2019 Tax
Questions:
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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 merely informs the taxpayer of the initial findings of the Bureau of Internal Revenue. It contains the proposed assessment, and the facts, law, rules, and regulations or jurisprudence on which the proposed assessment is based.
It does not contain a demand for payment but usually requires the taxpayer to reply within 15 days from receipt. Otherwise, the Commissioner of Internal Revenue will finalize an assessment and issue a FAN.
The PAN is a part of due process. It gives both the taxpayer and the Commissioner of Internal Revenue the opportunity to settle the case at the earliest possible time without the need for the issuance of a FAN.
On the other hand, a FAN contains not only a computation of tax liabilities but also a demand for payment within a prescribed period. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. It also signals the time when penalties and interests begin to accrue against the taxpayer. Thus, the National Internal Revenue Code imposes a 25% penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20% per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for payment until the amount is fully paid. Failure to file an administrative protest within 30 days from receipt of the FAN will render the assessment final, executory, and demandable.
(CIR vs. Transitions Optical Philippines G.R. No. 227544 February 11, 2017)
(b) No, it is not valid because as a general rule, PAN is required and the exemptions are not applicable in this case.
Section 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, That a preassessment notice shall not be required in the following cases:(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.
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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 (3%)Suggested Answers:
(a) The term 'input tax' means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of this Code.
The term 'output tax' means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of this Code. (National Internal Revenue Code)
(b) Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. 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 a zero rate. Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. (CIR vs. Seagate Technology G.R. NO. 153866 February 11, 2005)
(c) As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. (CIR vs. American Express G.R. NO. 152609 June 29, 2005)
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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) Section 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
(x)The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being course of trade or business. (National Internal Revenue Code)
(b) No, under TRAIN, association dues are now exempt from VAT.
"Sec. 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax:
"(y) Association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations;
(TRAIN Law) -
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 Pl,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 exemptions? Explain. (2%)
Suggested Answers:
(a)
Section 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter:(A) In the Case of Gifts Made by a Resident. -
"(1) 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
"(2) 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 this 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.
Sec. 100. Transfer for Less Than Adequate and Full Consideration - Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year: Provided, however, That a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth."
(National Internal Revenue Code, as amended by TRAIN Law)
(b) No, it does not fall as an exemption. Under Section 100 of TRAIN (see above), a transaction bona fide, at arm's length and free from donative intent shall be considered as for adequate and full consideration.
In this case, it was bona fide and free from donative intent as the sale was done for liquidity reasons while it was at arm's length because Z was an unrelated corporation.
(TRAIN Law) -
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 constituting the value of their house in Alabang as their family home; and 2. 200,000.00 in funeral expenses because no other expenses could 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, they can only claim one of the deductions.TRAIN has removed funeral expenses as one of the deductions. However TRAIN allows for family home deduction up to P10 million pesos.
"Sec. 86. Computation of Net Estate.— For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of a Citizen or a Resident - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate—
(7) The Family Home. - An amount equivalent to the current fair market value of the decedent’s family home: Provided, however, That if the said current fair market value exceeds Ten million pesos (10,000,000), the excess shall be subject to estate tax.
(TRAIN Law)
(b) Yes, the standard deduction under TRAIN is up to P5 million. No proof is required under the law."Sec. 86. Computation of Net Estate.— For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:
"(A) Deductions Allowed to the Estate of a Citizen or a Resident - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate—
"(1) Standard Deduction - An amount equivalent to Five million pesos (5,000,000).
(TRAIN Law)
(c) Yes, as A is a resident which means all properties wherever situated are included in the gross estate.
Section 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.
(National Internal Revenue Code) -
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. Its commercial airplanes neither operate within the Philippine territory nor are its service passengers embarking from Philippine airports. Nevertheless, XYZ Air is able to sell its airplane tickets in the Philippines through ABC Agency, its 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 Answers:
No, it is not meritorious as a similar case has been decided in jurisprudence.
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(1), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory. (Canada vs. CIR G.R. No. 169507 January 11, 2016) -
Differentiate tax exclusions from tax deductions.(3%)
Suggested Answers:
(a) Tax Exclusions are governed by Sec. 32 of the NIRC as they are not included in gross income. Tax Deductions are governed by Sec. 34 of the NIRC and they reduce the gross income.
Section 32. Gross Income. -
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:Section 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;
(National Internal Revenue Code) -
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 Answers:
No, B should not pay as this is a tax free exchange under the law. Under Section 40 of the NIRC, property transferred to a corporation in exchange for stock resulting in control by not more than four (4) persons is considered a tax free exchange. In this case, land and apartment was exchanged for shares which involved change of control as 51% ownership of the corporation was transferred to B.
Section 40. Determination of Amount and Recognition of Gain or Loss. -
(x)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. (National Internal Revenue Code)
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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 250,000,000.00. However, GHI, Inc. failed to commence operations. Its factory was temporarily closed effective September 15, 2010. On October 1, 2010, it sold its machineries and equipment to JKL Integrated for 300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010.
(a) Is the sale of the 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 Answers:
(a) The machineries and equipment are subject to normal corporate income tax based on similar cases decided in jurisprudence.
For corporations, the National Internal Revenue Code of 1997 treats the sale of land and buildings, and the sale of machineries and equipment, differently. Domestic corporations are imposed a 6% capital gains tax only on the presumed gain realized from the sale of lands and/or buildings. The National Internal Revenue Code of 1997 does not impose the 6% capital gains tax on the gains realized from the sale of machineries and equipment.
Therefore, only the presumed gain from the sale of petitioner's land and/or building may be subjected to the 6% capital gains tax. The income from the sale of petitioner's machineries and equipment is subject to the provisions on normal corporate income tax. (Smi-ed Philippines vs. Cir G.R. No. 175410 November 12, 2014)
(SMI-ED Philippines vs. Cir G.R. No. 175410 November 12, 2014)
(b)
Capital assets are those not included in the enumeration comprising ordinary assets.Section 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.
(National Internal Revenue Code) -
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 City X, 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 Answers:
As to the 1st contention, I would rule against it as it is not double taxation.
There is double taxation when the same taxpayer is taxed twice when he should be taxed only once for the same purpose by the same taxing authority within the same jurisdiction during the same taxing period, and the taxes are of the same kind or character. Double taxation is obnoxious. (Nursery Care vs. Acevedo G.R. No. 180651 July 30, 2014)
It cannot be double taxation as the taxing authority is different as this tax was imposed by the LGU while VAT is imposed by the National Government.
As to the 2nd contention, I would rule for it as the Local Government Code prohibits the levy of VAT.Section 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:
(x)
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;
(Local Government Code) -
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 1,000,000.00. Upon receipt of the funds, he went to a casino in Pasay City and won the 30,000,000.00 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 5,000.00.
Which of the above sums of money is/are subject to income tax? Explain. (5%)
Suggested Answers:
The P5,000 cash prize is subject to income tax as TRAIN law provides that only those prizes above P10,000 are subject to final tax.
Gambling winnings such as the P30,000,000 are not subject to income tax as they are subject to final tax.
The P1,000,000 may be considered exempt from taxes. His boxing winnings may be considered exempt under Republic Act No. 7549 as it was sanctioned by their respective sports association which in this case was the Olympics Committee.
"(1) Interests, Royalties, Prizes, and Other Winnings.— A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and. similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except winnings amounting to Ten thousand pesos (10,000) or less from Philippine Charity Sweepstakes and Lotto which shall be exempt), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of fifteen percent (15%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: (TRAIN Law)
Section 1. All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax: Provided, That such prizes and awards given to said athletes shall be deductible in full from the gross income of the donor: Provided, further, That the donors of said prizes and awards shall be exempt from the payment of donor's tax.
(R.A. No. 7549) -
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 by 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 the schedular rate under Section 24 (A) (2) of the Tax Code, as amended by Republic Act No. 10963, or the "Tax Reform for Acceleration and Inclusion" Law.
(a) ls 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 assessment on Mr. J's income within the Philippines at the schedular rate? Explain. (3%)
Suggested Answers:
(a) No, the BIR is not correct. Mr. F is a non-resident Filipino citizen as he was physically present abroad most of the time during the taxable year.
In this case, he spent 10 months of 2018 in the Tokyo Branch. As a non resident citizen, he is only taxable on sources of income from within the Philippines.
Section 22. Definitions - When used in this Title:(E) The term 'nonresident citizen' means:
(3) 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.
Section 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(National Internal Revenue Code)
(b) No, the BIR is not correct. Mr. J should not be taxed at the regular rate as he is a non-resident alien not doing business in the Philippines. As a Japanese not residing here, he is a non-resident alien. He is not considered engaged in trade or business as he has not spent more than 180 days in the Philippines as he only stayed here for 5 months. Hence he is subject to 25% final tax and not the schedular rate.
Section 22. Definitions - When used in this Title:
(G) The term 'nonresident alien' means an individual whose residence is not within the Philippines and who is not a citizen thereof.
Section 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
(National Internal Revenue Code) -
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 50,000.00 for the first vacation leave that any employee takes during a given calendar year. In addition, the senior engineers were also given housing inside the factory compound for the purpose of ensuring that there are available engineers within the premises every time 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? If so, what tax is applicable and what is the 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 Answers:
(a) Yes, the P50,000 should be considered as gross income as it covers all income derived from whatever source and given that there is an employer-employee relationship, it may be considered as a form of compensation for services. Hence it should be subject to income tax at the 0-35% rate.
Section 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(National Internal Revenue Code)
(b) No, it is not subject to fringe benefits tax as it is not applicable when the fringe benefit is for the convenience or advantage of the employer. In this case, the fact that the purpose of the housing was to ensure there were always available engineers means it was for the convenience of the employer."Sec. 33. Special Treatment of Fringe Benefit. -
(a) Imposition of Tax. - Effective January 1, 2018 and onwards, a final tax of thirty-five percent (35%) is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty five percent (65%) effective January 1, 2018 and onwards: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D), and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.
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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 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 Answers:
Yes, the City Assessor is correct. Ordinarily, real property owned by political subdivisions such as a City are exempt from real property tax. However, such exemption does not apply when the beneficial use has been granted to a taxable person. In this case, the fact that the land was leased to V Corp, a taxable person, means it is now subject to real property tax.
Section 234. Exemptions from Real Property Tax. - The following are exempted from payment of the real property tax:(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;
(Local Government Code)
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Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual compensation of 10,000,000.00, while Mr. S is a security guard in the same company earning an annual compensation of 200,000.00. 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 Answers:
(a) No, Mr. C is not required to file as he earns purely compensation income from one employer during the taxable year which means he qualifies for substituted filing.
Under “substituted filing”, an individual taxpayer although required under the law to file his income tax return, will no longer have to personally file his own income tax return but instead the employer’s annual information return filed will be considered as the “substitute” income tax return of the employee inasmuch as the information in the employer’s return is exactly the same information contained in the employee’s return.
Substituted filing applies only to individuals who meet all the following conditions:
a. The employee receives purely compensation income (regardless of amount) during the taxable year
b. The employee receives the income only from one employer in the Philippines during the taxable year
c. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer
d. The employee’s spouse also complies with all three (3) conditions stated above.
e. The employer files the annual information return (BIR Form No. 1604- CF)
f. The employer issues BIR Form 2316 (Oct 2002 ENCS) version to each employee
(Revenue Memorandum Circular 1-2003)
(b) Same answer as (a). It does not matter whether one is a CEO earning P10,000,000 or security guard earning P200,000 so long as you are earning purely compensation income from one employer. -
(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 Answers:
(a)
Section 22. Definitions - When used in this Title:
(P) The term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the period for which such return is made.(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the last day of any month other than December.
(National Internal Revenue Code)
(b) The deadline in a calendar year is April 15. The deadline for a fiscal year shall be the 15th day following the 4th month of the close of the fiscal year.Section 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -
(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.
(National Internal Revenue Code) -
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 100,000,000.00, which earns 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%)
(a) 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 Answers:
(a) For the 2% tax, it should be withheld by XYZ Bank and for the 20% tax, it should be ABC bank as the obligation to withhold is on the payor of the income.
“SECTION 2.57.3. Persons Required to Deduct and Withhold. – xxx xxx xxx xxx The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner/payee; hence, unjustifiable refusal of the latter to be subjected to withholding shall be a ground for the mandatory audit of all internal revenue tax liabilities, as well as the imposition of penalties pursuant to Section 275 of the Tax Code, as amended, upon verified complaint of the buyer-payor.
(Revenue Regulation 11-2018)
(b) The deadline is 2 years from date of payment.Section 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.
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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 25,000,000.00, including interests and penalties, for the year 2012. For 2012, T Corp. filed its income tax 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 its 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 Answers:
(a) No, the action has not yet prescribed as the law provides taxes can be assessed within 3 years from the last day prescribed by law for the filing of the return. In this case, the return was filed on April 15, 2013 which means the BIR has 3 years from said date to assess said taxes. Three years has not yet lapsed as the PAN was given on December 23, 2015 and FAN on April 11, 2016 which is within the prescriptive period.
Section 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
(National Internal Revenue Code)
(b) Yes, the CIR's motion should be granted. The taxpayer has only 30 days to protest the FAN. In this case, the protest on June 25, 2016 is more than 30 days from the receipt of the FAN on April 11, 2016.Section 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, That a preassessment notice shall not be required in the following cases:
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations.
(National Internal Revenue Code) -
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 Corp. 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 CT A 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 Answers:
(a) No, the BIR's contention is not meritorious as a similar case has been decided in jurisprudence.
With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the CTA En Banc in debunking the alleged failure to exhaust administrative remedies. Had CBK Power awaited the action of the Commissioner on its claim for refund prior to taking court action knowing fully well that the prescriptive period was about to end, it would have lost not only its right to seek judicial recourse but its right to recover the final withholding taxes it erroneously paid to the government thereby suffering irreparable damage.
(CBK Power vs. CIR G.R. Nos. 193383-84 January 14, 2015)(b) No as there would be non compliance with the 120 + 30 day period required under the law. The elevation to the CTA was done within a week without the taxpayer giving the CIR opportunity to act.
Pursuant to Section 112 (A)[42] and (D)[43] of the NIRC, a taxpayer has two (2) years from the close of the taxable quarter when the zero-rated sales were made within which to file with the CIR an administrative claim for refund or credit of unutilized input VAT attributable to such sales. The CIR, on the other hand, has 120 days from receipt of the complete documents within which to act on the administrative claim. Upon receipt of the decision, a taxpayer has 30 days within which to appeal the decision to the CTA. However, if the 120-day period expires without any decision from the CIR, the taxpayer may appeal the, inaction to the CTA within 30 days from the expiration of the 120-day period.
In Commissioner of Internal Revenue v. San Roque Power Corporation, we said that the 120+30-day period must be strictly observed except from the date of issuance of BIR Ruling No. DA-489-03 on December 10, 2003, which allowed taxpayers to file a judicial claim without waiting for the end of the 120-day period, up to the date of promulgation of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. on October 6, 2010, where we declared that compliance with the 120+30-day period is mandatory and jurisdictional.
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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 Answers:
(a) Yes, the City Treasurer was correct as the law requires the payment of the tax before any protest can be entertained.
Section 252. Payment Under Protest. -
(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be annotated on the tax receipts the words "paid under protest". The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt.
(Local Government Code)
(b) It should filed with the Local Board of Assessment Appeals.
Section 226. Local Board of Assessment Appeals. - Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of the provincial 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.
(Local Government Code)