General Principles

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2008

2009

2010

2011

2008

Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million down payment; and (b) the balance payable equally in twenty-four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stocks of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000 x 5% plus P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (35% on P299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion.

Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain.

SUGGESTED ANSWER:

No. As provided by Section 40 (C2 – b) of the National Internal Revenue Code, that no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation in instances where a “shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation.” Thus, exchange of the real estate property for the shares of stocks is considered as a legitimate tax avoidance scheme. Therefore, sale of the shares of stocks of domestic corporation, which is a capital asset, is subject to a final tax of 5% on the first P100,000 and 10% on the amount in excess of P100,000 (Sec. 24[C] of NIRC).

ALTERNATIVE ANSWER:

Yes. The RDO’s contention, that Maria Suerte committed tax evasion and not tax avoidance, is tenable. Maria Suerte’s sale of her property to MAS Corporation was an intermediary transaction aimed more at reducing Suerte’s tax liabilities that for MAS Corporation’s legitimate business purposes (Commissioner of Internal Revenue v. Norton Harrison Co., G.R. No. L-17618, August 31, 1964). Said sale was merely a tax ploy, a sham, and without business purpose and economic substance (CIR v. Toda’s Estate, G.R. no. 147188, 14 September 2004).

2009

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

A law that allows taxes to be paid in cash or in kind is valid.

SUGGESTED ANSWER:

TRUE. True. There is no law which requires payment of taxes in cash only. However, a law allowing payment of taxes in kind, although valid, may pose problems of valuation, hence, will violate the principle of administrative feasibility.

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

SUGGESTED ANSWER:

TRUE. According to Section 4 of the National Internal Revenue Code, compromise of any internal revenue tax may be made by the Commissioner when the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. This compromise settlement is, however, subject to certain minimum amounts.

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

SUGGESTED ANSWER:

TRUE. It provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes arising from the same transaction on which an overpayment is made and underpayment is due.

This doctrine, however, was rejected by the Supreme Court, saying that it was not convinced of the wisdom and proprietary thereof, and that it may work to tempt both the collecting agency and the taxpayer to delay and neglect their respective pursuits of legal action within the period set by law

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

SUGGESTED ANSWER:

FALSE. Congress can pass a law taxing income of religious institutions from its property or activities used for profit but not for their income from exercise of religious activities. The imposition of a tax on income of a religious institution from sale of religious articles would impair the free exercise and enjoyment of the religious profession and worship, as well as its rights of dissemination of religious beliefs.

A false return and a fraudulent return are one and the same.

SUGGESTED ANSWER:

FALSE. The Supreme Court held that there is a difference between “false return” and “fraudulent return.” While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due

Enumerate the 4 inherent limitations on taxation. Explain each item briefly.

SUGGESTED ANSWER:

The following are the inherent on the power to tax:

Purpose. – Taxes may be levied only for public purpose.
Inherently Legislative. – It is a power that is purely legislative and which the central legislative body cannot delegate wither to the executive or judicial department of the government without infringing upon the theory of separation of powers, save the exception of municipal corporations (Pepsi-Cola Bottling Comp. v. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27, 1976).
Territoriality. – No state may tax anything not within its jurisdiction without violating the due process clause of the constitution. The taxing power of a state does not extend beyond its territorial limits, but within such limits it may tax persons, property, income, or business.||| (Manila Gas Corp. v. Collector of Internal Revenue, G.R. No. 42780, January 17, 1936).
International Comity. This is a limitation which is founded on reciprocity designed to maintain harmonious and productive relationships among the various state. Under international comity, a state must recognize the generally-accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent, that limits that authority of a government to effectively impose taxes in a sovereign state and its instrumentalities, as well as in its property held, and activities undertaken in that capacity.

2010

Unfortunately, there are no questions that fall in the category of general principles.

2011

MULTIPLE CHOICE QUESTIONS

Anne Lapada, a student activist, wants to impugn the validity of a tax on text messages. Aside from claiming that the law adversely affects her since she sends messages by text, what may she allege that would strengthen her claim to the right to file a taxpayer’s suit?

A. That she is entitled to the return of the taxes collected from her in case the court nullifies the tax measure.
B. That tax money is being extracted and spent in violation of the constitutionally guaranteed right to freedom of communication.
C. That she is filing the case in behalf of a substantial number of taxpayers.

D. That text messages are an important part of the lives of the people she represents.

SUGGESTED ANSWER:

B. That tax money is being extracted and spent in violation of the constitutionally guaranteed right to freedom of communication.

In a taxpayer's suit, one is allowed to sue where there is an assertion that public funds are illegally disbursed or deflected to an illegal purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. (Province of North Cotabato vs. Government of the Philippines, G.R. No. 183591, October 14, 2008).

It is the remedy available to a taxpayer when taxes are used for illegal activities or when the public funds are used by the government for projects which are not intended for a public purpose. (Pascual vs. Sec. of Public Works, 110 Phil 331- It is only when an act complained of, which may include a legislative enactment, directly involves illegal disbursement of public funds derived from taxation. Maceda vs. Macaraig, 197 SCRA 771- When the issue involve the legality of expenditure of tax money, a taxpayer suit could be filed).

Which theory in taxation states that without taxes, a government would be paralyzed for lack of power to activate and operate it, resulting in its destruction?

A. Power to destroy theory
B. Lifeblood theory
C. Sumptuary theory
D. Symbiotic doctrine

SUGGESTED ANSWER:

B. Lifeblood theory

The lifeblood theory constitutes the theory of taxation, which provides that the existence of government is a necessity; that government cannot continue without means to pay its expenses; and that for these means it has a right to compel its citizens and property within its limits to contribute.

In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of the government and should be collected without necessary hindrance. They are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values.

Double taxation in its general sense means taxing the same subject twice during the same taxing period. In this sense, double taxation
A. violates substantive due process.
B. does not violate substantive due process.
C. violates the right to equal protection.
D. does not violate the right to equal protection.

SUGGESTED ANSWER:

C. violates the right to equal protection.

There is double taxation where one tax is imposed by the state and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be enacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof. (Punsalan v. Municipal Board of the City of Manila, G.R. No. L-4817, [May 26, 1954], 95 PHIL 46-51)

When not generally applied to all subjects, it would be contrary to the constitutional guarantees of uniformity of taxation and equal protection. (Villanueva vs City of Iloilo). In Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan (G.R. No. L-31156, February 27, 1976), the Supreme Court declared that double taxation does not violate the uniformity rule nor does it infringe the equal protection guarantee just because one tax is imposed by the national government and the other tax is levied by a local government unit.

The actual effort exerted by the government to effect the exaction of what is due from the taxpayer is known as
A. assessment.
B. levy.
C. payment.
D. collection.

SUGGESTED ANSWER:

D. collection.

The primary purpose of taxation is revenue raising to provide the wherewithal for the government to perform the functions for which it was created.

Although the power of taxation is basically legislative in character, it is NOT the function of Congress to
A. fix with certainty the amount of taxes.
B. collect the tax levied under the law.
C. identify who should collect the tax.
D. determine who should be subject to the tax.

SUGGESTED ANSWER:

B. collect the tax levied under the law.

The collection of the tax levied is essentially an administrative function.

Real property taxes should not disregard increases in the value of real property occurring over a long period of time. To do otherwise would violate the canon of a sound tax system referred to as

A. theoretical justice.
B. fiscal adequacy.
C. administrative feasibility.

D. symbiotic relationship.

SUGGESTED ANSWER:

B. fiscal adequacy.

Fiscal adequacy means that the revenues generated by taxation should be sufficient to meet the needs of the government. This is in consonance with the doctrine that taxes are the lifeblood of the government. The value of real property increases as time goes by. The government should levy taxes based on the current market value of the real property subject to taxation.

The power to tax is the power to destroy. Is this always so?
A. No. The Executive Branch may decide not to enforce a tax law which it believes to be confiscatory.
B. Yes. The tax collectors should enforce a tax law even if it results to the destruction of the property rights of a taxpayer.
C. Yes. Tax laws should always be enforced because without taxes the very existence of the State is endangered.
D. No. The Supreme Court may nullify a tax law, hence, property rights are not affected

SUGGESTED ANSWER:

D. No. The Supreme Court may nullify a tax law, hence, property rights are not affected

The power of the tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises, ultimately prohibiting certain things. But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. If it is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested in the legislature in ascertaining the amount of tax.

Lualhati Educational Foundation, Inc., a stock educational institution organized for profit, decided to lease for commercial use a 1,500 sq. m. portion of its school. The school actually, directly, and exclusively used the rents for the maintenance of its school buildings, including payment of janitorial services. Is the leased portion subject to real property taxation
A. Yes, since Lualhati is a stock and for profit educational institution.
B. No, since the school actually, directly, and exclusively used the rents for educational purposes.
C. No, but it may be subject to income taxation on the rents it receives.
D. Yes, since the leased portion is not actually, directly, and exclusively used for educational purposes.

SUGGESTED ANSWER:

D. Yes, since the leased portion is not actually, directly, and exclusively used for educational purposes.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v. Aquino. The Supreme Court ruled in that case that the test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. We also held that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from the property tax exemption granted under the Constitution. There is no exemption because the asset is not used actually, directly and exclusively for educational purposes. The commercial use of the property is also not incidental to and reasonably necessary for the accomplishment of the main purpose of a university, which is to educate its students. (Commissioner of Internal Revenue v. De La Salle University, Inc., G.R. Nos. 196596, 198841 & 198941, [November 9, 2016])

Money collected from taxation shall not be paid to any religious dignitary EXCEPT when
A. the religious dignitary is assigned to the Philippine Army.
B. it is paid by a local government unit.
C. the payment is passed in audit by the COA.

D. it is part of a lawmaker’s pork barrel.

SUGGESTED ANSWER:

A. the religious dignitary is assigned to the Philippine Army.

No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (Article VI, Sec 29 (2), 1987 Constitution)

Which of the following are NOT usually imposed when there is a tax amnesty?
A. Civil, criminal, and administrative penalties
B. Civil and criminal penalties
C. Civil and administrative penalties
D. Criminal and administrative penalties

SUGGESTED ANSWER:

A. Civil, criminal, and administrative penalties

Tax amnesty refers to the articulation of the absolute waiver by the sovereign of its right to collect taxes and power to impose penalties on persons or entities guilty of violating tax laws. (Metropolitan Bank and Trust Co v. Commissioner of Internal Revenue GR No 178798 August 4, 2009)

The head priest of the religious sect Tres Personas Solo Dios, as the corporation sole, rented out a 5,000 sq. m. lot registered in its name for use as school site of a school organized for profit. The sect used the rentals for the support and upkeep of its priests. The rented lot is
A. not exempt from real property taxes because the user is organized for profit.

B. exempt from real property taxes since it is actually, directly, and exclusively used for religious purposes.
C. not exempt from real property taxes since it is the rents, not the land, that is used for religious purposes.
D. exempt from real property taxes since it is actually, directly, and exclusively used for educational purposes.

SUGGESTED ANSWER:

D. exempt from real property taxes since it is actually, directly, and exclusively used for educational purposes.

Section 234(b) of the Local Government Code provides that charitable institutions, churches, personages 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. Although the real property is used for the profit, the said proceeds are actually, directly, and exclusively used by the priest for support and upkeep.

2012

Which statement below expresses the lifeblood theory?

a) The assessed taxes must be enforced by the government.

b) The underlying basis of taxation is government necessity, for without taxation, a government can neither exist nor endure;

c) Taxation is an arbitrary method of exaction by those who are in the seat of power;

d) The power of taxation is an inherent power of the sovereign to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues.

SUGGESTED ANSWER:

(B) The underlying basis of taxation is government necessity, for without taxation, a government can neither exist nor endure;

Legal Basis:

In National Power Corporation v. City of Cabanatuan it was held that taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.||| (G.R. No. 149110, [April 9, 2003], 449 PHIL 233-262)

Which statement is WRONG?

a) The power of taxation may be exercised by the government, its political subdivisions, and public utilities;

b) Generally, there is no limit on the amount of tax that may be imposed;

c) The money contributed as tax becomes part of the public funds;

d) The power of tax is subject to certain constitutional limitations.

SUGGESTED ANSWER:

a) The power of taxation may be exercised by the government, its political subdivisions, and public utilities;

Legal basis: In Abakada Guro Party List v. Ermita, it was held that taxation is an inherent attribute of sovereignty. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of government without infringing upon the theory of separation of powers.||| (G.R. Nos. 168056, 168207, 168461, 168463 & 168730, [September 1, 2005])

2013

Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was questioned in court by a cigarette company that would go out of business because it would not be able to pay the increased tax. The cigarette company is? - (1%)

(A) wrong because taxes are the lifeblood of the government

(B) wrong because the law recognizes that the power to tax is the power to destroy

(D) correct because Congress, in this case, exceeded its power to tax

SUGGESTED ANSWER:

(B) Wrong because the law recognizes that the power to tax is the power to destroy

In McCulloch v. Maryland, Chief Justice Marshall declared that the power to tax involves the power to destroy. This maxim only means that the power to tax includes the power to regulate even to the extent of prohibition or destruction of businesses. The reason is that the legislature has the inherent power to determine who to tax, what to tax and how much tax is to be imposed. Pursuant to the regulatory purpose of taxation, the legislature may impose tax in order to discourage or prohibit things or enterprises inimical to the public welfare.

In the given problem, the legislature’s imposition of prohibitive sin tax on cigarettes is congruent with its purpose of discouraging the public from smoking cigarettes which are hazardous to health.

XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It has no more cash and all it has are unsold glass panels. It received an assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels. Should the BIR grant the requested permission? - (1%)

(A) It should grant permission to make payment convenient to taxpayers.

(B) It should not grant permission because a tax is generally a pecuniary burden.

(D) It should not grant permission because the government does not have the storage facilities for glass panels.

SUGGESTED ANSWER:

(B) It should not grant permission because a tax is generally a pecuniary burden. This principle is one of the attributes or characteristics of tax.

Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because he thinks he is being subjected to double taxation. What advice will you give him? - (1%)

(A) Yes, there is double taxation and it is oppressive.

(B) The City of Makati does not have this power.

(D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government.

SUGGESTED ANSWER:

(D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government. There is double taxation when one tax is imposed by the national government and the other is imposed by a local government unit.4 However, the 1987 Constitution does not forbid double taxation. In Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan (G.R. No. L-31156, February 27, 1976), the Supreme Court declared that double taxation does not violate the uniformity rule nor does it infringe the equal protection guarantee just because one tax is imposed by the national government and the other tax is levied by a local government unit.

You are the retained tax counsel of ABC Corp. Your client informed you that they have been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official) on the tax matter they have referred to you for handling. The BIR insider's proposal is to settle the matter by significantly reducing the assessment, but he will get 50% of the savings arising from the reduced assessment. What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance of each of these considerations.

SUGGESTED ANSWER:

As a lawyer, I have the responsibility to give only a lawful advice. Canon I of the Code of

Professional Responsibility mandates me to “uphold the Constitution, obey the laws of the land and promote respect for law and legal processes. Rule 1.01 states that “a lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct.” Rule 1.02 provides that “a lawyer shall not counsel or abet activities aimed at defiance of the law or at lessening confidence in the legal system.”

Therefore, I will advise my client not to agree with the proposal of the BIR officer. Agreeing with the proposal will result in criminal prosecution under the following laws:

Under the NIRC, the officers of the board who authorized the tax evasion will be liable under Section 253(C), while the corporation shall be liable under Section 256.

The BIR official is liable under Section 269 which provides for the violations committed by government enforcement officers. Paragraph (d) of Section 269 provides that one of these violations is “offering or undertaking to accomplish, file or submit a report or assessment on a taxpayer without the appropriate examination of the books of accounts or tax liability, or offering or undertaking to submit a report or assessment less than the amount due the Government for any consideration or compensation, or conspiring or colluding with another or others to defraud the revenues or otherwise violate the provisions

of this Code.”

Under the Revised Penal Code, the officers of the corporation shall be liable under Article 212 for corruption of public officials while the BIR official is liable for direct bribery.

Both my client and the BIR official will also be liable under Republic Act No. 3019 or the Anti-Graft and Corrupt Practices Act.

The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At that time, there was only one installation manager in the municipality; thus, only he would be liable for the tax.

Is the law constitutional? - (1%)

(A) It is unconstitutional because it clearly discriminates against this person.

(B) It is unconstitutional for lack of legal basis.

(D) It is constitutional because the power to tax is the power to destroy

SUGGESTED ANSWER:

(C) It is constitutional as it applies to all persons in that class. The ordinance imposing tax on installation managers does not violate the equal protection clause under Section 1, Article III of the Constitution and the uniformity rule under Section 28, Article VI of the Constitution. The equal protection clause simply means that all persons subject to legislation shall be treated alike under like circumstances and conditions both in privileges conferred and liabilities imposed. On the other hand, the uniformity rule states that a tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but simply a geographical uniformity. (See: British American Tobacco v. Camacho, G.R. No. 163583, April 15, 2009)

In the given problem, the ordinance applies to all installation managers. In other words, the ordinance does not specifically identify who among the installation managers shall be liable for tax. The fact that there is only one installation manager in the municipality does not mean that the taxing authority singled him out as the only taxable person.

A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital's use and not more than 30% of its funds were used for administrative purposes. Is the hospital subject to tax on its income? If it is, at what rate?

SUGGESTED ANSWER:

The non-stock, non-profit hospital’s income from paying patients is subject to a preferential income tax of 10%. In Commissioner of Internal Revenue v. St. Luke’s Medical Center, the Supreme Court laid down the rules on the treatment of icome tax of non-profit hospitals. Pursuant to Sec. 30(E) and (G) of the NIRC, these hospitals are exempt from income tax with respect to their activities conducted exclusively for charitable or social welfare purposes. However, they are subject to a preferential income tax rate of 10% under charitable or social welfare purposes.

2014

Choose the correct answer. Double Taxation – (1%)

(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the same kind or character of tax, even if the purposes of imposing the same are different.

(B) is forbidden by law; and therefore, it is a valid defense against the validity of a tax measure.

(C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing.

(D) exists when a corporation is assessed with local business tax as a manufacturer, and at the same time, value-added tax as a person selling goods in the course of trade or business.

SUGGESTED ANSWER:

(C) Double taxation means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing. (Victorias Milling Co v. Municipality of Victorias, Negros Occidental, G.R. No. L-21183; September 27, 1968)

Choose the correct answer. Tax Avoidance ‒ (1%)

(A) is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

(B) is a tax saving device within the means sanctioned by law.

(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities than for legitimate business purpose.

(D) is any form of tax deduction scheme, regardless if the same is legal or not.

SUGGESTED ANSWER:

(B) Tax Avoidance is a tax saving device within the means sanctioned by law. CIR v. Benigno Toda, Jr., G.R. No. 147188; September 14, 2004)

On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms. Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200 million. These two (2) transactions were evidenced by two (2) separate Deeds of Absolute Sale notarized on the same day by the same notary public.

Investigations by the Bureau of Internal Revenue (BIR) showed that: (1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through the declaration of cash dividends to all its stockholders.

Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for deficiency income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the higher corporate income tax rate of thirty percent (30%). What is the liability of Haeltown Corporation, if any? (4%)

SUGGESTED ANSWER:

Haelton Corporation is liable for the deficiency income tax as a result of tax evasion. The purpose of selling first the property to Mr. Belly is to create a tax shelter. He never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale of him was merely a tax ploy, a sham and without business purpose and economic substance. The intermediary transaction, which was prompted more on the mitigation of tax liabilities than for legitimate business purpose constitutes one of tax evasion. However, being a corporation, Haelton can only be liable for civil fraud which is a civil liability rather than a criminal fraud which can only be committed by natural persons. (CIR v. Benigno Toda, Jr., G.R. No. 147188; September 14, 2004)

Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star, a non-resident foreign corporation with no property in the Philippines. Under the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hongkong.

Is the compensation for the services of Single Star taxable as income from sources within the Philippines? Explain. (4%)

SUGGESTED ANSWER:

No. The compensation for services rendered by Single Star is an income derived from sources without the Philippines. Pursuant to the case of Commissioner of Internal Revenue v. Baier-Nickel (G.R. No. 153793, August 29, 2006), the factor which determines the source of income for personal services is the place where the services were actually rendered. Moreover, Section 42 (C)(3) of the NIRC provides that compensation for labor or personal services performed without the Philippines is treated as income from sources without the Philippines. Since Single Star, a non-resident foreign corporation, will perform all the managerial services for Triple Star’s branch in Hong Kong, all compensation income arising from the performance of such services will be considered income from sources outside the Philippines, and therefore not subject to Philippine income tax

Choose the correct answer. Tax laws - (1%)

(A) may be enacted for the promotion of private enterprise or business for as long as it gives incidental advantage to the public or the State

(B)are inherently legislative; therefore, may not be delegated

(D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate

SUGGESTED ANSWER:

(D) Tax laws adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate (City of Baguio v. de Leon, G.R. No. L-24756; October 31, 1968)

2015

Explain the principles of sound taxation system.

SUGGESTED ANSWER:

Fiscal Adequacy

Fiscal Adequacy necessitates that sources of revenue must be adequate to meet government expenditures and other public needs (Chavez v. Ongpin). This principle is in consonance with the lifeblood doctrine of taxation. Nevertheless, a tax law that violates fiscal adequacy will retain its validity, as the Constitution does not expressly require that fiscal adequacy be observed.

Administrative Feasibility

Tax laws must be capable of effective and efficient enforcement. This principle requires that tax laws should be plain to the taxpayers, capable of enforcement by an adequate and well-trained staff of public officials, convenient as to time and manner of payment, and not duly burdensome or discoursing to business activity (Report of the Tax Commission of the Philippines).

Similar to Fiscal Adequacy, a violation of this principle does not invalidate a tax statute for the reason that administrative feasibility is not a requirement under the Constitution.

Theoretical Justice

Under Article VI, Section 28(1) of the Constitution, the rule of taxation must be uniform and equitable. The State must evolve a progressive system of taxation. This forms the basis for theoretical justice, which simply means that a tax system must take into consideration the taxpayers’ ability to pay and that it must be reasonable, fair and conscionable.

A tax law which violates Theoretical Justice is invalid for being repugnant to the Constitution.

Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a non-resident citizen.

(A) If the goods were produced from Ms. B's factory in the Philippines, is Ms. B's income from the sale to Ms. C taxable in the Philippines? Explain.

SUGGESTED ANSWER:

(A) Yes. Sec. 23(A) of the Tax Code provides that a citizen of the Philippines residing therein is taxable on all income derived from sources from within and without the Philippines.

Therefore, the prize money that he earned shall still be taxable in the Philippines even though the income derived its source in a foreign country.

(B) No. Under Sec.32(B)(7) of the Tax Code, ‘all prizes and awards granted to athletes in local and international sports competition and tournaments, whether held in the Philippines or abroad and sanctioned by their national sports association’ are included in the computation of gross income. Therefore, the prize money shall be taxable here in the Philippines as part of gross income.

(C) There are two methods that Mr. A may use to apply the income taxes he had already paid to the US for purposes of computing his income tax liability in the Philippines.

Using the exemption method, the income or capital which is taxable in the state of source or situs is exempted from the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the remaining income. While under the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter (CIR v. S.C. Johnson and Son, Inc.).

Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (4%)

SUGGESTED ANSWER:

Double taxation in the strict sense refers to double taxation in the objectionable or prohibited sense. There is double taxation in the strict sense when the same property is taxed twice for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same period, and they must be of the same character of tax (84 C.J.S. 131-132).

Double taxation in taxation in the broad sense refers to indirect double taxation, which is permissible. Indirect double taxation occurs when the taxes imposed are of different nature or character, imposed by different taxing authorities (Villanueva v. Iloilo City, 26 SCRA 578).

2016

Briefly explain the following doctrines: lifeblood doctrine; necessity theory; benefits received principle; and, doctrine of symbiotic relationship.

SUGGESTED ANSWER:

RA 10701 is constitutional and valid.

The equal protection clause under Section 1, Article III of the 1987 Constitution simply means that all persons subject to legislation shall be treated alike under like circumstances and conditions both in privileges conferred and liabilities imposed. Furthermore, the Supreme Court held in British American Tobacco v. Jose Isidro N. Camacho that a levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit classification for purposes of taxation. Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary; (2) the categorization is germane to achieve the legislative purpose; (3) the law applies, all things being equal, to both present and future conditions; and (4) the classification applies equally well to all those belonging to the same class.

In the given problem, RA 10701 complies with all the requisites of a valid classification. There is a substantial distinction between the private owners on one hand and the owners of public utility vehicles and the Government on the other hand. Hence, RA 10701 is constitutional and valid.

Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing assistant to a time deposit with AAB Bank. The bank regularly deducted 20% final withholding tax on the interest income from the time deposit.

Alfredo contends that the 20% final tax on the interest income constituted double taxation because his salary had been already subjected to withholding tax.

Is Alfredo’s contention correct? Explain your answer.

SUGGESTED ANSWER:

No, Alfredo’s contention that the 20% final tax on the interest income constituted double taxation is incorrect.

As held by the Supreme Court in the case CIR v. Citytrust Investment Philippines, double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and with the same kind of character of tax. The 20% final tax is imposed on the interest income while the tax earlier withheld is on the salary or compensation income. Thus, although both pertain to income tax, they do not pertain to the same thing or activity. Consequently, no double taxation exists.

San Juan University is a non-stock, non-profit educational institution. It owns a piece of land in Caloocan City on which its three 2-storey school buildings stood. Two of the buildings are devoted to classrooms, laboratories, a canteen, a bookstore, and administrative offices. The third building is reserved as dormitory for student athletes who are granted scholarships for a given academic year.

In 2017, San Juan University earned income from tuition fees and from leasing a portion of its premises to various concessionaires of food, books, and school supplies.

(A) Can the City Treasurer of Caloocan City collect real property taxes on the land and building of San Juan University? Explain your answer.

(B) Is the income earned by San Juan University for the year 2017 subject to income tax? Explain your answer.

SUGGESTED ANSWER:

(A) No, real property taxes on the land and building cannot be collected from San Juan University. Art. VI, Sec. 28(3) of the 1987 Constitution provides that all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. To be exempted it is required that: (1) the taxpayer falls under the classification non-stock, non-profit educational institution; and (2) the assets it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. Since the leased portion of San Juan’s University’s premises of for various concessionaires of food, books, and school supplies, intended to cater the students of the University, then it shall be incidental use, complimentary to the main or primary purpose which is educational. (CIR vs. YMCA, G.R. No. 124043 October 14, 1998)

(B) No, income earned by San Juan University is not subject to income tax provided that revenues are used actually, directly, and exclusively for educational purposes. Article XIV, Sect. 4(3) of the Constitution provides that all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. The requisites for availing the tax exemption under Article XIV, Section 4 (3) are as follows: (1) the taxpayer falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. The law does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. Thus, so long as the revenues and income derived by San Juan University, a non-stock, non-profit educational institution, are used actually, directly and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and duties. (CIR v. De La Salle University, Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016)

2018

KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of clothing and household materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City (Code). Subsequently, the Sangguniang Panlungsod enacted an ordinance amending the Code by inserting Section 21 which imposes a tax on "Businesses Subject to Excise, Value-Added and Percentage Taxes under the National Internal Revenue Code (NIRC)," at the rate of 50% of 1 % per annum on the gross sales and receipts on persons "who sell goods and services in the course of trade or business." KM Corporation paid the taxes due under Section 21 under protest, claiming that (a) local government units could not impose a tax on businesses already taxed under the NIRC and (b) this would amount to double taxation, since its business was already taxed under Sections 15 and 17 of the Code.

(b) Does this amount to double taxation? (2.5%)

SUGGESTED ANSWER:

Yes, there is double taxation.

For there to be direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character (City of Manila v. Coca-Cola Bottlers, G.R. No. 181845, August 4, 2009)

All the elements of such taxation is present. Firstly because Section 21 of the Revenue Code of Kalookan City (Code) imposed the tax on a person who sold goods and services in the course of trade or business based on a certain percentage of his gross sales or receipts, while Section 15 and 17 likewise imposed the tax on a person who sold goods and services in the course of trade or business but only identified such person with particularity, namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes – being imposed on the privilege of doing business in Kalookan City in order to make the taxpayers contribute to the city’s revenues – were imposed on the same subject matter and for the same purpose.

Secondly, the taxes were imposed by the same taxing authority (Kalookan City) and within the same jurisdiction in the same taxing period (i.e., per calendar year). Thirdly, the taxes were all in the nature of local business taxes. (Nursery Care Corporation et al. v. Acevedo, G.R. No. 180651, July 30, 2014)

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