SAN BEDA COLLEGE OF LAW SAN BEDA COLLEGE OF LAW

CRIMSON NOTESCRIMSON NOTES TAXATION LAWTAXATION LAW

Q & A

GENERAL PROVISIONS

Is the non-profit sale of Bibles taxable? No. Taxing non-profit sale of Bibles is a

violation of freedom of religious worship. Furthermore, RA 8047, which amended the EVAT Law (RA 7716) exempted Bibles (and newspapers) from VAT coverage.

What is the extent of the legislature’s power to choose the subject to be taxed?

The legislature can choose anyone who can be taxed, not anything that can be taxed. To illustrate, the manufacturer of the Bible can be taxed on his income but the act of manufacturing and selling the Bible cannot be taxed.

An ordinance was passed by the City of Manila which imposed a permit fee of P50.00 on aliens as a condition for employment or engaging in any business or occupation. Did this constitute a denial of due process?

Yes. The SC pointed out that aliens once admitted in the Philippines cannot be deprived of life w/o due process of law and this guarantee includes the means of livelihood (Villegas vs. Hsiu Chiong Tsai Pao).

Does the non-impairment of contracts clause in the Constitution apply to a public utility franchise?

The non-impairment rule does not apply to a public utility franchise since a it is subject to amendment, alteration or repeal by Congress when the public interest so requires (Art. XII, Sec. 11, 1987 Constitution).

5. Does the tax exemption in the Constitution of properties used for religious, charitable and educational purposes [Art. VI, Sec. 28(3)] apply to gifts?

In the case of Lladoc vs. Commissioner, the SC ruled that the Constitutional exemption applies only to property tax. Gifts are subject to donor’s tax. HOWEVER, at present under Sec. 101 of the CTRP, gifts made in favor of religious, charitable or educational organizations would nevertheless qualify for donor’s gift tax exemption.

Is proof of actual use for religious, charitable and educational purposes necessary in order to avail of the constitutional tax exemption?

In the case of Prov. of Abra vs. Hernando (107 SCRA104), the SC ruled that actual use is necessary. To be exempt, the lands, buildings, and improvements must not only be exclusively but also actually and

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directly used for religious and charitable purposes.

In the case of Apostolic Prefect vs. City Treasurer of Baguio (71 Phil 547), the SC held that “use” overrides “ownership”. Hence, even if a property is owned by a religious, charitable, or educational institution but is actually used for a non-exempt purpose, the exemption from tax of said property vanishes.

Is incidental use covered by the exemption?Yes. This is called the doctrine of

incidental use. This doctrine was discussed in Abra Valley College vs. Aquino (162 SCRA 106). In this case, the SC held that incidental use of school building for director’s residence will not deprive property of its tax-exempt character. The term exclusive use includes incidental use as long as it is reasonably necessary for the accomplishment of the taxpayer’s main purpose.

What is the situs of intangible property for tax purposes?

An intangible property may have different situs for tax purposes. Thus the following may impose a tax thereon:

The country where the intangible property receives protection ( see Sec. 104 CTRP);The place of domicile of the decedent at the time of his death (Mobilia Sequuntur Personam)

See Wells Fargo Bank v CIR, 70 Phil 325

A manufacturer has a factory in Pasig. It has a sales broker who transacts business in Manila. Is the manufacturer subject to business tax imposed by the City of Manila?

Yes. The power to levy a business (excise) tax upon the performance of an act does not depend upon the domicile of the person subject to the excise tax, nor upon the physical location of the property taxed, but depends upon the place where the act is performed. (See Allied Thread Co., Inc. v City of Manila, 133 SCRA 338)

A German Airline has a ticket office in the Philippines but without any landing right therein. a.) Is it subject to income tax? b.) How about percentage (excise) tax?

a. Yes. It is subject to income tax. The absence of flight operations to and from the Philippines is not determinative of situs of income taxation. The test of taxability is the

place of source of income or where the activity which produces the income.b. No. It is not subject to percentage (excise) tax. Its situs is the place where the act or privilege is done or performed. See CIR v BOAC, 149 SCRA 395

Resume of Situs of TaxationIncome tax-situs is the place of source

of income.Excise tax-situs is the place where the

act or privilege is done or preformed.Place of domicile of taxpayer is

immaterial.

As to its taxability, what will be your advice if you are consulted by San Beda on the following matters:income tax on amount received from students as tuition fee; income tax on interest on as:bank deposit loanreal property tax on the football field;real property tax on the new basketball court simply lent by an alumnus;income tax on income from the rock concert held at the football field;income tax on income from the operation of the cafeteria;income tax on money received as donation;income tax on money received as legacy;

(9) donor’s tax on its donations and tax treatment thereof for income tax purposes;(10)VAT on

supplies purchased to be used in the school’s operations

books purchased to be used at the library

educational services

A: San Beda being a non-stock, non-profit educational institution, I will consider the following:

(1) The tuition fee is not a taxable income pursuant to Sec. 30(H)CTRP;

(2) The interest on bank deposit is subject to 20%final tax; on loan is subject to 5-32% income tax; See last paragraph of Sec. 30, CTRP;

(3) The football field is not subject to real property tax pursuant to Sec. 234LGC;

(4) The basketball court is not subject to real property tax pursuant to Sec. 234 LGC only if San Beda can prove it is

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actually, directly and exclusively used for educational purposes. See Province of Abra v Hernando, 107 SCRA 104, important in determining its taxability. Use, not source, of the property taxable. See Abra Valley College, Inc. v Aquino, 162 SCRA 106;

(5) The income from the rock concert, an unrelated activity from the purposes of San Beda, is subject to 5-32% income tax. An activity is unrelated if the conduct of which is not substantially related to the exercise or performance by the school of its primary purpose or function (Sec. 27 B, CTRP)

(6) The income from the operation of cafeteria, a related or ancillary activity from the purposes of San Beda, is not subject to income tax. However, if it is operated by concession, it is subject to tax.

(7) The donation received is an exclusion from gross income (Sec. 32B3, CTRP). Hence it is not subject to income tax. The donation is already subject to donor’s tax payable by the donor (Sec. 98 CTRP). NB: The donor may claim exemption for the payment of the tax thereon pursuant to Sec. 101CTRP; provided, he can prove that not more than 30% of such amount shall be used by San Beda for administration purposes. Any income that may be subsequently received therefrom is subject to income tax(Sec. 32B3, CTRP).

(8) The legacy is not subject to income tax. Same as (7). See Secs. 32B3, 84, 87 CTRP;

(9) The donation is subject to donor’s tax unless San Beda can claim exemption under Sec. 101 CTRP. For income tax purposes, San Beda can claim the amount donated as deduction from its gross income, in full or in part, under Sec. 34H, CTRP.

(10)The VAT is imposable on the supplies purchased to be used in the school’s operations (Sec. 105 CTRP)The sale and importation of books are transactions exempt from VAT under Sec. 109y, CTRP. Hence San Beda is not liable therefore.The educational services of San Beda is not subject to VAT under Sec. 109m, CTRP.

The following table may help you in correlating the pertinent CTRP provisions in the above illustration.

Giver ReceiverIncome Tax- Sec. 34H Sec. 32B(3)Estate Tax Sec. 84, 87 N/ADonor’s Tax Sec. 98, 101 N/AVAT Sec. 105, 109 same

If it is CEU seeking your advice with regard to the above matters?

Same advice in the preceding problem except on the income tax treatment of CEU as a proprietary educational institution.

It is taxable just like any other domestic corporation. However, it may enjoy a preferential tax treatment(10% on its taxable income) if its gross income from unrelated activity does not exceed 50% of the taxable gross income derived from all sources. See Sec. 27B, CTRP.Note: Same considerations shall apply to religious, charitable institutions, etc.

When can a grant of tax-incentive be taken away by the government without violating the rule on non-impairment of contracts?

It depends on whether the grant is unilaterally or bilaterally given by the government. If unilaterally given, there is no impairment. It constitutes a mere revocation of a grant of privilege. If bilaterally given, there is impairment (Art. III, Sec. 10, Constitution). Exception: In case of grant of franchise to public utilities when common good so requires (Art. XII, Sec. 11, Constitution)

How are tax laws construed? In case of doubt

a. Taxation – is construed against the government;

b. Tax exemption – is construed against the taxpayer. Exception: If the exemption is granted to a government or religious institution. Note the Inherent limitation that the government is not subject to tax.

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How are rulings classified? Rulings of first impression. – They are

the rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the NIRC and other tax laws without established precedents. The term includes reversal, modification or revocation of any existing ruling.

Rulings with established precedents – They are mere reiterations of previous rulings, opinions and interpretations of the Commissioner, as delegated to duly authorized internal revenue officers.

Distinguish prospective, official, and jeopardy assessments.

Prospective assessment informs the taxpayer of the findings of the examiner who recommends a deficiency assessment. The taxpayer is usually given ten (10) days from notice within which to explain his side.

Official assessment is issued by the BIR in case the taxpayer fails to respond to the proposed assessment, or his explanation is not satisfactory to the Commissioner,

Jeopardy assessment is a delinquency tax assessment made without the benefit of complete or partial investigation by an authorized revenue officer. This is issued when the revenue officer finds himself without enough time to conduct an appropriate or thorough examination in view of the impending expiration of the prescriptive period for issuing a valid assessment. To prevent the issuance of a jeopardy assessment, the taxpayer may be required to execute a waiver of the statute of limitations.

When the BIR garnishes a taxpayer’s bank deposit, does it violate the Bank Secrecy Law (RA 1405)?

No. It is not a violation of the Bank Secrecy Law because the BIR is not inquiring the balance of the deposit but merely attaching it without knowing the balance of the same.(China Banking Corp. vs. Ortega).

Is the revenue producing activity of the government taxable?

It depends. If the activity is performed by the

government in its sovereign capacity (jure

imperii), the General Rule is exemption, the Exception is taxation. (Sec. 32, B7b, CTRP)

If the activity is performed by the government in its proprietary capacity (jure gestionis), the General Rule is taxation, the Exception is exemption. (Sec. 27C, CTRP).

If a seller adds to the selling price the tax imposed on him, can a tax-exempt purchaser claim a refund after paying for the same?

No. The purchaser paid the additional amount not as a tax but as part of the selling price of the product. The fact that a seller added the amount of tax to the price of the product did not make it a tax on the purchaser. See Phil. Acetylene Co. v CIR, 20 SCRA 1056

In the case above, if the buyer is specifically exempted from indirect taxes, can he now claim a refund?

Yes, if his specific exemption from indirect taxes contemplates taxes which, although not imposed upon or paid by him directly, form part of price paid or to be paid by him. See CIR v Gotamco, and Sons , Inc.,148 SCRA 36; Maceda v Macaraig.

If the tax is paid by the seller but passed on to the buyer, when can the seller claim a refund of the tax erroneously paid by the former?

It depends.If the tax is imposed directly on the thing

sold, only the buyer has the right to claim a refund. See Medina v City of Baguio (Taxes imposed therein were taxes on the admission tickets sold).

If the tax is imposed directly, not on the thing sold, but on the act of the seller who is exclusively made liable for its timely payment, the seller can claim a refund and hold the refunded taxes in trust for the buyers. See CIR vs American Rubber Co.

When can a taxpayer compensate his claims against the government from his tax liability?

As a general rule, taxes and debt cannot be compensated. An exception is when two obligations are both due and demandable and all the requisites of a valid compensation (Art. 1279 Civil Code) are present. See Domingo v Garlitos, 8 SCRA 447(Both the claim of the government and intestate, the latter’s claim had earlier been appropriated by a corresponding law, have

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already become overdue and demandable as well as fully liquidated).

If the claim of the taxpayer against the government has long been paid and deposited in a bank but he simply fails to withdraw it, can he compensate it against his tax liability?

No. There is no compensation if the parties involved are not creditors and debtors of each other. See Francia v IAC, 162 SCRA 753(The taxpayer knew that the payment for his claim had long been deposited to the bank but did not withdraw it. Further, his tax liability was due to a local government unit while his claim was against the national government).

If the taxpayer is clearly entitled to a tax refund although the CIR has not yet approved the same, can he compensate it against his other tax liability?

Yes. A return filed showing an overpayment shall be considered a written claim for refund (refer to Sec. 58(D) in relation to Sec. 204(C) CTRP). If not yet refunded, it may be deducted from the tax to be paid. See CIR v Itogon Suyoc Mines, Inc., 28 SCRA 867

If the government fails to use the taxpayer’s compelled contribution to a fund for the purpose to which it was set up, can he compensate his contribution from his tax liability?

No. The government does not owe anything from him. They are not mutual creditors and debtors of each other. See Republic v Mambulao Lumber Co., 4 SCRA 622 (The amount paid by the licensee as reforestation charges is in the nature of a tax which forms part of the reforestation fund, payable by it irrespective of whether the area covered by its license is reforested or not).NB: To reconcile the above cases, it may help to refer to the requisites of legal compensation under Art. 1279 Civil Code, specifically:

That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

b. That the two debts be due;

NATIONAL TAXATION

1. When is a seaman considered an OCW for purposes of income tax exemption from sources not within the Philippines?

When the seaman receives compensation abroad as a member of the complement of a vessel; and,When such vessel is engaged exclusively in international trade.

2. Is there an imprescriptible tax in the Tax Code?

Formerly documentary stamp tax. Now under the CTRP, a documentary stamp tax return is required. Thus, there is no more imprescriptible tax.

3. Distinguish “final withholding tax system” from the “creditable withholding tax system” per BIR Revenue Regulations 2-98.

Under the final withholding tax system, the amount withheld by the withholding agent constitutes a full and final payment of the tax due from the taxpayer. Failure of the withholding agent to withhold the correct amount of tax will make him liable for the deficiency. The taxpayer is no longer required to file an income tax return.

On the other hand, under the creditable withholding tax system, the tax withheld is intended to equalize or at least approximate the tax due of the taxpayer on his income. The taxpayer is still required to file an income tax return and pay the difference between the tax withheld and the tax due.

4. Are cash and property dividends taxable? If so, at what rate?

Cash and property dividends may either be exempt or taxable depending on whether the recipient is an individual or corporate taxpayer. The tax rate depends on what type of taxpayer is the recipient.

Consider the following summary of the pertinent CTRP provisions:

Corporate TaxpayerForeign to Domestic Corporation

32% (Sec. 32A)Domestic to Domestic Corporation

Exempt (Sec. 27D) c. Domestic to Foreign Corporation

Resident Foreign Corporation

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Exempt(Sec. 28A7d)Nonresident Foreign Corporation 15% subject to the condition stated in Sec. 28B5b. Otherwise, 32%

Individual Taxpayera. From Domestic Corporation

Resident citizen, nonresident citizen, resident alien 10%(Sec 24A)Nonresident alien engaged in business and trade 20%(Sec. 25A2)

Nonresident alien not engaged in business and trade 25% on gross income (Sec. 25B)

b. From Foreign CorporationResident citizen, nonresident citizen, resident alien, nonresident alien engaged in business and trade 5-32%(Sec. 24, 25A1)Nonresident alien not engaged in business and trade 25% on gross income (Sec. 25B)

NB: If a corporate taxpayer will not declare dividends, it will be subjected to 10% tax on improperly accumulated income (Sec. 29)

5. Are stock dividends taxable? How about liquidating dividends?

As a rule, stock dividends are not taxable. They will not result in a change in interest of the stockholder. They will result in a new cost per share which will be used in determining any gain or loss upon any subsequent sale of such shares.

They are taxable only if they will give stockholder an interest different from that which his former stocks represent (i.e. when the stockholder is given the option of choosing cash or property instead of stocks.). The measure of income in such case is the fair market value of stocks received.

Liquidating dividends are not taxable to the stockholder as dividends. They are considered as mere return of capital. But any gain or loss sustained by him is taxable income or deductible loss.

6. An employer is planning to take a life insurance policy on the life of his key officer as part of the latter’s fringe

benefits. Both seek your advice about the tax treatment of the following:

Premium payments;Amount to be received as return of premium;Proceeds of insurance

My advice depends on who will be the designated beneficiary. If the designated beneficiary is:

The employee’s estate or his heirs(1) Premium payments-

They are deductible by the employer for income tax purposes as ordinary and necessary expenses (Sec. 34A1).

They are not taxable fringe benefits of the officer under Sec. 33C2(2) Amount to be received as return of

premium-The amount is not taxable under Sec.

32B2. It is considered as a mere return of capital. Hence, not income.

If the amount to be received is much more than the total amount of the premiums, the excess amount is a taxable income.(3) Proceeds of life insurance-

The proceeds of life insurance policy paid to the heirs or decedent’s estate is excluded from gross income for income tax purposes under Sec. 32B1. If such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

For estate tax purposes, if the designated beneficiary is the

Estate-whether or not revocable-taxable

3rd person-If revocable-taxable

If irrevocable-not taxable(Sec. 85E)

The employer(1) Premium payments-

They are not deductible by the employer for income tax purposes (Sec. 36A4)

They are not considered fringe benefits to the officer.

Sec.32B2Sec. 32B1

7. What if the employer instead considers an accident or health insurance , what will be your advice?

My advice will be the same as in the case of life insurance policy payable to the

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employee’s estate in the preceding problem. See Sec. 32B4. With regard to the proceeds thereof, the amount which compensates the officer for lost profits is a taxable income.

8. As regards to his property insurance, the employer asks you on the tax treatment of the premium payments and the proceeds thereof. What will be your advice?

The premium payments are deductible for income tax purposes as ordinary and necessary expenses (Sec. 34A1)

The proceeds thereof covering the book value of the property are not taxable. They are considered as a mere return of capital. The amount in excess of the book value:

If to be used in restoring the property not taxable

If not taxable

9. Are retirement benefits, pensions taxable as income?

Yes. See Sec. 32A. Sec. 32B6 enumerates the exceptions.

NB: The amount received by an employee under a reasonable private benefit plan is excluded from gross income only if the fund cannot anymore be diverted by the employer for other purposes (Sec. 32B6a).Further, earnings of the trust fund are not subject to income tax under Sec. 60B. Exception-the interest income or yield from bank deposit or deposit substitute of trust fund is subject to 20% final tax (Sec. 24B,60A)

10. For estate tax purposes, are they also taxable?Yes. They are taxable including those that are enumerated as exclusions from gross income under Sec. 32B6. Exception the amount received by heirs under RA4917 (Sec. 86A7).

11. How will you treat the contributions of the employer to the retirement/pension benefit plan?The contributions are deductible by the employer for income tax purposes as ordinary and necessary expenses or as pension trusts (Sec. 34A,J).For the employee/officer, the contributions are not taxable fringe benefits.

12. Are prizes and awards taxable as income? If so, at what rate?It depends.

If prizes and awards are given primarily in recognition of charitable, civic, artistic, religious, literary, educational, scientific achievement (CCAR-LES), they are excluded from gross income provided the 2 requisites provided under Sec. 32B7c are met.If prizes and awards are given in cases other than the above, they are taxable income. If the value thereof is more than Php 10,000, the prizes and awards are subject to 20% final tax. If Php 10,000 or less, they are subject to 5-32% income tax.

13. What about the prizes and awards given in sports competition?It depends.If the sports competition is sanctioned by the athlete’s national sports association, the prizes and awards are excluded from gross income (Sec. 32B7d).If not sanctioned by the athlete’s national sports association, the prizes and awards are subject to income tax. If being an athlete is the recipient’s profession, the prizes and awards are subject to 5-32% income tax. If it is not his profession, the prizes and awards are subject to 20% final tax if their value is more than Php 10,000. If Php 10,000 or less, then they are subject to 5-32% income tax.

14. How are gains and losses treated?To determine the proper treatment of gains and losses, it is imperative to determine the type of property involved, whether it is an ordinary or a capital asset. See Sec. 39A. If it is an ordinary asset, the ordinary gains and losses are considered in determining income or loss from trade, business or profession. See Secs. 32A, 34D.If it is a capital asset, determine further whether or not it is a real property located in the Philippines. If it is, then it is subject to capital gains tax (See Secs. 24D, 27D5. See also Secs. 24C, 27D2). If not, the capital gains and losses are considered in determining the taxable income (Sec. 39).

NB: While both ordinary and capital gains/losses affect the taxable income, distinction between them is important under Sec. 34H. The 5 or 10% limitation therein is based on income from trade, business or profession without considering the net capital gains. Further, ordinary losses are deductible without limitations (Sec. 34D); capital losses have limitations (Sec. 39C).

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The following summary might help you:Type of AssetTax Treatment

Ordinary (see 4 types, Sec. 39A1, 32)Ordinary gains/losses are taxable income/deductible losses from business

Real Property loc. in the Phils.(Secs. 24D, 27D5)Capital gains tax based on FMV or GSP whichever is higher

Shares of stock of domestic corp. not listed and traded thru a local stock exchange(Sec. 24C, 27D2)Capital gains tax based on the net capital gains

Shares of stock of domestic corp. listed and traded thru a local stock exchange (Sec. 127)Stock transaction tax (percentage tax) based on the GSP

Shares of stock in a mutual fund company (Sec. 32B7h)Gains from redemption are excluded from gross income)

Bonds, debentures or other certificate of indebtedness (Sec. 32B7g)Gains from their sale, exchange, retirement are excluded from gross income

Bonds, debentures or other certificate of indebtedness (Sec. 32B7g)Gains from their sale, exchange, retirement are excluded from gross income

Real property not located in the PhilsPersonal property located in/out the Phils (including shares of stock of foreign corp.) (Sec. 39)Capital gains/losses are considered in determining the taxable income

15. Your client whose house and lot are being expropriated by the government asks you whether he is still subject to tax thereon. What will be your advice?He has two options. He may opt to be taxed at 6% of the FMV or GSP whichever is higher; he may consider the capital gain/loss thereon in computing his taxable income subject to the normal rate.

If the subject property is his principal residence and the proceeds of the sale will be utilized in acquiring or constructing a new principal residence, he may be exempted from paying the capital gains tax provided the requisites under Sec. 24D2 are met.

16. Is the immediately preceding advice (allowing exemption) available to all types of taxpayer?No. It is not available to a corporate taxpayer. Moreover, not all individual taxpayer can avail of the said exemption. They are only the following:A resident citizenA non-resident citizen (i.e. OCW). But not an immigrant to a foreign country.Alien resident under the following cases: a. Property acquired by intestate succession; b. Natural-born citizen who lost his Filipino citizenship (see Sec. 10, RA 7042 as amended by RA 8179-Foreign Investments Law) c. CondominiumA nonresident alien engaged in business and trade (in case of a former Filipino citizen who still maintains a residence in the Phil.).

A nonresident alien not engaged in business and trade cannot avail of the exemption.

17. What are the transfer taxes under the CTRP? Discuss.The transfer taxes under the CTRP are as follows:

Capital gains taxThis is a tax imposed upon capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital asset. This includes pacto de retro sales and other forms of conditional sales (Sec. 24D)This is also imposed upon the net capital gains realized from the sale, exchange or other disposition of shares of stock in a domestic corporation not listed and traded through a local stock exchange (Sec. 24C).

In both cases, consideration is essential.

Estate tax This is a tax imposed on the right to transmit property upon the death of the decedent and on certain transfers by the decedent during his lifetime which are made by law the equivalent of

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a testamentary disposition. See Sec. 84 CTRP, Art. 774 Civil Code.Death of the decedent is essential. In case of wills, formal requisites must be complied with. See Arts. 804-814 Civil Code.

Donor’s taxThis is a tax imposed on the transfer by a person of the property by gift. See Sec. 98 CTRP, Art. 725 Civil Code.Donative intent is essential. Further, the formal requisites must also be observed. See Arts. 748,749 Civil Code.

N.B.: There is another kind of transfer tax which is found under the Local Government Code (LGC) – the tax on transfer of real property ownership imposed by provinces (Sec. 135, LGC).

18. In case of transfer of property during the lifetime of the decedent, when is such transfer subject to capital gains tax, estate tax, donor’s tax?It depends on the type of the property involved and whether there is a full, inadequate, or no consideration at all. In case of real property located in the Philippines-Full Consideration

The transfer is subject to capital gains tax. Estate and donor’s taxes are not applicable since there are no succession and donation (gratuitous titles) to speak of.No consideration

The transfer is subject to either estate tax or donor’s tax. Capital gains tax is not applicable since there is no sale or exchange to speak of.Insufficient consideration

In cases of transfer in contemplation of death, revocable transfer, transfer under the general power of attorney, the transfer is subject to estate tax pursuant to Sec. 85G. In any other transfer involving real property located in the Philippines, the transfer is subject to capital gains tax (NB: the tax is based on the FMV or GSP whichever is higher).

A real property subjected to 6% capital gains tax under Sec. 24(D) on sale of real property by an individual will no longer be subjected to Donor’s tax on the amount by which the FMV exceeded the consideration. While not explicitly provided in the CTRP law, it is also deemed that same treatment shall be applied to lands and/or buildings held as capital assets by

a corporate seller and subjected to the 6% capital gains tax under Sec. 27(1)(5).

In case of property other than real property located in the Philippines-With consideration

The corresponding gain or loss is a taxable income or deductible loss for income tax purposes. Further, the transfer is subject to VAT provided it is in the ordinary course of trade or business (Sec. 105). Estate and donor’s taxes are not applicable.

No considerationThe transfer is either subject to estate or

donor’s tax. For income tax purposes, the value of the property may be claimed as a deduction under Sec. 34H.Insufficient consideration

In case of transfer in contemplation of death, revocable transfer, transfer under the general power of attorney, the transfer is subject to estate tax pursuant to Sec. 85G. In any other transfer involving property not a real property located in the Philippines, the transfer is subject to donor’s tax under Sec. 100.

In case there is no donative intent, the corresponding loss is a deductible loss for income tax purposes.

The following summary might help you:Capital Gains TaxEstate TaxDonor’s Tax

With Full Consideration Sec. 24C,D

N/A

N/A

No Consideration N/A

Sec. 84

Sec. 98

Insufficient Consideration Sec. 24D

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Sec. 85G

Sec. 100

19. For income tax purposes, is the resulting loss from transfer of property (other than real property located in the Philippines) for insufficient consideration always deductible?No. See losses which are not deductible under Sec. 36B.

20. When is the gratuitous transfer of property during the lifetime of the donor subject to estate tax? subject to donor’s tax?The transfer is subject to estate tax if it constitutes a donation mortis causa. There is donation mortis causa if its effectivity is dependent on donor’s death, such as:When the donor reserves the right to revoke the donation at his pleasure;When the intention of donor is to transfer ownership after his death;When the donor reserves the right to dispose of property.

The transfer is subject to donor’s tax if it constitutes a donation inter-vivos, that is when its effectivity is independent of donor’s death.

NB: Disposition is different from execution. Disposition or its taking effect does not depend whether the property is delivered during the lifetime or after the death of donor. See Art. 729 Civil CodeEffectivity of donation may be subject to condition/term (i.e.death).

21. Are checks acceptable for the payment of internal revenue taxes?Checks payable to BIR as payment for taxes are no longer acceptable beginning May 1, 1997, except in remote areas where there are no Accredited Agent Banks. The BIR however accepts cashier’s or manager’s check (Rev. Regs. No. 6-98).

22. Is criminal action allowed as a remedy for the collection of taxes?Yes, but no such action can be filed without the approval of the Commissioner of Internal Revenue (see Sec. 221 & 222, CTRP). The

approval may be given by the Regional Director. (Arches vs. Bellosillo, L-23534, May 10, 1967.)

III. LOCAL TAXATION AND REAL PROPERTY TAXATION

What is the nature of a business tax?This is a tax paid for each and every business activity. A tax on business is distinct from a tax on the article itself.

When can a local government unit impose an excise tax on the sale transactions perfected within its jurisdiction?It depends. a. If the sale is perfected and paid for within the jurisdiction of local taxing authority but delivered to the customer outside its jurisdiction, the sale is taxable by the local taxing authority. Reason: Delivery to Carrier is Delivery to Buyer (Art. 1423 Civil Code). See Philippine Match Co. v City of Manila 81 SCRA 99b. If the sale is perfected within the jurisdiction of local taxing authority but paid and delivered to customer outside its jurisdiction, not taxable by local taxing authority. Reason: Delivery to carrier is not considered delivery to buyer. Carrier is merely considered as agent of seller. See Shell v Municipality of Sipocot 105 Phil. 1263NB: To reconcile the above cases, check where the sale is consummated (where payment is made).

Can regular courts enjoin the collection of local tax?Yes, subject to the provisions of Rule 58 of Rules of Court(Preliminary Injuction).

Distinguish fair market value(FMV) from assessed value(AV).FMV is declared by the owner subject to the final determination by the assessor. On the other hand, AV is determined by the application of the assessment level to the FMV.FMV is the actual value of the real property in the market; AV is merely a percentage of the FMV.

What is appraisal?It is the act or process of determining the value of the property as of a specific date for a specific purpose (Sec. 199, LGC)

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What is an assessment level?The percentage applied to the FMV to determine the taxable value of the property.

How is assessed value (taxable value) of real property computed?

FMV x Assessment level (%) = Assessed Value

Assessment level depends on the nature of the property; whether residential, agricultural, commercial, industrial, mining, timberland, or special. Tax Rates: Cities - 2%, Municipalities in Metro Manila - 2%Provinces - 1%

Can Municipalities outside Metro Manila impose real property tax?No. However, they may impose a special levy or assessment.

As contemplated in the real property tax code, what is “property discovered for the first time”? What is its tax treatment?This refers to a property that has not been declared for tax purposes for so many years and when discovered, the owner must pay back taxes plus incremental penalties. Assessed taxes shall cover not more than 10 years prior to the date of the initial assessment.

IV. TARIFF AND CUSTOMS LAWS

What is a port of entry?A port of entry refers to a domestic port open to both foreign and coastwise trade (Sec. 3514, TCC).

For customs purposes, who is considered the owner of articles imported into the Philippines?All articles imported into the Phil. shall be held to be the property of: the person to whom the same are consigned; or,the holder of the bill of lading duly endorsed by the consignee therein named, or,the underwriters of the abandoned articles saved from a wreck at sea, along a coast or in any area of the Philippines (Sec. 1203, TCC)

Is a search warrant issued by a court necessary to effect searches and seizures under the TCC?

As a general rule, a search warrant is not required to enforce the provisions of the customs code because of the Lifeblood Theory. However, in case of searches of a dwelling place, a search warrant issued by a court is required.

When are personal and household effects of a RETURNING resident conditionally-free from duties?They are considered conditionally free from duties when the returning resident:Is a Filipino citizen; Has stayed in a foreign country for a period of at least six months.

Who is a BALIKBAYAN entitled to avail of the tax-free purchase incentive at Duty-free shops? A Balikbayan is either a:Filipino citizen who has been continuously out of the Philippines for a period of at least 1 year; orFilipino overseas worker; orFormer Filipino .citizen, as well as his family, who has been naturalized in a foreign country and comes or returns to the Philippines. (Sec. 2. [a], RA 6768).

The term family shall mean the spouse and children of the balikbayan who are not balikbayans in their own right (Sec. 2 [b]).

When can there be an automatic review of the decision of the Collector of Customs? When the decision of the Collector of Customs in seizure and protest cases is adverse to the government, it shall automatically be reviewed by the Commissioner of Customs. If the amount involved is P5 million and above, there will be an automatic review by the Secretary of Finance.

COURT OF TAX APPEALS (CTA): RA 1125, effective June 16, 1954

Does the CTA possess advisory and criminal jurisdiction?It has no advisory jurisdiction. Neither does it have criminal jurisdiction although it can take cognizance over cases involving the imposition by the Commissioner of compromise penalties.

Whose decisions are appealable to the CTA?GENERAL RULE: Decisions of either the Commissioner of Internal Revenue or the

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Commissioner of Customs are appealable to the CTA.

Rev. Regulation No. 12-85 provides that decisions of Regional Directors may be appealed to the CTA. A Regional Director possesses delegated powers to issue assessment notices on behalf of the CIR. (In Fortaleza vs. Collector, the Regional Director's assessment was made with endorsement of the Commissioner, so there was no need for the petitioner to elevate his case to the Commissioner).

EXCEPTION: In Commissioner of Customs v. Planter's Products Inc, Mar. 16, 1989, while a claim for refund was still pending in the Office of the Collector of Customs, the importer was allowed to file an appeal with the Tax Court even in the absence of an administrative decision of the claim for refund. The SC took note of the fact that the prescriptive period for judicial appeals on refunds (2 years) was about to expire.

Who may appeal?Any person, association or corporation adversely affected by a decision of the CIR/Customs;Stockholders of a dissolved company;Stockholders of a corporation who have unpaid subscription.Note:The Government cannot appeal to the CTA. The right is available only to persons, associations, or corporations. Further, it is not adversely affected by the decision of the BIR since the BIR itself is an agency of the Government.

What Decisions are Appealable? In Commissioner vs. Villa, Jan. 20, 1968, the term "decisions" in Sec. 7 of RA 1125 was interpreted to mean decisions of the CIR on the protest of the taxpayer against the assessments. Mere assessments of the CIR are not appealable to the CTA.

In cases where the taxpayer files several requests for reconsideration of a protested assessment and these requests for reconsideration are all denied, the appealable decision is the letter of denial where the CIR not only demanded payment BUT made a statement regarding a resort to legal remedies.

A reiteration of BIR's previous demand for payment amounts to finality of its decision.

Administrative actions which are tantamount to appealable decisions (when the action to collect is by judicial remedies).

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