Tax Sababan

8/11/2019 Tax Sababan

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Income Tax

1. Mr. X, resident citizen, derived the following items of income within the taxable period. Discuss onwhether or not he will include in his gross income the foregoing income in the filing of annual netincome tax return.

a. Sale of shares of stocks

We must distinguish. The income derived from the sale of shares of stocks will not be included in the gross

income of Mr. X, provided that it is a share of stock in a domestic corporation which isconsidered as a capital asset and it is not listed or traded in the local stock exchange. Insuch case, it will be subject to final income tax and a separate return is to beaccomplished by the taxpayer.

On the other hand, if the shares of stock is merely an ordinary asset or it fails to meetone or more of the requirements provided for by the law then it shall be included in thegross income, provided that it is not listed or traded in the local stock exchange. (Referto Section 24 C of the NIRC)

b. Sale of Real Property

We must distinguish. If the realty is a capital asset which is located within the Philippines, then Mr. X, being a

resident citizen, shall not include the income derived from the sale in his gross income.In such case, the income derived from the sale of realty shall be subject to final incometax and a separate return will be accomplished by the buyer.

On the other hand, if the realty is merely an ordinary asset or it fails to satisfy therequirements provided for by the law, then Mr. X, being a resident citizen, shall includein his gross income the income derived from the sale of real property. (Refer to Section24-D1 of the NIRC)

2. A,B C and Associates is a general professional partnership of new lawyers belonging to the same lawclass and fraternity. Aside from the receipt of income from exercise of common profession they receiveincome from bank interest in a bank in Makati. The BIR assessed the said general professionalpartnership of the corporate income tax on the part of the general professional partnership and netincome tax for the share of each partner.

a. Is the action of the BIR legally tenable? With respect the assessment of the corporate income tax, the BIR is not legally correct

because the general professional partnership, in this case, remains exempt fromcorporate income tax. The income derived by the general professional partnership froma bank interest merely constitutes a passive income which is subject to a final incometax and there is a separate return for this. Hence, the general professional partnership,


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in this case, remains exempt from corporate income tax and the BIR is not correct in theassessment.

However, with respect to the assessment of income tax for the share of each partner,the BIR is legally correct because the general professional partnership is not taxable as acorporation. Hence, the partners shall be liable to pay by way of net income tax in their

separate and individual capacity.b. Will your answer be the same if the other income was derived from the sale of real property?

If the other income was derived from the sale of realty, it depends on whether therealty is classified as a capital asset located within the Philippines.

Assuming that it is a capital asset and all other requirement provided for by law arepresent, the answer will be the same. The general professional partnership, in this case,remains exempt from corporate income tax because the income derived from thetransaction is subject to final income tax and a separate return is accomplished by thetaxpayer.

However, if the realty is an ordinary asset or one or more of the requirements providedfor by law are not satisfied, then the answer will not be the same. The generalprofessional partnership is no longer exempted from the corporate income tax becausetheir gross income is not anymore derived purely from the exercise of commonprofession. Since it is now taxable as a corporation, the share of each partner will nowbe treated as a dividend which is subject to final income tax. (Refer to Section 24-D1 andSection 26 of the NIRC)

3. The widow and children of a passenger who died in an airplane crash were paid P1,000,000.00 by theairline. This amount was reached after negotiation between the heirs of the deceased and the insurer ofthe airline, the latter having received evidence that the deceased had a substantial income at the time

of his death and that the productive years would have insured financial stability for his family.

a. Is the P1,000,000.00 subject to income tax?

The amount of P1-M shall not be subject to income tax because it is an exclusion fromthe gross income of the taxpayer.

Under the law, proceeds from a life insurance policy which is payable upon the death ofthe insured-taxpayer shall not form part of his gross income and therefore exemptedfrom income tax. (Refer to Section 32-B1 of the NIRC)

b. Will your answer be different if the said passenger did not die but was only hospitalized?

If the passenger did not die but was merely hospitalized, the answer will still be thesame because it is still an exclusion. But this time, the amount received from the insurerwill be classified as a compensation for injury or sickness.

Under the law, any amount of compensation received by the taxpayer as a result of theaccident whether by suit or by an agreement, such compensation will still be excluded


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from the gross income and therefore exempted from income tax. (Refer to Section 32-B4 of the NIRC)

4. A took out a life insurance policy for P1,000,000.00 naming his wife as a beneficiary. Under the termsof the policy, the insurer will pay A the amount of P1,000,000.00 after the 10 th year of the policy and his

beneficiaries, should he die before that date, A outlived the policy and received P1,000,000.00. Thepremiums paid on the policy was P100,000.00.

a. Is the P1-M received by A subject to tax? What about if he died before the 10 th year? Is itsubject to income tax?

If the insured was able to outlive the policy, the P1-M is not entirely subject to tax. Thereturn on premium amounting to P100,000.00 will constitute as an exclusion from the P1-M.

However, if the insured died before the 10 th year, then the entire P1-M will constitute as anexclusion because it will considered as a proceeds from a life insurance policy which ispayable upon the death of the insured. Hence, the amount received by A shall be exemptfrom income tax. (Refer to Section 32-B2 of the NIRC)

b. Is it subject to estate tax?

We must distinguish. If the designation of the wife as a beneficiary is revocable, then the proceeds from the

insurance policy shall form part of the gross estate of the deceased and therefore subject toestate tax.

However, if the designation of the wife as a beneficiary is irrevocable, then the proceedsshall not form part of the gross estate of the deceased and therefore exempt from estate

tax. (Refer to Section 85-E of the NIRC)

5. In January 2003, X Corporation, a resident foreign corporation, declared cash dividends to itsstockholders, one of whom is Y Corporation, a non resident foreign corporation organized , establishedand existing under the laws of B country. In B country, income derived outside B country is exempt fromincome tax.

a. Will the cash dividends received by Y corporation be subjected to income tax law of thePhilippines? What kind of income tax? Will you consider the higher rate of 30% or the lowerpreferential rate of 15%? We must qualify. If the dividend was received from a foreign corporation, it will only be subjected to the

income tax law of the Philippines provided that it is considered as an income from thesources within the Philippines. A cash dividend from a domestic corporation shall only beconsidered as an income derived from sources within the Philippines if at least 50% of thegross income of such foreign corporation during the three(3) year period ending with theclose of taxable year preceding the declaration of such dividends was derived from sourceswithin the Philippines.


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On the other hand, if the cash dividend is not considered as an income from sources within,then such dividend is exempt because being a non-resident foreign corporation, Ycorporation can only be subject to tax on its income derived from sources within thePhilippines.

If the cash dividend is taxable under Philippine law, then it will be taxed by way of thecorporate income tax which is 30%.

b. Corporation is a domestic corporation.

Corporation is a domestic corporation. Under the law, if a non-resident foreign corporation received a dividend from a domestic

corporation, then the lower rate of 15% shall be applied but subject to the rule onreciprocity. This is otherwise known as the intercorporate dividends tax.

Corporation which is now a domestic corporation. Since the country of Y corporation is granting an exemption from tax to non-resident foreign

corporation, then the more the reason that we have to apply the lower rate of 15% (Refer toSection 28-5b of the NIRC)

6. Santo Antonio Law School is a private educational institution which is a domestic corporation. SantoAntonio owns a 2-hectare lot. One half of which is used as Santo Antonio school campus while the otherhalf is vacant. To cope with the increasing operating costs and to upgrade its facilities, Santo Antonioplans to lease to supermarket the vacant portion of the lot.

a. With regard to the income of the law school from tuition fees, discuss the income tax liabilityas to the rate and kind of income tax or on whether or not it is liable to pay income tax.

With regard to its income from tuition fees, Santo Antonio Law School is exempt fromincome tax if it is a non-stock and non-profit, considering that it is a private educationalinstitution and a domestic corporation.

If the said school is a private educational institution, but stock and non-profit, then it issubject to a preferential rate of ten (10%) on its taxable income, provided that its incomefrom unrelated trade or business does not exceed fifty (50%) percent of its total income,and that it is accredited by the DECS, CHED and the TESDA. Otherwise, if the foregoingrequirements or conditions are not met, then the said school is subject to the normalcorporate income tax, despite its being a private educational institution. (Refer to Section27-B of the NIRC)

b. With regard to the lease of the vacant lot to the supermarket, can the rentals be exemptedfrom the income tax and real property tax on the ground of incidental purpose because therentals will be used to support educational institution?

The rentals cannot be exempted from income and real property tax. The income derived from the lease of the vacant lot to the supermarket is subject to income tax.

Despite the fact that said school is private and maybe non-stock and non-profit, hence exempt


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from paying income tax on the tuition fees, nonetheless its income from the said lease tosupermarket is subject to income tax. Inasmuch as the lease is considered as an incomegenerating activity apart from the primary source of the said school. Such being the case, thesaid lease is not exempt from income tax.

On the other hand, the income derived from the lease is also subject to real property tax. Theschool property is no longer actually, directly and exclusively used for educational purposes,irrespective of whether or not the said lease is merely an incidental purpose because the rentalswill be used to support the school. (Refer to Section 30 of the NIRC)

7. A parcel of land which is a capital asset located in the Philippines was sold by the owner who is aresident citizen.

a. Is it possible that he will be allowed to claim deductions in the payment of income for the saleof the foregoing real property?

It is possible that the owner will be allowed to claim deductions in the payment of incometax for the sale of the foregoing property.

If the real property classified as capital asset and located within the Philippines was sold tothe government or any of its political subdivisions or agencies or to government owned orcontrolled corporations, then the seller has the option of whether he will be taxed by way ofnet income tax or by way of final income tax on the sale of property.

If the seller opted to apply net income tax, then the gain from the sale of the said land willform part of his gross income where deductions are allowed.

Hence, it is possible that the seller owner will be allowed to claim deductions in thepayment of income for the sale of the foregoing real property. (Refer to Section 24-D1 ofthe NIRC)

b. Will your answer be the same if the seller taxpayer is a non-resident alien not engaged.

If the seller-taxpayer is a non-resident alien not engaged in trade or business in thePhilippines, then the answer will not be the same.

Basic is the rule that a non-resident alien not engaged in trade or business are not allowedto claim deductions because they do not pay by way of net income tax but by the way ofgross income tax or final income tax, as the case may be.

Hence, a seller-taxpayer who is a non-resident alien not engaged in trade or business cannotin any way claim any deductions. (Refer to Section 25-B of the NIRC)

8. X is a domestic corporation which is engaged in business of the manufacture of garments. In order toimprove its business, it engaged an American Corporation which is a resident foreign corporation to lookcustomers in the United States and to sell its products to the customers. X will pay the American firm acommission based on the volume of sales in the USA. X also entered into an agreement with the sameAmerican firm whereby the latter will render technical knowledge, information or assistance to X toenable it to meet the international export standards for the American firm will be paid a royalty.


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a. State whether the royalties and commissions payable to said American firm is subject toPhilippine income tax? What kind of income tax?

The royalties payable to the American firm, being a resident foreign corporation, shall besubject to final income tax of twenty (20%) percent as the said royalties are earned by said

corporation from sources within the Philippines, and considered as a passive income. On the other hand, the commissions payable to the American corporation is not subject to

Philippine income tax as the said commissions are income from without the Philippinesbecause the foreign corporation can only be held liable to pay income tax only on incomederived from sources within the Philippines. (Refer to Section 24-B1 of the NIRC)

b. In the foregoing, will your answer be the same if instead of the American firm , the domesticcorporation hired the services of a resident citizen? What kind of income tax?

If the domestic corporation hired the services of a resident citizen, the answer will not bethe same.

Both the royalties and the commissions payable to a resident citizen are subject to

Philippine income tax since it is a basic rule that a resident citizen shall be liable to payincome tax on income derived from sources within and without the Philippines.

The royalties, being a passive income earned within the Philippines will be subject to finalincome tax of twenty (20%) percent while the commissions will form part of the grossincome subject to net income tax (Refer to Section 24 A and 24-B of the NIRC)

9. A taxpayer receives bank interest :

a. Illustrate the application on net income tax and final income tax.

If a corporation, either a domestic corporation or resident foreign corporation earns bankinterest income which is not passive or even if passive income but earned without thePhilippines in the case of domestic corporation, then the said bank interest income will formpart of the gross income subject to net income tax.

In such case, the corporation may be held liable to pay income tax by way of minimumcorporate income tax of two percent (2%) of the gross income, provided that the said tax isimposed upon the corporation on its fourth year from the commencement of the operationswherein said tax is greater than that of the net income tax had the latter been imposed.(Refer to Section 27-E1 and Section 28-A2 of the NIRC)

b. Illustrate the application of net income tax and final income tax.

Net income tax is imposed on bank interest income if such income is not passive income, oreven if passive income but earned outside the Philippines in the case of resident citizen anddomestic corporation, hence not subject to final income tax and imposed upon all taxpayersexcept non-resident alien not engaged in trade or business in the Philippines and non-resident foreign corporation, in which they are liable to pay gross income tax.


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Interest income for long term deposit or investment shall form part of the gross incomesubject to net income tax of the domestic corporation and resident foreign corporation. Ifthe taxpayer is an individual, then such income is exempt from income tax. This rule appliesif the said income is not preterminated in five (5) years.

On the other hand, final income tax is imposed on bank interest income if such income is apassive income and earned within the Philippines, and is imposed on all the taxpayersexcept non-resident alien not engaged in trade or business in the Philippines and non-resident foreign corporation (Refer to Section 24-B of the NIRC)

10. X, an American citizen not engaged in trade or business in the Philippines. He is a stockholder of adomestic corporation and a stockholder also of a resident foreign corporation. In 2003 both thedomestic corporation and resident foreign corporation declare cash dividend.

a. Is X liable to pay income tax in the Philippines from the receipt of cash dividend issued bydomestic corporation and resident foreign corporation? What kind of income tax?

With respect to the cash dividend received from the domestic corporation, X shall be liableto pay income tax. The amount received from a domestic corporation shall be considered asan income derived from the sources within the Philippines. Being an American citizen who isnot engaged in trade or business in the Philippines, X can only be held liable to pay incometax on income derived from sources within. Hence, X shall not be held liable to pay incometax on cash dividend received from the domestic corporation.

With respect to the dividend received from the resident foreign corporation, X shall be liableto pay income tax provided that such cash dividend is considered as an income derived fromsources within the Philippines. A cash divided can only be considered as an income derivedfrom sources within the Philippines if at least fifty percent (50%) of the gross income of suchforeign corporation for the three (3) year period ending with the close of its taxable yearpreceding the declaration of such dividends was derived from sources within thePhilippines. If it is not considered as income from sources within the Philippines, X shall beexempt from income tax. (Refer to Section 42-A2b of the NIRC)

b. Will your answer in the foregoing facts be the same if the stockholder is a non-residentforeign corporation?

If the stockholder is a non-resident foreign corporation, the answer will not be the same. With respect to the cash dividend received from the domestic corporation, an

intercorporate dividend tax at the rate of 15% shall be imposed but subject to the rule onreciprocity.

With respect to the cash dividend received from a resident foreign corporation, the non-resident foreign corporation will be subject to tax provided that such cash dividend isconsidered as an income derived from sources within the Philippines. In order to beconsidered as income from sources within the Philippines, it is required that at least fiftypercent (50%) of the gross income of such foreign corporation, was derived from sources


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within the Philippines. If such cash dividend was not considered as an income from sourceswithin the Philippines, then the non-resident foreign corporation shall be exempt. (Refer toSection 28-B5b and Section 42 A2b of the NIRC)

11. X bought a jewelry in January 1999 for P100,000.00. He sold the same property in December 2000

for P180,000.00

a. If the said property is a capital asset, how much is the taxable income that should be reportedby X in the computation of net income tax?

If the jewelry is a capital asset, then the taxable income that should be reported by X in thecomputation of the income tax should be fifty percent (50%) of the net capital gain hederived from the sale.

The law provides that if a capital asset has been held by the taxpayer for a period of notmore than twelve (12) months prior to the sale or exchange, then only fifty (50%) of the gainis taxable.

If Tonio is a rank and file worker, then the management cannot claim itemized deductionthe premium paid to the insurance company. When the premium paid by the managementfor the life insurance of a rank and file employee, it is not considered as a deductibleexpense under the law.

On the other hand, if Tonio is a managerial employee, then the answer will not be the same.If a fringe benefit, like a life insurance is granted to a managerial employee, the companycan only claim it as an itemized deduction provided that the company has already paid thefinal income tax imposed on the gross monetary value of the fringe benefit. (Refer toSection 34-A1 and 36-A4 of the NIRC)

16. The Philippine embassy in Australia hired the service of Kylie Minougue, non-resident alien notengaged in trade or business in the Philippines, to perform for two (2) nights at the Philippine embassyin Australia. Minougue was paid P50,000.00.00 Australian dollars a night.

a. What are the taxes applicable under the NIRC? Was the income derived from sources withinthe Philippines?

Since Kylie Minogue is a non-resident not engaged in trade or business in the Philippines,the applicable taxes under the NIRC could either be gross income tax or final income tax?

The income derived can be considered as derived from sources within the Philippines. Whenit comes to compensation for the services, the income derived shall be considered as anincome from sources within the Philippines, provided that such services was performedwithin the Philippines. In this case, the Philippine Embassy in Australia can be considered as


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an extension of the Philippine territory. Hence, the income derived by Kylie Minogue fromher performance in the Philippine Embassy from Australia can be considered an incomederived from Philippine source. (Refer to Section 42-A3 of the NIRC)

b. Will your answer be the same if the artist was April Boy Regino? Is there a difference in your

answer?

If the artist was April Boy Regino, the answer will not be the same. As far as resident citizens are concerned, it is immaterial whether the service was performed

within or outside the Philippines because a resident citizen is taxable on all income derivedfrom sources within or without the Philippines.

Regardless of the place where April Boy Regino performed his concert, it shall always betaxable.

Hence, the answer will not be the same. (Refer to Section 24-A1b of the NIRC)

17. X, domestic corporation, issued cash dividend. One of the recipients is an alien employed in apetroleum service contractor.

a. Is the said non-resident alien liable to pay income tax? What kind of income tax?

We must distinguish. If an alien employed by a petroleum service contractor is a non-resident alien engaged in

trade or business within the Philippines, then the cash dividends he received from thedomestic corporation X shall be taxed by way of final income tax.

On the other hand, if an employed by a petroleum service contractor is non-resident aliennot engaged in trade or business within the Philippines, then the cash dividend he received

from the domestic corporation X shall be taxed by way of gross income tax.

b. Will your answer be the same if the taxpayer is employed in an offshore banking unit?

If the taxpayer is employed in an offshore banking unit, then the answer will not be thesame.

An alien employed in an offshore banking unit could either be a resident alien or a non-resident alien, whether or not engaged in trade or business within the Philippines.

If the alien employed in an offshore banking unit is a resident alien, then the cash dividendreceived from a domestic corporation X shall be taxed by way of the final income tax.

On the other hand, if the alien employed in an offshore banking unit is a non-resident alien,we have to further qualify. If the non-resident is engaged in trade or business, then the finalincome tax shall be applied while if the non-resident alien is not engaged in trade orbusiness, then the gross income tax shall be applied. (Refer to Section 24-B2, 25-A2 and 25-B of the NIRC)


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18. During the year, a domestic corporation derived the following items of gross income. If you were theresponsible officer of the corporation, are you to include in the ITR of the corporation the said profit orincome?

a. Profit from the sale of parcel of land.

We must distinguish. If the realty is a capital asset which is located within the Philippines, then I shall not include

the income derived from the sale in the income tax return of the corporation. In such case,the income derived from the sale of realty shall be subject to final income tax and aseparate return shall be accomplished by the buyer.

On the other hand, if the realty is merely an ordinary asset or it fails to satisfy the one ormore of the requirements provided for by the law, then I shall include in his gross incomethe income derived from the sale of real property. (Refer to Section 24-D1 of the NIRC)

b. Gains from stock transactions through Philippine Stock Exchange.

If I were the responsible officer of the corporation, then I will not include in the income taxreturn of the corporation the gains derived from the stock transactions.

When the sale of shares of stocks is listed or traded through the local stock exchange or throughinitial public offering, then net income tax will not apply. But instead, the applicable tax ispercentage tax which is being paid in lieu of the net income tax.

In this case, the gains from the stock transactions through Philippine Stock Exchange shall besubject to the percentage tax.

Hence, I will not include in the income tax return of the corporation the gains derived from thestock transactions. (Refer to Section 127 of the NIRC)

19. Pedro, a Filipino citizen, has immigrated to the US where he is now a permanent resident. Hereceives income from his employment in the US on which the US income tax is paid. He owns certainincome-earning real property in the Philippines from which he has paid income tax under the PhilippineIncome Tax law.

a. From his income from employment in the USA, is he liable to pay income tax under thePhilippine income tax law?

Pedro cannot be held liable to pay income tax under the Philippine law. Basic is the rule that a non-resident citizen shall only be held liable for derived from sources

within the Philippines. In this case, the income derived by Pedro from his employment in the US shall be

considered as an income derived from sources without the Philippines. Hence, Pedro cannot be held liable to pay income tax under the Philippine law. (Refer to

Section 24-A1b of the NIRC)


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b. In the payment of net income tax in the Philippines, can he claim tax credit pursuant to theincome tax paid in the USA?

Pedro cannot claim as tax credit the income tax he paid in the USA. Under the law, the taxpayer allowed to claim tax credit are resident citizen and domestic

corporation. In this case, Pedro is now a non-resident citizen. Hence, Pedro cannot claim as tax credit the income tax that he paid in the USA (Refer to

Section 34-2a of the NIRC)

20. Mr. X, resident citizen, while relaxing in his living room, picked up the telephone which had just rung.The voice at the other end, after asking for the name and address of Mr. X announced that he, Mr. X had just won a prize of P500,000.00. Within the week, his prize arrived through the mails. The program wassponsored by a charitable institution. Mr. X did not apply to join the contest. Is the prize considered partof gross income, subject to net income tax?

The prize cannot be considered as part of gross income. Under the law, a prize which was made primarily in recognition of a charitable institution

shall be exempt from tax provided that the recipient is not required to render substantialfuture services as a condition to receiving the prize or award.

In this case, the program which gives the award is sponsored by a charitable institution andthe winner Mr. X did not apply to join the contest.

Hence, the prize cannot be considered as part of gross income. (Refer to Section 32-B7c ofthe NIRC)

21. A domestic corporation has insured the life of his two workers. One is a managerial worker, and theother is a rank and file worker. The said life insurance shall mature upon death of both workers.

a. Do the premiums paid by the management constitute itemized deduction to be deductedfrom the gross income?

We must distinguish. With respect to the insurance premium paid in favor of a rank and file worker, it cannot be

considered as an itemized deduction on the part if the management. With respect to the insurance premium paid in favor of a managerial employee, it can be

considered as an itemized deduction provided that the final income tax imposed on the

gross monetary value of the fringe benefit has already been paid. (Refer to Section 34-A1aiand 36-A4 of the NIRC)

b. If both of the workers died, are the proceeds of their life insurance subject to estate tax?

We must qualify.


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If the beneficiary of the life insurance is the estate, then the proceeds of the life insuranceshall be subject to estate tax, regardless of whether the designation is revocable orirrevocable.

If the beneficiary is other than the estate, it will depend on whether the designation isrevocable or irrevocable. If the designation of the beneficiary is irrevocable, then theproceeds will no longer be subject to estate tax. On the other hand, if the designation of thebeneficiary is revocable, then the proceeds shall be subject to estate tax. (Refer to Section85-E of the NIRC)

22. SSC Company, a non-resident foreign corporation is a stockholder of a domestic corporation and aresident foreign corporation. Due to worldwide restructuring of SSC Company, it decided to sell all itsshares in domestic and resident foreign corporation. The negotiations and the signing of the contract ofsale were done in the Philippines. Is the income derived from that sale subject to the income tax law ofthe Philippines? What kind of income tax?

We must distinguish. With respect to the sale of the shares of stock in a domestic corporation, the incomederived from the sale shall be subject to income tax law of the Philippines. The lawprovides that an income derived from the sale of shares of stock in the domesticcorporation shall be treated as derived entirely from sources within the Philippines. Insuch case, the income from the sale shall be taxed by way of final income tax providedthat it is a capital asset and it is not listed or traded in the local stock exchange.

With respect to the sale of shares of stock in a foreign corporation, it shall also besubject to the Philippine income tax. When it comes to the sale of shares of stock in aforeign corporation, it shall be considered as an income from within if it is sold within

the Philippines. In this case, the signing of the contract of sale was done in thePhilippines. Hence, the income derived from the sale shall be taxed by way of grossincome tax since SSC Company is a non-resident foreign corporation. (Refer to Section24-D2 and Section 25-B of the NIRC)

23. X, a non-resident foreign corporation, is a stockholder of a resident foreign corporation. In the year2000, the resident foreign corporation declared cash dividends out of the profit earned in 1999.

a. Is the said cash dividend an income from sources within the Philippines? Is X liable to payincome tax in the Philippines for the receipt of the said cash dividend?

We have to qualify. The cash dividend received by X from the resident foreign corporation shall be considered

an income from sources within the Philippines provided that at least fifty (50%) of the grossincome of such foreign corporation for the three (3) year period ending with the close of itstaxable year preceding the declaration of such dividends was derived from sources withinthe Philippines. If the said requirements provided for by law has not been satisfied, thensuch cash dividend is considered as an income derived from sources outside the Philippines.


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Being a non-resident foreign corporation, X can only be liable to pay income tax providedthat the cash dividend is considered as an income derived from sources within thePhilippines. If it is derived from sources outside the Philippines, then X shall be exempt fromtax. (Refer to section 42-A2a of the NIRC)

b. Will your answer be the same if the resident foreign corporation declared stock dividend?

If the resident foreign corporation declared stock dividend, then the answer will not be thesame.

It is a general rule that stock dividends are exempt from income tax, except: (a) where thetreasury shares are canceled and redeemed by the corporation in such time and manner asto make such cancellation and redemption essentially equivalent to the distribution oftaxable dividends as it now represents a distribution of earnings or profits; or (b) where thecontrolling interest or the ownership of each shareholder is no longer uniform after thedeclaration of the stock dividend.

Hence, the answer will not be the same if a stock dividend was declared by the residentforeign corporation.

24. A insured his life for P1-M naming his wife as beneficiary. Under the terms of the life insurancepolicy, the insurer will pay A the amount of P1-M after 20 th year of the policy should he outlive thepolicy or to his beneficiary should he die before that date. A died before the 20 th year and thebeneficiary received P1-M. The premiums paid on the policy was P150,000.00

a. If A is receiving income which is pure compensation income, is he allowed to claim thepremiums he has paid to be a deduction from his gross income?

A shall not be allowed to claim the premiums he has paid to be a deduction from his grossincome.

The law provides that pure compensation income earner can only claim premium paymentson health or hospitalization insurance as an allowable deduction. It does not includepremiums paid on a life insurance policy.

In this case, the

Estate/Donors Tax

1. John, an American citizen domiciled in USA, died in 2001. He left shares of stock in San MiguelCorporation (domestic corporation). John is a non-resident alien at the time of his death. Is it possiblethat the estate of John shall be exempted from the payment of estate tax in the Philippines?

Under the law, the estate of a nonresident alien shall be exempt from payment of estate tax if atthe time of his death he is a resident of a foreign country where no transfer tax of any character


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is imposed on the intangible personal property of the citizen of the Philippines not residing insuch foreign country which allows similar exemption on the transfer of intangible personalproperty of Filipinos not residing in the Philippines.

Hence, even if the shares of stock in a domestic corporation considered as a property locatedwithin the Philippines, the estate of John can be exempted from estate tax provided that the

foreign country to which John is a resident does not impose a transfer tax or allows a similarexemption to the intangible property owned by Filipino citizens.

2. Mr. X, resident citizen, died in 2001. The gross value of the estate is only P175,000.00.

a. As an administrator or executor, are you obliged to file notice of death? Within what period?

I will be obliged to file a notice of death If I were the administrator or executor. Under the law if the value of the gross estate of the decedent exceeds P20,000, then the

executor, administrator or any other legal heirs; as the case may be, shall file notice of deathbefore the Commissioner of Internal Revenue.

The notice of death shall be filed within a period of two (2) months from the date of thedecedents death or within a like period after qualifying as an executor or administrator (Referto Section 89 of the NIRC)c. As an executor or administrator, are you obliged to file estate tax return? Within what

period? It depends. If the estate consists of registered or registrable property such as real property, shares of stok or

other similar property from which s clearance from the BIR is required as a condition precedentfor the transfer of ownership thereof, then he will be obliged to file an estate tax returnregardless of the gross value of the estate.

However, because the gross value of the estate is lower than P200,000.00 (Refer to Section 90par.A of the NIRC)

3. Mr. X, resident citizen, has sold a parcel of land located in the Philippines worth Php2M for onlyPhp1.5M. The selling price is way below the fair market value because the buyer is a relative byconsanguinity.

a. Is the difference of Php500 ,000 subject to donors tax? Why?

It depends whether the parcel of land is a capital or an ordinary asset.

If the parcel of land is considered as a capital asset located within the Philippines, the differenceof Php500,000 can never be subject to donors t ax. In such case a final income tax of 6% on saleof realty shall be imposed and the basis could either be the gross selling price or the fair marketvalue, whichever is higher. (Refer to Section 100 of the NIRC)

On the other hand, if the parcel of land is merely an ordinary asset, the difference ofPhp500,000 shall be subject to donors tax provided that the motive of Mr.X for selling theproperty for less than the adequate consideration is his generosity.


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b. Will your answer be the same if the motive of transferring the property for less than theadequate consideration is in contemplation of death?

The answer will not be the same. If the transferring of the property for less than the adequate consideration is in contemplation

of death, the difference of Php500,000 shall be subject to estate tax provided that the parcel ofland is not a capital asset located within the Philippines.

Hence, the answer will not be the same if the motive of Mr. X for selling his property for lessthan adequate consideration is in contemplation of death.

4. John died in September 2000 in Australia, at the time of his death, John was a citizen of USA and aresident of Makati, Philippines, John left the following property: shares of stock in a foreigncorporation; house and lot in USA and shares of stock in domestic corporation.

a. Which of the following property are subject to Philippine estate tax?

Since John is a resident alien, then all his property, real or personal, wherever situated shall besubject to Philippine estate tax. (Refer to Section 85 of the NIRC)

b. Will your answer be the same if the taxpayer is a non-resident alien ?

If the taxpayer is a non-resident alien, the answer will not be the same. With respect to the shares of stock in a domestic corporation, it will be subject to

Philippine estate tax since it is a personal intangible property which is considered aslocated within the Philippines;

With respect to the house and lot in the USA, it will not be subject to Philippine estatetax since it is located outside the Philippines; and

With respect to the shares of stock in a foreign corporation, it will not be subject toPhilippine estate tax provided that 85% of the business of such corporation is locatedwithin the Philippines or such share has acquired a business situs within the Philippines.(Refer to Section 104 of the NIRC)

5. X, a non-resident alien, donated shares of stock in a foreign corporation to his Filipino girlfriend.Considering that the donor is a non-resident alien and that the donee is a Filipino.

a. Is the donors tax of the Philippines applicable?

It depends. Since X is a non-resident alien, the shares of stock in a foreign corporation donated by X to his

Filipino girlfriend shall only be subject to donors tax law provided that: 85% of the business of such foreign corporation is located within the Philippines; or in

the alternative Such corporation has acquired a business situs within the Philippines.


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If neither of these requirements have been met, then the shares of stock donated by X to hisFilipino girlfriend shall not be subject to donors tax since it cannot be considered as anintangible property located within the Philippines. (Refer to Section 104 of the NIRC)

b. Will your answer be the same if the donor is a foreign corporation?

If the donor is a foreign corporation, the answer will be the same. The donation of shares of stock by a foreign corporation shall only be subject to donors tax

provided that 85% of the business of such foreign corporation is located within the Philippines,or in the alternative such foreign corporation has acquired a business situs within thePhilippines.

6. Pedro is leaving for Los Angeles, California, USA in May 2005. He and his wife desire to settle in LosAngeles, California, USA. He has real property in Metro Manila which he intends to donate to someone.He is considering to donate said real property to his brother-in-law and to a domestic corporation.

a. If you were the lawyer of Pedro, will you advice the splitting method of donating property orcumulative way of donating property?

If I were the lawyer of Pedro, I will tell him that it is immaterial on whether he avails of thesplitting or cumulative way of donating his properties to his brother-in-law or a domesticcorporation.

Under the law, a donation made to a stranger is always subject to a flat rate of 30%. For thepurpose of donors tax, a stranger is a person who is not a: a) brother, sister (whether by wholeor half blood), spouse, ancestor and lineal descendant; or b) relative by consanguinity in thecollateral line within the fourth degree of relationship.

In this case, the brother-in-law and a domestic corporation can be considered as a stranger. Hence, I will tell Pedro that it is immaterial on whether he avails of the cumulative or splittingway of donation. (Refer to section 99-B of the NIRC)

b. Will your answer be the same if the donees are the sister of his wife and his first cousin?

If the donees are the sister of his wife and his first cousin, the answer will not be the same. With respect to a donation made to a first cousin, the splitting mode of donation is necessary if

the thing donated is valued for more than P100,000.00 This shall be done in different calendaryear and the purpose is to avoid or to reduce the amount of donors tax that wi ll be paid.

With respect to the donation made to the sister of his wife, it is immaterial whether thedonation is made by splitting or cumulative method. Being a stranger, the donation made to thesister of his wife is always subject to the flat rate of 30%. (Refer to Section 99-B of the NIRC)

7. Mr. X, a resident citizen, has sold a parcel of land located in Metro Manila worth P3 million becausethe buyer is a relative by affinity.

a. Is the difference of P1- M pesos subject to donors tax? Why?


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We must distinguish. If the parcel of land which was sold is a capital asset, then the donors tax will not apply with

respect to the difference of P1-M pesos because the sale shall be subject to final income taximposed on the sale of real property.

On the other hand, if the parcel of land is merely an ordinary asset, then the difference of P1-Mshall be subject to donors tax because the sale for less than the adequate consideration is madefor the reason that the buyer is a relative by affinity. (Refer to Section 24 D1 and 100 of theNIRC)

b. Will your answer be the same if the subject matter of the sale is a shares of stock?

If the subject of the sale is a shares of stock, then the answer will not be the same. Under the law, if the subject matter of the sale for less than adequate consideration is other

than real property considered as capital asset, then the difference between the fair marketvalue and the amount of the consideration shall be subject to donors tax provided that the

purpose of the sale is mere liberality. In this case, the selling of the shares of stock for less than adequate consideration is for thereason that the buyer is a relative by affinity.

Hence the difference of P1- M is dubject to donors tax. (Refer to Section 100 of the NIRC)

VALUE ADDED TAX

1. X is a seller of vegetables in a supermarket in the City of Makati. The gross receipts of X in aperiod of one year exceed P550,000. X is engaged in the regular sale of fresh vegetables.

a. Is it possible that he is liable to pay VAT? It will not be possible for X to be subject to VAT. Under the law, the sale of agricultural food products shall be exempt from VAT

provided that the product was sold in its original state. In this case, X is selling fresh vegetables which can be considered as an agricultural

food product in its original state. Hence, X can never be subject to the payment of VAT even if the gross receipts for

his sale exceeds P550,000.00 (Refer to Sec. 109 par. c)b. Will your answer be the same if he is engaged in the regular sale of petroleum products?

The answer will not be the same. As a rule, the sale of petroleum products is exempt from VAT. However, if the

petroleum products consist of lubricating oil, processed gas, grease, wax andpetroleum then the transaction shall not be exempt.

Hence, if X is in the regular sale of petroleum products that are not exempt fromVAT, then he will be liable for the payment of VAT. (Refer to Section 109 par. e)

2. In the sale of real property, is it subject to VAT? It depends.


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If the real property is merely an ordinary asset and the sale was made in the regularcourse of business, then the sale transaction shall be subject to VAT.

However, if the real property is a capital asset or it is a real property utilized for lowcost or socialized housing, then the transaction shall be exempt from VAT. (Refer toSection 109 par. w)

3. A cooperative under RA 6938 is requesting the BIR to exempt it from the payment of VAT on itspurchase of commodities from manufacturers on the ground that it is exempt from all taxesincluding VAT under RA 6938, the Cooperative Code of the Philippines.a. Is the cooperative exempt from VAT? Will your answer be the same if the cooperative is the

seller? The cooperative shall not be exempt from VAT. Being an indirect tax, a VAT may be shifted by the manufacturers to the consumers

of their goods, properties or services. However, the answer will not be the same if the cooperative is the seller itself. In

such case, the cooperative may claim exemption from VAT provided that it is dulyregistered with the Cooperative Development Authority.

b. If the seller of an agricultural product is a cooperative, is the cooperative exempt from VAT? The cooperative is exempt from VAT if it is a seller of an agricultural product,

provided that it is duly registered with the Cooperative Development Authority.4. X is an operator of a restaurant subject to VAT. In the course of the operation of the restaurant,

X has accumulated thousands of bottles of RufinaPatis. Once a year, X sold said bottles.a. Is he liable to VAT for sale of bottles?

The sale of the bottles shall be subject to VAT. Under the law, the phrase in the ordinary course of trade or business means the

regular conduct of pursuit of a commercial or economic activity, includingtransactions incidental thereto, by a person.

Even if the sale of the bottles by X is not his primary business, the selling of thethousands of bottles shall be subject to VAT. (Refer to Section 105-3 par)

b. Is he liable to pay VAT if the gross receipt or the operation of the said restaurant did notexceed P550,000.00?

X shall not be liable to VAT if the gross receipt for the operation of said restaurantdid not exceed P550,000.00.

Under the law, if the transaction is other than those transactions that are exemptedfrom VAT, then such transaction shall be exempt from VAT provided that theirannual gross receipts do not exceed P550,000.00

Hence, X shall not be liable for the payment of VAT (Refer to Section 109 par. w)5. X, a licensed recruitment agency, receives income from abroad. The income is in the form of

foreign currency remittances paid by foreign employers in payment of services rendered by thesaid licensed recruitment agency. The service of the said agency is to send Filipino workers inabroad. The BIR send a notice of assessment obliging the recruitment agency to pay VAT?


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a. Is the recruitment agency liable to pay VAT? The recruitment agency is not liable to pay VAT. When the services rendered is paid for in acceptable foreign currency and

accounted for in accordance with the rules and regulations of theBangkoSentralngPilipinas, then the transaction shall be VAT exempt.

In this case, the income of a licensed recruitment agency for its services rendered ispaid in the form of foreign currency remittances by foreign employers.

Hence, the recruitment agency is not liable to pay VAT. (Refer to Section 108 B2 ofthe NIRC)

b. What will be the proper rate of VAT? X, a licensed recruitment agency shall be subject to zero (0%) percent rate of Vat

because the services rendered by the recruitment agency is subject to a zero-ratedtransaction.

6. Mr. X is an accountant but is exclusive employed in a private company. His only income is thesalary he received from his employer.a. In line with the present RR 1-2003 that all professionals are now liable to pay VAT, is X liable

to pay VAT? X shall not be liable to pay VAT. The law provides that the service of individuals shall be exempt from VAT if it is

rendered pursuant to employer-employee relationship. Notwithstanding the fact that all professionals are now liable to pay VAT under RR

1-2003, X as an accountant is rendering his service as an employee of a privatecompany.

Hence, X shall not be liable to pay VAT. (Refer to Section 109 par. o of the NIRC)

b.

What is the period to within which to file the VAT and pay the VAT in general? The VAT return shall be filed quarterly within twenty-five (25) days following theclose of each taxable quarter prescribed for each taxpayer and the payment of theVAT shall be made on a monthly basis (Refer to Section 114-A of the NIRC).

7. a. X, a resident citizen, is an importer of non-food agricultural products. Is he liable to pay VAT?b. X, a resident citizen, is an importer of newspaper and magazine. Is he liable to pay VAT?

a. X shall be liable to pay VAT. When it comes to non-food agricultural products, the lawonly exempts sale transaction and not importation. In this case, X is engaged in theimportation of non-agricultural products. Such transaction shall be subject to VAT.(Refer to Section 109 par. a of the NIRC).

b. It depends. If the importation of the magazine or newspapers appears at regularintervals with fixed prices for subscription and sale and which is not devoted principallyto the publication of paid advertisements, then such importation is exempt from VAT.However, if the said requirements provided for by law has not been met, then theimportation by X of newspaper and magazine shall be subject to VAT. (Refer to Sectionpar. y of the NIRC)


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8. X, government corporation, purchased manufactured products from B corporation which Bpassed on the VAT to X. X claims it should not pay the VAT because it is exempt from thepayment of all taxes under its charter.

a. Is the claim of X tenable? The claim of X is not tenable. When the charter of a government corporation exempts it from all forms of taxes, it

presumed to cover only those taxes which it is liable to pay directly. It does notcover indirect taxes such as VAT. Ion such case, the remedy of the governmentcorporation is to deduct and withhold the VAT liability at the rate of 3% of the grosspayment for the purchase of goods.

In this case, X cannot claim exemption from VAT and his remedy is to exercise hiswithholding of creditable value added tax.

Hence, the claim of X is not tenable (Refer to Section 115-c of the NIRC and Macedavs. Macaraig, June 8, 1993.)

b. In the abovementioned transactions, can B claim exemption from VAT due to the factthat the buyer is exempt from VAT? B cannot claim exemption from the value-added tax even if the buyer is exempt. Being an indirect tax, the value-added tax is really a tax against the seller and not

against the buyer. In such case, the seller should carry the burden of paying the VAT. Since the government corporation X is not exempt from the payment of the VAT,

then with more reason that it should be held liable to pay the VAT. Hence, B cannot claim exemption from the Vat even if the buyer is exempt.

LOCAL TAXES

1. The Municipal Council of Bian, Laguna passed a tax ordinance levying or imposing amusementtax. Assume that there was a public hearing conducted.a. Is this imposition of amusement tax tenable?

The imposition of amusement tax is not tenable. Under the LGC, municipalities are not authorize to impose amusement taxes; Hence, the imposition of amusement tax by the municipality of Bian is not tenable.

b. Will you answer be the same if the amusement tax imposed was levied b y the province ofLaguna?

If the amusement tax imposed is levied by the province, the answer will not be thesame.

Under the LGC, the province may levy an amusement tax to be collected from theproprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,boxing stadia, and other places of amusement at the rate of 30% of the grossreceipts from admission fees.

Hence, the levy of amusement tax by the Province of Laguna will now be tenable.(Refer to Section 140 of the LGC)


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2. In the foregoing question no. 1, if you were the concerned taxpayer and you did not agree withthe validity of the tax:a. What will be your remedy? Within what period of time should the remedy be exercised?

If I were the concerned taxpayer, I will file an appeal before the Office of theSecretary of Justice.

The appeal shall be made within the period of thirty (30) days from the date of theeffectivity of the tax ordinance and the Secretary of Justice has a period of sixty (60)days to a make a decision from the receipt of the appeal. (Refer to Section 187 ofLGC)

b. Will your answer be the same if you received notice of assessment reclassifying your parcelof land under the real property taxation? Within what period of time should the remedy beexercised? What office should the remedy be filed?

The answer will not be the same. If I did not agree with the notice of assessment reclassifying my parcel of land under

the real property taxation, my remedy is to file an appeal before the Local Board ofAssessment Appeals.

The appeal shall be made within a period of sixty (60) days from the receipt of thenotice of assessment. (Refer to Section 226 of the LGC)

3. Victory Liner, a transportation company with a garage for its buses, maintains said garage, arepair shop, machineries and equipment which can be moved around in the repair shop. Thetreasurer imposes a real estate tax but the transportation company did not agree with thetreasurer arguing that the property is a movable property.a. Is the treasurer legally correct in the imposition of the real estate tax?

The treasurer is legally correct in the imposition of the real estate tax.

Under the law, if a movable property is actually, directly and movable property shallbe considered as real property for the purposes of real property taxation. Even if the machineries and equipment are movable properties by nature, they are

considered as real property for the purpose of real property taxation because theyare actually, directly and exclusively used to meet the needs of the Victory Liner.

Hence, the imposition of the real estate tax by the treasurer is legally tenable. (Referto Section 198 par. of the LGC)

b. Will your answer be the same if the personal property is a typewriter? The answer will not be the same. If the personal property is a typewriter, the treasurer will not be legally correct in

the imposition of the real estate tax. A typewriter is not indispensable for the needs of the business since it is not

actually, directly and exclusively use in order to meet the needsof the transportationcompany. In fact a bus company may exist even without a typewriter (same

provision) .


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4. An ordinance of the City of Iloilo levies or imposes taxes on taxpayers selling goods at wholesaleor retail. A manufacturer of softdrinks sells at its plants or factory the softdrinks it manufacturesat wholesale or retail:a. Is said manufacturer subject to tax for selling softdrinks under such ordinance?

The manufacturer will not be subject to tax for selling softdrinks under suchordinance.

If the selling of the softdrinks was done by the manufacturer at its plants or factory,then such wholesaling orretailing shall be considered as included in themanufacturing. It can no longer be held liable for a separate tax on wholesaling orretailing.

Since the manufacturer sells at its plant or factory the softdrinks that itmanufactures in wholesale or retail, then it can no longer be subject to tax fortselling such softdrinks. (Refer to Section 143 of the LGC and the case of IloiloBottlers vs. Iloilo City, 164 SCRA 607).

b. Will your answer be the same if the manufacturer maintains separate establishments orstores apart from its factory?

The answer will not be the same. If the manufacturer maintains separate establishments or stores apart from its

factory, then the selling of such softdrinks cannot be considered as included in themanufacturing. It shall be liable for a business tax on wholesaling or retailing asidefrom the business tax on manufacturing. (same legal basis)

8. Mr. X, resident citizen, received a notice of assessment from the city government obliging him to paybusiness tax under local taxation. The business tax being collected is P100,000.00 He believes in goodfaith that his liability is only P45,000.00.

a. What will be his remedy?

The remedy of Mr. X is to file a written protest with the local treasurer protesting theassessment within the period of sixty (60) days from the receipt of the notice of assessment. Insuch case the local treasurer is given a period of sixty (60) days within which to decide theprotest from the time of its filing.

b. What will be his remedy if his remedy availed of was denied? Within what period of time?


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If the protest is denied, the remedy of Mr. X is to file a protest before the RTC within the periodof thirty (30) days from the receipt of the denial of the protest or from the lapse of sixty (60) dayperiod by the inaction of the local treasurer. (Refer to Section 195 of the LGC)

9. Pedro, resident citizen is engaged in banana plantation on his 50 hectare farm. He employed 300

workers in the plantation. He purchased his farm in 1985 for only P500,000.00. On this day, it has a fairmarket value of P10,000,000.00 Pedro now intends to transfer his 50 hectare farm to X, Inc. an existingdomestic corporation in which Pedro will be given shares of stocks worth P12,000,000.00 Pedro nowconsults you concerning the income tax consequences of this transaction.

a. Will he be liable to pay income tax for the gain of P2,000,000.00? Will the local government unitconcerned be authorized to levy or impose a local tax on the bananas?

We must distinguish.If Pedro gains control of the said domestic corporation as a result of the transfer, then Pedroshall not be liable for the gain of P2-M because the gain is not recognized under the law.However, if Pedro did not gain control of the said domestic corporation or he did not acquireownership of the stocks possessing at least fifty-one (51%) percent of the voting power thenPedro shall be taxed for the gain of P2-M. (Refer to Section 40-C of the LGC)

The local government unit is authorized to levy or impose a local tax on the bananas. When itcomes to agricultural products, the local government unit is authorized to impose local taxexcept when such agricultural products are being sold by marginal farmers. In this case, Pedro isnot a marginal farmer since he is not engaged in subsistence farming. He is in fact an owner ofbig plantation of bananas with an area of fifty (50) hectares. Hence, the local government unit isauthorized to levy or impose local tax on the bananas. (Refer to Section 40-B of the NIRC andSection 133-g of the LGC)

b. What will be the income tax liability if Pedro did not exchange the property with shares of stockbut instead Pedro sold the property to the government for P12,000,000.00? What will be youradvice? Should he pay the net income tax or final income tax? Will he be allowed to use cost as abasis for determining gain or loss? Is the holding period applicable?

If Pedro sold the property to the government, then Pedro shall be taxable on the gain by way ofthe net income tax.

Since the land is being used in the business of banana plantation by the taxpayer then suchproperty is merely considered as an ordinary asset. The proceeds derived from the sale of such

property are subject to net income tax and not final income tax. For the purpose of determining whether there is a gain or a loss, then cost shall be used since

the property was acquired by purchase in 1985 which is after March 1, 1913. The holding period is not applicable because it is merely an ordinary asset. Even if the land is a

capital asset, it will constitute as an exception to the rule on holding period because the finalincome tax shall not be imposed on the gain but whichever is higher between the actual sellingprice and the fair market value. (Refer to Section 40-B and 24-D of the NIRC)


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10. A coastal town passed a tax ordinance imposing tonnage due and wharfage due on vessels mooringor berthing at its municipal wharf.

a. Is the municipal government authorized to pass those tax ordinances?

The municipal government is authorized to pass those tax ordinances. Under the law, the imposition of tonnage due and wharfage due is an absolute limitation upon

the taxing power of the local government units. By way of exception, the local government unitmay impose wharfage dues upon wharfage on wharves constructed and maintained by the localgovernment unit concerned.

In this case, the tax ordinance imposes tonnage due and wharfage due on vessels mooring orberthing at its municipal wharf is an exception. .

Hence, the municipal government is authorized to pass those tax ordinances.

b. Will your answer be the same if the tax ordinance imposes income tax?

If the tax ordinance imposes income tax, the local government unit is not also absolutelyprohibited under the law. By way of exception to the rule, a local government unit may imposetaxes on banks and other financial institutions.

Hence, the answer will not be the same if the tax ordinance imposes income tax. (Refer toSetion 133 par. a and d of the LGC).

11. If a real estate owner is not satisfied with the assessment of his property issued by the assessor,what will be the remedy and within what period should he exercise the remedy?

If a real estate owner is not satisfied with the assessment of his property issued by the assessor,the remedy is to file an appeal before the Local Board of Assessment Appeals within a period ofsixty (60) days from the receipt of the written notice of assessment. (Refer to Section 226 of theLGC)

12. If a businessman received an assessment from the city treasurer regarding his local tax liability, whatwill be his remedy and within what period of time should he exercise the remedy?

If a business man received an assessment from the city treasurer regarding his local tax liabilityand he wanted to contest the said assessment, then the remedy is to file a protest before thesaid city treasurer within a period of sixty (60) days from the receipt of the notice of assessment.(Refer to Section 195 of the LGC)

13. Distinguish between taxp ayers remedies in connection with his tax assessment issued by the localtreasurer under local taxation and assessment issued by the assessor under Real Property Taxation.

The distinction between the taxpayers remedies in connection with his tax assessme nt issuedby the local treasurer under local taxation and assessment issued by the assessor under the RealProperty Taxation are as follows:


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With respect to tax assessment issued by the local treasurer, the remedy of the taxpayer is tofile a protest before such local treasurer within a period of sixty (60) days from the receipt of thenotice of assessment. The local treasurer is given a period of sixty (60) days within which todecide the protest. In case the local treasurer denied the protest, the taxpayer shall file anappeal before the RTC within a period of thirty (30) days from the receipt of the denial. On the

other hand, with respect to the tax assessment issued by the assessor, the remedy of thetaxpayer is to file an appeal before the Local Board of Assessment Appeals within the period ofsixty (60) days from the receipt of the assessment. The Local Board of Assessment Appeals has aperiod of one hundred twenty (120) days within which to decide the appeal. In case the LocalBoard o0f Assessment Appeals affirmed the assessment, then the taxpayer may file an appealbefore the Central Board of Assessment Appeals within a period of thirty (30) days from thereceipt of the decision of the board. (Refer to Section 195, 226 and 229 of the LGC)

14. The city council passed a local tax ordinance levying or imposing taxes on persons or entitiesengaged in the wholesale of sugar. ABC, Inc., a sugar central with principal office in the city is a

manufacturer and wholesaler of sugar. The city seeks to tax both the business of manufacturing andwholesaling.

a. If the manufacturer does not want to pay business tax of wholesaling because it is already payingbusiness tax of manufacturing, can it be legally sustained?

We must distinguish. If ABC, Inc., is maintaining a place for wholesaling which is separate and distinct from the place

of manufacturing, then ABC, Inc. cannot legally refuse to pay business tax on wholesaling. Insuch case, the activity of the wholesaling shal;l be taxed separately from the activity ofmanufacturing.

On the other hand, ABC inc. is doing its wholesaling activity within the place where theirmanufacturing activity also takes place, then ABC Inc. can legally refuse to pay tax onwholesaling because in such case, wholesaling is deemed included in the manufacturing. In suchcase, the tax paid on manufacturing already includes wholesaling. (Refer to Iloilo Bottlers vs.Iloilo City, 164 SCRA 607)

b. Assume that the wholesaling of sugar is being done in the entire country, where should thebusiness tax of wholesaling be paid?

If the wholesaling of sugar is being done in the entire country, then the business tax on

wholesaling shall be paid to the municipality where the branch or sales outlet is located. Butif there is no such branch or sales outlet, then the business tax on wholesaling shall be paidto the municipality where the principal office is located. (Refer to Section 150 of the LGC).

15. Assume that you are now a lawyer, where and when will you pay your occupation tax before youpractice your profession? What local government unit shall impose or levy the same?

Professional tax shall be payable annually on or before the thirty first (31 st) of January.


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It shall be paid at the province where I practice my profession or at the province where Imaintain my principal office in case I practice my profession in several places.

The local government unit authorized top levy or impose the same are the province and thecity. (Refer to Section 139 b, d and Section 151 of the LGC)

TARIFF AND CUSTOMS CODE

1. Explain the nature and the government officers authorized to levy the following: (a) Markingduty; (b) Discriminatory duty; (c) Dumping duty; and (d) Countervailing duty.a. Marking duty refers to a special customs dusty imposed by the customs commissioner upon

an imported commodity which is not marked or nor properly marked. The rate of which isequivalent to n5% of the goods;

b. Discriminatory duty is a special customs duty imposed by the President upon an importedcommodity because the foreign country from which the imported commodities camediscriminates the goods coming from the Philippines;

c. Dumping duty is a special customs duty imposed by the tariff commissioners upon animported commodities which is being sold at a very low price in the Philippines by reason ofoverproduction by the foreign country from which the imported goods came; and

d. Countervailing duty is a special customs duty imposed by the tariff commissioner upon theimported goods which is being sold at a very low price in the Philippines by reason of thesubsidy being enjoyed by foreign manufacturer from their country.

2. In a forfeiture case, the collector of customs decided against the taxpayer importer.a. What will be the remedy of the importer? Within what period should the remedy be

exercised? The remedy of the importer in case the decision of the collector of customs is

adverse to him is to elevate the case before the Commissioner of Customs withinfifteen (15) days after notification in writing by the Collector of Customs of hisaction or decision. (Refer to Article 2312 of the Tariff and Customs Code)

b. Will your answer be the same if the collector ruled in favor of the importer? Within whatperiod should the remedy exercised? To what office should the remedy be filed?

If the Collector of Customsruled in favor of the importer, the answer will not be thesame.

The decision of the Collector of Customs which is adverse to the government shall

be automatically elevated to the Commissioner for review. If such decision isaffirmed by the Commissioner, then the case shall be elevated and finally reviewedby the Secretary of Finance within a period of thirty (30) days from the receipt ofthe decision of the Commissioner. (Refer to Section 2135 of the Tariff and CustomsCode)


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3. Has the Regional Trial Court of Manila acquired jurisdiction over cases involving illegalimportation which are the subject of seizure proceedings by the collector of customs? Why?How do you call that principle?

The Regional Trial Court of Manila has not yet acquired jurisdiction over cases involvingillegal importation subject to seizure proceedings.

When it comes to cases involving forfeiture and seizure of illegal importation, theCollector of Customs has the exclusive jurisdiction. This is also called the principle ofprimary jurisdiction whereby the Collector of Customs assumes jurisdiction to theexclusion of the Regional Trial Courts.

Hence, the Regional Trial Court of Manila has not yet acquired jurisdiction over casesinvolving illegal importation subject to seizure proceedings (Refer to AuyongHian vs. CTA19 SCRA 10)

4. Explain the similarities between anti-dumping duty and countervailing duty. The similarities between anti-dumping duty and countervailing duty are as follows:

Both are special customs duty imposed by the tariff commissioners; and These special customs duties are being imposed because the imported products

are being sold at a very low price in the Philippines to the disadvantage of locallyproduced goods.

SECOND PART: THIS IS AN ITEMIZED PRESENTATION OF TAXATION LAW

TAX: PART I (IMPORTANT POINTERS)

I. General Principles

1. Taxation; Definition; Nature

The inherent power of the state to collect enforced proportional contribution to supportthe expenses of the government.

It is inherent; legislative in nature, civil and not political in character; and they are notpenal in nature.

2. Assuming that the new Constitution drafted by the delegates and ratified by the people to provide forthe enactment of the law imposing taxes, may the legislative body created by the same constitutionenact tax laws? Explain.

Yes, the legislative body may enact tax laws. Taxation is an inherent power of sovereign stateand can be exercised whether or not the constitution provides for it. Absence of anyConstitutional limitation, the taxing power becomes unlimited provided that revenues raisedtherein are for public purpose.

3. Taxes are the lifeblood of the nation; Meaning


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The primary purpose of taxes is for the government to generate funds for the State finance theneeds of the citizenry and to advance the common wealth. (PBCom vs. CIR; Jan. 28, 1999)

4. Uniformity of Taxation; Meaning

It means that all property belonging to the same class shall be taxed alike. (CIR vs. Lingayen Gulf;Aug. 4, 1998)

5. Charitable Institution; Tax Exemption

A charitable institution may claim tax exemption under the constitution but only with respect toreal property taxes; provided that such real properties are actually, directly and exclusively usedfor charitable purposes. (NOTE: the same rule with respect to religious and educationalinstitution.)

6. Global System vs. Schedular System

A Global System of taxation refers to a tax structure where only one (1) tax rate is applied acrossthe tax base; while

Schedular System of taxation refers to the imposition of graduated rates of taxes in scalar rangeor a layered set of tax bases.

7. NIRC; System of Taxation

The NIRC uses both global and scheduler system of taxation. It uses the global system with respect to the Corporate Income Tax Rate and the 10% VAT rate.

On the other hand, it uses scheduler system with respect to the Income tax table for Individual

Taxpayers.

8. Direct Taxes vs. Indirect Taxes; Examples

Direct Taxes are those that are demanded from the very person, who, it is intended or desired,sho uld pay them (e.g. Income Taxes, Estate and Donors Taxes and the Community Tax)

Indirect taxes are those that are demanded in the first instance from one person in theexpectation and intention that he can shift the burden to someone else. (e.g. VAT, RealProperties and Customs Duties) --- (Pollock vs,., Farmers; 1957 US 429

9. Double Taxation; Not a valid defense; Method of Relief

There is double taxation when there is an imposition of two (2) or more taxes upon the sameperson, the same property or subject matter, for the same purpose by the same State,Government or taxing authority, within the same jurisdiction or taxing district, during the sametaxing period and of the same kind or character of tax.


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Double taxation is not a valid defense against the legality of a tax. There is no constitutionalprohibition against double taxation. A tax enactment cannot be illegal simply because it resultsto double taxation; and

Relief from double taxation can be obtained either by exemption method or credit method. Inexemption method, the income or capital is taxable in the state of source or situs but isexempted in the state of residence while in credit method, the income or capital is taxed both inthe state of source and in the state of residence and the tax paid in the former is creditedagainst the tax levied in the latter.

10. X, a lessor of a property, pays real estate tax on the premises , a real estate dealers tax based onrental receipts, and income tax on rentals. X claims that this is double taxation. Decide.

There is no double taxation. The three (3) types of taxes have different purposes/nature and areimposed by different taxing authorities.

Real estate tax is imposed on the property itself by the Local Governments . Real estate dealers

tax is imposed on the dealers privilege to engage in the buy and sell of real property . Andfinally, the income tax on the rental income is imposed on the businessmans privilege to earnincome and is under the National Governments BIR.

11. Due Process; Taxation

Due process of law under the Constitution does not require judicial proceeding in tax cases. Thismust necessarily be so because it is upon taxation that the government chiefly relies to obtainthe means to carry on its operations. (PBCom vs. CIR; January 28, 1999)

However, due process requires that the taxpayer be informed of the law and the facts on whichthe assessment is made. Otherwise, the assessment is void. \

12. Tax Evasion vs. Tax Avoidance

Tax evasion is the use of fraudulent or forbidden schemes or devices to lessen or defeat thetaxpayers tax obligation; while

Tax avoidance is the legal method of reducing or altogether avoiding the tax liability by findingand availing of valid and legitimate shortfalls of the law.

13. Tax Amnesty vs. Tax Exemption

Tax amnesty is the Governments absolute forgiveness, waiver, exercise of general pardon or

intentional condonation of its right to collect past due and unpaid tax collectibles, includingimposable penalties on persons guilty of evasion or violation of a revenue or tax law, giving taxevaders who wish to relent and are willing to reform a chance to do so.

14. Tax exemption; Strictly construed against the taxpayer; Rationale

The right of taxation will not be surrendered unless the intention to surrender is too plain to bemistaken; the state cannot strip itself of the most essential power of taxation by doubtful words;


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it cannot be deprived of this higherst attribute of sovereignty. So, when exemption is claimed, itmust be shown indubitably to exist, for every presumption is against it, and well founded doubtis fatal to the claim. (Farrington vs. Tennessee, 95 US 679)

15. Networth method; Definition

It is a method of determining the taxable income of a taxpayer and it is accomplished bycomparing t he taxpayers Net Assets at the beginning versus the ending of the current taxableyear.

II. INCOME TAX

Tax on Individuals

1. Gross Income; Definition; Inclusions

It refers to all income derived from whatever source. These includes (but not limited to) compensation for services, including fees, commissions and

similar items; gross income from business; gains derived from dealings in property; interest;rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributiveshare of the gross income of general partnership.

2. Income vs. Capital

Income CapitalIt means any wealth which flows into the taxpayerother than return of capital.

It is the investment that brings about income.

It is the wealth. It is the fund.It is the fruit It is the tree.

3. Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation,what are the tax implications? Explain.

Mr. Y will be liable for income tax on the services he rendered using the fair market valuereceived for the valuation.

4. Tax treatment of certain incomes

Gross receipts from a trading business --- TAXABLE

Interests from money placements in the banks --- EXCLUDED Since interests are subject to a finalwithholding tax at source; Dividends from its stocks investments in domestic corporations --- EXCLUDED, since dividends re

subject to final withholding tax at source; Gains derived from stock transactions through the Philippine Stock Exchange --- EXCLUDED,

since capital gains are subject to final withholding tax at source;


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Proceeds under insurance policy on the loss of goods --- EXCLUDED there proceeds areexclusions under the tax code.

5. X was hired by Y t o watch over Ys fishponds with a salary of P10,000.00. To enable him to perform hisduties well, he was also provided with a small hut, which he could use as his residence, in the middle of

the fishponds. Is the fair market value of the use of the small hut by X a fringe benefit that is subject tothe 32% tax imposed by Section 33 of the NIRC? Explain.

No, the fair market value of the use of the small hut is not subject to 32% tax as a fringe benefit.The use of said hut is not taxable under the Employer Convenience Rule. Xs use of the hut is forthe convenience of his employer and intrinsically for his personal benefit.

6. 13 th month pay and other benefits

It shall be an exclusion from the gross income only to the extent of P30,000.00 and these includeChristmas bonus and productivity incentives.

7. Separation Benefits; Exclusion

Separation benefits shall only be an exclusion provided that it is received by an employee or hisheirs as result of death, sickness, permanent disability or for any cause which is beyond theemployees control of such as retrenchment, redundancy or closure of business.

8. Retirement Benefits; Tax-Exempt

Retirement benefits received by officials and employees of private firms are not subject toincome tax provided:

The retirement payment comes from the employers reasonable private benefit plan; The retiring employee has been in the service with the employer for at least ten (10)years;

Said employee is not less than fifty (50) years old; and The employee has not availed of any similar tax free plan in the past.

For employee which has no funded retirement plan, the retirement benefits shall be exemptprovided:

The retiring employee is at least sixty (60) years old; The employee has served the employer for at least five (5) years; and The employee has not availed of any similar tax-free plan in the past.

9. Ordinary Asset vs. Capital Asset

Capital Asset is a taxpayers property other than his ordinary assets. Under the tax code,ordinary assets shall include inventory on stock in trade; property primarily held for sale in theordinary course of business; depreciable property used in the trade of business; and realproperty used in the trade or business of the taxpayer.


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10. Sale of real property classified as capital assets to the government or any of its political subdivisions

The taxpayer has the option on whether he will be taxed either by way of the final income tax of6% or by way of the scheduler rates for individuals.

11. Wash Sale of Stocks; Definition; Deductibility

It is the taxpayers scheme to recognize a deductible loss in his Tax Return by selling shares at aloss where the shares sold are substantially identical with the shares he purchased thirty (30)days after said sale ( a 60 day window)

The loss suffered within the 60-day window is not entitled as a tax deduction. Only dealers insecurities can deduct loss on wash sales.

Personal/Additional Exemptions and Deductions

1. Basic Personal Exemptions Allowed Table

Taxpayer Basic ExemptionIndividual with no qualified dependents 50,000 (20K)Married individuals judicially decreed separated 50,000 (20K)Head of Family 50,000 (25K)Each married individual 50,000(32K)

2. Additional Exemptions; Rules

Only one (1) spouse can claim in the case of married individuals; The spouse in custody of the child can claim in case of legally separated spouses; Mother of an illegitimate child , living with her and chiefly dependent upon her, can claim

additional deduction on the childs account; and An additional exemption cannot exceed four (4) dependent children or P32,000.00

3. Deductions; General Rule

Taxpayers earning purely compensation income, arising from personal services under anemployer-employee relationship, are not allowed deductions. However, the only deductionsthat they are allowed is premium payments on health and/or hospital insurance amounting toP2,400.00 per year.

Individual taxpayers engaged in business or the practice of professions and Corporate taxpayerscan claim deductions.

4. Allowable Deductions vs. Personal Exemptions

Allowable deductions are deductions from gross income to arrive at the Net Taxable Income oftaxpayers engaged in business. An example of an allowable deduction is ordinary and necessaryexpenses; while


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Personal exemptions are deductions from Gross Income strictly allowed for natural and not juridical taxpayers in lieu of personal, family and living expenses. An example is the personalexemption of P32,000 given to individual taxpayer.

5. Expenses; Requisites for Deductibility

It must be ordinary and necessary; It must be paid or incurred within the taxable year; and It must be paid or incurred in carrying on a trade or business.

6. X is the manager of Mang Douglas Hamburger, Inc. X had dinner with Y, owner of a chain ofrestaurants to convince the latter to carry Mang Douglas hamburgers. After Y agreed, both went theirseparate ways . X celebrated by going to a singles bar. He picked up a partner and consum ed a bottle ofbeer. He drove home at 3:00 a.m. On his way home, he sideswiped a pedestrian, who died as a result ofthe accident. X amicably settled the case by paying the heir of the pedestrian. The money however camefrom Mang Douglas Hamburger, Inc. Discuss whether the reward given to the heir can be claimed byMang Douglas Hamburger, Inc. as an expense deductible in its income tax return.

The reward given to the heir cannot be an expense deductible for Mang Douglas Hamburger,Inc. The damage which X caused upon the pedestrian is not ordinary, necessary and normalexpense in the conduct of the hamburger business. X was no longer performing his regular taskwhen he inflicted the damage.

7. Losses; Requisites of Deductibility

The loss was actually sustained during the taxable year; The said loss was not compensated for by insurance or other indemnity; Loss was incurred in trade, profession or business; and For loss

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