457092814-2014-2019-TAXATION-LAW-BAR-Questions-and-Answers.pdf

SUGGESTED ANSWERS IN TAXATION LAW BAR QUESTIONS (2014-2017) | Compiled by JR Mendoza | PAGE 1
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2019 TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS
A.1.
On October 5, 2016, the Bureau of Internal Revenue (BIR) sent KLM Corp. a Final Assessment Notice (FAN),
stating that after its audit pursuant to a Letter of Authority duly issued therefor, KLM Corp. had deficiency
value-added and withholding taxes. Subsequently, a warrant of distraint and/or levy was issued against KLM
Corp. KLM Corp. opposed the actions of the BIR on the ground that it was not accorded due process
because it did not even receive a Preliminary Assessment Notice (PAN) after the BIR’s investigation, which
the BIR admitted.
(a) Distinguish a PAN from a FAN. (2%)
(b) Are the deficiency tax assessment and warrant of distraint and/or levy issued against KLM Corp. valid?
Explain. (3%)
SUGGESTED ANSWERS:
(a) A PAN is a communication issued by the Regional Assessment Division, or any other concerned BIR
Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the
review of these findings. If the Taxpayer disagrees with the findings stated in the PAN, he shall then
have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed
assessment.
A FAN, on the other hand, is a declaration of deficiency taxes issued to a taxpayer who:
(1) fails to respond to a PAN within the prescribed period of time, or (2) whose reply to the PAN was found
to be without merit. A FAN contains not only a computation of tax liabilities, but also a demand for
payment within a prescribed period. The formal letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.
If the Taxpayer disagrees with the findings stated in the FAN, he shall then have thirty (30) days from
receipt of FAN to file a protest, either a request for reconsideration or a request for reinvestigation.
(b) No, the deficiency tax assessment and warrant of distraint and/or levy issued against KLM Corp. are
not valid because KLM Corp. did not receive a PAN. After the investigation of BIR, if it is determined that
there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the BIR shall issue to
the taxpayer, at least by registered mail, a
PAN for the proposed assessment, showing in detail the facts and the law on which the assessment is
based. The taxpayer must be informed of his liability for deficiency taxes through a PAN and the non-
service of a PAN is fatal to the validity of the assessment.
A.2.
For purposes of value-added tax, define explain or distinguish the following terms:
(a) Input tax and output tax (3%)
(b) Zero-rated and effectively zero-rated transactions (3%)

(c) Destination principle (2%)
SUGGESTED ANSWERS:
(a) Input tax is the VAT that is added to the price on the purchase of goods and services, and on the
importation of goods or services; while an Output tax is the VAT that is calculated and charged on the
sale of goods and services, and on the lease of property from a VAT-registered person. Input tax may
either be a regular 12% input VAT, a 2% transitional input VAT, or a 4% presumptive input VAT; while
Output tax may either be a regular 12% VAT or 0% VAT.
(b) Zero-rated transactions generally refer to the export sale of good and supply of services. The tax rate
is set at zero. The seller of such transactions charges no output tax, but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons
or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such transactions to zero rate. The seller can also claim a refund of a tax
credit certificate for the VAT previously charged to customers.
A zero-rated transaction benefits the seller, while an effectively zero-rated transactions benefits the
purchaser.
(c) The destination principle provides that the destination of the goods determines taxation or
exemption from tax. Export sales of goods are subject to 0% rate (or zero-rated), while importations of
goods are subject to the 12% VAT. Exports are zero-rated because the consumption of such goods will be
made outside the Philippines, while imports of goods are subject to 12% VAT because they are for
consumption within the Philippines.
A.3.
All the homeowners belonging to ABC Village Homeowners’ Association elected a new set of members of
the Board of Trustees for the Association effective January 2019. The first thing that the Board looked into
is the need to increase the prevailing association dues. Mr. X, one of the trustees, proposed an increase of
100% to account for the payment of the 12% value-added tax (VAT) on the association dues which were
being collected for services allegedly rendered “in the course of trade or business” by ABC Village
Homeowners’ Association.
(a) What constitutes transactions done “in the course of trade or business” for purposes of applying VAT?
(2%)
(b) Is Mr. X correct in stating that the association dues are subject to VAT? Explain. (3%)
SUGGESTED ANSWERS:
(a) Transactions done “in the course of trade or business” refer to the sale, barter, exchange, lease of
goods or properties, service by persons, and the importation of goods in the regular conduct or pursuit
of a commercial or an economic activity, including transactions incidental thereto.
(b) Yes, Mr. X is correct in stating that the association dues are subject to VAT. Association dues,
membership fees, and other assessments and charges are exempt from VAT but only to the extent of

those collected on a purely reimbursement basis by homeowners’ associations. In this case, the
association dues were being collected for services allegedly rendered “in the course of trade or
business”. Thus, the association dues collected by ABC Village Homeowners’ Association are subject to
VAT.
A.4.
Due to rising liquidity problems and pressure from its concerned suppliers, P. Corp. instituted a flash auction
sale of its shares of stock. P. Corp. was then able to sell its treasury shares to Z, Inc., an unrelated
corporation, for P1, 000, 000.00, which was only a little below the valuation of P Corp.’s shares based on its
latest audited financial statements. In connection therewith, P Corp. sought a Bureau of Internal Revenue
ruling to confirm that, notwithstanding the price difference between the selling price of the shares and their
book value, the said transaction falls under one of the recognized exemptions to donor’s tax under the Tax
Code.
(a) Cite the instances under the Tax Code where gifts made are exempt from donor’s tax. (3%)
(b) Does the above transaction fall under any of the exemption? Explain. (2%)
SUGGESTED ANSWERS:
(a) The following are the instances where gifts made are exempt from donor’s tax:
i. Gifts made to or for the use of the National Government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of the said Government;
and,
ii. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or
research institution or organization, not more than 30% of said gifts shall be used by such donee
for administration purposes.
(b) No, the transaction does not fall under any of the exemption. However, the transaction may still be
exempt from donor’s tax even when the shares of stock were sold on a selling price that is less than the
fair market value of the shares provided that the sale is made in the ordinary course of business, in a
transaction which is a bona fide, at arm’s length, and free from any donative intent.
A.5.
A, a resident Filipino citizen, died in December 2018. A’s only assets consist of a house and lot in Alabang,
where his heirs currently reside, as well as a house in Los Angeles, California, USA. In computing A’s taxable
net estate, his heirs only deducted:
1. 10, 000,000.00 Pesos constituting the value of their house in Alabang as their family home;
2. 200,000.00 in funeral expenses because no other expenses count be substantiated.
a. Are both deductions claimed by A’s heirs correct? Explain. (2%)

b. May a standard deduction be claimed by A’s heirs? If so, how much and what proof needs to be presented
for the same to be validly made? (2%)
c. In determining the gross estate of A, should the heirs include A’s house in Los Angeles, California, USA?
Explain. (2%)
SUGGESTED ANSWERS:
(a) No, only the amount pertaining to the value of the decedent’s family home is deductible from the
gross estate, provided that the conditions for the deductibility of a family are complied with. Funeral
expenses are not considered deductible items under R. A. No. 10963.
Estate taxation is governed by the statute in force at the time of the death of the decedent. The tax
rates and procedures prescribed by R. A. No. 10963, otherwise known as the Tax Reform for
Acceleration and Inclusion Law and R.R. No. 12-2018 shall govern the estate of decedent who died on or
after the effectivity date of the TRAIN Law which is January 1, 2018. Since the decedent died on
December 2018, the operative law in force at this time is the TRAIN Lawn. The said law removed funeral
expenses from the list of deductible items for purposes of estate taxation.
The conditions for the deductibility of family home from the gross estate of the decedent are as follows:
i. The family home must be the actual residential home of the decedent and his family at the time
of his death, as certified by the barangay captain of the locality where the family home is
situated;
ii. The total value of the family home must be included as part of the gross estate of the decedent;
and
iii. Allowable deduction must be an amount equivalent to the current fair market value of the
decedent’s family home as declared or included in the gross estate; or the extent of the
decedent’s interest (whether conjugal/community, or exclusive property, whichever is lower, but
not exceeding 10, 000,000.00 pesos. ( R.R. No. 12-2018, Sec 6(7) (7.2)).
Considering that all the said requisites are complied with, the Php 10,000,000.00 pesos, the amount
pertaining to the value of the decedent’s family home is deductible from the gross estate of A.
(b) Yes, the heirs can claim a standard deduction in the amount of 5,000,000.00.
As provided under R.R. No. 12-2018, the value of the net estate of a citizen or resident alien of the
Philippines shall be subject to a standard deduction. A deduction in the amount of five million pesos shall
be allowed without need of a substantiation. The full amount of the five million pesos shall be allowed as
deduction for the benefit of the decedent (R.R.
No. 12-2018, Sec. 6(1). Since A is a resident filipino citizen, the heirs of the said decedent can claim a
standard deduction in the amount of 5,000,000.00.
(c) Yes, for estate tax purposes, the heirs should include the value of the A’s house in Los Angeles
California, USA.
As provided under the the TRAIN Law and R.R. No. 12-2018, for purposes of computing the estate tax of
a resident or a Filipino citizen, all properties, real or personal, tangible or intangible, wherever situated
shall be included in determining the gross estate. Since A was a resident Filipino citizen, the properties
of A within and outside the Philippines should be included in determining his or her gross estate. Hence,

the heirs of A should include A’s house in Los Angeles, California, USA in determining the latter’s gross
estate.
A.6.
XYZ Air, a 100% foreign-owned airline company based and registered in Netherlands, is engaged in the
international airline business and is a member signatory of the International Air Transport Association. It’s
commercial airplanes neither operate within the Philippine territory nor as its service passengers
embarking from Philippine airports. Nevertheless, XYZ Air is able to sell its airplane tickets in the Philippines
through ABC Agency, it’s general agent in the Philippines. As XYZ Air’s ticket sales, sold through ABC
Agency for the year 2013, amounted to 5,000,000. 00, the Bureau of Internal Revenue (BIR) assessed XYZ
Air deficiency income taxes on the ground that the income from the said sales constituted income derived
from sources within the Philippines.
Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident foreign corporation, it should only be
taxed for income derived from sources within the Philippines. However, since it only serviced passengers
outside the Philippine territory, the situs of the income from its ticket sales should be considered outside
the Philippines. Hence, no income tax should be imposed on the same.
Is XYZ Air’s protest meritorious? Explain. (5%)
SUGGESTED ANSWER:
No, the protest of XYZ Air is not meritorious.
Under the law, an international air carrier with no landing rights in the Philippines is a resident foreign
corporation if its local sales agent sells and issues tickets in its behalf. An offline international carrier
selling passage tickets in the Philippines through a local general sales agent, is considered a resident
foreign corporation doing business in the Philippines. As such, it is taxable on income derived from
sources within the Philippines and not on Gross Philippine Billings, subject to any applicable tax treaty.
(Air Canada vs. Commissioner of Internal Revenue G.R. No. 169507, January 11,2016).
In the case at bar, XYZ Air was able to sell its airplane tickets in the Philippines through ABC Agency, it’s
general agent in the Philippines. As such, it is taxable on income derived from sources within the
Philippines and not on Gross Philippine Billings, subject to any applicable tax treaty.
A7.
Differentiate tax exclusions from tax deductions. (3%)
SUGGESTED ANSWER:
Tax exclusions pertain to the computation of gross Income while tax deductions pertain to computation
of net Income. Tax exclusions are something received or earned by the taxpayer which do not form part
of gross income while tax deductions are something spent or paid in earning gross income. Lastly, the
former is flow of wealth to the taxpayer which are not treated as part of gross income for purposes of
computing the taxpayer’s taxable income due to the following reasons
a. it is exempted by the fundamental law;
b. b. It is exempted by a statute; and

c. c. It does not fall within the definition of income.
On the other hand, tax deductions are the amounts which the law allows to be subtracted from gross
income in order to arrive at net income.
A.8.
B transferred his ownership over a 1,000-square meter commercial land and three-door apartment to ABC
Corp., a family corporation of which B is a stockholder. The transfer was in exchange of 10,000 shares of
stock of ABC Corp. As a result, B acquired 51% ownership of ABC Corp., with all the shares of stock having
the right to vote. B paid no tax on the exchange, maintaining that it is a tax avoidance scheme allowed under
the law. The Bureau of Internal Revenue, on the other hand, insisted that B’s alleged scheme amounted to
tax evasion.
Should B pay taxes on the exchange? Explain. (3%)
SUGGESTED ANSWER:
No, B should not pay taxes on the said exchange.
As a general rule, upon the sale or exchange of property, the entire amount of the gain or loss, as the
case may be, shall be recognized. One of the accepted exceptions to th said rule is when a property is
transferred to a corporation by a person in exchange for stock or unit of participation in such a
corporation of which as a result of such exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation: provided, that stocks issued for services shall
not be considered as issued in return for property (NIRC. Sec. 40 C (6)(c)). Moreover, control, in the said
case, means ownership of stocks in a corporation possessing at least (51%) of the total voting power of
all classes of stocks entitled to vote.
In the case, B transferred his ownership over a 1,000-square meter commercial land and three-door. As a
result, B acquired 51% ownership of ABC Corp., with all the shares of stock having the right to vote.
A.9.
GHI Inc., is a corporation authorized to engage in the business of manufacturing ultra-high density
microprocessor unit packages. After its registration on July 5, 2005, GHI, Inc. constructed buildings and
purchased machineries and equipment. As of December 31, 2005, the total cost of the machineries and
equipment amounted to P250,000,000.00. However, GHI, Inc. failed to commence operations. Its factory
was temporarily closed effective Sept 15, 2010. On October 1, 2010, it sold its machineries and equipment
to JKL Integrated for P300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010.
(a) Is the sale of machineries and equipment to JKL Integrated subject to normal corporate income tax or
capital gains tax? Explain. (3%)
(b) Distinguish an ordinary asset from a capital asset. (2%)
SUGGESTED ANSWER:
(a) The sale of machineries and equipment to JKL Integrated is subject to normal corporate income tax.
Under Sec. 27 D sub. Par. 5 of the NIRC, a corporation is only subject to capital gains tax for the sale of

land and buildings. In this case, GHI Inc., a corporation, sold machineries and equipment. Hence, the sale
is subject to normal corporate income tax.
(b) The following are the distinctions between an ordinary asset from a capital asset:
1. As to taxability, an ordinary asset is subject to income tax; whereas, a capital asset is subject to
capital gains tax;
2. As to nature, as a rule, an ordinary asset is regularly used in the normal course of trade or
business; whereas, a capital asset is an asset not regularly used in the normal course of trade or
business
Under Sec. 39 of the NIRC, the term 'capital assets' means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade
or business of the taxpayer.
A.10.
In 2018, City X amended its Revenue Code to include a new provision imposing a tax on every sale of
merchandise by a wholesaler based on the total selling price of the goods, inclusive of value-added taxes
(VAT). ABC Corp., a wholesaler operating within the city, challenged the new provision based on the
following contentions: 1. The new provision is a form of prohibited double taxation because it essentially
amounts to City X imposing VAT which was already being levied by the national government; and 2. since
the tax being imposed is akin to VAT, it is beyond the power of City X to levy the same.
Rule on each of ABC Corp.’s contentions. (5%)
SUGGESTED ANSWER:
With regard to the first contention, ABC Corp is incorrect. Under the NIRC, direct double taxation exists
only when all of the following requisites are present:
The two taxes must be imposed on the same:
1. subject matter,
2. purpose,
3. by the same taxing authority,
4. within the same jurisdiction
5. during the same taxing period;
6. the taxes must be of the same kind or character.
In this case, the taxing authorities are different. Hence, the tax to be imposed by the LGU is not a form of
direct double taxation.

With regard to the second contention, ABC Corp is incorrect. Under the LGC, LGU’s are empowered to
enact ordinances that will aid in their revenue generation, which is consonance with the principle of the
fiscal autonomy of LGU’s. Although the tax to be imposed is akin to VAT, the LGU may nevertheless
impose such local business tax.
B.11.
Mr. D, a Filipino amateur boxer, joined an Olympic qualifying tournament held in Las Vegas, USA, where he
won the gold medal. Pleased with Mr. D’s accomplishment, the Philippine Government, through the
Philippine Olympic Committee, awarded him a cash prize amounting to P1,000,000.00. Upon receipt of the
funds, he went to a casino in Pasay City and won the P30,000,000.00 jackpot in the slot machine. The next
day, he went to a nearby Lotto outlet and bought a Lotto ticket which won him a cash prize of P5,000.00.
Which of the above sums of money is/are subject to income tax? Explain (5%)
SUGGESTED ANSWER:
Mr. D’s winnings from the casino in Pasay City, worth P30,000,000.00 is subject to income tax. Under
the TRAIN Law, other prizes and winnings in excess of P10,000 shall be subject to a 20% final tax on the
entire amount of the winnings. In this case, Mr. D’s winnings from the casino in Pasay City are more than
P10,000. Hence, it shall be subject to income tax.
With regard to Mr. D’s cash prize award after winning in an Olympic qualifying tournament held in Las
Vegas, it is not subject to income tax. Under the NIRC, prizes and awards granted to athletes in local and
international sports competitions and tournaments whether held in the PH or abroad and sanctioned by
their national sports associations, which in this case is the Philippine Olympic Committee, shall not be
subject to income tax.
With regard to Mr. D’s Lotto winnings, it is not subject to income tax. Under the NIRC, any winnings
through the PCSO Lotto that are in the amount of P10,000 or less shall be exempt from income tax. In
this case, Mr. D won P5,000 thru the PCSO Lotto. Hence, it shall not be subject to income tax.
B.12.
JKL-Philippines is a domestic corporation affiliated with JKL-Japan, a Japan-based information technology
company with affiliates across the world. Mr. F is a Filipino engineer employed by JKL-Philippines. In 2018,
Mr. F was sent to the Tokyo branch of JKL-Japan based on a contract entered into between the two (2)
companies. Under the said contract, Mr. F would be compensated by JKL-Philippines for the months spent
in the Philippines, and JKL-Japan for months spent in Japan. For the entirety of 2018, Mr. F spent ten (10)
months in the Tokyo branch.
On the other hand, Mr. J., a Japanese engineer employed by JKL-Japan, was sent to Manila to work with JKL-
Philippines as a technical consultant. Based on the contract between the two (2) companies, Mr. J’s annual
compensation would still be paid by JKL-Japan. However, he would be paid additional compensation by JKL-
Philippines for the months spent working as a consultant. For 2018, Mr. J stayed in the Philippines for five (5)
months.
In 2019, the Bureau of Internal Revenue (BIR) assessed JKL-Philippines for deficiency withholding taxes for
both Mr. F and Mr. J for the year 2018. As to Mr. F, the BIR argued that he is a resident citizen, hence, his
income tax should be based on his worldwide income. As to Mr. J, the BIR argued that he is a resident alien;
hence, his income tax should be based on his income from sources within the Philippines at a schedular rate

under Sec 24 (A) (2) of the Tax Code, as amended by Republic Act No. 10963, or the “Tax Reform for
Acceleration and Inclusion” Law.
(a) Is the BIR correct in basing its income tax assessment on Mr. F’s worldwide income? Explain. (3%)
(b) Is the BIR correct in basing its income tax on Mr. J’s income within the Philippines at a schedular rate
Explain (3%).
SUGGESTED ANSWER:
(a) No, the BIR is not correct in basing its income tax assessment on Mr. F’s worldwide income. Under the
NIRC, non-resident citizens are only taxed for income earned within the Philippines. In this case, the
hybrid status of the taxpayer cannot be applied, regardless of his initial 2-month stay in the Philippines
and subsequent transfer to Japan. For all intents and purposes, F is considered a non-resident citizen in
the year 2018. Hence, the income tax for 2018 should only be assessed on income earned within the
Philippines.
(b) No, the BIR is not correct in basing its income tax on Mr. J’s income within the Philippines at a
schedular rate. Under the NIRC, non-resident aliens not engaged in trade or business are subject to a flat
of rate of 25% based on the gross income. The NIRC states that non-resident aliens that have an
aggregate number of days staying in the
Philippines less than 180 days, are considered to be not engaged in trade or business. In this case, Mr. J
only stayed for five months or 150 days in the Philippines. Hence, he is considered as a NRANETB, and
shall be subjected to flat rate of 25% based on gross income earned within the Philippines.
B.13.
As a way to augment the income of the employees of DEF Inc., a private corporation, the management
decided to grant a special stipend of P50,000.00 for the first vacation leave that any employee takes
during a given calendar year. In addition, the senior engineers were also giving housing inside the factory
compound for the purpose of ensuring that there are available engineers within the premises everytime
there is a breakdown in the factory machineries and equipment.
a. Is the special stipend part of the taxable income of the employees receiving the same? I f so, what tax is
applicable and what tax rate? Explain. (3%)
b. Is the cash equivalent value of the housing facilities received by the senior engineers subject to fringe
benefits tax? Explain. (3%)
SUGGESTED ANSWER:
(a) Yes, the special stipend is part of the taxable income of the employees since the same may very well
be considered income on his part.
(b) No, the cash equivalent value of the housing facilities received by the senior engineers is not subject
to fringe benefits tax. The same is exempt from FBT since the housing is located within the Company's
premises and is generally for the convenience of the employer.

B.14.
City R owns a piece of land which it leased to V Corp. In turn, V Corp. constructed a public market thereon
and leased the stalls to vendors and small storeowners. The City Assessor then issued a notice of
assessment against V Corp. for the payment of real property taxes (RPT) accruing on the public market
building, as well as on the land where the said market stands.
Is the City Assessor correct in including the land in its assessment of RPT against V Corp., even if the same
is owned by City R? Explain (3%)
SUGGESTED ANSWER:
Yes. Under Section 234 of the Local Government Code, real property owned by the Republic of the
Philippines or any of its political subdivision is exempt from payment of real property tax except when
the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person or entity.
B.15.
Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual compensation of
P10,000,000.00 while Mr. S is a security guard in the same company earning an annual compensation of
P200,000.00. Both of them source their income only from their employment with MNO Company.
a. At the end of the year, is Mr. C personally required to file an annual income tax return? Explain. (2.5%)
b. How about Mr. S? Is he personally required to file an annual income tax return? Explain. (2.5%)
SUGGESTED ANSWER:
(a) No, individuals receiving purely compensation income from a single employer, which has been
correctly withheld are no longer required to file their annual ITR.
(b) No, individuals receiving purely compensation income from a single employer, which has been
correctly withheld are no longer required to file their annual ITR.
B.16.
a. Differentiate between a calendar year and a fiscal year. (2.5%)
b. When is the deadline for the filing of a corporation’s final adjustment return for a calendar year? How
about for a fiscal year? (2.5%)
SUGGESTED ANSWER:
(a) Calendar year means an accounting period of twelve months ending on the last day of December. On
the other hand, fiscal year means an accounting period of twelve months ending on the last day of any
month other than the month of December.
(b) For a calendar year, the final return should be filed on or before the 15th day of April following the
close of the taxable year. For a fiscal year, the final return is filed on or before the 15th day of the 4th
month following the close of the taxable year.

B.17.
XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of Internal Revenue. It secured a
loan from ABC Bank with a 6% per annum interest. All interest payments made by XYZ Corp. to ABC Bank is
subject to a 2% creditable withholding tax. At the same time, XYZ Corp. has a trust deposit with ABC Bank
in the amount of Php100,000,000.00, which earns a 2% interest per annum, but is subject to a 20% final
withholding tax on the interest income received by XYZ Corp.
(a) Who are the withholding agents in the case of: 1. The 20% final withholding tax; and 2. The 2% creditable
withholding tax? Explain. (2.5%)
(b) When is the deadline for filing a judicial claim for refund for any excess or erroneous taxes paid in the
case of: 1. The 20% final withholding tax; and 2. The 2% creditable withholding tax? (2.5%)
SUGGESTED ANSWER:
(a) For the 20% final withholding tax, the withholding agent is ABC Bank being in control of the payment
subject to withholding tax. (R.R. 2-98, Sec. 2.57.3). On the other hand, XYZ Corporation is the
withholding agent for the 2% creditable withholding tax being the party paying for the interest
payments on the loan secured, and being listed as a top 20,000 Philippine Corporation by the BIR. (RR
No. 6-2009).
(b) The deadline for filing a judicial claim for refund for any excess or erroneous taxes paid for both the (1)
20% final withholding tax and (2) the 2% creditable withholding tax is two (2) years from the date of
payment of the tax. (Section 229, NIRC).
B.18.
After a Bureau of Internal Revenue (BIR) audit, T. Corp., a domestic corporation engaged in buying and
selling of scrap metals, was found to have deficiency income tax of Php 25,000,000.00, including interests
and penalties, for the year 2012. For 2012, T Corp. filed its income return (ITR) on April 15, 2013 because it
used the calendar year for its accounting. The BIR sent the Preliminary Assessment Notice (PAN) on
December 23, 2015, and eventually, the Final Assessment Notice (FAN) on April 11, 2016, which were
received by T Corp. on the same dates that they were sent. Upon receipt of the FAN, T Corp. filed it protest
letter on June 25, 2016.
Thereafter, and without action from the Commissioner of Internal Revenue (CIR), T. Corp. filed a petition for
review before the Court of Tax Appeals, alleging that the assessment has prescribed. For its part, the CIR
moved to dismiss the case, pointing out that the assessment had already become final because the protest
was filed beyond the allowable period.
(a) Is T Corp.’s contention regarding the prescription of the assessment meritorious? Explain. (2.5%)
(b) Should the CIR’s motion to dismiss be granted? Explain (2.5%)
SUGGESTED ANSWER:
(a) No, T Corp.’s contention regarding prescription of the assessment is not meritorious.
Under Section 203 of the National Internal Revenue Code, as a general rule, internal revenue taxes shall
be assessed within three (3) years after the last day prescribed by law for the filing of the return. The

deadline for filing the annual income tax return (ITR) of corporations is the 15th day of the 4th month
following the close of the fiscal year.
Here, the 15 day of the 4th month following the close of the fiscal year 2012 of T Corp. is April 15, 2013,
which is also the date the ITR of T Corp. was filed. The BIR has until April 15, 2016 to assess for proper
taxes. The FAN was sent to and received by T Corp. on April 11, 2016, which is within the prescriptive
period.
(b) Yes, the CIR’s motion to dismiss should be granted.
The taxpayer or authorized representative or agent has thirty (30) days from date of receipt of the FAN
to protest the same. If the taxpayer fails to file a valid protest against the FAN within 30 days, the
assessment shall become final executory and demandable. (RR18-13).
Here, T Corp. received the FAN on April 11, 2016. T. Corp has until May 11, 2016 to protest the same.
However, T Corp. only filed the protest letter on June 25, 2016.
Thus, the motion to dismiss should be granted.
B.19.
On May 10, 2011, the final withholding tax for certain income payments to W Corp. was withheld and
remitted to the Bureau of Internal Revenue (BIR), and the corresponding return therefor was concomitantly
filed on the same date. Upon discovering that the amount
withheld was excessive, W Corp. filed with the BIR a claim for refund for erroneously withheld and collected
final withholding income tax on May 3, 2013. A week after, and without waiting for any decision from the
Commissioner of Internal Revenue (CIR), W Cor. Filed a petition for review before the Court of Tax Appeals
(CTA) to make sure that the petition was filed within the two (2)-year period for claiming refunds.
In resisting the claim, the BIR contended that the claim must be dismissed by the CTA on the ground of non-
exhaustion of administrative remedies because it did not give the CIR the opportunity to act on the claim of
refund.
(a) Is the BIR’s contention meritorious? Explain (2.5%)
(b) Assuming that the claim for refund filed by W Corp. is for excess and/or unutilized input VAT for the
second quarter of 2011, and for which the return was timely filed on July 25, 2011, would your answer be the
same? Explain. (2.5%)
SUGGESTED ANSWER:
(a) No, the BIR’s contention is not meritorious.
Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes.
Section 204 applies to administrative claims for refund, while Section 229 to judicial claims for refund.
In both instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the
tax or penalty. However, Section 229 of the NIRC further states the condition that a judicial claim for
refund may not be maintained until a claim for refund or credit has been duly filed with the
Commissioner. However, Section 229 does not imply that the Collector of Internal Revenue (CIR) first
act upon the taxpayer’s claim, and that the taxpayer shall not go to court before he is notified of the
Collector’s action.

The claim with the CIR was intended primarily as a notice of warning that unless the tax or penalty
alleged to have been collected erroneously or illegally is refunded, court action will follow, but the period
of two years provided in the last clause shall not be deemed interrupted pending consideration of the
claim. (CBK Power Company vs CIR, G.R. No. 193383-84, January 14, 2014).
(b) No, the answer will not be the same.
For value-added tax (VAT) refunds, Section 112 of the Tax Code provides that the taxpayer, whose sales
are zero-rated or effectively zero-rated, has two years after the close of the taxable quarter when the
sales were made, to apply for an administrative claim for refund. Thereafter, the Commissioner of
Internal Revenue (CIR) has 120 days from the submission of complete supporting documents to act upon
the claim for refund. In case of full or partial denial of the claim or failure of the CIR to act on the
application within 120 days, the taxpayer may appeal with the Court of Tax Appeals (CTA) within 30 days
from receipt of the decision or upon expiration of the 120-day period.
In the case of CIR vs. Aichi (GR No. 184823 dated October 6, 2010), the Supreme Court (SC) held that
the observance of the 120-day period is a mandatory and jurisdictional requisite to the filing of a judicial
claim for refund before the CTA. As such, its non-observance would warrant the dismissal of the judicial
claim for lack of jurisdiction.
B.20.
ABC, Inc. owns a 950-square meter commercial lot in Quezon City. It received a notice of assessment from
the City Assessor, subjecting the property to real property taxes (RPT). Believing that the assessment was
erroneous, ABC, Inc. filed a protest with the City Treasurer. However, for failure to pay the RPT, the City
Treasurer dismissed the protest.
(a) Was the City Treasurer correct in dismissing ABC, Inc.’s protest. Explain. (2.5%)
(b) Assuming that ABC, Inc. decides to appeal the dismissal, where should the appeal be filed. (2.5%)
SUGGESTED ANSWER:
(a) Yes, the City Treasurer was correct in dismissing ABC Inc.’s protest
Under Section 252 of the Local Government Code, no protest shall be entertained unless the taxpayer
first pays the tax, in which the words “paid under protest” shall be annotated on the tax receipts.
Here, ABC Inc. failed to first pay the real property tax assessed by the Quezon City when it filed a protest
before the City Treasurer.
(b) Assuming that ABC, Inc. decides to appeal the dismissal, the appeal should be filed with the Local
Board of Assessment Appeals (LBAA).
If the local treasurer denies the protest or fails to act upon it within the 60-day period provided for in
Section 252, the taxpayer/real property owner may then appeal or directly file a verified petition with
the LBAA within sixty days from denial of the protest or receipt of the notice of assessment, as provided
in Section 226 of R.A. No. 7160

I
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.
(a) May local government units impose a tax on businesses already subjected to tax under the NIRC? (2.5%)
(b) Does this amount to double taxation? (2.5%)
SUGGESTED ANSWER:
(a) Yes. “Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.” (Article 10, Section 5 of the 1987 Constitution).
Sec 133 of the LGC – Common limitations on the taxing power of LGC
Relate with Sec 143 (h) of the LGC – “Tax on Businesses: (h) On any business, not otherwise specified
in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That
on any business subject to the excise, value-added or percentage tax under the National Internal
Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts
of the preceding calendar year. The sanggunian concerned may prescribe a schedule of graduated tax
rates but in no case to exceed the rates prescribed herein.”
(b) Yes, it will amount to indirect double taxation. Under the law, direct double taxation exists if the
following requisites exist:
i. Both taxes are imposed on the same property or subject matter;
ii. For the same purpose;
iii. Imposed by the same taxing authority;  Within the same jurisdiction;
iv. During the same taxing period;
v. Covering the same kind or character of tax.
If there is an element lacking, only indirect double taxation exists. The Constitution only prohibits direct
double taxation.
II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and
construction work. Its principal office is located in Makati City, but it has various infrastructure projects in
the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a

policy that the employees' salaries are paid in the currency of the country where they are assigned or
detailed.
Below are some of the employees of KKI. Determine whether the compensation they received from KKI in
2017 is taxable under Philippine laws and whether they are required to file tax returns with the Bureau of
Internal Revenue (BIR). (2% each)
(a) Kris Konejero, a Filipino accountant in KKl's Tax Department in the Makati office, and married to a Filipino
engineer also working in KKI;
(b) Klaus Kloner, a German national who heads KKl's Design Department in its Makati office;
(c) Krisanto Konde, a Filipino engineer in KKl's Design Department who was hired to work at the principal
office last January 2017. In April 2017, he was assigned and detailed in the company's project in Jakarta,
Indonesia, which project is expected to be completed in April 2019;
(d) Kamilo Konde, Krisanto's brother, also an engineer assigned to KKl's project in Taipei, Taiwan. Since KKI
provides for housing and other basic needs, Kamila requested that all his salaries, paid in Taiwanese dollars,
be paid to his wife in Manila in its Philippine Peso equivalent; and
(e) Karen Karenina, a Filipino architect in KKl's Design Department who reported back to KKl's Makati office
in June 2017 after KKl's project in Kuala Lumpur, Malaysia was completed.
SUGGESTED ANSWER:
The Tax Code provides that only resident citizen who is a citizen of Philippines residing therein is taxable
on all income derived from sources within and without the Philippines.
Substituted filing requisites:
 Employee receives purely compensation income (regardless of amount) during the taxable year;
 Employee receives income from a single employer in the Philippines during the taxable year;
 The amount of tax due from the employee at the end of the year equals the amount of tax
withheld by the employer;
 If married, the employee’s spouse also complies with all three aforementioned conditions, or
otherwise receives no income;
 The employer files BIR Form 1604CF; and
 Employee has BIR Form 2316 or Certificate of Final Tax Withheld At Source (BIR Form 2306)
issued by his employer.
(a) (Resident citizens) Taxable; Not required (if compliant with the substituted filing)
(b) (Resident alien) Taxable; Not required (if compliant with the substituted filing)
(c) (Non-resident citizen) Taxable only on the Philippine sourced income; Not required (if compliant with
the substituted filing)
◦ Sec 22 (E)(3): “Most of the time” – At least 183 days abroad
◦ A citizen of the Philippines who works and derives income from abroad and whose employment
◦ thereat requires him to be physically present abroad most of the time during the taxable year.
(d) (Non-resident citizen) No Philippine sourced income; Not required
◦ Sec 22 (E)(2): Reside abroad for employment on a permanent basis
◦ A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad,
◦ either as an immigrant or for employment on a permanent basis.

(e) (Non-resident citizen) Taxable only on the Philippine sourced income; Not required (if compliant with
the substituted filing)
◦ Sec 22 (E)(4): Previously a non-resident citizen who arrives in the Philippines
◦ A citizen who has been previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date of his arrival in
the Philippines.
III
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSl-affiliated
corporations:
1. from 1999 to 2004 as Vice President of K-Gold Inc.,
2. from 2004 to 2007 as Vice President of KPB Bank;
3. from 2007 to 2011 as CEO of K-Com Inc.;
4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years until his
retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-
qualified multiemployer-employee retirement plan (MEE RP), under which the employees may be moved
around within the controlled group (i.e., from one KSI subsidiary or affiliate to another) without loss of
seniority rights or break in the tenure. Kim was well-loved by his employer and colleagues, so upon
retirement, and on his last day in office, KSI gave him a Mercedes Benz car worth PhP 5 million as a surprise,
with a streamer that reads: "You'll be missed. Good luck, Sir Kim."
(a) Are the retirement benefits paid to Kim pursuant to the MEERP taxable? (2.5%)
(b) Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company? (2.5%)
SUGGESTED ANSWER:
(a) Exempt. Sec 32 (B)(6)(a): Retirement benefits received under RA No. 7641 (Retirement Pay Law, Art.
287 of the Labor Code); or those received by officials and employees of private firms, whether individual
or corporate, under a reasonable private benefit plan maintained by the employer, provided the following
requisites are present:
 The retiree has been in the service of the same employer for at least 10 years;
 The retiree is not less than 50 years of age;
 Exemption is availed of only once.
Considered as within 10 years due to the fact that “employees may be moved around within the
controlled group without loss of seniority rights or break in the tenure”.
(b) Donor’s tax. Not in consideration of services rendered but by reason of gratuity.

IV
Years ago, Krisanto bought a parcel of land in Muntinlupa for only PhP65,000. He donated the land to his
son, Kornelio, in 1980 when the property had a fair market value of PhP75,000, and paid the corresponding
donor's tax.
Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5 million and paid the capital gains tax,
documentary stamp tax, local transfer tax, and other fees and charges. Katrina, in turn, donated the land to
Klaret School last August 30, 2017 to be used as the site for additional classrooms. No donor's tax was paid,
because Katrina claimed that the donation was exempt from taxation. At the time of the donation to Klaret
School, the land had a fair market value of PhP 65 million.
(a) Is Katrina liable for donor's tax? (2.5%)
(b) How much in deduction from gross income may Katrina claim on account of the said donation? (2.5%)
SUGGESTED ANSWER:
(a) Yes. Sec 101 (a) (3) – Exempt from donor’s tax: Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution, accredited nongovernment organization,
trust or philanthropic organization or research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic organization and/or research institution
or organization' is a school, college or university and/or charitable corporation, accredited
nongovernment organization, trust or philanthropic organization and/or research institution or
organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive
no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or
other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation.
(b) None. Sec 34 (H)(1)- Contributions or gifts actually paid or made within the taxable year to, or for the
use of the Government of the Philippines or any of its agencies or any political subdivision thereof
exclusively for public purposes, or to accredited domestic corporation or associations organized and
operated exclusively for religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non -
government organizations, in accordance with rules and regulations promulgated by the Secretary of
finance, upon recommendation of the Commissioner, no part of the net income of which inures to the
benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the
case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income
derived from trade, business or profession as computed without the benefit of this and the following
subparagraphs. Here, the donee is not qualified and thus, no deduction from gross income is allowed.
V
Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a restaurant chain,
Karina's, Inc. The restaurant's principal office is in Makati City, Philippines.
Korina's became so popular as a Filipino restaurant that the owners decided to expand its operations
overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout North America and five

(5) stores in various parts of Europe where there were large Filipino communities. Each store abroad was in
the name of a corporation organized under the laws of the state or country in which the store was located.
All stores had identical capital structures: 60% of the outstanding capital stock was owned by Karina's, Inc.,
while the remaining 40% was owned directly by the spouses Konstantino and Korina.
Beginning 2017, in light of the immigration policy enunciated by US President Donald Trump, many Filipinos
have since returned to the Philippines and the number of Filipino immigrants in the US dropped significantly.
On account of these developments, Konstantino and Karina decided to sell their shares of stock in the five
(5) US corporations that were doing poorly in gross sales. The spouses' lawyer-friend advised them that
they will be taxed 5% on the first PhP100,000 net capital gain, and 10% on the net capital gain in excess of
PhP100,000.
Is the lawyer correct? If not, how should the spouses Konstantino and Karina be taxed on the sale of their
shares? (5%)
SUGGESTED ANSWER:
No. Foreign shares are not within the purview of Sec 24(C) or CGT.
Sec 24(C) - Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange - The provisions
of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange.
But the shares are considered capital assets, as defined under Sec 39(A) - "capital assets" means
property held by the taxpayer (whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property used in the
trade or business, of a character which is subject to the allowance for depreciation provided in
Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.
Thus, must be taxed based on the holding period as provided in Sec 39(B) - Percentage Taken Into
Account. • In the case of a taxpayer, other than a corporation, only the following percentages of the gain
or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing
net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has
been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been
held for more than twelve (12) months.
VI
Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles, established a
branch office in the Philippines in 2010. The Philippine branch constructed a manufacturing plant in
Kabuyao, Laguna, and the construction lasted three (3) years. Commercial operations in the Laguna plant
began in 2014.
In just two (2) years of operation, the Philippine branch had remittable profits in an amount exceeding 175%
of its capital. However, the head office in Korea instructed the branch not to remit the profits to the Korean
head office until instructed otherwise. The branch chief finance officer is concerned that the BIR might hold
the Philippine branch liable for the 10% improperly accumulated earnings tax (IAET) for permitting its
profits to accumulate beyond reasonable business needs.

(a) Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated above? (2.5%)
(b) Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)
SUGGESTED ANSWER:
(a) No. Sec 29 (A) – IAET covers only domestic corporations. Branch is considered a resident foreign
corporation, thus, not subject to IAET
(b) No. Sec 28 (A)(5) – BPRT is imposed only on actual remittance. Here, no remittance was made. Thus,
not subject to BPRT.
VII
Karissa is the registered owner of a beachfront property in Kawayan, Quezon which she acquired in 2015.
Unknown to many, Karissa was only holding the property in trust for a rich politician who happened to be her
lover. It was the politician who paid for the full purchase price of the Kawayan property. No deed of trust or
any other document showing that Karissa was only holding the property in trust for the politician was
executed between him and Karissa.
Karissa died single on May 1, 2017 due to a freak surfing accident. She left behind a number of personal
properties as well as real properties, including the Kawayan property. Karissa's sister, Karen, took charge of
registering Karissa's estate as a taxpayer and reporting, for income tax and VAT purposes, the rental income
received by the estate from real properties. However, it was only on October 1, 2017 when Karen managed
to file an estate tax return for her sister's estate. The following were claimed as deductions in the estate tax
return:
1. Funeral expenses amounting to PhP250,000;
2. Medical expenses amounting to PhP100,000, incurred when Karissa was hospitalized for pneumonia a
month before her death; and
3. Loss valued at PhP6 million arising from the destruction of Karissa's condominium unit due to fire which
occurred on September 15, 2017.
(a) Should the beachfront property be included in Karissa's gross estate? (2.5%)
(b) Are the claimed deductions proper? (2.5%)
SUGGESTED ANSWER:
(a) Yes. Sec 90 (A) of the Tax Code provides that the gross value of the estate exceeds Two hundred
thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate
consists of registered or registrable property. Hence, the beachfront property should be included in the
gross estate.
(b) For the funeral expenses, it is limited up to Php 200,000 only; For the medical expenses, the actual
amount can be claimed (Php 100,000); and for the loss, the total amount of such loss.

VIII
Upon the death of their beloved parents in 2009, Karla, Karla, and Karlie inherited a huge tract of farm land
in Kanlaon City. The siblings had no plans to use the property. Thus, they decided to donate the land, but
were not sure to whom the donation should be made. They consult you, a well-known tax law expert, on the
tax implications of the possible donations they plan to make, by giving you a list of the possible donees:
1. The Kanlaon City High School Alumni Association (KCHS AA), since the siblings are all alumni of the same
school and are active members of the organization. KCHS AA is an organization intended to promote and
strengthen ties between the school and its alumni;
2. The Kanlaon City Water District which intends to use the land for its offices; or
3. Their second cousin on the maternal side, Kikay, who serves as the caretaker of the property.
Advise the siblings which donation would expose them to the least tax liability. (5%)
SUGGESTED ANSWER:
I will advise the siblings that the donation to the Kanlaon City Water District would expose them to the
least tax liability. Sec 101 (A)(2) of the Tax Code provides that gifts made to or for the use of the National
Government or any entity created by any of its agencies which is not conducted for profit, or to any
political subdivision of the said Government are considered exempt gifts.
While the other donations will be subject to 30% Donors tax based on the net gifts since they are
considered donations to strangers under Sec 99(B) of the Tax Code. A stranger as defined is a person
who is not a: (1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant;
or (2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
IX
Karlito, a Filipino businessman, is engaged in the business of metal fabrication and repair of LPG cylinder
tanks. He conducts business under the name and style of "Karlito's Enterprises," a single proprietorship.
Started only five (5) years ago, the business has grown so enormously that Karlito decided to incorporate it
by transferring all the assets of the business, particularly the inventory of goods on hand, machineries and
equipment, supplies, parts, raw materials, office furniture and furnishings, delivery trucks and other vehicles,
buildings, and tools to the new corporation, Karlito's Enterprises, Inc., in exchange for 100% of the capital
stock of the new corporation, the stock subscription to which shall be deemed fully paid in the form of the
assets transferred to the corporation by Karlito.
As a result, Karlito's Enterprises, the sole proprietorship, ceased to do business and applied for cancellation
of its BIR Certificate of Registration. The BIR, however, assessed Karlito VAT on account of the cessation of
business based on the current market price of the assets transferred to Karlito's Enterprises, Inc.
(a) Is the transfer subject to VAT? (2.5%)
(b) Is the transfer subject to income tax? (2.5%)
SUGGESTED ANSWER:
(a) Not subject to VAT. Sec 106 (C) - Changes in or Cessation of Status of a VAT-registered Person. - The
tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a

certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-
registered person changes or is terminated.
However, Sec 40(C)(2) transactions are covered by the exceptions laid down in RR 2-98.
(b) No, not subject to income tax. Sec 40 (C)(2) - No gain or loss shall be recognized if in pursuance of a
plan of merger or consolidation: (a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation,
solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security
holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a corporation of which as a result of such exchange
said person, alone or together with others, not exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for services shall not be considered as issued in return for
property.
X
Klaus, Inc., a domestic, VAT-registered corporation engaged in the land transportation business, owns a
house and lot along Katipunan St., Quezon City. This property is being used by Klaus, lnc.'s president and
single largest shareholder, Atty. Krimson, as his residence. No business activity transpires there except for
the company's Christmas party which is held there every December. Atty. Krimson recently grew tired of the
long commute from Katipunan to his office in Makati City and caused the company to sell the house and lot.
The sale was recorded in the books of Klaus, Inc. as investment in real property.
(a) Is the sale of the said property subject to VAT? (2.5%)
(b) Is the sale subject to 6% capital gains tax or regular corporate income tax of 30%? (2.5%)
SUGGESTED ANSWER:
(a) Yes. Incidental sale subject to VAT
In the Supreme Court (SC) case of Commissioner of Internal Revenue vs. Magsaysay Lines (G.R. No.
146984. July 28, 2006), the Supreme Court upheld a 1992 CTA decision which ruled that the sale of
shipping vessels, made by a corporation engaged in the sale of services, would not be subject to VAT. The
Court further ruled that the VAT is imposed on transactions which occur in the course of trade or
business. Although there are incidental transactions which invariably contribute to the production chain,
these should not be subjected to VAT because since they do not occur within the course of trade or
business, “the providers of such goods or services would hardly, if at all, have the opportunity to
appropriately credit any VAT liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through the ordinary course of trade or
business.” Applying this SC decision to the facts provided in RMC 15-2011, the sale of the vehicles
should not be subjected to VAT because, although the company would profit from the sale, it was not
made in the course of trade or business or incidental thereto.

(b) Subject to RCIT because it became a property which would properly be included in the inventory of a
taxpayer. The corporate income tax rate both for domestic and resident foreign corporations is 30%
based on net taxable income.
XI
Koko's primary source of income is his employment with the government. He earns extra from the land he
inherited from his parents, and which land he has been leasing to a private, non-stock, non-profit school
since 2005.
Last January, the school offered to buy the land from Koko for an amount equivalent to its zonal value plus
15% of such zonal value. Koko agreed but required the school to pay, in addition to the purchase price, the
12% VAT. The school refused Koko's proposal to pass on the VAT contending that it was an entity exempt
from such tax. Moreover, it said that Koko was not regularly engaged in the real estate business and,
therefore, was not subject to VAT. Consequently, Koko should not charge any VAT to the school.
(a) Is the contention of the school correct? (2.5%)
(b) Will your answer be the same if Koko signed up as a VAT-registered person only in 2017? (2.5%)
SUGGESTED ANSWER:
(a) No. sale of real properties held primarily for sale to customers or held for lease in the ordinary course
of trade or business of the seller shall be subject to VAT
(b) No. If VAT-registered, no need to qualify. Subject to VAT regardless of the gross annual revenue.
XII
The BIR Commissioner, in his relentless enforcement of the Run After Tax Evaders (RATE) program, filed
with the Department of Justice (DOJ) charges against a movie and television celebrity. The Commissioner
alleged that the celebrity earned around PhP 50 million in fees from product endorsements in 2016 which
she failed to report in her income tax and VAT returns for said year. The celebrity questioned the proceeding
before the DOJ on the ground that she was denied due process since the BIR never issued any Preliminary
Assessment Notice (PAN) or a Final Assessment Notice (FAN), both of which are required under Section
228 of the NIRC whenever the Commissioner finds that proper taxes should be assessed.
Is the celebrity's contention tenable? (2.5%)
SUGGESTED ANSWER:
No. No need for PAN and FAN may be issued automatically.
Sec. 222 (A) of the Tax Code provides that in the case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be filed without assessment, at any time within ten (10) years after the discovery of the
falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory,
the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection
thereof.

XIII
The Collector at the Port of Koronadal seized 100 second-hand right-hand drive buses imported from
Japan. He issued warrants of distraint and scheduled the vehicles for auction sale. Kamila, the importer of
the second-hand buses, filed a replevin suit with the Regional Trial Court (RTC). The RTC granted the
replevin upon filing of a bond.
Did the RTC err in granting the replevin? (2.5%)
SUGGESTED ANSWER:
Yes. RTC has no jurisdiction. Sec 202 (j) - Exercise of exclusive original jurisdiction over forfeiture cases
under “Customs Modernization and Tariff Act (GMTA)”. RA10863.
XIV
The City of Kabankalan issued a notice of assessment against KKK, Inc. for deficiency real property taxes
for the taxable years 2013 to 2017 in the amount of PhP 20 million. KKK paid the taxes under protest and
instituted a complaint entitled "Recovery of Illegally and/or Erroneously-Collected Local Business Tax,
Prohibition with Prayer to Issue TRO and Writ of Preliminary Injunction" with the RTC of Negros Occidental.
The RTC denied the application for TRO. Its motion for reconsideration having been denied as well, KKK
filed a petition for certiorari with the Court of Appeals (CA) assailing the denial of the TRO.
Will the petition prosper? (5%)
SUGGESTED ANSWER:
No. The jurisdiction is with the CTA and not with the CA. RA 9282 provided that CTA Exclusive appellate
jurisdiction in tax collection cases:
"a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection
cases originally decided by them, in their respective territorial jurisdiction.
XV
In 2015, Kerwin bought a three-story house and lot in Kidapawan, North Cotabato. The property has a floor
area of 600 sq.m. and is located inside a gated subdivision. Kerwin initially declared the property as
residential for real property tax purposes.
In 2016, Kerwin started using the property in his business of manufacturing garments for export. The entire
ground floor is now occupied by state-of-the-art sewing machines and other equipment, while the second
floor is used as offices. The third floor is retained by Kerwin as his family's residence. Kerwin's neighbors
became suspicious of the activities going on inside the house, and they decided to report it to the
Kidapawan City Hall. Upon inspection, the local government discovered that the property was being utilized
for commercial use. Immediately, the Kidapawan Assessor reclassified the property as commercial with an
assessment level of 50% effective January 2017, and assessed Kerwin back taxes and interest. Kerwin
claims that only 2/3 of the building was used for commercial purposes since the third floor remained as
family residence. He argues that the property should have been classified as partly commercial and partly
residential.
(a) Is the Kidapawan assessor correct in assessing back taxes and interest? (2.5%)

(b) Is Kerwin correct that only 2/3 of the property should be considered commercial? (2.5%)
(c) If Kerwin wants to file an administrative protest against the assessment, is he required to pay the
assessment taxes first? With whom shall the protest be filed and within what period? (2.5%)
SUGGESTED ANSWER:
(a) Sec 222 of the LGC - Assessment of Property Subject to Back Taxes. - Real property declared for the
first time shall be assessed for taxes for the period during which it would have been liable but in no case
for more than ten (10) years prior to the date of initial assessment: Provided, however, That such taxes
shall be computed on the basis of the applicable schedule of values in force during the corresponding
period. If such taxes are paid on or before the end of the quarter following the date the notice of
assessment was received by the owner or his representative, no interest for delinquency shall be
imposed thereon; otherwise, such taxes shall be subject to an interest at the rate of two percent (2%)
per month or a fraction thereof from the date of the receipt of the assessment until such taxes are fully
paid.
(b) No. Sec 198(B) of the LGC - Real property shall be classified, valued and assessed on the basis of
actual use regardless of where located, whoever owns it, and whoever uses it.
(c) No. Protest – within 60 days from receipt of assessment (sec. 195, LGC). Payment under protest is
not necessary.
When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges
have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee or charge, the
amount of deficiency, the surcharges, interests and penalties. Within sixty (60) days from the receipt of
the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the
assessment; otherwise, the assessment shall become final and executory. The local treasurer shall
decide the protest within sixty (60) days from the time of its filing. If the local treasurer finds the protest
to be wholly or partly meritorious, he shall issue a notice canceling wholly or partially the assessment.
However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the
protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days from the
receipt of the denial of the protest or from the lapse of the sixty (60) day period prescribed herein within
which to appeal with the court of competent jurisdiction otherwise the assessment becomes conclusive
and unappealable.cralaw
Remedy against the Assessment/Appeal, within 60 days from notice of assessment of provincial, city or
municipal assessor to Local Board of Assessment Appeals (Sec. 226, LGC)
Local Board of Assessment Appeals. - Any owner or person having legal interest in the property who is
not satisfied with the action of the provincial, city or municipal assessor in the assessment of his
property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal
to the Board of Assessment appeals of the province or city by filing a petition under oath in the form
prescribed for the purpose, together with copies of the tax declarations and such affidavits or
documents submitted in support of the appeal.
XVI
In an action for ejectment filed by Kurt, the lessor-owner, against Kaka, the lessee, the trial court ruled in
favor of Kurt. However, the trial court first required Kurt to pay the realty taxes due on the property for 2016
before he may recover possession thereof.

Kurt objected, arguing that the delinquent realty taxes were never raised as an issue in the ejectment case.
At any rate, Kurt claimed that it should be Kaka who should be made liable for the realty taxes since it was
Kaka who possessed the property throughout 2016.
Is Kurt correct in resisting the trial court's requirement to pay the taxes first? (2.5%)
SUGGESTED ANSWER:
LGC Sec 268. Payment of Delinquent Taxes on Property Subject of Controversy. - In any action involving
the ownership or possession of, or succession to, real property, the court may, motu propio or upon
representation of the provincial, city, or municipal treasurer or his deputy, award such ownership,
possession, or succession to any party to the action upon payment to the court of the taxes with interest
due on the property and all other costs that may have accrued, subject to the final outcome of the action
XVII
Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract of land in
Kalinga.
KKI has devoted 1 /2 of the land for various uses: a church with a cemetery exclusive for deceased priests
and nuns, a school providing K to 12 education, and a hospital which admits both paying and charity patients.
The remaining 1/2 portion has remained idle.
The KKI Board of Trustees decided to lease the remaining 1 /2 portion to a real estate developer which
constructed a community mall over the property.
Since the rental income from the lease of the property was substantial, the KKI decided to use the amount
to finance (1) the medical expenses of the charity patients in the KKI Hospital and (2) the purchase of books
and other educational materials for the students of KKI School.
(a) Is KKI liable for real property taxes on the land? (2.5%)
(b) Is KKl's income from the rental fees subject to income tax? (2.5%)
SUGGESTED ANSWER:
Test is the use of the property. (Lung Center Case)
(a) Yes. The Court held that the petitioner is a charitable institution within the context of the 1973 and
1987 Constitutions.
The test whether an enterprise is charitable or not is whether it exists to carry out a purpose
reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage. Hence,
the Lung Center was organized for the welfare and benefit of the Filipino people.
As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, so long as the money received is devoted
to charitable objects and no money inures to the private benefit of the persons managing or operating
the institution. As well as the reason of donation in the form of subsidies granted by the government.

(b) No. Those portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable purposes.
The petitioner failed to prove that the entirety of its real property is actually, directly and exclusively
used for charitable purposes. While portions of the hospital are used for the treatment of patients and
the dispensation of medical services to them, whether paying or non-paying, other portions thereof are
being leased to private individuals for their clinics and a canteen.
Hence, the portions of the land leased to private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied
by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
ADE = exempt from income tax (De lasalle)
The requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (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
records of the case showed that the foundation’s operation is not for profit, but in pursuit of its primary
purpose which is “to establish a school xxx the primary intention being to form the whole man through
the integration of a liberal Christian education with professional competence for participation in
Philippine development.”
XVIII
Kathang Isip, Inc. (Kii) is a domestic corporation engaged in the business of manufacturing, importing,
exporting, and distributing toys both locally and abroad. Its principal office is located in Kalookan City,
Philippines. It has 50 branches in different cities and municipalities in the country. When Kii applied for
renewal of its mayor's permit and licenses in its principal office in January this year, Kalookan City
demanded payment of the local business tax on the basis of the gross sales reported by the corporation in
its audited financial statements for the preceding year. Kil protested, contending that Kalookan City may tax
only the sales consummated by its principal office but not the sales consummated by its branch offices
located outside Kalookan City.
When Kalookan City denied the protest, Kil engaged the services of Atty. Kristeta Kabuyao to file the
necessary judicial proceedings to appeal the decision of Kalookan City. Atty. Kabuyao is a legal expert, but
resides in Kalibo, Aklan where her husband operates a resort. She, however, practices in Metro Manila,
including Kalookan City. The counsel representing the city, in the case filed in Kalookan City by KII,
questioned the use of Atty. Kabuyao's Professional Tax Receipt (PTR) issued in Aklan for a case filed in
Kalookan City.
(a) Is Kll's contention that Kalookan City can only collect local business taxes based on sales consummated
in the principal office meritorious? (2.5%)'
(b) Is the Kalookan City counsel correct in saying that Atty. Kabuyao's PTR issued in Aklan cannot be used in
Kalookan? (2.5%)
SUGGESTED ANSWER:
(a) Sec 150 of the LGC – For purposes of collection of the taxes under Section 143 (tax on business),
businesses maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch

or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the
municipality where such branch or sales outlet is located.
(b) Sec 139(B) of the LGC – Professional Tax
(B) Every person legally authorized to practice his profession shall pay the professional tax to the
province where he practices his profession or where he maintains his principal office in case he practices
his profession in several places: Provided, however, That such person who has paid the corresponding
professional tax shall be entitled to practice his profession in any part of the Philippines without being
subjected to any other national or local tax, license, or fee for the practice of such profession.
XIX
The BIR assessed Kosco, Inc., an importer of food products, deficiency income and value-added taxes, plus
50% surcharge after determining that Kosco, Inc. had under-declared its sales by an amount exceeding
30% of that declared in its income tax and VAT returns. Kosco, Inc. denied the alleged under-declaration,
protested the deficiency assessment for income and value-added taxes and challenged the imposition of
the 50% surcharge on the ground that the surcharge may only be imposed if Kosco, Inc. fails to pay the
deficiency taxes within the time prescribed for their payment in the notice of assessment.
(a) Is the imposition of the 50% surcharge proper? (2.5%)
(b) If your answer to {a) is yes, may Kosco, Inc. enter into a compromise with the BIR for reduction of the
amount of surcharge to be paid? (2.5%)
SUGGESTED ANSWER:
(a) Yes. Penalty: 50% of the tax or of the deficiency tax, in case any payment has been made on the basis
of a return before the discovery of the falsity or fraud.
• In case of: [ FiFa ]
a) Willful neglect to File the return within the period prescribed; or
b) False or fraudulent return is willfully made, in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud.
Prima facie evidence of a false or fraudulent return as determined by the Commissioner pursuant to the
rules and regulations promulgated by the Sec. of Finance:
a.) substantial under declaration of taxable sales, receipts or income - failure to report sales, receipts or
income in an amount exceeding 30% of that declared per return
b.) substantial overstatement of deductions - claim of deductions in an amount exceeding 30% of actual
deductions
(b) Yes. Compromise based on 2 grounds: a) financial capacity; and b) assessment is of doubtful validity.
XX
Krisp Kleen, Inc. (KKI) is a corporation engaged in the manufacturing and processing of steel and its by-
products. It is both registered with the Board of Investments with a pioneer status, and with the BIR as a
VAT entity. On October 10, 2010, it filed a claim for refund/credit of input VAT for the period January 1 to
March 31, 2009 before the Commissioner of Internal Revenue (CIR). On February 1, 2011, as the CIR had not

yet made any ruling on its claim for refund/credit, KKI, fearful that its period to appeal to the courts might
prescribe, filed an appeal with the Court of Tax Appeals (CTA).
(a) Can the CTA act on KKl's appeal? (2.5%)
(b) Will your answer be the same if KKI filed its appeal on March 20, 2011 and CIR had not yet acted on its
claim? (2.5%)
SUGGESTED ANSWER:
Aichi case
120+30 days is mandatory and jurisdictional
(a) The prescriptive period of 2 year . Sec. 204 (c) and 229 are applied only in instances of erroneous
payment and illegal collection. Sec. 112 (A) of NIRC applies here. Sec. 31 Chapter VIII Book I of the
Administrative Code of 1987 being the more recent law governing legal period applies making 1 year =
12 months. The principle of Lex Posterioni Derogati Priori applies. Thus, since it is filed on exactly Sept.
30, 2004 filing is timely.
(b) Filing an administrative claim is a condition precedent to a judicial claim for refund . Sec. 112 (D) of the
NIRC clearly provides that the CIR has 120 days from date of the submission of the complete documents
in support of the application within which to grant or deny the claim. In case of full or partial denial by the
CIR, the recourse is to appeal before the CTA within 30 days from receipt of the decision of the CIR.
However, if after the 120-day period the CIR fails to act on the application for tax refund, the remedy is
to appeal the inaction of the CIR to the CTA within 30 days.

I.
SMZ, Inc. is a VAT-registered enterprise engaged in the general construction business. HP International
contracts the services of SMZ Inc, to construct HP International’s factory building located in the Laguna
TechnoPark, a special economic zone HP International is registered with the Philippine Economic Zone
Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys income tax holiday pursuant to the
Special Economic Zone Act of 1995.
SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zero-rating of its sale of
services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground that HP
International already enjoys income tax holiday: Is the BIR correct in denying SMZ, Inc.’s application? Explain
your answer: (6%)
SUGGESTED ANSWER
No. All sales of goods, properties, and services made by a VAT-registered supplier from the Customs
Territory to an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the
latter’s type or class of PEZA registration (Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, June
13, 2016, citing Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G.R.
No. 150154, August 9, 2005).
Moreover, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons or
entities whose exemption under special laws effectively subjects the supply of such services to zero
percent (0%) rate are considered zero-rated. Considering the law doés not provide for any additional
qualification or disqualification, the BIR cannot deny the application on the ground that HP International
already enjoys income tax holiday.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the
requirements provided by law. To do so constitutes lawmaking, which is generally reserved for Congress
(Soriano v. Secretary of Finance, et al, G.R. Nos. 184450, 184508, 184538, 185234, January 24, 2017).
ALTERNATIVE ANSWER
The BIR is wrong. Under Sec 108(B)(3) of the NIRC, the sale is effectively zero-rated and there is no need
to file an application for zero-rating with the BIR The BIR in pointing out that HP International enjoys
income tax holiday is of no moment, because a sale of services to an ecozone enterprise by a supplier
from the customs territory is considered as an effectively zero-rated sale of service in view of the
exemption enjoyed by the Peza enterprise from indirect taxes.
II.
Wreck Corporation is a domestic corporation engaged in the business of importing, refining and selling
petroleum products. During the period from September 1, 2014 to December 31, 2014, Wreck Corporation
imported 225 million liters of Jet A-1 aviation fuel and paid the excise taxes thereon. Seventy-five percent
(75%) of the total volume of aviation fuel imported were actually sold to international carriers of Philippine
and foreign registries for their use or consumption outside of the Philippines in the period from November 1,
2014, to December 31, 2014. Wreck Corporation did not pass on to the international carriers the excise
taxes it paid on the importation of petroleum products.

On June 25, 2015, Wreck Corporation filed an administrative claim for refund or issuance of tax credit
certificate amounting to the excise taxes it had paid on the importation of 225 million liters of Jet A-l
aviation fuel.
If you were the Commissioner of Internal Revenue, will you grant Wreck Corporation’s administrative claim
for refund or issuance of tax credit certificate? Explain your answer. (6%)
SUGGESTED ANSWER:
Yes, but only the excise tax which corresponds to the 75% of the total volume of aviation fuel imported
that were actually sold to the inter national carriers. Wreck Corporation, as the statutory taxpayer who
is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the
excise taxes it paid for petroleum products sold to international carriers, the latter having been granted
exemption from the payment of said excise tax under Sec. 135 (a) of the NIRC(CIR v. Pilipinas. Shell
Petroleum Corporation, G.R. No. 188497, February 19, 2014).
III
Vanderful, Inc.’s income tax return for taxable year 2015 showed an overpayment due to excess creditable
withholding taxes in the amount of P750,000. The company. opted to carry over the excess income tax
credits: as tax credit against its quarterly income tax liabilities for the next succeeding years. For taxable
year 2016, the company’s income tax return showed an overpayment due to excess creditable withholding
taxes in the amount of PI,100,000, which included the carry-over from year 2015 in the amount of
P750,000 because its operations resulted in a net loss hence, there was no application for any tax liability.
This time, the company opted and marked the box “To be refunded” in respect of the total amount of
P1,100,000.
Vanderful, Inc. now files in the BIR a claim for refund of unutilized overpayments of P1,100,000, Is the claim
meritorious? (4%).
SUGGESTED ANSWER:
No, but only to the extent of the amount of P750,000.00 which was carried over from year 2015.
Section 76 of the NIRC of 1997 clearly states: Once the option to carry-over and apply the excess
quarterly income tax” against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed therefor. Section 76 expressly states
that the option shall be considered irrevocable for that taxable period referring to the period comprising
the succeeding taxable years. Section 76 further states that no application for cash refund or issuance
of a tax credit certificate shall be allowed therefore referring to that taxable period..” comprising the
succeeding taxable years (Asiaworld Properties Philippine Corporation v. CIR, G.R. No. 171766, July 29,
2010).
IV.
On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose of
enforcing the Tariff and Customs Code, assorted brands of liquor and cigarettes said to have been illegally
imported into the Philippines were seized from a store operating in a Freeport zone. The store owner moved
for the quasáhal of the warrant on the ground that the col-… lector of Customs had no jurisdiction to enforce
it within the Freeport zone..

Should the motion to quash be granted (3%)
SUGGESTED ANSWERS
No. The treatment of the Freeport zone as a separate customs territory cannot completely divest the
Government of its right to intervene in the operations and management of such Freeport, especially
when patent violations of the customs and tax laws are discovered. After all, Section 602 of the Tariff
and Customs Code vests exclusive original jurisdiction in the Bureau of Customs over seizure and
forfeiture cases in the enforcement of the tariff and customs laws (Agrier Co., Ltd. v. Hon. Fitus B.
Villanueva, et al., G.R. No. 158150, September 10, 2014).
V.
On March 30, 2016, XL Co. filed an administrative claim for refund of unutilized Input VAT for taxable year
2014, together with supporting documents, XL Co. claimed that its sale of generated power and delivery of
electric capacity was VAT zero-rated. Due to the inaction of the Commissioner of Internal Revenue (CIR), XL
Co. filed with the Court of Tax Appeals (CTA) the following judicial claims for refund.
Period Covered Date Filed
1st Quarter of 2014 March 31, 2016
2nd Quarter of 2014 June 30, 2016
3rd and 4th quarter of 2014 August 12, 2016
Is XL Co.’s claim for VAT refund timely filed? Explain your answer. (5%)
SUGGESTED ANSWER:
As regards the claims for VAT refund which are administrative in nature, all have been timely filed. The
law requires that the administrative claim should be filed within two years from the end of the quarter
when the sale was made (Sec. 112(A), NIRC); hence, the filing of the administrative claim for refund on
March 30, 2016 covering the four quarters of 2014, complies with the period prescribed by law.
The same is not true, however, as to the judicial claims. Only the judicial claim filed on August 12, 2016 is
timely filed. As provided by Section 112(C), 1997 NIRC, as amended, one of the conditions for a judicial
claim of refund or credit under the VAT System is compliance with the 120+30 day mandatory and
jurisdictional periods. Strict compliance with the 120+30 day periods is, thus, necessary for such claim
to prosper (CIR V. San Roque Power Corporation, G.R. Nos. 187485, 196113 and 197156, October 8,
2013).
The Commissioner has been granted by law 120 days within which to decide the taxpayer’s claim. Then,
if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may
appeal to the CTA within 30 days from the expiration of the 120-day. period. Applying this to the present
case, the 120+ day from the filing of the administrative claim fell on July 28, 2016. XL Co. may ile the
judicial claim from July 29, 2016 to August 27, 2016; thus, only the judicial claim filed on August 12.
2016 has been timely filed.

VI.
Heeding the pronouncement of the President that the worsening traffic condition in the metropolis was a
sign of economic progress, the Congress enacted Republic Act No. 10701, also known as An Act Imposing, a
Transport Tax on the Purchase of Private Vehicles. Under RA 10701, buyers of private vehicles are required
to pay a transport tax equivalent to 5% of the total purchase price per vehicle purchased. RA 10701
provides that the Land Transportation Office (LTO) shall not accept for registration any new vehicles
without proof of payment of the 5% transport tax. RA 10701 further provide that existing owners of private
vehicles shall be required to pay a tax equivalent to 5% of the current fair market : value of every vehicle
registered with the LTO. However, RA 10701 exempts owners of public utility vehicles and the Government
from the coverage of the 5% transport tax.
A group of private vehicle owners sue on the ground that the law is unconstitutional for contravening the
Equal Protection Clause of the Constitution.
Rule on the constitutionality and validity of RA 10701. (5%).
SUGGESTED ANSWER
RA 10701 is valid and constitutional. 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 (British American Tobacco v. Jose Isidro N. Camacho, G.R. No. 163583, August 20, 2008, 562
SCRA 511).
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or
objects of taxation, similarly situated are to be treated alike both in privileges and liabilities. Unifor-. mity
does not forfend classification as long as: (1) the standards that are used therefore 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 (Rufino R. Tan v. Ramon R. Del Rosario, Jr., G.R. Nos. 109289 and
109446, October 13, 1994, 237 SCRA 324, 331). All of the foregoing requirements of a valid
classification having been net and those which are singled out are a.class. in themselves, there is no
violation of the “Equal Protection Clause” of the Constitution.
VII.
Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty Corporation (SPRC).
He invited the Regional Director of the Housing and Land Use Regulatory Board (HLURB) to lunch at the
Sulo Hotel in Quezon City to discuss the approval of SPRC’s application for a development permit in
connection with its subdivision development project in Pasig City, At breakfast the following day, Calvin met
a prospective client interested to enter into a joint venture with SPRC. for the construction of a residential
condominium unit in Cainta, Rizal.
Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional Director of HLURB
and the prospective client, respectively. The expenses were duly supported by official receipts issued in his
name. At month’s end, he requested the reimbursement of his expenses, and SPRC granted his request.
(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your answer. (2.5%)
SUGGESTED ANSWER

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