
in relation to Section 27 (A) (1).

c) Who are liable to pay the 10% preferential income tax rate under Sec. 27 (B) of
the Tax Code and what are the requirements or qualifications?

Section 27 (B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means
private, following the definition of a "proprietary educational institution" as "any private school
maintained and administered by private individuals or groups" with a government permit. "Non-
profit" means no net income or asset accrues to or benefits any member or specific person, with
 TAXATION
all the net income or asset devoted to the institution's purposes and all its activities conducted
not for profit.

d) Is the term “non-profit” synonymous with “charitable” for tax purposes?

No, "non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club
Filipino, Inc. de Cebu, the Supreme Court considered as non-profit a sports club organized for
recreation and entertainment of its stockholders and members. The club was primarily funded
by membership fees and dues. If it had profits, they were used for overhead expenses and
improving its golf course. The club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. The
Court defined "charity" in Lung Center of the Philippines v. Quezon City as "a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening the burden of government." A non-profit
club for the benefit of its members fails this test. An organization may be considered as non-
profit if it does not distribute any part of its income to stockholders or members. However,
despite its being a tax exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of Section 30.

e) What is the test in order for an entity to be considered a charitable institution
for tax purposes?

To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center. The issue in Lung Center concerns exemption from real property tax and not
income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a
gift to an indefinite number of persons which lessens the burden of government. In other words,
charitable institutions provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes
taxes which should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the Treasury.

f) Are charitable institutions ipso facto entitled to a tax exemption?

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements
for a tax exemption are specified by the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions, subject to the constitutional
provision that "[n]o law granting any tax exemption shall be passed without the concurrence of
a majority of all the Members of Congress." The requirements for a tax exemption are strictly
 TAXATION
construed against the taxpayer because an exemption restricts the collection of taxes necessary
for the existence of the government.

g) Will a hospital lose its charitable character if it receives income from paying
patients?

No, the Supreme Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This ruling uses the
same premise as Hospital de San Juan and Jesus Sacred Heart College which says that receiving
income from paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable 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." The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test requires that
the institution use the property in a certain way, i.e., for a charitable purpose. Thus, the Court
held that the Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use requirement is
simply to remove from the tax exemption that portion of the property not devoted to charity.

h) What are the requirements for a charitable institution to be exempt from income
tax?

Section 30 (E) of the NIRC provides that a charitable institution must be:

1. A non-stock corporation or association;
2. Organized exclusively for charitable purposes;
3. Operated exclusively for charitable purposes; and,
4. No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section
30 (E) of the NIRC specifically requires that the corporation or association be non-stock, which is
 TAXATION
defined by the Corporation Code as "one where no part of its income is distributable as dividends
to its members, trustees, or officers" and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized." However, under Lung Center, any profit by
a charitable institution must not only be plowed back "whenever necessary or proper," but must
be "devoted or used altogether to the charitable object which it is intended to achieve."

The operations of the charitable institution generally refer to its regular activities. Section 30 (E)
of the NIRC requires that these operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person." The use of lands, buildings and
improvements of the institution is but a part of its operations.

i) Is St. Luke’s exempt from income tax as a charitable institution in relation to
income from its paying patients?

No, there is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28 (3),
Article VI of the Constitution requires that a charitable institution use the property "actually,
directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30 (E)
of the NIRC requires that a charitable institution must be "organized and operated exclusively"
for charitable purposes. Likewise, to be exempt from income taxes, Section 30 (G) of the NIRC
requires that the institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and
operated exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30 (E) that the
"[n]on-stock corporation or association [must be] organized and operated exclusively for . . .
charitable . . . purposes . . . ." It likewise qualifies the requirement in Section 30 (G) that the civic
organization must be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for
charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit"
 TAXATION
without losing its tax exempt status for its not-for-profit activities. The only consequence is that
the "income of whatever kind and character" of a charitable institution "from any of its activities
conducted for profit, regardless of the disposition made of such income, shall be subject to tax."
Prior to the introduction of Section 27 (B), the tax rate on such income from for-profit activities
was the ordinary corporate rate under Section 27 (A). With the introduction of Section 27 (B), the
tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately P1.73 billion from paying
patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues
from paying patients are income received from "activities conducted for profit." Indeed, St.
Luke's admits that it derived profits from its paying patients. St. Luke's declared P1,730,367,965
as "Revenues from Services to Patients" in contrast to its "Free Services" expenditure of
P218,187,498. xxx.

In Lung Center, the Supreme Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." . . . The words "dominant
use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitution and the law. Solely is synonymous with
exclusively.

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered
any other way. There is a "purpose to make profit over and above the cost" of services. The P1.73
billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure
of P218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income
in 1998. However, if a part of the remaining 34.80% of the operating income is reinvested in
property, equipment or facilities used for services to paying and non-paying patients, then it
cannot be said that the income is "devoted or used altogether to the charitable object which it is
intended to achieve." The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly
qualifies that income from activities for profit is taxable "regardless of the disposition made of
such income."

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the
clear and plain text of Section 30 (E) and (G). Section 30 (E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely
 TAXATION
exempt from income tax. An institution under Section 30 (E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate
rate but now at the preferential 10% rate pursuant to Section 27 (B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution
is spared from sharing in the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and other taxpayers.

St. Luke's fails to meet the requirements under Section 30 (E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under
Section 27 (B) of the NIRC as long as it does not distribute any of its profits to its members and
such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-
profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27 (B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes" and
thus exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue,
the Court said that "good faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and interest." (CIR vs. St. Luke’s Medical
Center, Inc. GR Nos. 195909 and 195960 dated September 26, 2012)

21. What are the “De Minimis” Benefits which are exempt from income and fringe benefits tax?

a) Monetized unused vacation leave credits of private employees not exceeding ten
(10) days during the year and the monetized value of leave credits paid to
government officials and employees;
b) Monetized value of vacation and sick leave credits paid to government officials
and employees;
c) Medical cash allowance to dependents of employees not exceeding Php750 per
employee per semester or Php125 per month;
d) Rice subsidy of Php1,500 or one (1) sack of 50-kg. rice per month amounting to
not more than Php1,500;
e) Uniform and clothing allowance not exceeding Php5,000 per annum;
f) Actual yearly medical benefits not exceeding Php10,000 per annum;
g) Laundry allowance not exceeding Php300 per month;
h) Employee achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding Php10,000 received by
 TAXATION
the employee under an established written plan which does not discriminate in
favor of highly paid employees;
i) Gifts given during Christmas and major anniversary celebrations not exceeding
Php5,000 per employee per annum;
j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%)
of the basic minimum wage; and,
k) Benefits received by an employee by virtue of a collective bargaining agreement
(“CBA”) and productivity incentive schemes provided that the total annual
monetary value received from both CBA and productivity incentive schemes
combined do not exceed ten thousand pesos (Php10,000.00) per employee per
taxable year.

All other benefits given not included in the enumeration above shall not be considered de
minimis benefits and shall be subject to withholding tax on compensation income. (Enumeration
now exclusive)

The amount of “de minimis” benefits conforming to the ceiling herein prescribed shall not be
considered in determining the P82,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the “de minimis” benefits
over their respective ceilings prescribed by these regulations shall be considered as part of “other
benefits” and the employee receiving it will be subject to tax only on the excess over the
P82,000.00 ceiling. xxx. (Revenue Regulations 5-2011, as amended)

22. Air Canada is a foreign corporation organized and existing under the laws of Canada. It was
granted an authority to operate as an offline carrier by the Civil Aeronautics Board. As an off-
line carrier, Air Canada does not have flights originating from or coming to the Philippines and
does not operate any airplane in the Philippines.

Air Canada engaged the services of Aerotel Ltd., Corp. (“Aerotel”) as its general sales agent in
the Philippines. Aerotel sells Air Canada’s passage documents or tickets in the Philippines.

Article VIII of the RP-Canada Tax Treaty states that "profits from sources within a Contracting
State derived by an enterprise of the other Contracting State from the operation of ships or
aircraft in international traffic may be taxed in the first-mentioned State but the tax so
charged shall not exceed the lesser of a) one and one-half per cent (1.5%) of the gross revenues
derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such
profits derived by an enterprise of a third State.”

a) In relation to its sale of tickets, is Air Canada subject to the 2.5% Gross Philippine
 TAXATION
Billings Tax under Sec. 28(A)(3)(a) of the Tax Code?

No, as an offline international carrier with no landing rights in the Philippines, Air Canada is not
liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal
Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. –

(A) Tax on Resident Foreign Corporations. -

. . . .

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a
tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket
or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings
if the passenger boards a plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the Philippines, but transshipment
of passenger takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons, excess
baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.

b) Is Air Canada a resident foreign corporation which may be subject to the 30%
Corporate Income Tax?

Yes, Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) of the
 TAXATION
1997 National Internal Revenue Code, thus, it may be subject to 32% (now 30%) tax on its taxable
income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an income
tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%). (emphasis supplied)

The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation declared British Overseas Airways Corporation, an international air carrier with no
landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company. This
court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or for the purpose and object
of the business organization. "In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct
and intention to establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character.["]

BOAC, during the periods covered by the subject-assessments, maintained a
general sales agent in the Philippines. That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip
into series of trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in the
 TAXATION
services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and are in progressive
pursuit of, the purpose and object of its organization as an international air carrier.
In fact, the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments. Accordingly,
it is a resident foreign corporation subject to tax upon its total net income received
in the preceding taxable year from all sources within the Philippines. (Emphasis
supplied, citations omitted)

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to
petitioner. There is nothing on record to show that Aerotel solicited orders alone and for its own
account and without interference from, let alone direction of, petitioner. On the contrary,
Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the express
written consent of [the latter,]" and it must perform its functions according to the standards
required by petitioner. Through Aerotel, petitioner is able to engage in an economic activity in
the Philippines.

Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from
sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel,
is income realized from the pursuit of its business activities in the Philippines.

c) Does Article VIII of the RP-Canada Tax Treaty apply?

Yes, the application of the regular 32% (now 30%) tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty between
the Philippines and the home country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue, this court held
that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the
coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the
general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not
apply, an international air carrier would be liable for the tax under Section 28(A)(1).

This court in South African Airways declared that the correct interpretation of these provisions is
that: "international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall be
taxed at the rate of 2½% of its Gross Philippine Billings[;] while international air carriers that do
not have flights to and from the Philippines but nonetheless earn income from other activities in
 TAXATION
the country [like sale of airline tickets] will be taxed at the rate of 32% (now 30%) of such [taxable]
income."

In this case, there is a tax treaty that must be taken into consideration to determine the proper
tax rate.

While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income from sale of airline tickets in the
Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article
VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign
corporation organized and existing under the laws of Canada.” (Air Canada vs. CIR, GR No. 169507
dated January 11, 2016)

23. C Bank, a domestic corporation, owns 53% of HK Corp., a foreign corporation engaged in the
business of financing. HK Corp. became insolvent. C Bank claimed as a “bad debt” expense or
“ordinary loss” the value of its investment in HK Corp. for income tax purposes which it
considered to be “worthless.” Was the claim of deduction correct?

No, an equity investment is a capital, not ordinary, asset of the investor the sale or exchange of
which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the
property sold or exchanged is not a capital asset. A capital asset is defined negatively under Sec.
39 of the NIRC; viz:

“(1) Capital assets. - 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
 TAXATION
subsection (f) of section six; or real property used in the trade or business of the
taxpayer."

Thus, shares of stock like the other securities defined in Section 22(t) of the NIRC, would
be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of,
or an active trader (for his own account) in, securities.

In the hands, however, of another who holds the shares of stock by way of an investment, the
shares to him would be capital assets. When the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of capital assets.

Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived
from the sale or exchange of capital assets, and not from any other income of the taxpayer. (China
Banking Corporation vs. CA, GR No. 125508 dated July 19, 2000)

24. What is the loss limitation rule and the exception to the said rule?

Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains
from such sales or exchanges. (Exception) - If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any
bond, debenture, note, or certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision thereof), with interest
coupons or in registered form, any loss resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in determining the applicability of such limitation
to other losses. (Sec. 39(C) NIRC)

25. May a bank allow withdrawal of a deposit upon death of the depositor without certification
from the BIR that the Estate Tax has been paid?

No, under Sec. 97 of the NIRC, if a bank has knowledge of the death of a person, who maintained
a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the
said deposit account, unless the Commissioner has certified that the taxes imposed thereon by
this Title (Estate Tax) have been paid xxx.

Taxes are created primarily to generate revenues for the maintenance of the government.
However, this particular tax may also serve as guard against the release of deposits to persons
who have no sufficient and valid claim over the deposits. Based on the assumption that only
those with sufficient and valid claim to the deposit will pay the taxes for it, requiring the
certificate from the BIR increases the chance that the deposit will be released only to them. (PNB
vs. Santos, GR No. 208295 dated December 10, 2014)

However, the administrator of the estate or any one of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos
 TAXATION
(P20,000.00) without certification that the Estate tax has been paid. (Sec. 97, NIRC)

26. What are “deductible judicial expenses” for estate tax purposes?
Judicial expenses are expenses of administration. Administration expenses, as an allowable
deduction from the gross estate of the decedent for purposes of arriving at the value of the net
estate, have been construed by the federal and state courts of the United States to include all
expenses "essential to the collection of the assets, payment of debts or the distribution of the
property to the persons entitled to it. "In other words, the expenses must be essential to the
proper settlement of the estate. The Supreme Court ruled that the notarial fee relative to the
extrajudicial settlement executed by the heirs; and, attorney’s fee relative to the guardianship
proceedings when the decedent was still alive constitute as allowable and deductible judicial
expenses because these expenses contributed to the proper settlement of the estate. (CIR vs. CA
and Pajonar, GR No. 123206 dated March 22, 2000)

27. Which expenses are not deductible for estate tax purposes?

a) Expenditures incurred for the individual benefit of the heirs, devisees or legatees;
b) Compensation paid to a trustee of the decedent's estate when it appears that such
trustee was appointed for the purpose of managing the decedent's real estate for
the benefit of the testamentary heir;
c) Premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the
office, and not necessary in the settlement of the estate; and,
d) Attorney's fees incident to litigation incurred by the heirs in asserting their
respective rights. (CIR vs. CA and Pajonar, GR No. 123206 dated March 22, 2000)

28. May actual claims of creditors be fully allowed as deductions from the gross estate of the
decedent despite the fact that the said claims were reduced or condoned through compromise
agreements entered into by the Estate (after death) with its creditors?

Yes, we express our agreement with the date-of-death valuation rule, made pursuant to the
ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States. First. There is no law, nor do
we discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government. Any doubt on whether a
person, article or activity is taxable is generally resolved against taxation. Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the
term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the
 TAXATION
claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions. (Dizon vs. CTA, GR No. 140944 dated April 30, 2008)

29. What are the transfers exempt from Estate Tax?

a) The merger of usufruct in the owner of the naked title;
b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary;
c) The transmission from the first heir, legatee or donee in favor of another
beneficiary, in accordance with the desire of the predecessor; and,
d) All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which insures to the benefit of any
individual: Provided, however, That not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be used by such institutions for
administration purposes. (Sec. 87 NIRC)

30. What are the requisites for the claim of vanishing deduction?

a) The property respecting which the deduction is sought must have been received
by the decedent as a gift within five (5) years from the date of his death, or
received by him by bequest, devise or inheritance from a prior decedent who died
within five (5) years from the date of the decedent’s death;
b) The property with respect to which deduction is claimed must have formed part
of the Gross Estate situated in the Philippines of the prior decedent or taxable gift
of the donor;
c) The property must be the same property received from the prior decedent or
donor or the one received in exchange therefor;
d) Estate Tax and Donor’s Tax on the previous transfer must have been paid; and,
e) No vanishing deduction on the property was allowed to the prior estate. (Sec.
86(A)(2) NIRC)

31. Diosdado purchased 100 common shares in Peralta Philippines Corporation (“PPC”) with a total
par value of P100.00 from Audrey for the price of P500.00. PPC is a domestic corporation and is
not listed with the Philippine Stock Exchange. The common shares sold to Diosdado were
 TAXATION
acquired by Audrey for P150.00 and have a book value of P900.00 at the time of sale.

a) Other than Documentary Stamp Tax, what are the taxes due on the transaction?

The sale of shares is subject to Capital Gains Tax at the rate of 5%/10% under Sec. 24(C) of the
Tax Code based on the net capital gain computed as follows:

Selling Price: P500.00
Cost: P150.00
Net Capital Gain: P350.00
5% on the
1st P100,000.00 5%
Capital Gains Tax: P 17.50

If the book value (fair market value) of the shares of stock exceed the selling price of the shares,
the difference is considered “a deemed donation” under RR No. 6-2008, as amended in relation
to Sec. 100 of the Tax Code. Thus, the said transaction is also subject to donor’s tax computed as
follows:

Book Value: P900.00
Selling Price: P500.00
Deemed Donation: P400.00
Donor’s Tax
Rate for Donations
Between strangers 30%
Donor’s Tax: P120.00

b) Audrey argues that the selling price is the “actual value” prevailing in the market
and that there was no donative intent on her part when she sold the shares
below the book value. Thus, the transaction should not be subject to donor’s tax.
Is Audrey’s argument correct?

No, absence of donative intent, if that be the case, does not exempt the sale of stock transaction
from donor’s tax since Sec. 100 of the NIRC categorically states that the amount by which the fair
market value of the property exceeded the value of the consideration shall be deemed a gift.
Thus, even if there is no actual donation, the difference in price is considered a donation by fiction
of law.

Moreover, RR No. 6-2008 does not alter Sec. 100 of the NIRC but merely sets the parameters for
determining the “fair market value” of a sale of stocks. Such issuance was made pursuant to the
 TAXATION
CIR’s power to interpret tax laws and to promulgate rules and regulations for their
implementation. (Philamlife vs. SOF, GR No. 210987 dated November 24, 2014)

32. Are donations made to a political party/candidate exempt from Donor’s Tax?

Yes, provided the same is duly reported to the COMELEC. (Sec. 99C NIRC, Sec. 13 RA 7166)

33. Grasya, a candidate during the last elections received P1,000,000.00 in campaign contributions.
Grasya only utilized P600,000.00 in her campaign. What would be the tax implication of the
excess campaign contributions amounting to P400,000.00?

Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax.

Moreover, any candidate who fails to file with the COMELEC the appropriate Statement of
Expenditures required under the Omnibus Election Code, shall be automatically precluded from
claiming such expenditures as deductions from his/her campaign contributions. As such, the
entire amount of such campaign contributions shall be considered as directly subject to income
tax.

Thus, if Grasya failed to file the required Statement of Contribution and Expenditures (“SOCE”)
with the COMELEC, the entire P1,000,000.00 shall be subject to both income and donor’s tax.
(Revenue Regulations No. 7-2011)

Note that per RMC No. 30-2016 dated March 14, 2016, (a) donations/contributions which are
utilized/spent outside (before or after but not during) the campaign period; and, (b)
donations/contributions made by corporations (violation of the Corporation Code), are subject
to donor’s tax.

34. FBD Company’s accountant submitted its books of accounts to the BIR without the Company’s
consent. This resulted in a deficiency tax assessment. Is the assessment valid?

Yes, petitioner impugns the manner in which the documents in question reached the BIR, the
accountant having allegedly submitted them to the BIR without its (petitioner’s) consent.
Petitioner’s lack of consent does not, however, imply that the BIR obtained them illegally or that
the information received is false or malicious. Nor does the lack of consent preclude the BIR from
assessing deficiency taxes on petitioner based on the documents. Thus, Section 5 of the Tax Code
provides:

In ascertaining the correctness of any return, or in making a return when none has
been made, or in determining the liability of any person for any internal revenue
 TAXATION
tax, or in collecting any such liability, or in evaluating tax compliance, the
Commissioner is authorized:

(A) To examine any book, paper, record or other data which may be relevant or
material to such query;
(B) To obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office
or officer of the national and local governments, government agencies and
instrumentalities, including the Bangko Sentral ng Pilipinas and government-
owned and –controlled corporations, any information such as, but not limited to,
costs and volume of production, receipts or sales and gross incomes of taxpayers,
and the names, addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters of
multinational companies, joint accounts, associations, joint ventures orconsortia
and registered partnerships and their members;
(C) To summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or care of
the books of accounts and other accounting records containing entries relating to
the business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representatives at a time and place specified
in the summons and to produce such books, papers, records, or other data, and
to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; and,
(E) To cause revenue officers and employees to make a canvass from time to time
of any revenue district or region and inquire after and concerning all persons
therein who may be liable to pay any internal revenue tax, and all persons owning
or having the care, management or possession of any object with respect to which
a tax is imposed.

x x x x (Emphasis and underscoring supplied)

The law thus allows the BIR access to all relevant or material records and data in the person of
the taxpayer, and the BIR can accept documents which cannot be admitted in a judicial
proceeding where the Rules of Court are strictly observed. To require the consent of the taxpayer
would defeat the intent of the law to help the BIR assess and collect the correct amount of taxes.
(Fitness By Design, Inc. vs. CIR, GR No. 177982 dated October 17, 2008)

35. The BIR issued an assessment against Sony Corporation covering the year 2010 for Value-added
Tax. However, the Letter of the Authority authorizes the examination only for the year 2009. Is
the assessment valid?

No, based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to
the appropriate revenue officer assigned to perform assessment functions. It empowers or
 TAXATION
enables said revenue officer to examine the books of account and other accounting records of a
taxpayer for the purpose of collecting the correct amount of tax. The very provision of the Tax
Code that the CIR relies on is unequivocal with regard to its power to grant authority to examine
and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the examination of
any taxpayer. x xx [Emphasis supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go beyond
the authority given. In the absence of such an authority, the assessment or examination is a
nullity. (CIR vs. Sony Phils., Inc., GR No. 178697 dated November 17, 2010)

36. What are the instances wherein the statute of limitations for assessment and/or collection is
suspended under Sec. 223 of the NIRC?

a) For the period during which the Commissioner is prohibited from making an
assessment or beginning distraint or levy or a proceeding in court and for sixty
(60) days thereafter;
b) When the taxpayer requests for a reinvestigation which is granted by the
Commissioner;
c) When the taxpayer cannot be located in the address given by him in the return
filed upon which a tax is being assessed or collected: Provided, that, if the taxpayer
informs the Commissioner of any change in address, the running of the Statute of
Limitations will not be suspended;
d) When the warrant of distraint or levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and,
e) When the taxpayer is out of the Philippines.

37. What are the distinctions between a request for reconsideration and a request for
reinvestigation?

a) Request for reconsideration. – refers to a plea for a re-evaluation of an
assessment on the basis of existing records without need of additional evidence.
It may involve both a question of fact or of law or both. A request for
 TAXATION
reconsideration even if granted by the CIR does not suspend the statute of
limitations for assessment and collection.
b) Request for reinvestigation. – refers to a plea for re-evaluation of an
assessment on the basis of newly-discovered or additional evidence that a
taxpayer intends to present in the reinvestigation. It may also involve a question
of fact or law or both. A request for reinvestigation if granted by the CIR suspends
the statute of limitation for assessment and collection. (BPI vs. CIR, GR No. 139736
dated October 17, 2005)

38. BCI Company is a registered taxpayer with BIR-Las Pinas City. It changed its address to
Canlubang, Calamba, Laguna but failed to inform the BIR in writing. Despite its failure to inform
the BIR in writing of its whereabouts, the BIR examiners conducted their investigation at BCI
Company’s present office in Canlubang, Calamba, Laguna. The BIR argues that the prescriptive
period under Sec. 223 of the Tax Code is suspended. Is the BIR correct?

No, it is true that, under Section 223 of the Tax Reform Act of 1997, the running of the Statute of
Limitations provided under the provisions of Sections 203 and 222 of the same Act shall be
suspended when the taxpayer cannot be located in the address given by him in the return filed
upon which a tax is being assessed or collected. In addition, Section 11 of Revenue Regulation
No. 12-85 states that, in case of change of address, the taxpayer is required to give a written
notice thereof to the Revenue District Officer or the district having jurisdiction over his former
legal residence and/or place of business. However, this Court agrees with both the CTA Special
First Division and the CTA En Banc in their ruling that the above mentioned provisions on the
suspension of the three-year period to assess apply only if the BIR Commissioner is not aware of
the whereabouts of the taxpayer.

In this case, the CTA found that the BIR officers, at various times prior to the issuance of the
subject FAN, conducted examination and investigation of respondent's tax liabilities for 1999 at
the latter's new address in Laguna. (CIR vs. BASF Coating + Inks Phils., Inc., GR No. 198677 dated
November 26. 2014)

39. Is the issuance of a Preliminary Assessment Notice (“PAN”) (except as provided under Sec. 228)
mandatory? What is the effect of the failure to issue the PAN on the Final Assessment Notice
(“FAN”)?

Yes, it is clear that the sending of a PAN to the taxpayer to inform him of the assessment made is
but part of the "due process requirement in the issuance of a deficiency tax assessment," the
absence of which renders nugatory any assessment made by the tax authorities. The use of the
word "shall" in subsection 3.1.2 of Revenue Regulations No. 12-99 describes the mandatory
nature of the service of a PAN. The persuasiveness of the right to due process reaches both
 TAXATION
substantial and procedural rights and the failure of the CIR to strictly comply with the
requirements laid down by law and its own rules is a denial of Metro Star’s right to due process.

Thus, for its failure to send the PAN stating the facts and the law on which the assessment was
made as required by Section 228 of R.A. No. 8424, the assessment (“FAN”) made by the CIR is
void. (CIR vs. Metro Star Superama, Inc., G.R. No. 185371 dated December 8, 2010)

40. The taxpayer after filing its protest failed to submit “relevant supporting documents” requested
by the BIR within the 60-day period provided for under Sec. 228 of the Tax Code. The CIR
contends that because of this the assessment has now become final and unappealable. Is the
CIR correct?

No, we reject petitioner’s view that the assessment has become final and unappealable. It cannot
be said that respondent failed to submit relevant supporting documents that would render the
assessment final because when respondent submitted its protest, respondent attached the GIS
and Balance Sheet. Further, petitioner cannot insist on the submission of proof of DST payment
because such document does not exist as respondent claims that it is not liable to pay, and has
not paid, the DST on the deposit on subscription.

The term "relevant supporting documents" should be understood as those documents necessary
to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR
can only inform the taxpayer to submit additional documents. The BIR cannot demand what type
of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the
BIR, which may require the production of documents that a taxpayer cannot submit.

After respondent submitted its letter-reply stating that it could not comply with the presentation
of the proof of DST payment, no reply was received from petitioner.

Section 228 states that if the protest is not acted upon within 180 days from submission of
documents, the taxpayer adversely affected by the inaction may appeal to the CTA within 30 days
from the lapse of the 180-day period. Respondent, having submitted its supporting documents
on the same day the protest was filed, had until 31 July 2002 to wait for petitioner’s reply to its
protest. On 28 August 2002 or within 30 days after the lapse of the 180-day period counted from
the filing of the protest as the supporting documents were simultaneously filed, respondent filed
a petition before the CTA.

Respondent has complied with the requisites in disputing an assessment pursuant to Section 228
of the Tax Code. Hence, the tax assessment cannot be considered as final, executory and
demandable. (CIR vs. First Express Pawnshop, GR Nos. 172045-06 dated June 16, 2009) Note that
under RR No. 18-2013, failure to submit relevant supporting documents within the 60-day period
shall mean the taxpayer is barred from disputing the correctness of the issued assessment by
 TAXATION
introduction of newly discovered or additional evidence, and the Final Decision on the Disputed
Assessment shall consequently be denied (issued).

41. What is the rule on tax liens?

If any person, corporation, partnership, joint-account (cuentas en participacion), association or
insurance company liable to pay an internal revenue tax, neglects or refuses to pay the same
after demand, the amount shall be a lien in favor of the Government of the Philippines from the
time when the assessment was made by the Commissioner until paid, with interests, penalties,
and costs that may accrue in addition thereto upon all property and rights to property belonging
to the taxpayer: Provided, That this lien shall not be valid against any mortgagee, purchaser or
judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the
Register of Deeds of the province or city where the property of the taxpayer is situated or located.
(Sec. 219 NIRC)

42. In the year 2010, XYZ Corporation had excess income tax credits of P100,000.00 which it carried
over to the year 2011. By the end of the year 2011, its income tax return showed an excess tax
credit of P150,000.00. The said figure includes the P100,000.00 from the year 2010 and
P50,000.00 for the year 2011. Two (2) months thereafter, XYZ Corporation filed a claim for
refund in the amount of P150,000.00 which is the total excess income tax credits as of the year
2011.

a) Should the claim for refund be granted?

The claim for refund should be partially granted to the extent of P50,000.00. The excess income
tax credits from the year 2010 amounting to P100,000.00 which was carried over to year 2011
can no longer be refunded pursuant to the irrevocability rule.

Section 76 of the National Internal Revenue Code provides:

SEC. 76. - Final Adjustment Return. (“FAR”) - Every corporation liable to tax under
Section 27 shall file a final adjustment return covering the total taxable income for
the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years. Once the
 TAXATION
option to carry-over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed therefor.
(Underscoring and emphasis supplied.)

The last sentence of Section 76 is clear in its mandate. Once a corporation exercises the option
to carry-over and apply the excess quarterly income tax against the tax due for the taxable
quarters of the succeeding taxable years, such option is irrevocable for that taxable period.
Having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter
choose to apply for a cash refund or for the issuance of a tax credit certificate for the amount
representing such overpayment.

In the recent case of Commissioner of Internal Revenue v. PL Management International
Philippines, Inc., the Court discussed the irrevocability rule of Section 76 in this wise:

The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the
NIRC of 1985, which provides:

Section 79. Final Adjustment Return. - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
net income of that year the corporation shall either:

(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly
income taxes-paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year.

As can be seen, Congress added a sentence to Section 76 of the NIRC of 1997 in order to lay down
the irrevocability rule, to wit:

xxx Once the option to carry-over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been made, such option shall be
 TAXATION
considered irrevocable for that taxable period and no application for tax refund or issuance of a
tax credit certificate shall be allowed therefor.

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue, the Court expounds on
the two alternative options of a corporate taxpayer whose total quarterly income tax payments
exceed its tax liability, and on how the choice of one option precludes the other, viz:

The first option is relatively simple. Any tax on income that is paid in excess of the
amount due the government may be refunded, provided that a taxpayer properly
applies for the refund.

The second option works by applying the refundable amount, as shown on the
FAR of a given taxable year, against the estimated quarterly income tax liabilities
of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of one
precludes the other. Indeed, in Philippine Bank of Communications v.
Commissioner of Internal Revenue, the Court ruled that a corporation must signify
its intention - whether to request a tax refund or claim a tax credit - by marking
the corresponding option box provided in the FAR. While a taxpayer is required to
mark its choice in the form provided by the BIR, this requirement is only for the
purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess
income taxes paid. xxx

In Commissioner of Internal Revenue v. Bank of the Philippine Islands, the Court,
citing the aforequoted pronouncement in Philam Asset Management, Inc., points
out that Section 76 of the NIRC of 1997 is clear and unequivocal in providing that
the carry-over option, once actually or constructively chosen by a corporate
taxpayer, becomes irrevocable. The Court explains:

Hence, the controlling factor for the operation of the irrevocability rule is that the
taxpayer chose an option; and once it had already done so, it could no longer make
another one. Consequently, after the taxpayer opts to carry-over its excess tax
credit to the following taxable period, the question of whether or not it actually
gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit
in stating that once the option to carry over has been made, "no application for
tax refund or issuance of a tax credit certificate shall be allowed therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to
carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for tax
 TAXATION
refund or issuance of a tax credit certificate shall be allowed therefor." The phrase
"for that taxable period" merely identifies the excess income tax, subject of the
option, by referring to the taxable period when it was acquired by the taxpayer. In
the present case, the excess income tax credit, which BPI opted to carry over, was
acquired by the said bank during the taxable year 1998. The option of BPI to carry
over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply
for a refund of the very same 1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxable period"
as a prescriptive period for the irrevocability rule. This would mean that since the
tax credit in this case was acquired in 1998, and BPI opted to carry it over to 1999,
then the irrevocability of the option to carry over expired by the end of 1999,
leaving BPI free to again take another option as regards its 1998 excess income
tax credit. This construal effectively renders nugatory the irrevocability rule.

b) What is the rationale for the irrevocability rule?

The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of
1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayer's excess tax credit.

c) XYZ Corporation argues that to deny its claim for refund would result to unjust
enrichment on the part of the government. Is this argument correct?

No, the Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim
for refund of the taxpayer, because of the irrevocability rule, would be tantamount to unjust
enrichment on the part of the government. The Court addressed the very same argument in
Philam, where it elucidated that there would be no unjust enrichment in the event of denial of
the claim for refund under such circumstances, because there would be no forfeiture of any
amount in favor of the government. The amount being claimed as a refund would remain in the
account of the taxpayer until utilized in succeeding taxable years, as provided in Section 76 of the
NIRC of 1997. It is worthy to note that unlike the option for refund of excess income tax, which
prescribes after two years from the filing of the FAR, there is no prescriptive period for the
carrying over of the same. Therefore, the excess income tax credit of XYZ Corporation, which it
acquired in 2010 and opted to carry over, may be repeatedly carried over to succeeding taxable
years, i.e., to 2011, 2012, 2013, and so on and so forth, until actually applied or credited to a tax
liability of XYZ Corporation. (CIR vs. Mirant Philippines Operations Corporation, GR No. 171742
dated June 15, 2011)

d) In relation to the irrevocability rule, is it absolutely required for the taxpayer to
present the quarterly income tax returns (“ITRs”) to prove that there was no
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carry-over made of the excess income tax credits to the succeeding year?

Proving that no carry-over has been made does not absolutely require the presentation of the
quarterly ITRs.

In Philam, the petitioner therein sought for recognition of its right to the claimed refund of
unutilized CWT. The CIR opposed the claim, on the grounds similar to the case at hand, that no
proof was provided showing the non-carry over of excess CWT to the subsequent quarters of the
subject year. In a categorical manner, the Court ruled that the presentation of the quarterly ITRs
was not necessary. Therein, it was written:

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR
in requesting a tax refund has no basis in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely requires the
filing of the FAR for the preceding – not the succeeding – taxable year. Indeed, any
refundable amount indicated in the FAR of the preceding taxable year may be
credited against the estimated income tax liabilities for the taxable quarters of the
succeeding taxable year. However, nowhere is there even a tinge of a hint in any
provisions of the [NIRC] that the FAR of the taxable year following the period to
which the tax credits are originally being applied should also be presented to the
BIR.

Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides
that claims for refund of income taxes deducted and withheld from income
payments shall be given due course only (1) when it is shown on the ITR that the
income payment received is being declared part of the taxpayer’s gross income;
and (2) when the fact of withholding is established by a copy of the withholding
tax statement, duly issued by the payor to the payee, showing the amount paid
and the income tax withheld from that amount.

It has been submitted that Philam cannot be cited as a precedent to hold that the presentation
of the quarterly income tax return is not indispensable as it appears that the quarterly returns
for the succeeding year were presented when the petitioner therein filed an administrative claim
for the refund of its excess taxes withheld in 1997.

It appears however that there is misunderstanding in the ruling of the Court in Philam. That
factual distinction does not negate the proposition that subsequent quarterly ITRs are not
indispensable. The logic in not requiring quarterly ITRs of the succeeding taxable years to be
presented remains true to this day. What Section 76 requires, just like in all civil cases, is to prove
the prima facie entitlement to a claim, including the fact of not having carried over the excess
 TAXATION
credits to the subsequent quarters or taxable year. It does not say that to prove such a fact,
succeeding quarterly ITRs are absolutely needed.

This simply underscores the rule that any document, other than quarterly ITRs may be used to
establish that indeed the non-carry over clause has been complied with, provided that such is
competent, relevant and part of the records. The Court is thus not prepared to make a
pronouncement as to the indispensability of the quarterly ITRs in a claim for refund for no court
can limit a party to the means of proving a fact for as long as they are consistent with the rules
of evidence and fair play. The means of ascertainment of a fact is best left to the party that alleges
the same. The Court’s power is limited only to the appreciation of that means pursuant to the
prevailing rules of evidence. To stress, what the NIRC merely requires is to sufficiently prove the
existence of the non-carry over of excess CWT in a claim for refund. (Winebrenner & Inigo
Insurance Brokers, Inc. vs. CIR, GR No. 206526 dated January 28, 2015)

We are likewise unmoved by the assertion of the petitioner that the respondent should have
submitted the quarterly returns of the respondent to show that it did not carry-over the excess
withholding tax to the succeeding quarter. When the taxpayer was able to establish prima facie
its right to the refund by testimonial and object evidence, the BIR should have presented rebuttal
evidence (quarterly income tax return) to shift the burden of evidence back to the BIR. Indeed,
the BIR ought to have its own copies of the taxpayer’s quarterly returns on file, on the basis of
which it could rebut the taxpayer's claim that it did not carry over its unutilized and excess
creditable withholding taxes for the immediately succeeding quarters. The BIR's failure to present
such vital document (quarterly income tax return) during the trial in order to bolster the BIR's
contention against the taxpayer's claim for the tax refund was fatal. (Republic vs. Team (Phils.)
Energy Corporation, GR No. 188016 dated January 14, 2015, J. Bersamin)

43. When is a written claim for refund not necessary?

a) A return filed showing an overpayment shall be considered as a written claim for
credit or refund. (Sec. 204(C) NIRC)
b) The Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. (Sec. 229 NIRC)

44. Who should file a claim for refund of erroneously paid indirect taxes?

The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another. (CIR vs. SMART Communications, Inc. G.R. Nos. 179045-46 dated August 25,
2010)

However, if the law confers an exemption from both direct or indirect taxes, a claimant is
entitled to a tax refund even if it only bears the economic burden of the applicable tax. On the
other hand, if the exemption conferred only applies to direct taxes, then the statutory taxpayer
 TAXATION
is regarded as the proper party to file the refund claim." In PASAR's case, Section 17 of P.D. No.
66, as affirmed in one case decided by the Supreme Court, specifically declared that supplies,
including petroleum products, whether used directly or indirectly, shall not be subject to internal
revenue laws and regulations. Such exemption includes the payment of excise taxes, which was
passed on to PASAR by Petron. PASAR, therefore, is the proper party to file a claim for refund.
(CIR vs. Philippine Associated Smelting and Refining Corporation, GR No. 186223 dated October
1, 2014)

45. If a withholding agent files a claim for refund on behalf of the income earner who is a non-
resident, what additional duty is imposed on the withholding agent?

While the withholding agent has the right to recover the taxes erroneously or illegally collected,
he nevertheless has the obligation to remit the same to the principal taxpayer. As an agent of the
taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly enriching
himself at the expense of the principal taxpayer from whom the taxes were withheld, and from
whom he derives his legal right to file a claim for refund. (CIR vs. SMART Communications, Inc.
G.R. Nos. 179045-46 dated August 25, 2010)

46. HCP Corporation and HCP Supervisors Union entered into a Collective Bargaining Agreement
(“CBA”). The CBA grants gasoline allowance to the union members and any unused gasoline
allowance is convertible into cash. Upon conversion, HCP Corporation withheld and remitted to
the BIR the withholding tax on compensation income. HCP Supervisors Union opposed the
company’s practice of treating the gasoline allowance that, when converted into cash, is
considered as compensation income that is subject to withholding tax. The disagreement
between the company and the union on the matter resulted in a grievance which they referred
to the CBA grievance procedure for resolution. As it remained unsettled there, they submitted
the issue to a panel of voluntary arbitrators as required by the CBA.

a) Does the Voluntary Arbitrator have jurisdiction to rule on the issue?

The Voluntary Arbitrator’s jurisdiction is limited to labor disputes. The Voluntary Arbitrator has
no competence to rule on the taxability of the gas allowance and on the propriety of the
withholding of tax. These issues are clearly tax matters, and do not involve labor disputes. To be
exact, they involve tax issues within a labor relations setting as they pertain to questions of law
on the application of Section 33 (A) of the NIRC. They do not require the application of the Labor
Code or the interpretation of the MOA and/or company personnel policies. Furthermore, the
company and the union cannot agree or compromise on the taxability of the gas allowance.
Taxation is the State’s inherent power; its imposition cannot be subject to the will of the parties.

b) What is the proper remedy of HCP Supervisors Union considering its position that the
converted gas allowance is not subject to withholding tax?

On the other hand, if the union disputes the withholding of tax and desires a refund of the
withheld tax, it should have filed an administrative claim for refund with the CIR. Paragraph 2,
 TAXATION
Section 4 of the NIRC expressly vests the CIR original jurisdiction over refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or other tax matters. The
union has no cause of action against the company.

Under the withholding tax system, the employer as the withholding agent acts as both the
government and the taxpayer’s agent. Except in the case of a minimum wage earner, every
employer has the duty to deduct and withhold upon the employee’s wages a tax determined in
accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon the
CIR’s recommendation. As the Government’s agent, the employer collects tax and serves as the
payee by fiction of law. As the employee’s agent, the employer files the necessary income tax
return and remits the tax to the Government.

Based on these considerations, we hold that the union has no cause of action against the
company. The company merely performed its statutory duty to withhold tax based on its
interpretation of the NIRC, albeit that interpretation may later be found to be erroneous. The
employer did not violate the employee's right by the mere act of withholding the tax that may
be due the government.

Moreover, the NIRC only holds the withholding agent personally liable for the tax arising from
the breach of his legal duty to withhold, as distinguished from his duty to pay tax. Under Section
79 (B) of the NIRC, if the tax required to be deducted and withheld is not collected from the
employer, the employer shall not be relieved from liability for any penalty or addition to the
unwithheld tax.

Thus, if the BIR illegally or erroneously collected tax, the recourse of the taxpayer, and in proper
cases, the withholding agent, is against the BIR, and not against the withholding agent.The
union's cause of action for the refund or non-withholding of tax is against the taxing authority,
and not against the employer. (Honda Cars Philippines, Inc. vs. Honda Cars Technical Specialist
Supervisors Union, GR No. 204142 dated November 19, 2014)

47. What are the requisites for the claim for refund of creditable withholding tax?

a) The claim must be filed with the CIR within the two-year period from the date of
payment of the tax;
b) It must be shown on the return that the income received was declared as part of
the gross income; and,
c) The fact of withholding must be established by a copy of a statement (BIR Form
2307) duly issued by the payor to the payee showing the amount paid and the
amount of the tax withheld. (CIR vs. Far East Bank, GR No. 173854 dated March
15, 2010)

48. FEBTC filed a judicial claim for refund with the CTA. The BIR filed its answer but failed to present
any evidence. FEBTC argues that the claim for refund should be granted for failure of the BIR to
 TAXATION
present any evidence refuting its allegations. Is FEBTC correct?

No, the burden is on the taxpayer to prove its entitlement to the refund. Moreover, the fact that
the petitioner failed to present any evidence or to refute the evidence presented by respondent
does not ipso facto entitle the respondent to a tax refund. It is not the duty of the government
to disprove a taxpayer’s claim for refund. Rather, the burden of establishing the factual basis of
a claim for a refund rests on the taxpayer.

And while the petitioner has the power to make an examination of the returns and to assess the
correct amount of tax, his failure to exercise such powers does not create a presumption in favor
of the correctness of the returns. The taxpayer must still present substantial evidence to prove
his claim for refund. As we have said, there is no automatic grant of a tax refund.

Hence, for failing to prove its entitlement to a tax refund, respondent’s claim must be denied.
Since tax refunds partake of the nature of tax exemptions, which are construed strictissimi
juris against the taxpayer, evidence in support of a claim must likewise be strictissimi scrutinized
and duly proven. (CIR vs. Far East Bank, GR No. 173854 dated March 15, 2010)

49. In claims for refund, may the 2-year prescriptive period under Sec. 229 of Tax Code be reckoned
from the date of discovery of the erroneously paid tax?

No, Sec. 229 of the Tax Code provides that: “xxx. In any case, no such suit or proceeding shall be
filed after the expiration of two (2) years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment appears clearly to have been
erroneously paid.”

As can be gleaned from the foregoing, the prescriptive period provided is mandatory regardless
of any supervening cause that may arise after payment. It should be pointed out further that
while the prescriptive period of two (2) years commences to run from the time that the refund is
ascertained, the propriety thereof is determined by law (in this case, from the date of payment
of tax), and not upon the discovery by the taxpayer of the erroneous or excessive payment of
taxes. The issuance by the BIR of the Ruling declaring the tax-exempt status of NORD/LB, if at all,
is merely confirmatory in nature. As aptly held by the CTA-First Division, there is no basis that the
subject exemption was provided and ascertained only through BIR Ruling No. DA-342-2003, since
said ruling is not the operative act from which an entitlement of refund is determined. In other
words, the BIR is tasked only to confirm what is provided under the Tax Code on the matter of
tax exemptions as well as the period within which to file a claim for refund.

Instead, may the claim for refund be filed within the 6-year period under Art. 1145 of the Civil
Code invoking solutio indebiti?

No, in this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive period
 TAXATION
for initiating an action on the ground of quasi contract or solutio indebiti under Article 1145 of
the New Civil Code. There is solutio indebiti where: (1) payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not through liberality or some other
cause. Here, there is a binding relation between petitioner as the taxing authority in this
jurisdiction and respondent MERALCO which is bound under the law to act as a withholding agent
of NORD/LB Singapore Branch, the taxpayer. Hence, the first element of solutio indebiti is lacking.
Moreover, such legal precept is inapplicable to the present case since the Tax Code, a special law,
explicitly provides for a mandatory period for claiming a refund for taxes erroneously paid. (CIR
vs. Meralco, GR No. 181459 dated June 9, 2014)

50. What are the rules on prescription for violations of any provision of the Tax Code?

All violations of any provision under the Tax Code shall prescribe after Five (5) years.

Prescription shall begin to run from the day of the commission of the violation of the law, and if
the same be not known at the time, from the discovery thereof and the institution of judicial
proceedings for its investigation and punishment.

The prescription shall be interrupted when proceedings are instituted against the guilty persons
and shall begin to run again if the proceedings are dismissed for reasons not constituting
jeopardy.

The term of prescription shall not run when the offender is absent from the Philippines. (Sec. 281
NIRC)

51. H&B Co. was assessed deficiency income tax by the BIR covering taxable year 2002. For failure
to protest the Final Assessment Notice within the 30-day period under Sec. 228 of the Tax Code,
the deficiency tax assessment became final and unappealable. Unfortunately, the BIR failed to
collect the deficiency tax within the five (5) year period under Sec. 222 (c) of the Tax Code.
Subsequently, H&B Co. filed an appeal with the Court of Tax Appeals (“CTA”) arguing that the
BIR’s right to collect has already prescribed. On the other hand, the BIR argues that since the
assessment has already become final and unappealable, the CTA does not have jurisdiction
over the case. Is the BIR correct?

No, we cannot countenance the CIR’s assertion with regard to this point. The jurisdiction of the
CTA is governed by Section 7 of Republic Act No. 1125, as amended, and the term "other matters"
 TAXATION
referred to by the CIR in its argument can be found in number (1) of the aforementioned
provision, to wit:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided –

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law as part of law administered by the Bureau of Internal
Revenue. (Emphasis supplied.)

Plainly, the assailed CTA En Banc Decision was correct in declaring that there was nothing in the
foregoing provision upon which petitioner’s theory with regard to the parameters of the term
"other matters" can be supported or even deduced. What is rather clearly apparent, however, is
that the term "other matters" is limited only by the qualifying phrase that follows it.

Thus, on the strength of such observation, we have previously ruled that the appellate
jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters
relating to assessments or refunds. The second part of the provision covers other cases that arise
out of the National Internal Revenue Code (NIRC) or related laws administered by the Bureau of
Internal Revenue (BIR).

In the case at bar, the issue at hand is whether or not the BIR’s right to collect taxes had already
prescribed and that is a subject matter falling under Section 223(c) [now Sec. 222(c)] of the 1986
NIRC, the law applicable at the time the disputed assessment was made. To quote Section 223(c):

Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in
court within three years (now 5 years) following the assessment of the tax.

Thus, from the foregoing, the issue of prescription of the BIR’s right to collect taxes may be
considered as covered by the term "other matters" over which the CTA has appellate jurisdiction.

Furthermore, the phraseology of Section 7, number (1), denotes an intent to view the CTA’s
jurisdiction over disputed assessments and over "other matters" arising under the NIRC or other
laws administered by the BIR as separate and independent of each other. This runs counter to
petitioner’s theory that the latter is qualified by the status of the former, i.e., an "other matter"
must not be a final and unappealable tax assessment or, alternatively, must be a disputed
assessment.

Likewise, the first paragraph of Section 11 of Republic Act No. 1125, as amended by Republic Act
No. 9282, belies petitioner’s assertion as the provision is explicit that, for as long as a party is
adversely affected by any decision, ruling or inaction of petitioner, said party may file an appeal
 TAXATION
with the CTA within 30 days from receipt of such decision or ruling. The wording of the provision
does not take into account the CIR’s restrictive interpretation as it clearly provides that the mere
existence of an adverse decision, ruling or inaction along with the timely filing of an appeal
operates to validate the exercise of jurisdiction by the CTA.

To be sure, the fact that an assessment has become final for failure of the taxpayer to file a
protest within the time allowed only means that the validity or correctness of the assessment
may no longer be questioned on appeal. However, the validity of the assessment itself is a
separate and distinct issue from the issue of whether the right of the CIR to collect the validly
assessed tax has prescribed. This issue of prescription, being a matter provided for by the NIRC,
is well within the jurisdiction of the CTA to decide. (CIR vs. Hambrecht & Quist Philippines, Inc.,
GR No. 169225 November 17, 2010)

52. XYZ Corporation received a Final Assessment Notice (“FAN”). XYZ Corporation filed a protest
against the said FAN. Subsequently, the BIR issued a Final Decision on a Disputed Assessment
(“FDDA”) which indicated the legal basis but failed to indicate the factual basis of the decision.

a) Is the FDDA valid?

No, the FDDA must state the facts and law on which it is based to provide the taxpayer the
opportunity to file an intelligent appeal. An FDDA which contains a taxpayer’s supposed tax
liabilities, without providing any details on the specific transactions which gave rise to its
supposed tax deficiencies is void. While it provided for the legal bases of the assessment, it fell
short of informing the taxpayer of the factual bases thereof.

b) Does a void FDDA render the FAN void?

No, a void FDDA does not ipso facto render the assessment void.

Clearly, a decision of the CIR on a disputed assessment differs from the assessment itself. Hence,
the invalidity of one does not necessarily result to the invalidity of the other—unless the law or
regulations otherwise provide. The nullity of the FDDA does not extend to the nullification of the
entire assessment. As if there was no decision rendered by the CIR. It is tantamount to a denial
by inaction by the CIR, which may still be appealed before the CTA and the assessment evaluated
on the basis of the available evidence and documents. (CIR vs. Liquigaz Phils. Corporation, GR
No. 215534 dated April 18, 2016)

53. What is the destination principle and cross border doctrine in relation to VAT?

According to the Destination Principle, goods and services are taxed only in the country where
these are consumed. In connection with the said principle, the Cross Border Doctrine mandates
that no VAT shall be imposed to form part of the cost of the goods destined for consumption
outside the territorial border of the taxing authority. Hence, actual export of goods and services
from the Philippines to a foreign country must be free of VAT, while those destined for use or
 TAXATION
consumption within the Philippines shall be imposed with 12% VAT. Export processing zones are
to be managed as a separate customs territory from the rest of the Philippines and, thus, for tax
purposes, are effectively considered as foreign territory. For this reason, sales by persons from
the Philippine customs territory to those inside the export processing zones are already taxed as
exports. (Atlas Consolidated Mining and Development Corporation, GR Nos. 141104 and 148763
dated June 8, 2007)

54. XYZ Corporation, a VAT registered taxpayer located outside the PEZA Zone or customs territory
sold goods to Nickel Corporation a corporation located inside the PEZA Zone.

a) Is the sale of goods made by XYZ Corporation to Nickel Corporation subject to
the 12% VAT?

No, under RMC 74-99 dated October 15, 1999, all sales of goods, properties, and services made
by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be
subject to VAT, at zero percent (0%) rate, regardless of the latter's type or class of PEZA
registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a
VAT-exempt entity.

Section 8 of Rep. Act No. 7916 mandates that PEZA shall manage and operate the ECOZONES as
a separate customs territory. The provision thereby establishes the fiction that an ECOZONE is a
foreign territory separate and distinct from the customs territory. Accordingly, the sales made by
suppliers from a customs territory to a purchaser located within an ECOZONE will be considered
as exportations. Following the Philippine VAT system’s adherence to the Cross Border Doctrine
and Destination Principle, the VAT implications are that “no VAT shall be imposed to form part of
the cost of goods destined for consumption outside the territorial border of the taxing authority.

b) Assuming that XYZ Corporation erroneously passed on VAT to Nickel
Corporation, may Nickel Corporation claim a refund of the input VAT passed on
to it?

No, the petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan. Its plant
site was specifically located inside the Rio Tuba Export Processing Zone — a special economic
zone (ECOZONE) As such, the purchases of goods and services by the petitioner that were
destined for consumption within the ECOZONE should be free of VAT; hence, no input VAT should
then be paid on such purchases, rendering the petitioner not entitled to claim a tax refund or
credit. Verily, if the petitioner had paid the input VAT, the CTA was correct in holding that the
petitioner's proper recourse was not against the Government but against the seller who had
shifted to it the output VAT following RMC No. 42-03. (Coral Bay Nickel Corporation vs. CIR, GR
 TAXATION
No. 190506 dated June 13, 2016, J. Bersamin)

55. Who are liable for VAT?

Any person who, in the course of his trade or business, sells, barters, exchanges or leases goods
or properties, or renders services, and any person who imports goods, shall be liable to VAT
imposed in Secs. 106 to 108 of the Tax Code.

However, in the case of importation of taxable goods, the importer, whether an individual or
corporation and whether or not made in the course of his trade or business, shall be liable to VAT
imposed in Sec. 107 of the Tax Code. (Sec. 105 NIRC)

56. What is the meaning of the phrase “in the course of trade or business”?

The term "in the course of trade or business" means the regular conduct or pursuit of a
commercial or economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.

Non-resident persons who perform services in the Philippines are deemed to be making sales in
the course of trade or business, even if the performance of services is not regular. (Sec. 105 NIRC)

57. If a Company renders services in the Philippines on a reimbursement of cost basis, is the
transaction subject to VAT?

Yes, as long as the Company renders services for a fee in the Philippines, whether it incurs profit
or not it, the transaction is subject to VAT.

The Tax Code clarifies that even a non-stock, non-profit organization or government entity, is
liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every
stage of the distribution process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The term "in the
course of trade or business" requires the regular conduct or pursuit of a commercial or an
economic activity, regardless of whether or not the entity is profit-oriented.

In fact, even if such corporation was organized without any intention of realizing profit, any
income or profit generated by the entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives
payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without
realizing profit, for purposes of determining liability for VAT on services rendered. As long as the
 TAXATION
entity provides service for a fee, remuneration or consideration, then the service rendered is
subject to VAT. (CIR vs. CA and COMASERCO, GR No. 125355 dated March 30, 2000)
58. Are subsidized expenses paid for by a subsidiary and subsequently reimbursed by its parent
company subject to VAT?

No. The CIR further argues that Sony (“the subsidiary”) itself admitted that the reimbursement
from SIS (“parent company”) was income and, thus, taxable. In support of this, the CIR cited a
portion of Sony's protest filed before it:

“The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latter's advertising expenses will not affect the validity of the input
taxes from such expenses. Thus, at the most, this is an additional income of our client subject to
income tax. We submit further that our client is not subject to VAT on the subsidy income as this
was not derived from the sale of goods or services.”

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should
be subject to the 12% VAT. To begin with, the said subsidy termed by the CIR as reimbursement
was not even exclusively earmarked for Sony's advertising expense for it was but an assistance
or aid in view of Sony's dire or adverse economic conditions, and was only "equivalent to the
latter's (Sony's) advertising expenses. Section 106 of the Tax Code explains when VAT may be
imposed or exacted. Thus:

“SEC. 106. Value-added Tax on Sale of Goods or Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected on
every sale, barter or exchange of goods or properties, value-added tax equivalent
to ten percent (10%) [now 12%] of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged, such tax to be paid by the
seller or transferor.”

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony.
It was but a dole out by SIS and not in payment for goods or properties sold, bartered or
exchanged by Sony.

In the case of CIR v. Court of Appeals (CA) [COMASERCO Case above], the Court had the occasion
to rule that services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the present case.
In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the
former “reimbursement-on-cost” which means that it was paid the cost or expense that it
incurred although without profit. This is not true in the present case. Sony did not render any
service to SIS at all. The services rendered by the advertising companies, paid for by Sony using
SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent
 TAXATION
to the latter's advertising expense but never received any goods, properties or service from Sony.
(CIR vs. Sony Philippines, Inc., GR No. 178697 dated November 17, 2010)

Note that in the COMASERCO Case the “reimbursement” was subject to VAT since COMASERCO
rendered service to its affiliates. While in the SONY Case, Sony did not render any service and that
is the reason why the “reimbursement” in that case was not considered subject to VAT.

59. Who are liable to register as a VAT taxpayer?

Any person who, in the course of trade or business, sells, barters or exchanges goods or
properties or engages in the sale or exchange of services shall be liable to register if:

a) His gross sales or receipts for the past twelve (12) months, other than those that
are exempt under Sec. 109 (1)(A) to (U) [now A to V under RA 10378] of the Tax
Code, have exceeded One Million Nine Hundred Nineteen Thousand Five Hundred
Pesos (P1,919,500.00); or
b) There are reasonable grounds to believe that his gross sales or receipts for the
next twelve (12) months, other than those that are exempt under Sec. 109 (1)(A)
to (U) [now A to V under RA 10378] of the Tax Code, will exceed One Million Nine
Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00); or
c) Franchise grantees of radio and television broadcasting, whose gross annual
receipts for the preceding calendar year exceeded P10,000,000.00.

If he fails to register, he shall be liable to pay the output tax under Secs. 106 and/or 108 of the
Tax Code as if he were a VAT-registered person, but without the benefit of input tax credits for
the period in which he was not properly registered.

A VAT-registrable person is a person who is mandatorily required to register for VAT but does
not. (236(G) NIRC)

60. Who may opt to register as a VAT taxpayer?

a) Any person who is VAT-exempt under Sec. 109(1)(v) [now 109(1)(w) under RA
10378] not required to register for VAT may, elect to be VAT-registered; or
b) Any person who is VAT-registered but enters into transactions which are exempt
from VAT (mixed transactions) may opt that the VAT apply to his transactions
which would have been exempt under Section 109(1) of the Tax Code, as
amended. [Sec. 109(2)]; or
c) Franchise grantees of radio and/or television broadcasting whose annual gross
receipts of the preceding year do not exceed ten million pesos (P10,000,000.00)
derived from the business covered by the law granting the franchise may opt for
 TAXATION
VAT registration. This option, once exercised, shall be irrevocable. (Sec. 119, Tax
Code).

Any person who elects to register under (a) and (b) above shall not be allowed to cancel his
registration for the next three (3) years. (236(H) NIRC)

61. When is the sale of real property subject to VAT?

Under the Tax Code, sale of real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business of the seller shall be subject to VAT.

However, under Revenue Regulations No. 4-07, even if the real property is not primarily held for
sale to customers or held for lease in the ordinary course of trade or business but the same is
used in the trade or business of the seller, the sale thereof shall be subject to VAT being a
transaction incidental to the taxpayer's main business. (Note that this is in direct conflict with the
Tax Code but enjoys the presumption of validity)

62. Which sales of real property are exempt or not subject to VAT?

a) Sale of real properties utilized for low-cost housing as defined by RA No. 7279,
otherwise known as the "Urban Development and Housing Act of 1992" and other
related laws, such as RA No. 7835 and RA No. 8763;
b) Sale of real properties utilized for socialized housing as defined under RA No.
7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the
price ceiling per unit is P225,000.00 or as may from time to time be determined
by the HUDCC and the NEDA and other related laws; and,
c) Sale of residential lot valued at One Million Nine Hundred Nineteen Thousand Five
Hundred Pesos (P1,919,500.00) and below, or house & lot and other residential
dwellings valued at Three Million One Hundred Ninety-Nine Thousand Two
Hundred Pesos (P3,199,200.00) and below. (Sec. 109(P) NIRC)

63. What are the transactions “deemed sale” which are subject to VAT?

The following transactions shall be "deemed sale" pursuant to Sec. 106 (B) of the Tax Code:

(1) Transfer, use or consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business. Transfer of goods or
 TAXATION
properties not in the course of business can take place when VAT-registered person
withdraws goods from his business for his personal use;

(2) Distribution or transfer to:

i. Shareholders or investors share in the profits of VAT-registered person;

Property dividends which constitute stocks in trade or properties primarily
held for sale or lease declared out of retained earnings on or after January 1,
1996 and distributed by the company to its shareholders shall be subject to
VAT based on the zonal value or fair market value at the time of distribution,
whichever is applicable.

ii. Creditors in payment of debt or obligation.

(3) Consignment of goods if actual sale is not made within 60 days following the date
such goods were consigned. Consigned goods returned by the consignee within the
60-day period are not deemed sold;

(4) Retirement from or cessation of business with respect to all goods on hand,
whether capital goods, stock-in-trade, supplies or materials as of the date of such
retirement or cessation, whether or not the business is continued by the new owner
or successor. The following circumstances shall, among others, give rise to
transactions "deemed sale":

i. Change of ownership of the business. There is a change in the
ownership of the business when a single proprietorship incorporates; or the
proprietor of a single proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new partnership which
takes over the business.

64. Abel Corporation (transferee) is a merchandising concern and has an inventory of goods for
sale amounting to PhP1 Million. Nel Corporation (transferor), a real estate developer,
exchanged its real properties for shares of stocks of Abel Corporation resulting in the
acquisition of corporate control. Is the inventory of goods and transfer of real property subject
to VAT?

The inventory of goods owned by Abel Corporation is not subject to output tax despite the change
in corporate control because the same corporation still owns them. This is in recognition of the
separate and distinct personality of the corporation from its stockholders. However, the
exchange of real properties held for sale or lease by Nel Corporation, for the shares of stocks of
 TAXATION
Abel Corporation, whether resulting in corporate control or not, is subject to VAT. (Revenue
Regulations No. 010-2011 dated July 7, 2011)

65. Are gross receipts derived by operators or proprietors of cinema/theater houses from
admission tickets subject to VAT?

No, while the enumeration of services under Sec. 108 is merely by way of example only and not
exclusive, the legislative intent is not to impose VAT on gross receipts of cinema/theater houses
on their admission tickets. Instead, the same is subject to the 10% amusement tax under the
Local Government Code, as amended. Only lessors or distributors of cinematographic films are
included in the coverage of VAT. (CIR vs. SM Prime Holdings, GR No. 183505 dated February 26,
2010)

66. May toll fees collected by tollway operators be subjected to VAT?

Yes, services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of the
Code. (Diaz vs. the SOF and the CIR, GR No. 193007 dated July 19, 2011)

67. Is a toll fee a "user’s tax" and to impose VAT on toll fees is tantamount to taxing a tax?

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose of
raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private
tollway operators as reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by either the government
or private individuals or entities, as an attribute of ownership.

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the
seller’s liability but merely the burden of the VAT.

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted,
the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order
to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in
 TAXATION
this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden
of VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed
as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts and not necessarily
on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it
will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part
of the toll fees that one has to pay in order to use the tollways. (Diaz vs. the SOF and the CIR, GR
No. 193007 dated July 19, 2011)

68. What are the distinctions between a zero-rated sale and an exempt sale?

Taxable transactions are those transactions which are subject to value-added tax either at the
rate of twelve percent (12%) or zero percent (0%). In taxable transactions, the seller shall be
entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties
or services.

An exemption means that the sale of goods, properties or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid. The person making the exempt sale of goods, properties or services
shall not bill any output tax to his customers because the said transaction is not subject to VAT.
Thus, a VAT-registered purchaser of goods, properties or services that are VAT-exempt, is not
entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt.

To begin with, it must be recalled that generally, sale of goods and supply of services performed
in the Philippines are taxable at the rate of 12%. However, export sales, or sales outside the
Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person. Under
the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
purchase of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund.

In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt
the transaction completely from VAT previously collected on inputs. It is thus the only true way
to ensure that goods are provided free of VAT. While the zero rating and the exemption are
computationally the same, they actually differ in several aspects, to wit:

a) A zero-rated sale is a taxable transaction but does not result in an output tax while
an exempted transaction is not subject to the output tax;
b) The input VAT on the purchases of a VAT-registered person with zero-rated sales
may be allowed as tax credits or refunded while the seller in an exempt transaction
 TAXATION
is not entitled to any input tax on his purchases despite the issuance of a VAT
invoice or receipt; and,
c) Persons engaged in transactions which are zero-rated, being subject to VAT, are
required to register while registration is optional for VAT-exempt persons. (CIR vs.
Cebu Toyo Corp., GR No. 149073 dated February 16, 2005)

69. Is an approved prior application for zero-rating with the BIR necessary in order for the
transaction to be considered effectively zero rated?

No, the BIR regulations additionally requiring an approved prior application for effective zero
rating cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such
regulations is not "within the statutory authority x x x granted by the legislature.”

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayer’s
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does
not and cannot become exempt simply because an application therefor was not made or, if made,
was denied. To allow the additional requirement is to give unfettered discretion to those officials
or agents who, without fluid consideration, are bent on denying a valid application. (CIR vs.
Seagate Technology (Philippines), GR No. 153886 dated February 11, 2005)

70. When is a VAT registered taxpayer entitled to a claim for refund on its excess input VAT?

a) If the VAT registered taxpayer has excess input tax attributable to zero-rated sales
which have not been applied to any output tax; and,
b) If the VAT registered taxpayer has unused input tax and it desires to cancel its VAT
registration. (Secs. 112 (A) and (B) NIRC)

71. What is the prescriptive period to file a claim for refund for excess input VAT with the BIR?

For letter (a) above – excess input tax attributable to zero-rated sales, within 2 years
after the close of the taxable quarter when the zero-rated sales are made. [Sec.
112(A)]

For letter (b) above – cancellation of VAT registration, within 2 years from the date
of cancellation of VAT registration. [Sec. 112(B) NIRC]

72. What is the prescriptive period to file a judicial claim for refund for excess input VAT with the
 TAXATION
CTA?

After the taxpayer has filed its administrative claim for refund with the BIR above, the taxpayer
has duty to submit all supporting documents (no period provided by the Tax Code). Within 120
days from the complete submission of documents, the CIR shall decide on the refund.

The taxpayer may appeal to the CTA:

a) In case the CIR acted on the claim for refund (during the 120 day period), within
30 days from the denial of the claim for refund; or,
b) In case of inaction, within 30 days from the lapse of the 120 day period. [Sec.
112(C)]

73. When is the reckoning of the 120-day period in relation to Sec. 112(C) of the Tax Code?

Starting June 11, 2014, the reckoning of the 120-day period is from the filing of the administrative
claim for refund. Under RMC 54-2014 dated June 11, 2014, the application for VAT refund/tax
credit must be accompanied by complete supporting documents. In addition, the taxpayer shall
attach a statement under oath attesting to the completeness of the submitted documents. The
affidavit shall further state that the said documents are the only documents which the taxpayer
will present to support the claim. (Pilipinas Total Gas, Inc. vs. CIR, GR No. 207112 dated December
8, 2015)

74. Prior to June 11, 2014, what are the rules on the reckoning of the 120-day period?

a) For purposes of determining when the supporting documents have been
completed - it is the taxpayer who ultimately determines when complete
documents have been submitted for the purpose of commencing and continuing
the running of the 120-day period.
b) Except in those instances where the BIR would require additional documents in
order to fully appreciate a claim for tax credit or refund, in terms what additional
document must be presented in support of a claim for tax credit or refund - it is
the taxpayer who has that right and the burden of providing any and all
documents that would support his claim for tax credit or refund.
c) Thereafter, whether these documents are actually complete as required by law-
is for the CIR and the courts to determine.
d) Lest it be misunderstood, the benefit given to the taxpayer to determine when it
should complete its submission of documents is not unbridled. Under RMC No. 49-
2003, if in the course of the investigation and processing of the claim, additional
documents are required for the proper determination of the legitimacy of the
claim, the taxpayer-claimants shall submit such documents within thirty (30) days
from request of the investigating/processing office. Notice, by way of a request
from the tax collection authority to produce the complete documents in these
 TAXATION
cases, is essential.
e) In all cases, whatever documents a taxpayer intends to file to support his claim
must be completed within the two-year period under Section 112(A) of the NIRC.
(Pilipinas Total Gas, Inc. vs. CIR, GR No. 207112 dated December 8, 2015)

75. Assume that the filing of the administrative claim for refund and the judicial claim for refund
relative to excess input VAT was filed on the same day (but within the 2 year period under Sec.
112), was the judicial claim for refund premature and thus, should be dismissed? Stated
differently, should the BIR be given the full 120 days to decide before a judicial claim for refund
under Sec. 112 be filed with the CTA?

The BIR should be given the full 120 days to decide, otherwise, the judicial claim for refund with
the CTA should be dismissed for being premature.

Section 112 (D) [now 112 (C)] of the NIRC clearly provides that the CIR has "120 days, from the
date of the submission of the complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In case of full or partial denial by the
CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days from receipt of the
decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for
tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within
30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September
30, 2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-
day period.For this reason, we find the filing of the judicial claim with the CTA premature.

Respondent's assertion that the non-observance of the 120-day period is not fatal to the filing of
a judicial claim as long as both the administrative and the judicial claims are filed within the two-
year prescriptive period has no legal basis.

There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A) of the
said provision states that "any VAT-registered person, whose sales are zero-rated or effectively
zero-rated may, within two years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales." The phrase "within two (2) years . . . apply for the issuance of a
tax credit certificate or refund" refers to applications for refund/credit filed with the CIR and not
to appeals made to the CTA. This is apparent in the first paragraph of subsection (D) [now 112
(C)] of the same provision, which states that the CIR has "120 days from the submission of
complete documents in support of the application filed in accordance with Subsections (A) and
(B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D)
[now 112 (C)] of the NIRC, which already provides for a specific period within which a taxpayer
should appeal the decision or inaction of the CIR. The second paragraph of Section 112 (D) [now
 TAXATION
112 (C)] of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR before the
lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both
instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then,
the 120-day period is crucial in filing an appeal with the CTA. (CIR vs. Aichi Forging Company of
Asia, Inc., GR No. 184823 dated October 6, 2010)

76. Is it required that the judicial claim for refund with the CTA be filed within 2-years from the
close of the taxable quarter from which the zero-rated sales were made?

No, the 2-year prescriptive period only applies to the administrative claim for refund under Sec.
112(A). The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or
refund" refers to applications for refund/credit filed with the CIR and not to appeals made to the
CTA. This is apparent in the first paragraph of subsection (C) of the same provision, which states
that the CIR has "120 days from the submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(C) of
the NIRC, which already provides for a specific period within which a taxpayer should appeal the
decision or inaction of the CIR. (CIR vs. Aichi Forging Asia, GR No. 184823 dated October 6, 2010)

The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that the
law grants the taxpayer for filing his administrative claim with the Commissioner. This Court
cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly grants in
clear, plain, and unequivocal language. (CIR vs. San Roque Power Corporation, GR No. 187485
dated February 12, 2013)

77. What are the rules on the claim of excess input VAT in relation to the cases decided by the
Supreme Court?

A. Two-Year Prescriptive Period under Sec. 112(A) under the NIRC:

1. It is only the administrative claim that must be filed within the two-year prescriptive
period. (Aichi)
2. The proper reckoning date for the two-year prescriptive period is the close of the
taxable quarter when the relevant sales were made. (San Roque)
3. The only other rule is the Atlas ruling, which (is) applied only from 8 June 2007 to
12 September 2008. Atlas states that the two-year prescriptive period for filing a claim
 TAXATION
for tax refund or credit of unutilized input VAT payments should be counted from the
date of filing of the VAT return and payment of the tax. (San Roque)

B. 120+30 Day Period under Sec. 112(C) under the NIRC:

1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within
thirty days after the Commissioner denies the claim within the 120-day period, or (2)
file the judicial claim within thirty days from the expiration of the 120-day period if
the Commissioner does not act within the 120-day period.
2. The 30-day period always applies, whether there is a denial or inaction on the part
of the CIR.
3. As a general rule, the30-day period to appeal is both mandatory and jurisdictional.
(Aichi and San Roque)
4. As an exception to the general rule, premature filing is allowed only if filed between
10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in
force. (San Roque) Note that in BIR Ruling No. DA-489-03, the BIR ruled that "a
taxpayer-claimant need not wait for the lapse of the 120-day period before it could
seek judicial relief with the CTA by way of Petition for Review. In Aichi Forging, the
Supreme Court held that it is mandatory to wait for the 120-day period in case of
inaction by the CIR under Sec. 112(C).
5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-
489-03 was in force. (San Roque) [CIR vs. Mindanao II Geothermal Partnership, GR No.
191498 dated January 15, 2014]

78. Instead of filing a claim for refund, may the taxpayer claim the untilized input tax attributable
to zero-rated sales as an expense for income tax purposes?

No, the unutilized creditable input tax related to zero-rated sales can only be recovered through
the application for refund or tax credit. Nowhere in the Tax Code can we find a specific provision
expressly providing for another mode for recovering unapplied input taxes, particularly that
unapplied input taxes may be treated outright as deductible expense for income tax purposes.
(RMC No. 57-2013 dated August 23, 2013)

79. Is prior payment of VAT necessary in order to claim transitional input VAT credit under Sec.
111(A) of the NIRC?

No, Sec. 111(a) of the NIRC reads:

"(A) Transitional Input Tax Credits. - A person who becomes liable to value-added
tax or any person who elects to be a VAT-registered person shall, subject to the
filing of an inventory according to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, be allowed
input tax on his beginning inventory of goods, materials and supplies equivalent
to two percent (2%) of the value of such inventory or the actual value-added tax
 TAXATION
paid on such goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.

Contrary to the view of the CTA and the CA, there is nothing in the above-quoted provision to
indicate that prior payment of taxes is necessary for the availment of the 2% transitional input
tax credit. Obviously, all that is required is for the taxpayer to file a beginning inventory with the
BIR.

To require prior payment of taxes is not only tantamount to judicial legislation but would also
render nugatory the provision in Section 111(A) of the NIRC that the transitional input tax credit
shall be "2% of the value of [the beginning] inventory or the actual [VAT] paid on such goods,
materials and supplies, whichever is higher" because the actual VAT paid on the goods, materials,
and supplies would always be higher than the 2% of the beginning inventory which, following the
view of Justice Carpio, would have to exclude all goods, materials, and supplies where no taxes
were paid. Clearly, limiting the value of the beginning inventory only to goods, materials, and
supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it would have
specifically stated that the beginning inventory excludes goods, materials, and supplies where no
taxes were paid. As retired Justice Consuelo Ynares-Santiago has pointed out in her Concurring
Opinion in the earlier case of Fort Bonifacio:

If the intent of the law were to limit the input tax to cases where actual VAT was paid, it could
have simply said that the tax base shall be the actual value-added tax paid. Instead, the law as
framed contemplates a situation where a transitional input tax credit is claimed even if there was
no actual payment of VAT in the underlying transaction. In such cases, the tax base used shall be
the value of the beginning inventory of goods, materials and supplies.

Moreover, prior payment of taxes is not required to avail of the transitional input tax credit
because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax refund.
Tax refund is defined as the money that a taxpayer overpaid and is thus returned by the taxing
authority. Tax credit, on the other hand, is an amount subtracted directly from one’s total tax
liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment. Thus, unlike a tax refund, prior payment of taxes is not a prerequisite to avail of a
tax credit. In fact, in Commissioner of Internal Revenue v. Central Luzon Drug Corp., we declared
that prior payment of taxes is not required in order to avail of a tax credit. (Fort Bonifacio
Development vs. CIR, GR No. 173425 dated September 4, 2012 – Law updated to RA No. 9337)

80. How are tax ordinances interpreted?

In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the
local government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption,
incentive or relief granted by any local government unit pursuant to the provisions of the Local
 TAXATION
Government Code shall be construed strictly against the person claiming it. (Petron Corp. vs.
Tiangco, GR No. 158881 dated April 16, 2008)

81. What are the Fundamental Principles of Local Taxation?

The following fundamental principles shall govern the exercise of the taxing and other revenue-
raising powers of local government units:

(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based as far as practicable on the taxpayer's ability to pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
(4) not be contrary to law, public policy, national economic policy, or in the
restraint of trade;
(c) The collection of local taxes, fees, charges and other impositions shall in no case
be let to any private person;
(d) The revenue collected pursuant to the provisions of this Code shall inure solely
to the benefit of, and be subject to the disposition by, the local government unit
levying the tax, fee, charge or other imposition unless otherwise specifically
provided herein; and,
(e) Each local government unit shall, as far as practicable, evolve a progressive system
of taxation. (Sec. 130 LGC)
82. Secs. 13 and 14 of Republic Act (“RA”) 9165 provides that producers of “graded films” shall be
entitled to an amusement tax reward. Under the said law, all revenue from amusement tax on
“graded films” shall be deducted and withheld by proprietors and operators of theaters and
cinema houses and shall be remitted to the Film Development Council of the Philippines
(“FDCP”). FDCP shall in turn “reward” the amusement tax proceeds to the producers of the
“graded films.”

Are Secs. 13 and 14 of RA 9165 constitutional?

No. Material to the case at bar is the concept and scope of local fiscal autonomy. In Pimentel v.
Aguirre, fiscal autonomy was defined as "the power [of LGUs] to create their own sources of
revenue in addition to their equitable share in the national taxes released by the national
government, as well as the power to allocate their resources in accordance with their own
priorities. It extends to the preparation of their budgets, and local officials in tum have to work
within the constraints thereof.

Section 5, Article X of the 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
 TAXATION
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.”

Taking the resulting scheme into consideration, it is apparent that what Congress did in this
instance was not to exclude the authority to levy amusement taxes from the taxing power of the
covered LGUs, but to earmark, if not altogether confiscate, the income to be received by the LGU
from the taxpayers in favor of and for transmittal to FDCP, instead of the taxing authority. This,
to Our mind, is in clear contravention of the constitutional command that taxes levied by LGUs
shall accrue exclusively to said LGU and is repugnant to the power of LGUs to apportion their
resources in line with their priorities.

In the case at bar, through the application and enforcement of Sec. 14 of RA 9167, the income
from the amusement taxes levied by the covered LGUs did not and will under no circumstance
accrue to them, not even partially, despite being the taxing authority therefor. Congress,
therefore, clearly overstepped its plenary legislative power, the amendment being violative of
the fundamental law's guarantee on local autonomy xxx. (Film Development Council of the
Philippines vs. Colon Heritage Realty Corporation, GR No. 203754 dated June 16, 2015)

83. What are the Common Limitations on the Taxing Power of Local Government Units?

Unless otherwise provided under the Local Government Code, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa,
except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage
dues, and all other kinds of customs fees, charges and dues except wharfage on
wharves constructed and maintained by the local government unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions of local government units in the guise
 TAXATION
of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges
in any form whatsoever upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as pioneer
or non-pioneer for a period of six (6) and four (4) years, respectively from the date of
registration;
(h) Excise taxes on articles enumerated under the national Internal Revenue Code, as
amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and persons engaged in
the transportation of passengers or freight by hire and common carriers by air, land
or water, except as provided in this Code;
(k) Taxes on premiums paid by way or reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of
all kinds of licenses or permits for the driving thereof, except tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported, except as
otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and
cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-
nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code
of the Philippines" respectively; and,
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (Sec. 133 LGC)

84. Is a Local Government Unit empowered under the Local Government Code to impose business
taxes on persons or entities engaged in the sale of petroleum products?

No, the language of Section 133(h) makes plain that the prohibition with respect to petroleum
products extends not only to excise taxes thereon, but all "taxes, fees and charges." The earlier
reference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation: all
articles already covered by excise taxation under the NIRC, such as alcohol products, tobacco
products, mineral products, automobiles, and such non-essential goods as jewelry, goods made
of precious metals, perfumes, and yachts and other vessels intended for pleasure or sports. In
contrast, the later reference to "taxes, fees and charges" pertains only to one class of articles of
the many subjects of excise taxes, specifically, "petroleum products". While local government
units are authorized to burden all such other class of goods with "taxes, fees and charges,"
excepting excise taxes, a specific prohibition is imposed barring the levying of any other type of
taxes with respect to petroleum products. (Petron Corp. vs. Tiangco, GR No. 158881 dated April
16, 2008)

85. May a Local Government Unit impose business tax on common carriers pursuant to Sec. 143(h)
 TAXATION
of the Local Government Code?

No, gross receipts of common carriers are not subject to business tax. Section 133 (j) of the LGC
clearly and unambiguously proscribes LGUs from imposing any tax on the gross receipts of
transportation contractors, persons engaged in the transportation of passengers or freight by
hire, and common carriers by air, land, or water. Yet, confusion arose from the phrase "unless
otherwise provided herein," found at the beginning of the said provision. The City of Manila and
its public officials insisted that said clause recognized the power of the municipality or city, under
Section 143 (h) of the LGC, to impose tax "on any business subject to the excise, value-added or
percentage tax under the National Internal Revenue Code, as amended." And it was pursuant to
Section 143 (h) of the LGC that the City of Manila and its public officials enacted, approved, and
implemented Section 21 (B) of the Manila Revenue Code, as amended.

Section 133 (j) of the LGC prevails over Section 143 (h) of the same Code. The omnibus grant of
power to municipalities and cities under Section 143 (h) of the LGC cannot overcome the specific
exception/exemption in Section 133 (j) of the same Code. This is in accord with the rule on
statutory construction that specific provisions must prevail over general ones.

Finally, Sec. 115 (now 117) of the NIRC provides: “The gross receipts of common carriers derived
from their incoming and outgoing freight shall not be subjected to the local taxes imposed under
Republic Act No. 7160, otherwise known as the Local Government Code of 1991.“ (City of Manila
vs. Colet, GR No. 120051 etc. dated December 10, 2014)

86. On December 8, 2005, the Provincial Board of the Province of Benguet approved Provincial Tax
Ordinance No. 05-107, otherwise known as the Benguet Revenue Code of 2005 ("Tax
Ordinance"). Section 59, Article X of the Tax Ordinance levied a ten percent (10%) amusement
tax on gross receipts from admissions to "resorts, swimming pools, bath houses, hot springs
and tourist spots." Pelizloy Realty Corporation ("Pelizloy") owns Palm Grove Resort, which is
designed for recreation and which has facilities like swimming pools, a spa and function halls.
Pelizloy contests the validity of Sec. 59, Article X of the Tax Ordinance. Is the Tax Ordinance
valid in so far as it authorizes the imposition of an amusement tax on resorts, swimming pools,
bath houses, hot springs and tourist spots?

No, Section 131 (c) of the Local Government Code provides for the definition of “Amusement
Places” which are the proper subjects of the amusement tax:

x x x

(c) "Amusement Places" include theaters, cinemas, concert halls, circuses and
other places of amusement where one seeks admission to entertain oneself by
seeing or viewing the show or performances.

Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are bound by a common
typifying characteristic in that they are all venues primarily for the staging of spectacles or the
 TAXATION
holding of public shows, exhibitions, performances, and other events meant to be viewed by an
audience. Accordingly, ‘other places of amusement’ must be interpreted in light of the typifying
characteristic of being venues "where one seeks admission to entertain oneself by seeing or
viewing the show or performances" or being venues primarily used to stage spectacles or hold
public shows, exhibitions, performances, and other events meant to be viewed by an audience.

As defined in The New Oxford American Dictionary, ‘show’ means "a spectacle or display of
something, typically an impressive one"; while ‘performance’ means "an act of staging or
presenting a play, a concert, or other form of entertainment." As such, the ordinary definitions
of the words ‘show’ and ‘performance’ denote not only visual engagement (i.e., the seeing or
viewing of things) but also active doing (e.g., displaying, staging or presenting) such that actions
are manifested to, and (correspondingly) perceived by an audience.

Considering these, it is clear that resorts, swimming pools, bath houses, hot springs and tourist
spots cannot be considered venues primarily "where one seeks admission to entertain oneself by
seeing or viewing the show or performances". While it is true that they may be venues where
people are visually engaged, they are not primarily venues for their proprietors or operators to
actively display, stage or present shows and/or performances.

Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the
same category or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows
that they cannot be considered as among the ‘other places of amusement’ contemplated by
Section 140 of the LGC and which may properly be subject to amusement taxes. (Pelizloy Realty
Corporation vs. Province of Benguet, GR No. 183137 dated April 10, 2013)

87. The City of Cebu enacted an ordinance imposing amusement tax on entities operating golf
courses in relation to Sec. 140 of the Local Government Code.

a) Is the ordinance valid?

No, in light of Pelizloy Realty, a golf course cannot be considered a place of amusement. People
do not enter a golf course to see or view a show or performance. Petitioner also, as proprietor or
operator of the golf course, does not actively display, stage, or present a show or performance.
People go to a golf course to engage themselves in a physical sport activity, i.e., to play golf; the
same reason why people go to a gym or court to play badminton or tennis or to a shooting range
for target practice, yet there is no showing herein that such gym, court, or shooting range is
similarly considered an amusement place subject to amusement tax.

b) May the amusement tax be imposed on the basis of residual taxing powers under
Sec. 186 of the Local Government Code?

No, an LGU may exercise its residual power to tax when there is neither a grant nor a prohibition
by statute; or when such taxes, fees, or charges are not otherwise specifically enumerated in
the Local Government Code, NIRC, as amended, or other applicable laws. In the present case,
 TAXATION
Section 140, in relation to Section 131 (c), of the Local Government Code already explicitly and
clearly cover amusement tax and respondent Cebu City must exercise its authority to impose
amusement tax within the limitations and guidelines as set forth in said statutory provisions. (Alta
Vista Golf and Country Club vs. The City of Cebu, GR No. 180235 dated January 20, 2016)

88. CASURECO III is a duly organized electric cooperative and has its principal place of business in
Iriga City. It is engaged in the business of electric power distribution to various end-users and
consumers within the City of Iriga and the municipalities of Nabua, Bato, Baao, Buhi, Bula and
Balatan of the Province of Camarines Sur, otherwise known as the "Rinconada area.”

CASURECO III argues that it should only liable to pay franchise tax on its gross receipts received
from the supply of the electricity within the City of Iriga and not those from the Rinconada area.
Is this argument correct?

No, it should be stressed that what the City of Iriga seeks to collect from CASURECO III is a
franchise tax, which as defined, is a tax on the exercise of a privilege. As Section 137 of the LGC
provides, franchise tax shall be based on gross receipts precisely because it is a tax on business,
rather than on persons or property. Since it partakes of the nature of an excise tax, the situs of
taxation is the place where the privilege is exercised, in this case in the City of Iriga, where
CASURECO III has its principal office and from where it operates, regardless of the place where
its services or products are delivered. Hence, franchise tax covers all gross receipts from Iriga City
and the Rinconada area. (City of Iriga vs. CASURECO III, GR No. 192945 dated September 5, 2012)

89. For the first three quarters of 1998, MPI paid its business taxes with the City Treasurer of Makati
City in the amount of P1,695,654.36 computed based on its gross sales for the year 1997.
Subsequently, MPI decided to “close shop” and “retired” its business in Makati City. Upon filing
of its application for retirement of business, MPI was assessed additional business taxes for the
year 1998 in the total amount of P1,898,106.96. This pertained to the business tax due for the
4th quarter of 1998 based on the year 1997 sales (P566,468.12) as well as the alleged tax due
for the first 3 quarters of 1998 (P1,331,638.84) when MPI still operated its business in Makati
City.

MPI paid the assessment under protest and then filed a claim for refund which was
subsequently denied by the City Treasurer.

MPI then filed a claim for refund with the Regional Trial Court (“RTC“). The RTC denied the claim
for refund on the ground that the business taxes paid by MPI for the year 1998 are payments
for business taxes for the year 1997 which accrued in January 1998 and became payable within
the first 20 days thereof. Thus, the disputed assessment was correct, as it pertained to MPI’s
business tax for year 1998 which would have accrued in January 1999.

Are the business taxes paid by the MPI in 1998 pertaining to business taxes due for the year
 TAXATION
1997?

No, business taxes paid in the current year, although computed based on the previous year’s
gross sales or gross receipts, represent business taxes for the privilege of engaging in business
for the current year.
Business taxes, imposed in the exercise of police power for regulatory purposes, are paid for the
privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the
year as a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite
to the conduct of business.

Section 145 of the LGC Provides: “Section 145. Retirement of Business. - A business subject to tax
pursuant to the preceding sections shall, upon termination thereof, submit a sworn statement of
its gross sales or receipts for the current year. If the tax paid during the year be less than the tax
due on said gross sales or receipts of the current year, the difference shall be paid before the
business is considered officially retired.”

The assessment against MPI for additional business taxes for the year 1998 is erroneous. Section
145 of the LGC provides that, upon retirement of the business, a taxpayer shall pay additional tax
only if the tax paid during the year is less than the tax due computed based on the gross sales or
receipts of the current year. Since MPI’s total payments in 1998 already amounted to
P2,262,122.48, it is no longer liable to pay the assessed business tax of P1,331,638.04 which was
computed based on the gross sales for 1998, which was the year of retirement. (Mobil Phils. vs.
City Treasurer of Makati City, GR No. 154092 dated July 14, 2005)

90. SMART was assessed deficiency local franchise tax by the City of Iloilo in relation to Sec. 137 of
the Local Government Code. SMART contends that it is exempt from local franchise tax by virtue
of its charter, RA No. 7294, Section 9 of which provides:

Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the
same taxes on their real estate buildings and personal property, exclusive of this franchise, as
other persons or corporations which are now or hereafter may be required by law to pay. In
addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to
three percent (3%) of all gross receipts of the business transacted under this franchise by the
grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this
franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall
continue to be liable for income taxes payable under Title II of the National Internal Revenue
Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended
or repealed, in which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National Internal
 TAXATION
Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue.
[Emphasis supplied.]

a) Did Sec. 193 of the Local Government Code withdraw the tax exemption enjoyed
by SMART?

No. Section 193 of the LGC provides:

Section 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned
or controlled corporations, except local water districts, cooperatives duly
registered under RA No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.

While, we have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption privileges
then enjoyed by all persons, save those expressly mentioned, have been withdrawn effective
January 1, 1992 — the date of effectivity of the LGC. The first clause of Section 137 of the LGC
states the same rule. However, the withdrawal of exemptions, whether under Section 193 or 137
of the LGC, pertains only to those already existing when the LGC was enacted. The intention of
the legislature was to remove all tax exemptions or incentives granted prior to the LGC. As
SMART's franchise was made effective on March 27, 1992 — after the effectivity of the LGC —
Section 193 will therefore not apply in this case.

b) Is SMART liable to pay local franchise tax?

Yes, for two (2) reasons:

First. But while Section 193 of the LGC will not affect the claimed tax exemption under SMART's
franchise, we fail to find a categorical and encompassing grant of tax exemption to SMART
covering exemption from both national and local taxes:

R.A. No 7294 does not expressly provide what kind of taxes SMART is exempted from. It is not
clear whether the "in lieu of all taxes" provision in the franchise of SMART would include
exemption from local or national taxation. What is clear is that SMART shall pay franchise tax
equivalent to three percent (3%) of all gross receipts of the business transacted under its
 TAXATION
franchise. But whether the franchise tax exemption would include exemption from exactions by
both the local and the national government is not unequivocal.

The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether SMART is exempted
from both local and national franchise tax must be construed strictly against SMART which claims
the exemption; and,

Second. Nonetheless, even if Section 9 of SMART's franchise can be construed as covering local
taxes as well, reliance thereon would now be unavailing. The "in lieu of all taxes" clause basically
exempts SMART from paying all other kinds of taxes for as long as it pays the 3% franchise tax; it
is the franchise tax that shall be in lieu of all taxes, and not any other form of tax. Franchise taxes
on telecommunications companies, however, have been abolished by R.A. No. 7716 or the
Expanded Value-Added Tax Law (E-VAT Law), which was enacted by Congress on January 1, 1996.
To replace the franchise tax, the E-VAT Law imposed a 10% (now 12%) value-added tax on
telecommunications companies under Section 108 of the National Internal Revenue Code. The
"in lieu of all taxes" clause in the legislative franchise of SMART has thus become functus officio,
made inoperative for lack of a franchise tax. (City of Iloilo, et. al., vs. SMART Communications,
Inc., GR No. 167260 dated February 27, 2009)

91. What are the taxes or fees that barangays may impose?

(a) Taxes - On stores or retailers with fixed business establishments with gross sales
of receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or
less, in the case of cities and Thirty thousand pesos (P30,000.00) or less, in the
case of municipalities, at a rate not exceeding one percent (1%) on such gross sales
or receipts.

(b) Service Fees or Charges. - Barangays may collect reasonable fees or charges for
services rendered in connection with the regulations or the use of barangay-
owned properties or service facilities such as palay, copra, or tobacco dryers.

(c) Barangay Clearance. - No city or municipality may issue any license or permit for
any business or activity unless a clearance is first obtained from the barangay
where such business or activity is located or conducted. For such clearance, the
sangguniang barangay may impose a reasonable fee. The application for clearance
shall be acted upon within seven (7) working days from the filing thereof. In the
 TAXATION
event that the clearance is not issued within the said period, the city or
municipality may issue the said license or permit.
(d) Other fees and Charges. - The barangay may levy reasonable fees and charges:
(1) On commercial breeding of fighting cocks, cockfights and cockpits;
(2) On places of recreation which charge admission fees; and
(3) On billboards, signboards, neon signs, and outdoor advertisements. (Sec.
152 LGC)

92. RDS owns a parcel of land located in Marikina City. He assigned said property to SAR Corp. in
exchange for shares of stock in SAR Corp. RDS tried to pay the transfer tax on the transfer of
the parcel of land but the same was not accepted by the City Treasurer for being deficient.

RDS filed a case for mandamus and damages against the Marikina City Treasurer praying that
the latter be compelled to "perform a ministerial duty, that is, to accept the payment of transfer
tax based on the actual consideration of the transfer/assignment.”

Was mandamus the correct remedy?

No, under Section 195 of the Local Government Code which is quoted immediately below, a
taxpayer who disagrees with a tax assessment made by a local treasurer may file a written protest
thereof:

SECTION 195. Protest of Assessment. – When the local treasurer or his duly
authorized representative finds that the correct taxes, fees, or charges have not
been paid, he shall issue a notice of assessment stating the nature of the tax, fee,
or charge, the amount of deficiency, the surcharges, interests and penalties.
Within sixty (60) days from the receipt of the notice of assessment, the taxpayer
may file a written protest with the local treasurer contesting the assessment;
otherwise, the assessment shall become final and executory. The local treasurer
shall decide the protest within sixty (60) days from the time of its filing. If the local
treasurer finds the protest to be wholly or partly meritorious, he shall issue a
notice cancelling wholly or partially the assessment. However, if the local
treasurer finds the assessment to be wholly or partly correct, he shall deny the
protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty
(30) days from the receipt of the denial of the protest or from the lapse of the
sixty-day (60) period prescribed herein within which to appeal with the court of
 TAXATION
competent jurisdiction, otherwise the assessment becomes conclusive and
unappealable.

That RDS protested in writing against the assessment of tax due and the basis thereof is on record
as in fact it was on that account that the City Treasurer sent him the above-quoted July 15, 2005
letter which operated as a denial of RDS’ written protest.

RDS should thus have, following the earlier above-quoted Section 195 of the Local Government
Code, either appealed the assessment before the court of competent jurisdiction or paid the tax
and then sought a refund.

RDS did not observe any of these remedies available to him, however. He instead opted to file a
petition for mandamus to compel respondent to accept payment of transfer tax as computed by
him.

Mandamus lies only to compel an officer to perform a ministerial duty (one which is so clear and
specific as to leave no room for the exercise of discretion in its performance) but not a
discretionary function (one which by its nature requires the exercise of judgment). The City
Treasurer’s argument that "[m]andamus cannot lie to compel the City Treasurer to accept as full
compliance a tax payment which in his reasoning and assessment is deficient and incorrect" is
thus persuasive. (San Juan vs. Castro, GR No. 174617 dated December 27, 2007)

93. May the RTC enjoin the collection of local taxes?

Yes, the LGC does not specifically prohibit an injunction enjoining the collection of taxes

A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the
government should be collected promptly, without unnecessary hindrance or delay. In line with
this principle, the National Internal Revenue Code of 1997 (NIRC) expressly provides that no court
shall have the authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by the code. An exception to this rule obtains only when in
the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the interest
of the government and/or the taxpayer.

The situation, however, is different in the case of the collection of local taxes as there is no
express provision in the LGC prohibiting courts from issuing an injunction to restrain local
governments from collecting taxes. Thus, in the case of Valley Trading Co., Inc. v. Court of First
Instance of Isabela, Branch II, cited by the petitioner, we ruled that:

Unlike the National Internal Revenue Code, the Local Tax Code does not contain
any specific provision prohibiting courts from enjoining the collection of local
taxes. Such statutory lapse or intent, however it may be viewed, may have allowed
 TAXATION
preliminary injunction where local taxes are involved but cannot negate the
procedural rules and requirements under Rule 58.

In light of the foregoing, petitioner’s reliance on the above-cited case to support its view that the
collection of taxes cannot be enjoined is misplaced. The lower court’s denial of the motion for
the issuance of a writ of preliminary injunction to enjoin the collection of the local tax was upheld
in that case, not because courts are prohibited from granting such injunction, but because the
circumstances required for the issuance of writ of injunction were not present.

Nevertheless, it must be emphasized that although there is no express prohibition in the LGC,
injunctions enjoining the collection of local taxes are frowned upon. Courts therefore should
exercise extreme caution in issuing such injunctions. (Angeles City vs. Angeles Electric
Corporation, GR No. 166134 dated June 29, 2010)

94. Ordinance No. 18 mandates the collection of a fee based on the total project cost of special
projects (including “cell sites”). In questioning the constitutionality of Ordinance No. 18:

a) Does the CTA have appellate jurisdiction over the case?
b) Is Section 187 (appeal to the DOJ Secretary) of the LGC applicable?

Considering that the fees in the said ordinance are not in the nature of local taxes, and Smart is
questioning the constitutionality of the ordinance, the CTA correctly dismissed the petition for
lack of jurisdiction. Likewise, Section 187 of the LGC, which outlines the procedure for
questioning the constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the
resolution of the issue on non-exhaustion of administrative remedies. (Smart vs. Municipality of
Malvar, Batangas, GR No. 204429 dated February 18, 2014.)

95. What are the fundamental principles in real property taxation?

The appraisal, assessment, levy and collection of real property tax shall be guided by the following
fundamental principles:

(a) Real property shall be appraised at its current and fair market value;
(b) Real property shall be classified for assessment purposes on the basis of its actual
use;
(c) Real property shall be assessed on the basis of a uniform classification within each
local government unit;
(d) The appraisal, assessment, levy and collection of real property tax shall not be let
to any private person; and
(e) The appraisal and assessment of real property shall be equitable. (Sec. 198 LGC)

96. Manila Electric Company (“Meralco”) owns and uses transformers, electric posts, transmission
 TAXATION
lines, insulators and electric meters.

a) May the said properties qualify as machineries subject to real property tax
under the Local Government Code?

Yes, under Section 199 (o) of the Local Government Code, machinery, to be deemed real property
subject to real property tax, need no longer be annexed to the land or building as these "may or
may not be attached, permanently or temporarily to the real property," and in fact, such
machinery may even be "mobile."

The same provision though requires xxx that it: (a) must be actually, directly, and exclusively used
to meet the needs of the particular industry, business, or activity; and (b) by their very nature
and purpose, are designed for, or necessary for manufacturing, mining, logging, commercial,
industrial, or agricultural purposes.

b) May Art. 415 (5) of the Civil Code be used to determine if the said properties
qualify as real property subject to real property tax?

No, the properties under Article 415, paragraph (5) of the Civil Code are immovables by
destination, or "those which are essentially movables, but by the purpose for which they have
been placed in an immovable, partake of the nature of the latter because of the added utility
derived therefrom.“ These properties, including machinery, become immobilized if the following
requisites concur: (a) they are placed in the tenement by the owner of such tenement; (b) they
are destined for use in the industry or work in the tenement; and (c) they tend to directly meet
the needs of said industry or works. The first two requisites are not found anywhere in the Local
Government Code.

MERALCO insists on harmonizing the aforementioned provisions of the Civil Code and the Local
Government Code. The Court disagrees, however, for this would necessarily mean imposing
additional requirements for classifying machinery as real property for real property tax purposes
not provided for, or even in direct conflict with, the provisions of the Local Government Code.

Therefore, for determining whether machinery is real property subject to real property tax, the
definition and requirements under the Local Government Code (not the Civil Code) are
controlling. (Meralco vs. The City Assessor and City Treasurer of Lucena City, GR No. 166102 dated
August 5, 2015)

97. May submarine communications cables be classified as taxable real property by the local
governments?

Yes, submarine or undersea communications cables are akin to electric transmission lines which
this Court has recently declared in Manila Electric Company v. City Assessor and City Treasurer of
Lucena City, as "no longer exempted from real property tax" and may qualify as "machinery"
subject to real property tax under the Local Government Code. To the extent that the
 TAXATION
equipment's location is determinable to be within the taxing authority's jurisdiction, the Court
sees no reason to distinguish between submarine cables used for communications and aerial or
underground wires or lines used for electric transmission, so that both pieces of property do not
merit a different treatment in the aspect of real property taxation. (Capitol Wireless, Inc. vs. The
Provincial Treasurer of Batangas, GR No. 180110 dated May 30, 2016)

98. What are the real properties exempt from real property tax?

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by
local water districts and government owned or controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
power;
(d) All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and,
(e) Machinery and equipment used for pollution control and environmental
protection.

Except as provided herein (under the LGC), any exemption from payment of real
property tax previously granted to, or presently enjoyed by, all persons, whether
natural or juridical, including all government-owned or controlled corporations are
hereby withdrawn upon the effectivity of the Local Government Code. (Sec. 234 LGC)

99. What is the procedure in order to claim exemption from real property tax?

Every person by or for whom real property is declared, who shall claim tax exemption for such
property from real property tax shall file with the provincial, city or municipal assessor within
thirty (30) days from the date of the declaration of real property sufficient documentary evidence
in support of such claim including corporate charters, title of ownership, articles of incorporation,
by-laws, contracts, affidavits, certifications and mortgage deeds, and similar documents. (Sec.
206 LGC)

100. SP Computer College is a non-stock non-profit educational institution. It requested the
City Assessor of Caloocan City to extend tax exemption to certain parcels of landclaiming that
the same were being used actually, directly and exclusively for educational purposes pursuant
to Article VI, Section 28(3) of the 1987 Constitution and other applicable provisions of the Local
Government Code. The request was denied. SP Computer College filed a petition for mandamus
to compel the City Assessor to declare its real properties as exempt from real property taxation.
 TAXATION
Was mandamus the proper remedy?

No, appeal to the Local Board of Assessment Appeals is the proper remedy. Under Section 226
of RA 7160, the remedy of appeal to the Local Board of Assessment Appeals is available from an
adverse ruling or action of the provincial, city or municipal assessor in the assessment of
property, thus:

Section 226. Local Board of Assessment Appeals. -Any owner or person having
legal interest in the property who is not satisfied with the action of the provincial,
city or municipal assessor in the assessment of his property may, within sixty (60)
days from the date of receipt of the written notice of assessment, appeal to the
Board of Assessment Appeals of the province or city by filing a petition under oath
in the form prescribed for the purpose, together with copies of the tax
declarations and such affidavits or documents submitted in support of the appeal.

Petitioner also argues that it is seeking to enforce, through the petition for mandamus, a clear
legal right under the Constitution and the pertinent provisions of the Local Government Code
granting tax exemption on properties actually, directly and exclusively used for educational
purposes. But petitioner is taking an unwarranted shortcut. The argument gratuitously presumes
the existence of the fact which it must first prove by competent and sufficient evidence before
the City Assessor. It must be stressed that the authority to receive evidence, as basis for
classification of properties for taxation, is legally vested on the respondent City Assessor whose
action is appealable to the Local Board of Assessment Appeals and the Central Board of
Assessment Appeals, if necessary.

The petitioner cannot bypass the authority of the concerned administrative agencies and directly
seek redress from the courts even on the pretext of raising a supposedly pure question of law
without violating the doctrine of exhaustion of administrative remedies. Hence, when the law
provides for remedies against the action of an administrative board, body, or officer, as in the
case at bar, relief to the courts can be made only after exhausting all remedies provided
therein. Otherwise stated, before seeking the intervention of the courts, it is a precondition that
petitioner should first avail of all the means afforded by the administrative processes.

Besides, mandamus does not lie against the respondent City Assessor in the exercise of his
function of assessing properties for taxation purposes. While its duty to conduct assessments is
a ministerial function, the actual exercise thereof is necessarily discretionary. Well-settled is the
rule that mandamus may not be availed of to direct the exercise of judgment or discretion in a
particular way, or to retract or reverse an action already taken in the exercise of either. (Systems
Plus College of Caloocan City vs. Local Government of Caloocan City, GR No. 146382 dated August
7, 2003)

101. When an assessment has been issued against a taxpayer for deficiency real property
 TAXATION
tax. What are the remedies available to the said taxpayer?

Once an assessment has already been issued by the assessor, the proper remedy of a taxpayer
depends on whether the assessment was erroneous or illegal.

An erroneous assessment “presupposes that the taxpayer is subject to the tax but is disputing
the correctness of the amount assessed.” With an erroneous assessment, the taxpayer claims
that the local assessor erred in determining any of the items for computing the real property tax,
i.e., the value of the real property or the portion thereof subject to tax and the proper assessment
levels. In case of an erroneous assessment, the taxpayer must exhaust the administrative
remedies provided under the Local Government Code before resorting to judicial action.

On the other hand, an assessment is illegal if it was made without authority under the law. In
case of an illegal assessment, the taxpayer may directly resort to judicial action without paying
under protest the assessed tax and filing an appeal with the Local and Central Board of
Assessment Appeals. Thus:

A. Erroneous Assessments:
1. Pay the tax then file a written protest with the Local Treasurer within 30 days from
the date of payment of the tax;
2. If protest is denied or upon the lapse of the 60-day period to decide the protest,
the taxpayer may appeal to the LBAA wihin 60 days from the denial of the protest
or the lapse of the 60-day period to decide the protest;
3. The LBAA has 120 days to decide the appeal;
4. If the taxpayer is unsatisfied with the LBAA’s decision, the taxpayer may appeal
before the CBAA within 30 days from the receipt of the LBAA’s decision;
5. The decision of the CBAA is appealble to the CTA En Banc under Rule 43; and,
6. The decision of the CTA En Banc is appealable to the SC under Rule 45 raising pure
questions of law.

B. Illegal Assessments:
1. Taxpayer shall file a complaint for injunction before the Regional Trial Court to
enjoin the LGU from collecting real property taxes;
2. The party unsatisfied with the decision of the RTC shall file an appeal, not a
petition for certiorari, before the CTA, the complaint being a local tax case decided
 TAXATION
by the RTC case decided by the RTC. The appeal shall be filed within 15 days
(should be 30 days);
3. Decision of the CTA is appealable to the SC under Rule 45 raising pure questions
of law;

C. Remedies on other scenarios:
1. In case the LGU has issued a notice of delinquency, the taxpayer may file a
complaint for injunction to enjoin the impending sale of the real property at public
auction;
2. In case the LGU has already sold the property at public auction, the taxpayer must
first deposit with the court the amount for which the real property was sold,
together with interest of 2% per month from the date of sale to the time of the
institution of action. The taxpayer may then file a complaint to assail the validity
of the public auction;
3. Decisions of the RTC in these cases are appealable to the CTA and the latter’s
decisions appealable before the SC under Rule 45; (City of Lapu-Lapu vs. PEZA, GR
No. 184203 dated November 26, 2014)

102. XYZ Corporation questioned a real property tax assessment alleging that the
assessment is invalid and illegal with the Regional Trial Court (“RTC”). The RTC issued a decision
upholding the real property tax assessment. Where should the decision of the RTC be appealed?

The decision of the RTC should be appealed to the Court of Tax Appeals Division.

The CTA has jurisdiction over real property tax cases decided by the RTC. Basis is: “Decisions,
resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them
in the exercise of their original jurisdiction;” The term "local taxes" in the aforementioned
provision should be considered in its general and comprehensive sense, which embraces real
property tax assessments xxx. (NPC vs. Municipal Government of Navotas, GR No. 192300 dated
November 24, 2014)

103. NPC entered into an Energy Conversion Agreement (“ECA”) with Mirant under a Build-
Operate-Transfer arrangement whereby Mirant will build and finance a coal-fired thermal
power plant on the lots owned by the NPC in Pagbilao, Quezon for the purpose of converting
fuel into electricity, and thereafter, operate and maintain the power plant for a period of 25
years. Under the ECA, NPC undertook responsibility to pay all taxes. Is the power plant exempt
 TAXATION
from real property tax under Sec. 234 (c) of the LGC?

At any rate, the NPC’s claim of tax exemptions is completely without merit. To successfully claim
exemption under Section 234(c) of the LGC, the claimant must prove two elements:

a. the machineries and equipment are actually, directly, and exclusively used
by local water districts and government-owned or controlled corporations; and
b. the local water districts and government-owned and controlled corporations
claiming exemption must be engaged in the supply and distribution of water
and/or the generation and transmission of electric power.

As applied to the present case, the government-owned or controlled corporation claiming
exemption must be the entity actually, directly, and exclusively using the real properties, and the
use must be devoted to the generation and transmission of electric power. Neither the NPC nor
Mirant satisfies both requirements. Although the plant’s machineries are devoted to the
generation of electric power, by the NPC’s own admission and as previously pointed out, Mirant
– a private corporation – uses and operates them. That Mirant operates the machineries solely
in compliance with the will of the NPC only underscores the fact that NPC does not actually,
directly, and exclusively use them. The machineries must be actually, directly, and exclusively
used by the government-owned or controlled corporation for the exemption under Section
234(c) to apply.

Nor will NPC find solace in its claim that it utilizes all the power plant’s generated electricity in
supplying the power needs of its customers. Based on the clear wording of the law, it is the
machineries that are exempted from the payment of real property tax, not the water or electricity
that these machineries generate and distribute.

Even the NPC’s claim of beneficial ownership is unavailing. The test of exemption is the use, not
the ownership of the machineries devoted to generation and transmission of electric power.
(NPC vs. Province of Quezon, GR No. 171586 dated July 15, 2009)

104. Who are the entities vested with personality to contest a real property tax assessment?

Section 226 of the LGC lists down the two entities vested with the personality to contest an
assessment: (1) the owner; and, (2) the person with legal interest in the property.

A person legally burdened with the obligation to pay for the tax imposed on a property has legal
interest in the property and the personality to protest a tax assessment on the property. This is
the logical and legal conclusion when Section 226, on the rules governing an assessment protest,
 TAXATION
is placed side by side with Section 250 on the payment of real property tax; both provisions refer
to the same parties who may protest and pay the tax:

SECTION 226. Local Board of Assessment SECTION 250. Payment of Real Property
Appeals. - Any owner or person having Taxes in Installments. - The owner of the
legal interest in the property who is not real property or the person having legal
satisfied with the action of the provincial, interest therein may pay the basic real
city or municipal assessor in the property tax xxx due thereon without
assessment of his property may, within interest in four (4) equal installments xxx.
sixty (60) days from the date of receipt of
the written notice of assessment, appeal
to the Board of Assessment Appeals of
the province or city xxx. (NPC vs. Province
of Quezon, GR No. 171586 dated July 15,
2009)

105. Are Airport Lands and Buildings of the Manila International Airport Authority (“MIAA”)
exempt from real estate tax?

MIAA’s Airport Lands and Buildings are exempt from real estate tax for the following reasons: (a)
MIAA is an instrumentality of the National Government in relation to Sec. 133 (o) of the LGC
which provides that the taxing power of LGUs shall not extend to: taxes, fees or charges of any
kind on the National Government, its agencies and instrumentalities, and local government units;
and, (b) real properties of MIAA are owned by the Republic of the Philippines being property of
public dominion under Art. 420 of the Civil Code.

The rule that a tax exemption is strictly construed against the taxpayer claiming the exemption
does not apply when Congress grants an exemption to a national government instrumentality
from local taxation, in which case, the exemption is construed liberally in favor of the national
government instrumentality.

On the nature of the MIAA properties, the enumeration of property of public dominion in Article
420 of the Civil Code includes those intended for public use, such as “ports” which are
constructed by the State. The term ports includes seaports and airports, hence, includes the
MIAA Airport Lands and Buildings. Being properties of public dominion, MIAA’s Airport Lands
and Buildings are outside the commerce of man and will remain inalienable unless the President
of the Philippines issues a proclamation withdrawing the Airport Lands and Buildings from public
use.

Section 234(a) of the LGC exempts from real estate tax real property owned by the Republic of
the Philippines except if the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person. Hence, portions of the Airport Lands and Buildings that MIAA
leases to private entities are not exempt from real estate tax. Moreover, being property of public
 TAXATION
dominion the Airport Lands and Buildings are exempt from tax delinquency sales. (MIAA vs. CA,
GR No. 155650 dated July 20, 2006)

106. Are real properties owned by the Philippine Economic Zone Authority (“PEZA”) subject
to real property tax?

PEZA’s real properties are exempt from real estate tax for the following reasons: (a) PEZA is an
instrumentality of the National Government in relation to Sec. 133 (o) of the LGC which provides
that the taxing power of LGUs shall not extend to: taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, and local government units; and, (b)
Real properties under PEZA’s title are owned by the Republic of the Philippines. The properties
sought to be taxed are located in publicly owned economic zones. These economic zones are
property of public dominion under Art. 420 of the Civil Code. (City of Lapu-Lapu vs. PEZA, GR No.
184203 dated November 26, 2014)

107. Are commercial properties owned by the Republic of the Philippines that are being
leased to private entities exempt from execution or foreclosure sale in case there is failure to
pay the real property tax?

No, only properties owned by the Republic, considered as “property of public dominion” under
Art. 420 of the Civil Code, are exempt from execution and foreclosure sale.

In order to be considered property of public dominion the property must be "intended for public
use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks,
shores, roadsteads" or the property must be "intended for some public service or for the
development of the national wealth."

If portions of a commercial area owned by the Republic are leased to different business
establishments, not only are the said properties subject to real property tax under Sec. 234 (a) of
the LGC, the said properties are not also considered “property of public dominion” and therefore
may be sold at public auction to satisfy a tax delinquency. (City of Pasig vs. Republic, GR No.
185023 dated August 24, 2011)

108. GSIS is an instrumentality of the government. It leased its property (“Katigbak
Property”) to Manila Hotel Corporation (“MHC”). The lease contract provides that it shall be
MHC who will pay the real property tax during the lease term, if any.

a) Is GSIS liable to pay real property tax on its properties?

No, as a general rule. GSIS is an instrumentality of the national government and is exempt from
real property tax under Sec. 133(o) of the LGC. In addition, properties titled in its name are owned
by the Republic and are exempt under Sec. 234(a) of the LGC. The tax exemption of property of
the Republic or its instrumentality ceases only if, as stated in Sec. 234(a) of the LGC, beneficial
use thereof has been granted, for a consideration or otherwise, to a taxable person. GSIS, as a
 TAXATION
government instrumentality, is not a taxable juridical person under Sec. 133(o) of the LGC. GSIS,
however, lost in a sense that status with respect to the Katigbak property when it contracted
its beneficial use to MHC, doubtless a taxable person.

b) Between GSIS and MHC, who should pay the real property tax?

It should be MHC, the beneficial user of the property. The unpaid tax attaches to the property
and is chargeable against the taxable person who had actual or beneficial use and possession of
it regardless of whether or not he is the owner (Beneficial Use Doctrine). Being in possession and
having actual use of the Katigbak property since November 1991, MHC is liable for the realty
taxes assessed over the Katigbak property from 1992 to 2002. Also, under the provisions of the
lease contract, MHC obligated itself to pay the real property tax.

As a matter of law and contract, therefore, MHC stands liable to pay the realty taxes due on the
Katigbak property. Considering, however, that MHC has not been impleaded in the instant case,
the remedy of the City of Manila is to serve the realty tax assessment covering the subject
Katigbak property to MHC and to pursue other available remedies in case of nonpayment, for
said property cannot be levied under its charter. (GSIS vs. City of Manila, GR No. 186242 dated
December 23, 2009)

109. What is the jurisdiction of the CTA in “civil” cases?

a) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;
b) Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relations thereto, or other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial;
c) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction;
d) Decisions of the Commissioner of Customs in cases involving liability for customs
duties, fees or other money charges, seizure, detention or release of property
affected, fines, forfeitures or other penalties in relation thereto, or other matters
 TAXATION
arising under the Customs Law or other laws administered by the Bureau of
Customs;
e) Decisions of the Central Board of Assessment Appeals in the exercise of its
appellate jurisdiction over cases involving the assessment and taxation of real
property originally decided by the provincial or city board of assessment appeals;
f) Decisions of the Secretary of Finance on customs cases elevated to him
automatically for review from decisions of the Commissioner of Customs which
are adverse to the Government under Section 2315 of the Tariff and Customs
Code;
g) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural
product, commodity or article, and the Secretary of Agriculture in the case of
agricultural product, commodity or article, involving dumping and countervailing
duties under Section 301 and 302, respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No. 8800, where either party may
appeal the decision to impose or not to impose said duties; and,
h) Exclusive original jurisdiction in tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties: Where the principal amount
of taxes and fees, exclusive of charges and penalties, claimed is One million pesos
(P1,000,000.00) or more. (RA 9282)

110. What is the jurisdiction of the CTA in “criminal" cases?

The CTA has exclusive original jurisdiction over all criminal offenses arising from violations of the
National Internal Revenue Code or Tariff and Customs Code and other laws administered by the
Bureau of Internal Revenue or the Bureau of Customs: Where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is One million pesos (P1,000,000.00) or more.
(RA 9282)

111. In criminal cases falling under the original jurisdiction of the CTA, may the recovery of
the civil liability be filed separately?

No, any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action
and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at
all times be simultaneously instituted with, and jointly determined in the same proceeding by the
CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the
 TAXATION
civil action, and no right to reserve the filling of such civil action separately from the criminal
action will be recognized. (RA 9282)
112. Which cases are directly cognizable by the CTA En Banc?

a) Decisions by the Central Board of Assessment Appeals in Real Property Tax Cases;
b) Decisions by the Regional Trial Court in the exercise of its appellate jurisdiction in
local tax cases;
c) Decisions by the Regional Trial Court in the exercise of its appellate jurisdiction in
tax collection cases; and,
d) Decisions by the Regional Trial Court in the exercise of its appellate jurisdiction in
criminal cases.

113. RCC filed a petition for review with the Court of Tax Appeals to appeal the decision of
the Commissioner of Internal Revenue which denied his protest against a deficiency tax
assessment.

a) Will the filing of the petition for review suspend the collection of taxes?

It will not. No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue
or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal
treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of
Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax liability as provided by existing law:
Provided, however, That when in the opinion of the Court the collection by the aforementioned
government agencies may jeopardize the interest of the Government and/or the taxpayer the
Court any stage of the proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double the
amount with the Court. (RA 9282)

b) RA 9282 requires the taxpayer either to deposit the amount claimed or to file a
surety bond for not more than double the amount with the Court. What does the
term “amount claimed” mean?

“Amount claimed” means principal amount of taxes excluding penalties, interests and
surcharges.

c) May posting of the bond be dispensed with?

Yes, the bond should be dispensed with if:

a) Prescription has already set in; or,
b) Whenever it is determined by the courts that the method employed by the
 TAXATION
Commissioner of Internal Revenue in the collection of tax is not sanctioned by law.

The purpose of the rule is not only to prevent jeopardizing the interest of the taxpayer, but more
importantly, to prevent the absurd situation wherein the court would declare “that the collection
by the summary methods of distraint and levy was violative of law, and then, in the same breath
require the petitioner to deposit or file a bond as a prerequisite for the issuance of a writ of
injunction.” (Spouses Pacquiao vs. The CTA, GR No. 213394 dated April 6, 2016.

Section 11 of R.A. 1125, as amended, indicates that the requirement of the bond as a condition
precedent to suspension of the collection applies only in cases where the processes by which the
collection sought to be made by means thereof are carried out in consonance with the law, not
when the processes are in plain violation of the law that they have to be suspended for
jeopardizing the interests of the taxpayer.

If the taxpayer raises the illegality of the assessment, the CTA should conduct a preliminary
hearing in order to determine whether the required surety bond should be dispensed with or
reduced. (Tridharma Marketing Corporation vs. CTA, GR No. 215950 dated June 20, 2016, J.
Bersamin)

114. Does the CTA have Certiorari Jurisdiction?

Yes, while there is no express grant of such power, with respect to the CTA, Section 1, Article VIII
of the 1987 Constitution provides, nonetheless, that judicial power shall be vested in one
Supreme Court and in such lower courts as may be established by law and that judicial power
includes the duty of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power
of the CTA includes that of determining whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order
in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that
the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these
cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must
have the authority to issue, among others, a writ of certiorari. In transferring exclusive
jurisdiction over appealed tax cases to the CTA, it can reasonably be assumed that the law
intended to transfer also such power as is deemed necessary, if not indispensable, in aid of such
 TAXATION
appellate jurisdiction. There is no perceivable reason why the transfer should only be considered
as partial, not total.

If this Court were to sustain petitioners' contention that jurisdiction over their certiorari petition
lies with the CA, this Court would be confirming the exercise by two judicial bodies, the CA and
the CTA, of jurisdiction over basically the same subject matter – precisely the split-jurisdiction
situation which is anathema to the orderly administration of justice. The Court cannot accept
that such was the legislative motive, especially considering that the law expressly confers on the
CTA, the tribunal with the specialized competence over tax and tariff matters, the role of judicial
review over local tax cases without mention of any other court that may exercise such power.
Thus, the Court agrees with the ruling of the CA that since appellate jurisdiction over private
respondents' complaint for tax refund is vested in the CTA, it follows that a petition for certiorari
seeking nullification of an interlocutory order issued in the said case should, likewise, be filed
with the same court. To rule otherwise would lead to an absurd situation where one court
decides an appeal in the main case while another court rules on an incident in the very same
case. (City of Manila vs. Hon. Grecia-Cuerdo, GR No. 175723 dated February 4, 2014.)

115. What are some of the important doctrines laid down by the Supreme Court involving
customs seizures and forfeitures?

a) There is no question that Regional Trial Courts are devoid of any competence to pass
upon the validity or regularity of seizure and forfeiture proceedings conducted by the
Bureau of Customs and to enjoin or otherwise interfere with these proceedings

The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive
jurisdiction to hear and determine all questions touching on the seizure and forfeiture
of dutiable goods. The Regional Trial Courts are precluded from assuming cognizance
over such matters even through petitions of certiorari, prohibition or mandamus.

The rule that Regional Trial Courts have no review powers over such proceedings is
anchored upon the policy of placing no unnecessary hindrance on the government's
drive, not only to prevent smuggling and other frauds upon Customs, but more
importantly, to render effective and efficient the collection of import and export
duties due the State, which enables the government to carry out the functions it has
been instituted to perform. (Jao vs. CA, GR No. 104604 dated October 6, 1995)

b) Even if the seizure by the Collector of Customs were illegal, which has yet to be
proven, such act does not deprive the Bureau of Customs of jurisdiction thereon. (R.V.
Marzan Freight, Inc. vs. CA, GR No. 128064 dated March 4, 2004)

c) The decision of the Collector of Customs in seizure proceedings, concerns
the res rather than the persona. The proceeding is a probe on contraband or illegally
imported goods. These merchandise violated the revenue law of the country, and as
such, have been prevented from being assimilated in lawful commerce until
 TAXATION
corresponding duties are paid thereon and the penalties imposed and satisfied either
in the form of fine or of forfeiture in favor of the government who will dispose of them
in accordance with law. The importer or possessor is treated differently. The fact that
the administrative penalty be falls on him is an inconsequential incidence to criminal
liability. By the same token, the probable guilt cannot be negated simply because he
was not held administratively liable. The Collector's final declaration that the articles
are not subject to forfeiture does not detract his findings that untaxed goods were
transported in respondents' car and seized from their possession by agents of the law.
Whether criminal liability lurks on the strength of the provision of the Tariff and
Customs Code adduced in the information can only be determined in a separate
criminal action. Respondents' exoneration in the administrative cases cannot deprive
the State of its right to prosecute. But under our penal laws, criminal responsibility, if
any, must be proven not by preponderance of evidence but by proof beyond
reasonable doubt.

Considering, therefore, that proceedings for the forfeiture of goods illegally imported
are not criminal in nature since they do not result in the conviction of the wrongdoer
nor in the imposition upon him of a penalty, proof beyond reasonable doubt is not
required in order to justify the forfeiture of the goods. In this case, the degree of proof
required is merely substantial evidence which means such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion. (Feeder
International Line, Pte., Ltd. vs. CA, GR No. 94262 dated May 31, 1991)

d) The acquittal in a criminal proceeding is not a bar to a forfeiture proceeding. Thus, it
has been held that since the forfeiture proceedings is one in rem under which the
offense is attached primarily to the thing rather than the offender, the forfeiture
proceedings stands independent of, and wholly unaffected by, any criminal
proceeding in personam and is not barred by a conviction of the individual under a
criminal charge. (Acting Commissioner of Customs vs. CTA, GR No. 62636 dated April
27, 1984)

e) Forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods
and not against the owner. It is in the nature of a proceeding in rem, i.e., directed
against the res or imported articles and entails a determination of the legality of their
importation. In this proceeding, it is in legal contemplation the property itself which
commits the violation and is treated as the offender, without reference whatsoever
to the character or conduct of the owner. The issue here is limited to whether the
imported goods should be forfeited and disposed of in accordance with law for
violation of the Tariff and Customs Code. Hence, the ruling of the District Collector in
the forfeiture case, insofar as the aspect of fraud is concerned, is not conclusive; nor
does it preclude the importer from invoking absence of fraud in the redemption
proceedings. (Transglobe International, Inc. vs. CA, GR No. 126634 dated January 25,
 TAXATION
1999)

f) Verily, the rule is that from the moment imported goods are actually in the possession
or control of the Customs authorities, even if no warrant for seizure or detention had
previously been issued by the Collector of Customs in connection with the seizure and
forfeiture proceedings, the BOC acquires exclusive jurisdiction over such imported
goods for the purpose of enforcing the customs laws, subject to appeal to the Court
of Tax Appeals whose decisions are appealable to this Court. As we have clarified in
Commissioner of Customs v. Makasiar, the rule that RTCs have no review powers over
such proceedings is anchored upon the policy of placing no unnecessary hindrance on
the government's drive, not only to prevent smuggling and other frauds upon
Customs, but more importantly, to render effective and efficient the collection of
import and export duties due the State, which enables the government to carry out
the functions it has been instituted to perform. (SBMA vs. Rodriguez, GR No. 160270
dated April 23, 2010)

116. What is the rule with respect to de minimis importations?

No duties and taxes shall be collected on goods with an FOB or FCA value of ten thousand pesos
(P10,000.00) or below. (Sec. 423 of the CMTA)

117. What are the requirements or rules in order for importations made by returning
residents to be exempt from customs duties?

a) Returning Residents - shall refer to nationals who have stayed in a foreign country for a period
of at least six (6) months. It includes spouse and dependent children.
b) Exemption covers:
1. Personal and household effects belonging to returning residents including household
appliances, jewelry, precious stones, and other goods of luxury previously exported from the
Philippines must be covered by a Certificate of Identification (“CI”) issued by the District
Collector or a Customs Officer. Upon importation of the exported goods, the Customs
Examiner shall verify the identity of the goods brought in as against the CI; and,
2. Personal and household effects normally used for the comfort and convenience of the
Returning Residents during their stay abroad which must accompany them on their return,
or arrive within a reasonable time which, barring unforeseen and fortuitous events, in no case
 TAXATION
shall exceed sixty (60) calendar days after the owner's return. It does not cover luxury items,
vehicles, watercrafts, aircrafts and animals purchased in foreign countries.
c) The imported goods must: (1) not be in commercial quantities; and, (2) not intended for
barter, sale or for hire.
d) Exemption is limited to the following FOB and FCA values:
1. Three hundred fifty thousand pesos (P350,000.00) for those who have stayed in a foreign
country for at least ten (10) years and have not availed of this privilege within ten (10) years
prior to returning resident's arrival;
2. Two hundred fifty thousand pesos (P250,000.00) for those who have stayed in a foreign
country for a period of at least five (5) but not more than ten (10) years and have not availed
of this privilege within five (5) years prior to returning resident's arrival; or
3. One hundred fifty thousand pesos (P150,000.00) for those who have stayed in a foreign
country for a period of less than five (5) years and have not availed of this privilege within six
(6) months prior to returning resident's arrival.(Sec. 800 of the CMTA and CAO 6-2016 dated
December 2, 2016)

118. What are the tax exemption privileges of OFWs?

In addition to the tax-exempt privileges enjoyed by returning residents, OFWs shall have
the privilege to bring in tax and duty free home appliances and other durables limited to
one (1) of every kind once every calendar year accompanying them on their return or
arriving within a period not exceeding sixty (60) days after the OFW’s return with a value
not exceeding One hundred fifty thousand pesos (P150,000.00). Durables refer to goods,
as household appliances, machinery or sports equipment that may be used repeatedly or
continuously over a period of a year or more, assuming a normal or average rate of
physical usage. (Sec. 800 of the CMTA and CAO 6-2016 dated December 2, 2016)

119. What are the requirements or rules in order for “balikbayan boxes” to be exempt from
customs duties?

a) Who are entitled to the exemption? Non-resident Filipinos, OFWs and Returning
Residents (“Qualified Filipinos”);
b) Qualified Filipinos while abroad are allowed to send to their families or relatives in the
Philippines Balikbayan Boxes which shall be exempt from the payment of duties and taxes, up to
three (3) times in a calendar year;
c) Balikbayan Boxes brought in by Qualified Filipinos from abroad as accompanied or
unaccompanied baggage as passengers shall be included in counting the availment;
d) De minimis importation shall not be included in the counting. A shipment that is above
Php10,000.00 shall be automatically considered as one availment; and,
e) Balikbayan boxes shall contain personal and household effects only and shall neither be
in commercial quantities nor intended for barter, sale or for hire, and that the total FCA value for
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all Balikbayan Boxes per sender in any calendar year shall not exceed one hundred fifty thousand
pesos (P150,000.00). (Sec. 800 of the CMTA and CAO 5-2016 dated December 2, 2016)

120. When is there Misdeclaration, Misclassification and Undervaluation in Goods
Declaration?

a) Misdeclaration – when there is a discrepancy in the quantity, quality, description, weight,

or measurement of the goods.
b) Misclassification – when there is insufficient or wrong description of the goods or use of
wrong tariff heading resulting in a discrepancy in duty and tax to be paid.
c) Undervaluation – when: (1) the declared value fails to disclose in full the price actually
paid or payable; or (2) when an incorrect valuation method is used or valuation rules are not
properly observed. (Sec. 1400 of the CMTA)

121. What is the effect if there is a Misdeclaration, Misclassification and Undervaluation in

the Goods Declaration?

There shall be imposed a surcharge equivalent to 250% of the duty and tax due. No surcharge
shall be imposed: (a) when the discrepancy in the duty is less than 10%; (b) when the declared
tariff heading is rejected in a formal customs dispute settlement process involving difficult or
highly technical question of tariff classification; (c) when the tariff classification declaration relied
on an official government ruling.

If the Misdeclaration, Misclassification and Undervaluation in the Goods Declaration is

intentional or fraudulent, a surcharge of 500% shall be imposed without prejudice to the
application of fines and penalties under Sec. 1401 of the CMTA. There is prima facie evidence of
fraud if the discrepancy in duty and tax to be paid between what is legally determined and what
is declared is more than 30% percent. (Sec. 1400 of the CMTA)

122. What is outright smuggling and technical smuggling?

a) Outright Smuggling – refers to an act of importing goods into the country
without complete customs prescribed importation documents, or without
being cleared by customs or other regulatory government agencies, for the
purpose of evading payment of prescribed taxes, duties and other government
charges.
b) Technical Smuggling – refers to an act of importing goods into the country
by means of fraudulent, falsified or erroneous declaration of goods to it
nature, kind, quality, quantity or weight, for the purpose of reducing or
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avoiding payment of prescribed taxes, duties and other charges. (Sec. 102 of
the CMTA)
123. What is the legal effect of possession of smuggled goods?

When, upon trial for smuggling, the defendant is shown to have or to have had possession
of the goods in question, possession shall be deemed sufficient evidence to authorize
conviction unless the defendant shall explain the possession to the satisfaction of the
court. (Sec. 1401 of the CMTA)

124. What is the effect of payment of the tax due in smuggling cases?

Payment of the tax due after apprehension shall not constitute a valid defense. (Sec. 1401
of the CMTA)

125. What are the other fraudulent practices under the CMTA?

a) Making or attempting to make any entry of imported or exported goods by means
of any false or fraudulent statement, document or practice; or
b) Knowingly and willfully filing of any false or fraudulent claim for payment of
drawback or refund of duties. (Sec. 1403 of the CMTA)

126. Mercado is the owner of Al-Mer Cargo Management. A shipment coming from Bangkok,
Thailand arrived at the Manila International Container Port with Al-Mer Cargo Management
as consignee. Al-Mer Cargo Management filed an Informal Import Declaration and Entry
(“IIDE”) and Permit to Deliver through its broker, Consular Cargo Services, describing the items
in the shipment as "personal effects, assorted mens and ladies wearing apparels, (sic) textile
and accessories.” Upon examination of the shipment, the Bureau of Customs found the
shipment to contain general merchandise in commercial quantities instead of personal effects
of no commercial value.

Eventually, Mercado was charged and convicted for violation of Sec. 3602 of the TCCP (now
Sec. 1403 of the CMTA), specifically for making an entry by means of false and fraudulent
invoice and declaration.

Was the conviction of Mercado correct?

No, the act thereby imputed against Mercado — making an entry by means of false and
fraudulent invoice and declaration — fell under the first form of fraudulent practice punished
under Section 3602 of the TCCP (now Sec. 1403 of the CMTA). The elements to be established in
order to convict him of the crime charged are, specifically: (1) there must be an entry of imported
or exported articles; (2) the entry was made by means of any false or fraudulent invoice,
declaration, affidavit, letter, or paper; and (3) there must be intent to avoid payment of taxes.

It is undisputed that the customs documents (like the IIDE and Permit to Deliver) were filed with
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and the imported goods passed through the customs authorities, thereby satisfying the first
element of entry of imported articles. However, the second and third elements were not
established beyond reasonable doubt. Although there was a discrepancy between the
declaration made and the actual contents of the shipment, the petitioner firmly disavowed his
participation in securing the clearance for the shipment as well as in preparing and filing the
import documents. He insisted that being only the consignee of the shipment, he did not file the
IIDE in the Bureau of Customs and he had no knowledge about the entry. It was the broker who
prepared and signed the IIDE. (Mercado vs. People, GR No. 167510 dated July 8, 2015, J.
Bersamin)

127. In general when may a vehicle, vessel or aircraft and its cargo be subject to forfeiture?

Any vehicle, vessel or aircraft, including cargo, which shall be used unlawfully in the importation
or exportation of articles or in conveying and/or transporting contraband or smuggled articles
in commercial quantities into or from any Philippine port or place. The mere carrying or holding
on board of contraband or smuggled articles in commercial quantities shall subject such vessel,
vehicle, aircraft or any other craft to forfeiture; Provided, That the vessel, or aircraft or any other
craft is not used as duly authorized common carrier and as such a carrier it is not chartered or
leased;

Moreover, under Sec. 1114 of the CMTA, the forfeiture of the vehicle, vessel, or aircraft shall
not be effected if it is established that the owner thereof or his agent in charge of the means
of conveyance used as aforesaid has no knowledge of or participation in the unlawful act:
Provided, however, That a prima facie presumption shall exist against the vessel, vehicle or
aircraft under any of the following circumstances:

1. If the conveyance has been used for smuggling before;

2. If the owner is not in the business for which the conveyance is generally used;
and,
3. If the owner is not financially in a position to own such conveyance.

Note also that the burden of proof in seizure and forfeiture cases is with the claimant.(Sec. 1123
of the CMTA.)

128. Palacio Shipping, Inc. (“Palacio”) is the owner of the M/V Don Martin, a vessel of
Philippine registry engaged in coastwise trade. The M/V Don Martin docked at the port of
Cagayan de Oro City with its cargo of 6,500 sacks of rice. The 6,500 sacks of rice was purchased
in Sablayan, Occidental Mindoro. The District Collector of Customs concluded that in the
absence of a showing of lawful entry into the country, the 6,500 sacks of rice were of foreign
origin and thus subject to seizure and forfeiture.

Was the seizure and forfeiture of the rice cargo and its carrying vessel correct?

No, to warrant forfeiture, Section 2530(a) and (f) of the TCCP (now Sec. 1113 of the CMTA)
 TAXATION
requires that the importation must have been unlawful or prohibited. To warrant the forfeiture
of the 6,500 sacks of rice and the carrying vessel, there must be a prior showing of probable cause
that the rice cargo was smuggled. Once probable cause has been shown, the burden of proof is
shifted to the claimant. The government should establish probable cause prior to forfeiture by
proving: (1) that the importation or exportation of the 6,500 sacks of rice was effected or
attempted contrary to law, or that the shipment of the 6,500 sacks of rice constituted prohibited
importation or exportation; and (2) that the vessel was used unlawfully in the importation or
exportation of the rice, or in conveying or transporting the rice, if considered as contraband or
smuggled articles in commercial quantities, into or from any Philippine port or place.

The Supreme Court, after a review of the records held that no probable cause existed to justify
the forfeiture of the rice cargo and the vessel. The court ruled that the rice cargo was purchased
locally and that the carrying vessel was licensed only for coastwise trade. In the absence of any
showing by the government that the vessel was licensed to engage in trade with foreign countries
and was not limited to coastwise trade, the inference that the shipment of the 6,500 sacks of rice
was transported only between Philippine ports and not imported from a foreign country became
fully warranted. With the petitioners having convincingly established that the 6,500 sacks of rice
were of local origin, the shipment need not be accompanied by import documents. (M/V Don
Martin VOY 047 and its cargoes, Palacio Shipping vs. The Secretary of Finance, GR No. 160206
dated July 15, 2015, J. Bersamin)

129. Mr. Jose D. Cruz is a driver of a taxi cab. While in the Manila International Airport, he
was engaged by a passenger who loaded three (3) boxes in his taxi cab. When they were about
to depart, elements of the National Customs Police stopped the cab and upon investigation,
found that the three (3) boxes loaded therein contained articles smuggled out of the Manila
International Airport. As a consequence, the apprehending officers recommended that the
three (3) boxes, its contents and the taxi cab be seized and made subject of a forfeiture
proceeding under Section 2530 (k) of the Tariff and Customs Code as amended (now Sec. 1113
of the CMTA). Is the recommendation correct? Why?

The recommendation to seize the taxi cab is not correct. Sec. 1114 of the CMTA provides that
“the forfeiture shall not be effected if it is established that the owner of the means of conveyance
is engaged as a common carrier or his agent at the time has no knowledge of the unlawful act.”
The taxi cab is a common carrier, and we presume that the driver had no knowledge of the
unlawful act. (1979 CBLE Question – Nague citing M. Tejam)

However, in one case, the Supreme Court held that lack of knowledge by the owner that a
vessel is being used illegally in the importation of goods will not absolve the vessel from
forfeiture.

According to the Supreme Court, under Section 2530 of the TCCP (now Sec. 1113 of the CMTA),
the vessel is clearly subject to forfeiture in favor of the Government. Forfeiture proceedings are
in the nature of proceedings in rem (Vierneza vs. Commissioner of Customs, 24 SCRA 394) and
are directed against the res. The fact that private respondent has allegedly no actual knowledge
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that M/B "Maria Victoria-P" was used illegally does not render the vessel immune from forfeiture.
This is so because the forfeiture proceedings in this case was instituted against the vessel itself.
Private respondent's defense that he has no actual knowledge that the vessel was used illegally
is personal to him but cannot absolve the vessel from liability of forfeiture.

Moreover, Section 2530 of the TCCP (now Sec. 1113 of the CMTA) prescribes in an unequivocal
term the imposition of the penalty of forfeiture in cases of unlawful importation of foreign
articles regardless of whether such importation occurred with or without the knowledge of the
owner of the vessel. (Commissioner of Customs vs. CTA, GR No. L-31733 dated September 20,
1985).

130. What is the judicial procedure with respect to customs cases?

1. Appeal to the Court of Tax Appeals Division within 30 days from receipt of the decision
via Petition for Review under Rule 42 in the following cases:

a) Decisions of the Commissioner of Customs in cases involving liability for

customs duties, fees or other money charges, seizure, detention or release of
property affected, fines, forfeitures of other penalties in relation thereto, or
other matters arising under the Customs Law or other laws administered by
the Bureau of Customs;
b) Decisions of the Secretary of Finance on customs cases elevated to him
automatically for review from decisions of the Commissioner of Customs
adverse to the Government under Section 2315 of the Tariff and Customs
Code (now Sec. 1104 of the CMTA by analogy in relation to Secs. 1127 and
1128) ; and,
c) Decisions of the Secretary of Trade and Industry, in the case of non-
agricultural product, commodity or article, and the Secretary of Agriculture, in
the case of agricultural product, commodity or article, involving dumping and
countervailing duties under Section 301 and 302, respectively, of the Tariff
and Customs Code (now Secs. 711 and 713 of the CMTA), and safeguard
measures under Republic Act No. 8800 (now Sec. 712 of the CMTA), where
either party may appeal the decision to impose or not to impose said duties;

2. Party aggrieved by the decision of the Court of Tax Appeals Division should file a
motion for reconsideration or new trial (mandatory) with the Court of Tax Appeals
Division within 15 days from receipt of the decision.

3. From a denial of the motion for reconsideration or new trial, the Party aggrieved may
appeal to the Court of Tax Appeals En Banc via Petition for review under Rule 43 within
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15 days from receipt of the said denial.

4. Party aggrieved by the decision of the Court of Tax Appeals En Banc may file a motion
for reconsideration or new trial (optional) within 15 days from receipt of the said
decision.

5. Party aggrieved by the decision of the Court of Tax Appeals En Banc or denial of the
motion for reconsideration or new trial may file an appeal with the Supreme Court via
Petition for Review on Certiorari under Rule 45 within 15 days from receipt of said
decision or denial.

131. What is the rationale for providing an automatic review involving the decision made by
the Collector which is adverse to the Government?

It is intended to protect the interest of the Government in the collection of taxes and customs
duties in those seizure and protest cases which, without the automatic review provided therein,
neither the Commissioner of Customs nor the Secretary of Finance would probably ever know
about. Without the automatic review by the Commissioner of Customs and the Secretary of
Finance, a collector in any of our country's far-flung ports, would have absolute and unbridled
discretion to determine whether goods seized by him are locally produced, hence, not dutiable
or of foreign origin, and therefore subject to payment of customs duties and taxes. His decision,
unless appealed by the aggrieved party (the owner of the goods), would become final with 'the
no one the wiser except himself and the owner of the goods. The owner of the goods cannot be
expected to appeal the collector's decision when it is favorable to him. A decision that is favorable
to the taxpayer would correspondingly be unfavorable to the Government, but who will appeal
the collector's decision in that case certainly not the collector.

Evidently, it was to cure this anomalous situation (which may have already defrauded our
government of huge amounts of uncollected taxes), that the provision for automatic review by
the Commissioner of Customs and the Secretary of Finance of unappealed seizure and protest
cases was conceived to protect the government against corrupt and conniving customs
collectors. (Yaokasin vs. Commissioner of Customs, GR No. 84111 dated December 22, 1989)

132. What are the kinds of abandonment?

a) Express abandonment – There is an express abandonment when the owner, importer
or consignee signifies with the Collector of Customs in writing his intention to
abandon his importation in favor of the government; and,
b) Implied abandonment – There is an implied abandonment when:
i. The importer, owner, consignee or interested party after due notice, fails to
file a goods declaration for the importation within a period of fifteen (15) days from
the date of the discharge of the last package from the vessel or aircraft. The period
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to file the goods declaration may, upon request, be extended on valid grounds for
another fifteen (15) days;
ii. Having filed an entry for shipment, an interested party fails to pay the assessed
duties, taxes and other charges thereon, or if the regulated goods failed to comply
with Section 117 of the CMTA, within fifteen (15) days from the date of final
assessment: Provided, That if such regulated goods are subject of an alert order
and the assessed duties, taxes and other charges thereof are not paid within fifteen
(15) days from notification by the Bureau of Customs of the resolution of the alert
order, the same shall also be deemed abandoned claim his importation within a
non-extendible period of fifteen (15) days from the date of posting of the notice to
claim such importation;
iii. Having paid the assessed duties, taxes and other charges, the owner, importer
or consignee or interested party after due notice, fails to claim the goods within
thirty (30) days from payment; and,
iv. When the owner or importer fails to claim goods in customs bonded
warehouses within the prescribed period. (Sec. 1129 of the CMTA)

133. What are the effects of abandonment?

a) Expressly abandoned goods shall be ipso facto be deemed the property of the
government and to be disposed off in accordance with the CMTA.
b) If the Bureau of Customs has not disposed of the abandoned goods, the owner or
importer of goods impliedly abandoned may, at any time within thirty (30) days after the
lapse of the prescribed period to file the declaration, reclaim the goods provided that all
legal requirements have been complied with and the corresponding duties, taxes and
other charges, without prejudice to charges and fees due to the port or terminal operator,
as well as expenses incurred have been paid before the release of the goods from customs
custody.
c) When the Bureau of Customs sells goods which have been impliedly abandoned,
although no offense has been discovered, the proceeds of the sale, after deduction of any
duty and tax and all other charges and expenses incurred as provided in Section 1143 of
the CMTA, shall be turned over to those persons entitled to receive them or, when this is
not possible, held at their disposal for a specified period. After the lapse of the specified
period, the balance shall be transferred to the forfeiture fund as provided in Section 1151
of the CMTA. (Sec. 1130 of the CMTA)

134. Does the Bureau of Customs have jurisdiction over seizure cases within the Subic
Freeport?

Yes, under RA 7227, its implementing rules and CAO 4-93 (Rules and Regulations for Customs
Operations in the Subic Special Economic and Freeport Zone), both the SBMA and the Bureau of
Customs have the power to seize and forfeit goods or articles entering the Subic Bay Freeport,
except that SBMA’s authority to seize and forfeit goods or articles entering the Subic Bay Freeport
has been limited only to cases involving violations of RA No. 7227 or its IRR. There is no question
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therefore, that the authority of the Bureau of Customs is larger in scope because it covers cases
concerning violations of the customs laws.

The authority of the Bureau of Customs to seize and forfeit goods and articles entering the Subic
Bay Freeport does not contravene the nature of the Subic Bay Freeport as a separate customs
authority. Indeed, the investors can generally and freely engage in any kind of business as well
as import into and export out goods with minimum interference from the Government. (Agriex
Co., Ltd., vs. Villanueva, GR No. 158150 dated September 10, 2014, J. Bersamin)


*****Good Luck and God Bless*****